##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




---

FORM 10-K

(Mark One)

|  |  |                                                                              
|- |  | -----------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION
	13 OR 15(d) OF THE SECURITIES EXCHANGE    
|  |  | ACT OF 1934                                                                  
|  |  | FOR THE FISCAL YEAR ENDED DECEMBER 31,
	2001                                 
|  |  | OR                                                                           
|o |  | TRANSITION REPORT PURSUANT TO
	SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|  |  | ACT OF 1934                                                                  
|  |  | For the transition period
	from to                                           
|  |  |                                                                              

COMMISSION FILE NUMBER 1-8607



---

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.





At February 1, 2002, 1,878,256,705 shares of
Common Stock and Preferred Stock Purchase Rights were
outstanding.

At February 1, 2002, the aggregate market
value of the voting stock held by nonaffiliates was
$75,130,268,200.

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
proxy statement dated March 12, 2002, issued in connection
with the 2002 annual meeting of shareholders (Part III).



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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, Boston, Chicago
	 and Pacific
	Stock Exchanges(a)
|                                                                          
|Debt Securities:                                                           |                                                                                            | New York Stock Exchange                                    
|Issued by BellSouth Capital Funding
	Corporation(b)                        |                                                                                            |                                                            
|                                                                           | 7.12% Debentures due 2097                                                                  |                                                             | 
|                                                                           | 7 3/8% Quarterly Interest Bonds due 2039                                                   |                                                             | 
|Issued by Southern Bell Telephone and Telegraph
	Company (c)               |                                                                                            |                                                            
|                                                                           | Forty Year 4 3/8% Debentures, due
	August 1, 2003                                          |                                                             | 
|                                                                          
|Issued by BellSouth Telecommunications, Inc.                               |                                                                                            |                                                            
|                                                                           | Forty Year 8 1/4% Debentures, due
	July 1, 2032                                            |                                                             | 
|                                                                           | Forty Year 7 7/8% Debentures, due
	August 1, 2032                                          |                                                             | 
|                                                                           | Forty Year 7 1/2% Debentures, due
	June 15, 2033                                           |                                                             | 
|                                                                           | Fifteen Year 5 7/8% Debentures, due
	January 15, 2009                                      |                                                             | 
|                                                                           | Forty Year 6 3/4% Debentures, due
	October 15, 2033                                        |                                                             | 
|                                                                           | Forty Year 7 5/8% Debentures, due
	May 15, 2035                                            |                                                             | 
|                                                                           | Thirty Year 7% Debentures, due October 1,
	2025                                            |                                                             | 
|                                                                           | Fifty Year 5.85% Debentures, due
	November 15, 2045                                        |                                                             | 
|                                                                           | One Hundred Year 7% Debentures, due
	December 1, 2095                                      |                                                             | 
|                                                                           | Twenty Year 6.30% Amortizing Debentures, due
	December 15, 2015                            |                                                             | 
|                                                                           | Principal Amount of One Hundred Year 6.65%
	Zero-To-Full Debentures, due December 15, 2095 |                                                             | 
|                                                                           | Twelve Year 7% Notes, due February 1, 2005                                                 |                                                             | 
|                                                                           | Ten Year 6 1/4% Notes, due May 15, 2003                                                    |                                                             | 
|                                                                           | Eleven Year 6 3/8% Notes, due June 15,
	2004                                               |                                                             | 
|                                                                           | Ten Year 6 1/2% Notes, due June 15, 2005                                                   |                                                             | 
|                                                                           | 6% Reset Put Securities, due June 15, 2012                                                 |                                                             | 
|                                                                           | Thirty Year 6 3/8% Debentures, due
	June 1, 2028                                           |                                                             | 






|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | We have filed applications with the Securities
	and Exchange Commission to delist our common stock from the
	Boston and Pacific stock exchanges.

|    |                                                          
|--- | ---------------------------------------------------------
|(b) | Subsequently merged with and into BellSouth
	Corporation.

|    |                                                                      
|--- | ---------------------------------------------------------------------
|(c) | Subsequently merged with and into BellSouth
	Telecommunications, Inc.





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TABLE OF CONTENTS



|                                                                                      |                                                                          |                                     |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------------------- |  |  |  |  |  | 
|PART I                                                                               
|Cautionary Language Concerning Forward-Looking Statements                            
|BUSINESS                                                                             
|                                                                                      | OVERVIEW                                                                
|                                                                                      | COMMUNICATIONS GROUP                                                    
|                                                                                      | DOMESTIC WIRELESS                                                       
|                                                                                      | LATIN AMERICA                                                           
|                                                                                      | DOMESTIC ADVERTISING AND PUBLISHING                                     
|                                                                                      | ALL OTHER BUSINESSES                                                    
|                                                                                      | RESEARCH AND DEVELOPMENT                                                
|                                                                                      | EMPLOYEES                                                               
|PROPERTIES                                                                           
|                                                                                      | GENERAL                                                                 
|                                                                                      | CAPITAL EXPENDITURES                                                    
|LEGAL PROCEEDINGS                                                                    
|SUBMISSION OF MATTERS TO A VOTEOF SHAREHOLDERS                                       
|ADDITIONAL INFORMATION -- DESCRIPTION OF BELLSOUTH STOCK                             
|EXECUTIVE OFFICERS                                                                   
|PART II                                                                              
|MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|SELECTED FINANCIAL AND OPERATING DATA                                                
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|Consolidated Results of Operations                                                   
|Results by Segment                                                                   
|                                                                                      |                                                                          | Communications Group               
|                                                                                      |                                                                          | Domestic Wireless                  
|                                                                                      |                                                                          | Latin America                      
|                                                                                      |                                                                          | Domestic Advertising and Publishing
|                                                                                      |                                                                          | All Other Businesses               
|                                                                                      | Liquidity and Financial Condition                                       
|                                                                                      | Quantitative and Qualitative Disclosure About Market Risk               
|                                                                                      | Proportional Debt                                                       
|                                                                                      | Operating Environment and Trends of the Business                        
|                                                                                      | Critical Accounting Policies                                            
|                                                                                      | Cautionary Language Concerning Forward-Looking Statements               
|8. Consolidated Financial Statements                                                 
|                                                                                      | REPORT OF MANAGEMENT                                                    
|                                                                                      | REPORT OF INDEPENDENT ACCOUNTANTS                                       
|                                                                                      | REPORT OF INDEPENDENT AUDITORS                                          
|                                                                                      | CONSOLIDATED STATEMENTS OF INCOME                                       
|                                                                                      | CONSOLIDATED BALANCE SHEETS                                             
|                                                                                      | CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|                                                                                      | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
|                                                                                      | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                                                             
|PART IV                                                                              
|EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                      
|SIGNATURES                                                                           
|CONSENT OF INDEPENDENT ACCOUNTANTS                                                   
|CONSENT OF INDEPENDENT AUDITORS                                                      



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TABLE OF CONTENTS

|                                                                  |      |                                                                                  |                                                                        |                                                                                               |    |    |    | 
|----------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | -- | -- | -- | 
|Item                                                              |      |                                                                                  |                                                                        | Page                                                                                         
|                                                                  |      |                                                                                  |                                                                        |                                                                                              
|PART I                                                            |      |                                                                                  |                                                                        |                                                                                              
|Cautionary Language Concerning Forward-Looking
        Statements |      |                                                                                  | 3                                                                      |                                                                                              
|                                                                  |      | 1.                                                                               |                                                                        | Business                                                                                      |    |    | 4  | 
|                                                                  |      | Overview                                                                         |                                                                        |                                                                                               | 4  |   
|                                                                  |      | Communications Group                                                             |                                                                        |                                                                                               | 4  |   
|                                                                  |      | Domestic Wireless                                                                |                                                                        |                                                                                               | 13 |   
|                                                                  |      | Latin America                                                                    |                                                                        |                                                                                               | 16 |   
|                                                                  |      | Domestic Advertising and Publishing                                              |                                                                        |                                                                                               | 19 |   
|                                                                  |      | All Other Businesses                                                             |                                                                        |                                                                                               | 20 |   
|                                                                  |      | Research and Development                                                         |                                                                        |                                                                                               | 20 |   
|                                                                  |      | Employees                                                                        |                                                                        |                                                                                               | 20 |   
|                                                                  |      | 2.                                                                               |                                                                        | Properties                                                                                    |    |    | 21 | 
|                                                                  |      | General                                                                          |                                                                        |                                                                                               | 21 |   
|                                                                  |      | Capital Expenditures                                                             |                                                                        |                                                                                               | 21 |   
|                                                                  |      | 3.                                                                               |                                                                        | Legal Proceedings                                                                             |    |    | 22 | 
|                                                                  |      | 4.                                                                               |                                                                        | Submission of Matters to a Vote of Shareholders                                               |    |    | 23 | 
|Additional InformationDescription of
        BellSouth Stock     |      |                                                                                  | 23                                                                     |                                                                                              
|Executive Officers                                                |      |                                                                                  | 25                                                                     |                                                                                              
|PART II                                                           |      |                                                                                  |                                                                        |                                                                                              
|                                                                  |      | 5.                                                                               |                                                                        | Market for Registrants Common Equity and
        Related Shareholder Matters                 |    |    | 26 | 
|                                                                  |      | 6.                                                                               |                                                                        | Selected Financial and Operating Data                                                         |    |    | 27 | 
|                                                                  |      | 7.                                                                               |                                                                        | Managements Discussion and Analysis of
        Financial Condition and Results of Operations |    |    | 28 | 
|                                                                  |      | Consolidated Results of Operations                                               |                                                                        |                                                                                               | 28 |   
|                                                                  |      | Results by Segment                                                               |                                                                        |                                                                                               | 31 |   
|                                                                  |      | Communications Group                                                             |                                                                        |                                                                                               | 31 |   
|                                                                  |      | Domestic Wireless                                                                |                                                                        |                                                                                               | 34 |   
|                                                                  |      | Latin America                                                                    |                                                                        |                                                                                               | 35 |   
|                                                                  |      | Domestic Advertising and Publishing                                              |                                                                        |                                                                                               | 37 |   
|                                                                  |      | All Other Businesses                                                             |                                                                        |                                                                                               | 37 |   
|                                                                  |      | Liquidity and Financial Condition                                                |                                                                        |                                                                                               | 38 |   
|                                                                  |      | Quantitative and Qualitative Disclosure About
        Market Risk                |                                                                        |                                                                                               | 40 |   
|                                                                  |      | Proportional Debt                                                                |                                                                        |                                                                                               | 41 |   
|                                                                  |      | Operating Environment and Trends of the Business                                 |                                                                        |                                                                                               | 41 |   
|                                                                  |      | Critical Accounting Policies                                                     |                                                                        |                                                                                               | 46 |   
|                                                                  |      | Cautionary Language Concerning Forward-Looking
        Statements                |                                                                        |                                                                                               | 48 |   
|8.                                                                |      | Consolidated Financial Statements                                                |                                                                        |                                                                                               | 49 |   
|                                                                  |      | Report of Management                                                             |                                                                        |                                                                                               | 49 |   
|                                                                  |      | Report of Independent Accountants                                                |                                                                        |                                                                                               | 50 |   
|                                                                  |      | Report of Independent Auditors                                                   |                                                                        |                                                                                               | 50 |   
|                                                                  |      | Consolidated Statements of Income                                                |                                                                        |                                                                                               | 51 |   
|                                                                  |      | Consolidated Balance Sheets                                                      |                                                                        |                                                                                               | 52 |   
|                                                                  |      | Consolidated Statements of Cash Flows                                            |                                                                        |                                                                                               | 53 |   
|                                                                  |      | Consolidated Statements of Shareholders
        Equity and Comprehensive Income |                                                                        |                                                                                               | 54 |   
|                                                                  |      | Notes to Consolidated Financial Statements                                       |                                                                        |                                                                                               | 55 |   
|                                                                  |      | 9.                                                                               |                                                                        | Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure  |    |    | 82 | 
|PART III                                                          |      |                                                                                  |                                                                        |                                                                                              
|                                                                  | *10. |                                                                                  | Directors and Executive Officers of the Registrant                     |                                                                                               |    | 82 |   
|                                                                  | *11. |                                                                                  | Executive Compensation                                                 |                                                                                               |    | 82 |   
|                                                                  | *12. |                                                                                  | Security Ownership of Certain Beneficial Owners
        and Management |                                                                                               |    | 82 |   
|                                                                  | *13. |                                                                                  | Certain Relationships and Related Transactions                         |                                                                                               |    | 82 |   

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|                                   |     |  |                                                                  |      |  |    | 
|---------------------------------- | --- |  | ---------------------------------------------------------------- | ---- |  | -- | 
|Item                               |     |  |                                                                  | Page
|                                   |     |  |                                                                  |     
|PART IV                            |     |  |                                                                  |     
|                                   | 14. |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K |      |  | 82 | 
|Signatures                         |     |  | 86                                                               |     
|Consent of Independent Accountants |     |  | 87                                                               |     
|Consent of Independent Auditors    |     |  | 87                                                               |     






|  |                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------
|* | Included in BellSouth Corporations
	definitive proxy statement dated March 12, 2002 and incorporated
	herein by reference.




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 that could affect future operating
results, financial position and cash flows and could cause
actual results to differ materially from those expressed in the
forward-looking statements are:



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

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BUSINESS







OVERVIEW





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

We are a Fortune 100 communications services
company providing voice and data services to more than 46
million customers in the United States and 15 other countries.
We provide an array of voice, broadband data and e-commerce
solutions to business customers, including Web hosting and other
Internet services. In the residential market, we offer DSL
high-speed Internet access, advanced voice features and other
services. We also provide online and directory advertising
services, including BellSouth® Real PagesSM.com.
We own approximately 40 percent of Cingular Wireless (Cingular),
the nations second largest wireless company, which
provides wireless data and voice services. With one of the
largest shareholder bases in America, we have assets of
$52 billion and employ approximately 88,000 individuals.
Our principal executive offices are located at 1155 Peachtree
Street, N.E., Atlanta, Georgia 30309-3610 (telephone number
404-249-2000). We are incorporated under the laws of the State
of Georgia.

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

The Telecommunications Act of 1996 superseded the
governing terms of the 1983 settlement and provided for the
development of competition in local telecommunications markets
and the conditions under which the Baby Bells can provide
interLATA wireline telecommunications and other services. Our
ability to enter the businesses previously proscribed to us by
the terms of the 1983 settlement, including the provision of
interLATA long distance services, is subject to compliance with
the Telecommunications Act of 1996 and the regulations of the
Federal Communications Commission (FCC).

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

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

 Communications group;

 Domestic wireless;


 Latin America; and


 Domestic advertising and publishing.


See note K to our consolidated financial
statements for financial data on each of our segments.







COMMUNICATIONS GROUP





OVERVIEW

Through our BellSouth Telecommunications, Inc.
(BST) subsidiary, we are the predominant telephone service
provider in the southeastern U.S. serving substantial portions
of the population within Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and
Tennessee. BST provides wireline communications services,
including local exchange, network access and intraLATA long
distance services. Other subsidiaries in the communications
group provide various services including wholesale long
distance, sale of data communications equipment, marketing for
switched and broadband-based Internet services and electronic
commerce. Communications group operations generated 79% of our
total operating revenues for 2001 and 70% for 2000 and 1999.

While we provide telephone 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 for business customers
and residential customers within our

4



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territory from other telecommunications carriers,
including cable television operators.


We have organized our marketing efforts to
parallel our major customer bases: consumer, small business,
large business, interconnection services and long distance.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consumer.This unit
	serves the largest segment of the market within our region, the
	residential customer. While traditional telephone service
	remains the core of this market, customer demands are rapidly
	broadening to include an expanded range of standard services,
	from convenience features such as caller ID, call forwarding and
	voice mail, to secondary lines, dial-up access to the Internet,
	high-speed digital subscriber lines and video services.
|
| | Small Business.This
	unit focuses on providing, in addition to traditional 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.                                                                                                                                                                              
|
| | Large Business.This
	unit provides a wide range of standard and highly specialized
	services and products to large and complex business customers.
	In addition to traditional voice services, product and service
	offerings to these customers include Internet access, private
	networks, high-speed data transmission, conferencing and
	industry-specific communications arrangements.                                                                             
|
| | 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. Other services provided to these carriers
	include voice and data, as well as advanced products and
	transport services. The unit provides services to both
	affiliated and nonaffiliated customers in six different carrier
	markets:                              



| |   |                                                   
| | - | --------------------------------------------------
| |  | wireless service providers,                       
|
| |  | competitive local exchange carriers,              
|
| |  | competitive switched and special access providers,
|
| |  | long distance carriers,                           
|
| |  | information service providers and                 
|
| |  | public payphone service providers.                



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Long Distance.This
	unit was created to manage BellSouths entry into the
	interLATA long distance business, which will commence after we
	receive approval from the FCC. The unit currently provides
	wholesale long distance primarily to wireless communications
	providers and smaller wireline telecommunications providers. The
	unit also offers prepaid calling card services through
	agreements with unaffiliated long distance 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 national needs through teaming or wholesale
service arrangements with other companies.

Specifically, we intend to:



| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | become the leading provider of local broadband/IP
	services in the southeast by transitioning our traditional voice
	technology to new broadband/IP platforms that support both voice
	and new data services and applications;                                                                                          
|
| |  | optimize our portfolio of products and services
	by utilizing marketing approaches targeted to our different
	customer segments, superior service and marketing strength to
	grow our market share by offering packages of voice, data and
	multimedia applications through improved distribution channels
	and systems;
|
| |  | reduce our existing cost structure by managing
	the utilization of existing assets and redirecting spending to
	focus new investment on high-growth, higher margin broadband
	products; and                                                                                                                             
|
| |  | continue to be the preferred telecommunications
	provider for wholesale customers of our network.                                                                                                                                                                                                                       

BUSINESS OPERATIONS

LOCAL SERVICE

Local service operations provide lines from our
exchange offices to customers premises for the origination
and termination of telecommunications, including the following:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | basic dial-tone local telephone service provided
	through the regular switched network;                
|
| |  | dedicated private line facilities for voice and
	special services, such as transport of data and video;
|
| |  | switching services for customers internal
	communications through our facilities;                     
|
| |  | high-speed Internet access through Digital
	Subscriber Lines (DSL);                                    

5



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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | services for data communications, which include
	managing and configuring special service networks; and
|
| |  | dedicated low- or high-capacity public or private
	digital networks.                                   

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 per-use
basis. Additional local service revenues are derived from
charges for inside wire maintenance contracts, voice messaging
services, directory assistance and public payphone services.

We offer the vast majority of our local services
on a wholesale basis to other competitive local carriers for
resale to their customers. We offer these products in the form
of both resold lines and unbundled network elements (UNEs) which
our competitors combine for their customers. Local service
revenues also include charges for the collocation of
competitors equipment in our facilities.

NETWORK ACCESS

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 local exchange carriers, competitive
switched and special access providers, and wireless providers,
including Cingular. These connections are provided by linking
these carriers and subscribers to our public switched network
through dedicated services and facilities. As a result of access
reform, the revenues which we derive from these services have
diminished over the past several years. See Regulatory
EnvironmentFederal Regulatory Matters Access Charge
Reform for a discussion of this matter.

LONG DISTANCE

We provide limited long distance services within,
but not between, areas within our local service territory that
were defined at the time the Bell System was broken up in 1983.
These services include:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | service beyond the local calling area;                                                                         
|
| |  | Wide Area Telecommunications Service (WATS or 800
	services) for customers with highly concentrated demand; and
|
| |  | special services, such as transport of data and
	video.                                                        

Revenues from the above services have decreased
as competition for customers has intensified and as more
customers have subscribed to our wider local area calling plans.
We expect that long distance revenues will continue to decline
until we receive permission from the FCC to provide interLATA
long distance services. Such approval will allow us to compete
more effectively with bundled service offerings.

The Telecommunications Act of 1996 restricts Baby
Bell companies from providing interLATA long distance wireline
communications in their original service areas or regions, and
establishes procedures for the removal of restrictions. We and
other companies subject to these restrictionsVerizon
Communications, Inc., SBC Communications, Inc., and Qwest
Communications International Inc.may apply to the FCC on a
state-by-state basis to offer interLATA long distance wireline
service in our respective regions. The FCC must act on each
application within 90 days. The FCC must grant the
application if it determines, among other things, that the
applicant has:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | Met a competitive checklist establishing that it
	has opened its network to competitive carriers; and
|
| |  | Shown:                                                                                               



| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the presence of a facilities-based competitor
	offering both residential and business local services; or                                                                                                                                               
|
| |  | if there is no such competitor, a statement that
	has been approved or permitted to take effect by state
	regulatory authorities of the terms under which the company
	would be willing to interconnect with a competitive local
	exchange carrier; and
|
| |  | its application is consistent with the public
	interest.                                                                                                                                                                                               

The FCC is required to consult with state
regulatory authorities and the U.S. Department of Justice when
reviewing an application.

Between December 1999 and February 2002, the FCC
has approved Verizon Communications applications to
provide interLATA long distance services in Connecticut,
Massachusetts, New York, Pennsylvania and Rhode Island and
approved SBC Communications applications to provide
interLATA long distance services in Arkansas, Kansas, Missouri,
Oklahoma and Texas.

Although not required, we typically present the
substance of our FCC applications to state public service
commissions prior to filing with the FCC. To date, each of the
commissions in our nine states has established a docket to
consider our application. The commissions in each of Georgia,
Louisiana, Mississippi and South Carolina have recommended
approval of our applica-

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tions. The other state commissions have not yet
issued a recommendation.


In October 2001, we filed applications with the
FCC to provide long distance services in Georgia and Louisiana.
We withdrew these applications in December 2001 in order to
incorporate updated information into the filings. We filed the
revised applications with the FCC in February 2002. We plan to
begin offering interLATA long distance wireline service in each
of our southeastern states as soon as the FCC approves our
application for each state.

Because of the scrutiny of applications by the
state commissions, the FCC and the Justice Department, the time
required to obtain judicial review of adverse decisions and the
possible challenges by other carriers of any approved
applications, it is uncertain when we will be authorized to
commence interLATA long distance service over our wireline
network.

Effective January 16, 2002, we entered into
a non-exclusive wholesale services agreement with Qwest
Communications International Inc. Under the agreement, we are
obligated to purchase $350 million of Qwest products and
services for resale to our business customers. The take-or-pay
agreement has a four year term and replaces a prior agreement,
entered into in January 2001, pursuant to which BellSouth was
obligated to purchase over a five year period $250 million of
products and services in exchange for Qwest stock at
contractually fixed prices. Under the prior agreement, BellSouth
delivered approximately 1.7 million Qwest shares to Qwest in
exchange for services. The prior agreement was terminated. As
part of the new arrangement, BellSouth has received a credit of
$71 million toward future purchases under the wholesale services
agreement.

Currently, BellSouth and Qwest coordinate the
marketing of certain services to targeted business customers,
with Qwest providing data networking, Internet and long distance
voice services and BellSouth providing local networking
services. After BellSouth receives regulatory relief to provide
long distance services, BellSouth expects to be a retail
provider of high-speed data networking and voice communications
services for business customers that will include products and
services under the wholesale services agreement.

DIGITAL AND DATA

A key component in our growth in local service
and network access revenues is the provision of digital and data
services to all of our customer groups. These services and
products are provided primarily over non-switched access lines
that typically have significantly greater capacity per line than
a traditional switched access line. These lines are well suited
for high-capacity applications that previously could not be
provided over traditional switched access lines. Uses of these
lines include bulk data transmission, video conferencing,
automated teller machines, or ATMs, check/credit card
authentication, multimedia and interconnection with wireless
networks.

During 2001, data telecommunications represented
a significant portion of the traffic on our wireline network,
and we believe that the amount of our business derived from data
will continue to increase. To capitalize on the transition from
voice to data, we will need to continue to expand our
capabilities in the data communications market. We have
continuously updated our network with new advances in digital
technology. For over a decade, fiber optics has been our choice
of technology as we have upgraded our core network to meet the
demand for data, and over 90% of our customers are within 12,000
feet of fiber optic cables. Our deployment of broadband services
and upgraded systems enables us to provide high-speed Internet
access and entertainment services. These services also utilize
new technologies that provide for the simultaneous, high-speed
transport of voice, data, still images and video.

We offer dial-up and dedicated Internet and
intranet connections to consumers and businesses. This service
is deployed on local Internet protocol networks across the
southeastern U.S., whereby customers have access to a variety of
public-switched and dedicated networking capabilities to meet
their data communications, electronic commerce, web design and
hosting and customer network management needs. We provided
Internet access services to approximately 1.2 million
customers at December 31, 2001.

Over the last several years, the demand for
high-speed access to the Internet has increased substantially.
Although fiber optics in our core network is well suited to
provide high-speed access, the traditional switched access lines
which connect many businesses and most residences to our network
are not capable, in their original state, of delivering high
speed access. In response, we have deployed digital subscriber
line (DSL) products which enhance the existing switched
lines and provide Internet access speeds up to 1.5 Megabits
per second, which is nearly 30 times faster than todays
56K dial-up modems. We offer these DSL products to other
carriers and to Internet service providers who use these
products to provide Internet services to their customers. We
also offer Internet access services using these DSL products
directly to our customers in 63 markets under the name BellSouth
FastAccess® DSL service. We offer our FastAccess

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customers a self-install kit for these products
and 97% of residential customers requesting service have elected
to self-install in recent months with a success rate of about
90%.


We have approximately 70% of the households in
our market qualified to receive DSL and ended 2001 with 620,500
customers served over our DSL facilities. We plan to increase
our coverage to approximately 76% of the households in our
market and the total customers served over our DSL facilities to
1.1 million by the end of 2002.

Data communications provided over wireline
facilities are generally subject to the same laws and
regulations as fixed line voice communications. As a result,
under current FCC interpretations, we are generally prohibited
from providing interLATA long distance data transmission
services. While our commercial relationships with various
companies provide our customers with alternative access to
interLATA long distance services, we believe that our entry into
the long distance business remains critical to our successfully
competing in the data services business.

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
premises equipment sales and maintenance services. Beginning in
2000, other communications group revenues also includes amounts
received from the universal service fund for support of
high-cost areas.

We currently offer local payphone services
through a separate subsidiary of BST, and we include the
revenues from this business in other communications group
revenues. We plan to sell or take out of service all of our
114,000 public payphones by the end of 2003. Our exit plan
contemplates a gradual phase-out of the business. Accordingly,
we do not expect any material financial impact on results of
operations with respect to exiting this business.

REGULATORY ENVIRONMENT

FEDERAL REGULATORY MATTERS

The FCC regulates rates and other aspects of
carriers provision of interstate telecommunications
services while state regulatory commissions have jurisdiction
over carriers provision of intrastate telecommunications
services. The FCC has considerable authority to establish
policies for pricing and terms of local interconnection that had
once been considered the exclusive jurisdiction of the state
regulatory authorities. We expect the FCC to continue policies
that promote local service competition.

Price Regulation

The FCC regulates interstate prices using a price
regulation plan, which is known as a price cap plan.
The FCCs price cap plan 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 U.S. economy.

Access Charge Reform

Federal policies implemented by the FCC have
strongly favored access reform, whereby the historical subsidy
for local service that is contained in network access charges
paid by long distance carriers is moved to end-user charges or
universal service funds, or both.

In May 2000, the FCC released an order, referred
to as the CALLS order, designed to result in lower consumer
prices for long distance service by reforming the way in which
access costs are recovered. The order applies to all local
exchange carriers operating under price caps, and as such covers
BellSouth. The order reduces the productivity factor to 0.0% for
products that meet price targets as specified in the order.
Although the order reduces the access charges paid to BellSouth
by other carriers, we are able to increase subscriber line
charges paid by residential and single-line business customers
each year through 2003. Any increases that we request after July
2001 are subject to a cost review. In December 2001, the FCC
began a cost review associated with a $1.00 increase in our
residential and single-line business subscriber line charge that
is scheduled to take effect July 1, 2002. If the increase
in residential and single-line business subscriber line charges
is permitted to take effect, there will be a corresponding
decrease in the charges paid by carriers.

On April 27, 2001, the FCC released a Notice
of Proposed Rulemaking that commences a broad inquiry that will
begin a fundamental examination of all forms of intercarrier
compensationpayments among telecommunications carriers
resulting from their interconnecting networks. In general, there
are two broad 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 Notice of Proposed Rulemaking is to examine
the existing rules pertaining to intercarrier compensation and
explore alternative forms of intercarrier compensation. This
proceeding could lead to permanent changes in the compensation
that BellSouth currently receives from other carriers and its
end user customers. One alternative under consideration is
bill and keep, a policy that requires carriers to
exchange traffic freely with each

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other and to recover from end user customers the
costs of originating and terminating traffic.


Also on April 27, 2001, the FCC released an
Order on Remand and Report and Order addressing the issue of
compensation for Internet service provider traffic. In its
Order, the FCC acknowledged that dial-up calls to Internet
service providers are not local calls, but instead are
information access traffic exempt from the
reciprocal compensation provisions of the Telecommunications Act
of 1996. The FCC has implemented a three-year interim period
during which local carriers will pay intercarrier compensation
for such calls in decreasing increments. After the three-year
interim period, the new rules on intercarrier compensation to be
adopted in connection with the Notice of Proposed Rulemaking
referred to above are expected to be in effect. If no rules have
been adopted by that time, the intercarrier compensation in
effect at the end of the third year would remain in effect. An
appeal of the FCC Order is pending. If the Order is not affirmed
on appeal, the rates we pay for Internet service provider
traffic and other traffic subject to the FCC rates could change.
Although we cannot currently estimate the possible change, we
believe it could have an adverse effect on our expenses.

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

Universal Service

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

The FCCs universal service mechanism for
non-rural carriers serving high-cost 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. It also established support for
rural health care providers so that they may pay rates
comparable to those that urban health care providers pay for
similar services. Industry-wide annual costs of the program,
estimated at approximately $2.3 billion, are to be funded
out of the universal service fund. Local and long distance
carriers contributions to the education and health care
funds are assessed by the fund administrator on the basis of the
carriers interstate end-user revenues.

FCC Interconnection Order

In connection with the requirements of the
Telecommunications Act of 1996, the FCC has adopted rules
governing interconnection and related matters. The FCC has
jurisdiction to set pricing standards for certain
interconnection services between incumbent carriers and other
carriers to be implemented by the state commissions. The FCC has
prescribed a forward-looking economic cost approach for pricing
interconnection and the separate, unbundled network elements,
such as the use of the customer access line, the central office
switch and other pieces of the network that together constitute
what a carrier needs to provide telecommunications service.

In July 2000, the U.S. Court of Appeals for the
Eighth Circuit vacated the FCC methodology for pricing unbundled
network elements and the methodology for determining wholesale
rates for retail services. The order also affirmed the previous
decision of the Eighth Circuit that vacated FCC rules that
required incumbent carriers to combine previously uncombined
elements for requesting carriers. The Eighth Circuits
order has been stayed while on appeal to the U.S. Supreme Court.
In October 2001, the U.S. Supreme Court heard several appeals
from the order of the U.S. Court of Appeals.

Access to proprietary network elements can be
required only when necessary or, in the case of a
non-proprietary element, when the failure to provide access
would impair the ability of the requesting carrier to provide
services. In 1999, the FCC adopted a revised list of network
elements that incumbent carriers must make available to
competitors.

The FCCs list, together with its
regulations prohibiting incumbent carriers from separating
currently combined elements, means that incumbent carriers are
required to provide certain combinations of network elements
that competitors may substitute for certain higher priced
incumbent carriers services. This substitution could lead
to further increases in competition for certain local exchange
access services and materially reduce the incumbent
carriers access charge revenues. The FCC determined that,
for an interim period, it would not apply

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these new rules to allow the substitution of
certain network elements for special access services unless the
telecommunications carrier provides a significant amount of
local exchange services. This issue is continuing to be reviewed
by the FCC. An adverse decision on this issue would have a
material adverse impact on network access revenues.


The FCCs list does not require incumbent
carriers to make available to competitors some network elements
used to provide advanced data services, except in very limited
circumstances. This outcome reduces a disincentive to the
incumbent carriers to invest in these rapidly expanding services.

The FCC has adopted an all elements
rule, which allows competing carriers to provide local telephone
service relying solely on the elements in an incumbent
carriers network, and has refused to impose a requirement
of facility ownership on carriers that seek to lease network
elements. The FCC has also adopted a pick and choose
rule which requires that incumbent carriers, for a reasonable
time, make available to requesting competitive local exchange
carriers contractual provisions, including related rates and
terms, contained in any other agreements that have been
previously approved by the state commission for that same state.
Exceptions are allowed when the incumbent carrier can prove to
the state commission that providing the particular item
requested is either more costly than providing it to the
original carrier or is technically infeasible. These rulings may
make it easier for a competitive local exchange carrier to
compete with us.

In December 2001, the FCC commenced its first
triennial review of its policies concerning unbundled network
elements. During the course of the proceeding, the FCC is
expected to reconsider the circumstances under which incumbent
local exchange carriers must make parts of their networks
available to requesting carriers and to resolve any outstanding
issues related to unbundled network elements. A decision
increasing the unbundled network elements that we are required
to make available, including allowing the substitution of
unbundled network elements for special access services, to
requesting carriers could have a material adverse effect on our
revenues and results of operations.

Number Portability

During 1998, the FCC adopted an order that allows
telecommunications carriers to recover over five years their
carrier-specific costs of implementing long-term number
portability, which allows customers to retain their local
telephone numbers in the event they change local carriers. The
order allows for such cost recovery in the form of a surcharge
from customers to whom number portability is available.

During 1999, the FCC granted the wireless
industry an extension regarding their local number portability
obligations until November 2002. These requirements will enable
customers to keep their number when switching between carriers
without regard to whether the carrier is a wireline or wireless
service provider. Wireless carriers must offer number
portability to their customers beginning November 2002. The
implementation of wireless number portability could impact our
wireline operations.

STATE REGULATORY MATTERS

We are subject to regulation of our local and
limited 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 specified services, they enhance our
ability to adjust prices and service options to respond more
effectively to changing market conditions and competition. Price
regulation also provides an opportunity to benefit more fully
from productivity enhancements. The majority of these plans have
limitations on raising prices for basic local exchange services
during the early years with provisions for inflation-based price
increases in later years.

While some plans are not subject to either review
or renewal, other plans contain specified termination dates
and/or review periods. During 2001, the Mississippi Public
Service Commission completed its review of the Mississippi price
regulation plan. In an order dated October 31, 2001, the
Mississippi Commission approved the plan for an additional six
year term with specified modifications, including new
performance measures. We expect that the plan in North Carolina
will be reviewed during 2002. Upon review or renewal, a
regulatory commission could require substantial modifications to
prices and other terms of these plans.

Beginning in 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission under existing state laws. In April 1999, however,
the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under
a new state statute, adopted subsequent to the Commissions
approval of the earlier plan.

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


Other State Regulatory Matters

In 2000, the Florida Public Service Commission
issued a proposed agency action stating that our change in 1999
from a late payment charge based on a percentage of the amounts
overdue to a flat rate fee plus an interest charge violated the
Florida price regulation statute and voted that approximately
$65 million should be refunded. We protested the decision. On
August 30, 2001, the Commission issued an order adopting
its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The
total amount as of December 31, 2001 subject to potential
refund was $83 million, including interest. No accrual has been
recorded in the consolidated financial statements for this
matter.

In January 2001, the Georgia Public Service
Commission entered an order adopting new company performance
measures, which will be used as one means to assess our
wholesale service quality to competitive local exchange
carriers. In addition, the Commission adopted a Self Enforcement
Plan. The Self Enforcement Plan consists of three tiers. Under
tier 1, we will be required to pay remedial sums to individual
competitive local exchange carriers if we fail to meet certain
performance criteria set by the Commission. Under tier 2, we
will pay additional sums directly to the State Treasury for
failing to meet certain performance metrics. Under tier 3, if we
fail to meet certain performance criteria, then we will suspend
additional marketing and sales of long distance services allowed
by the Telecommunications Act of 1996. Our annual liability
under the Plan is capped at 44% of net revenues in Georgia. The
decision also adopts other remedial measures for the filing of
late or incomplete performance reports, and a market penetration
adjustment for new and advanced services, which increases the
amount of the payments where low volumes of advanced or nascent
services are involved. The Self Enforcement Plan went into
effect on March 1, 2001. We have made payments under the
Self Enforcement Plan and we may be required to make payments in
the future. Under the terms of the Plan, the Commission
considers potential revisions to the measures at regular
intervals. The Commission is currently conducting such a review.

In May 2001, the Louisiana Public Service
Commission issued an order adopting new company performance
measures, in addition to clarification of existing measures,
which will be used as one means to assess our wholesale service
quality to competitive local exchange carriers. In addition, the
Commission adopted a Self Enforcement Plan. The Self Enforcement
Plan consists of three tiers. Under tier 1, we will be required
to pay remedial sums to individual competitive local exchange
carriers if we fail to meet certain performance criteria set by
the Commission. Under tier 2, we will pay additional sums
directly to the State Treasury for failing to meet certain
performance metrics. Under tier 3, if we fail to meet certain
performance criteria, then the Louisiana Public Service
Commission may initiate a proceeding to determine whether to
recommend to the FCC suspension of our marketing and sales of
long distance services allowed by the Telecommunications Act of
1996. Our annual liability under the Louisiana Plan is
procedurally capped at $59 million. The order also adopts
other remedial measures for the filing of late or incomplete
performance reports, and a market penetration adjustment for new
and advanced services, which increases the amount of the
payments where low volumes of advanced or nascent services are
involved. We have made payments under the Self Enforcement Plan
and we may be required to make payments in the future. Under the
terms of the Plan, the Commission considers potential revisions
to the measures at regular intervals.

COMPETITION

LOCAL SERVICE

The Telecommunications Act of 1996 requires the
elimination of state and local legislative and regulatory
barriers to competition for interstate and intrastate
telecommunications services, subject only to competitively
neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of
customers. The Telecommunications Act of 1996 also includes
requirements that incumbent local exchange carriers, such as
BST, negotiate rates, terms and conditions with other carriers
regarding interconnection, the provision of access to unbundled
network elements, the payment of compensation for local calls
terminating on the network of a

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carrier other than the originating carrier, the
resale of telecommunications services and the provision of
physical collocation of equipment in the incumbent
carriers facilities. If a negotiated agreement cannot be
reached, either party may seek arbitration with the state
regulatory authority or the FCC if the state fails to act. If
rates are disputed, the arbitrator must set rates based on cost,
which may include a reasonable profit. Incumbent carriers are
also required to negotiate wholesale rates for the purpose of
making telecommunications services available for resale by
competing carriers. If an agreement cannot be reached, the
arbitrator must set the wholesale rates at the incumbent
carriers retail rates, less costs that are avoided. We are
continually negotiating and executing interconnection and resale
agreements with other carriers. Many of the negotiations result
in arbitration before the state public service commissions.


The state public service commissions with
jurisdiction over our services have granted numerous
applications to competitive local exchange carriers for
authority to offer local telephone service. As a result,
substantial competition has developed for customers.
Competitors, including major carriers, resell our local
services, use separate network elements or provide services over
their own facilities. At December 31, 2001, we had
provisioned approximately 1.7 million equivalent access
lines to competing carriers, an increase of 32.8 percent
since December 31, 2000.

An increasing number of voice and data
communications networks utilizing fiber optic lines have been
and are being constructed by communications providers in all
major metropolitan areas throughout our wireline service
territory. These networks offer high-volume users a competitive
alternative to our public and private line offerings.
Furthermore, wireless voice and paging services, and Internet
services (including all of such services being provided by our
companies) increasingly compete with wireline communications
services. These wireless services are provided by a number of
well-capitalized entities in most of our markets. Technological
developments have made it feasible for cable television networks
to carry data and voice communications, and, as such, we face
increased competition within our region from cable television
ventures.

Federal and state policies strongly favor further
changes to the networks and business operations of incumbent
carriers to encourage telecommunications services competition.
The FCC has considerable authority to establish policies for
pricing and terms of local interconnection that had once been
considered the exclusive jurisdiction of the state regulatory
authorities. We expect the FCC to continue to pursue policies
that promote local service competition. We are losing market
share with respect to residential customers and business
customers, particularly higher margin small business customers.
We expect competition for local service revenues to continue to
adversely affect our results of operations. These adverse
effects could be partially mitigated by our being authorized to
offer in-region interLATA long distance wireline service as
contemplated in the Telecommunications Act of 1996. It is
uncertain when we will be authorized to offer in-region
interLATA long distance wireline service.

NETWORK ACCESS

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

LONG DISTANCE

A number of companies compete with us in our
nine-state region for the limited long distance business that we
are permitted to conduct. These companies compete by reselling
long distance services obtained at bulk rates from us or
providing long distance services over their own facilities.

The Telecommunications Act of 1996 permits all
incumbent local exchange carriers, such as Verizon, Qwest, SBC
Communications and BellSouth, to offer full long distance
service outside of the states containing their local wireline
service territories. Many of these carriers have announced plans
to compete for all long distance service in our territory. In
addition, AT&T, WorldCom, Sprint and other carriers
currently provide long distance service to our local service
customers.

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 mainte-

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nance 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 our
proportionate share of Cingular Wireless. Cingular is a joint
venture that was formed by the combination of most of the former
domestic wireless operations of BellSouth and SBC
Communications. BellSouth has an approximate 40 percent
economic interest in Cingular, and SBC has an approximate
60 percent economic interest. These former domestic
wireless operations represented 11% of revenues in 2000 and 13%
of revenues in 1999. Cingular is managed independently from both
parents, currently with a four-seat Board of Directors comprised
of two directors from each parent. BellSouth and SBC share
control of Cingular.

Cingular is the second-largest provider of
advanced mobile wireless voice and data communications services
in the United States, with almost 21.6 million U.S.
wireless subscribers in over 220 metropolitan markets.



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| |  | VoiceCingular offers wireless voice and
	data communications services across an extensive U.S. footprint,
	providing cellular and PCS services in 42 of the 50 largest U.S.
	metropolitan areas, and having access to licenses to provide
	cellular or PCS services covering an aggregate population of
	231 million, or approximately 81% of the U.S. population.
	Cingular operates one of the largest and most digitalized U.S.
	wireless networks, with 100% of its existing cellular and PCS
	networks utilizing digital technology, and over 96% of its
	cellular and PCS minutes of use being digital. Cingular also
	currently provides wireless Internet, short messaging and other
	data services over its cellular and PCS networks to over 300,000
	subscribers.                                                                                        
|
| |  | DataCingular provides end-to-end wireless
	data solutions for businesses and individuals, and operates a
	digital packet-switched 900 MHz wireless network covering all of
	the 50 largest metropolitan areas. Cingular serves over 700,000
	wireless data subscribers on this network, and provides wireless
	data services to 216 of the Fortune 500 companies, the U.S.
	Congress and the Department of Defense. Cingular has entered
	into strategic relationships with leading data services
	equipment and Internet companies, including Palm, Inc., RIM, Sun
	Microsystems and Microsoft Corp. Cingular is deploying high-
	speed General Packet Radio Service, or GPRS,
	throughout its cellular and PCS networks and has recently
	introduced this service in its Washington state, Las Vegas,
	eastern Tennessee, coastal Georgia and Carolinas markets.

BUSINESS STRATEGY

Cingulars goal is to be the premier
nationwide provider of advanced wireless voice and data services
in the United States. To accomplish this goal, Cingular intends
to:



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand its existing footprint and its network
	capacity by obtaining access to additional spectrum, primarily
	through FCC auctions, spectrum exchanges and purchases, mergers
	and acquisitions, joint ventures and alliances;
|
| |  | continue to promote the Cingular brand, to expand
	and take advantage of its existing distribution capabilities and
	to cross-sell its products and services;                                                                  
|
| |  | capture economies through its large scale and
	national scope, allowing it to further realize the significant
	revenue and cost synergies offered by its formation;                                                            
|
| |  | capitalize on its expertise in wireless data
	technology, applications, marketing and operations to drive the
	development and use of advanced wireless data applications over
	multiple communications devices;               
|
| |  | increase the capacity, speed and functionality of
	its cellular and PCS networks by:                                                                                                                                           



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | deploying GPRS data technology in California,
	which it expects to complete in the first half of 2002 and which
	completes the deployment of GPRS in its markets that use Global
	System for Mobile Communication technology, or GSM;
|
| |  | overlaying GSM voice and GPRS data technology on
	its existing Time Division Multiple Access, or TDMA,
	network, beginning in early 2002;                                                                                            



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | upgrading its GPRS markets to a third generation,
	or 3G, technology known as Enhanced

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| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Data Rates for Global Evolution, or
	EDGE, beginning in 2003, when software is expected
	to be available, and completing its deployment of this
	technology in early 2004; and
|
| |  | deploying GSM/GPRS and, when available, EDGE
	technology in all of its newly licensed areas.                                                                                    

COMPETITION

Cingular faces substantial competition in all
aspects of its business, which could cause reduced pricing and
have adverse effects on its results of operations, including
reduced profitability. There is substantial and increasing
competition in all aspects of the wireless communications
industry. Cingular competes for customers based principally on
service offerings, price, call quality, coverage area and
customer service. Cingulars competitors are principally
large providers of cellular, PCS and other wireless
communications services, but Cingular also competes with smaller
companies, as well as dispatch mobile telephone companies,
resellers and wireline telephone service providers. Some of
Cingulars competitors may have greater financial,
technical, marketing, distribution and other resources than
Cingular does. In addition, some of the indirect retailers who
sell Cingulars services also sell its competitors
services. Moreover, Cingular may experience significant
competition from companies that provide similar services using
other communications technologies and services. While some of
these technologies and services are now operational, others are
being developed or may be developed in the future.

Cingulars ability to compete successfully
will depend in part on its marketing efforts and on its ability
to anticipate and respond to various competitive factors
affecting the industry, including new services and technologies,
changes in consumer preferences, demographic trends, economic
conditions and pricing strategies of competitors. As a result of
competition, Cingular may be required to reduce its service
prices, restructure service packages to provide more services
without increasing prices, and increase its advertising and
promotional spending to respond to competition. As a result, its
revenues, margins, average revenue per subscriber and cost per
gross subscriber addition could be negatively impacted.

The wireless communications industry has been
experiencing significant consolidation, and this trend is
expected to continue. This trend may create additional large,
well-capitalized competitors with substantial financial,
technical, marketing, distribution and other resources to
compete with Cingulars product and service offerings.
Competitors with more complete nationwide footprints may be able
to offer nationwide services and plans more economically due to
less dependence on roaming arrangements. In addition, global
combinations of wireless carriers, such as the alliance between
AT&T Wireless and NTT DoCoMo Inc. of Japan, the joint
venture between Sprint and Virgin Group, Verizon Wireless (which
is a joint venture between Verizon and Vodaphone plc), and
mergers and acquisitions, such as the acquisition of VoiceStream
Wireless by Deutsche Telekom, give domestic competitors better
access to international technologies, marketing expertise and
strategies, cost synergies and sources of capital.

Under the current rules of the FCC, six or more
PCS licensees, two cellular licensees and one or more enhanced
specialized mobile radio licensees may operate in each
geographic area. This structure has resulted in the presence of
multiple competitors in Cingulars markets and makes it
challenging for Cingular to attract new customers and retain
existing ones. Future rules and spectrum allocations or
re-allocations may increase the number of wireless licensees in
an area. Competition also may increase to the extent that
smaller, stand-alone wireless providers transfer licenses to
larger, better capitalized and more experienced wireless
providers.

NETWORK

Licenses

Cingular has licenses to provide cellular and PCS
wireless services on the 850 MHz and 1900 MHz portions of the
radio spectrum in areas that cover approximately 81% of the U.S.
population. Cingulars licenses in the 850 MHz band enable
it to provide both analog and digital cellular services, while
its 1900 MHz licenses are limited to digital service. Cingular
also has 900 MHz licenses to provide data services in certain
areas. Cingular obtained its domestic spectrum assets through
application lotteries, mergers, acquisitions, exchanges, FCC
auctions and uncontested application grants of cellular licenses.

Coverage

Cingular has access to wireless licenses in 45 of
the 50 top wireless markets across the country. 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 and PCS wireless service is
available. Moreover, as of year-end 2001, Cingular provides
wireless data services over its 900 MHz network in all of the 50
largest metropolitan areas. Cingulars cellular and PCS
networks are substantially built-out, except for certain areas
covered by recently acquired licenses.

14



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Technology

Cingular offers analog and digital service in
most of its cellular markets and digital service in its 1900 MHz
markets. Digital technology offers many advantages over analog
technology, including substantially increased network capacity,
lower operating costs per unit, reduced susceptibility to fraud
and the opportunity to provide improved data transmissions.
Digital service also provides extended battery life, improved
voice quality, greater call security, lower per-minute costs, as
well as enhanced features and services such as interactive
messaging, facsimile, e-mail and wireless connections to
computer/data networks and the Internet. At present,
Cingulars cellular and PCS networks provide digital
coverage to its entire covered population.

Cingular uses TDMA digital technology in its
cellular and contiguous PCS markets and GSM digital technology
in its other PCS markets. There are estimated to be over
590 million GSM customers worldwide and 82 million
TDMA customers worldwide, according to the GSM Association and
the Universal Wireless Communications Consortium, respectively.
In October 2001, Cingular announced its plan to upgrade its
network to EDGE, its choice for 3G wireless technology. As
a transitionary step, GSM voice and GPRS data technology will be
overlaid on Cingulars existing TDMA network beginning in
early 2002. Additionally, new handsets referred to as GAIT
phones are currently being developed that should enable TDMA and
GSM platforms to be interoperable for voice and data services
over both 850 MHz and 1900 MHz. Cingular expects to migrate its
existing network to 3G EDGE technology by early 2004.

Cingulars 900 MHz interactive paging
service utilizes a packet-switched radio network operating at
around 8,000 bytes per second. Cingular is the only operator of
such a network in the United States, though similar networks
exist in other countries. This is a dedicated packet-switched
network, which allows users to access the network almost
instantly and also allows customers to pay based on volume
transmitted instead of connection time. This network is built on
an open international standard, which permits the creation of
off-the-shelf applications by independent application developers.

REGULATORY ENVIRONMENT

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

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



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

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

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

The Communications Act of 1934 and the FCC rules
require the FCCs prior approval of the assignment or
transfer of control of a license for a wireless system. Before
Cingular can complete any such purchase or sale, it must file
appropriate applications with the FCC,

15



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








LATIN AMERICA





OVERVIEW

Our Latin America operations consist primarily of
wireless service providers operating in 11 countries. We do not
own 100% of each of these companies; adjusting market and
customer data to reflect this partial ownership, our licensed
service areas had a population of approximately 157 million
and provided wireless services to approximately 7.4 million
customers, each as of November 30, 2001. The operations in
Latin America generated 12% of our total operating revenues in
2001, 11% of our total operating revenues in 2000 and 9% of our
total operating revenues in 1999.

The results of our Latin America subsidiaries
reflect a fiscal year ending November 30 to facilitate
timely reporting of the consolidated results of BellSouth. The
table below sets forth a summary overview of our Latin America
operating companies as of November 30, 2001. The operating
company data is presented on a total basis regardless of our
ownership percentage and does not necessarily represent amounts
attributable to our consolidated financial results.

|          |                  |                     |       |            |  |            |      |      |       |  |       |       |        | 
|--------- | ---------------- | ------------------- | ----- | ---------- |  | ---------- | ---- | ---- | ----- |  | ----- | ----- | ------ | 
|          |                  | BellSouth           |       |            |  |           
|          |                  | Ownership in        |       | Total      |  | Total     
|          |                  | Operating           |       | Population |  | Customers 
|Country   |                  | Company             |       | Served     |  | Served    
|          |                  |                     |       |            |  |           
|          |                  | (percent)           |       | (In        |  | (In       
|          |                  |                     |       | millions)  |  | thousands)
|Argentina |                  |                     | 65.0  |            |  |            | 37.5 |      |       |  | 1,588 |      
|Brazil    |                  |                     |       |            |  |            |      |      |       |  |       |      
|          | Sao Paulo region |                     |       | 45.4       |  |            |      | 18.1 |       |  |       | 1,781 |       
|          | Northeast region |                     |       | 47.1       |  |            |      | 26.6 |       |  |       | 942   |       
|Chile     |                  |                     | 100.0 |            |  |            | 15.4 |      |       |  | 860   |      
|Colombia  |                  |                     | 66.0  |            |  |            | 43.0 |      |       |  | 1,126 |      
|Ecuador   |                  |                     | 89.4  |            |  |            | 12.8 |      |       |  | 344   |      
|Guatemala |                  |                     | 60.0  |            |  |            | 11.7 |      |       |  | 75    |      
|Nicaragua |                  |                     | 89.0  |            |  |            | 2.9  |      |       |  | 157   |      
|Panama    |                  |                     | 43.7  |            |  |            | 3.0  |      |       |  | 293   |      
|Peru      |                  |                     | 97.4  |            |  |            | 26.1 |      |       |  | 404   |      
|Uruguay   |                  |                     | 46.0  |            |  |            | 2.1  |      |       |  | 138   |      
|Venezuela |                  |                     | 78.2  |            |  |            | 24.4 |      |       |  | 3,106 |      
|          |                  |                     |       |            |  |            |      |      |       |  |       |      
|          |                  | Total Latin America |       |            |  |            |      |      | 223.6 |  |       |       | 10,814 | 
|          |                  |                     |       |            |  |            |      |      |       |  |       |      

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

When entering new markets in Latin America, we
typically seek to establish relationships with one or more local
partners who are familiar with the countrys business and
political environment. In some cases, the ownership structure of
these companies reflects government requirements that local
owners hold a specified interest in the companies
concession or license.

BUSINESS STRATEGY

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



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | grow the core mobile business by expanding
	services to our existing customer base and by profitably
	penetrating the rest of the market;                                    
|
| |  | realize increased operating efficiencies at our
	existing operations by increasing asset utilization and by
	sharing resources, information and expertise across markets; and
|
| |  | increase our ownership in existing operations and
	expand into new geographic service areas if                                                                               

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| |  |                                                     
| |  | ----------------------------------------------------
| |  | opportunities become available on attractive
	terms.

Economic conditions in Latin America have been
deteriorating as the U.S. economy has been in a recession. These
deteriorating conditions could make it difficult for us to
continue to meet our strategic and financial goals. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Operating
Environment and Trends of the Business  Latin
American Economic Trends.

TECHNOLOGY

All of our international wireless markets utilize
digital technology in their wireless service offerings. We have
always selected the type of digital technology for each
international market offering the best cost, quality and
capacity available at the time in that part of the world. Time
Division Multiple Access technology (TDMA) was chosen for
Brazil, Chile, Ecuador, Nicaragua, Panama and Peru. More
recently, we chose Code Division Multiple Access technology
(CDMA) to upgrade the networks in Argentina, Uruguay and
Venezuela and to launch service in Guatemala, based on
improvements in cost quality and capacity as that technology has
matured.

COMPETITION

Our international wireless operations are subject
to significant competition, generally from at least one other
wireless provider and, increasingly, from new PCS providers and
resellers. In some cases, the government-owned telephone
companies operate incumbent wireline and wireless systems or
have a substantial investment in a competing wireless provider.
The competing wireless providers generally have access to
substantial financial resources. Many governments have
privatized the government-owned telephone companies, and these
privatized companies often become more formidable competitors
due to the availability of additional capital and technical
expertise. We anticipate an increasing number of competitors in
our wireless service markets in Latin America.

LICENSES AND REGULATION

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

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

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

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

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FOREIGN RISKS

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

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

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

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

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

PROPOSED TRACKING STOCK

In December 2000, our shareholders approved
amendments to our charter that permit us to issue our common
stock in series. This amendment gives us the flexibility to
conduct a public offering of shares of Latin America group stock
to finance our expansion in Latin America. If we issue shares of
Latin America group stock to the public, our Board of Directors
would initially designate two series: Latin America group stock,
intended to reflect the separate performance of our Latin
American businesses, and BLS group stock, intended to reflect
the separate performance of all of our other businesses. At that
time, each existing share of our common stock would be changed
into one share of BLS group stock.

In the event of a public offering, a number of
shares of Latin America group stock would be reserved for the
BLS group or for issuance to the holders of BLS group stock. We
might distribute, as a dividend to the holders of BLS group
stock, the reserved shares of Latin America group stock within
six to 12 months following a public offering. However, our
Board of Directors may decide to initially issue Latin America
group stock in some other manner or not to create BLS group
stock and Latin America group stock.

Our decision whether, and when, to create, issue
and distribute Latin America group stock is subject to a number
of factors, including market conditions and other factors.

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DOMESTIC ADVERTISING AND PUBLISHING





OVERVIEW

We own a group of companies that publish, print,
sell advertising in and perform related services concerning
alphabetical and classified telephone directories in both paper
and electronic formats. Advertising and publishing revenues are
derived primarily from sales of directory advertising, and
represented approximately 9% of our total operating revenues in
2001 and 8% of our total operating revenues in 2000 and 1999.

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

We also act as a sales agent for advertising in
yellow page directories in certain states and for nonaffiliated
telephone companies and receive a portion of the advertising
revenue as a commission. During 2001, we contracted with 101
nonaffiliated telephone companies to sell advertising in over
295 classified directories in 39 states. We also act as an agent
for national yellow page ad placements in all 50 states on
behalf of over 550 companies.

In addition to publishing directories in
traditional paper form, we publish white and yellow page
directories in other media. For example, we offer white and
yellow page directories on CD-ROM for many of our major markets,
publish Internet white and yellow page directories for the
southeastern U.S. and offer additional Internet advertising
services. These services link to and are available on similar
on-line directories with information for businesses nationwide.
We also sell additional advertising to local and national
businesses for our on-line yellow pages.

We continually seek to expand our advertising and
publishing business by increasing advertising sales in our
traditional directory products. We also market to organizations
and companies with unique directory needs. An export directory,
restaurant and entertainment guides and Internet directories are
examples of such directory services and products.

We own a printing company which prints
substantially all white and yellow pages and specialty
directories distributed within our wireline telecommunications
markets. This company also prints other materials for us and our
affiliates and, to a limited extent, documents for nonaffiliated
companies. In 2001, it printed 58 million white page, yellow
page and specialty directories.

COMPETITION

Competition for advertising revenues continues to
intensify. Many different media compete for advertising
revenues, and some newspaper organizations and other companies
have begun publishing their own directories. Competition for
directory sales agency contracts for the sale of advertising in
publications of nonaffiliated companies also continues to be
strong. Competitors offer directory listings in various media
such as CD-ROM, the Internet and other electronic databases. As
such offerings expand and are enhanced through interactivity and
other features, we will experience heightened competition in our
directory advertising and publishing businesses. We have
responded to the increasing competition and changing market
environment with new directory products, product enhancements,
multi-media delivery options, including Internet directory
services, pricing changes and local promotions.

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ALL OTHER BUSINESSES





We own interests in joint ventures that provide
wireless communications in Denmark, Germany and Israel. These
operations are subject to many of the same licensing, regulatory
and other business considerations as our Latin American
operations. In addition, we have a wholly-owned subsidiary that
provides reinsurance related to customer premises equipment,
both wireline and wireless.

In January 2002, we signed a definitive agreement
with Dutch telecommunications provider Royal KPN N.V. (KPN),
restructuring our relationship. Under the new agreement, we will
exchange our 22.51% stake in E-Plus for 234.7 million KPN
shares. After this exchange, we will hold approximately 9.42% of
KPNs outstanding shares. As part of the transaction we
have surrendered our existing warrant on KPN shares and our
exchange rights with regard to KPN Mobile.

During 2001, we sold our 24.5% ownership interest
in Skycell, an Indian wireless venture.







RESEARCH AND DEVELOPMENT





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 which
supports our commitment to national security and emergency
preparedness.







EMPLOYEES





At December 31, 2001, we employed
approximately 87,875 individuals. About 60% of BellSouths
employees at December 31, 2001 were represented by the
Communications Workers of America (CWA), which is affiliated
with the AFL-CIO. New collective bargaining agreements with the
CWA were ratified in September 2001. These three-year contracts
cover approximately 56,000 employees. The contracts include
basic wage increases totaling 13% compounded over the three
years covered by the contracts. In addition, the agreements
provide for a standard incentive award of two percent of base
salary and overtime compensation, which is subject to adjustment
based on company performance measures for plan years 2001, 2002
and 2003. Other terms of the agreement include pension band
increases and pension plan cash balance improvements for active
employees.




20



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##### Table of Contents






PROPERTIES







GENERAL





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:

|                              |  |      |      |      |  |  |      | 
|----------------------------- |  | ---- | ---- | ---- |  |  | ---- | 
|                              |  | 2000 |      | 2001
|                              |  |      |      |     
|Outside plant                 |  |      | 40%  |      |  |  | 40%  | 
|Central office equipment      |  |      | 38   |      |  |  | 39   | 
|Operating and other equipment |  |      | 9    |      |  |  | 9    | 
|Land and buildings            |  |      | 7    |      |  |  | 7    | 
|Furniture and fixtures        |  |      | 4    |      |  |  | 4    | 
|Plant under construction      |  |      | 2    |      |  |  | 1    | 
|                              |  |      |      |      |  |  |      | 
|                              |  |      | 100% |      |  |  | 100% | 
|                              |  |      |      |      |  |  |      | 

These properties are divided among our operating
segments as follows: communications group, 92%; Latin America,
6%; domestic advertising and publishing, 1%; and other, 1%.

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. 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.







CAPITAL EXPENDITURES





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

Total investment in property, plant and equipment
has increased from $50.1 billion at January 1, 1997 to
$64.3 billion at December 31, 2001, not including
deductions for accumulated depreciation. Significant additions
to property, plant and equipment will be required to meet the
growing demand for telecommunications services and to
continually modernize and improve such services to meet
competitive demands. We project continued population and
economic expansion in certain growth centers within our
nine-state area during the next five to ten years. In addition,
growth in international markets will require investment to
expand existing wireless networks.

Our capital expenditures for 1997 through 2001
were as follows:

|     |  |          |       | 
|---- |  | -------- | ----- | 
|     |  | Millions
|     |  |         
|1997 |  | $        | 4,858 | 
|1998 |  | $        | 5,212 | 
|1999 |  | $        | 6,200 | 
|2000 |  | $        | 6,995 | 
|2001 |  | $        | 5,997 | 

We project capital expenditures of approximately
$4.8 to $5.0 billion for 2002. A majority of the
expenditures will be to expand, enhance and modernize current
wireline operating systems.

We expect expenditures for 2002 to be financed
substantially through internal sources and, to the extent
necessary, from external financing sources.




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##### Table of Contents






LEGAL PROCEEDINGS

Reciprocal compensation

Following the enactment of the Telecommunications
Act of 1996, our telephone company subsidiary, BellSouth
Telecommunications, Inc. (BST), and various competitive local
exchange carriers entered into interconnection agreements
providing for, among other things, the payment of reciprocal
compensation for local calls initiated by the customers of one
carrier that are completed on the network of the other carrier.
Numerous competitive local carriers have claimed entitlement
from BST for compensation associated with dial-up calls
originating on BSTs network and connecting with Internet
service providers (ISPs) served by the competitive local
carriers networks. BST has maintained that dial-up calls
to Internet service providers are not local calls for which
terminating compensation is due under the interconnection
agreements; however, the courts and state regulatory commissions
in BSTs operating territory that have considered the
matter have, in most cases, ruled that BST is responsible for
paying reciprocal compensation on these calls.

We have commenced discussions with competitive
local exchange carriers concerning settlement of these claims,
and agreements have been reached in many circumstances. We do
not expect the financial impact of future settlements to have a
material impact on our results of operations, financial position
or cash flows.

In a related matter, a competitive local carrier
has claimed terminating compensation of approximately
$165 million for service arrangements that we did not
believe involved traffic under our interconnection
agreements. We filed a complaint with the state regulatory
commission asking that agency to declare that we did not owe
reciprocal compensation for these arrangements. In March 2000,
the state commission ruled in our favor finding that
compensation was not owed to the competitive local carrier. The
parties have agreed to a settlement of this matter. In October
2001, a stipulation of dismissal was filed with the court to
effect the settlement.

Foreign Corrupt Practices Act

In July 2000, the SEC began a formal
investigation of whether we and others may have violated the
Foreign Corrupt Practices Act (FCPA). The SEC subpoenaed
documents relating to the activities of our foreign affiliates,
and we produced responsive documents. Prior to the commencement
of the SECs formal investigation, we had engaged outside
counsel to investigate an FCPA matter relating to the activities
of one of our foreign affiliates in Latin America, and outside
counsel concluded that those activities did not violate the Act.
Thereafter and independent of these developments, our internal
auditors, in the ordinary course of conducting audit reviews,
identified issues concerning accounting entries made by another
of our Latin American affiliates. We informed the SEC as to this
matter, and the SEC expanded its investigation to encompass it.

In January 2002, we entered into a settlement
with the SEC regarding these matters. Under the terms of the
settlement, the Company neither admits nor denies the SECs
findings that BellSouth violated the books and records and
internal controls provisions of the Securities Exchange Act of
1934. In reaching the settlement, we agreed to pay a civil
penalty of $150,000 and agreed to the entry of an administrative
order requiring BellSouth to refrain from violations of those
provisions. In its order, the SEC acknowledged our cooperation
and also acknowledged that we have taken remedial actions and
enhanced our compliance program.

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 break-up of the Bell System. At
December 31, 2001, our recorded liability related to these
matters was approximately $21 million. We continue to
believe that expenditures in connection with additional remedial
actions under the current environmental protection laws or
related matters would not be material to our results of
operations, financial position or cash flows.

Other Matters

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




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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,
2001.



---






ADDITIONAL INFORMATION  DESCRIPTION
OF BELLSOUTH STOCK


General

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

Dividend Rights

The holders of common stock are entitled to
receive, from funds legally available for the payment thereof,
dividends when and as declared by resolution of the Board. While
any series of preferred stock is outstanding, no dividends,
other than dividends payable solely in common stock, may be
declared or paid on common stock, and no common stock may be
purchased, redeemed or otherwise acquired for value, 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 non-payment of
preferred stock dividends.

Liquidation Rights

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

Pre-emptive Rights; Conversion Rights;
Redemption

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

Preferred Stock Purchase Rights

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

If an Acquiring Person becomes such without prior
Board approval, the Rights are adjusted, and each holder, other
than the Acquiring Person, then has the right to receive, on
payment of the Purchase Price, the

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##### Table of Contents



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.

Board Classification; Removal of
Directors

Board classification provisions adopted by the
shareholders and contained in the By-laws prescribe a
shareholder vote for approximately one-third of the directors,
instead of all directors, at each annual meeting of shareholders
for a three-year term. Additionally, such provisions provide
that shareholders may remove directors from office only for
cause, and can amend the By-laws with respect to the number of
directors or amend the board classification provisions only by
the affirmative vote of the holders of at least 75% of the
outstanding shares entitled to vote for the election of
directors.

Limitation on Shareholders
Proceedings

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



---

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



---

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##### Table of Contents








EXECUTIVE OFFICERS


The executive officers of BellSouth Corporation
are listed below:

|                       |  |     |    |        |  |                                                               |  |        |      |  |  |  |      | 
|---------------------- |  | --- | -- | ------ |  | ------------------------------------------------------------- |  | ------ | ---- |  |  |  | ---- | 
|                       |  |     |    |        |  |                                                               |  | This  
|                       |  |     |    |        |  | Officer                                                       |  | Office
|Name                   |  | Age |    | Office |  | Since                                                         |  | Since 
|                       |  |     |    |        |  |                                                               |  |       
|F. Duane Ackerman      |  |     | 59 |        |  | Chairman of the Board, President and Chief
	Executive Officer |  |        | 1983 |  |  |  | 1997 | 
|                      
|Keith O. Cowan         |  |     | 45 |        |  | Chief Planning and Development Officer                        |  |        | 1996 |  |  |  | 2000 | 
|                      
|Francis A. Dramis, Jr. |  |     | 53 |        |  | Chief Information and E-Commerce Officer                      |  |        | 1998 |  |  |  | 2000 | 
|                      
|Ronald M. Dykes        |  |     | 54 |        |  | Chief Financial Officer                                       |  |        | 1988 |  |  |  | 1995 | 
|                      
|Gary D. Forsee         |  |     | 51 |        |  | Vice ChairmanDomestic Operations                             |  |        | 1999 |  |  |  | 2002 | 
|                      
|Charles R. Morgan      |  |     | 55 |        |  | General Counsel                                               |  |        | 1998 |  |  |  | 1998 | 
|                      
|W. Patrick Shannon     |  |     | 39 |        |  | Vice PresidentFinance                                        |  |        | 1997 |  |  |  | 2000 | 
|                      
|Rafael de la Vega      |  |     | 50 |        |  | PresidentLatin America Operations                            |  |        | 1997 |  |  |  | 2002 | 

All of the executive officers of BellSouth, other
than Mr. Dramis, Mr. Forsee and Mr. Morgan, have
for at least the past five years held high level management or
executive positions with BellSouth or its subsidiaries.
Mr. Dramis joined BellSouth in December 1998 from CIO
Strategies Inc., a Clifton, Virginia-based information
technology consulting firm. Prior to joining BellSouth in
September 1999, Mr. Forsee was President and Chief
Executive Officer of Global One, a global telecommunications
joint venture, and before that held various senior positions
with Sprint Corporation. Prior to joining BellSouth in February
1998, Mr. Morgan was a partner with Mayer, Brown &
Platt, a Chicago-based international law firm.

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

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##### Table of Contents






PART II




MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED 
    SHAREHOLDER MATTERS

The principal market for trading in BellSouth
common stock is the New York Stock Exchange, Inc. (NYSE).
BellSouth common stock is also listed on the Boston, Chicago and
Pacific exchanges in the United States and the London,
Frankfurt, Amsterdam and Swiss exchanges. We have filed
applications with the SEC to delist our common stock from the
Boston and Pacific exchanges. The ticker symbol for BellSouth
common stock is BLS. At February 1, 2002, there were
811,067 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.

|               |  |               |       |           |  |          |       |  |  |   |     | 
|-------------- |  | ------------- | ----- | --------- |  | -------- | ----- |  |  | - | --- | 
|               |  |               |       |          
|               |  | Market Prices |       | Per Share
|               |  |               |       | Dividends
|               |  | High          |       | Low       |  | Declared
|               |  |               |       |           |  |         
|2000           |  |               |       |           |  |          |       |  |  |   |     | 
|First Quarter  |  | $             | 48.13 |           |  | $        | 34.94 |  |  | $ | .19 | 
|Second Quarter |  |               | 53.50 |           |  |          | 41.63 |  |  |   | .19 | 
|Third Quarter  |  |               | 44.25 |           |  |          | 35.50 |  |  |   | .19 | 
|Fourth Quarter |  |               | 50.63 |           |  |          | 38.75 |  |  |   | .19 | 
|2001           |  |               |       |           |  |          |       |  |  |   |     | 
|First Quarter  |  |               | 45.88 |           |  |          | 36.46 |  |  |   | .19 | 
|Second Quarter |  |               | 43.07 |           |  |          | 37.40 |  |  |   | .19 | 
|Third Quarter  |  |               | 42.95 |           |  |          | 36.67 |  |  |   | .19 | 
|Fourth Quarter |  |               | 42.48 |           |  |          | 36.26 |  |  |   | .19 | 

STOCK TRANSFER AGENT AND REGISTRAR

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

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##### Table of Contents






SELECTED FINANCIAL AND OPERATING DATA

(DOLLARS
IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


|                                                                        |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                       
|                                                                       
|At December 31 or for the year ended                                    |  | 1997 |        | 1998 |  | 1999 |        | 2000 |  | 2001
|                                                                       
|                                                                       
|Income Statement Data:                                                  |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Operating revenues                                                      |  | $    | 20,561 |      |  | $    | 23,123 |      |  | $    | 25,224 |   |  | $ | 26,151 |   |  | $ | 24,130 |  
|                                                                       
|Operating expenses                                                      |  |      | 15,185 |      |  |      | 17,219 |      |  |      | 18,787 |   |  |   | 19,267 |   |  |   | 17,789 |  
|                                                                       
|Operating income                                                        |  |      | 5,376  |      |  |      | 5,904  |      |  |      | 6,437  |   |  |   | 6,884  |   |  |   | 6,341  |  
|                                                                       
|Net income                                                              |  |      | 3,261  |      |  |      | 3,527  |      |  |      | 3,448  |   |  |   | 4,220  |   |  |   | 2,570  |  
|                                                                       
|Operating income margin                                                 |  |      | 26.1   | %    |  |      | 25.5   | %    |  |      | 25.5   | % |  |   | 26.3   | % |  |   | 26.3   | %
|                                                                       
|                                                                       
|Diluted earnings per share of common stock                              |  | $    | 1.64   |      |  | $    | 1.78   |      |  | $    | 1.80   |   |  | $ | 2.23   |   |  | $ | 1.36   |  
|                                                                       
|Diluted weighted-average shares of Common stock
	outstanding (millions) |  |      | 1,989  |      |  |      | 1,984  |      |  |      | 1,916  |   |  |   | 1,891  |   |  |   | 1,887  |  
|                                                                       
|Dividends declared per share of common stock                            |  | $    | .72    |      |  | $    | .73    |      |  | $    | .76    |   |  | $ | .76    |   |  | $ | .76    |  
|                                                                       
|Balance Sheet Data:                                                     |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Total assets                                                            |  |      | 36,301 |      |  |      | 39,410 |      |  |      | 43,453 |   |  |   | 50,925 |   |  |   | 52,046 |  
|                                                                       
|Long-term debt                                                          |  |      | 7,348  |      |  |      | 8,715  |      |  |      | 9,113  |   |  |   | 12,463 |   |  |   | 15,014 |  
|                                                                       
|Shareholders equity                                                    |  |      | 15,165 |      |  |      | 16,110 |      |  |      | 14,815 |   |  |   | 16,912 |   |  |   | 18,597 |  
|                                                                       
|Other:                                                                  |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Operating cash flow                                                     |  |      | 7,039  |      |  |      | 7,741  |      |  |      | 8,199  |   |  |   | 8,590  |   |  |   | 7,998  |  
|                                                                       

Significant events affecting our historical
earnings trends include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1997 results include gains resulting from the
	sales of our interests in Optus Communications, ITT World
	Directories and Bellcore, which increased net income by $352, or
	$0.18 per share, $128, or $0.06 per share, and $23, or $0.01 per
	share. 1997 results also include the effect of a regulatory
	settlement in South Carolina, which reduced operating revenues
	by $72 and net income by $47, or $0.02 per share, as well as a
	loss of $9 incurred in connection with the early redemption of
	long-term debt.
|
| |  | 1998 results include gains resulting from the
	sale of our interests in BellSouth New Zealand and ITT World
	Directories, which increased net income by $110, or $0.06 per
	share, and $96, or $0.05 per share. 1998 results also include
	the effect of contingent interest and prepayment penalties
	associated with the repayment of a loan receivable which
	increased net income by $62, or $0.03 per share.                                                                                                         

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
1999, 2000 and 2001.

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

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





Consolidated Results of Operations

Key selected financial and operating data for the
three years ended December 31, 1999, 2000 and 2001 are as
follows. All references to earnings per share are on a diluted
basis.

|                                                 |                    |                |        |          |  |      |        |        |  |      |        |        |  |  |         |      |  |  |       |      | 
|------------------------------------------------ | ------------------ | -------------- | ------ | -------- |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  |  | ------- | ---- |  |  | ----- | ---- | 
|                                                
|                                                
|                                                 |                    |               
|                                                 |                    | Percent Change
|                                                 |                    |               
|                                                 |                    | 2000 vs.       |        | 2001 vs.
|                                                 |                    | 1999           |        | 2000     |  | 2001 |        | 1999   |  | 2000
|                                                
|                                                
|Results of operations:                           |                    |                |        |          |  |      |        |        |  |      |        |        |  |  |         |      |  |  |       |     
|Operating revenues                               |                    | $              | 25,224 |          |  | $    | 26,151 |        |  | $    | 24,130 |        |  |  | 3.7     |      |  |  | (7.7  | )   
|Operating expenses                               |                    |                | 18,787 |          |  |      | 19,267 |        |  |      | 17,789 |        |  |  | 2.6     |      |  |  | (7.7  | )   
|Operating income                                 |                    |                | 6,437  |          |  |      | 6,884  |        |  |      | 6,341  |        |  |  | 6.9     |      |  |  | (7.9  | )   
|Interest expense                                 |                    |                | 1,030  |          |  |      | 1,328  |        |  |      | 1,315  |        |  |  | 28.9    |      |  |  | (1.0  | )   
|Net earnings (losses) of equity affiliates       |                    |                | (169   | )        |  |      | 690    |        |  |      | 465    |        |  |  | N/M     | *    |  |  | (32.6 | )   
|Gain (loss) on sale of operations                |                    |                | 55     |          |  |      | (14    | )      |  |      | 38     |        |  |  | N/M     |      |  |  | N/M   |     
|Other income (expense), net                      |                    |                | 195    |          |  |      | 366    |        |  |      | (1,512 | )      |  |  | 87.7    |      |  |  | N/M   |     
|Provision for income taxes                       |                    |                | 2,040  |          |  |      | 2,378  |        |  |      | 1,447  |        |  |  | 16.6    |      |  |  | (39.2 | )   
|Net income                                       |                    | $              | 3,448  |          |  | $    | 4,220  |        |  | $    | 2,570  |        |  |  | 22.4    |      |  |  | (39.1 | )   
|Earnings per share                               |                    | $              | 1.80   |          |  | $    | 2.23   |        |  | $    | 1.36   |        |  |  | 23.9    |      |  |  | (39.0 | )   
|Cash Flow Data:                                  |                    |                |        |          |  |      |        |        |  |      |        |        |  |  |         |      |  |  |       |     
|Cash provided by operating activities            |                    | $              | 8,199  |          |  | $    | 8,590  |        |  | $    | 7,998  |        |  |  | 4.8     |      |  |  | (6.9  | )   
|Cash used for investing activities               |                    |                | (9,888 | )        |  |      | (9,303 | )      |  |      | (7,039 | )      |  |  | 5.9     |      |  |  | 24.3  |     
|Cash (used for) provided by financing activities |                    |                | (167   | )        |  |      | 487    |        |  |      | (1,428 | )      |  |  | N/M     |      |  |  | N/M   |     
|Other:                                           |                    |                |        |          |  |      |        |        |  |      |        |        |  |  |         |      |  |  |       |     
|Effective tax rate                               |                    |                | 37.2   | %        |  |      | 36.0   | %      |  |      | 36.0   | %      |  |  | -120bps |      |  |  | 0 bps |     
|Average short-term debt                          |                    | $              | 6,182  |          |  | $    | 6,987  |        |  | $    | 6,164  |        |  |  | 13.0    |      |  |  | (11.8 | )   
|Average long-term debt                           |                    |                | 8,599  |          |  |      | 10,740 |        |  |      | 13,687 |        |  |  | 24.9    |      |  |  | 27.4  |     
|                                                 | Total average debt |                | $      | 14,781   |  |      | $      | 17,727 |  |      | $      | 19,851 |  |  |         | 19.9 |  |  |       | 12.0 | 
|                                                

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

During 2000 and 2001, several events occurred
which significantly affected the comparability of our operating
results. Those events include the following:

Formation of Cingular Wireless

In October 2000, we contributed our domestic
wireless voice and data operations to a joint venture with SBC
Communications, Inc.(SBC) and formed Cingular Wireless
(Cingular). We own an approximate 40% economic stake in
Cingular, and share joint control with SBC. Accordingly, we
account for our share of Cingulars results using the
equity method. Prior to October 2000, we consolidated the
revenues and expenses of these operations. As a result of this
change, our 2000 results include nine months of revenues and
expenses attributable to our former domestic wireless operations
and three months of equity in earnings attributable to Cingular.

Adoption of SAB 101

Effective January 1, 2000 we changed the
method of recognizing revenues and expenses derived from
installation and activation activities. We did this to comply
with new accounting guidance contained in SAB 101, Revenue
Recognition in Financial Statements, which requires that
revenues from such activities be deferred and recognized over
the estimated life of the relationship with the customer. The
change in methodology resulted in deferring an equal amount of
revenue and expense and therefore did not impact earnings. SAB
101 prohibited the restatement of prior period results; as a
result, our reported 1999 operating revenues and expenses are
not comparable to the 2000 and 2001 periods. If we had changed
the method effective January 1, 1999, revenues and expenses
in that year would have been reduced equally by $248.

28



---



##### Table of Contents



In addition to the items described above, the
following events impacted operating expenses from 1999 to 2001:

|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  
|------------------------------------------------------------- |  | --------------------------- | ---- | ------ |  | ------ | ---- | - |  | - | ---- | -
|                                                              |  |                            
|                                                              |  | Impact On Reported Results
|                                                              |  | Increase (Decrease)        
|                                                              |  |                            
|                                                              |  |                             |      | Income |  |       
|                                                              |  | Operating                   |      | Before |  | Net   
|                                                              |  | Expense                     |      | Taxes  |  | Income
|                                                              |  |                             |      |        |  |       
|1999                                                          |  |                             |      |        |  |        |      |   |  |   |      |  
|Restructurings and asset impairments                          |  | $                           | 320  |        |  | $      | (305 | ) |  | $ | (187 | )
|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  
|                                                              |  | $                           | 320  |        |  | $      | (305 | ) |  | $ | (187 | )
|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  
|2000                                                          |  |                             |      |        |  |        |      |   |  |   |      |  
|Restructurings and asset impairments                          |  | $                           | 606  |        |  | $      | (606 | ) |  | $ | (393 | )
|Gains from pension settlements                                |  |                             | (362 | )      |  |        | 362  |   |  |   | 223  |  
|Contract termination settlement                               |  |                             | 203  |        |  |        | (203 | ) |  |   | (125 | )
|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  
|                                                              |  | $                           | 447  |        |  | $      | (447 | ) |  | $ | (295 | )
|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  
|2001                                                          |  |                             |      |        |  |        |      |   |  |   |      |  
|Restructurings and asset impairments                          |  | $                           | 358  |        |  | $      | (358 | ) |  | $ | (227 | )
|Adjustment to ISP accrual                                     |  |                             | 143  |        |  |        | (143 | ) |  |   | (88  | )
|Postretirement benefit expense for former
	wireless employees |  |                             | 72   |        |  |        | (72  | ) |  |   | (47  | )
|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  
|                                                              |  | $                           | 573  |        |  | $      | (573 | ) |  | $ | (362 | )
|                                                              |  |                             |      |        |  |        |      |   |  |   |      |  

Restructurings and asset
impairments Represents
restructuring related costs and related asset impairments for
actions taken to reduce operating costs. For 2001, these costs
include severance related costs and asset impairments, primarily
software. For 2000, these costs include the restructuring of our
domestic wireless entertainment business and the reduction of
our domestic general and administrative staff. The 1999 amount
represents the loss associated with the writedown of equipment
that was replaced as we upgraded our U.S. wireless network.

Gains from pension
settlements During 2000,
the number of employees who voluntarily separated and elected to
receive lump-sum retirement benefits exceeded thresholds that
require current recognition of deferred gains related to these
employees.

Contract termination
settlement BellSouth
settled litigation with a distributor of residential telephone
equipment and paid approximately $200 to the distributor for the
termination of their existing agreement.

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

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

Operating Revenues

Operating revenues decreased $2,021 during 2001
and increased $927 during 2000. These changes reflect:



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Growth in communications group revenues of $675
	during 2001 and $713 during 2000, driven by strong growth in
	digital and data revenues, wholesale revenues, and sales of
	custom calling features. These increases were offset by declines
	in basic service revenues, reflecting competition, rate
	reductions and a slowing economy. Revenues were $118 lower in
	2001 and $204 lower in 2000 reflecting net deferrals related to
	SAB 101. These decreases were entirely offset by corresponding
	decreases in operating expenses.                                                                                                                                                                                                                                                                                                        
| 
| | For domestic wireless operations, a decrease of
	$2,766 in 2001 and $470 in 2000, due to the contribution of our
	domestic wireless operations to Cingular in October 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
| | For 2001, relatively flat revenue growth from our
	Latin America group of $4. The Latin America group revenues in
	2001 were favorably impacted by the addition of the operations
	in Colombia. The unfavorable impacts, however, of weakening
	economies, changes in foreign currency exchange rates and an
	unfavorable change in the interconnection agreements as well as
	changes in telecommunications regulation at our Venezuelan
	operations in 2001 substantially offset growth. For 2000, the
	Latin America group grew revenues by $542, resulting from growth
	in the customer bases of our existing wireless operations of
	67.1% and the addition of new wireless operations in Colombia.
	The groups results in 2000 were also affected by weakening
	economies and changes in foreign currency rates but to a lesser
	degree.

Operating Expenses

Total operating expenses decreased $1,478 during
2001 and increased $480 during 2000. Excluding the items listed
in the previous table, total operating expenses decreased $1,604
during 2001 and increased $353 during 2000, which reflect the
following:



|  |                                                                                      
|- | -------------------------------------------------------------------------------------
| | Operational and support expenses decreased $1,451
	in 2001 and increased $89 in 2000.



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expenses in the communications group increased
	$577 in 2001 and $291 in 2000 as a result of higher levels of
	spending for customer service

29



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | and network support functions in support of
	customer service initiatives as well as expenses for our
	accelerated DSL growth initiative. Expenses were $118 lower in
	2001 and $204 lower in 2000 reflecting net deferrals related to
	SAB 101. These decreases were entirely offset by
	corresponding decreases in operating revenues.                                                                                                                                                                                                                                  
|
| |  | Expenses from domestic wireless operations
	decreased $1,959 in 2001 and $400 in 2000, attributable to our
	contribution of those operations to Cingular.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Expenses in the Latin America segment decreased
	$261 in 2001 after an increase of $462 in 2000. This change was
	driven primarily by customer acquisition-related costs, and
	reflects more targeted acquisition efforts during 2001. Also
	included in these changes were increases of $121 in 2001 and $98
	in 2000 resulting from wireless operations in Colombia which
	were acquired in mid-2000. The Latin America segments
	expenses were favorably impacted by $105 in 2001 and $177 in
	2000 from the weakening of foreign currencies against the U.S.
	Dollar.



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization decreased $153 in
	2001 and increased $264 in 2000. The decrease in 2001 is
	attributable to the contribution of our former wireless
	operations to Cingular resulting in a decrease of $642 of
	expenses, offset by increases at the communications group
	reflecting increased deployment of capitalized software and
	investment in broadband. The increase in 2000 was primarily a
	result of additions of property, plant, equipment and software
	to support expansion of our communications group and Latin
	American wireless networks.

Interest Expense

Interest expense decreased $13 in 2001 and
increased $298 in 2000. Interest expense decreased in 2001
primarily as a result of decreases in interest rates on
short-term borrowings. The decrease in the rates was partially
offset by higher debt levels. The increase in interest expense
in 2000 is attributable to higher average long-term debt
balances resulting from borrowings associated with the financing
of our investments in Colombia and Brazil and the buyout of
minority partner interests in the Carolinas DCS business prior
to the contribution of those operations to Cingular and higher
interest rates.

Gain (loss) on sale of operations

In 2001, we recognized a gain of $24 from the
sale of a 24.5% ownership interest in Skycell, an Indian
wireless venture, and $14 from the sale of BellSouth
International Wireless Services, an international wireless
roaming clearinghouse. During 2000, we sold ownership interests
in wireless data operations in Belgium, the Netherlands and the
United Kingdom. These sales generated a loss of $14. Gains for
1999 include $39 from the sale of a 100% ownership interest in
Honolulu Cellular and $16 from the sale of a wireless property
in Alabama.

Net earnings (losses) of equity
affiliates

Earnings from our unconsolidated businesses
decreased $225 in 2001 and increased $859 in 2000. The 2000
period included a $479 gain from the redemption of AT&T from
the AB Cellular partnership and $68 in income related to the
restructuring of our ownership interest in E-Plus. Excluding
these events, equity in earnings would have increased $322 in
2001 and $312 in 2000. The change of $322 in 2001 reflects
approximately $620 higher equity in earnings from Cingular,
offset by a decrease of approximately $140 attributable to the
contribution of domestic wireless holdings to Cingular and $120
attributable to higher foreign currency exchange losses in Latin
America. The change of $312 in 2000 primarily reflects a $240
improvement in foreign currency losses in the Latin American
operations.

Other income (expense), net

Other income (expense), net includes interest
income, gains (losses) on disposition of assets, losses
from the writedown of investments, foreign currency gains
(losses) and miscellaneous nonoperating income (losses).
The decrease in 2001 is due to $1,817 of losses related to the
writedown of equity investments due to other-than-temporary
declines in their fair values. The increase in 2000 is primarily
attributable to increases of $202 from higher interest income,
lower minority interest expense and changes in miscellaneous
nonoperating items. Other income (expense), net included
interest income from Cingular of $291 in 2001 and $71 in 2000.

Provision for income taxes

The provision for income taxes decreased $931
during 2001 and increased $338 during 2000. Our effective tax
rate decreased from 37.2% in 1999 to 36.0% in 2000 and remained
at 36.0% in 2001.

The effective tax rate for 2001 was 36.0%,
consistent with 2000. The year 2001 includes recognition of a
deferred tax asset of $122 related to the excess of tax basis
over book basis in our investment in E-Plus. We recognized this
asset when it became apparent this temporary difference would
reverse in the foreseeable future due to a decision to exchange
shares in E-Plus for shares of KPN. The rate was negatively
impacted by

30



---



##### Table of Contents



an increase in losses from foreign equity
investments, which are reported net of tax, and the writedown of
equity investments for which no state tax benefits were recorded.


The decrease in the 2000 effective tax rate was
driven by the impact of additional income related to the
restructuring of our ownership in our German wireless
operations, the recognition of tax incentives, tax benefits
generated by the sale of our international wireless data
properties and more favorable results from companies we report
on the equity-method, which generally are recorded net of tax
benefits or expense.

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



---




Results by Segment

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



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

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

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

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









Communications Group





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

Adjustments to Segment Results

Gross versus net presentationWe have
adjusted the communications groups historical revenues and
expenses to present all revenues from sales of customer premises
equipment on an agency-fee basis (net of associated direct
costs). We made this adjustment to present these revenues on a
basis comparable to amounts earned under a new vendor contract
entered into during first quarter 2001. We have also adjusted
the communications groups historical revenues and expenses
to reflect a change in reporting of gross receipts taxes in
Florida. Beginning in the fourth quarter of 2001, we are
required to account for the tax collected from customers as a
pass-through billing (i.e. net presentation). Both of these
changes are neutral to earnings as they reduce revenues and
expenses by an equal amount.

SAB 101Effective January 1, 2000, we
changed the method of recognizing revenues and expenses derived
from installation and activation activities. We did this to
comply with new accounting guidance contained in SAB 101, which
requires that revenues from such activities be deferred and
recognized over the estimated life of the relationship with the
customer. The change in methodology resulted in deferring an
equal amount of revenue and expense and therefore did not impact
earnings. For management purposes and in order to provide
comparable revenue and expense data, we have adjusted the 1999
period to present the results which would have occurred if SAB
101 was adopted on January 1, 1999.

31



---



##### Table of Contents



|                                            |                                  |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |      |       |      |  
|------------------------------------------- | -------------------------------- | -------------- | -------------------------------- | -------- | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ----- | ---- | ---- | ---- | ----- | ---- | ----- | ---- | -
|                                           
|                                           
|                                            |                                  |               
|                                            |                                  | Percent Change
|                                            |                                  |               
|                                            |                                  | 2000 vs.       |                                  | 2001 vs.
|                                            |                                  | 1999           |                                  | 2000     |        | 2001   |         | 1999   |        | 2000  
|                                           
|                                           
|Results of Operations:                      |                                  |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |     
|Segment operating revenues:                 |                                  |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |     
|                                            | Local service                    |                | $                                | 10,686   |        |        | $       | 11,468 |        |        | $       | 11,810 |        |        |       | 7.3  |      |      |       | 3.0  |      
|                                            | Network access                   |                |                                  | 4,639    |        |        |         | 4,769  |        |        |         | 4,969  |        |        |       | 2.8  |      |      |       | 4.2  |      
|                                            | Long distance                    |                |                                  | 681      |        |        |         | 675    |        |        |         | 747    |        |        |       | (0.9 | )    |      |       | 10.7 |      
|                                            | Other communications             |                |                                  | 1,463    |        |        |         | 1,543  |        |        |         | 1,545  |        |        |       | 5.5  |      |      |       | 0.1  |      
|                                            |                                  |                | Total segment operating revenues |          |        | 17,469 |         |        |        | 18,455 |         |        |        | 19,071 |       |      |      | 5.6  |       |      |       | 3.3  |  
|Segment operating expenses:                 |                                  |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |     
|                                            | Operational and support expenses |                |                                  | 8,392    |        |        |         | 8,683  |        |        |         | 9,260  |        |        |       | 3.5  |      |      |       | 6.6  |      
|                                            | Depreciation and amortization    |                |                                  | 3,479    |        |        |         | 3,786  |        |        |         | 4,045  |        |        |       | 8.8  |      |      |       | 6.8  |      
|                                            |                                  |                | Total segment operating expenses |          |        | 11,871 |         |        |        | 12,469 |         |        |        | 13,305 |       |      |      | 5.0  |       |      |       | 6.7  |  
|Segment operating income                    |                                  |                | 5,598                            |          |        |        | 5,986   |        |        |        | 5,766   |        |        |        | 6.9   |      |      |      | (3.7  | )   
|Segment net income                          |                                  | $              | 3,166                            |          |        | $      | 3,356   |        |        | $      | 3,304   |        |        |        | 6.0   |      |      |      | (1.5  | )   
|Key Indicators:                             |                                  |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |     
|Access line counts:                         |                                  |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |     
|                                            | Access lines:                    |                |                                  |          |        |        |         |        |        |        |         |        |        |        |       |      |      |      |       |      |      
|                                            |                                  | Residential    |                                  |          | 17,002 |        |         |        | 17,135 |        |         |        | 16,773 |        |       |      | 0.8  |      |       |      | (2.1  | )   
|                                            |                                  | Business       |                                  |          | 8,232  |        |         |        | 8,525  |        |         |        | 8,440  |        |       |      | 3.6  |      |       |      | (1.0  | )   
|                                            |                                  | Other          |                                  |          | 265    |        |         |        | 248    |        |         |        | 209    |        |       |      | (6.4 | )    |       |      | (15.7 | )   
|                                            |                                  |                | Total access lines               |          |        | 25,499 |         |        |        | 25,908 |         |        |        | 25,422 |       |      |      | 1.6  |       |      |       | (1.9 | )
|                                            | Access line equivalents(1)       |                |                                  | 17,477   |        |        |         | 27,892 |        |        |         | 40,207 |        |        |       | 59.6 |      |      |       | 44.2 |      
|                                            |                                  |                | Total equivalent access lines    |          |        | 42,976 |         |        |        | 53,800 |         |        |        | 65,629 |       |      |      | 25.2 |       |      |       | 22.0 |  
|Resold lines and unbundled network elements |                                  |                | 816                              |          |        |        | 1,308   |        |        |        | 1,737   |        |        |        | 60.3  |      |      |      | 32.8  |     
|Access minutes of use (millions)            |                                  |                | 110,755                          |          |        |        | 115,217 |        |        |        | 110,106 |        |        |        | 4.0   |      |      |      | (4.4  | )   
|Long distance messages (millions)           |                                  |                | 644                              |          |        |        | 504     |        |        |        | 430     |        |        |        | (21.7 | )    |      |      | (14.7 | )   
|DSL customers                               |                                  |                | 30                               |          |        |        | 215     |        |        |        | 621     |        |        |        | N/M   | *    |      |      | 188.8 |     
|Digital and data services revenues          |                                  | $              | 2,683                            |          |        | $      | 3,409   |        |        | $      | 4,338   |        |        |        | 27.1  |      |      |      | 27.3  |     
|Calling feature revenues                    |                                  | $              | 1,913                            |          |        | $      | 2,145   |        |        | $      | 2,281   |        |        |        | 12.1  |      |      |      | 6.3   |     
|Capital expenditures                        |                                  | $              | 4,853                            |          |        | $      | 5,440   |        |        | $      | 5,125   |        |        |        | 12.1  |      |      |      | (5.8  | )   
|                                           
|                                           



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



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

Segment operating revenues

Local service

Local service revenues increased $342 during 2001
and $782 during 2000, attributable to strong growth in digital
and data revenues, wholesale revenues, and by our marketing of
calling features. Those increases were offset by a decrease in
basic service revenues reflecting competition, rate reductions
and a slowing economy. Revenues were $118 lower in 2001 and $204
lower in 2000 reflecting net deferrals related to SAB 101.
These decreases were entirely offset by corresponding decreases
in operating expenses.

Residential access lines decreased 2.1% in 2001
and rose 0.8% in 2000. Business access lines decreased 1.0% in
2001 and increased 3.6% in 2000. We have experienced a worsening
trend in access line declines over the past five quarters. The
core business was affected by a slowing economy, as evidenced by
negative employment growth of 0.1% in the southeast in 2001
compared to positive growth of 2.1% in 2000, competitive impacts
related to over 300 active carriers authorized to provide
telecommunications services in our region and technological
changes manifested in the shifting of customers from wireline to
wireless and second line customers to high-speed access service.

At December 31, 2001, we provided
1.7 million wholesale lines to competitors, on both a
resale and unbundled network elements (UNE) basis. At
December 31, 2001, UNEs accounted for approximately 59% of
our wholesale lines and at December 31, 2000 they
represented 41%. Because of the larger discounts associated with
UNEs versus resale, this shift to UNEs is negatively impacting
our revenue growth. We also estimate that we have lost an
additional 2.2 million lines to facilities based competitors.

32



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Revenues from optional calling features such as
caller ID, call waiting, call return and voicemail service
increased $136, or 6.3%, during 2001 and $232, or 12.1%, during
2000. These increases were driven by growth in calling feature
usage through our Complete Choice® package, a one-price
bundled offering of over 20 calling features.

Increased penetration of extended local area
calling plans driven by demand for Area Plus, a BellSouth
package that combines a basic telephone line with an expanded
local calling area, also increased local service revenues by
approximately $52 during 2001 and $168 during 2000. Area Plus
packages grew 11.1% in 2001 to over 2 million.

Network access

Network access revenues increased $200 in 2001
and $130 in 2000. Revenues from dedicated high-capacity data
line offerings grew approximately $411 in 2001 and $296 in 2000
as Internet service providers and high-capacity users increased
their use of our network. The increases were offset by a decline
of $216 in 2001 and $62 in 2000 in revenues derived from
switched access services resulting from a decrease in access
minutes-of-use volumes and the impacts of access charge rate
reductions. Access minutes-of-use decreased 4.4% in 2001 after
an increase of 4.0% in 2000. These volumes continue to be
negatively impacted by migration of minutes to dedicated digital
and data services offerings which are fixed-charge based rather
than minute-of-use based, competition from competitive local
exchange carriers whose traffic completely bypasses our network,
and the effect of alternative services such as wireless and
Internet e-mail.

Net rate impacts also decreased revenues by $50
in 2001 and $339 in 2000. These reductions are primarily related
to the FCCs access reform and productivity factor
adjustments. The reductions were partially offset by recoveries
of local number portability costs in both 2001 and 2000.

Long distance

Long distance revenues increased $72 in 2001
after a decrease of $6 in 2000. Strong growth in wholesale long
distance and prepaid long distance cards was partially offset by
losses in intraLATA toll as toll messages declined 14.7% in 2001
and 21.7% in 2000. Growth in wholesale long distance was driven
by increased sales to second and third tier long distance
carriers and higher volumes related to Cingular driven by
proliferation of free long distance plans. IntraLATA toll losses
are driven by the increased demand for Area Plus services, which
are included in local service.

Other communications

Other communications revenues growth was flat in
2001 after an increase of 5.5% in 2000. For 2001, growth in
revenues from wireless interconnection and higher sales of data
networking equipment were offset by reductions in payphone
revenues as BellSouth continues to transition out of this
business by year-end 2003 and by impacts related to exiting the
wireless entertainment business. The increase in 2000 was
primarily attributable to proceeds from universal service funds,
partially offset by decreases in sales of customer premises
equipment.

Segment operating expenses

Operational and support expenses

Operational and support expenses increased $577
during 2001 and $291 during 2000. The increase in 2001 was
primarily attributable to higher labor costs associated with
data growth initiatives and customer service initiatives, higher
ongoing information technology expenses and service penalties.
In addition, the provision for uncollectible receivables
increased $171 as the slowing economy caused an increase in CLEC
and small business failures. The increase in 2001 also included
$150 for costs of sales associated with wholesale long distance
and data networking equipment. These increases were offset by
credits to expense of $141 as recognized pension plan credits
exceeded expenses from other retiree benefits.

The increase in 2000 was primarily attributable
to increases in labor costs and reciprocal compensation expense
totaling $230. Also contributing to this increase were expenses
related to data initiatives, including high-speed Internet
access and optical-fiber based broadband services, and
promotional expenses related to expanding our Internet customer
base. These increases were offset by credits to expense of $106
as recognized pension plan credits exceeded expenses from other
retiree benefits.

Expenses were $118 lower in 2001 and $204 lower
in 2000 reflecting net deferrals related to SAB 101. These
decreases were entirely offset by corresponding decreases in
operating revenues.

Depreciation and amortization

Depreciation and amortization expense increased
$259 during 2001 and $307 during 2000. The increases are
primarily attributable to amortization of capitalized software
and depreciation resulting from higher levels of net property,
plant and equipment partially offset by declines in the overall
composite depreciation rate.

33



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##### Table of Contents









Domestic Wireless





During fourth quarter 2000, we contributed our
domestic wireless operations to a joint venture with SBC
Communications, forming the second largest wireless carrier in
the U.S., Cingular. We own an approximate 40% economic interest
in the venture and share control with SBC. We account for the
investment under the equity method. For management purposes, we
evaluate our domestic wireless segment based on our
proportionate share of Cingulars results. Accordingly,
results for our domestic wireless segment reflect the
proportional consolidation of approximately 40% of
Cingulars results for all of 2001 and the last three
months of 2000, whereas the first nine months of 2000 and all of
1999 reflect the historical results of our wireless business
that were contributed to Cingular. Because of the change in
operations, growth rates are not indicative of the underlying
operations.

Certain reclassifications of prior period amounts
have been made, where appropriate, to reflect comparable
operating results.

|                                           |                                  |                                  |       |          |       |      |       |       |       |      |       |       |       |  |       |      |      |  |       |      |      | 
|------------------------------------------ | -------------------------------- | -------------------------------- | ----- | -------- | ----- | ---- | ----- | ----- | ----- | ---- | ----- | ----- | ----- |  | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                          
|                                          
|                                           |                                  |                                 
|                                           |                                  | Percent Change                  
|                                           |                                  |                                 
|                                           |                                  | 2000 vs.                         |       | 2001 vs.
|                                           |                                  | 1999                             |       | 2000     |       | 2001 |       | 1999  |       | 2000
|                                          
|                                          
|Segment operating revenues:                |                                  |                                  |       |          |       |      |       |       |       |      |       |       |       |  |       |      |      |  |       |     
|                                           | Service revenues                 |                                  | $     | 3,238    |       |      | $     | 3,944 |       |      | $     | 5,227 |       |  |       | 21.8 |      |  |       | 32.5 |     
|                                           | Equipment revenues               |                                  |       | 303      |       |      |       | 337   |       |      |       | 416   |       |  |       | 11.2 |      |  |       | 23.4 |     
|                                           |                                  | Total segment operating revenues |       |          | 3,541 |      |       |       | 4,281 |      |       |       | 5,643 |  |       |      | 20.9 |  |       |      | 31.8 | 
|Segment operating expenses:                |                                  |                                  |       |          |       |      |       |       |       |      |       |       |       |  |       |      |      |  |       |     
|                                           | Operational and support expenses |                                  |       | 2,641    |       |      |       | 3,129 |       |      |       | 3,856 |       |  |       | 18.5 |      |  |       | 23.2 |     
|                                           | Depreciation and amortization    |                                  |       | 692      |       |      |       | 642   |       |      |       | 767   |       |  |       | (7.2 | )    |  |       | 19.5 |     
|                                           |                                  | Total segment operating expenses |       |          | 3,333 |      |       |       | 3,771 |      |       |       | 4,623 |  |       |      | 13.1 |  |       |      | 22.6 | 
|Segment operating income                   |                                  |                                  | 208   |          |       |      | 510   |       |       |      | 1,020 |       |       |  | 145.2 |      |      |  | 100.0 |     
|Net earnings (losses) of equity affiliates |                                  |                                  | 143   |          |       |      | 146   |       |       |      | (29   | )     |       |  | 2.1   |      |      |  | N/M   | *   
|Segment net income                         |                                  | $                                | 161   |          |       | $    | 297   |       |       | $    | 425   |       |       |  | 84.5  |      |      |  | 43.1  |     
|Customers (000s)                           |                                  |                                  | 4,887 |          |       |      | 8,337 |       |       |      | 8,638 |       |       |  | 70.6  |      |      |  | 3.6   |     
|Average monthly revenue per customer       |                                  | $                                | 59    |          |       | $    | 57    |       |       | $    | 52    |       |       |  | (3.4  | )    |      |  | (8.8  | )   



---






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

Segment operating revenues

Segment operating revenues grew $1,362 during
2001 and $740 during 2000 when comparing our approximate 40%
proportionate interest in Cingular to our wireless properties
prior to the contribution. These increases are attributable to
changes in the operations between the periods and by the larger
customer base created by the formation of Cingular.

On a proforma basis, as if Cingular had been
formed on January 1, 1999, Cingulars revenues increased
12.8% in 2001 and 15.3% in 2000, driven by increases in the
cellular and PCS customer base of 9.7% in 2001 and 18.6% in
2000. The slower growth in 2001 reflects the economic slowdown,
higher penetration levels and increasing competition. In
addition, the rate of customer growth was impacted by higher
churn reflecting management initiatives to migrate analog
customers to digital services and improve the profitability of
prepaid services. Average monthly usage by customers increased
during 2001 and 2000 partially offset by lower per minute
pricing. Average monthly revenue per customer decreased in 2001
and remained relatively flat during 2000 due primarily to
declines in revenue received from other wireless carriers for
their customers roaming on Cingulars network.

Segment operating expenses

Operational and support expenses

Operational and support expenses increased $727
during 2001 and $488 during 2000. As with revenues, these
increases were also attributable to the change in operations
between periods.

On a proforma basis, as if Cingular had been
formed on January 1, 1999, Cingulars expenses increased
12.0% in 2001 and 14.1% in 2000. Cingulars expense growth
was driven by increased service costs resulting from a rise in
minutes of use, higher bad debt expense due to the slowing
economy, higher cash expenses for marketing and advertising
related to Cingulars national branding campaign and merger
and integration related

34



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##### Table of Contents



expenses. Cost of equipment also increased
primarily due to an increase in handset purchases in order to
accommodate substantial growth, coupled with a shift towards
higher priced handsets.


Depreciation and amortization

Depreciation and amortization increased $125
during 2001 and decreased $50 during 2000.

On a proforma basis, as if Cingular had been
formed on January 1, 1999, Cingulars 2001 expenses
increased 5.5% over 2000, largely attributable to higher levels
of gross property, plant and equipment. Depreciation expense in
2000 was favorably impacted by the lower asset base which
resulted from accelerated depreciation in an equipment exchange
program.

Net earnings (losses) of equity
affiliates

Net earnings (losses) of unconsolidated domestic
wireless businesses decreased $175 in 2001 and remained
relatively flat between 1999 and 2000. The 2001 decrease is
attributable to the contribution to Cingular of our ownership
interests in our domestic wireless equity affiliates and losses
related to the formation of a network joint venture with
VoiceStream in late 2001.







Latin America





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

|                                        |                                     |                                  |       |          |       |      |       |       |       |      |       |       |       |  |       |       |      |  |       |       |      |  
|--------------------------------------- | ----------------------------------- | -------------------------------- | ----- | -------- | ----- | ---- | ----- | ----- | ----- | ---- | ----- | ----- | ----- |  | ----- | ----- | ---- |  | ----- | ----- | ---- | -
|                                       
|                                       
|                                        |                                     |                                 
|                                        |                                     | Percent Change                  
|                                        |                                     |                                 
|                                        |                                     | 2000 vs.                         |       | 2001 vs.
|                                        |                                     | 1999                             |       | 2000     |       | 2001 |       | 1999  |       | 2000
|                                       
|                                       
|Segment operating revenues:             |                                     |                                  |       |          |       |      |       |       |       |      |       |       |       |  |       |       |      |  |       |      
|                                        | Service revenues                    |                                  | $     | 2,084    |       |      | $     | 2,386 |       |      | $     | 2,430 |       |  |       | 14.5  |      |  |       | 1.8   |     
|                                        | Equipment revenues                  |                                  |       | 133      |       |      |       | 197   |       |      |       | 170   |       |  |       | 48.1  |      |  |       | (13.7 | )   
|                                        | Other revenues                      |                                  |       | 119      |       |      |       | 248   |       |      |       | 249   |       |  |       | 108.4 |      |  |       | 0.4   |     
|                                        | Advertising and publishing revenues |                                  |       | 69       |       |      |       | 135   |       |      |       | 86    |       |  |       | 95.7  |      |  |       | (36.3 | )   
|                                        |                                     | Total segment operating revenues |       |          | 2,405 |      |       |       | 2,966 |      |       |       | 2,935 |  |       |       | 23.3 |  |       |       | (1.0 | )
|Segment operating expenses:             |                                     |                                  |       |          |       |      |       |       |       |      |       |       |       |  |       |       |      |  |       |      
|                                        | Operational and support expenses    |                                  |       | 1,849    |       |      |       | 2,311 |       |      |       | 2,050 |       |  |       | 25.0  |      |  |       | (11.3 | )   
|                                        | Depreciation and amortization       |                                  |       | 450      |       |      |       | 605   |       |      |       | 605   |       |  |       | 34.4  |      |  |       | N/M   | *   
|                                        | Total segment operating expenses    |                                  |       | 2,299    |       |      |       | 2,916 |       |      |       | 2,655 |       |  |       | 26.8  |      |  |       | (9.0  | )   
|Segment operating income                |                                     |                                  | 106   |          |       |      | 50    |       |       |      | 280   |       |       |  | (52.8 | )     |      |  | N/M   |      
|Net losses of equity affiliates         |                                     |                                  | (46   | )        |       |      | (45   | )     |       |      | (36   | )     |       |  | 2.2   |       |      |  | 20.0  |      
|Segment net loss                        |                                     | $                                | (86   | )        |       | $    | (152  | )     |       | $    | (50   | )     |       |  | (76.7 | )     |      |  | 67.1  |      
|Customers(1)(000s)                      |                                     |                                  | 4,230 |          |       |      | 7,069 |       |       |      | 7,585 |       |       |  | 67.1  |       |      |  | 7.3   |      
|Average monthly revenue per customer(1) |                                     | $                                | 52    |          |       | $    | 34    |       |       | $    | 25    |       |       |  | (34.6 | )     |      |  | (26.5 | )    
|                                       

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



|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts shown are for our consolidated
	properties and do not include customer data for our
	unconsolidated properties.

Segment operating revenues

Segment operating revenues decreased $31 in 2001
and increased $561 in 2000. The 2001 results were negatively
affected by numerous factors including:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The continued weakening of our Latin American
	operations local currencies against the U.S. Dollar.
	Absent changes in foreign currency exchange rates, revenues
	would have been $156 higher in 2001;
|
| |  | Unfavorable changes in the interconnection
	agreements as well as changes in telecommunication regulation,
	which reduced revenues by approximately $64;                                               
|
| |  | Decreases in equipment revenues at our operations
	in Venezuela and Argentina totaling $55, attributable to a
	reduction in gross customer additions from 2000;                                        
|
| |  | A $49 decrease in advertising and publishing
	revenues attributable to increased competitive and economic
	pressures on our wireless operations in Brazil; and                                         
|
| |  | The loss of $63 in revenues from BellSouth
	Access, a wholesale communications provider. This operation was
	shut down in November 2000.                                                               

These decreases were partially offset by a $189
increase in the revenues from the Colombian operations

35



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##### Table of Contents



which were acquired in mid-2000, as well as $46
in revenues from complementary business ventures in Venezuela,
primarily wholesale long distance voice, data access and
transport and Internet access.


The 2000 revenue increase was primarily due to
substantial growth in the customer bases of our consolidated
wireless operations, which collectively increased by
2.8 million customers or 67.1%. Included in this increase
were 859,000 customers in the Colombian operations. The 2000
increase also includes:



| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Unfavorable changes in foreign currency exchange
	rates significantly offset growth during 2000; absent changes in
	those rates, revenues would have been $289 higher in 2000;
|
| |  | $147 of revenues attributable to the Colombian
	wireless operations acquired in mid-2000 and the consolidation
	of the Nicaraguan operations beginning first quarter 2000;    
|
| |  | Growth in advertising and publishing revenues in
	Brazil and Peru totaling $66 in 2000;                                                                                       
|
| |  | Higher equipment revenues resulting from higher
	gross customer additions and an increase in prepaid customers
	who generally pay higher prices for equipment; and            
|
| |  | $82 in new revenues from the long distance
	business in Argentina, which commenced in the first quarter of
	2000.                                                             

Growth in both years was offset by declining
monthly revenue per customer resulting from continued expansion
into lower-usage customer segments through offerings such as
prepaid cellular service as well as economic and competitive
pressures in the region.

Segment operating expenses

Operational and support expenses

Operational and support expenses decreased $261
in 2001 and increased $462 in 2000. The 2001 decrease was the
result of reductions in expenses resulting from a 17.4% decline
in gross customer additions and reductions in administrative
costs, partially offset by increased expenses from a full year
of the Colombian operations. The increase in 2000 was primarily
the result of operational and customer acquisition costs
associated with growth in customer levels and expanded
operations. The 2000 increase also includes $125 of expenses
attributable to the Colombian wireless operations which were
acquired in mid-2000 and the consolidation of the Nicaraguan
operations beginning first quarter 2000. Since 1999, our
existing operations have added 1.8 million customers in
Argentina, Chile and Venezuela. We have also added approximately
1.6 million customers through the acquisition and
development of businesses in Colombia, Ecuador, Nicaragua and
Peru.

Operational and support expenses denominated in
local currencies were favorably impacted by the weakening of
foreign currencies against the U.S. Dollar. Absent changes in
foreign currency exchange rates, operational and support
expenses would have been $105 higher in 2001 and would have been
$177 higher in 2000.

Depreciation and amortization

Depreciation expense decreased $20 in 2001 and
increased $92 in 2000. The decrease in 2001 is a result of lower
depreciation in Venezuela due to a change in the useful life of
network equipment effective first quarter 2001 offset by higher
gross depreciable plant resulting from the continued investment
in our wireless network infrastructure. Amortization expense
increased $20 during 2001 as a result of the intangibles related
to our purchase of the operations in Colombia.

The increase in 2000 is due primarily to higher
gross depreciable plant resulting from the continued investment
in our wireless network infrastructure. Amortization expense
increased $63 during 2000 as a result of the intangibles related
to our purchase of the operations in Colombia and acquisition
activity during 1999 related to an increase in our ownership in
Peru and purchases of interests in advertising and publishing
entities in Brazil.

Net losses of equity affiliates

Net losses from our Latin American equity
affiliates improved $9 to $(36) in 2001 and $1 to $(45) in 2000.

36



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##### Table of Contents









Domestic Advertising and Publishing





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

|                            |                                  |                                  |       |          |       |      |       |      |       |      |       |       |       |  |      |      |      |   |      |     |     | 
|--------------------------- | -------------------------------- | -------------------------------- | ----- | -------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ----- | ----- |  | ---- | ---- | ---- | - | ---- | --- | --- | 
|                           
|                           
|                            |                                  |                                 
|                            |                                  | Percent Change                  
|                            |                                  |                                 
|                            |                                  | 2000 vs.                         |       | 2001 vs.
|                            |                                  | 1999                             |       | 2000     |       | 2001 |       | 1999 |       | 2000
|                           
|                           
|Segment operating revenues  |                                  | $                                | 1,960 |          |       | $    | 2,066 |      |       | $    | 2,091 |       |       |  | 5.4  |      |      |   | 1.2  |    
|Segment operating expenses: |                                  |                                  |       |          |       |      |       |      |       |      |       |       |       |  |      |      |      |   |      |    
|                            | Operational and support expenses |                                  |       | 1,024    |       |      |       | 997  |       |      |       | 1,023 |       |  |      | (2.6 | )    |   |      | 2.6 |    
|                            | Depreciation and amortization    |                                  |       | 27       |       |      |       | 28   |       |      |       | 28    |       |  |      | 3.7  |      |   |      | N/M | *  
|                            |                                  | Total segment operating expenses |       |          | 1,051 |      |       |      | 1,025 |      |       |       | 1,051 |  |      |      | (2.5 | ) |      |     | 2.5 | 
|Segment operating income    |                                  |                                  | 909   |          |       |      | 1,041 |      |       |      | 1,040 |       |       |  | 14.5 |      |      |   | (0.1 | )  
|Segment net income          |                                  | $                                | 567   |          |       | $    | 635   |      |       | $    | 633   |       |       |  | 12.0 |      |      |   | (0.3 | )  
|                           

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

Segment operating revenues

Revenues increased $25 during 2001 and $106
during 2000. Overall industry growth slowed during 2001 in
connection with the economic decline, which lowers demand for
advertising. The increases in both 2001 and 2000 were
principally a result of volume growth, changes in ad mix and
nominal price increases.

Segment operating expenses

Operational and support expenses increased $26 in
2001 and decreased $27 in 2000. The increase in 2001 is
attributable to increases of $47 in the directory businesses,
partially offset by $21 of lower expense related to electronic
media offerings. Provisions for uncollectible receivables was a
primary driver of the increase as other costs were held in line
with revenue growth. The decrease in 2000 was attributable to
lower costs of $45 in the directory businesses attributable to
expense control efforts, partially offset by $17 of higher
expenses related to electronic media offerings.

Depreciation and amortization remained relatively
flat in both 2000 and 2001.









All Other Businesses





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

|                                  |  |                |    |          |  |      |     |      |  |      |     |  |  |  |       |   |  |  |       |  
|--------------------------------- |  | -------------- | -- | -------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | ----- | - |  |  | ----- | -
|                                 
|                                 
|                                  |  |               
|                                  |  | Percent Change
|                                  |  |               
|                                  |  | 2000 vs.       |    | 2001 vs.
|                                  |  | 1999           |    | 2000     |  | 2001 |     | 1999 |  | 2000
|                                 
|                                 
|Segment operating revenues        |  | $              | 77 |          |  | $    | 103 |      |  | $    | 140 |  |  |  | 33.8  |   |  |  | 35.9  |  
|Segment operating expenses        |  | $              | 86 |          |  | $    | 79  |      |  | $    | 113 |  |  |  | (8.1  | ) |  |  | 43.0  |  
|Segment operating (loss) income   |  | $              | (9 | )        |  | $    | 24  |      |  | $    | 27  |  |  |  | N/M   | * |  |  | 12.5  |  
|Net earnings of equity affiliates |  | $              | 70 |          |  | $    | 40  |      |  | $    | 4   |  |  |  | (42.9 | ) |  |  | N/M   |  
|Segment net income                |  | $              | 61 |          |  | $    | 49  |      |  | $    | 31  |  |  |  | (19.7 | ) |  |  | (36.7 | )
|                                 

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

Segment Operating Results

Revenues and expenses were derived primarily from
the sale of insurance on wireless handsets and amortization of
deferred revenues related to a transaction with Crown Castle to
monetize wireless towers in 1999. In addition, revenues for 2000
and 1999 included revenues from wireless data operations in
Belgium, the Netherlands and the United Kingdom which were sold
in mid-2000.

Net earnings of equity affiliates declined $36 in
2001 and $30 in 2000. The declines were attributable to the
German operations, partially offset by income from the
operations in Denmark and Israel.

During 2001, we sold a 24.5% ownership interest
in Skycell, an Indian wireless venture.



---

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##### Table of Contents






Liquidity and Financial Condition

Net cash provided by (used for):

|                     |  |                |        |          |  |      |        |      |  |      |        |   |  |  |     |   |  |  |      |  
|-------------------- |  | -------------- | ------ | -------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | --- | - |  |  | ---- | -
|                    
|                    
|                     |  |               
|                     |  | Percent Change
|                     |  |               
|                     |  | 2000 vs.       |        | 2001 vs.
|                     |  | 1999           |        | 2000     |  | 2001 |        | 1999 |  | 2000
|                    
|                    
|Operating activities |  | $              | 8,199  |          |  | $    | 8,590  |      |  | $    | 7,998  |   |  |  | 4.8 |   |  |  | (6.9 | )
|Investing activities |  | $              | (9,888 | )        |  | $    | (9,303 | )    |  | $    | (7,039 | ) |  |  | 5.9 |   |  |  | 24.3 |  
|Financing activities |  | $              | (167   | )        |  | $    | 487    |      |  | $    | (1,428 | ) |  |  | N/M | * |  |  | N/M  |  
|                    

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

Net cash provided by operating
activities

Cash generated by operations decreased $592
during 2001 and increased $391 during 2000. The decrease in 2001
was driven primarily by the contribution of our domestic
wireless operations to the Cingular joint venture in 2000. Those
operations, which were contributed in October 2000, generated
total operating cash flow of $892 during the first three
quarters of 2000. This decrease was partially offset by
favorable timing of tax and other payments supporting
operational activity.

The increase in 2000 was driven by higher
revenues, offset significantly by a $530 decrease in proceeds
associated with the sublease of wireless towers to Crown Castle.
Partially offsetting these impacts were higher working capital
demands to support growth in our communications group,
substantial increases in the wireless customer base and
initiatives such as Internet and long distance.

Net cash used for investing
activities

During 2001, we invested $5,997 for capital
expenditures to support our wireline and wireless networks, to
promote the introduction of new products and services and to
increase operating efficiency and productivity. Significant
investments were also made to support deployment of high-speed
Internet access and optical fiber-based broadband services. Also
during 2001, we advanced $1,850 to E-Plus via demand notes that
replaced previously guaranteed debt, invested $279 in loan
participation agreements related to the Colombian operations and
invested approximately $105 in our wireless operations in
Brazil. We also generated approximately $1,100 through the sale
of a portion of our investment in Qwest common stock.

Net cash provided by (used for) financing
activities

During 2001 and 2000, we refinanced a portion of
our commercial paper borrowings with proceeds from the issuance
of long-term debt. We paid dividends of $0.76 per share during
both years.

Our debt to total capitalization ratio was 52.0%
at December 31, 2001 compared to 54.2% at December 31,
2000. The change is primarily a function of increases in
shareholders equity.

Anticipated sources and uses of
funds

Cash flows from operations are our primary source
of cash for funding existing operations, capital expenditures,
debt interest and principal payments, and dividend payments to
shareholders. Should the need arise, however, we believe we are
well positioned to raise capital in the public debt markets. At
December 31, 2001, our long-term debt rating was Aa3 from
Moodys Investor Service and A+ from Standard and
Poors. Our short-term credit rating at December 31,
2001 was P-1 from Moodys and A-1 from Standard and
Poors. Our commercial paper program at the end of last
year was $8.0 billion, but only $2.5 billion was outstanding. We
believe we have ready access to the commercial paper market in
the event funding in excess of our operating cash flows is
needed. Furthermore, we have $2.5 billion in unused committed
back-up lines of credit available in case we are unable to
access the commercial paper market. We also have a registration
statement on file with the SEC under which $2.3 billion of
long-term debt securities could be issued. While current
liabilities exceed current assets, our sources of
funds  primarily from operations and, to the extent
necessary, from readily available external financing
arrangements  are sufficient to meet all current
obligations on a timely basis. We believe that these sources of
funds will be sufficient to meet the needs of our business for
at least the remainder of 2002.

We anticipate generating more than sufficient
cash from operations in 2002 to cover planned capital
expenditures of $4.8 billion to $5.0 billion, dividend payments
to shareholders, and current maturities of long-term debt.
Certain non-recurring events, described below, may absorb
additional cash resources.

BellSouth owns approximately 66% of BellSouth
Colombia. BellSouths partner holds the remaining 34%.

38



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##### Table of Contents



BellSouth has agreed with our partner to a series
of related put and call agreements whereby we can acquire, or
could be compelled by our partner to acquire, additional shares
of the company, up to the partners entire interest, at a
price approximately equal to appraised fair value. Our partner
has the right to put to us approximately one-half of his 34%
interest in the Colombian operations in 2002. The remaining
balance can be put to us beginning in 2006 until 2009.
BellSouths first call option for up to a number of shares
currently equal to approximately 10.5% of BellSouth
Colombias outstanding common stock is first exercisable in
December 2003. We cannot determine whether BellSouth or its
partner will exercise their rights under the agreement, or the
amount if exercised.


BellSouth owns approximately 78% of Telcel, our
Venezuelan operation. Telcels other major shareholder
holds an indirect 22% interest in Telcel. That shareholder has
the right to require BellSouth to purchase (the puts), and
BellSouth has the right to require that shareholder to sell (the
calls) to BellSouth, approximately half of that
shareholders interest in Telcel in 2000 and the remaining
balance in 2002. In 2000, the shareholder initiated a process
for appraising the value of its interest in Telcel. If BellSouth
exercises its call right, BellSouth would purchase that
shareholders interest at between 100% and 120% of its
appraised fair value. If the shareholder elects to require
BellSouth to purchase the interest, BellSouth would do so at
between 80% and 100% of its appraised fair value. We cannot
determine whether BellSouth or its partner will exercise their
rights under the agreement, or the amount if exercised.

Other events that may absorb additional cash
resources are discussed below under Operating Environment
and Trends of the Business  Latin America
Economic Trends.

On January 22, 2002, the SEC issued FR-61
Commission Statement about Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The release sets forth certain views of the Commission regarding
disclosure that should be considered by registrants. Disclosure
matters addressed by the release are liquidity and capital
resources including off-balance sheet arrangements, certain
trading activities that include non-exchange traded contracts
accounted for at fair value, and effects of transactions with
related and certain other parties. The following tables set
forth the information and format described in the release with
regard to disclosures about contractual obligations and
commercial commitments. These disclosures are also included in
the notes to the financial statements and cross referenced in
the tables below.

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

|                                    |  |                        |        |           |  |           |       |           |  |          |       |            |  |   |       |  |  |   |        |  |  |  |   | 
|----------------------------------- |  | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | -------- | ----- | ---------- |  | - | ----- |  |  | - | ------ |  |  |  | - | 
|                                   
|                                   
|                                    |  |                        |        |          
|                                    |  | Payments Due by Period |        |          
|                                    |  |                        |        |          
|                                    |  |                        |        | Less than |  |           |       | After 5   |  | Footnote
|Contractual Obligations             |  | Total                  |        | 1 year    |  | 1-3 years |       | 4-5 years |  | years    |       | reference1
|                                   
|                                   
|Debt maturing within 1 year         |  | $                      | 5,111  |           |  | $         | 5,111 |           |  | $        |      |            |  | $ |      |  |  | $ |       |  |  |  | E | 
|Long-term debt                      |  |                        | 15,326 |           |  |           |      |           |  |          | 3,783 |            |  |   | 1,738 |  |  |   | 9,805  |  |  |  | E | 
|Operating leases                    |  |                        | 796    |           |  |           | 129   |           |  |          | 298   |            |  |   | 74    |  |  |   | 295    |  |  |  | M | 
|Unconditional purchase obligations2 |  |                        | 4,158  |           |  |           | 706   |           |  |          | 2,246 |            |  |   | 1,206 |  |  |   |       |  |  |  | M | 
|Interest rate swaps3                |  |                        | 37     |           |  |           | (7    | )         |  |          | 44    |            |  |   |      |  |  |   |       |  |  |  | L | 
|Forward contracts3                  |  |                        | 39     |           |  |           |      |           |  |          | 39    |            |  |   |      |  |  |   |       |  |  |  | L | 
|Total contractual cash obligations  |  | $                      | 25,467 |           |  | $         | 5,939 |           |  | $        | 6,410 |            |  | $ | 3,018 |  |  | $ | 10,100 |  |  |  |   | 
|                                   

The following table discloses aggregate
information about our commercial commitments. Commercial
commitments are items that BellSouth could be obligated to pay
in the future. They are not included in our consolidated balance
sheet.


|                                           |  |                                            |     |           |  |           |     |           |  |          |     |            |  |   |    |  |  |   |    |  |  |  |   | 
|------------------------------------------ |  | ------------------------------------------ | --- | --------- |  | --------- | --- | --------- |  | -------- | --- | ---------- |  | - | -- |  |  | - | -- |  |  |  | - | 
|                                          
|                                          
|                                           |  |                                            |     |          
|                                           |  | Amount of Commitment Expiration per Period |     |          
|                                           |  |                                            |     |          
|                                           |  | Total                                      |     |           |  |          
|                                           |  | Amounts                                    |     | Less than |  |           |     | After 5   |  | Footnote
|Other Commercial Commitments               |  | Committed                                  |     | 1 year    |  | 1-3 years |     | 4-5 years |  | years    |     | reference1
|                                          
|                                          
|Letters of credit and financial guarantees |  | $                                          | 595 |           |  | $         | 175 |           |  | $        | 380 |            |  | $ | 30 |  |  | $ | 10 |  |  |  | L | 
|Venezuela put/call agreement4              |  |                                            |    |           |  |           |    |           |  |          |    |            |  |   |   |  |  |   |   |  |  |  | M | 
|Colombia put/call agreements4              |  |                                            |    |           |  |           |    |           |  |          |    |            |  |   |   |  |  |   |   |  |  |  | M | 
|Total commercial commitments               |  | $                                          | 595 |           |  | $         | 175 |           |  | $        | 380 |            |  | $ | 30 |  |  | $ | 10 |  |  |  |   | 
|                                          

39



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##### Table of Contents



The following table discloses aggregate
information about our derivative financial instruments, the
source of fair value of these instruments and their maturities.


|                                     |  |                                       |     |           |  |           |   |           |  |          |     |            |  |  |   |  |  |  |   |  |  |  |   | 
|------------------------------------ |  | ------------------------------------- | --- | --------- |  | --------- | - | --------- |  | -------- | --- | ---------- |  |  | - |  |  |  | - |  |  |  | - | 
|                                    
|                                    
|                                     |  |                                       |     |          
|                                     |  | Fair Value of Contracts at Period-end |     |          
|                                     |  |                                       |     |          
|                                     |  | Total Fair                            |     | Less than |  |           |   | After 5   |  | Footnote
|Source of Fair Value                 |  | Value                                 |     | 1 year    |  | 1-3 years |   | 4-5 years |  | years    |     | reference1
|                                    
|                                    
|Prices provided by external sources5 |  | $                                     | (76 | )         |  | $         | 7 |           |  | $        | (83 | )          |  |  |  |  |  |  |  |  |  |  | L | 
|                                    



---



|  |                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Refers to the notes to BellSouths
	consolidated financial statements included herein.                                                                                                                                                                                                                                 
| 
|2 | The total unconditional purchase obligation
	includes $490 related to agreements with Qwest and Nortel that
	do not stipulate annual minimum purchases. The agreement with
	Qwest expires in four years and the Nortel agreement expires in
	2003.                                                                     
| 
|3 | The amounts due for the interest rate swaps and
	forward contracts are based on market valuations at
	December 31, 2001. Actual payments, if any, may differ at
	settlement date.                                                                                                                                      
| 
|4 | The total amount that could be paid under the
	agreements is based on appraised fair market value. These
	entities are not publicly traded and therefore a determination
	of fair market value is not practicable as of the date of this
	filing. These agreements expire in 2003 for Venezuela and 2009
	for Colombia.
| 
|5 | Fair value of derivative financial instruments
	are provided by external sources, primarily the counterparty to
	the contract.                                                                                                                                                                                         

Related party transactions

We own an approximate 40% interest in Cingular.
We generated revenues of approximately $230 in 2001 and $65 in
2000 from the provision of local interconnect and long distance
services to Cingular. We also earned $287 in 2001 and $72 in
2000 from interest income on advances to Cingular.

We have also made advances to several other
affiliates. These advances totaled $2,888 at December 31,
2001 and $1,094 at December 31, 2000. We earned $89 in
2001, $56 in 2000 and $51 in 1999 from interest income on these
advances.









Quantitative and Qualitative Disclosure About Market 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.

Foreign Currency Translation

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

Foreign Exchange Risk

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

Several of our foreign operations hold U.S.
Dollar-denominated debt and recognize foreign currency gains or
losses based on movements in the exchange rate between the U.S.
Dollar and local currencies. Our proportionate share of these
liabilities was $1.56 billion at December 31, 2001. The
equity income related to these investments is subject to
fluctuations in the U.S. Dollar/ local currency exchange rate.
See Operating Environment and Trends of the
BusinessForeign Risks.

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##### Table of Contents



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 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 and not the full
notional or contract amount. Such contracts and agreements have
been executed with creditworthy 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 includes the debt of our consolidated Latin
American operations. Fair values for the majority of our
long-term debt obligations are based on quotes from dealers.

|      |                       |          |   |       |   |      |   |       |   |      |   |            |   |        |   |            |   |  |   |       |   |  |   |       |   |  |   |        |  |  |   |        | 
|----- | --------------------- | -------- | - | ----- | - | ---- | - | ----- | - | ---- | - | ---------- | - | ------ | - | ---------- | - |  | - | ----- | - |  | - | ----- | - |  | - | ------ |  |  | - | ------ | 
|     
|     
|      |                       | Total    |   |      
|      |                       | Recorded |   |      
|      |                       | 2002     |   | 2003  |   | 2004 |   | 2005  |   | 2006 |   | Thereafter |   | Amount |   | Fair Value
|     
|     
|Debt: |                       |          |   |       |   |      |   |       |   |      |   |            |   |        |   |            |   |  |   |       |   |  |   |       |   |  |   |        |  |  |   |       
|      | Fixed rate debt       |          | $ | 5,063 |   |      | $ | 861   |   |      | $ | 275        |   |        | $ | 467        |   |  | $ | 1,003 |   |  | $ | 9,493 |   |  | $ | 17,162 |  |  | $ | 17,492 | 
|      | Average interest rate |          |   | 3.78  | % |      |   | 6.98  | % |      |   | 8.69       | % |        |   | 6.67       | % |  |   | 5.10  | % |  |   | 6.93  | % |  |   |        |  |  |   |        | 
|      | Variable rate debt    |          | $ | 48    |   |      | $ | 1,800 |   |      | $ | 180        |   |        | $ | 200        |   |  | $ | 735   |   |  | $ |      |   |  | $ | 2,963  |  |  | $ | 2,963  | 
|      | Average interest rate |          |   | 9.76  | % |      |   | 2.04  | % |      |   | 2.82       | % |        |   | 4.18       | % |  |   | 7.50  | % |  |   |      | % |  |   |        |  |  |   |        | 
|     



---






Proportional Debt


Our consolidated debt at December 31, 2001
was $20,125 representing the debt of all consolidated
subsidiaries. We have minority partners in various consolidated
wireless properties as well as significant investments in other
wireless properties that are not consolidated for accounting
purposes due to the fact that we do not exercise control over
those operations. The following table presents our proportionate
share of total debt for all of our investments 
adjusting our share of debt in each of our consolidated
subsidiaries or equity method investments based on ownership
percentages.

|                                                                                     |  |   |        |  
|------------------------------------------------------------------------------------ |  | - | ------ | -
|Consolidated debt                                                                    |  | $ | 20,125 |  
|Less: debt attributable to minority partners                                         |  |   | (464   | )
|Plus: debt associated with unconsolidated
	investments (excluding shareholder loans) |  |   | 2,800  |  
|                                                                                     |  |   |        |  
|Proportional debt                                                                    |  | $ | 22,461 |  
|                                                                                     |  |   |        |  

Debt attributable to minority partners represents
our minority partners share of external debt included in
our consolidated balance sheet at December 31, 2001.

Debt associated with unconsolidated investments
relates primarily to our interests in Cingular and Brazil. This
is non-recourse debt.




Operating Environment and Trends of the Business

Domestic Economic Trends

The nations economy went into a recession
beginning in March 2001. The output of goods and services grew
an estimated 1.1% for 2001 after expanding 4.1% for 2000. The
unemployment rate reached 5.8% in December 2001, up from an
average of 4.0% during 2000. The manufacturing sector has
contracted more sharply than other sectors of the economy.
Industrial production in December 2001 had declined 7.0% from
its peak in June 2000. The Southeast region with its large
manufacturing base has been especially adversely affected by the
recession. In the nine-state region served by BellSouth
Telecommunications, Inc., manufacturing employment declined 5.4%
from December 2000 to December 2001. Total employment in the
region fell 0.1% during that period. The national economy and
the regional economy are expected to recover in 2002.
Demographic trends in the nine-state region remain favorable.
Population growth has averaged 1.5% annually, with net migration
adding more than 500,000 people to the region each year. This
growth is likely to bring stronger demand for telecommunications
services. The heightened competition faced by BellSouth
Telecommunications, Inc. and the growing percentage of revenues
from unregulated businesses have raised the susceptibility of
BellSouths financial performance to cycles in the economy.

Latin American Economic Trends

Economic conditions in Latin America have been
deteriorating as the U.S. economy has entered a recession.
Certain of our partners in our international operations have
advised us that they may be unable or unwilling to provide their
share of any additional equity capital contributions. In certain
cases, the same operations

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##### Table of Contents



banks have advised us that they will require that
the shareholders in the operations provide additional equity,
loans or shareholder guarantees as a condition to the
banks providing additional debt financing or extending the
maturity of, or renewing, existing debt financing.


The following table presents our investments in,
and related commitments, for our four largest operations in
Latin America at the end of 2001.

|          |  |            |       |            |  |          |     |            |  |   |       |  |  |   |     |    
|--------- |  | ---------- | ----- | ---------- |  | -------- | --- | ---------- |  | - | ----- |  |  | - | --- | ---
|          |  |            |       | Advances   |  |          |     |           
|          |  | Book       |       | to         |  | External |     |           
|          |  | Investment |       | Subsidiary |  | Debt(a)  |     | Guarantees
|          |  |            |       |            |  |          |     |           
|Brazil    |  | $          | (60   | )(b)       |  | $        | 375 |            |  | $ | 853   |  |  | $ | 100 | (c)
|Argentina |  |            | 379   |            |  |          |    |            |  |   | 306   |  |  |   |    |    
|Venezuela |  |            | 1,334 |            |  |          |    |            |  |   | 97    |  |  |   |    |    
|Colombia  |  |            | 701   |            |  |          | 279 | (d)        |  |   | 509   |  |  |   |    |    
|          |  |            |       |            |  |          |     |            |  |   |       |  |  |   |     |    
|          |  | $          | 2,354 |            |  | $        | 654 |            |  | $ | 1,765 |  |  | $ | 100 |    
|          |  |            |       |            |  |          |     |            |  |   |       |  |  |   |     |    



---



|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(a) | Represents BellSouths proportionate share
	of each operations non-shareholder related debt. All debt
	is non-recourse.



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(b) | We will continue to record losses for our Brazil
	operations until the sum of our investment in and advances to
	these operations equal zero.



|    |                            
|--- | ---------------------------
|(c) | Guaranteed in January 2002.



|    |                                                               
|--- | --------------------------------------------------------------
|(d) | Represents a loan participation agreement with a
	third party.

Brazil.Brazils gross domestic product (GDP) growth slowed
markedly in the second half of 2001 due mostly to a decline in
industrial production during the third quarter. Estimated real
GDP growth for the year is about 1.5%. Monetary policy has been
kept tight to limit inflation and to bolster the currency. The
Brazilian Real depreciated about 40.0% compared to the U.S.
Dollar in mid-2001, but rebounded to finish the year down 17.0%.
Slow economic growth in the range of 2.0 to 2.5% is expected in
2002.

In Brazil, our partners and we are discussing
with our banks the funding requirements of our Brazilian
operations for 2002, including the source of funds for required
principal payments to the banks. We have not yet agreed as to
the sources of funds for these requirements and there can be no
assurance that we will reach agreement.

Argentina.Argentinas economy is in its fourth year of recession. The
Argentine government has removed the peg of the peso to the U.S.
Dollar, resulting in a significant devaluation of the peso
against the dollar. The Argentine government has also defaulted
on the payment of its debt obligations. Whether companies doing
business in Argentina will default on their obligations depends
upon their own financial condition, and, in the case of U.S.
Dollar obligations, continued access to the foreign exchange
markets.

Default and currency devaluation, although
long-anticipated, have resulted in considerable uncertainty
about the governments political stability, its management
of the economy and the current exchange rate regime. Economic
activity slowed sharply in the last weeks of 2001, and real GDP
declined an estimated 2.8% for the year. The outlook is poor for
2002 with real GDP expected to drop another 5.0 to 6.0%.
Inflation seems likely to return to Argentina as a consequence
of the currency devaluation.

After giving effect to the devaluation, our
Argentine operation is no longer in compliance with the
financial covenants of two U.S. Dollar-denominated loans.
Although there can be no assurance, we expect that this
operation will be able to continue to make interest payments on
these loans so long as the government allows access to the
foreign exchange markets, and we anticipate that this operation
will seek from its banks a waiver of any default and a
renegotiation of its financial covenants and a restructuring of
its principal payments.

Venezuela.Economic
growth was sluggish in 2001. Public expenditures, financed by
taxation of oil revenues, provided most of the growth. The
banded exchange rate helped to restrain inflation to 13.0% but
the elimination of such band in February 2002 may cause an
increase in inflation going forward. Lifting the band on the
currency should increase the competitiveness of the non-oil
private sector. The fiscal deficit is near 5.0% of GDP and is an
ongoing problem. Political risk spiraled upward in the last
months of 2001 as the presidency of Hugo Chavez encountered
difficulties in its relationships with both labor unions and the
business community. Uncertainty over economic policies has
risen. Economic growth will remain moderate at best in 2002.

From time to time, the Venezuelan government has
considered imposing foreign exchange controls. If implemented,
our ability to repatriate funds from this operation would be
adversely affected.

Colombia.Weak
demand domestically and for its exports caused Colombias
economic growth to be below expectations in 2001. Real GDP
growth was likely below 3.0% and could end up nearer to 2.0% for
the year. An expected, albeit modest, recovery of export demand
should boost growth back over 3.0% in 2002. The weak economy has
lowered inflation to 8.0%, and it is expected to remain below
10.0% in the near term. Economic growth will be slow until
confidence returns and investment spending picks up. That might
take some time as the peace process has been stumbling and the
political outlook is uncertain. The exchange rate was relatively
stable in 2001. Given the risky economic and political
environment, some volatility going forward should be expected.

Our partner in Colombia has the right to put to
us approximately half of its 34% interest in our Colombian
operations, beginning in June 2002. In December 2002,

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we have the right to put to our partner U.S. $35
of debt in our Colombian operations. We are discussing the
funding requirements for our Colombian operations for 2003,
including the source of funds for required principal payments to
our operations banks, with our partner and the banks.


Regulatory Developments

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

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

Our intrastate prices are regulated under price
regulation plans provided by statute or approved by state public
service commissions. Under these plans, the state regulatory
commissions or state legislatures have established maximum
prices that can be charged for certain telecommunication
services. Some plans are subject to periodic review and may
require renewal. These commissions generally may require price
reductions and other concessions from us as a condition to
approving these plans. The Mississippi Public Service Commission
has completed its review of the Mississippi price regulation
plan. In an order dated October 31, 2001, the Mississippi
Commission approved the plan for an additional six year term
with certain modifications, including new performance measures.
We expect that the plan in North Carolina will be reviewed
during June 2002. Upon review or renewal, a regulatory
commission could require substantial modifications to prices and
other terms of these plans. In addition, a petition by the South
Carolina Consumer Advocate to review the level of our earnings
under a subsequently invalidated price regulation plan in South
Carolina is currently on appeal.

Access Charge
Reform.Federal policies implemented
by the FCC have strongly favored access reform, whereby the
historical subsidy for local service that is contained in
network access charges paid by long distance carriers is moved
to end-user charges or universal service funds, or both.

In May 2000, the FCC released an order, referred
to as the CALLS order, designed to result in lower consumer
prices for long distance service by reforming the way in which
access costs are recovered. The order applies to all local
exchange carriers operating under price caps, and as such covers
BellSouth. The order reduces the productivity factor to 0.0% for
products that meet price targets as specified in the order.
Although the order reduces the access charges paid to BellSouth
by other carriers, we are able to increase subscriber line
charges paid by residential and single-line business customers
each year through 2003. Any increases which we request after
July 2001 are subject to a cost review. In December 2001, the
FCC began a cost review associated with a $1.00 increase in the
residential and single-line business subscriber line charge that
is scheduled to take effect July 1, 2002. If the increase
in residential and single-line business subscriber line charges
is permitted to take effect, there will be a corresponding
decrease in the charges paid by carriers.

On April 27, 2001, the FCC released a Notice
of Proposed Rulemaking that commences a broad inquiry that will
begin a fundamental examination of all forms of intercarrier
compensationpayments among telecommunications carriers
resulting from their interconnecting networks. In general, there
are two broad 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 Notice of Proposed Rulemaking is to examine
the existing rules pertaining to intercarrier compensation and
explore alternative forms of intercarrier compensation. This
proceeding could lead to permanent changes in the compensation
that BellSouth currently receives from other carriers and its
end user customers. One alternative under consideration is
bill and keep, a policy that requires carriers to
exchange traffic freely with each other and to recover from end
user customers the costs of originating and terminating traffic.

Also on April 27, 2001, the FCC released an
Order on Remand and Report and Order addressing the issue of
compensation for ISP traffic. In its Order, the FCC acknowledged
that dial-up calls to Internet service providers are not local
calls, but instead are information access traffic
exempt from the reciprocal compensation provisions of the
Telecommunications Act of 1996. The FCC has implemented a
three-year interim period during which local carriers will pay
intercarrier compensation for such calls in decreasing
increments. After the three-year interim period, the new rules
on intercarrier compensation to be adopted in connection with
the Notice of Proposed Rulemaking referred to above are expected
to be in effect. If no rules have been adopted by that time, the
intercarrier compensation in effect at the end of the third year
would remain in

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effect. An appeal of the FCC Order is pending. If
the Order is not affirmed on appeal, the rates we pay for
Internet service provider traffic and other traffic subject to
the FCC rates could change. Although we cannot currently
estimate the possible change, we believe it could have an
adverse effect on our expenses.


The FCC has considerable authority to establish
policies for pricing and terms of local interconnection that had
once been considered the exclusive jurisdiction of the state
regulatory authorities. We expect the FCC to continue policies
that promote local service competition. In addition, there are
other aspects of access charges and universal service fund
contribution requirements that continue to be considered by the
state and federal regulatory commissions that could result in
greater expense levels or reduced revenues.

Universal Service.Historically, network access charges paid by other carriers were
set at levels that subsidized the cost of providing local
residential service. The Telecommunications Act of 1996 requires
that the FCC identify and remove the historical implicit local
service subsidy from network access rates, arrange for a
universal service fund to ensure the continuation of service to
high-cost, low-income service areas and develop the arrangements
for payments into that fund by all carriers. The FCCs
universal service order established funding mechanisms for
high-cost and low-income service areas. We began contributing to
the new funds in 1998 and are recovering our contributions
through increased interstate charges to retail end users. We
began receiving support for service to residents in Alabama,
Kentucky, Mississippi and South Carolina in January 2000.

FCC Interconnection
Order.In connection with the
requirements of the Telecommunications Act of 1996, the FCC has
adopted rules governing interconnection and related matters. The
FCC has jurisdiction to set pricing standards for certain
interconnection services between incumbent carriers and other
carriers to be implemented by the state commissions. In December
2001, the FCC commenced its first triennial review of its
policies concerning unbundled network elements. During the
course of the proceeding, the FCC is expected to consider the
circumstances under which incumbent local exchange carriers must
make parts of their networks available to requesting carriers
and will resolve any outstanding issues related to unbundled
network elements. A decision increasing the unbundled network
elements that we are required to make available, including
allowing the substitution of unbundled network elements for
special access services, to requesting carriers could have a
material adverse effect on our revenues and results of
operations.

Long Distance.In
October 2001, we filed applications with the FCC to offer long
distance service to customers in Louisiana and Georgia. These
filings, which followed the unanimous approval by the Public
Service Commissions (PSC) in Louisiana and Georgia, were
withdrawn in December 2001. We refiled applications with the FCC
to offer long distance service to customers in those states in
February 2002. In October 2001, the Mississippi PSC unanimously
endorsed BellSouths state-level filing to provide long
distance service. We have also made filings with the PSCs in
each of Alabama, Florida, Kentucky, North Carolina, South
Carolina and Tennessee to review our compliance with the
requirements for obtaining long distance authority. We expect to
file an application with the FCC for each state at the
appropriate point in the state commissions consideration.
We do not know if the FCC will require further changes in our
network interconnection elements and operating systems before it
will approve such petitions. Any such changes could result in
significant additional expense and increased local service
competition from CLECs that use our network.

Broadband
Regulation.The FCC, various state
public service commissions and Congress are all considering
whether to adopt rules and regulations relating to the provision
of broadband services. We are unable to predict whether any such
regulations will be adopted. Any regulations relating to our
provision of broadband services could adversely affect our
business and results of operations.

Other State Regulatory
Matters.In 2000, the Florida Public
Service Commission issued a proposed agency action stating that
our change in 1999 from a late charge based on a percentage of
the amounts overdue to a flat rate fee plus an interest charge
violated the Florida price regulation statute and voted that
approximately $65 should be refunded. We protested the decision.
On August 30, 2001, the Commission issued an order adopting
its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The
total amount as of December 31, 2001 subject to potential
refund was $83, including interest. No accrual has been recorded
in the consolidated financial statements related to this matter.

During 2001, the Georgia and Louisiana Public
Service Commissions each adopted new company performance
measures, which will be used as one means to assess our
wholesale service quality to competitive local exchange
carriers. In addition, these Commissions each adopted a Self
Enforcement Plan. Generally, the Self Enforcement Plans consist
of three tiers. Under tier 1, we will be required to pay
remedial sums to individual competitive local exchange carriers
if we fail to meet

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certain performance criteria set by the relevant
Commission. Under tier 2, we will pay additional sums directly
to the State Treasury for failing to meet certain performance
metrics. Under tier 3, if we fail to meet certain performance
criteria, then our marketing and sales of long distance services
allowed by the Telecommunications Act of 1996 may be suspended.
Each Commission caps our annual liability under its Plan. We
have made payments under each Self Enforcement Plan and we may
be required to make payments in the future.


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 M to our consolidated financial
statements.

Foreign Risks

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

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

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

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

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

Competition

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

We expect local service competition to steadily
increase, particularly with respect to business customers. We
are losing market share with respect to business customers,
particularly small business customers. Our business customers
produce higher profit margins for us than residential customers.
Competition for local service revenues could adversely affect
our results of operations if lost revenues are not offset by
revenues arising from our being authorized to offer in-region
interLATA long distance wireline services, or from revenues
arising from our other initiatives, such as data and broadband
services. It is uncertain when we will be authorized to offer
in-region interLATA long distance wireline services.

The presence of multiple aggressive competitors
in our domestic and international wireless markets makes it more
difficult for Cingular and for us to attract new customers and
retain existing ones. Furthermore, while we do not compete
primarily on the basis of price, low prices offered by
competitors attempting to obtain market share have pressured us
to reduce prices and

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develop pricing plans attractive to lower usage
customers. These trends are expected to continue and could
adversely affect our results of operations in the future.


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

Technology

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

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

Legal Matters

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

New Accounting Pronouncements

See note A to our consolidated financial
statements.




Critical Accounting Policies

We have various policies that are important to
the portrayal of our financial condition and results of
operations. These policies require managements most
difficult, subjective or complex judgments, often as a result of
the need to make estimates or assumptions about the effect of
matters that are inherently uncertain. These include the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We use the composite group remaining life method
	and straight-line composite rates to depreciate the assets of
	our telephone subsidiary as described in note A to our
	consolidated financial statements. We periodically review data
	on asset retirement activity, cost of removal and salvage values
	to determine adjustments to depreciation rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Revenues are recorded when services are provided
	as described in note A to our consolidated financial
	statements. Our pricing is subject to oversight by both state
	and federal regulatory commissions. Such regulation also covers
	services, competition and other public policy issues. Different
	interpretations by regulatory bodies may result in adjustments
	to revenues in future periods. We monitor these proceedings
	closely and make adjustments to revenue accordingly.                                                                                                                                                                                                                                                                                                                                 
|
| |  | We review the valuation of accounts receivable on
	a monthly basis. The allowance for uncollectible accounts is
	estimated based on historical experience of write-offs and
	future expectations of conditions that might impact the
	collectibility of accounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Each year we calculate the costs of providing
	retiree benefits under the provisions of SFAS 87 and
	SFAS 106. The key assumptions used in making these
	calculations are disclosed in note G to our consolidated
	financial statements. The most significant of these assumptions
	are the discount rate used to value the future obligation,
	expected return on plan assets and health care cost trend rates.
	We select discount rates commensurate with current market
	interest rates on high-quality, fixed-rate debt securities. The
	expected return on assets is based on our current view of the
	long-term returns on assets held by the plans, which is
	influenced by historical averages. The medical cost trend rate
	is based on our actual medical claims and future projections of
	medical cost trends.
|
| |  | Our estimates of deferred income taxes and the
	significant items giving rise to the deferred assets and
	liabilities are shown in note I to our consolidated
	financial statements. These reflect our assessment of actual
	future taxes to be paid on items reflected in the financial
	statements, giving consideration to both timing and probability
	of realization. Actual income taxes could vary from these
	estimates due to future changes in income tax law or results
	from final review of our tax returns by taxing authorities.                                                                                                                                                                                                                                                                            
|
| |  | Our determination of the treatment of contingent
	liabilities in the financial statements is based on our view of
	the expected outcome of the applicable contingency. We consult
	with legal counsel on matters related to litigation and other
	experts both within and outside the company with respect to
	matters in the ordinary course of business. We accrue a
	liability if the likelihood of an adverse outcome is probable of
	occurrence and the amount is estimable. We disclose the                                                                                                                                                                                                                                                                                                                          

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | matter if either the likelihood of an adverse
	outcome is only reasonably possible or an estimate is not
	determinable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We review long-lived assets for impairment as
	described in note A to our consolidated financial
	statements. In analyzing potential impairments, we use
	projections of future cash flows from the asset. These
	projections are based on our views of growth rates for the
	related business, anticipated future economic, regulatory and
	political conditions, the assignment of discount rates relative
	to risk and estimates of terminal values.                                                                                                                                                                                                                                                                                                                                            
|
| |  | We have investments in equity securities that are
	accounted for under the cost method as discussed in note B
	to our consolidated financial statements. We evaluate whether
	declines in value are temporary or other-than-temporary.
	Temporary declines are reflected in other comprehensive income,
	and other-than- temporary declines are recorded as a realized
	loss with a new cost basis in the investment being established.
	This evaluation is based on the duration and extent to which the
	fair value is less than cost; the financial health of and
	business outlook for the investee, including industry
	performance, changes in technology, and operational and
	financing cash flow factors; and our intent and ability to hold
	the investment, including strategic factors.

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Cautionary Language Concerning Forward-Looking Statements

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

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

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



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

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REPORT OF MANAGEMENT

To the Shareholders of BellSouth Corporation:

These financial statements have been prepared in
conformity with generally accepted accounting principles and
have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report is contained herein.

The integrity and objectivity of the data in
these financial statements, including estimates and judgments
relating to matters not concluded by the end of the year, are
the responsibility of the management of BellSouth. Management
has also prepared all other information included therein unless
indicated otherwise.

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

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

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

/s/ F. DUANE ACKERMAN




F. Duane Ackerman


CHAIRMAN OF THE BOARD, PRESIDENT AND


CHIEF EXECUTIVE OFFICER


/s/ RONALD M. DYKES




Ronald M. Dykes


CHIEF FINANCIAL OFFICER


February 8, 2002

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REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders

BellSouth Corporation


In our opinion, based on our audits and the
report of other auditors, the accompanying consolidated balance
sheets and the related consolidated statements of income, of
cash flows and of shareholders equity and comprehensive
income present fairly, in all material respects, the financial
position of BellSouth Corporation and its subsidiaries at
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 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, an equity method investee. BellSouths financial
statements include an investment of $2,489 million as of
December 31, 2001, and equity method income of $675 million
for the year then ended. 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 2001
amounts included for Cingular Wireless, LLC, is based solely on
the report of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable
basis for our opinion.

As discussed in Note A to the consolidated
financial statements, in 2000 BellSouth Corporation adopted
Staff Accounting Bulletin No. 101 and changed its method of
accounting for certain revenues.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia


February 8, 2002




REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareowners

Cingular Wireless LLC


We have audited the consolidated balance sheet of
Cingular Wireless LLC as of December 31, 2001, and the
related consolidated statement of operations, changes in
members capital, and cash flows for the year then ended
(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 audit.

We conducted our audit in accordance with
auditing standards generally accepted in the 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 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 audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Cingular Wireless LLC at
December 31, 2001 and the consolidated results of its
operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States.

/s/ Ernst & Young LLP

Atlanta, Georgia


February 8, 2002

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BELLSOUTH CORPORATION






CONSOLIDATED STATEMENTS OF INCOME


(IN
MILLIONS, EXCEPT PER SHARE AMOUNTS)


|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |        |        | 
|------------------------------------------- | ------------------------------------------------- | ------------------------ | ----- | ------ | ------ | ---- | ----- | ------ | ------ | - | ------ | ------ | ------ | 
|                                            |                                                   |                         
|                                            |                                                   | For the years ended     
|                                            |                                                   | December 31,            
|                                            |                                                   |                         
|                                            |                                                   | 1999                     |       | 2000   |        | 2001
|                                            |                                                   |                          |       |        |        |     
|Operating Revenues:                         |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            | Communications group                              |                          | $     | 17,596 |        |      | $     | 18,309 |        |   | $      | 18,984 |       
|                                            | Domestic wireless                                 |                          |       | 3,236  |        |      |       | 2,766  |        |   |        |       |       
|                                            | Latin America                                     |                          |       | 2,364  |        |      |       | 2,906  |        |   |        | 2,910  |       
|                                            | Domestic advertising and publishing               |                          |       | 1,942  |        |      |       | 2,042  |        |   |        | 2,073  |       
|                                            | All other                                         |                          |       | 86     |        |      |       | 128    |        |   |        | 163    |       
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            |                                                   | Total Operating Revenues |       |        | 25,224 |      |       |        | 26,151 |   |        |        | 24,130 | 
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|Operating Expenses:                         |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            | Operational and support expenses                  |                          |       | 13,796 |        |      |       | 13,726 |        |   |        | 12,649 |       
|                                            | Depreciation and amortization                     |                          |       | 4,671  |        |      |       | 4,935  |        |   |        | 4,782  |       
|                                            | Provision for restructuring and asset impairments |                          |       | 320    |        |      |       | 606    |        |   |        | 358    |       
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            |                                                   | Total Operating Expenses |       |        | 18,787 |      |       |        | 19,267 |   |        |        | 17,789 | 
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|Operating income                            |                                                   |                          | 6,437 |        |        |      | 6,884 |        |        |   | 6,341  |       
|Interest expense                            |                                                   |                          | 1,030 |        |        |      | 1,328 |        |        |   | 1,315  |       
|Gain (loss) on sale of operations           |                                                   |                          | 55    |        |        |      | (14   | )      |        |   | 38     |       
|Net earnings (losses) of equity affiliates  |                                                   |                          | (169  | )      |        |      | 690   |        |        |   | 465    |       
|Other income (expense), net                 |                                                   |                          | 195   |        |        |      | 366   |        |        |   | (1,512 | )     
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|Income Before Income Taxes                  |                                                   |                          | 5,488 |        |        |      | 6,598 |        |        |   | 4,017  |       
|Provision for Income Taxes                  |                                                   |                          | 2,040 |        |        |      | 2,378 |        |        |   | 1,447  |       
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            |                                                   | Net Income               |       | $      | 3,448  |      |       | $      | 4,220  |   |        | $      | 2,570  | 
|                                            |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|Weighted-Average Common Shares Outstanding: |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            | Basic                                             |                          |       | 1,898  |        |      |       | 1,876  |        |   |        | 1,875  |       
|                                            | Diluted                                           |                          |       | 1,916  |        |      |       | 1,891  |        |   |        | 1,887  |       
|Earnings Per Share:                         |                                                   |                          |       |        |        |      |       |        |        |   |        |       
|                                            | Basic                                             |                          | $     | 1.82   |        |      | $     | 2.25   |        |   | $      | 1.37   |       
|                                            | Diluted                                           |                          | $     | 1.80   |        |      | $     | 2.23   |        |   | $      | 1.36   |       
|Dividends Declared Per Common Share         |                                                   | $                        | .76   |        |        | $    | .76   |        |        | $ | .76    |       

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

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##### Table of Contents



BELLSOUTH CORPORATION






CONSOLIDATED BALANCE SHEETS


(IN
MILLIONS, EXCEPT PER SHARE AMOUNTS)


|                                      |                                                                                           |                      |                              |                                            |       |        |        |        |       |        |        | 
|------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------- | ---------------------------- | ------------------------------------------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | 
|                                      |                                                                                           | December 31,         |                              | December 31,                              
|                                      |                                                                                           | 2000                 |                              | 2001                                      
|                                      |                                                                                           |                      |                              |                                           
|ASSETS                                |                                                                                           |                      |                              |                                            |       |        |        |       
|Current Assets:                       |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      | Cash and cash equivalents                                                                 |                      | $                            | 1,061                                      |       |        | $      | 592    |      
|                                      | Accounts receivable, net of allowance for
	uncollectibles of $377 and $476.               |                      |                              | 5,157                                      |       |        |        | 5,206  |      
|                                      | Material and supplies                                                                     |                      |                              | 379                                        |       |        |        | 382    |      
|                                      | Other current assets                                                                      |                      |                              | 809                                        |       |        |        | 675    |      
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      |                                                                                           | Total current assets |                              |                                            | 7,406 |        |        |        | 6,855 |       
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|Investments and advances              |                                                                                           |                      | 11,010                       |                                            |       |        | 10,620 |       
|Property, plant and equipment, net    |                                                                                           |                      | 24,157                       |                                            |       |        | 24,943 |       
|Deferred charges and other assets     |                                                                                           |                      | 4,180                        |                                            |       |        | 5,122  |       
|Intangible assets, net                |                                                                                           |                      | 4,172                        |                                            |       |        | 4,506  |       
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      |                                                                                           |                      |                              | Total assets                               |       | $      | 50,925 |        |       | $      | 52,046 | 
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|LIABILITIES AND SHAREHOLDERS
	EQUITY |                                                                                           |                      |                              |                                            |       |        |        |       
|Current Liabilities:                  |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      | Debt maturing within one year                                                             |                      | $                            | 7,569                                      |       |        | $      | 5,111  |      
|                                      | Accounts payable                                                                          |                      |                              | 2,233                                      |       |        |        | 1,656  |      
|                                      | Other current liabilities                                                                 |                      |                              | 3,468                                      |       |        |        | 3,301  |      
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      |                                                                                           |                      | Total current liabilities    |                                            |       | 13,270 |        |        |       | 10,068 |       
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|Long-term debt                        |                                                                                           |                      | 12,463                       |                                            |       |        | 15,014 |       
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|Noncurrent liabilities:               |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      | Deferred income taxes                                                                     |                      |                              | 3,580                                      |       |        |        | 3,206  |      
|                                      | Other noncurrent liabilities                                                              |                      |                              | 4,700                                      |       |        |        | 5,161  |      
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      |                                                                                           |                      | Total noncurrent liabilities |                                            |       | 8,280  |        |        |       | 8,367  |       
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|Shareholders equity:                 |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      | Common stock, $1 par value (8,650 shares
	authorized; 1,872 and 1,877 shares outstanding) |                      |                              | 2,020                                      |       |        |        | 2,020  |      
|                                      | Paid-in capital                                                                           |                      |                              | 6,740                                      |       |        |        | 6,875  |      
|                                      | Retained earnings                                                                         |                      |                              | 14,074                                     |       |        |        | 15,137 |      
|                                      | Accumulated other comprehensive income                                                    |                      |                              | (488                                       | )     |        |        | (294   | )    
|                                      | Shares held in trust and treasury                                                         |                      |                              | (5,222                                     | )     |        |        | (4,996 | )    
|                                      | Guarantee of ESOP debt                                                                    |                      |                              | (212                                       | )     |        |        | (145   | )    
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      |                                                                                           |                      | Total shareholders equity   |                                            |       | 16,912 |        |        |       | 18,597 |       
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       
|                                      |                                                                                           |                      |                              | Total liabilities and shareholders equity |       | $      | 50,925 |        |       | $      | 52,046 | 
|                                      |                                                                                           |                      |                              |                                            |       |        |        |       

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

52



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##### Table of Contents



BELLSOUTH CORPORATION






CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN MILLIONS)


|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |        |       |  
|---------------------------------------------------- | ----------------------------------------------------- | -------------------------------------------------------------- | ------ | ------ | ----- | ---- | ------ | ------ | ------ | - | ------ | ------ | ----- | -
|                                                     |                                                       |                                                               
|                                                     |                                                       | For the years ended                                           
|                                                     |                                                       | December 31,                                                  
|                                                     |                                                       |                                                               
|                                                     |                                                       | 1999                                                           |        | 2000   |       | 2001
|                                                     |                                                       |                                                                |        |        |       |     
|Cash Flows from Operating
	Activities:               |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Net income                                           |                                                       | $                                                              | 3,448  |        |       | $    | 4,220  |        |        | $ | 2,570  |       
|Adjustments to net income:                           |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|                                                     |                                                       | Depreciation and amortization                                  |        |        | 4,671 |      |        |        | 4,935  |   |        |        | 4,782 |  
|                                                     |                                                       | Net losses on sale or impairment of equity
	securities         |        |        |      |      |        |        |       |   |        |        | 1,937 |  
|                                                     |                                                       | Provision for restructuring and asset impairments              |        |        | 320   |      |        |        | 606    |   |        |        | 358   |  
|                                                     |                                                       | Provision for uncollectibles                                   |        |        | 365   |      |        |        | 372    |   |        |        | 574   |  
|                                                     |                                                       | Pension income                                                 |        |        | (421  | )    |        |        | (693   | ) |        |        | (797  | )
|                                                     |                                                       | Pension settlement gain                                        |        |        |      |      |        |        | (362   | ) |        |        |      |  
|                                                     |                                                       | Postretirement benefit curtailment charge related
	to Cingular |        |        |      |      |        |        |       |   |        |        | 72    |  
|                                                     |                                                       | Net losses (earnings) of equity affiliates                     |        |        | 169   |      |        |        | (690   | ) |        |        | (465  | )
|                                                     |                                                       | Dividends received from equity affiliates                      |        |        | 97    |      |        |        | 156    |   |        |        | 369   |  
|                                                     |                                                       | Minority interests in income of subsidiaries                   |        |        | 57    |      |        |        | 9      |   |        |        | 25    |  
|                                                     |                                                       | Deferred income taxes and investment tax credits               |        |        | (54   | )    |        |        | 615    |   |        |        | (178  | )
|                                                     |                                                       | (Gain) loss on sale of operations                              |        |        | (55   | )    |        |        | 14     |   |        |        | (38   | )
|Net change in:                                       |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|                                                     |                                                       | Accounts receivable and other current assets                   |        |        | (860  | )    |        |        | (1,000 | ) |        |        | (743  | )
|                                                     |                                                       | Accounts payable and other current liabilities                 |        |        | 49    |      |        |        | 591    |   |        |        | (682  | )
|                                                     |                                                       | Deferred charges and other assets                              |        |        | (86   | )    |        |        | (169   | ) |        |        | (22   | )
|                                                     |                                                       | Other liabilities and deferred credits                         |        |        | 316   |      |        |        | (236   | ) |        |        | 41    |  
|Other reconciling items, net                         |                                                       |                                                                | 183    |        |       |      | 222    |        |        |   | 195    |       
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|                                                     | Net cash provided by operating activities             |                                                                |        | 8,199  |       |      |        | 8,590  |        |   |        | 7,998  |      
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Cash Flows from Investing
	Activities:               |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Capital expenditures                                 |                                                       |                                                                | (6,200 | )      |       |      | (6,995 | )      |        |   | (5,997 | )     
|Investments in and advances to equity affiliates     |                                                       |                                                                | (138   | )      |       |      | (576   | )      |        |   | (2,072 | )     
|Proceeds from sale of equity securities              |                                                       |                                                                |       |        |       |      |       |        |        |   | 1,210  |       
|Acquisitions, net of cash acquired                   |                                                       |                                                                | (3,745 | )      |       |      | (1,836 | )      |        |   |       |       
|Purchases of wireless licenses                       |                                                       |                                                                | (123   | )      |       |      | (93    | )      |        |   | (10    | )     
|Proceeds from sale of operations                     |                                                       |                                                                | 215    |        |       |      | 23     |        |        |   | 47     |       
|Purchases of short-term investments                  |                                                       |                                                                | (143   | )      |       |      | (507   | )      |        |   | (77    | )     
|Proceeds from disposition of short-term
	investments |                                                       |                                                                | 59     |        |       |      | 570    |        |        |   | 96     |       
|Proceeds from repayment of loans and advances        |                                                       |                                                                | 83     |        |       |      | 61     |        |        |   | 17     |       
|Investment in debt securities                        |                                                       |                                                                |       |        |       |      |       |        |        |   | (279   | )     
|Other investing activities, net                      |                                                       |                                                                | 104    |        |       |      | 50     |        |        |   | 26     |       
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|                                                     | Net cash used for investing activities                |                                                                |        | (9,888 | )     |      |        | (9,303 | )      |   |        | (7,039 | )    
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Cash Flows from Financing
	Activities:               |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Net borrowings (repayments) of short-term
	debt      |                                                       |                                                                | 4,070  |        |       |      | (1,140 | )      |        |   | (3,990 | )     
|Proceeds from long-term debt                         |                                                       |                                                                | 522    |        |       |      | 4,176  |        |        |   | 4,603  |       
|Repayments of long-term debt                         |                                                       |                                                                | (217   | )      |       |      | (451   | )      |        |   | (759   | )     
|Dividends paid                                       |                                                       |                                                                | (1,449 | )      |       |      | (1,427 | )      |        |   | (1,424 | )     
|Purchase of treasury shares                          |                                                       |                                                                | (3,120 | )      |       |      | (779   | )      |        |   |       |       
|Other financing activities, net                      |                                                       |                                                                | 27     |        |       |      | 108    |        |        |   | 142    |       
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|                                                     | Net cash (used for) provided by financing
	activities |                                                                |        | (167   | )     |      |        | 487    |        |   |        | (1,428 | )    
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Net Decrease in Cash and Cash Equivalents            |                                                       |                                                                | (1,856 | )      |       |      | (226   | )      |        |   | (469   | )     
|Cash and Cash Equivalents at Beginning of Period     |                                                       |                                                                | 3,143  |        |       |      | 1,287  |        |        |   | 1,061  |       
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       
|Cash and Cash Equivalents at End of Period           |                                                       | $                                                              | 1,287  |        |       | $    | 1,061  |        |        | $ | 592    |       
|                                                     |                                                       |                                                                |        |        |       |      |        |        |        |   |        |       

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

53



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##### Table of Contents



BELLSOUTH CORPORATION






CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


AND COMPREHENSIVE INCOME

(IN
MILLIONS)


|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |  
|------------------------------------------ | ------------------------------------------------------------------- | ---------------- | ----- | --------- |  | ------ | ---- | ------------ |  | -------- | ----- | ------------- |  | --------- | ----- | ------- |  | ----- | ------ | - |  | - | ---- | ---- | - | - | ------ | - |  | - | ---- | - |  | - | ------ | ---- | -
|                                           |                                                                     |                  |       |          
|                                           |                                                                     | Number of Shares |       | Amount   
|                                           |                                                                     |                  |       |          
|                                           |                                                                     |                  |       | Shares    |  |        |      | Accum. Other |  | Shares   |       |              
|                                           |                                                                     |                  |       | Held In   |  |        |      | Compre-      |  | Held In  |       | Guarantee     |  |          
|                                           |                                                                     | Common           |       | Trust and |  | Common |      | Paid-in      |  | Retained |       | hensive       |  | Trust and |       | of ESOP |  |      
|                                           |                                                                     | Stock            |       | Treasury  |  | Stock  |      | Capital      |  | Earnings |       | Income (Loss) |  | Treasury  |       | Debt    |  | Total
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |      
|                                           |                                                                     |                  |       | (a)       |  |        |      |              |  |          |       |               |  | (a)       |       |         |  |      
|Balance at December 31, 1998               |                                                                     |                  | 2,020 |           |  |        | (70  | )            |  | $        | 2,020 |               |  | $         | 6,766 |         |  | $     | 9,479  |   |  | $ | (64  | )    |   | $ | (1,752 | ) |  | $ | (339 | ) |  | $ | 16,110 |     
|Net income                                 |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 3,448  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 3,448  |     
|Other comprehensive income, net of tax:    |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|                                           | Foreign currency translation adjustment                             |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (134 | ) |   |        |   |  |   |      |   |  |   |        | (134 | )
|                                           | Net unrealized losses on securities                                 |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (115 | ) |   |        |   |  |   |      |   |  |   |        | (115 | )
|                                           | Minimum pension liability adjustment                                |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (45  | ) |   |        |   |  |   |      |   |  |   |        | (45  | )
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Total comprehensive income                 |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 3,154  |     
|Dividends declared                         |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | (1,436 | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (1,436 | )   
|Share issuances for employee benefit plans |                                                                     |                  |       |           |  |        | 2    |              |  |          |       |               |  |           |       |         |  |       | (45    | ) |  |   |      |      |   |   | 77     |   |  |   |      |   |  |   | 32     |     
|Purchase of treasury stock                 |                                                                     |                  |       |           |  |        | (70  | )            |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   | (3,120 | ) |  |   |      |   |  |   | (3,120 | )   
|Purchase of stock by grantor trust         |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   | (3     | ) |  |   |      |   |  |   | (3     | )   
|Tax benefit related to stock options       |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           | 5     |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 5      |     
|ESOP activities and related tax benefit    |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 10     |   |  |   |      |      |   |   |        |   |  |   | 63   |   |  |   | 73     |     
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Balance at December 31, 1999               |                                                                     |                  | 2,020 |           |  |        | (138 | )            |  | $        | 2,020 |               |  | $         | 6,771 |         |  | $     | 11,456 |   |  | $ | (358 | )    |   | $ | (4,798 | ) |  | $ | (276 | ) |  | $ | 14,815 |     
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Net income                                 |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 4,220  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 4,220  |     
|Other comprehensive income, net of tax:    |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|                                           | Foreign currency translation adjustment                             |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | 50   |   |   |        |   |  |   |      |   |  |   |        | 50   |  
|                                           | Net unrealized losses on securities(b)                              |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (169 | ) |   |        |   |  |   |      |   |  |   |        | (169 | )
|                                           | Minimum pension liability adjustment                                |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (11  | ) |   |        |   |  |   |      |   |  |   |        | (11  | )
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Total comprehensive income                 |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 4,090  |     
|Dividends declared                         |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | (1,424 | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (1,424 | )   
|Share issuances for employee benefit plans |                                                                     |                  |       |           |  |        | 9    |              |  |          |       |               |  |           | (35   | )       |  |       | (187   | ) |  |   |      |      |   |   | 355    |   |  |   |      |   |  |   | 133    |     
|Purchase of treasury stock                 |                                                                     |                  |       |           |  |        | (19  | )            |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   | (779   | ) |  |   |      |   |  |   | (779   | )   
|Tax benefit related to stock options       |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           | 4     |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 4      |     
|ESOP activities and related tax benefit    |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 9      |   |  |   |      |      |   |   |        |   |  |   | 64   |   |  |   | 73     |     
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Balance at December 31, 2000               |                                                                     |                  | 2,020 |           |  |        | (148 | )            |  | $        | 2,020 |               |  | $         | 6,740 |         |  | $     | 14,074 |   |  | $ | (488 | )    |   | $ | (5,222 | ) |  | $ | (212 | ) |  | $ | 16,912 |     
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Net income                                 |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 2,570  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 2,570  |     
|Other comprehensive income, net of tax:    |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|                                           | Foreign currency translation adjustment                             |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (30  | ) |   |        |   |  |   |      |   |  |   |        | (30  | )
|                                           | Net unrealized losses on securities(b)                              |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (277 | ) |   |        |   |  |   |      |   |  |   |        | (277 | )
|                                           | Adjustments for other-than-temporary losses
	included in net income |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | 595  |   |   |        |   |  |   |      |   |  |   |        | 595  |  
|                                           | Net unrealized losses on derivatives                                |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (71  | ) |   |        |   |  |   |      |   |  |   |        | (71  | )
|                                           | Minimum pension liability adjustment                                |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (23  | ) |   |        |   |  |   |      |   |  |   |        | (23  | )
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Total comprehensive income                 |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 2,764  |     
|Dividends declared                         |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | (1,424 | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (1,424 | )   
|Share issuances for employee benefit plans |                                                                     |                  |       |           |  |        | 5    |              |  |          |       |               |  |           | 8     |         |  |       | (85    | ) |  |   |      |      |   |   | 230    |   |  |   |      |   |  |   | 153    |     
|Purchase of stock by grantor trust         |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   | (4     | ) |  |   |      |   |  |   | (4     | )   
|Tax benefit related to stock options       |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           | 127   |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 127    |     
|ESOP activities and related tax benefit    |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 2      |   |  |   |      |      |   |   |        |   |  |   | 67   |   |  |   | 69     |     
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Balance at December 31, 2001               |                                                                     |                  | 2,020 |           |  |        | (143 | )            |  | $        | 2,020 |               |  | $         | 6,875 |         |  | $     | 15,137 |   |  | $ | (294 | )    |   | $ | (4,996 | ) |  | $ | (145 | ) |  | $ | 18,597 |     
|                                           |                                                                     |                  |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     



|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Trust and treasury shares are not considered to
	be outstanding for financial reporting purposes. As of
	December 31, 2001, there were approximately 36 shares held
	in trust and 107 shares held in treasury.



|    |                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------
|(b) | Net unrealized losses include adjustments for
	realized gains of $17 in 2000 and realized losses of $129 in
	2001.

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

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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE AACCOUNTING POLICIES

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

ORGANIZATION

We are an international telecommunications
company headquartered in Atlanta, Georgia. For management
purposes, our operations are organized into four reportable
segments: Communications group; Domestic wireless; Latin
America; and Domestic advertising and publishing.

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 which 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 which we report on a one-month lag
basis. All significant intercompany transactions and accounts
have been eliminated. During fourth quarter 2000, we contributed
our domestic wireless operations to a joint venture with SBC
Communications, forming Cingular. We own an approximate 40%
economic interest in the venture and share control with SBC.
Accordingly, we account for this investment under the equity
method. Certain revenue and expense trends are impacted by the
change from consolidation to equity method treatment for the
periods presented. Certain amounts in the prior period
consolidated financial statements have been reclassified to
conform to the current years presentation.

USE OF ESTIMATES

Our consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles. Such financial statements include estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and
the amounts of revenues and expenses. Actual results could
differ from those estimates.

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 $93 for 1999, $93 for 2000 and $86 for 2001. At
December 31, 2001, cash and cash equivalents primarily
consisted of cash held by our operations in Venezuela.

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 composite group remaining life method of depreciation and
straight-line composite rates determined on the basis of equal
life groups of certain categories of telephone plant acquired in
a given year. This method requires the periodic revision of
depreciation rates. When depreciable telephone plant is disposed
of, the original cost less net salvage value is charged to
accumulated depreciation. The cost of other property, plant and
equipment is depreciated using either straight-line or
accelerated methods over the estimated useful lives of the
assets. Depreciation of property, plant and equipment was $4,398
for 1999, $4,492 for 2000 and $4,195 for 2001. 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.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is the excess consideration paid over
the fair value of net tangible assets acquired in business
combinations; other intangibles includes amounts allocated to
acquired licenses and customer lists. These assets are being
amortized using the straight-line and accelerated methods over
periods of benefit that do not exceed 40 years. Intangible
assets also include amounts capitalized for computer software
costs, which are amortized over periods of benefit of 3 to
5 years.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE AACCOUNTING POLICIES
(Continued)


The carrying value of intangible assets is
periodically reviewed to determine whether such intangibles are
fully recoverable from projected net cash flows of the related
business unit. Amortization of such intangibles was $273 for
1999, $443 for 2000 and $587 for 2001.

VALUATION OF LONG-LIVED ASSETS

We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. It is reasonably
possible that these 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.

FOREIGN CURRENCY

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

Exchange gains and losses on transactions and
equity investments denominated in a currency other than their
functional currency are generally included in results of
operations as incurred unless the transactions are hedged. See
Derivative Financial Instruments below.

DERIVATIVE FINANCIAL INSTRUMENTS

We generally enter into derivative financial
instruments only for hedging purposes. Deferral accounting is
applied when the derivative reduces the risk of the underlying
hedged item effectively as a result of high inverse correlation
with the value of the underlying exposure. If a derivative
instrument either initially fails or later ceases to meet the
criteria for deferral or hedge accounting, any subsequent gains
or losses are recognized currently in income.

REVENUE RECOGNITION

Revenues are recognized when earned. Certain
revenues derived from local telephone and wireless services are
billed monthly in advance and are recognized the following month
when services are provided. Print advertising and publishing
revenues and related directory costs are recognized upon
publication of directories. Revenues derived from other
telecommunications services, principally network access, long
distance and wireless airtime usage, are recognized monthly as
services are provided. Revenues from installation and activation
activities are deferred and recognized over the life of the
customer relationship which is generally four years. Allowances
for uncollectible billed services are adjusted monthly. The
provision for such uncollectible accounts was $365 for 1999,
$372 for 2000 and $574 for 2001.

In December 1999, the SEC issued Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial
Statements (SAB 101) which provides guidance on revenue
recognition. SAB 101 is effective for fiscal years
beginning after December 15, 1999. During 1999 and prior
years, consistent with industry practice, we recognized
telecommunications service activation fees and related costs at
the time of service initiation. Based on guidance in SAB 101, we
changed our accounting policies, effectively deferring the
recognition of revenue and certain related costs associated with
new service activation over the life of the customer
relationship. Costs are deferred only to the extent that revenue
is deferred.

We accounted for SAB 101 as a change in
accounting principle effective January 1, 2000, and
therefore have not restated our 1999 financial statements
included herein. The net effect of adoption resulted in
deferring $1,426 in revenues and certain related costs related
to activation services provided prior to January 1, 2000.
These revenues and costs are to be recognized over a period of
approximately 4 years. Because an equal amount of revenue
and expense was deferred, there was no impact on net income for
the change in accounting principle.

MAINTENANCE AND REPAIRS

The cost of maintenance and repairs of plant,
including the cost of replacing minor items not resulting in

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE AACCOUNTING POLICIES
(Continued)


substantial betterments, is charged to operating
expenses.

ADVERTISING

We expense advertising costs as they are
incurred. Our total advertising expense was $539 for 1999, $460
for 2000 and $276 for 2001.

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.

For financial reporting purposes, we amortize
deferred investment tax credits earned prior to the 1986 repeal
of the investment tax credit and also some transitional credits
earned after the repeal. The credits are being amortized as a
reduction to the provision for income taxes over the estimated
useful lives of the assets to which the credits relate.

EARNINGS PER SHARE

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

|                                                         |  |      |       |      |  |      |       |  |  |  |       | 
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                         |  | 1999 |       | 2000 |  | 2001
|                                                         |  |      |       |      |  |     
|Basic common shares outstanding                          |  |      | 1,898 |      |  |      | 1,876 |  |  |  | 1,875 | 
|Incremental shares from stock options and benefit
	plans |  |      | 18    |      |  |      | 15    |  |  |  | 12    | 
|                                                         |  |      |       |      |  |      |       |  |  |  |       | 
|Diluted common shares outstanding                        |  |      | 1,916 |      |  |      | 1,891 |  |  |  | 1,887 | 
|                                                         |  |      |       |      |  |      |       |  |  |  |       | 

The earnings amounts used for per-share
calculations are the same for both the basic and diluted
methods. Outstanding options of 198,000 shares for 1999,
29 million shares for 2000 and 50 million shares for
2001 were not included in the computation of diluted earnings
per share because the exercise price of these options was
greater than the average market price of the common stock.

ADOPTION OF NEW ACCOUNTING STANDARDS

Derivative Instruments and Hedging
Activities

Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities requires that entities
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. Gains and losses resulting from changes in the fair
values of those derivatives are to be accounted for depending on
the use of the derivative and whether it qualifies for hedge
accounting. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain
Hedging Activities, which amended SFAS No. 133. The
amendments in SFAS No. 138 address certain implementation
issues and relate to such matters as the normal purchases and
normal sales exception, the definition of interest rate risk,
hedging recognized foreign-currency-denominated assets and
liabilities, and intercompany derivatives.

We adopted SFAS No. 133 and SFAS
No. 138 effective January 1, 2001. The impact of
implementation was not material. The fair value of derivative
instruments at December 31, 2001 was $(76).

Business Combinations and Goodwill and Other
Intangible Assets

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires the
purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. SFAS No. 141
also provides new criteria to determine whether an acquired
intangible asset should be recognized separately from goodwill.

Upon adoption of SFAS No. 142, amortization
of existing goodwill will cease and the remaining book value
will be tested for impairment at least annually at the reporting
unit level using a new two-step impairment test. Amortization of
goodwill recorded on equity investments will also cease, but
this embedded goodwill will continue to be tested for impairment
under current accounting rules for equity investments. In
addition, we will have adjustments to the equity in net income
of affiliates line item

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE AACCOUNTING POLICIES
(Continued)


to reflect the impact of adopting these new
statements on the operations of our equity investments. We
adopted both statements effective January 1, 2002. As a
result of the implementation of this standard, we will cease to
amortize goodwill and domestic wireless licenses and therefore
expect an after-tax increase of net income of approximately $135
in 2002. During 2002, we will perform the first of the required
impairment tests of goodwill as of January 1, 2002, and we
have not yet determined what the effect of these tests will be
on our earnings and financial position. Any impairment resulting
from our initial application of the statements will be recorded
as a cumulative effect of accounting change as of
January 1, 2002.

Asset Retirement Obligations and Disposal of a
Segment of a Business

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

NOTE BINVESTMENTS AND ADVANCES

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

|                                                  |  |      |        |      |  |   |        | 
|------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                  |  | 2000 |        | 2001
|                                                  |  |      |        |     
|Investments accounted for under the equity method |  | $    | 2,501  |      |  | $ | 2,664  | 
|Investments accounted for under the cost method   |  |      | 3,496  |      |  |   | 848    | 
|Other investments                                 |  |      | 77     |      |  |   | 408    | 
|Advances to and notes receivable from affiliates  |  |      | 4,936  |      |  |   | 6,700  | 
|                                                  |  |      |        |      |  |   |        | 
|Investments and advances                          |  | $    | 11,010 |      |  | $ | 10,620 | 
|                                                  |  |      |        |      |  |   |        | 

EQUITY METHOD INVESTMENTS


Ownership in equity investments at
December 31 is as follows:

|                             |       |            |        |            |  |            |       |            |  |  |       |  |  |   |       |       | 
|---------------------------- | ----- | ---------- | ------ | ---------- |  | ---------- | ----- | ---------- |  |  | ----- |  |  | - | ----- | ----- | 
|                             |       |            |        |           
|                             |       | 2000       |        | 2001      
|                             |       |            |        |           
|                             |       | Ownership  |        | Investment |  | Ownership  |       | Investment
|                             |       | Percentage |        | Balance    |  | Percentage |       | Balance   
|                             |       |            |        |            |  |            |       |           
|AB Cellular (U.S.)(1)        |       |            | 100.0% |            |  | $          | 1,894 |            |  |  |      |  |  | $ |      |      
|Abiatar (Uruguay)            |       |            | 46.0%  |            |  |            | 39    |            |  |  | 46.0% |  |  |   | 46    |      
|BellSouth Guatemala(2)       |       |            | 60.0%  |            |  |            | 53    |            |  |  | 60.0% |  |  |   | 56    |      
|BellSouth Panama             |       |            | 43.7%  |            |  |            | 54    |            |  |  | 43.7% |  |  |   | 69    |      
|BCP  São Paulo (Brazil)     |       |            | 44.5%  |            |  |            | 80    |            |  |  | 45.4% |  |  |   | 1     |      
|BSE  Northeast
	(Brazil)(3) |       |            | 46.8%  |            |  |            | (28   | )          |  |  | 47.0% |  |  |   | (61   | )    
|Cellcom (Israel)             |       |            | 34.8%  |            |  |            | 78    |            |  |  | 34.8% |  |  |   | 122   |      
|Cingular Wireless            |       |            | 40.0%  |            |  |            | 348   |            |  |  | 40.0% |  |  |   | 2,489 |      
|E-Plus (Germany)(3)          |       |            | 22.5%  |            |  |            | (85   | )          |  |  | 22.5% |  |  |   | (105  | )    
|OESP Midia (Brazil)          |       |            | 40.0%  |            |  |            | 24    |            |  |  | 40.0% |  |  |   | 17    |      
|Sonofon (Denmark)            |       |            | 46.5%  |            |  |            | 18    |            |  |  | 46.5% |  |  |   | 30    |      
|SkyCell (India)(4)           |       |            | 24.5%  |            |  |            | (5    | )          |  |  |      |  |  |   |      |      
|Other                        |       |            |       |            |  |            | 31    |            |  |  |      |  |  |   |      |      
|                             |       |            |        |            |  |            |       |            |  |  |       |  |  |   |       |      
|                             | Total |            |        |            |  |            | $     | 2,501      |  |  |       |  |  |   | $     | 2,664 | 
|                             |       |            |        |            |  |            |       |            |  |  |       |  |  |   |       |      






|    |                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We redeemed AT&T from AB Cellular in December
	2000. In January 2001, we contributed our remaining investment
	to Cingular in accordance with the contribution agreement. This
	investment was accounted for under the equity method since our
	control was temporary. See note C for further discussion.                      
|   
|(2) | 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.                                                                                                                                      
|   
|(3) | We have advanced approximately $200 to the
	Brazil-Northeast operations and will continue to record losses
	until the sum of our investment in and advances to this
	operation equal zero. We had previously guaranteed debt issued
	by E-Plus, and accordingly continued to record losses in excess
	of our equity investment.
|   
|(4) | We sold our investment in SkyCell in August 2001.
	See note C for further discussion.                                                                                                                                                                                                                                          

SUMMARY FINANCIAL INFORMATION OF EQUITY INVESTEES

A summary of combined financial information as
reported by our equity investees is set forth below:

|                           |  |      |        |      |  |   |        | 
|-------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                           |  | 2000 |        | 2001
|                           |  |      |        |     
|Balance Sheet Information: |  |      |        |      |  |   |        | 
|Current assets             |  | $    | 5,118  |      |  | $ | 4,264  | 
|                           |  |      |        |      |  |   |        | 
|Noncurrent assets          |  | $    | 31,623 |      |  | $ | 33,901 | 
|                           |  |      |        |      |  |   |        | 
|Current liabilities        |  | $    | 16,757 |      |  | $ | 15,936 | 
|                           |  |      |        |      |  |   |        | 
|Noncurrent liabilities     |  | $    | 16,185 |      |  | $ | 17,653 | 
|                           |  |      |        |      |  |   |        | 

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE BINVESTMENTS AND ADVANCES
(Continued)


|                              |  |      |       |      |  |      |       |  |  |   |        | 
|----------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ------ | 
|                              |  | 1999 |       | 2000 |  | 2001
|                              |  |      |       |      |  |     
|Income Statement Information: |  |      |       |      |  |      |       |  |  |   |        | 
|Revenues                      |  | $    | 5,326 |      |  | $    | 9,188 |  |  | $ | 18,515 | 
|                              |  |      |       |      |  |      |       |  |  |   |        | 
|Operating Income              |  | $    | 433   |      |  | $    | 906   |  |  | $ | 2,969  | 
|                              |  |      |       |      |  |      |       |  |  |   |        | 
|Net (Loss) Income             |  | $    | (638  | )    |  | $    | 1,201 |  |  | $ | 1,109  | 
|                              |  |      |       |      |  |      |       |  |  |   |        | 

Foreign Currency Devaluation

In January 1999, the Brazilian Government changed
its foreign exchange policy, extinguishing the exchange band
through which it had managed the range of the fluctuation of the
Real in relation to the U.S. Dollar, allowing the market to
freely determine the exchange rate. As a consequence of this
change, the Real devalued significantly in relation to the U.S.
Dollar in early 1999. The devaluation and subsequent
fluctuations in the exchange rate resulted in our Brazilian
wireless properties recording net currency losses related to
their net U.S. Dollar-denominated liabilities. Our share of
the Brazilian foreign currency losses was $308 for 1999, $73 for
2000 and $180 for 2001.

COST METHOD INVESTMENTS

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

Over the course of 2001, there has been a broad
decline in the public equity markets, particularly in technology
and communications stocks, including investments held in our
portfolio. Similarly, we experienced significant declines in the
value of certain publicly held investments and restricted
securities. As a result, we recorded a $1,817 noncash pretax
charge to reduce the carrying value of certain strategic
investments in publicly traded and private equity securities,
principally our investment in Qwest. We concluded that the
continuing depressed market of these investments, as well as the
difficulties experienced by similar companies, indicated that
the decline was other than temporary. This charge is included in
Other income (expense), net in the accompanying consolidated
statements of income.

The tables below show certain summarized
information related to our investments:

|                       |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |       | 
|---------------------- | ----- | ---- | ----- | ---------- |  | ---------- | -- | ----- |  | - | --- | --- |  | - | ----- | ----- | 
|                       |       |      |       | Unrealized |  | Unrealized |    | Fair 
|                       |       | Cost |       | gains      |  | losses     |    | value
|                       |       |      |       |            |  |            |    |      
|December 31, 2000      |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |      
|Investment in Qwest    |       | $    | 3,500 |            |  | $          |   |       |  | $ | 472 |     |  | $ | 3,028 |      
|Other cost investments |       |      | 484   |            |  |            | 81 |       |  |   | 97  |     |  |   | 468   |      
|                       |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |      
|                       | Total |      | $     | 3,984      |  |            | $  | 81    |  |   | $   | 569 |  |   | $     | 3,496 | 
|                       |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |      
|December 31, 2001      |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |      
|Investment in Qwest    |       | $    | 644   |            |  | $          |   |       |  | $ |    |     |  | $ | 644   |      
|Other cost investments |       |      | 149   |            |  |            | 55 |       |  |   |    |     |  |   | 204   |      
|                       |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |      
|                       | Total |      | $     | 793        |  |            | $  | 55    |  |   | $   |    |  |   | $     | 848   | 
|                       |       |      |       |            |  |            |    |       |  |   |     |     |  |   |       |      

At the beginning of 2001, we held 74 million
shares of Qwest common stock. During the year, we sold
26.7 million shares for cash proceeds of $1,135 and
generated a realized loss of $130. We also tendered
1.7 million shares to Qwest as consideration for services
purchased pursuant to a services agreement entered into in
January 2001. At December 31, 2001, we held
45.5 million shares of Qwest stock, all of which are
classified as available-for-sale.

OTHER INVESTMENTS

Other investments at December 31, 2001
consist primarily of $279 in loan participation agreements
related to the Colombian operations.

ADVANCES AND NOTES RECEIVABLE

In addition to our equity investments, we have
made advances to several of our equity affiliates. The ad-

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE BINVESTMENTS AND ADVANCES
(Continued)


vances to and notes receivable from our equity
investments at December 31 are as follows:

|         |                                     |      |       |       |  |   |       |       | 
|-------- | ----------------------------------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|         |                                     | 2000 |       | 2001 
|         |                                     |      |       |      
|Cingular |                                     | $    | 3,842 |       |  | $ | 3,812 |      
|E-Plus   |                                     |      |      |       |  |   | 1,841 |      
|KPN      |                                     |      | 443   |       |  |   | 446   |      
|Brazil   |                                     |      | 375   |       |  |   | 375   |      
|Other    |                                     |      | 276   |       |  |   | 226   |      
|         |                                     |      |       |       |  |   |       |      
|         | Total advances and notes receivable |      | $     | 4,936 |  |   | $     | 6,700 | 
|         |                                     |      |       |       |  |   |       |      

The advances to Cingular carry an interest rate
of 7.5% and mature March 31, 2003. We earned $71 in 2000
and $291 in 2001 from interest income on this advance to
Cingular. In addition, Cingular owed us $125 at
December 31, 2001, which represents receivables incurred in
the ordinary course of business, and is included in other
current assets.

As part of the February 2000 restructuring of our
investment in E-Plus discussed in note C, we agreed to make
up to $3 billion of loans available to KPN, our partner in
E-Plus. We loaned approximately $443 to KPN during 2000. KPN
repaid this advance in January 2002.

In August 2001, we loaned Euro 1,510, or $1,382,
directly to E-Plus with an expected March 1, 2004 due date,
at LIBOR plus 310 basis points. In October 2001, we loaned Euro
525, or $468, directly to E-Plus with an expected March 1,
2004 due date, at LIBOR plus 185 basis points. E-Plus used the
proceeds from these loans to pay down existing third party debt
previously guaranteed by BellSouth.

The advances to our partnerships in Brazil bear
interest varying at rates based on LIBOR and mature between 2005
and 2007.

We have noncontrolling financial interests
ranging from 70% to 80% in the CSL Ventures and
1155 Peachtree Associates real estate partnerships. We have
receivables and advances to these partnerships which totalled
$161 at December 31, 2000 and $154 at December 31,
2001. The notes receivable bear interest at rates ranging from
7.29% to 7.88% while the advances to these partnerships bear
interest at LIBOR + 160 basis points. Principal amounts
outstanding at December 31, 2001 are due and payable to us
at varying dates through January 15, 2038. The instruments
require periodic payments of interest and are collateralized by
various real estate holdings.



We earned interest income from the advances to
Cingular totalling $72 in 2000 and $287 in 2001. Interest income
earned from other advances was $51 in 1999, $56 in 2000 and $89
in 2001.

NOTE CPARTNERSHIPS, ACQUISITIONS AND
DIVESTITURES

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

DOMESTIC WIRELESS

Buyout of PCS Partnerships

In September 2000, we acquired the remaining
44.2% interest in the Carolinas PCS partnership bringing our
ownership interest to 100%. The partnership provides PCS service
in North Carolina, South Carolina and northeast Georgia. The PCS
property and related debt was subsequently contributed to
Cingular, which is described below.

Cingular

In October 2000, we combined our domestic
wireless voice and data businesses with those of SBC
Communications in a joint venture. Cingular is owned
approximately 40% by BellSouth and approximately 60% by SBC
Communications but is jointly controlled. The investment in
Cingular is accounted for under the equity method; accordingly,
we include our share of Cingulars earnings as Net earnings
(losses) of equity affiliates in our consolidated income
statements.

We contributed the following amounts to Cingular
during 2000:

|                       |  |   |       | 
|---------------------- |  | - | ----- | 
|Current assets         |  | $ | 675   | 
|Noncurrent assets      |  |   | 4,655 | 
|                       |  |   |       | 
|Total assets           |  | $ | 5,330 | 
|                       |  |   |       | 
|Current liabilities    |  | $ | 1,637 | 
|Noncurrent liabilities |  |   | 3,396 | 
|                       |  |   |       | 
|Total liabilities      |  | $ | 5,033 | 
|                       |  |   |       | 
|Net assets contributed |  | $ | 297   | 
|                       |  |   |       | 

As of December 31, 2001, our book investment
exceeded our proportionate share of the net assets of Cingular
by $77.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE CPARTNERSHIPS, ACQUISITIONS AND
DIVESTITURES (Continued)


Redemption of AT&T from AB Cellular
Partnership

In December 2000, we exercised our option to
redeem AT&Ts 55.6% partnership interest in AB Cellular
Holding, LLC (AB Cellular) as part of a venture agreement with
AT&T Wireless Services, by distributing to AT&T the Los
Angeles area cellular business. This transaction was accounted
for as a non pro rata distribution, and accordingly was
accounted for at fair value. As a result of this transaction we
reported a pre-tax gain of $479, which is included in Net
earnings (losses) of equity affiliates. The overall net income
impact of this gain was $292. Our recorded gain represented
44.4% of the excess of the fair value of the Los Angeles net
assets over the net book value of those assets.

Upon receiving FCC approval in early January
2001, we contributed our 100% interest in the Houston-area
cellular market; 87.35% interest in the Galveston, Texas-area
market; and approximately $1,100 in cash, previously held at the
AB Cellular equity investment, to Cingular. Our 40% ownership
percentage of Cingular did not change as a result of this
transaction, however, our book value investment in Cingular
increased approximately $1,700.

LATIN AMERICA

1999

We invested $20 in a venture in Guatemala that
won rights to three PCS licenses which cover a substantial
portion of the country. We also raised our ownership interest in
our Peruvian communications company through a series of
transactions totaling $238, increasing our ownership from 59% to
97%.

In addition, we acquired a non-controlling 40%
interest in OESP Midia Ltda., a directory publishing business in
Brazil for approximately $23. This investment is accounted for
using the equity method. We also acquired 100% of Listel-Listas
Telefonicas, a directory publishing business in Brazil, for
total consideration of approximately $115.

2000

In May 2000, we completed the purchase of a
combination of voting common stock and American Depositary
Receipts representing nonvoting preferred stock of Tele Centro
Oeste Celular Participacoes SA (TCO), a Brazilian company, for a
total purchase price of approximately $240. TCO provides
cellular service in central-west Brazil, including Brasilia, as
well as northern Brazil. The common stock portion of the
investment represents 11.8% of the voting power of TCO. The
combined investment in common and preferred stock represents
17.3% of the total capital of TCO. This investment is accounted
for under the cost method, subject to the guidelines of
available-for-sale securities under SFAS No. 115. In first
quarter 2002, we sold the American Depositary Receipts.

In June 2000, we acquired a 50.4%
controlling equity interest in Celumóvil S.A. (BellSouth
Colombia) for a purchase price of approximately $399, funded by
$299 of cash and $100 note which was paid in December 2000.
BellSouth Colombia provides wireless service in the Eastern
region of Colombia, which includes the capital city of Bogota,
and in the Atlantic or coastal region.

In July 2000, BellSouth Colombia acquired
100% of Cocelco, a wireless operator that since 1984 has been
serving the Western region of Colombia, which includes the
cities of Medellin and Cali. This acquisition was funded by a
$384 capital contribution and a $30 shareholder loan from
BellSouth. This transaction increased BellSouths ownership
interest in BellSouth Colombia to approximately 66.0%.

In all transactions, the excess of the respective
purchase price over the net book value of the assets acquired
was allocated to customer lists, wireless licenses or goodwill.
The excess consideration paid over net assets acquired, along
with other intangible assets, is being amortized using either
straight-line or accelerated methods over periods of benefit,
which do not exceed 40 years.

ALL OTHER

In February 2000, we closed on a previously
announced alliance with Royal KPN N.V. (KPN). We utilized our
right of first refusal which enabled KPN to acquire a 77.5%
interest in E-Plus and allowed us the option after
18 months of converting our 22.5% interest in E-Plus into
either 200 million shares of KPN or shares representing at
the time an estimated 33.3% ownership interest in KPNs
wireless subsidiary.

As a result of this transaction, we recognized
income of $143, or $68 after tax. The gain related to a
settlement payment from the selling shareholder regarding a
dispute over the terms of the E-Plus shareholder agreement
governing the provisions of the sale.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE CPARTNERSHIPS, ACQUISITIONS AND
DIVESTITURES (Continued)


As part of this transaction, we also agreed to
make up to $3,000 of loans available to KPN to be used for
further wireless investments in Europe and received
non-detachable warrants to purchase approximately
90 million additional shares of KPN. Our commitment to lend
expires and all loans made under the commitment must be repaid
on March 1, 2004.

In January 2002, we elected to convert our
investment in E-Plus to shares of KPN  See
note S. As part of that transaction, our loan commitment
was capped at $1,850.

DIVESTITURES

1999

We sold our 100% interest in Honolulu Cellular
for total proceeds of $194. The pretax gain on the sale was $39,
or $23 after tax. We also sold our 100% interest in a wireless
property located in Dothan, Alabama for total proceeds of $21.
The pretax gain on the sale was $16, or $10 after tax.

2000

In July 2000, we sold our ownership
interests in mobile data operations in Belgium, the Netherlands
and the United Kingdom for total proceeds of $28. These sales
generated a pre-tax net loss of $14 and a $30 after-tax gain
resulting from tax benefits associated with the sale of the
operations in the United Kingdom.

2001

In August 2001, we sold our 24.5% ownership
interest in SkyCell Communications, a wireless communications
provider in India, for total proceeds of $21. The pretax gain on
the sale was $24, or $19 after tax. In September 2001, we
sold our 100% ownership interest in BellSouth International
Wireless Services, a roaming clearinghouse, for total proceeds
of $25. The pretax gain on the sale was $14, or $9 after tax.

NOTE DBALANCE SHEET
INFORMATION

PROPERTY, PLANT AND EQUIPMENT

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

|                                   |  |             |       |      |  |      |        |  |  |   |        | 
|---------------------------------- |  | ----------- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                   |  | Estimated   |       |      |  |     
|                                   |  | Depreciable |       |      |  |     
|                                   |  | Lives       |       |      |  |     
|                                   |  | (In Years)  |       | 2000 |  | 2001
|                                   |  |             |       |      |  |     
|Central office equipment           |  |             | 810  |      |  | $    | 23,428 |  |  | $ | 25,375 | 
|Outside plant                      |  |             | 1220 |      |  |      | 24,483 |  |  |   | 25,361 | 
|Operating and other equipment      |  |             | 515  |      |  |      | 4,772  |  |  |   | 5,209  | 
|Building and building improvements |  |             | 2545 |      |  |      | 3,783  |  |  |   | 4,264  | 
|Furniture and fixtures             |  |             | 1015 |      |  |      | 2,517  |  |  |   | 2,511  | 
|Station equipment                  |  |             | 6     |      |  |      | 667    |  |  |   | 617    | 
|Land                               |  |             |      |      |  |      | 228    |  |  |   | 269    | 
|Plant under construction           |  |             |      |      |  |      | 1,034  |  |  |   | 726    | 
|                                   |  |             |       |      |  |      |        |  |  |   |        | 
|                                   |  |             |       |      |  |      | 60,912 |  |  |   | 64,332 | 
|Less: accumulated depreciation     |  |             |       |      |  |      | 36,755 |  |  |   | 39,389 | 
|                                   |  |             |       |      |  |      |        |  |  |   |        | 
|Property, plant and equipment, net |  |             |       |      |  | $    | 24,157 |  |  | $ | 24,943 | 
|                                   |  |             |       |      |  |      |        |  |  |   |        | 

DEFERRED CHARGES AND OTHER ASSETS

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

|                                              |                                   |      |       |       |  |   |       |       | 
|--------------------------------------------- | --------------------------------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                              |                                   | 2000 |       | 2001 
|                                              |                                   |      |       |      
|Deferred activation and installation expenses |                                   | $    | 1,630 |       |  | $ | 1,748 |      
|Prepaid pension and postretirement benefits   |                                   |      | 1,775 |       |  |   | 2,672 |      
|Other                                         |                                   |      | 775   |       |  |   | 702   |      
|                                              |                                   |      |       |       |  |   |       |      
|                                              | Deferred charges and other assets |      | $     | 4,180 |  |   | $     | 5,122 | 
|                                              |                                   |      |       |       |  |   |       |      

INTANGIBLE ASSETS

Intangible assets are summarized as follows at
December 31:

|                               |  |             |       |      |  |      |       |   |  |   |        |  
|------------------------------ |  | ----------- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                               |  | Estimated   |       |      |  |     
|                               |  | Amortizable |       |      |  |     
|                               |  | Lives       |       |      |  |     
|                               |  | (In Years)  |       | 2000 |  | 2001
|                               |  |             |       |      |  |     
|Capitalized software           |  |             | 35   |      |  | $    | 1,240 |   |  | $ | 2,208  |  
|Goodwill                       |  |             | 1540 |      |  |      | 1,855 |   |  |   | 1,908  |  
|Licenses and concessions       |  |             | 1040 |      |  |      | 1,415 |   |  |   | 1,294  |  
|Customer lists                 |  |             | 36   |      |  |      | 402   |   |  |   | 420    |  
|Assets held for sale           |  |             |       |      |  |      | 231   |   |  |   | 231    |  
|                               |  |             |       |      |  |      |       |   |  |   |        |  
|                               |  |             |       |      |  |      | 5,143 |   |  |   | 6,061  |  
|Less: accumulated amortization |  |             |       |      |  |      | (971  | ) |  |   | (1,555 | )
|                               |  |             |       |      |  |      |       |   |  |   |        |  
|Intangible assets, net         |  |             |       |      |  | $    | 4,172 |   |  | $ | 4,506  |  
|                               |  |             |       |      |  |      |       |   |  |   |        |  

Assets held for sale, which represent FCC
licenses used for Multichannel Multipoint Distribution Service
(MMDS) spectrum, were previously utilized in our wireless
video business. This spectrum has traditionally been utilized
for fixed-wireless service applications such as wireless video
transmission or wireless Internet

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE DBALANCE SHEET INFORMATION
(Continued)


access. In late 2001, the FCC added a mobile
allocation to the spectrum band which increased the available
uses for the spectrum. We are currently exploring various
opportunities to monetize this asset. The gross book value of
this license is $231 and the associated accumulated amortization
is $23 at December 31, 2001.

During 2001, we recorded an asset impairment loss
of $89 to writedown previously capitalized software costs, as a
result of terminating a purchasing software project.

OTHER CURRENT LIABILITIES

Other current liabilities are summarized as
follows at December 31:

|                                       |  |      |       |      |  |   |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                       |  | 2000 |       | 2001
|                                       |  |      |       |     
|Advanced billing and customer deposits |  | $    | 850   |      |  | $ | 687   | 
|Interest and rents accrued             |  |      | 489   |      |  |   | 534   | 
|Taxes payable                          |  |      | 333   |      |  |   | 505   | 
|Dividends payable                      |  |      | 362   |      |  |   | 363   | 
|Salaries and wages payable             |  |      | 337   |      |  |   | 311   | 
|Accrued compensated absences           |  |      | 267   |      |  |   | 254   | 
|Restructuring and severance accrual    |  |      | 236   |      |  |   | 202   | 
|Other                                  |  |      | 594   |      |  |   | 445   | 
|                                       |  |      |       |      |  |   |       | 
|Other current liabilities              |  | $    | 3,468 |      |  | $ | 3,301 | 
|                                       |  |      |       |      |  |   |       | 

OTHER NONCURRENT LIABILITIES

Other noncurrent liabilities are summarized as
follows at December 31:

|                                                |  |      |       |      |  |   |       | 
|----------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                |  | 2000 |       | 2001
|                                                |  |      |       |     
|Deferred installation and activation revenues   |  | $    | 1,630 |      |  | $ | 1,748 | 
|Accrued pension and postretirement benefits     |  |      | 809   |      |  |   | 940   | 
|Deferred credits                                |  |      | 817   |      |  |   | 832   | 
|Compensation related accruals                   |  |      | 623   |      |  |   | 665   | 
|Minority interests in consolidated subsidiaries |  |      | 368   |      |  |   | 441   | 
|Postemployment benefits                         |  |      | 265   |      |  |   | 262   | 
|Other                                           |  |      | 188   |      |  |   | 273   | 
|                                                |  |      |       |      |  |   |       | 
|Other noncurrent liabilities                    |  | $    | 4,700 |      |  | $ | 5,161 | 
|                                                |  |      |       |      |  |   |       | 

NOTE EDEBT

DEBT MATURING WITHIN ONE YEAR

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

|                                                 |  |      |       |      |  |   |       | 
|------------------------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                                                 |  | 2000 |       | 2001
|                                                 |  |      |       |     
|Short-term notes payable:                        |  |      |       |      |  |   |       | 
|Bank loans                                       |  | $    | 1,129 |      |  | $ | 631   | 
|Commercial paper                                 |  |      | 5,730 |      |  |   | 2,533 | 
|Current maturities of long-term debt             |  |      | 710   |      |  |   | 1,947 | 
|                                                 |  |      |       |      |  |   |       | 
|Debt maturing within one year                    |  | $    | 7,569 |      |  | $ | 5,111 | 
|                                                 |  |      |       |      |  |   |       | 
|Weighted-average interest rate at end of period: |  |      |       |      |  |   |       | 
|Bank loans                                       |  |      | 9.44% |      |  |   | 4.98% | 
|Commercial Paper                                 |  |      | 6.51% |      |  |   | 1.94% | 
|                                                
|Credit Lines:                                    |  |      |       |      |  |   |       | 
|Committed credit lines                           |  | $    | 3,325 |      |  | $ | 2,506 | 
|Borrowings under committed lines                 |  |      | 588   |      |  |   | 12    | 
|Uncommitted credit lines                         |  |      | 807   |      |  |   | 1,338 | 
|Borrowings under uncommitted lines               |  |      | 202   |      |  |   | 1,076 | 

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

LONG-TERM DEBT

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

|                                             |  |                                          |        |      |        |      |        |   |        | 
|-------------------------------------------- |  | ---------------------------------------- | ------ | ---- | ------ | ---- | ------ | - | ------ | 
|                                             |  |                                          |        | 2000 |        | 2001
|                                             |  |                                          |        |      |        |     
|Issued by BellSouth Telecommunications, Inc. |  |                                          |        |      |        |      |        |  
|4.38%6%                                     |  | 20032045                                |        | $    | 682    |      |        | $ | 507    | 
|6.13%7%                                     |  | 20032033                                |        |      | 2,600  |      |        |   | 2,600  | 
|7.5%8.25%                                   |  | 20322035                                |        |      | 1,150  |      |        |   | 1,150  | 
|7%                                           |  | 2095                                     |        |      | 500    |      |        |   | 500    | 
|6%                                           |  | Reset Put Securities due 2012            |        |      | 500    |      |        |   | 500    | 
|2.42%                                        |  | Extendible Liquidity Securities due 2006 |        |      | 1,800  |      |        |   | 1,800  | 
|6.65%                                        |  | Zero-to-Full Debentures due 2095         |        |      | 176    |      |        |   | 188    | 
|6.3%                                         |  | Amortizing Debentures due 2015           |        |      | 320    |      |        |   | 306    | 
|Issued by BellSouth Corporation              |  |                                          |        |      |        |      |        |  
|5%7.38%                                     |  | 20022039                                |        |      | 1,317  |      |        |   | 4,049  | 
|7.75%7.88%                                  |  | 20102030                                |        |      | 2,000  |      |        |   | 2,000  | 
|7.12%                                        |  | 2097                                     |        |      | 500    |      |        |   | 500    | 
|4.29%                                        |  | 20-put-1 Securities due 2021             |        |      |       |      |        |   | 1,000  | 
|9.13%9.19%                                  |  | Guarantee of ESOP Debt                   |        |      | 307    |      |        |   | 213    | 
|Issued by Foreign Operations                 |  |                                          |        |      |        |      |        |  
|3.30%9.25%                                  |  | Argentina due 20022008                  |        |      | 350    |      |        |   | 354    | 
|2.82%                                        |  | Chile due 20022004                      |        |      | 190    |      |        |   | 180    | 
|4.69%18.45%                                 |  | Colombia due 20022006                   |        |      | 376    |      |        |   | 771    | 
|6%25.2%                                     |  | Venezuela due 20022004                  |        |      | 200    |      |        |   | 124    | 
|3.19%4.18%                                  |  | Peru due 2005                            |        |      | 202    |      |        |   | 204    | 
|Capital leases and other                     |  |                                          | 73     |      |        |      | 92     |  
|Unamortized discount, net of premium         |  |                                          | (70    | )    |        |      | (77    | )
|                                             |  |                                          |        |      |        |      |        |   |        | 
|                                             |  |                                          |        |      | 13,173 |      |        |   | 16,961 | 
|Current maturities                           |  |                                          | (710   | )    |        |      | (1,947 | )
|                                             |  |                                          |        |      |        |      |        |   |        | 
|Long-term debt                               |  | $                                        | 12,463 |      |        | $    | 15,014 |  
|                                             |  |                                          |        |      |        |      |        |   |        | 

63



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE EDEBT (Continued)


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                                                        
|                                                                           |  |                                                                           
|Reset Put Securities
	20-put-1 Securities
	Extendible Liquidity Securities |  | June 15, 2002
	Annually beginning April 2002
	Annually beginning Dec. 2000

If the holders of the put options on the Reset
Put Securities and 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. The
extendible liquidity securities may be extended in
thirteen-month increments by the holders of the notes but will
not extend later than January 2006. The extendible liquidity
securities bear interest at the three-month LIBOR, plus or minus
a spread ranging from minus 0.02% to plus 0.06%.

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.

Maturities of long-term debt outstanding, in
principal amounts, at December 31, 2001 are summarized
below. Maturities after the year 2006 include the final
principal amount of $500 for the Zero-to-Full Debentures due in
2095.

|           |  |   |        | 
|---------- |  | - | ------ | 
|Maturities |  |   |        | 
|2002       |  | $ | 1,947  | 
|2003       |  |   | 2,661  | 
|2004       |  |   | 455    | 
|2005       |  |   | 667    | 
|2006       |  |   | 1,738  | 
|Thereafter |  |   | 9,805  | 
|           |  |   |        | 
|Total      |  | $ | 17,273 | 
|           |  |   |        | 

At December 31, 2001, we had a shelf
registration statement on file with the Securities and Exchange
Commission under which $2,250 of debt securities could be
publicly offered.

NOTE FSHAREHOLDERS
EQUITY

AMENDMENT TO CHARTER

In December 2000, our shareholders adopted
articles of amendment to our charter. The articles of amendment
increased the number of shares of common stock authorized to be
issued from 4,400,000,000 to 8,650,000,000. The articles of
amendment also permit us to issue our common stock in series.

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, 2001, no preferred shares had been
issued. The series A first preferred stock was created for a
previous shareholder rights plan which has expired.

SHAREHOLDER RIGHTS PLAN

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

SHARES HELD IN TRUST AND TREASURY

During 1996 and 1997, we issued shares to grantor
trusts to provide partial funding for the benefits payable under
certain nonqualified benefit plans. The trusts are irrevocable,
and assets contributed to the trusts can only be used to pay
such benefits with certain exceptions. The assets held in the
trusts consist of cash and 35.7 million shares of BellSouth
common stock at December 31, 2000 and 35.8 million shares
at December 31, 2001. Of the total shares of BellSouth
common stock held by the trusts at December 31, 2000,
31.9 million were issued directly from us to the trusts out
of previously unissued shares and 3.8 million shares were
acquired in open market transactions through the

64



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE FSHAREHOLDERS EQUITY
(Continued)

use of the trusts funds. At
December 31, 2001, 31.9 million were issued directly
from us and 3.9 million shares were acquired in open market
transactions.

The total cost of the shares issued by us as of
the date of funding the trusts is included in common stock and
paid-in capital; however, because these shares are not
considered outstanding for financial reporting purposes, the
shares are included within shares held in trust and treasury, a
reduction to shareholders equity. In addition, there is no
earnings per share impact of these shares. The cost of shares
acquired in open market purchases by the trusts are also
included in shares held in trust and treasury.

In addition to shares held by the grantor trusts,
shares held in trust and treasury includes treasury shares. We
purchase treasury shares when we consider market and other
conditions to be favorable. In 2000, we purchased
19.1 million shares for an aggregate of $779. We have
reissued a total of 8.7 million shares in 2000 and
5.4 million shares in 2001 under various employee and
director benefit plans.

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

|                                  |  |        |             |        |  |   |       | 
|--------------------------------- |  | ------ | ----------- | ------ |  | - | ----- | 
|                                  |  |       
|                                  |  | 2000  
|                                  |  |       
|                                  |  | Shares |             | Amount
|                                  |  |        |             |       
|Shares held by grantor trusts     |  |        | 35,653,926  |        |  | $ | 560   | 
|Shares held in treasury           |  |        | 112,521,368 |        |  |   | 4,662 | 
|                                  |  |        |             |        |  |   |       | 
|Shares held in trust and treasury |  |        | 148,175,294 |        |  | $ | 5,222 | 
|                                  |  |        |             |        |  |   |       | 

|                                  |  |        |             |        |  |   |       | 
|--------------------------------- |  | ------ | ----------- | ------ |  | - | ----- | 
|                                  |  |       
|                                  |  | 2001  
|                                  |  |       
|                                  |  | Shares |             | Amount
|                                  |  |        |             |       
|Shares held by grantor trusts     |  |        | 35,755,505  |        |  | $ | 565   | 
|Shares held in treasury           |  |        | 106,987,374 |        |  |   | 4,431 | 
|                                  |  |        |             |        |  |   |       | 
|Shares held in trust and treasury |  |        | 142,742,879 |        |  | $ | 4,996 | 
|                                  |  |        |             |        |  |   |       | 

GUARANTEE OF ESOP DEBT

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

NOTE GEMPLOYEE BENEFIT PLANS

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Substantially all of our nonrepresented and
represented employees are covered by noncontributory defined
benefit pension plans, as well as postretirement health and life
insurance welfare plans.

The pension plan covering nonrepresented
employees is a cash balance plan, which provides pension
benefits determined by a combination of compensation-based
service and additional credits and individual account-based
interest credits. The 2000 and 2001 projected benefit
obligations assume additional credits greater than the minimum
levels specified in the written plan. For represented 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. The 2000
and 2001 represented pension obligations include the projected
effect of future bargained-for improvements. The accounting for
the nonrepresented health care plan anticipates certain
cost-sharing adjustments for employees who retire after
December 31, 1991. The adjustments consider past practice
but are not provided for in the written plan.

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

|                                                        |  |      |        |      |  |   |        |  
|------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                        |  | 2000 |        | 2001
|                                                        |  |      |        |     
|Change in benefit obligation:                           |  |      |        |      |  |   |        |  
|Benefit obligation at the beginning of the year         |  | $    | 12,960 |      |  | $ | 12,264 |  
|Service cost                                            |  |      | 188    |      |  |   | 209    |  
|Interest cost                                           |  |      | 918    |      |  |   | 919    |  
|Amendments                                              |  |      | (338   | )    |  |   | (536   | )
|Actuarial loss                                          |  |      | 296    |      |  |   | 587    |  
|Benefits and lump sums paid                             |  |      | (1,760 | )    |  |   | (1,376 | )
|Spin-off associated with Cingular                       |  |      |       |      |  |   | (163   | )
|Curtailment loss                                        |  |      |       |      |  |   | 24     |  
|                                                        |  |      |        |      |  |   |        |  
|Benefit obligation at the end of the year               |  | $    | 12,264 |      |  | $ | 11,928 |  
|                                                        |  |      |        |      |  |   |        |  
|Change in plan assets:                                  |  |      |        |      |  |   |        |  
|Fair value of plan assets at the beginning of the
	year |  | $    | 20,563 |      |  | $ | 19,406 |  
|Actual return (loss) on plan assets                     |  |      | 603    |      |  |   | (1,193 | )
|Benefits and lump sums paid                             |  |      | (1,760 | )    |  |   | (1,376 | )
|Spin-off associated with Cingular                       |  |      |       |      |  |   | (220   | )
|                                                        |  |      |        |      |  |   |        |  
|Fair value of plan assets at the end of year            |  | $    | 19,406 |      |  | $ | 16,617 |  
|                                                        |  |      |        |      |  |   |        |  

65



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE GEMPLOYEE BENEFIT PLANS
(Continued)


|                                |  |      |        |      |  |   |        |  
|------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                |  | 2000 |        | 2001
|                                |  |      |        |     
|Funded status:                  |  |      |        |      |  |   |        |  
|As of the end of the year       |  | $    | 7,142  |      |  | $ | 4,689  |  
|Unrecognized prior service cost |  |      | (37    | )    |  |   | (542   | )
|Unrecognized net gain           |  |      | (5,493 | )    |  |   | (1,777 | )
|Unrecognized net asset          |  |      | (44    | )    |  |   | (24    | )
|                                |  |      |        |      |  |   |        |  
|Prepaid pension cost            |  | $    | 1,568  |      |  | $ | 2,346  |  
|                                |  |      |        |      |  |   |        |  

Pension plan assets included BellSouth common
stock of $24 at December 31, 2000 and $9 at
December 31, 2001.

|                                                                       |  |      |       |      |  |   |       |  
|---------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                       |  | 2000 |       | 2001
|                                                                       |  |      |       |     
|Amounts recognized in the consolidated balance
	sheets at December 31: |  |      |       |      |  |   |       |  
|Prepaid pension cost                                                   |  | $    | 1,633 |      |  | $ | 2,435 |  
|Accrued pension liability                                              |  |      | (65   | )    |  |   | (89   | )
|                                                                       |  |      |       |      |  |   |       |  
|Net amount recognized                                                  |  | $    | 1,568 |      |  | $ | 2,346 |  
|                                                                       |  |      |       |      |  |   |       |  

|                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                              |  | 1999 |        | 2000 |  | 2001
|                                                                              |  |      |        |      |  |     
|Components of net pension benefit:                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Service cost                                                                  |  | $    | 185    |      |  | $    | 188    |   |  | $ | 209    |  
|Interest cost                                                                 |  |      | 911    |      |  |      | 918    |   |  |   | 919    |  
|Expected return on plan assets                                                |  |      | (1,449 | )    |  |      | (1,537 | ) |  |   | (1,655 | )
|Amortization of prior service cost                                            |  |      | 40     |      |  |      | 26     |   |  |   | (31    | )
|Amortization of actuarial gain                                                |  |      | (87    | )    |  |      | (267   | ) |  |   | (220   | )
|Amortization of transition asset                                              |  |      | (21    | )    |  |      | (21    | ) |  |   | (19    | )
|                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Net pension benefit                                                           |  | $    | (421   | )    |  | $    | (693   | ) |  | $ | (797   | )
|                                                                              |  |      |        |      |  |      |        |   |  |   |        |  
|Weighted-average assumptions used in
	developing pension information include: |  |      |        |      |  |      |        |   |  |   |        |  
|Discount rate                                                                 |  |      | 7.75%  |      |  |      | 7.75%  |   |  |   | 7.25%  |  
|Expected return on plan assets                                                |  |      | 9.00%  |      |  |      | 9.00%  |   |  |   | 9.00%  |  
|Rate of compensation increase                                                 |  |      | 5.20%  |      |  |      | 5.30%  |   |  |   | 5.10%  |  

Retiree Health and Life

|                                                        |  |      |        |      |  |   |        |  
|------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                        |  | 2000 |        | 2001
|                                                        |  |      |        |     
|Change in benefit obligation:                           |  |      |        |      |  |   |        |  
|Benefit obligation at the beginning of the year         |  | $    | 4,933  |      |  | $ | 5,750  |  
|Service cost                                            |  |      | 56     |      |  |   | 42     |  
|Interest cost                                           |  |      | 399    |      |  |   | 428    |  
|Amendments                                              |  |      | (15    | )    |  |   | 426    |  
|Actuarial loss                                          |  |      | 673    |      |  |   | 55     |  
|Benefits and lump sums paid                             |  |      | (304   | )    |  |   | (355   | )
|Spin-off associated with Cingular                       |  |      |       |      |  |   | (10    | )
|Curtailment loss                                        |  |      |       |      |  |   | (21    | )
|Special termination benefits                            |  |      | 8      |      |  |   |       |  
|                                                        |  |      |        |      |  |   |        |  
|Benefit obligation at the end of the year               |  | $    | 5,750  |      |  | $ | 6,315  |  
|                                                        |  |      |        |      |  |   |        |  
|Change in plan assets:                                  |  |      |        |      |  |   |        |  
|Fair value of plan assets at the beginning of the
	year |  | $    | 3,421  |      |  | $ | 3,445  |  
|Actual loss on plan assets                              |  |      | (64    | )    |  |   | (371   | )
|Employer contribution                                   |  |      | 376    |      |  |   | 425    |  
|Plan participants contributions                        |  |      | 15     |      |  |   | 19     |  
|Benefits and lump sums paid                             |  |      | (303   | )    |  |   | (355   | )
|                                                        |  |      |        |      |  |   |        |  
|Fair value of plan assets at the end of year            |  | $    | 3,445  |      |  | $ | 3,163  |  
|                                                        |  |      |        |      |  |   |        |  
|Funded status:                                          |  |      |        |      |  |   |        |  
|As of the end of the year                               |  | $    | (2,305 | )    |  | $ | (3,152 | )
|Unrecognized prior service cost                         |  |      | 203    |      |  |   | 506    |  
|Unrecognized net loss                                   |  |      | 924    |      |  |   | 1,573  |  
|Unrecognized net obligation                             |  |      | 576    |      |  |   | 459    |  
|                                                        |  |      |        |      |  |   |        |  
|Accrued benefit cost                                    |  | $    | (602   | )    |  | $ | (614   | )
|                                                        |  |      |        |      |  |   |        |  

Retiree health and life assets included BellSouth
common stock of $10 at December 31, 2000 and $5 at
December 31, 2001.

|                                                                       |  |      |      |      |  |   |      |  
|---------------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                                                       |  | 2000 |      | 2001
|                                                                       |  |      |      |     
|Amounts recognized in the consolidated balance
	sheets at December 31: |  |      |      |      |  |   |      |  
|Prepaid benefit cost                                                   |  | $    | 142  |      |  | $ | 237  |  
|Accrued benefit liability                                              |  |      | (744 | )    |  |   | (851 | )
|                                                                       |  |      |      |      |  |   |      |  
|Net amount recognized                                                  |  | $    | (602 | )    |  | $ | (614 | )
|                                                                       |  |      |      |      |  |   |      |  

|                                                                                           |  |      |       |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                           |  | 1999 |       | 2000 |  | 2001
|                                                                                           |  |      |       |      |  |     
|Components of net other postretirement benefit
	cost:                                      |  |      |       |      |  |      |        |   |  |   |        |  
|Service cost                                                                               |  | $    | 45    |      |  | $    | 56     |   |  | $ | 42     |  
|Interest cost                                                                              |  |      | 273   |      |  |      | 399    |   |  |   | 428    |  
|Expected return on plan assets                                                             |  |      | (207  | )    |  |      | (270   | ) |  |   | (299   | )
|Amortization of prior service cost                                                         |  |      | 52    |      |  |      | 86     |   |  |   | 65     |  
|Amortization of actuarial loss                                                             |  |      | 2     |      |  |      | 25     |   |  |   | 31     |  
|Amortization of transition obligation                                                      |  |      | 82    |      |  |      | 82     |   |  |   | 79     |  
|                                                                                           |  |      |       |      |  |      |        |   |  |   |        |  
|Net postretirement benefit cost                                                            |  | $    | 247   |      |  | $    | 378    |   |  | $ | 346    |  
|                                                                                           |  |      |       |      |  |      |        |   |  |   |        |  
|Weighted-average assumptions used in
	developing other postretirement information include: |  |      |       |      |  |      |        |   |  |   |        |  
|Discount rate                                                                              |  |      | 7.75% |      |  |      | 7.75%  |   |  |   | 7.25%  |  
|Expected return on assets                                                                  |  |      | 8.00% |      |  |      | 8.25%  |   |  |   | 8.25%  |  
|Rate of compensation increase                                                              |  |      | 4.80% |      |  |      | 4.80%  |   |  |   | 4.80%  |  
|Health care cost trend rate Pre-65                                                         |  |      | 8.00% |      |  |      | 9.00%  |   |  |   | 8.50%  |  
|Health care cost trend rate Post-65                                                        |  |      | 7.50% |      |  |      | 11.60% |   |  |   | 11.10% |  

The health care cost trend rates used to value
the accumulated postretirement obligation in 2001 are assumed to
decrease by 0.5% per year to 5.5% by 2007 for pre-age 65 and by
2012 for post-age 65. 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

66



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE GEMPLOYEE BENEFIT PLANS
(Continued)


trend rates would have the following effects as
of December 31, 2001:

|                                                      |  |                |     |                |  |   |      |  
|----------------------------------------------------- |  | -------------- | --- | -------------- |  | - | ---- | -
|                                                      |  | 1-Percentage   |     | 1-Percentage  
|                                                      |  | Point Increase |     | Point Decrease
|                                                      |  |                |     |               
|Effect on total service and interest cost
	components |  | $              | 40  |                |  | $ | (32  | )
|Effect on other postretirement benefit obligation     |  | $              | 463 |                |  | $ | (383 | )

The change in net pension income and net other
postretirement benefit cost is affected by several variables,
including asset gains and experience losses; and changes in
actuarial assumptions such as discount rate, return on plan
assets and health care trend rates.

The consolidated net pension benefit and other
postretirement benefit cost amounts above are exclusive of
settlement, curtailment and special termination benefit effects.
In 2000, lump-sum pension distributions for the represented
pension plan surpassed the settlement threshold equal to the sum
of the service cost and interest cost components of net periodic
pension cost. This resulted in settlement gain recognition of
$362 for all cash settlements under the plan. Workforce
reduction activity in 2000 resulted in other postretirement
special termination benefits of $8. In 2001, workforce reduction
activity resulted in a curtailment charge of $26 for other
postretirement benefits. The curtailment impact on pensions was
not significant in 2001.

Activity related to Cingular

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

In 2001, we also transferred a portion of our
prepaid pension cost and accrued retiree health and life benefit
cost to Cingular. The transfer was accounted for as a spin-off.
The result was a reduction to the prepaid pension balance
retained at BellSouth and a reduction to the postretirement
benefit liability retained at BellSouth. The following amounts
were transferred to Cingular:

|                                |  |         |     |                 |  |   |     |  
|------------------------------- |  | ------- | --- | --------------- |  | - | --- | -
|                                |  | Prepaid |     | Accrued Retiree
|                                |  | Pension |     | Health and Life
|                                |  |         |     |                
|Benefit obligation transferred  |  | $       | 163 |                 |  | $ | 10  |  
|Market value of assets          |  |         | 220 |                 |  |   |    |  
|                                |  |         |     |                 |  |   |     |  
|Funded status                   |  |         | 57  |                 |  |   | (10 | )
|Unrecognized prior service cost |  |         |    |                 |  |   |    |  
|Unrecognized net (gain) loss    |  |         | (37 | )               |  |   | 2   |  
|Unrecognized net obligation     |  |         |    |                 |  |   | 1   |  
|                                |  |         |     |                 |  |   |     |  
|Prepaid (accrued) position      |  | $       | 20  |                 |  | $ | (7  | )
|                                |  |         |     |                 |  |   |     |  

Supplemental Executive Retirement
Plan

We also maintain a nonqualified supplemental
retirement plan for certain employees. The unfunded accumulated
benefit obligations were $292 at December 31, 2000 and $352
at December 31, 2001. An intangible asset of $9 at
December 31, 2000 was recognized pursuant to
paragraph 37 of SFAS No. 87, as was accumulated other
comprehensive income, net of deferred taxes, of $56 at
December 31, 2000 and $79 at December 31, 2001. The
expense associated with this plan was $38 in 1999, $46 in 2000
and $55 in 2001.

DEFINED CONTRIBUTION PLANS

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

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

We match a portion of employees eligible
contributions to the Savings Plans at rates determined annually
by the Board of Directors. Our matching obligation is fulfilled
with shares released from the suspense accounts

67



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE GEMPLOYEE BENEFIT PLANS
(Continued)


semiannually for allocation to participants. The
number of shares allocated to each participants account is
based on the market price of the shares at the time of
allocation. If shares released for allocation do not fulfill our
matching obligation, we make further contributions to the Trusts
to fund the purchase of additional shares in the open market to
fulfill the remaining obligation.

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

|                                                            |  |      |      |      |  |      |      |  |  |   |      | 
|----------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                            |  | 1999 |      | 2000 |  | 2001
|                                                            |  |      |      |      |  |     
|Compensation cost                                           |  | $    | 31   |      |  | $    | 33   |  |  | $ | 37   | 
|Interest expense                                            |  | $    | 24   |      |  | $    | 19   |  |  | $ | 15   | 
|Actual interest on ESOP Notes                               |  | $    | 37   |      |  | $    | 30   |  |  | $ | 22   | 
|Cash contributions, excluding dividends paid to
	the trusts |  | $    | 73   |      |  | $    | 75   |  |  | $ | 79   | 
|Dividends paid to the trusts, used for debt
	service        |  | $    | 43   |      |  | $    | 41   |  |  | $ | 39   | 
|Shares allocated to participants (millions)                 |  |      | 43.3 |      |  |      | 48.3 |  |  |   | 53.4 | 
|Shares unallocated (millions)                               |  |      | 20.2 |      |  |      | 15.2 |  |  |   | 10.1 | 

NOTE HSTOCK COMPENSATION
PLANS

At December 31, 2001, we have stock options
outstanding under several stock-based compensation plans. The
BellSouth Corporation Stock Plan (the Stock Plan) provides for
grants to key employees of stock options and various other
stock-based awards. One share of BellSouth common stock is the
underlying security for any award. The aggregate number of
shares of BellSouth common stock which may be granted under the
Stock Plan in any calendar year cannot exceed one and a quarter
percent of the shares outstanding at the time of grant. Prior to
adoption of the Stock Plan, stock options were granted under the
BellSouth Corporation Stock Option Plan. Stock options granted
under both plans entitle an optionee to purchase shares of
BellSouth common stock within prescribed periods at a price
either equal to, or in excess of, the fair market value on the
date of grant. Options granted under these plans generally
become exercisable at the end of three to five years and have a
term of 10 years.

We apply APB Opinion No. 25 and related
Interpretations in accounting for our stock plans. Accordingly,
no compensation cost has been recognized for grants of stock
options. Had compensation cost for our stock-based compensation
plans been determined in accordance with the provisions of SFAS
No. 123, Accounting for Stock-Based
Compensation, our net income and earnings per share would
have been changed to the pro forma amounts indicated below:

|                                       |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                       |  | 1999 |       | 2000 |  | 2001
|                                       |  |      |       |      |  |     
|Net incomeas reported                 |  | $    | 3,448 |      |  | $    | 4,220 |  |  | $ | 2,570 | 
|Net incomepro forma                   |  | $    | 3,379 |      |  | $    | 4,118 |  |  | $ | 2,446 | 
|Basic earnings per shareas reported   |  | $    | 1.82  |      |  | $    | 2.25  |  |  | $ | 1.37  | 
|Basic earnings per sharepro forma     |  | $    | 1.78  |      |  | $    | 2.20  |  |  | $ | 1.30  | 
|Diluted earnings per shareas reported |  | $    | 1.80  |      |  | $    | 2.23  |  |  | $ | 1.36  | 
|Diluted earnings per sharepro forma   |  | $    | 1.76  |      |  | $    | 2.18  |  |  | $ | 1.30  | 

The pro forma amounts reflected above are not
likely to be representative of the effects on reported net
income in future years because, in general, the number of future
shares to be issued under these plans is not known and the
assumptions used to determine the fair value can vary
significantly.

The following table summarizes the activity for
stock options outstanding:

|                                                                                     |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                     |  | 1999 |            | 2000 |  | 2001
|                                                                                     |  |      |            |      |  |     
|Options outstanding at January 1                                                     |  |      | 59,202,910 |      |  |      | 71,699,081 |   |  |   | 84,814,050 |  
|Options granted                                                                      |  |      | 15,385,731 |      |  |      | 23,598,035 |   |  |   | 16,361,471 |  
|Options exercised                                                                    |  |      | (1,839,933 | )    |  |      | (7,792,877 | ) |  |   | (5,344,850 | )
|Options forfeited                                                                    |  |      | (1,049,627 | )    |  |      | (2,690,189 | ) |  |   | (2,363,371 | )
|                                                                                     |  |      |            |      |  |      |            |   |  |   |            |  
|Options outstanding at December 31                                                   |  |      | 71,699,081 |      |  |      | 84,814,050 |   |  |   | 93,467,300 |  
|                                                                                     |  |      |            |      |  |      |            |   |  |   |            |  
|Weighted-average option prices per common share:                                     |  |      |            |      |  |      |            |   |  |   |            |  
|Outstanding at January 1                                                             |  | $    | 22.77      |      |  | $    | 27.73      |   |  | $ | 33.09      |  
|Granted at fair market value                                                         |  | $    | 45.51      |      |  | $    | 44.89      |   |  | $ | 42.10      |  
|Exercised                                                                            |  | $    | 15.74      |      |  | $    | 17.46      |   |  | $ | 21.02      |  
|Forfeited                                                                            |  | $    | 30.22      |      |  | $    | 39.58      |   |  | $ | 44.25      |  
|Outstanding at December 31                                                           |  | $    | 27.73      |      |  | $    | 33.09      |   |  | $ | 35.10      |  
|Weighted-average fair value of options granted at
	fair market value during the year |  | $    | 11.19      |      |  | $    | 13.46      |   |  | $ | 10.99      |  
|Options exercisable at December 31                                                   |  |      | 19,114,773 |      |  |      | 33,224,789 |   |  |   | 53,116,756 |  
|Shares available for grant at December 31                                            |  |      | 18,825,466 |      |  |      | 39,384,921 |   |  |   | 46,102,961 |  

68



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE HSTOCK COMPENSATION PLANS
(Continued)


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:

|                        |  |      |       |      |  |      |       |  |  |  |       | 
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                        |  | 1999 |       | 2000 |  | 2001
|                        |  |      |       |      |  |     
|Expected life (years)   |  |      | 5     |      |  |      | 5     |  |  |  | 5     | 
|Dividend yield          |  |      | 1.67% |      |  |      | 1.69% |  |  |  | 1.81% | 
|Expected volatility     |  |      | 23.0% |      |  |      | 27.0% |  |  |  | 26.0% | 
|Risk-free interest rate |  |      | 4.82% |      |  |      | 6.27% |  |  |  | 4.74% | 

The following table summarizes information about
stock options outstanding at December 31, 2001:

|               |  |             |      |             |  |          |      |            |  |          |       |  |  |  |      |  |  |   |       | 
|-------------- |  | ----------- | ---- | ----------- |  | -------- | ---- | ---------- |  | -------- | ----- |  |  |  | ---- |  |  | - | ----- | 
|               |  |             |      |            
|               |  | Outstanding |      | Exercisable
|               |  |             |      |            
|               |  |             |      | Average     |  |          |      | Average   
|Exercise       |  | Options     |      | Average     |  | Exercise |      | Options    |  | Exercise
|Price Range    |  | (millions)  |      | Life(a)     |  | Price    |      | (millions) |  | Price   
|               |  |             |      |             |  |          |      |            |  |         
|$12.10 $15.42 |  |             | 6.9  |             |  |          | 2.39 |            |  | $        | 14.57 |  |  |  | 6.9  |  |  | $ | 14.57 | 
|$15.56 $22.19 |  |             | 20.0 |             |  |          | 4.35 |            |  | $        | 21.38 |  |  |  | 20.0 |  |  | $ | 21.38 | 
|$22.25 $30.91 |  |             | 13.0 |             |  |          | 6.08 |            |  | $        | 30.69 |  |  |  | 13.0 |  |  | $ | 30.69 | 
|$31.11 $40.27 |  |             | 2.3  |             |  |          | 8.08 |            |  | $        | 37.16 |  |  |  | 1.3  |  |  | $ | 36.00 | 
|$40.37 $51.78 |  |             | 51.3 |             |  |          | 8.26 |            |  | $        | 44.24 |  |  |  | 11.9 |  |  | $ | 44.62 | 
|              
|$12.10 $51.78 |  |             | 93.5 |             |  |          | 6.68 |            |  | $        | 35.10 |  |  |  | 53.1 |  |  | $ | 28.36 | 
|              
|              



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

NOTE IINCOME TAXES

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

The provision for income taxes is summarized as
follows:

|                                 |         |      |       |       |   |      |       |       |   |   |       |       |  
|-------------------------------- | ------- | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|                                 |         | 1999 |       | 2000  |   | 2001
|                                 |         |      |       |       |   |     
|Current                          |         |      |       |       |   |      |       |       |   |   |       |      
|                                 | Federal |      | $     | 1,875 |   |      | $     | 1,559 |   |   | $     | 1,440 |  
|                                 | State   |      |       | 208   |   |      |       | 100   |   |   |       | 88    |  
|                                 | Foreign |      |       | 11    |   |      |       | 104   |   |   |       | 97    |  
|                                 |         |      |       |       |   |      |       |       |   |   |       |      
|                                 |         | $    | 2,094 |       |   | $    | 1,763 |       |   | $ | 1,625 |      
|                                 |         |      |       |       |   |      |       |       |   |   |       |      
|Deferred, net                    |         |      |       |       |   |      |       |       |   |   |       |      
|                                 | Federal |      | $     | 78    |   |      | $     | 600   |   |   | $     | (210  | )
|                                 | State   |      |       | 5     |   |      |       | 97    |   |   |       | 54    |  
|                                 | Foreign |      |       | 71    |   |      |       | (25   | ) |   |       | 25    |  
|                                 |         |      |       |       |   |      |       |       |   |   |       |      
|                                 |         | $    | 154   |       |   | $    | 672   |       |   | $ | (131  | )    
|                                 |         |      |       |       |   |      |       |       |   |   |       |      
|Investment tax credits, net      |         |      |       |       |   |      |       |       |   |   |       |      
|                                 | Federal |      | $     | (41   | ) |      | $     | (39   | ) |   | $     | (33   | )
|                                 | Foreign |      |       | (167  | ) |      |       | (18   | ) |   |       | (14   | )
|                                 |         |      |       |       |   |      |       |       |   |   |       |      
|                                 |         | $    | (208  | )     |   | $    | (57   | )     |   | $ | (47   | )    
|                                 |         |      |       |       |   |      |       |       |   |   |       |      
|Total provision for income taxes |         | $    | 2,040 |       |   | $    | 2,378 |       |   | $ | 1,447 |      
|                                 |         |      |       |       |   |      |       |       |   |   |       |      

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

|                                      |  |      |        |      |  |   |        |  
|------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                      |  | 2000 |        | 2001
|                                      |  |      |        |     
|Marketable securities                 |  | $    | 119    |      |  | $ | 601    |  
|Loss carryforwards                    |  |      | 366    |      |  |   | 425    |  
|Restructuring accrual                 |  |      | 178    |      |  |   | 216    |  
|Allowance for uncollectibles          |  |      | 98     |      |  |   | 172    |  
|Foreign subsidiary basis differential |  |      |       |      |  |   | 130    |  
|Regulatory accruals                   |  |      | 96     |      |  |   | 64     |  
|Inflation adjustment                  |  |      | 197    |      |  |   | 18     |  
|Derivatives                           |  |      |       |      |  |   | 16     |  
|Compensation related                  |  |      | 94     |      |  |   |       |  
|Other                                 |  |      | 111    |      |  |   | 142    |  
|                                      |  |      |        |      |  |   |        |  
|                                      |  |      | 1,259  |      |  |   | 1,784  |  
|                                      |  |      |        |      |  |   |        |  
|Valuation allowance                   |  |      | (592   | )    |  |   | (470   | )
|                                      |  |      |        |      |  |   |        |  
|Deferred tax assets                   |  | $    | 667    |      |  | $ | 1,314  |  
|                                      |  |      |        |      |  |   |        |  
|Depreciation                          |  | $    | (2,656 | )    |  | $ | (2,968 | )
|Equity investments                    |  |      | (696   | )    |  |   | (641   | )
|Issue basis accounting                |  |      | (264   | )    |  |   | (288   | )
|Licenses                              |  |      | (259   | )    |  |   | (190   | )
|Compensation related                  |  |      |       |      |  |   | (183   | )
|Other                                 |  |      | (16    | )    |  |   | (99    | )
|                                      |  |      |        |      |  |   |        |  
|Deferred tax liabilities              |  |      | (3,891 | )    |  |   | (4,369 | )
|                                      |  |      |        |      |  |   |        |  
|Net deferred tax liability            |  | $    | (3,224 | )    |  | $ | (3,055 | )
|                                      |  |      |        |      |  |   |        |  

The valuation allowance, which increased by $439
in 2000 and decreased $122 in 2001, primarily relates to state
and foreign net operating losses that may not be utilized during
the carryforward period. The increase in 2000 relates primarily
to net deferred tax assets and net operating losses in Colombia.
During 2001, a significant amount of the net deferred tax assets
reversed and net operating losses expired. This resulted in an
overall decrease in the valuation allowance. The net deferred
tax liability at December 31, 2000 included a current asset
balance of $270 and a noncurrent liability balance, including
investment tax credits, of $(3,580). The net deferred tax
liability at December 31, 2001 included a current asset
balance of $97 and a noncurrent liability balance, including
investment tax credits, of $(3,206).

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

|                                                       |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                       |  | 1999 |      | 2000 |  | 2001
|                                                       |  |      |      |      |  |     
|Federal statutory tax rate                             |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State income taxes, net of federal income tax
	benefit |  |      | 2.5  |      |  |      | 1.9  |   |  |  | 2.3  |  
|Net earnings (losses) of equity affiliates             |  |      | 2.0  |      |  |      |     |   |  |  | 1.9  |  
|Change in valuation allowance                          |  |      |     |      |  |      | 1.0  |   |  |  | 1.8  |  
|Investment tax credits                                 |  |      | (3.5 | )    |  |      | (0.7 | ) |  |  | (0.9 | )
|Tax over book basis in foreign investments             |  |      |     |      |  |      | (0.7 | ) |  |  | (3.2 | )
|Other                                                  |  |      | 1.2  |      |  |      | (0.5 | ) |  |  | (0.9 | )
|                                                       |  |      |      |      |  |      |      |   |  |  |      |  
|Effective tax rate                                     |  |      | 37.2 | %    |  |      | 36.0 | % |  |  | 36.0 | %
|                                                       |  |      |      |      |  |      |      |   |  |  |      |  

69



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE IINCOME TAXES (Continued)


The reduction in the 2000 effective tax rate was
driven by the impact of additional income related to the
restructuring of our ownership in our German wireless
operations, the recognition of tax incentives, tax benefits
generated by the sale of our international wireless data
properties and more favorable results from companies we report
on the equity-method, which generally are recorded net of tax
benefits or expense.

While the rate in 2001 remained unchanged, state
income tax expense increased as a percentage of pre-tax earnings
due to the impact of the investment writedown. The 2001
provision included recognition of a deferred tax asset for the
excess of our tax basis over book basis when it became evident
that this temporary difference would reverse in the foreseeable
future.

At December 31, 2001, the deferred tax
liability related to approximately $1,178 of cumulative
unrepatriated earnings on consolidated foreign subsidiaries and
equity investments in unconsolidated businesses was excluded
under SFAS No. 109 because such earnings are intended to be
reinvested indefinitely. The determination of the deferred tax
liability is not practicable at this time.

NOTE JSUPPLEMENTAL CASH FLOW
INFORMATION

|               |  |      |       |      |  |      |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|               |  | 1999 |       | 2000 |  | 2001
|               |  |      |       |      |  |     
|Cash paid for: |  |      |       |      |  |      |       |  |  |   |       | 
|Income taxes   |  | $    | 1,906 |      |  | $    | 2,031 |  |  | $ | 1,371 | 
|               |  |      |       |      |  |      |       |  |  |   |       | 
|Interest       |  | $    | 1,013 |      |  | $    | 1,242 |  |  | $ | 1,321 | 
|               |  |      |       |      |  |      |       |  |  |   |       | 

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

During 1999, we entered an agreement with Crown
Castle to sublease portions of our cellular towers. See
note O for further discussion of this matter. As
consideration for the transaction, we received Crown Castle
stock valued at approximately $153 in 1999 and $27 in 2000.

NOTE KSEGMENT INFORMATION

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

During fourth quarter 2000, we contributed our
domestic wireless operations to a joint venture with SBC
Communications, forming the second largest wireless carrier in
the U.S., Cingular. We own an approximate 40% economic interest
in the venture and share control with SBC. We account for the
investment under the equity method. For management purposes we
evaluate our domestic wireless segment based on our
proportionate share of Cingulars results. Accordingly,
results for our domestic wireless segment for all of 2001 and
the last three months of 2000 reflect the proportional
consolidation of 40% of Cingulars results, whereas the
first nine months of 2000 and all of 1999 reflect the historical
results of our wireless business that have been contributed to
Cingular.

The following table provides information for each
operating segment:

|                                           |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                           |  | 1999 |        | 2000 |  | 2001
|                                           |  |      |        |      |  |     
|Communications group                       |  |      |        |      |  |      |        |   |  |   |        |  
|External revenues                          |  | $    | 17,155 |      |  | $    | 18,143 |   |  | $ | 18,927 |  
|Intersegment revenues                      |  |      | 314    |      |  |      | 312    |   |  |   | 144    |  
|Depreciation and amortization              |  |      | 3,479  |      |  |      | 3,786  |   |  |   | 4,045  |  
|Operating income                           |  |      | 5,598  |      |  |      | 5,986  |   |  |   | 5,766  |  
|Interest expense                           |  |      | 560    |      |  |      | 699    |   |  |   | 597    |  
|Net earnings (losses) of equity affiliates |  |      | (4     | )    |  |      | (1     | ) |  |   |       |  
|Income taxes                               |  |      | 1,883  |      |  |      | 1,962  |   |  |   | 1,896  |  
|Segment net income                         |  | $    | 3,166  |      |  | $    | 3,356  |   |  | $ | 3,304  |  
|Segment assets                             |  | $    | 26,186 |      |  | $    | 30,581 |   |  | $ | 32,525 |  
|Equity method investments                  |  | $    | 17     |      |  | $    | 5      |   |  | $ |       |  
|Capital expenditures                       |  | $    | 4,853  |      |  | $    | 5,440  |   |  | $ | 5,125  |  
|                                          
|Domestic wireless                          |  |      |        |      |  |      |        |   |  |   |        |  
|External revenues                          |  | $    | 3,518  |      |  | $    | 4,257  |   |  | $ | 5,643  |  
|Intersegment revenues                      |  |      | 23     |      |  |      | 24     |   |  |   |       |  
|Depreciation and amortization              |  |      | 692    |      |  |      | 642    |   |  |   | 767    |  
|Operating income                           |  |      | 208    |      |  |      | 510    |   |  |   | 1,020  |  
|Interest expense                           |  |      | 94     |      |  |      | 177    |   |  |   | 328    |  
|Net earnings (losses) of equity affiliates |  |      | 143    |      |  |      | 146    |   |  |   | (29    | )
|Income taxes                               |  |      | 88     |      |  |      | 165    |   |  |   | 251    |  
|Segment net income                         |  | $    | 161    |      |  | $    | 297    |   |  | $ | 425    |  
|Segment assets                             |  | $    | 6,310  |      |  | $    | 2,246  |   |  | $ | 2,412  |  
|Equity method investments                  |  | $    | 1,735  |      |  | $    | 2,246  |   |  | $ | 2,412  |  
|Capital expenditures                       |  | $    | 603    |      |  | $    | 377    |   |  | $ |       |  
|                                          
|Latin America                              |  |      |        |      |  |      |        |   |  |   |        |  
|External revenues                          |  | $    | 2,364  |      |  | $    | 2,906  |   |  | $ | 2,910  |  
|Intersegment revenues                      |  |      | 41     |      |  |      | 60     |   |  |   | 25     |  
|Depreciation and amortization              |  |      | 450    |      |  |      | 605    |   |  |   | 605    |  
|Operating income                           |  |      | 106    |      |  |      | 50     |   |  |   | 280    |  
|Interest expense                           |  |      | 88     |      |  |      | 178    |   |  |   | 215    |  
|Interest income                            |  |      | 6      |      |  |      | 32     |   |  |   | 36     |  
|Net earnings (losses) of equity affiliates |  |      | (46    | )    |  |      | (45    | ) |  |   | (36    | )
|Income tax expense (benefit)               |  |      | 8      |      |  |      | (16    | ) |  |   | 63     |  
|Segment net loss                           |  | $    | (86    | )    |  | $    | (152   | ) |  | $ | (50    | )

70



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE KSEGMENT INFORMATION
(Continued)


|                                    |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                    |  | 1999 |       | 2000 |  | 2001
|                                    |  |      |       |      |  |     
|Latin America, continued            |  |      |       |      |  |      |       |  |  |   |       | 
|Segment assets                      |  | $    | 4,570 |      |  | $    | 6,971 |  |  | $ | 6,574 | 
|Equity method investments           |  | $    | 316   |      |  | $    | 221   |  |  | $ | 127   | 
|Capital expenditures                |  | $    | 629   |      |  | $    | 818   |  |  | $ | 500   | 
|                                   
|Domestic advertising and publishing |  |      |       |      |  |      |       |  |  |   |       | 
|External revenues                   |  | $    | 1,942 |      |  | $    | 2,042 |  |  | $ | 2,073 | 
|Intersegment revenues               |  |      | 18    |      |  |      | 24    |  |  |   | 18    | 
|Depreciation and amortization       |  |      | 27    |      |  |      | 28    |  |  |   | 28    | 
|Operating income                    |  |      | 909   |      |  |      | 1,041 |  |  |   | 1,040 | 
|Interest expense                    |  |      | 7     |      |  |      | 14    |  |  |   | 16    | 
|Income taxes                        |  |      | 339   |      |  |      | 394   |  |  |   | 394   | 
|Segment net income                  |  | $    | 567   |      |  | $    | 635   |  |  | $ | 633   | 
|Segment assets                      |  | $    | 1,456 |      |  | $    | 1,688 |  |  | $ | 1,843 | 
|Capital expenditures                |  | $    | 35    |      |  | $    | 55    |  |  | $ | 63    | 
|                                   

RECONCILIATION TO CONSOLIDATED FINANCIAL
INFORMATION

|                                      |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|Operating revenues                    |  |   |        |   |  |   |        |   |  |   |        |  
|Total reportable segments             |  | $ | 25,375 |   |  | $ | 27,768 |   |  | $ | 29,740 |  
|Cingular proportional consolidation   |  |   |       |   |  |   | (1,198 | ) |  |   | (5,540 | )
|Domestic wireless roamer adjustment   |  |   | (282   | ) |  |   | (267   | ) |  |   |       |  
|Customer premises equipment revenues  |  |   | 143    |   |  |   | 109    |   |  |   | 13     |  
|Florida gross receipts tax            |  |   | 50     |   |  |   | 57     |   |  |   | 44     |  
|Impact of accounting change (SAB 101) |  |   | 248    |   |  |   |       |   |  |   |       |  
|Corporate, eliminations and other     |  |   | (310   | ) |  |   | (318   | ) |  |   | (127   | )
|                                      |  |   |        |   |  |   |        |   |  |   |        |  
|Total consolidated                    |  | $ | 25,224 |   |  | $ | 26,151 |   |  | $ | 24,130 |  
|                                      |  |   |        |   |  |   |        |   |  |   |        |  

The Cingular proportional consolidation shown
above represents the amount necessary to reconcile the
proportional results of Cingular to GAAP results. We have also
adjusted the domestic wireless segments revenues and
expenses in 1999 and 2000 to treat revenues and expenses related
to roaming activity on a basis consistent with Cingulars
results. The customer premises equipment and Florida gross
receipts tax represent adjustments to the Communications
groups prior operating activity to conform prior activity
to the current structure of these transactions. As described in
note A, we adopted the provisions of SAB No. 101
effective January 1, 2000. The revenue reclassification in
1999 that would have been recorded had SAB No. 101 been
effective January 1, 1999 would have been an equal
reduction of revenues and expenses of $248.

|                          |                                                   |      |        |      |   |      |        |      |   |   |        |        |  
|------------------------- | ------------------------------------------------- | ---- | ------ | ---- | - | ---- | ------ | ---- | - | - | ------ | ------ | -
|                          |                                                   | 1999 |        | 2000 |   | 2001
|                          |                                                   |      |        |      |   |     
|Net income                |                                                   |      |        |      |   |      |        |      |   |   |        |       
|Total reportable segments |                                                   | $    | 3,808  |      |   | $    | 4,136  |      |   | $ | 4,312  |       
|Corporate and other       |                                                   |      | 24     |      |   |      | 71     |      |   |   | 85     |       
|Reconciling items:        |                                                   |      |        |      |   |      |        |      |   |   |        |       
|                          | Gains on ownership transactions                   |      |        | 33   |   |      |        | 390  |   |   |        | 28     |  
|                          | Foreign currency transaction losses               |      |        | (325 | ) |      |        | (82  | ) |   |        | (230   | )
|                          | Net losses on sale or impairment of securities    |      |        |     |   |      |        |     |   |   |        | (1,263 | )
|                          | Restructurings and asset impairments              |      |        | (187 | ) |      |        | (393 | ) |   |        | (227   | )
|                          | Pension and postretirement related gains (losses) |      |        |     |   |      |        | 223  |   |   |        | (47    | )
|                          | Other items                                       |      |        | 95   |   |      |        | (125 | ) |   |        | (88    | )
|                          |                                                   |      |        |      |   |      |        |      |   |   |        |       
|Total consolidated        |                                                   | $    | 3,448  |      |   | $    | 4,220  |      |   | $ | 2,570  |       
|                          |                                                   |      |        |      |   |      |        |      |   |   |        |       
|Segment assets            |                                                   |      |        |      |   |      |        |      |   |   |        |       
|Total reportable segments |                                                   | $    | 38,522 |      |   | $    | 41,486 |      |   | $ | 43,354 |       
|Corporate and other       |                                                   |      | 4,931  |      |   |      | 9,439  |      |   |   | 8,692  |       
|                          |                                                   |      |        |      |   |      |        |      |   |   |        |       
|Total consolidated        |                                                   | $    | 43,453 |      |   | $    | 50,925 |      |   | $ | 52,046 |       
|                          |                                                   |      |        |      |   |      |        |      |   |   |        |       

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. Gains on ownership transactions include: for 1999, gains
from the sale of our investments in Honolulu Cellular and a
wireless property in Alabama; for 2000, gains from the
restructuring of the investment in E-Plus and the redemption of
AT&T from the AB Cellular partnership; in 2001, gains from
the sale of investments in SkyCell and BellSouth International
Wireless Services. Other items include: for 1999, the
recognition of foreign investment tax credits generated in prior
years; for 2000, expense related to the termination of a
contract with a vendor; for 2001, an adjustment to the accrual
for reciprocal compensation.

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

|                  |  |        |        |               |  |       |       |  |  |   |        | 
|----------------- |  | ------ | ------ | ------------- |  | ----- | ----- |  |  | - | ------ | 
|                  |  | United |        |               |  |      
|                  |  | States |        | International |  | Total
|                  |  |        |        |               |  |      
|1999:             |  |        |        |               |  |       |       |  |  |   |        | 
|Revenues          |  | $      | 22,866 |               |  | $     | 2,358 |  |  | $ | 25,224 | 
|Long-lived assets |  |        | 32,153 |               |  |       | 3,913 |  |  |   | 36,066 | 
|2000:             |  |        |        |               |  |       |       |  |  |   |        | 
|Revenues          |  | $      | 23,245 |               |  | $     | 2,906 |  |  | $ | 26,151 | 
|Long-lived assets |  |        | 37,571 |               |  |       | 5,948 |  |  |   | 43,519 | 
|2001:             |  |        |        |               |  |       |       |  |  |   |        | 
|Revenues          |  | $      | 21,220 |               |  | $     | 2,910 |  |  | $ | 24,130 | 
|Long-lived assets |  |        | 39,936 |               |  |       | 5,255 |  |  |   | 45,191 | 

71



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE LFINANCIAL INSTRUMENTS

The recorded amounts of cash and cash
equivalents, temporary cash investments, bank loans and
commercial paper approximate fair value due to the short-term
nature of these instruments. The fair value for BSTs
long-term debt is estimated based on the closing market prices
for each issue at December 31, 2000 and 2001. Fair value
estimates for the Guarantee of ESOP Debt, BellSouth Corporation
long-term debt, foreign exchange contracts, foreign currency
swaps and interest rate swaps are based on quotes from dealers.
Since judgment is required to develop the estimates, the
estimated amounts presented herein may not be indicative of the
amounts that we could realize in a current market exchange.

Following is a summary of financial instruments
where the fair values differ from the recorded amounts as of
December 31:

|                                         |                                 |          |   |            |  |  |   |       |  
|---------------------------------------- | ------------------------------- | -------- | - | ---------- |  |  | - | ----- | -
|                                         |                                 |         
|                                         |                                 | 2000    
|                                         |                                 |         
|                                         |                                 | Recorded |   | Estimated 
|                                         |                                 | Amount   |   | Fair Value
|                                         |                                 |          |   |           
|Balance sheet financial instruments:     |                                 |          |   |            |  |  |   |      
|Long-term debt:                          |                                 |          |   |            |  |  |   |      
|                                         | Issued by BST                   |          | $ | 7,728      |  |  | $ | 7,613 |  
|                                         | Issued by BellSouth Corporation |          |   | 3,817      |  |  |   | 3,823 |  
|                                         | Guarantee of ESOP debt          |          |   | 307        |  |  |   | 323   |  
|Off-balance sheet financial instruments: |                                 |          |   |            |  |  |   |      
|                                         | Interest rate swaps             |          |   |           |  |  |   | (6    | )

|                                     |                                 |          |   |            |   |  |   |       |  
|------------------------------------ | ------------------------------- | -------- | - | ---------- | - |  | - | ----- | -
|                                     |                                 |         
|                                     |                                 | 2001    
|                                     |                                 |         
|                                     |                                 | Recorded |   | Estimated 
|                                     |                                 | Amount   |   | Fair Value
|                                     |                                 |          |   |           
|Balance sheet financial instruments: |                                 |          |   |            |   |  |   |      
|Long-term debt:                      |                                 |          |   |            |   |  |   |      
|                                     | Issued by BST                   |          | $ | 7,551      |   |  | $ | 7,568 |  
|                                     | Issued by BellSouth Corporation |          |   | 6,348      |   |  |   | 7,683 |  
|                                     | Guarantee of ESOP debt          |          |   | 213        |   |  |   | 213   |  
|                                     | Interest rate swaps             |          |   | (37        | ) |  |   | (37   | )
|                                     | Forwards                        |          |   | (39        | ) |  |   | (39   | )

DERIVATIVE FINANCIAL INSTRUMENTS

We are, from time to time, party to currency swap
agreements, interest rate swap agreements and foreign exchange
forward contracts in our normal course of business for purposes
other than trading. These financial instruments are used to
mitigate foreign currency and interest rate risks, although to
some extent they expose us to market risks and credit risks. We
control the credit risks associated with these instruments
through the evaluation and continual monitoring of the
creditworthiness of the 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
were a party to various interest rate swaps, which qualify for
hedge accounting and we believe are 100% effective, with an
aggregate notional amount of $1,120 at December 31, 2000
and $1,195 at December 31, 2001. The following table
summarizes the average rates of these agreements:

|                              |               |                 |  |       |  |  |  |       | 
|----------------------------- | ------------- | --------------- |  | ----- |  |  |  | ----- | 
|                              |               |                
|                              |               | At December 31,
|                              |               |                
|                              |               | 2000            |  | 2001 
|                              |               |                 |  |      
|Pay fixed / receive variable: |               |                 |  |       |  |  |  |      
|                              | Rate paid     |                 |  | 6.03% |  |  |  | 5.88% | 
|                              | Rate received |                 |  | 6.67% |  |  |  | 1.96% | 

In addition, we participate in an interest rate
swap with a notional amount of $500, which qualifies for hedge
accounting. Therefore, all changes in the fair value of this
instrument are recorded to earnings. The following table
summarizes the average rates of this instrument:

|                              |               |                 |  |       |  |  |  |       | 
|----------------------------- | ------------- | --------------- |  | ----- |  |  |  | ----- | 
|                              |               |                
|                              |               | At December 31,
|                              |               |                
|                              |               | 2000            |  | 2001 
|                              |               |                 |  |      
|Pay variable / receive fixed: |               |                 |  |       |  |  |  |      
|                              | Rate paid     |                 |  | 6.42% |  |  |  | 1.97% | 
|                              | Rate received |                 |  | 6.00% |  |  |  | 6.00% | 

The swaps mature at dates ranging from 2002 to
2005.

FORWARDS

In August 2001, we loaned Euro 1,510,
or $1,382, to E-Plus, an equity investment. In October 2001, we
loaned an additional Euro 525, or $468, to E-Plus. Both loans
have an expected March 1, 2004 due date. Simultaneously
with these transactions, in order to mitigate foreign currency
risk, we also entered into forward contracts to sell Euro with a
March 1, 2004 settlement date. These forwards, which
qualify as cash flow hedges, enable us to receive $1,382
equivalent to Euro 1,510, based on a forward rate of 0.9158 and

72



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE LFINANCIAL INSTRUMENTS
(Continued)


$468 equivalent to Euro 525, based on a
forward rate of 0.8914.

OTHER

We have also issued letters of credit and
financial guarantees related to equity method investees which
approximate $595 at December 31, 2001. Since there is no
market for the instruments, it is not practicable to estimate
their fair value.

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 totalled $497 at December 31, 2000
and $492 at December 31, 2001.

NOTE MCOMMITMENTS AND
CONTINGENCIES

LEASES

We have entered into operating leases for
facilities and equipment used in operations. Rental expense
under operating leases was $297 for 1999, $314 for 2000 and $240
for 2001. 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, 2001:

|           |  |         |     | 
|---------- |  | ------- | --- | 
|           |  | Minimum
|           |  | Rentals
|           |  |        
|2002       |  | $       | 129 | 
|2003       |  |         | 109 | 
|2004       |  |         | 97  | 
|2005       |  |         | 92  | 
|2006       |  |         | 74  | 
|Thereafter |  |         | 295 | 
|           |  |         |     | 
|Total      |  | $       | 796 | 
|           |  |         |     | 

OUTSIDE PLANT

We currently self-insure all of our outside plant
against casualty losses. Such outside plant, located in the nine
southeastern states served by BST, is susceptible to damage from
severe weather conditions and other perils. The net book value
of outside plant was $7,395 at December 31, 2000 and $7,462
at December 31, 2001.

OUTSOURCING CONTRACTS

Beginning in 1997, we contracted with various
entities to outsource the performance of certain engineering
functions, as well as our information technology operations and
application development. These contracts expire at various dates
through 2007, are generally renewable, and are cancelable upon
the payment of additional fees or for nonperformance. Future
minimum payments for these contracts range from $350 to $706
annually over the contract periods.

In 2001, we entered into an agreement with Nortel
for the purchase and delivery of approximately $250 of switching
equipment, software and services through the year 2003.

PUT-CALL PROVISIONS

Colombia

BellSouth owns approximately 66% of BellSouth
Colombia. BellSouths partner holds the remaining 34%
interest. BellSouth has agreed with our partner to a series of
related put and call agreements whereby we can acquire, or could
be compelled by our partner to acquire, additional shares of the
company, up to the partners entire interest, at a price
approximately equal to appraised fair value. Our partner has the
right to put to us approximately one-half of his 34% interest in
the Colombian operations in 2002. The remaining balance can be
put to us beginning in 2006 until 2009. BellSouths first
call option for up to a number of shares currently equal to
approximately 10.5% of BellSouth Colombias outstanding
common stock is first exercisable in December 2003. We
cannot determine whether BellSouth or its partner will exercise
their rights under the agreement, or the amount if exercised.

Venezuela

BellSouth owns approximately 78% of Telcel, our
Venezuelan operation. Telcels other major shareholder
holds an indirect 22% interest in Telcel. That shareholder has
the right to require BellSouth to purchase (the puts), and
BellSouth has the right to require that shareholder to sell (the
calls) to BellSouth, approximately half of that
shareholders interest in Telcel in 2000 and the remaining
balance in 2002. In 2000, the shareholder initiated a process
for appraising the value of its interest

73



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE MCOMMITMENTS AND CONTINGENCIES
(Continued)


in Telcel. If BellSouth exercises its call right,
BellSouth would purchase that shareholders interest at
between 100% and 120% of its appraised fair value. If the
shareholder elects to require BellSouth to purchase the
interest, BellSouth would do so at between 80% and 100% of its
appraised fair value. We cannot determine whether BellSouth or
its partner will exercise their rights under the agreement, or
the amount if exercised.

RECIPROCAL COMPENSATION

Following the enactment of the Telecommunications
Act of 1996, 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. Numerous competitive local carriers have
claimed entitlement from BST for compensation associated with
dial-up calls originating on BSTs network and connecting
with Internet service providers served by the competitive local
carriers networks. BST has maintained that dial-up calls
to Internet service providers are not local calls for which
terminating compensation is due under the interconnection
agreements; however, the courts and state regulatory commissions
in BSTs operating territory that have considered the
matter have, in most cases, ruled that BST is responsible for
paying reciprocal compensation on these calls.

We have commenced discussions with competitive
local exchange carriers concerning settlement of these claims,
and agreements have been reached in many circumstances. We do
not expect the financial impact of future settlements to have a
material impact on our results of operations, financial position
or cash flows.

In April 2001, the FCC released an Order on
Remand and Report and Order addressing the issue of compensation
for Internet service provider traffic. In its Order, the FCC
acknowledged that dial-up calls to Internet service providers
are not local calls, but instead are information
access traffic exempt from the reciprocal compensation
provisions of the Telecommunications Act of 1996. The FCC has
implemented a three-year interim period during which local
carriers will pay intercarrier compensation for such calls in
decreasing increments. After the three-year interim period, the
new rules on intercarrier compensation to be adopted in
connection with the Notice of Proposed Rulemaking referred to
above are expected to be in effect. If no rules have been
adopted by that time, the intercarrier compensation in effect at
the end of the third year would remain in effect. An appeal of
the FCC Order is pending. If the Order is not affirmed on
appeal, the rates we pay for Internet service provider traffic
and other traffic subject to the FCC rates could change.
Although we cannot currently estimate the possible change, we
believe it could have an adverse effect on our expenses.

In a related matter, a competitive local carrier
has claimed terminating compensation of approximately $165 for
service arrangements that we did not believe involved
traffic under our interconnection agreements. We
filed a complaint with the state regulatory commission asking
that agency to declare that we did not owe reciprocal
compensation for these arrangements. In March 2000, the
state commission ruled in our favor finding that compensation
was not owed to the competitive local carrier. The parties have
agreed to a settlement of this matter. In October 2001, a
stipulation of dismissal was filed with the court to effect the
settlement.

COMPLIANCE MATTERS

Foreign Corrupt Practices Act

In July 2000, the SEC began a formal
investigation of whether we and others may have violated the
Foreign Corrupt Practices Act (FCPA). The SEC subpoenaed
documents relating to the activities of our foreign affiliates,
and we produced responsive documents. Prior to the commencement
of the SECs formal investigation, we had engaged outside
counsel to investigate an FCPA matter relating to the activities
of one of our foreign affiliates in Latin America, and outside
counsel concluded that those activities did not violate the Act.
Thereafter and independent of these developments, our internal
auditors, in the ordinary course of conducting compliance
reviews, identified issues concerning accounting entries made by
another of our Latin American affiliates. We informed the SEC as
to this matter, and the SEC expanded its investigation to
encompass it.

In January 2002, we entered into a settlement
with the SEC regarding these matters. Under the terms of the
settlement, the Company neither admits nor denies the SECs
findings that BellSouth violated the books and records and
internal control provisions of the Securities Exchange Act of
1934. In reaching the settlement, we agreed to pay a civil
penalty of $150 thousand dollars and agreed to the entry of an
administrative order

74



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE MCOMMITMENTS AND CONTINGENCIES
(Continued)


requiring BellSouth to refrain from violations of
those provisions. In its order, the SEC acknowledged our
cooperation and also acknowledged that we have taken remedial
actions and enhanced our compliance program.

REGULATORY MATTERS

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

Also in 2000, the Florida Public Service
Commission issued a proposed agency action stating that our
change in 1999 from a late charge based on a percentage of the
amounts overdue to a flat rate fee plus an interest charge
violated the Florida price regulation statute and voted that
approximately $65 should be refunded. We protested the decision.
On August 30, 2001, the Commission issued an order adopting
its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The
total amount as of December 31, 2001 subject to potential
refund was $83, including interest. No accrual has been recorded
in these financial statements related to this matter.

OTHER CLAIMS

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

NOTE NRELATED PARTY
TRANSACTIONS

In addition to the advances to affiliates
discussed in note B and activity related to Cingular
discussed in note G, other significant transactions with
related parties are summarized in the succeeding paragraphs.

We generated revenues of approximately $65 in
2000 and $230 in 2001 from the provision of local interconnect
and long distance services to Cingular.

In October 2000, we entered into a transition
services agreement with Cingular, pursuant to which we provide
transition services and products for a limited period of time.
The services we provide include government and regulatory
affairs, finance, compensation and benefit accounting, human
resources, internal audit, risk management, legal, security and
tax. Provided services continue until 90 days after Cingular
gives notice or until the agreements terminate on
December 31, 2002. The fees are determined based on the
cost of providing the level of service expected to be provided
at the time we entered into the agreements.

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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE OOTHER EVENTS

CONTRACT TERMINATION PAYMENT

In October 1999, two of the Companys
wholly-owned subsidiaries, BellSouth Products, Inc.
(BSP) and BST filed a complaint against U. S. Electronics,
Inc. (USE), in the United States District Court for the Northern
District of Georgia. The complaint alleged that USE, a
distributor of residential telephone equipment, breached its
distributorship contract with BSP and violated the
Robinson-Patman Act. USE denied the material allegations of the
complaint and filed counterclaims against the Company, BSP, BST
and several other BellSouth entities, alleging that the
BellSouth companies were in breach of the distributorship
contract. In January 2001, BellSouth settled the litigation and
paid approximately $200 to USE for the termination of their
then-existing agreement. BellSouth entered into a new agreement
with USE.

RESTRUCTURING OF WIRELESS VIDEO ENTERTAINMENT
BUSINESS

In December 2000, we announced that we would
restructure our video entertainment service and concentrate our
entertainment business on our fiber optic-based wireline video
operations. This move was made to better align our resources
with our strategic priorities in broadband services.

We recorded charges of approximately $498, or
$323 net of tax, related to this restructuring in the fourth
quarter of 2000. These charges consisted of approximately $289
for asset writeoffs and writedowns and $209 for contract
termination penalties, migration of customers to alternative
service providers and for severance and related benefit
expenses. The remaining liability as of December 31, 2001
was $25. Operating revenues generated by this business were $52
in 1999, $75 in 2000 and $24 in 2001. Operating losses generated
by this business were $101 in 1999, $110 in 2000 and $16 in 2001.

RESTRUCTURING ACTIONS

In February 2000, we announced that we would
reduce our domestic general and administrative staff by
approximately 2,100 positions. These reductions were the result
of the streamlining of work processes in conjunction with our
shift to a more simplified management structure. As a result of
these reductions, we recorded a one-time charge of $78, or $48
after tax, for severance and post-employment health benefits
under pre-existing separation pay plans. We completed the
program during the first quarter of 2001, as planned, consistent
with the original estimates.

In October 2001, we announced that we would
record a charge reflecting restructuring actions that were taken
to reduce operating costs in response to a slowing economy and
increased competition. As a result of these reductions, we
eliminated approximately 4,200 positions and recorded a charge
of $232, or $143 after tax. The charge consists primarily of
severance and post-employment health benefits under pre-existing
separation pay plans. As of December 31, 2001, the
liability related to this plan was $202.

SUBLEASE OF COMMUNICATIONS TOWERS

In June 1999, we signed a definitive agreement
with Crown Castle International Corporation (Crown) for the
sublease of all unused space on approximately 1,850 of our
wireless communications towers in exchange for $610 to be paid
in a combination of cash and Crown common stock. As of
December 31, 2000 we had closed on 1,865 towers and
received $614. We also entered into a five-year, build-to-suit
agreement with Crown covering up to 500 towers. Under a similar
agreement, Crown will sublease all unused space on 773 PCS
towers in exchange for $317 in cash. As of December 31,
2000, we had closed on 732 towers and received $300. In
connection with this agreement, we entered into an exclusive
three-year, build-to-suit agreement. The agreements with Crown
were transferred to Cingular upon its formation. During 2001, we
closed on 71 additional towers with proceeds of $30. We have
completed all tower closings under these agreements.

NOTE PPROPOSED TRACKING STOCK

In December 2000, our shareholders approved
amendments to our charter that permit us to issue our common
stock in series. This amendment gives us the flexibility to
conduct a public offering of shares of Latin America group stock
to finance our expansion in Latin America. If we issue shares of
Latin America group stock to the public, our Board of Directors
would initially designate two series: Latin America group stock,
intended to reflect the separate performance of our Latin
American businesses, and BLS group stock, intended to reflect
the separate performance of all of our other businesses. At that
time, each existing share of our common stock would be changed
into one share of BLS group stock.

76



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE PPROPOSED TRACKING STOCK
(Continued)


In the event of a public offering, a number of
shares of Latin America group stock would be reserved for the
BLS group or for issuance to the holders of BLS group stock. We
might distribute, as a dividend to the holders of BLS group
stock, the reserved shares of Latin America group stock within
six to 12 months following a public offering. However, our
Board of Directors may decide to initially issue Latin America
group stock in some other manner or not to create BLS group
stock and Latin America group stock.

Our decision whether, and when, to create, issue
and distribute Latin America group stock is subject to a number
of factors, including market conditions and other factors.

NOTE QSUBSIDIARY FINANCIAL
INFORMATION

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

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

Condensed Consolidating Statements of
Income

|                                     |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ----- | ----------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | 
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 1999
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |       | Adjustments |  | Total
|                                     |  |                                      |        |       |  |        |       |             |  |      
|Total operating revenues             |  | $                                    | 17,478 |       |  | $      | 8,774 |             |  | $     | 1,508 |  |  | $ | (2,536 | ) |  | $ | 25,224 | 
|Total operating expenses             |  |                                      | 12,533 |       |  |        | 8,174 |             |  |       | 626   |  |  |   | (2,546 | ) |  |   | 18,787 | 
|                                     |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|Operating income                     |  |                                      | 4,945  |       |  |        | 600   |             |  |       | 882   |  |  |   | 10     |   |  |   | 6,437  | 
|Interest expense                     |  |                                      | 559    |       |  |        | 180   |             |  |       | 531   |  |  |   | (240   | ) |  |   | 1,030  | 
|Other income (expense), net          |  |                                      | 20     |       |  |        | (79   | )           |  |       | 429   |  |  |   | (289   | ) |  |   | 81     | 
|                                     |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|Income before income taxes           |  |                                      | 4,406  |       |  |        | 341   |             |  |       | 780   |  |  |   | (39    | ) |  |   | 5,488  | 
|Provision (benefit) for income taxes |  |                                      | 1,636  |       |  |        | 134   |             |  |       | 276   |  |  |   | (6     | ) |  |   | 2,040  | 
|                                     |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|Net income                           |  | $                                    | 2,770  |       |  | $      | 207   |             |  | $     | 504   |  |  | $ | (33    | ) |  | $ | 3,448  | 
|                                     |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 

|                            |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|--------------------------- |  | ------------------------------------ | ------ | ----- |  | ------ | ----- | ----------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | 
|                            |  |                                     
|                            |  | For the Year Ended December 31, 2000
|                            |  |                                     
|                            |  | BST                                  |        | Other |  | Parent |       | Adjustments |  | Total
|                            |  |                                      |        |       |  |        |       |             |  |      
|Total operating revenues    |  | $                                    | 18,069 |       |  | $      | 9,242 |             |  | $     | 2,145 |  |  | $ | (3,305 | ) |  | $ | 26,151 | 
|Total operating expenses    |  |                                      | 12,805 |       |  |        | 8,667 |             |  |       | 1,130 |  |  |   | (3,335 | ) |  |   | 19,267 | 
|                            |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|Operating income            |  |                                      | 5,264  |       |  |        | 575   |             |  |       | 1,015 |  |  |   | 30     |   |  |   | 6,884  | 
|Interest expense            |  |                                      | 695    |       |  |        | 281   |             |  |       | 936   |  |  |   | (584   | ) |  |   | 1,328  | 
|Other income (expense), net |  |                                      | 25     |       |  |        | 755   |             |  |       | 879   |  |  |   | (617   | ) |  |   | 1,042  | 
|                            |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|Income before income taxes  |  |                                      | 4,594  |       |  |        | 1,049 |             |  |       | 958   |  |  |   | (3     | ) |  |   | 6,598  | 
|Provision for income taxes  |  |                                      | 1,689  |       |  |        | 385   |             |  |       | 299   |  |  |   | 5      |   |  |   | 2,378  | 
|                            |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 
|Net income                  |  | $                                    | 2,905  |       |  | $      | 664   |             |  | $     | 659   |  |  | $ | (8     | ) |  | $ | 4,220  | 
|                            |  |                                      |        |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |        | 

|                                     |  |                                      |        |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ----- | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 2001
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |       | Adjustments |  | Total
|                                     |  |                                      |        |       |  |        |       |             |  |      
|Total operating revenues             |  | $                                    | 18,517 |       |  | $      | 6,564 |             |  | $     | 2,730  |   |  | $ | (3,681 | ) |  | $ | 24,130 |  
|Total operating expenses             |  |                                      | 13,900 |       |  |        | 5,507 |             |  |       | 2,078  |   |  |   | (3,696 | ) |  |   | 17,789 |  
|                                     |  |                                      |        |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|Operating income                     |  |                                      | 4,617  |       |  |        | 1,057 |             |  |       | 652    |   |  |   | 15     |   |  |   | 6,341  |  
|Interest expense                     |  |                                      | 596    |       |  |        | 269   |             |  |       | 789    |   |  |   | (339   | ) |  |   | 1,315  |  
|Other income (expense), net          |  |                                      | 31     |       |  |        | 464   |             |  |       | (1,139 | ) |  |   | (365   | ) |  |   | (1,009 | )
|                                     |  |                                      |        |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|Income before income taxes           |  |                                      | 4,052  |       |  |        | 1,252 |             |  |       | (1,276 | ) |  |   | (11    | ) |  |   | 4,017  |  
|Provision (benefit) for income taxes |  |                                      | 1,456  |       |  |        | 610   |             |  |       | (627   | ) |  |   | 8      |   |  |   | 1,447  |  
|                                     |  |                                      |        |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|Net income                           |  | $                                    | 2,596  |       |  | $      | 642   |             |  | $     | (649   | ) |  | $ | (19    | ) |  | $ | 2,570  |  
|                                     |  |                                      |        |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  

77



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE QSUBSIDIARY FINANCIAL INFORMATION
(Continued)


Condensed Consolidating Balance
Sheets

|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|------------------------------------------ |  | ----------------- | ------ | ----------------- |  | ------ | ------ | ----------- |  | ----- | ------ | --- |  | ----- | ------- | ------ |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | - | ------ | - |  | - | ------ | 
|                                           |  |                   |        |                  
|                                           |  | December 31, 2000 |        | December 31, 2001
|                                           |  |                   |        |                  
|                                           |  | BST               |        | Other             |  | Parent |        | Adjustments |  | Total |        | BST |  | Other |         | Parent |  | Adjustments |        | Total
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |      
|ASSETS                                     |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Current assets:                            |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Cash and cash equivalents                  |  | $                 | 62     |                   |  | $      | 999    |             |  | $     |       |     |  | $     |        |        |  | $           | 1,061  |       |  | $ | 111    |  |  | $ | 481    |  |  | $ |       |   |  | $ |       |   |  | $ | 592    | 
|Accounts receivable, net                   |  |                   | 3,195  |                   |  |        | 2,162  |             |  |       | 5,522  |     |  |       | (5,722  | )      |  |             | 5,157  |       |  |   | 3,115  |  |  |   | 2,308  |  |  |   | 4,066  |   |  |   | (4,283 | ) |  |   | 5,206  | 
|Other current assets                       |  |                   | 271    |                   |  |        | 837    |             |  |       | 184    |     |  |       | (104    | )      |  |             | 1,188  |       |  |   | 437    |  |  |   | 571    |  |  |   | 75     |   |  |   | (26    | ) |  |   | 1,057  | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total current assets                       |  |                   | 3,528  |                   |  |        | 3,998  |             |  |       | 5,706  |     |  |       | (5,826  | )      |  |             | 7,406  |       |  |   | 3,663  |  |  |   | 3,360  |  |  |   | 4,141  |   |  |   | (4,309 | ) |  |   | 6,855  | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Investments and advances                   |  |                   | 322    |                   |  |        | 7,505  |             |  |       | 10,592 |     |  |       | (7,409  | )      |  |             | 11,010 |       |  |   | 287    |  |  |   | 5,801  |  |  |   | 8,117  |   |  |   | (3,585 | ) |  |   | 10,620 | 
|Property, plant and equipment, net         |  |                   | 21,277 |                   |  |        | 2,518  |             |  |       | 362    |     |  |       |        |        |  |             | 24,157 |       |  |   | 22,085 |  |  |   | 2,580  |  |  |   | 278    |   |  |   |       |   |  |   | 24,943 | 
|Deferred charges and other assets          |  |                   | 3,868  |                   |  |        | 219    |             |  |       | 186    |     |  |       | (93     | )      |  |             | 4,180  |       |  |   | 4,795  |  |  |   | 213    |  |  |   | 180    |   |  |   | (66    | ) |  |   | 5,122  | 
|Intangible assets, net                     |  |                   | 692    |                   |  |        | 3,291  |             |  |       | 189    |     |  |       |        |        |  |             | 4,172  |       |  |   | 1,122  |  |  |   | 3,081  |  |  |   | 288    |   |  |   | 15     |   |  |   | 4,506  | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total assets                               |  | $                 | 29,687 |                   |  | $      | 17,531 |             |  | $     | 17,035 |     |  | $     | (13,328 | )      |  | $           | 50,925 |       |  | $ | 31,952 |  |  | $ | 15,035 |  |  | $ | 13,004 |   |  | $ | (7,945 | ) |  | $ | 52,046 | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Current liabilities:                       |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Debt maturing within one year              |  | $                 | 1,830  |                   |  | $      | 1,724  |             |  | $     | 8,791  |     |  | $     | (4,776  | )      |  | $           | 7,569  |       |  | $ | 3,468  |  |  | $ | 794    |  |  | $ | 4,261  |   |  | $ | (3,412 | ) |  | $ | 5,111  | 
|Other current liabilities                  |  |                   | 3,514  |                   |  |        | 4,054  |             |  |       | 1,105  |     |  |       | (2,972  | )      |  |             | 5,701  |       |  |   | 3,063  |  |  |   | 1,568  |  |  |   | 1,182  |   |  |   | (856   | ) |  |   | 4,957  | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total current liabilities                  |  |                   | 5,344  |                   |  |        | 5,778  |             |  |       | 9,896  |     |  |       | (7,748  | )      |  |             | 13,270 |       |  |   | 6,351  |  |  |   | 2,362  |  |  |   | 5,443  |   |  |   | (4,268 | ) |  |   | 10,068 | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Long-term debt                             |  |                   | 7,641  |                   |  |        | 1,594  |             |  |       | 8,139  |     |  |       | (4,911  | )      |  |             | 12,463 |       |  |   | 7,353  |  |  |   | 2,313  |  |  |   | 8,450  |   |  |   | (3,102 | ) |  |   | 15,014 | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Noncurrent liabilities:                    |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Deferred income taxes                      |  |                   | 2,306  |                   |  |        | 1,271  |             |  |       | 3      |     |  |       |        |        |  |             | 3,580  |       |  |   | 2,907  |  |  |   | 1,080  |  |  |   | (840   | ) |  |   | 59     |   |  |   | 3,206  | 
|Other noncurrent liabilities               |  |                   | 3,209  |                   |  |        | 1,316  |             |  |       | 321    |     |  |       | (146    | )      |  |             | 4,700  |       |  |   | 3,330  |  |  |   | 1,436  |  |  |   | 492    |   |  |   | (97    | ) |  |   | 5,161  | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total noncurrent liabilities               |  |                   | 5,515  |                   |  |        | 2,587  |             |  |       | 324    |     |  |       | (146    | )      |  |             | 8,280  |       |  |   | 6,237  |  |  |   | 2,516  |  |  |   | (348   | ) |  |   | (38    | ) |  |   | 8,367  | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Shareholders equity:                      |  |                   | 11,187 |                   |  |        | 7,572  |             |  |       | (1,324 | )   |  |       | (523    | )      |  |             | 16,912 |       |  |   | 11,831 |  |  |   | 7,844  |  |  |   | (541   | ) |  |   | (537   | ) |  |   | 18,597 | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total liabilities and shareholders equity |  | $                 | 29,687 |                   |  | $      | 17,531 |             |  | $     | 17,035 |     |  | $     | (13,328 | )      |  | $           | 50,925 |       |  | $ | 31,952 |  |  | $ | 15,035 |  |  | $ | 13,004 |   |  | $ | (7,945 | ) |  | $ | 52,046 | 
|                                           |  |                   |        |                   |  |        |        |             |  |       |        |     |  |       |         |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 

78



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE QSUBSIDIARY FINANCIAL
INFORMATION

(Continued)


Condensed Consolidating Cash Flow
Statements

|                                     |  |                                      |        |       |  |        |        |             |  |       |        |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ------ | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 1999
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |        | Adjustments |  | Total
|                                     |  |                                      |        |       |  |        |        |             |  |      
|Cash flows from operating activities |  | $                                    | 5,573  |       |  | $      | 1,945  |             |  | $     | (275   | ) |  | $ | 956    |   |  | $ | 8,199  |  
|Cash flows from investing activities |  |                                      | (4,572 | )     |  |        | (1,871 | )           |  |       | 416    |   |  |   | (3,861 | ) |  |   | (9,888 | )
|Cash flows from financing activities |  |                                      | (1,293 | )     |  |        | (27    | )           |  |       | (1,752 | ) |  |   | 2,905  |   |  |   | (167   | )
|                                     |  |                                      |        |       |  |        |        |             |  |       |        |   |  |   |        |   |  |   |        |  
|Net (decrease) increase in cash      |  | $                                    | (292   | )     |  | $      | 47     |             |  | $     | (1,611 | ) |  | $ |       |   |  | $ | (1,856 | )
|                                     |  |                                      |        |       |  |        |        |             |  |       |        |   |  |   |        |   |  |   |        |  

|                                     |  |                                      |        |       |  |        |        |             |  |       |      |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ------ | ----------- |  | ----- | ---- | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 2000
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |        | Adjustments |  | Total
|                                     |  |                                      |        |       |  |        |        |             |  |      
|Cash flows from operating activities |  | $                                    | 8,024  |       |  | $      | 2,014  |             |  | $     | (317 | ) |  | $ | (1,131 | ) |  | $ | 8,590  |  
|Cash flows from investing activities |  |                                      | (5,238 | )     |  |        | (2,379 | )           |  |       | (412 | ) |  |   | (1,274 | ) |  |   | (9,303 | )
|Cash flows from financing activities |  |                                      | (2,764 | )     |  |        | 950    |             |  |       | (104 | ) |  |   | 2,405  |   |  |   | 487    |  
|                                     |  |                                      |        |       |  |        |        |             |  |       |      |   |  |   |        |   |  |   |        |  
|Net increase (decrease) in cash      |  | $                                    | 22     |       |  | $      | 585    |             |  | $     | (833 | ) |  | $ |       |   |  | $ | (226   | )
|                                     |  |                                      |        |       |  |        |        |             |  |       |      |   |  |   |        |   |  |   |        |  

|                                     |  |                                      |        |       |  |        |       |             |  |       |       |   |  |   |      |   |  |   |        |  
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ----- | ----------- |  | ----- | ----- | - |  | - | ---- | - |  | - | ------ | -
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 2001
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |       | Adjustments |  | Total
|                                     |  |                                      |        |       |  |        |       |             |  |      
|Cash flows from operating activities |  | $                                    | 6,077  |       |  | $      | 1,250 |             |  | $     | 1,422 |   |  | $ | (751 | ) |  | $ | 7,998  |  
|Cash flows from investing activities |  |                                      | (4,888 | )     |  |        | (962  | )           |  |       | (955  | ) |  |   | (234 | ) |  |   | (7,039 | )
|Cash flows from financing activities |  |                                      | (1,140 | )     |  |        | (317  | )           |  |       | (956  | ) |  |   | 985  |   |  |   | (1,428 | )
|                                     |  |                                      |        |       |  |        |       |             |  |       |       |   |  |   |      |   |  |   |        |  
|Net increase (decrease) in cash      |  | $                                    | 49     |       |  | $      | (29   | )           |  | $     | (489  | ) |  | $ |     |   |  | $ | (469   | )
|                                     |  |                                      |        |       |  |        |       |             |  |       |       |   |  |   |      |   |  |   |        |  

NOTE R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
|                       |         |         |       |         |  |         |       |        
|2000                   |         |         |       |         |  |         |       |         |  |   |       |     |  |   |       |    
|Operating Revenues     |         | $       | 6,440 |         |  | $       | 6,701 |         |  | $ | 6,850 |     |  | $ | 6,160 |    
|Operating Income       |         | $       | 1,623 |         |  | $       | 1,947 |         |  | $ | 1,937 |     |  | $ | 1,377 |    
|Net Income             |         | $       | 1,001 |         |  | $       | 1,064 |         |  | $ | 1,036 |     |  | $ | 1,119 |    
|Earnings per share(a): |         |         |       |         |  |         |       |         |  |   |       |     |  |   |       |    
|                       | Basic   |         | $     | .53     |  |         | $     | .57     |  |   | $     | .55 |  |   | $     | .60 | 
|                       | Diluted |         | $     | .53     |  |         | $     | .56     |  |   | $     | .55 |  |   | $     | .59 | 
|2001                   |         |         |       |         |  |         |       |         |  |   |       |     |  |   |       |    
|Operating Revenues     |         | $       | 5,919 |         |  | $       | 5,985 |         |  | $ | 6,013 |     |  | $ | 6,213 |    
|Operating Income       |         | $       | 1,601 |         |  | $       | 1,550 |         |  | $ | 1,697 |     |  | $ | 1,493 |    
|Net Income             |         | $       | 891   |         |  | $       | 880   |         |  | $ | 7     |     |  | $ | 792   |    
|Earnings per share(a): |         |         |       |         |  |         |       |         |  |   |       |     |  |   |       |    
|                       | Basic   |         | $     | .48     |  |         | $     | .47     |  |   | $     | .00 |  |   | $     | .42 | 
|                       | Diluted |         | $     | .47     |  |         | $     | .47     |  |   | $     | .00 |  |   | $     | .42 | 



---



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

The quarters shown were affected by the following:



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Foreign currency gains of $19 in first quarter
	2000, or $0.01 per share, losses of $32, or $0.02 per share, in
	second quarter 2000, losses of $23, or $0.01 per share, in third
	quarter 2000 and losses of $46, or $0.02 per share, in fourth
	quarter 2000.
|
| |  | First quarter 2000 also includes                                                                                                                                                                                                                               



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | $48, or $0.03 per share, in expense for our
	announced plan to reduce our domestic general and administrative
	staff, and           
|
| |  | $68, or $0.04 per share, of income related to the
	restructuring of our ownership interest in the German wireless
	operator, E-Plus.



| |   |                                  
| | - | ---------------------------------
| |  | Fourth quarter 2000 also includes



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | income of $292, or $0.15 per share, from the
	redemption of AT&T from the AB Cellular partnership;                                                                      
|
| |  | expense related to the restructuring of our
	wireless video entertainment business which decreased operating
	income by $498 and net income by $323, or $0.17 per share;
|
| |  | pension benefit settlement gains which increased
	operating income by $362 and net income by $223, or $0.12 per
	share; and                                             
|
| |  | expense related to the contract termination which
	decreased operating income by $203 and net income by $125, or
	$0.07 per share.                                      



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2001, we recorded foreign currency losses
	of $43, or $0.02 per share, in first quarter, $112, or $0.06 per
	share, in second quarter, $55,

79



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE RQUARTERLY FINANCIAL
INFORMATION
(UNAUDITED)     (Continued)




| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | or $0.03 per share, in third quarter and $20, or
	$0.01 per share, in fourth quarter.                                                                                                                                      
|
| |  | We recorded losses as a result of selling shares
	of Qwest common stock, which reduced net income by $32, or $0.02
	per share, during first quarter 2001 and $52, or $0.03 per
	share, during third quarter 2001.          
|
| |  | We recorded losses related to the writedown of
	our investments in equity securities, which reduced net income
	by $1,017, or $0.54 per share, in third quarter 2001 and $162,
	or $0.09 per share, in fourth quarter 2001.
|
| |  | First quarter 2001 also includes expense recorded
	for changes in postretirement medical benefit obligations, which
	reduced net income by $47, or $0.02 per share.                                                        
|
| |  | Second quarter 2001 also includes our adjustment
	to an accrual for reciprocal compensation, which reduced net
	income by $88, or $0.05 per share.                                                                         
|
| |  | Third quarter 2001 also includes a gain related
	to the sale of our 24.5% ownership interest in SkyCell
	Communications, which increased net income by $19, or $0.01 per
	share.                                           
|
| |  | Fourth quarter 2001 also includes losses on asset
	impairments and severance related costs, which reduced net
	income by $227, or $0.12 per share.                                                                         

NOTE SSUBSEQUENT EVENTS

SALE OF TCO SHARES

During first quarter 2002, we sold the American
Depositary Receipts representing nonvoting preferred stock that
we held in TCO. We received total proceeds of $90 and recognized
a gain of $22, or $14 after tax. Our investment in TCO, now
solely in common stock, represents 11.8% of the total capital of
TCO.

CONVERSION OF E-PLUS INTEREST TO KPN

In January 2002, we signed a definitive agreement
with Dutch telecommunications provider Royal KPN N.V. (KPN)
restructuring our relationship. Under the new agreement, we will
exchange our 22.51% stake in E-Plus for 234.7 million KPN
shares. After this exchange we will hold approximately 9.42% of
KPNs outstanding shares. As part of the transaction we
have surrendered our existing warrant on KPN shares and our
exchange rights with regard to KPN Mobile. We expect to record a
gain as a result of this transaction; the exact amount will be
determined using KPNs stock price at the time of closing.
Based on KPNs stock price at the time of the announcement,
we would record an after-tax gain of approximately $900.

Also as part of the agreement, KPN repaid $426
under a loan facility provided by BellSouth. Upon closing, KPN
will assume approximately 2.13 billion Euro in BellSouth
loans currently extended to E-Plus. We have agreed on new terms
for our loan facility, providing for a cap of 2.13 billion
Euro, the current level of BellSouths loans to E-Plus,
including accrued interest.

QWEST

Effective January 16, 2002, we entered into
a non-exclusive wholesale services agreement with Qwest. Under
the agreement, we are obligated to purchase $350 of Qwest
products and services for resale to our business customers. The
take-or-pay agreement has a four year term and replaces a prior
agreement, entered into in January 2001, pursuant to which
BellSouth was obligated to purchase over a five year period $250
of products and services in exchange for Qwest stock at
contractually fixed prices. Under the prior agreement, BellSouth
delivered approximately 1.7 million Qwest shares to Qwest
in exchange for services. The prior agreement was terminated. As
part of the new arrangement, BellSouth has received a credit of
$71 towards future purchases under the wholesale services
agreement.

Currently, BellSouth and Qwest coordinate the
marketing of certain services to targeted business customers,
with Qwest providing data networking, Internet and long distance
voice services and BellSouth providing local networking
services. After BellSouth receives regulatory relief to provide
long distance services, BellSouth expects to be a retail
provider of high-speed data networking and voice communications
services for business customers that will include products and
services under the wholesale services agreement.

ARGENTINA AND VENEZUELA

In early 2002, the Argentine government announced
economic reforms, including a devaluation of the peso. As a
result of the devaluation, our Argentine operations violated a
debt covenant on its U.S. Dollar-denominated debt. We are
currently evaluating options to resolve the

80



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE SSUBSEQUENT EVENTS
(Continued)


issue. The debt is classified as non-current in
the December 31, 2001 balance sheet as the peso and U.S.
Dollar were pegged at an exchange rate of 1 to 1 as of
November 30, 2001 (our international operations are
recorded on a one-month lag basis). The devaluation, resulting
new laws and regulations instituted, and the instability of the
government make it difficult to anticipate the long term impacts
of the economic situation in Argentina. Due to the rapidly
changing environment, we are closely monitoring the situation
and cannot anticipate the ultimate outcome.

On February 12, 2002, Venezuelas
government floated its currency, ending a five-year-old regime
that permitted the bolivar to trade only within a fixed-band
against the U.S. Dollar. As a result, devaluation occurred. It
is uncertain what the long term impacts of the devaluation will
have on our operations.

Based on the current monetary asset positions of
these operations, we expect to record a charge of $200 to $230
in the first quarter of 2002. This charge is primarily a
function of the remeasurement of U.S. Dollar-denominated
liabilities, primarily long-term debt.

81



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##### Table of Contents






CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND

FINANCIAL
DISCLOSURE


No change in accountants or disagreements on the
adoption of appropriate accounting standards or financial
disclosure has occurred during the periods included in this
report.




PART III

ITEMS 10 THROUGH 13.

Information regarding executive officers required
by Item 401 of Regulation S-K is furnished in a
separate disclosure on page 25 in Part I of this report since
the registrant did not furnish such information in its
definitive proxy statement prepared in accordance with
Schedule 14A.

The additional information required by these
items will be included in the registrants definitive proxy
statement dated March 12, 2002 as follows, and is herein
incorporated by reference pursuant to General Instruction G(3):

|     |     |             |  |                                                                 |  |  |                 | 
|---- | --- | ----------- |  | --------------------------------------------------------------- |  |  | --------------- | 
|     |     |             |  | Page(s) in                                                     
|     |     |             |  | Definitive Proxy                                               
|Item |     | Description |  | Statement                                                      
|     |     |             |  |                                                                
|     | 10. |             |  | Directors and Executive Officers of the Registrant              |  |  | 7 to 9*; 27**   | 
|     | 11. |             |  | Executive Compensation                                          |  |  | 12; 18*** to 25 | 
|     | 12. |             |  | Security Ownership of Certain Beneficial Owners
	and Management |  |  | 13              | 
|     | 13. |             |  | Certain Relationships and Related Transactions                  |  |  | 9****           | 



---



| |   |                                                         
| | - | --------------------------------------------------------
| | * | Ending at the caption Corporate Governance
	Philosophy



| |    |                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------
| | ** | Only the information under the caption
	Section 16(a) Beneficial Ownership Reporting
	Compliance



| |     |                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------
| | *** | Only the information under the caption
	Compensation Committee Interlocks and Insider
	Participation



|     |                                                                
|---- | ---------------------------------------------------------------
|**** | Only the information under the caption
	Independent Directors




PART IV




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

|                                                                                                                                                                                                                                                                                                                                              |                                                                           |                 |  |    | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------- |  | -- | 
|                                                                                                                                                                                                                                                                                                                                              |                                                                           | Page(s) in This
|                                                                                                                                                                                                                                                                                                                                              |                                                                           | Form 10-K      
|                                                                                                                                                                                                                                                                                                                                              |                                                                           |                
|a. Documents filed as a part of the report:                                                                                                                                                                                                                                                                                                   |                                                                           |                 |  |   
|(1) Financial Statements:                                                                                                                                                                                                                                                                                                                     |                                                                           |                 |  |   
|                                                                                                                                                                                                                                                                                                                                              | Report of Independent Accountants                                         |                 |  | 50 | 
|                                                                                                                                                                                                                                                                                                                                              | Report of Independent Auditors                                            |                 |  | 50 | 
|                                                                                                                                                                                                                                                                                                                                              | Consolidated Statements of Income                                         |                 |  | 51 | 
|                                                                                                                                                                                                                                                                                                                                              | Consolidated Balance Sheets                                               |                 |  | 52 | 
|                                                                                                                                                                                                                                                                                                                                              | Consolidated Statements of Cash Flows                                     |                 |  | 53 | 
|                                                                                                                                                                                                                                                                                                                                              | Consolidated Statements of Shareholders
	Equity and Comprehensive Income |                 |  | 54 | 
|                                                                                                                                                                                                                                                                                                                                              | Notes to Consolidated Financial Statements                                |                 |  | 55 | 
|(2) Financial statement schedules have been
	omitted because the required information is contained in the
	financial statements and notes thereto or because such schedules
	are not required or applicable.                                                                                                                                  |                                                                           |                 |  |   
|(3) Exhibits: Exhibits identified in
	parentheses below, on file with the SEC, are incorporated herein
	by reference as exhibits hereto. All management contracts or
	compensatory plans or arrangements required to be filed as
	exhibits to this Form 10-K Report pursuant to
	Item 14(c) are filed as Exhibits 10a through 10jj inclusive. |                                                                           |                 |  |   

82



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##### Table of Contents



|        |       |  |  |                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 3a    |  |  | Amended Articles of Incorporation of BellSouth
	Corporation adopted December 5, 2000. (Exhibit 3a to
	Form 10-K for the year ended December 31, 2000, File
	No. 1-8607.)                                                                                                                                                   
|        | 3b    |  |  | Bylaws of BellSouth Corporation adopted
	December 5, 2000. (Exhibit 3a to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)                                                                                                                                                                               
|        | 4     |  |  | BellSouth Corporation Shareholder Rights
	Agreement. (Exhibit 1 to Report on Form 8-A dated
	November 23, 1999, File No. 1-8607.)                                                                                                                                                                                          
|        | 4a    |  |  | No instrument which defines the rights of holders
	of long and intermediate term debt of BellSouth Corporation is
	filed herewith pursuant to Regulation S-K,
	Item 601(b)(4)(iii)(A). Pursuant to this regulation,
	BellSouth Corporation hereby agrees to furnish a copy of any
	such instrument to the SEC upon request.
|        | 10a   |  |  | BellSouth Corporation Officer Short Term
	Incentive Award Plan. (Exhibit 10y to Form 10-Q for
	the quarter ended September 30, 1996, File No. 1-8607.)                                                                                                                                                                     
|        | 10b   |  |  | BellSouth Corporation Executive Long Term
	Incentive Plan. (Exhibit 10e to Form 10-K for the year
	ended December 31, 1991, File No. 1-8607.)                                                                                                                                                                              
|        | 10c   |  |  | BellSouth Corporation Executive Long Term
	Disability and Survivor Protection Plan as amended and restated
	effective January 1, 1994. (Exhibit 10c-1 to
	Form 10-K for the year ended December 31, 1993, File
	No. 1-8607.)                                                                                               
|        | 10d   |  |  | BellSouth Corporation Executive Transfer Plan.
	(Exhibit 10ee to Registration Statement No. 2-87846.)                                                                                                                                                                                                                      
|        | 10e   |  |  | BellSouth Corporation Death Benefit Program.
	(Exhibit 10ff to Form 10-K for the year ended
	December 31, 1989, File No. 1-8607.)                                                                                                                                                                                          
|        | 10f   |  |  | BellSouth Corporation Plan For Non-Employee
	Directors Travel Accident Insurance. (Exhibit 10ii to
	Registration Statement No. 2-87846.)                                                                                                                                                                                  
|        | 10g   |  |  | BellSouth Corporation Executive Incentive Award
	Deferral Plan as amended and restated effective
	September 23, 1996. (Exhibit 10g to Form 10-K for
	the year ended December 31, 1996, File No. 1-8607.)                                                                                                                   
|        | 10h   |  |  | BellSouth Corporation Nonqualified Deferred
	Compensation Plan as amended and restated effective
	November 25, 1996. (Exhibit 10h to Form 10-K for
	the year ended December 31, 1996, File No. 1-8607.)                                                                                                                    
|        | 10i   |  |  | BellSouth Corporation Supplemental Executive
	Retirement Plan as amended on March 23, 1998.
	(Exhibit 10i to Form 10-Q for the quarter ended
	March 31, 1998, File No. 1-8607.)                                                                                                                                            
|        | 10j   |  |  | BellSouth Corporation Directors Retirement Plan.
	(Exhibit 10qq to Form 10-K for the year ended
	December 31, 1986, File No. 1-8607.)                                                                                                                                                                                      
|        | 10k   |  |  | BellSouth Corporation Financial Counseling Plan.
	(Exhibit 10r to Form 10-K for the year ended
	December 31, 1992, File No. 1-8607.)                                                                                                                                                                                       
|        | 10k-1 |  |  | Amendment dated November 3, 1995 to the
	BellSouth Corporation Financial Counseling Plan for Executives.
	(Exhibit 10l-1 to Form 10-K for the year ended
	December 31, 1995, File No. 1-8607.)                                                                                                                             
|        | 10l   |  |  | BellSouth Corporation Deferred Compensation Plan
	for Non-Employee Directors. (Exhibit 10gg to Registration
	Statement No. 2-87846.)                                                                                                                                                                                       
|        | 10m   |  |  | BellSouth Corporation Executive Life Insurance
	Plan as amended and restated as the BellSouth Split-Dollar Life
	Insurance Plan, effective August 31, 1998.
	(Exhibit 10m to Form 10-K for the year ended
	December 31, 1998, File No. 1-8607.)                                                                            
|        | 10n   |  |  | BellSouth Corporation Non-Employee Director Stock
	Plan. (Exhibit 10z to Form 10-Q for the quarter ended
	March 31, 1997, File No. 1-8607.)                                                                                                                                                                                
|        | 10p   |  |  | BellSouth Non-Employee Directors Charitable
	Contribution Program. (Exhibit 10z to Form 10-K for
	the year ended December 31, 1992, File No. 1-8607.)                                                                                                                                                                      
|        | 10q   |  |  | BellSouth Personal Retirement Account Pension
	Plan, as amended and restated effective January 1, 1998.
	(Exhibit 10q to Form 10-K for the year ended
	December 31, 1998, File No. 1-8607.)                                                                                                                                
|        | 10q-1 |  |  | Amendment dated December 22, 1998 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-1 to Form 10-K for the year ended
	December 31, 1998, File No. 1-8607.)                                                                                                                                        
|        | 10q-2 |  |  | Amendment dated March 22, 1999 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-2 to Form 10-Q for the quarter ended
	March 31, 1999, File No. 1-8607.)                                                                                                                                           
|        | 10q-3 |  |  | Amendment dated April 7, 1999 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-3 to Form 10-Q for the quarter ended
	March 31, 1999, File No. 1-8607.)                                                                                                                                            
|        | 10q-4 |  |  | Amendment dated May 6, 1999 to the BellSouth
	Personal Retirement Account Pension Plan. (Exhibit 10q-4 to
	Form 10-Q for the quarter ended June 30, 1999, File
	No. 1-8607.)                                                                                                                                               
|        | 10q-5 |  |  | Amendment dated May 6, 1999 to the BellSouth
	Personal Retirement Account Pension Plan. (Exhibit 10q-5 to
	Form 10-Q for the quarter ended June 30, 1999, File
	No. 1-8607.)                                                                                                                                               
|        | 10q-6 |  |  | Amendment dated May 7, 1999 to the BellSouth
	Personal Retirement Account Pension Plan. (Exhibit 10q-6 to
	Form 10-Q for the quarter ended June 30, 1999, File
	No. 1-8607.)                                                                                                                                               

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|        |        |  |  |                                                                                                                                                                                                             
|------- | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        | 
|Number  |        | 
|        |        | 
|        | 10q-7  |  |  | Amendment dated September 13, 1999 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-7 to Form 10-Q for the quarter ended
	September 30, 1999, File No. 1-8607.)                    
|        | 10q-8  |  |  | Amendment dated December 22, 1999 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-8 to Form 10-K for the year ended
	December 31, 1999, File No. 1-8607.)                         
|        | 10q-9  |  |  | Amendment dated December 15, 2000 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-9 to Form 10-K for the year ended
	December 31, 2000, File No. 1-8607.)                         
|        | 10q-10 |  |  | Amendment dated December 15, 2000 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-10 to Form 10-K for the year ended
	December 31, 2000, File No. 1-8607.)                        
|        | 10q-11 |  |  | Amendment dated December 15, 2000 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-11 to Form 10-K for the year ended
	December 31, 2000, File No. 1-8607.)                        
|        | 10q-12 |  |  | Amendment dated December 15, 2000 to the
	BellSouth Personal Retirement Account Pension Plan.
	(Exhibit 10q-12 to Form 10-Q for the quarter ended
	September 30, 2001, File No. 1-8607.)                    
|        | 10q-13 |  |  | Amendment dated December 18, 2001 to the
	BellSouth Personal Retirement Account Pension Plan.                                                                                                               
|        | 10r    |  |  | BellSouth Corporation Trust Under Executive
	Benefit Plan(s) as amended April 28, 1995.
	(Exhibit 10u-1 to Form 10-Q for the quarter ended
	June 30, 1995, File No. 1-8607.)                                
|        | 10r-1  |  |  | Amendment dated May 23, 1996 to the
	BellSouth Corporation Trust Under Executive Benefit Plan(s).
	(Exhibit 10s-1 to Form 10-Q for the quarter ended
	June 30, 1996, File No. 1-8607.)                      
|        | 10s    |  |  | BellSouth Telecommunications, Inc. Trust Under
	Executive Benefit Plan(s) as amended April 28, 1995.
	(Exhibit 10v-1 to Form 10-Q for the quarter ended
	June 30, 1995, File No. 1-8607.)                   
|        | 10s-1  |  |  | Amendment dated May 23, 1996 to the
	BellSouth Telecommunications, Inc. Trust Under Executive Benefit
	Plan(s). (Exhibit 10t-1 to Form 10-Q for the quarter
	ended June 30, 1996, File No. 1-8607.)         
|        | 10t    |  |  | BellSouth Corporation Trust Under Board of
	Directors Benefit Plan(s) as amended April 28, 1995.
	(Exhibit 10w-1 to Form 10-Q for the quarter ended
	June 30, 1995, File No. 1- 8607.)                      
|        | 10t-1  |  |  | Amendment dated May 23, 1996 to the
	BellSouth Corporation Trust Under Board Directors Benefit
	Plan(s). (Exhibit 10u-1 to Form 10-Q for the quarter
	ended June 30, 1996, File No. 1-8607.)                
|        | 10u    |  |  | BellSouth Telecommunications, Inc. Trust Under
	Board of Directors Benefit Plan(s) as amended April 28,
	1995. (Exhibit 10x-1 to Form 10-Q for the quarter
	ended June 30, 1995, File No. 1-8607.)          
|        | 10u-1  |  |  | Amendment dated May 23, 1996 to the
	BellSouth Telecommunications, Inc. Trust Under Board of
	Directors Benefit Plan(s). (Exhibit 10v-1 to Form 10-Q
	for the quarter ended June 30, 1996, File No. 1-8607.)
|        | 10v-1  |  |  | The Amended and Restated BellSouth Corporation
	Stock Plan Effective April 24, 1995 As Amended
	(Exhibit 10v-1 to Form 10-K for the year ended
	December 31, 2000, File No. 1-8607.)                        
|        | 10w    |  |  | BellSouth Retirement Savings Plan as amended and
	restated effective July 1, 2001.                                                                                                                          
|        | 10w-1  |  |  | First Amendment dated December 18, 2001 to
	the BellSouth Retirement Savings Plan.                                                                                                                          
|        | 10x    |  |  | BellSouth Corporation Officer Estate Enhancement
	Plan and Agreement. (Exhibit 10x to Form 10-K for the
	year ended December 31, 1996, File No. 1-8607.)                                                    
|        | 10y    |  |  | BellSouth Change in Control Executive Severance
	Agreements. (Exhibit 10y to Form 10-K for the year
	ended December 31, 1996, File No. 1-8607.)                                                             
|        | 10z    |  |  | BellSouth Compensation Deferral Plan as amended
	and restated effective September 28, 1998.
	(Exhibit 10z to Form 10-Q for the quarter ended
	September 30, 2001, File No. 1-8607.)                         
|        | 10aa   |  |  | BellSouth Employee Stock Investment Plan.
	(Exhibit 10aa to Form 10-Q for the quarter ended
	March 31, 1998, File No. 1-8607.)                                                                              
|        | 10aa-1 |  |  | Amendment dated November 27, 1996 to the
	BellSouth Employee Stock Investment Plan. (Exhibit 10aa-1
	to Form 10-Q for the quarter ended March 31, 1998,
	File No. 1-8607.)                                  
|        | 10aa-2 |  |  | Amendment dated March 21, 1997 to the
	BellSouth Employee Stock Investment Plan. (Exhibit 10aa-2
	to Form 10-Q for the quarter ended March 31, 1998,
	File No. 1-8607.)                                     
|        | 10aa-3 |  |  | Amendment dated May 5, 1998 to the BellSouth
	Employee Stock Investment Plan. (Exhibit 10aa-3 to
	Form 10-Q for the quarter ended March 31, 1998, File
	No. 1-8607.)                                        
|        | 10aa-4 |  |  | Amendment dated December 15, 2000 to the
	BellSouth Employee Stock Investment Plan. (Exhibit 10aa-4
	to Registration Statement No. 333-52416.)                                                              
|        | 10aa-5 |  |  | Amendment dated December 18, 2001 to the
	BellSouth Employee Stock Investment Plan.                                                                                                                         
|        | 10bb   |  |  | BellSouth Officer Motor Vehicle Policy.
	(Exhibit 10bb to Form 10-Q for the quarter ended
	March 31, 1998, File No. 1-8607.)                                                                                
|        | 10cc   |  |  | BellSouth Supplemental Life Insurance Plan, as
	amended and restated effective August 31, 1998.
	(Exhibit 10cc to Form 10-K for the year ended
	December 31, 1998, File No. 1-8607.)                        
|        | 10dd   |  |  | Agreement with Chief Executive Officer.
	(Exhibit 10dd to Form 10-K for the year ended
	December 31, 1998, File No. 1-8607.)                                                                                

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|        |        |  |  |                                                                                                                                                                                                                      
|------- | ------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        | 
|Number  |        | 
|        |        | 
|        | 10ee   |  |  | Retirement Agreement dated October 27, 1999
	for Jere A. Drummond. (Exhibit 10ee to Form 10-Q for
	the quarter ended September 30, 1999, File No. 1-8607.)                                                           
|        | 10gg   |  |  | Retention Agreement dated October 18, 2000
	for Francis A. Dramis. (Exhibit 10gg to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)                                                               
|        | 10gg-1 |  |  | BellSouth Corporation Stock Plan Restricted
	Shares Award Agreement dated October 18, 2000 for
	Francis A. Dramis (Exhibit 10gg-1 to Form 10-K
	for the year ended December 31, 2000, File No. 1-8607.)              
|        | 10gg-2 |  |  | BellSouth Corporation Stock Plan Restricted
	Shares Award Escrow Agreement dated October 18, 2000 for
	Francis A. Dramis. (Exhibit 10gg-2 to Form 10-K
	for the year ended December 31, 2000, File No. 1-8607.)      
|        | 10hh   |  |  | Retention Agreement dated October 26, 2000
	for Ronald M. Dykes. (Exhibit 10hh to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)                                                                 
|        | 10hh-1 |  |  | Retention Agreement dated November 19, 2001
	for Ronald M. Dykes.                                                                                                                                                    
|        | 10hh-2 |  |  | BellSouth Corporation Stock Plan Restricted
	Shares Award Agreement dated October 26, 2000 for
	Ronald M. Dykes (Exhibit 10hh-1 to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)                
|        | 10hh-3 |  |  | BellSouth Corporation Stock Plan Restricted
	Shares Award Escrow Agreement dated October 26, 2000 for
	Ronald M. Dykes. (Exhibit 10hh-2 to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)        
|        | 10ii   |  |  | Retention Agreement dated October 18, 2000
	for Gary D. Forsee. (Exhibit 10ii to Form 10-K for the
	year ended December 31, 2000, File No. 1-8607.)                                                                  
|        | 10ii-1 |  |  | BellSouth Corporation Stock Plan Restricted
	Shares Award Agreement dated October 18, 2000 for
	Gary D. Forsee (Exhibit 10ii-1 to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)                 
|        | 10ii-2 |  |  | BellSouth Corporation Stock Plan Restricted
	Shares Award Escrow Agreement dated October 18, 2000 for
	Gary D. Forsee. (Exhibit 10ii-2 to Form 10-K for
	the year ended December 31, 2000, File No. 1-8607.)         
|        | 10jj   |  |  | BellSouth Officer Compensation Deferral Plan
	(Exhibit 10jj to Form 10-Q for the quarter ended
	September 30, 2001, File No. 1-8607)                                                                                 
|        | 11     |  |  | Computation of Earnings Per Share.                                                                                                                                                                                   
|        | 12     |  |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                   
|        | 21     |  |  | Subsidiaries of BellSouth.                                                                                                                                                                                           
|        | 24     |  |  | Powers of Attorney.                                                                                                                                                                                                  
|        | 99a    |  |  | Annual report on Form 11-K for BellSouth
	Retirement Savings Plan for the fiscal year ended
	December 31, 2001 (to be filed under Form 11-K within
	180 days of the end of the period covered by this report).       
|        | 99b    |  |  | Annual report on Form 11-K for BellSouth
	Savings and Security ESOP Plan for the fiscal year ended
	December 31, 2001 (to be filed under Form 11-K within
	180 days of the end of the period covered by this report).

b. Reports on Form 8-K:

|                 |  |                                          
|---------------- |  | -----------------------------------------
|Date of Event    |  | Subject                                  
|                 |  |                                          
|October 22, 2001 |  | Documents related to $2.75B debt offering

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SIGNATURES

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



| |                       
| | ----------------------
| | BELLSOUTH CORPORATION 
|
| | /s/ W. PATRICK SHANNON
| |                       
| | W. Patrick Shannon    
| | Vice PresidentFinance
| | February 28, 2002     

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the date indicated.

PRINCIPAL EXECUTIVE OFFICER:

F. Duane Ackerman*


CHAIRMAN OF THE BOARD, PRESIDENT


AND CHIEF EXECUTIVE OFFICER


PRINCIPAL FINANCIAL OFFICER:

Ronald M. Dykes*


CHIEF FINANCIAL OFFICER


PRINCIPAL ACCOUNTING OFFICER:

W. Patrick Shannon*


Vice PresidentFinance


DIRECTORS:

|                       |  |                         
|---------------------- |  | ------------------------
|F. Duane Ackerman*     |  | Joseph M. Magliochetti* 
|Reuben V. Anderson*    |  | John G. Medlin, Jr.*    
|James H. Blanchard*    |  | Leo F. Mullin*          
|J. Hyatt Brown*        |  | Eugene F. Murphy*       
|Armando M. Codina*     |  | Robin B. Smith*         
|Kathleen F. Feldstein* |  | William S. Stavropoulos*
|James P. Kelly*        |  |                         

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

| |                                       
| | --------------------------------------
| |                                       
| | W. Patrick Shannon                    
| | (INDIVIDUALLY AND AS ATTORNEY-IN-FACT)
| | February 28, 2002                     

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CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by
reference of our report dated February 8, 2002 relating to
the financial statements of BellSouth Corporation, which appears
in this Form 10-K, in the following Registration Statements:

Form S-3
(File No. 333-21233),

Form S-3
(File No. 333-67084),

Form S-8
(File No. 33-38264),

Form S-8
(File No. 333-31600),

Form S-8
(File No. 333-49169),

Form S-8
(File No. 333-52416),

Form S-8
(File No. 333-75660).

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia


February 28, 2002





CONSENT OF INDEPENDENT AUDITORS

We consent to the use of our report dated
February 8, 2002 with respect to the consolidated financial
statements of Cingular Wireless LLC (not included separately
herein) in the Annual Report (Form 10-K) of BellSouth
Corporation for the year ended December 31, 2001.

/s/ Ernst & Young LLP

Atlanta, Georgia


February 27, 2002


87