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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
 (Mark One)
     /X/                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                                THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                         OR
     / /               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                                THE SECURITIES EXCHANGE ACT OF 1934
 
                         For the transition period from
                                       to
                         COMMISSION FILE NUMBER 1-8607
                            ------------------------
 
                             BELLSOUTH CORPORATION
 
<TABLE>
<S>                                      <C>
               A GEORGIA                             I.R.S. EMPLOYER
              CORPORATION                            NO. 58-1533433
            1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
                         Telephone number 404 249-2000
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                                  NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                      ON WHICH REGISTERED
---------------------------------------  ---------------------------------------
             Common Stock                      New York, Boston, Chicago,
       (par value $1 per share)                 Pacific and Philadelphia
                  and                                Stock Exchanges
    Preferred Stock Purchase Rights
 
      9 1/4% Notes due 1/15/98 of                New York Stock Exchange
 BellSouth Capital Funding Corporation
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                     None.
 
    At  February 1, 1997, 991,205,642 shares of Common Stock and Preferred Stock
Purchase Rights were outstanding.
 
    At February 1, 1997, the aggregate market value of the voting stock held  by
non-affiliates was $43,984,750,364.
 
    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. [  ]
 
    Indicate  by check  mark whether  the registrant  (1) has  filed all reports
required to be filed by  Section 13 or 15(d) of  the Securities Exchange Act  of
1934  during  the preceding  12  months (or  for  such shorter  period  that the
registrant was required to file such reports), and (2) has been subject to  such
filing requirements for the past 90 days. Yes /X/ No / /
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Portions  of  the registrant's  definitive proxy  statement dated  March 11,
1997, issued in connection  with the 1997 annual  meeting of shareholders  (Part
III).
 
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<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
  ITEM                                                                                                            PAGE
---------                                                                                                       ---------
<C>        <S>                                                                                                  <C>
                                                         PART I
 
       1.  Business...........................................................................................          1
           General............................................................................................          1
           Business Operations................................................................................          1
           Telephone Company Operations.......................................................................          2
           Other Telecommunications Business Operations.......................................................          8
           Competition........................................................................................         11
           Research and Development...........................................................................         15
           Licenses and Franchises............................................................................         16
           Employees..........................................................................................         16
       2.  Properties.........................................................................................         17
           General............................................................................................         17
           Capital Expenditures...............................................................................         17
           Environmental Matters..............................................................................         18
       3.  Legal Proceedings..................................................................................         18
       4.  Submission of Matters to a Vote of Shareholders....................................................         19
Additional Information -- Description of BellSouth Stock......................................................         19
Executive Officers............................................................................................         22
 
                                                         PART II
 
       5.  Market for Registrant's Common Equity and Related Stockholder Matters..............................         23
       6.  Selected Financial and Operating Data..............................................................         24
       7.  Management's Discussion and Analysis of Results of Operations and Financial Condition..............         25
           Results of Operations..............................................................................         25
           Volumes of Business................................................................................         27
           Operating Revenues.................................................................................         28
           Operating Expenses.................................................................................         31
           Other Income Statement Items.......................................................................         33
           Extraordinary Losses...............................................................................         33
           Financial Condition................................................................................         34
           Operating Environment and Trends of the Business...................................................         36
       8.  Consolidated Financial Statements and Supplementary Data...........................................         39
           Report of Management...............................................................................         39
           Audit Committee Chairman's Letter..................................................................         40
           Report of Independent Accountants..................................................................         40
           Consolidated Statements of Income..................................................................         41
           Consolidated Balance Sheets........................................................................         42
           Consolidated Statements of Shareholders' Equity....................................................         43
           Consolidated Statements of Cash Flows..............................................................         44
           Notes to Consolidated Financial Statements.........................................................         45
           Supplementary Data -- Domestic Cellular Proportionate Operating Data...............................         64
       9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............         65
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
  ITEM                                                                                                            PAGE
---------                                                                                                       ---------
                                                        PART III
<C>        <S>                                                                                                  <C>
 
     *10.  Directors and Executive Officers of the Registrant.................................................         65
     *11.  Executive Compensation.............................................................................         65
     *12.  Security Ownership of Certain Beneficial Owners and Management.....................................         65
     *13.  Certain Relationships and Related Transactions.....................................................         65
 
                                                         PART IV
 
      14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................         65
 
Signatures....................................................................................................         68
Consent of Independent Accountants............................................................................         69
</TABLE>
 
------------------------
 
*Included  in BellSouth Corporation's definitive proxy statement dated March 11,
 1996 and incorporated herein by reference.
<PAGE>
                                     PART I
 
ITEM 1.  BUSINESS
 
                                    GENERAL
 
    BellSouth   Corporation   (BellSouth)   is  a   holding   company  providing
telecommunications  services,  systems  and   products  primarily  through   two
wholly-owned   subsidiaries,   BellSouth  Telecommunications,   Inc.  (BellSouth
Telecommunications) and  BellSouth  Enterprises, Inc.  (BellSouth  Enterprises).
BellSouth    Telecommunications   provides   predominantly   tariffed   wireline
telecommunications services to  approximately two-thirds of  the population  and
one-half of the territory within Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi,  North Carolina,  South Carolina  and Tennessee.  BellSouth's other
businesses (predominantly wireless and international communications services and
advertising  and   publishing   products)  are   conducted   primarily   through
subsidiaries  of BellSouth  Enterprises. BellSouth  has its  principal executive
offices at 1155 Peachtree Street,  N.E., Atlanta, Georgia 30309-3610  (telephone
number 404-249-2000).
 
    BellSouth  was incorporated in 1983 under the  laws of the State of Georgia.
On December 31, 1983, pursuant to a consent decree approved by the United States
District Court for the District of Columbia (the D. C. District Court)  entitled
"Modification of Final Judgment" (the MFJ) settling antitrust litigation brought
by  the United States Department of Justice (the Justice Department) in 1974 and
the related Plan  of Reorganization, American  Telephone and Telegraph  Company,
now  AT&T Corp. (AT&T), formed seven  holding companies including BellSouth (the
Holding Companies),  and  transferred to  them  one  or more  of  the  operating
telephone  companies (the Operating Telephone Companies) that were formerly part
of the  Bell  System.  As a  result,  AT&T  transferred to  BellSouth  its  100%
ownership  of  South Central  Bell Telephone  Company  (South Central  Bell) and
Southern Bell Telephone  and Telegraph  Company (Southern Bell).  On January  1,
1984,  ownership  of  the  Holding  Companies was  transferred  by  AT&T  to its
shareholders. As a result, BellSouth became a publicly traded company. BellSouth
Telecommunications is the surviving corporation from the merger of South Central
Bell and Southern Bell, effective at midnight December 31, 1991.
 
    Under the  MFJ,  the  Operating  Telephone  Companies  could  provide  local
exchange,  exchange  access,  information  access  and  toll  telecommunications
services within their  assigned geographical territories,  termed "Local  Access
and Transport Areas" (LATAs). Although prohibited from providing service between
LATAs,  the Operating Telephone Companies provided exchange access services that
linked a subscriber's telephone or other equipment in one of their LATAs to  the
transmission facilities of carriers (the Interexchange Carriers), which provided
toll telecommunications services between different LATAs.
 
    In  February 1996, the President signed  into law the Telecommunications Act
of 1996  (the  1996 Act).  This  legislation  provides for  the  development  of
competitive  local telecommunications markets; terminates on a prospective basis
the MFJ,  enabling  the  provision  by  the  Operating  Telephone  Companies  of
interLATA   telecommunications  and   other  services;  and   repeals  the  laws
prohibiting  the  Operating  Telephone  Companies  and  their  affiliates   from
providing  video  services  within  their  service  areas.  The  ability  of the
Operating Telephone Companies to enter businesses previously proscribed to  them
by  the  MFJ  is,  however,  generally  subject  to  numerous  criteria  and the
development of and compliance with newly mandated federal regulations.
 
                              BUSINESS OPERATIONS
 
    Approximately 70%, 70%  and 72%  of BellSouth's operating  revenues for  the
years  ended December 31, 1996, 1995  and 1994, respectively, were from wireline
telecommunications  services  provided  by  BellSouth  Telecommunications.   The
remainder   was   principally  derived   from  wireless   operations,  directory
advertising and  publishing,  billing  and  collection  and  other  nonregulated
services. Revenues from services provided to AT&T, BellSouth's largest customer,
comprised  approximately  9%,  10% and  11%  of  1996, 1995  and  1994 operating
revenues, respectively.
 
                                       1
<PAGE>
                          TELEPHONE COMPANY OPERATIONS
 
    BellSouth  Telecommunications  provides,   predominantly,  local   exchange,
exchange  access and intraLATA toll services within  each of the 38 LATAs in its
combined  nine-state  wireline  operating  area.  BellSouth   Telecommunications
provided approximately 22,135,000 customer access lines at December 31, 1996, an
overall  increase of  4.7% since December  31, 1995. The  increase was primarily
attributable to  continued  economic  growth  in  BellSouth  Telecommunications'
nine-state  service  region. Growth  in second  residential lines  accounted for
approximately 28% of the overall increase  in total access lines since  December
31,  1995. (See "Management's  Discussion and Analysis  of Results of Operations
and Financial Condition -- Volumes of Business.")
 
    At December  31,  1996,  approximately  74%  of  access  lines  were  in  44
metropolitan areas, each having a population of 125,000 or more. Many localities
and  some  sizable areas  in the  states  in which  BellSouth Telecommunications
operates are served primarily by  non-affiliated telephone companies, which  had
approximately  29% of the  network access lines  in such states  on December 31,
1996. BellSouth Telecommunications  does not  furnish, on  a significant  scale,
local exchange, access or toll services in the areas served by such companies.
 
LOCAL AND INTRALATA TOLL SERVICES
 
    Charges  for local services for  each of the years  ended December 31, 1996,
1995 and  1994 accounted  for  approximately 42%,  41%  and 41%  of  BellSouth's
operating  revenues, respectively. Local services  operations provide lines from
telephone exchange  offices to  subscribers' premises  for the  origination  and
termination   of  telecommunications,  including   the  following:  basic  local
telephone service  provided  through  the regular  switched  network;  dedicated
private  line facilities  for voice and  special services, such  as transport of
data, radio and  video, and  foreign exchange services;  switching services  for
customers'   internal  communications  through  facilities  owned  by  BellSouth
Telecommunications; services  for  data  transport  that  include  managing  and
configuring  special service networks; and dedicated low or high capacity public
or private  digital  networks. Other  local  services revenue  is  derived  from
intercept  and  directory  assistance, public  telephones  and  various optional
central office features, such  as Caller ID service,  Call Waiting, Call  Return
and  3-Way  Calling. As  other  telecommunications companies  are  authorized by
regulatory agencies  to compete  in the  provision of  local service,  BellSouth
Telecommunications  will  increasingly  sell to  such  carriers  unbundled local
service elements and discounted wholesale local service for resale.
 
    BellSouth Telecommunications  offers  certain  enhanced  services,  such  as
MemoryCallSM voice messaging service, through its network. These services differ
from  basic services  in that  they employ  computer processing  applications to
alter  the  subscriber's   transmitted  information;   provide  the   subscriber
additional,   different  or  restructured  information;  or  involve  subscriber
interaction with  stored  information.  The  terms  of  many  of  these  service
offerings  are  not  regulated under  the  rules of  the  Federal Communications
Commission (FCC), but the FCC prescribes  the method by which such services  may
be  provided  (for  example,  through  structurally  separated  subsidiaries  or
arrangements providing  access to  competitive  providers). During  1996,  total
revenue from enhanced and other optional services was approximately $1 billion.
 
    BellSouth  Telecommunications provides  intraLATA toll  services within (but
not between) its 38 LATAs. Such toll services provided approximately 4%, 6%  and
7% of BellSouth's operating revenues for the years ended December 31, 1996, 1995
and  1994, respectively. These services include the following: intraLATA service
beyond the local calling area; Wide Area Telecommunications Service (WATS or 800
services) for customers with highly  concentrated demand; and special  services,
such as transport of data, radio and video. In recent years, these toll revenues
have  decreased as local calling areas have been expanded and as competition for
toll customers has intensified. This trend is expected to continue.
 
REGULATION OF LOCAL AND TOLL SERVICES
 
    BellSouth Telecommunications  is subject  to  regulation of  its  intrastate
services  by  state  authorities  in each  state  where  it  provides intrastate
telecommunications services; such regulation covers rates,
 
                                       2
<PAGE>
services,   competition    and    other   issues.    Traditionally,    BellSouth
Telecommunications'  rates were set in each state  in its service area at levels
which were  anticipated to  generate revenues  sufficient to  cover its  allowed
expenses  and to  provide an opportunity  to earn a  fair rate of  return on its
capital investment.  Such a  regulatory  structure was  satisfactory in  a  less
competitive  era;  however, as  discussed below,  the regulatory  processes have
changed  in  response   to  the   increasingly  competitive   telecommunications
environment.
 
    RATE REGULATION
 
    Under  one  form of  alternative  regulation, generally  known  as incentive
regulation, economic  incentives  are  provided  to  lower  costs  and  increase
productivity  through  the potential  availability of  "shared" earnings  over a
benchmark rate of  return. Generally,  when levels above  targeted returns  were
reached,  earnings were  "shared" by  providing refunds  or price  reductions to
customers.
 
    Another alternative form of regulation, generally known as price regulation,
establishes maximum prices  that can be  charged for certain  telecommunications
services.  While  such a  plan  limits the  amount  of increases  in  prices for
specified services,  it enhances  the  company's ability  to adjust  prices  and
service  options to more  effectively respond to  changing market conditions and
competition and provides an opportunity to more fully benefit from  productivity
enhancements.  For these  reasons, BellSouth Telecommunications  has focused its
regulatory and legislative efforts on establishing price regulation. Such  plans
have  been approved  or authorized  by the  requisite legislative  or regulatory
bodies in all  nine states in  BellSouth Telecommunications' wireline  operating
area. These plans are operational in all states except Tennessee, where judicial
appeals are pending.
 
    The  following section  contains a  brief description  of certain regulatory
proceedings in BellSouth Telecommunications' nine-state wireline territory.
 
ALABAMA
 
    From December 1988 to  September 1995, an incentive  regulation plan was  in
effect  in Alabama. In response to a  law enacted in 1995 permitting the Alabama
Public Service Commission  to authorize alternative  methods of regulation  that
are  not  based on  rate  of return  for  local exchange  carriers,  the Alabama
Commission approved a  price regulation  plan, effective  September 1995.  Under
this  plan, prices  for basic  services, including  local exchange  services for
residence and business customers, are capped for five years, after which  prices
may  be  changed  in  accordance with  an  inflation-based  formula;  prices for
non-basic services  are  capped  for  one  year,  after  which  aggregate  price
increases  are limited to  10% annually; and  intrastate switched access charges
are reduced  below interstate  switched access  rates. Additional  terms of  the
price  regulation plan require  annual price reductions  aggregating $57 million
through  1999,  excluding  intrastate  switched  access  reductions.  Reductions
related  to intrastate switched  access are estimated to  be $25 million through
1999.
 
FLORIDA
 
    From 1988  through 1992,  an  incentive regulation  plan  was in  effect  in
Florida.  In  1994,  the Florida  Public  Service Commission  extended  the plan
through 1997,  with required  price  reductions aggregating  approximately  $300
million over a three-year period.
 
    In  1995, a  law was  enacted which  allowed qualified  service providers to
elect price regulation. Under price regulation, prices for basic services (which
include flat-rate residential and single-line business local exchange  services)
are  capped for five years, after which prices may be changed in accordance with
an inflation-based  formula. Prices  for certain  non-basic services,  including
multi-line  business service, are capped for three  years at the rates in effect
in July  1995; prices  for other  non-basic services  may be  adjusted  annually
subject  to defined  limitations. The  price regulation  provisions also provide
that intrastate switched access prices will  decrease by 5% annually until  such
rates  are at  parity with  1994 interstate  switched access  rates. In November
1995, BellSouth Telecommunications filed with the Florida Commission an election
for price regulation, which became effective in January 1996. Although BellSouth
Telecommunications is currently operating under price regulation, it must comply
with the sharing provisions of the incentive plan described above through 1997.
 
                                       3
<PAGE>
GEORGIA
 
    From 1990 to  August 1995,  BellSouth Telecommunications  operated under  an
incentive  regulation plan in Georgia.  In April 1995, a  law was enacted which,
effective in July 1995, allowed BellSouth Telecommunications to elect the  price
regulation  plan  as  described  in the  legislation.  In  July  1995, BellSouth
Telecommunications filed an election with the Georgia Public Service Commission;
such election became effective in  August 1995. Basic residence and  single-line
business  rates are capped for five years,  after which prices may be changed in
accordance with an inflation-based formula. Rates for intrastate switched access
services may be no higher than the rates charged for interstate switched  access
services.
 
KENTUCKY
 
    From  1988  to July  1995, an  incentive  regulation plan  was in  effect in
Kentucky. In July 1995, the Kentucky Public Service Commission approved a  price
regulation  plan. Under the  plan, basic residential rates  are capped for three
years, after which prices may be  changed in accordance with an  inflation-based
formula.  Intrastate switched  access rates are  limited to rates  in effect for
interstate switched access.  Prices for  services deemed  competitive under  the
plan   can  be  set  by  BellSouth  Telecommunications  in  response  to  market
conditions.
 
    In September 1996, the Kentucky Commission issued an order concerning  local
competition   and   universal   service   funds.   The   order   provided   that
Commission-approved negotiated  agreements  for  interconnection  shall  be  the
primary  means for  implementing local  competition. The  universal service fund
rules established by the  Commission are preliminary and  interim until the  FCC
issues its order on this matter.
 
LOUISIANA
 
    From February 1992 to April 1996, an incentive regulation plan was in effect
in  Louisiana.  Effective April  1996, the  Louisiana Public  Service Commission
approved a price regulation plan that will remain in effect for a six-year term,
subject to review. Under the provisions of the price regulation plan, prices for
basic services,  which include  the provision  of local  exchange services,  are
capped  for five years, after which prices  may be changed in accordance with an
inflation-based formula. After five years, no individual basic service price can
be  increased  by  more  than  10%  in  any  twelve-month  period.  Prices   for
interconnection  services are capped for three  years, after which no individual
service can be increased more than 10% in any twelve-month period. For non-basic
services, price increases may not exceed 20% in any twelve-month period.
 
    In  connection  with  the  approval  of  price  regulation,  the   Louisiana
Commission  concluded its  review of  BellSouth Telecommunications'  earnings by
requiring an aggregate  $70 million price  reduction, to be  apportioned over  a
three-year period beginning April 1, 1996.
 
MISSISSIPPI
 
    From  June 1990 to January 1996, an  incentive regulation plan was in effect
in Mississippi.  In November  1995, the  Mississippi Public  Service  Commission
approved a six-year price regulation plan, effective in January 1996. Reviews of
this  plan will be conducted by the  Mississippi Commission after three and five
years. Under  the provisions  of  the plan,  prices  for basic  services,  which
include  the provision  of basic local  telephone service, are  capped for three
years, after which the basic service category rates will be reduced annually  to
effect  an annual  reduction in  revenues of 1%  or $3.75  million, whichever is
greater, for the last three years of the plan. In addition, intrastate  switched
access prices are capped at the same level as interstate prices over the life of
the plan.
 
NORTH CAROLINA
 
    Prior  to June 1996, traditional rate of  return regulation was in effect in
North Carolina. In April 1995, a law was enacted that allowed price  regulation,
and  pursuant to  approval by the  North Carolina Utilities  Commission, a price
regulation plan became  effective in  June 1996. Under  the terms  of the  plan,
prices  for residence basic local exchange  services are capped for three years,
after which time any price increases are limited by an inflation-based  formula.
For business basic local exchange, interconnection
 
                                       4
<PAGE>
and certain non-basic services, any increases in current prices are also subject
to inflation-based formulae. Prices for toll switched access services are capped
at  current prices, after giving effect to specified price reductions ordered in
conjunction with approval of the price regulation plan.
 
SOUTH CAROLINA
 
    Prior to  1996,  BellSouth Telecommunications'  rates  were regulated  on  a
traditional  rate of return  basis. In December 1994,  the South Carolina Public
Service  Commission  issued   an  order   requiring  that   prices  be   reduced
prospectively by approximately $26 million on an annual basis and with no change
in   the  previously  authorized  return  on   equity  of  13%.  Based  upon  an
investigation by the South Carolina Commission of BellSouth  Telecommunications'
1992  earnings,  refunds  of  approximately  $29  million,  plus  interest, were
ordered. The  prospective rate  reduction was  implemented, but  the refund  was
stayed  pending  judicial review  of the  decision. In  October 1996,  the South
Carolina Court of  Common Pleas entered  an order affirming  the South  Carolina
Commission's order of the refund. BellSouth Telecommunications intends to pursue
an  appeal of this decision. The  South Carolina Commission has postponed review
of BellSouth Telecommunications' earnings in 1993 and 1994 until a resolution of
the 1992 period is reached. While complete  assurance cannot be given as to  the
outcome of these matters, BellSouth believes that any financial impact would not
be material to its financial position or annual operating results or cash flows.
 
    In  January 1996, the South Carolina  Commission approved a price regulation
plan which includes provisions that basic local exchange residence and  business
service  rates  will not  increase for  five  years, after  which prices  may be
changed in  accordance  with  an inflation-based  formula.  Intrastate  switched
access rates will be capped for three years after which prices may be changed in
accordance  with an  inflation-based formula.  The rates  for non-basic services
will be set by BellSouth Telecommunications, subject only to the limitation that
the price for any  individual service may  not be increased more  than 20% in  a
twelve-month period.
 
TENNESSEE
 
    An  incentive regulation plan,  which had been in  effect since August 1990,
ended in 1995. In June 1995, a  law was enacted which allowed qualified  service
providers  to elect price regulation. BellSouth Telecommunications elected price
regulation under which the prices for basic  services are to be capped for  four
years,  after which prices may be  changed in accordance with an inflation-based
formula. Prices for services other than basic services are to be adjusted  based
on an inflation-based formula.
 
    In  order to implement  the price regulation  election, the Tennessee Public
Service Commission  required BellSouth  Telecommunications to  reduce prices  by
approximately  $56 million on an  annual basis. BellSouth Telecommunications has
appealed to the Tennessee Court of Appeals. This Court has stayed implementation
of  both  the  rate  reduction   and  price  regulation  plan  pending   further
consideration of the issues.
 
    LOCAL SERVICE COMPETITION
 
    The  1996 Act requires  the elimination of  state legislative and regulatory
barriers  to  competition   for  local  telephone   service,  subject  only   to
competitively  neutral requirements  to preserve and  advance universal service,
protect   the   public   safety   and   welfare,   maintain   the   quality   of
telecommunications  services and safeguard the rights of customers. The 1996 Act
also includes  requirements  that  incumbent  local  exchange  carriers  (ILECs)
negotiate with other carriers for interconnection, use of network elements on an
unbundled  basis and resale of local  services. If a negotiated agreement cannot
be reached,  either  party  may  seek  arbitration  with  the  state  regulatory
authority  or the  FCC if  the state fails  to act.  If rates  are disputed, the
arbitrator must set rates for access to network elements on an unbundled  basis,
based on cost, which may include a reasonable profit. ILECs are also required to
negotiate  to provide their retail services  at wholesale rates for the purposes
of resale by competing carriers. If agreement cannot be reached, the  arbitrator
shall  set  the wholesale  rates at  the ILEC's  retail rates  less costs  to be
 
                                       5
<PAGE>
avoided. BellSouth Telecommunications  has executed over  40 interconnection  or
resale  agreements with such  carriers and is  currently involved in arbitration
proceedings with a number of other carriers, including AT&T, MCI  Communications
Corporation (MCI) and Sprint Corporation (Sprint).
 
    In connection with the requirements of the 1996 Act, in August 1996, the FCC
released  an order adopting rules governing interconnection and open competition
in  the  local  telephone  service  industry  (the  Order).  Among  the   issues
specifically  addressed by  the Order are  the network elements  that ILECs must
make available; pricing standards to be followed by states in setting rates  for
interconnection,  access to  network elements on  an unbundled  basis and resold
services. BellSouth and several other ILECs joined in an appeal of the Order  to
the  United States  Court of  Appeals for the  Eighth Circuit  (the Court). Upon
request of several state  commissions and ILECs, the  Court stayed the Order  in
part,  pending appeal.  Such stay relates  to pricing  prescriptions and certain
other terms. The Court heard oral arguments  in January 1997, and a decision  is
pending.  Notwithstanding  these  developments,  however,  as  discussed  above,
BellSouth  Telecommunications  and   a  number  of   carriers  have   negotiated
interconnection  agreements and state regulatory  commissions are arbitrating or
have approved  various  terms of  interconnection  between BellSouth  and  other
carriers.  These terms  may be  revised, depending  on, among  other things, the
outcome of the appeal  of the Order. The  arbitration results for the  wholesale
discount rates vary by state from approximately 15% to 21%.
 
    In  attempting to comply with the technical requirements of interconnection,
BellSouth expects to incur significant costs associated with the development  or
modification of systems necessary to make interconnection possible. For example,
BellSouth  Telecommunications will be  required to provide  for long-term number
portability whereby customers switching to competing local carriers will be able
to retain their telephone numbers without interruption or charge. It is  unclear
as to what degree BellSouth will be able to recover these costs.
 
REGULATION OF ACCESS SERVICES
 
    BellSouth  Telecommunications  provides  access services  by  connecting the
equipment and facilities of its subscribers with the communications networks  of
Interexchange Carriers. These connections are provided by linking these carriers
and   subscribers   through   the   public   switched   network   of   BellSouth
Telecommunications or  through dedicated  private lines  furnished by  BellSouth
Telecommunications.  Rates and other  aspects of interstate  access services are
regulated by the FCC,  and state regulatory  commissions have jurisdiction  over
the  provision of  access to the  Interexchange Carriers  to complete intrastate
telecommunications.
 
    Access charges,  which  are  payable  both  by  Interexchange  Carriers  and
subscribers,  provided approximately 23%,  23% and 24%  of BellSouth's operating
revenues for the  years ended December  31, 1996, 1995  and 1994,  respectively.
These  charges are  designed to  recover the costs  of the  common and dedicated
facilities and switching  equipment used  to connect  networks of  Interexchange
Carriers with the telephone company's local network and to subsidize the cost of
providing  local service  to rural  and other  high-cost areas.  In addition, an
interstate subscriber line access charge of $3.50 per line per month applies  to
single-line business and residential customers. The interstate subscriber access
charge for multi-line business customers varies by state but cannot exceed $6.00
per   line  per   month.  The   state  commissions   have  authorized  BellSouth
Telecommunications to collect  from the Interexchange  Carriers and, in  several
states, from customers charges for providing intrastate access services.
 
    The  FCC regulates the level of access charges through a price cap plan. The
price cap plan limits aggregate price changes to the rate of inflation minus  an
ILEC-selected   productivity  offset,  plus  or  minus  exogenous  cost  changes
recognized by the FCC. Two of the productivity options in the current plan, 4.0%
and 4.7%, provide defined earnings limitations with a sharing mechanism. A third
option in  the  plan,  5.3%,  removes  both  earnings  limitations  and  sharing
requirements.    Consistent   with    a   pricing    strategy   that   BellSouth
Telecommunications  considered  compatible  with  an  increasingly   competitive
business  environment, it selected  a 5.3% productivity  factor, which, together
with other adjustments, has
 
                                       6
<PAGE>
decreased interstate access revenues below  what would have been produced  under
the  other alternatives by approximately $220 million on an annual basis at 1994
access volume  levels. The  FCC has  under consideration  the issue  of  whether
further modification of this plan is warranted.
 
    The 1996 Act requires the FCC to identify the local service subsidy provided
by  access charges; to provide for the removal of such subsidy from access rates
in order  that  access  charges  reflect underlying  costs;  to  arrange  for  a
universal  service fund to ensure the  continuation of universal service; and to
develop the arrangements for payments into that fund by all carriers. The FCC is
currently engaged  in this  proceeding. In  addition, the  FCC has  commenced  a
proceeding to revise its access charge rules.
 
INTERLATA TOLL SERVICE
 
    As  a result of the 1996 Act,  BellSouth and the other Holding Companies are
freed from the judicial restrictions of  the MFJ that constrained the  provision
of  interLATA communications  throughout their wireline  service territories and
elsewhere; the  1996  Act establishes  in  its place  a  new restriction  and  a
procedure  for its removal. These companies or their affiliates may apply to the
FCC on a state-by-state  basis to offer  in-region interLATA wireline  services,
and the FCC must act on such application within 90 days. The FCC must grant such
application  if  it determines  that  the applicant  (a)  has met  a competitive
checklist; (b)  has  shown  (i)  the presence  of  a  facilities-based  provider
offering  both residential  and business  services or (ii)  if there  is no such
provider, a statement  that has  been approved or  permitted to  take effect  by
state  regulatory authorities, of the  terms under which it  would be willing to
interconnect with a  competitive local  carrier; (c)  will operate  consistently
with  the separate subsidiary requirement; and  (d) has presented an application
consistent with the public interest. The  FCC is required to consult with  state
regulatory   authorities  and   the  Justice   Department  when   reviewing  the
application.
 
    BellSouth plans to begin offering interLATA wireline service in each of  its
in-region  states as soon  as the FCC  approves its application  for each state.
BellSouth has  filed  documents  with  the  Georgia  Public  Service  Commission
requesting  that  the  Georgia  Commission  approve  a  statement  of  generally
available terms and conditions as provided for in the 1996 Act and to  establish
that such terms and conditions meet the competitive checklist referred to above.
BellSouth  will file an  application for each  state as soon  as it believes the
conditions described  above are  met.  Because of  the proceedings  required  to
obtain  approval and the  potential challenges of competitors  and others, it is
uncertain when BellSouth will be authorized to commence interLATA service in any
of its in-region states. The 1996 Act requires that in-region interLATA  service
be provided through a subsidiary separate from BellSouth Telecommunications.
                            ------------------------
 
    In addition to the above matters, BellSouth Telecommunications is a party or
is  subject to numerous proceedings pending  before federal and state regulatory
and judicial  bodies.  These matters  involve,  among other  things,  terms  and
conditions  of services provided by  BellSouth Telecommunications, rates charged
for such  services, access  reform, universal  service, number  portability  and
relationships  with competitive  service providers and  affiliates. No assurance
can be given as to the outcome of any such matters.
 
PUBLIC TELEPHONES
 
    In September 1996, the FCC issued an order which requires ILECs to  reassign
their  payphone  assets from  regulated telephone  company accounts  to separate
unregulated accounts or to transfer assets  to a separate subsidiary. They  must
also  remove any  subsidy of payphone  operations from their  regulated rates no
later than April 15, 1997 and meet certain other requirements. In return,  ILECs
that   own  payphone  units  are  given  the  freedom  to  pursue  new  business
opportunities. BellSouth Telecommunications is currently taking action to comply
with these requirements.
 
                                       7
<PAGE>
    Consequently, on  April  1,  1997,  BellSouth  Telecommunications  plans  to
transfer  its  payphone  assets  to  a  separate  subsidiary,  BellSouth  Public
Communications, Inc. (BPC). BPC  has filed for  certification as an  independent
payphone  provider in each of the nine states where BellSouth Telecommunications
provides wireline telephone service. It plans to continue to provide independent
payphone services throughout  BellSouth Telecommunications'  territory and  will
selectively  provide payphone services in  areas served by independent telephone
companies.
 
BILLING AND COLLECTION SERVICES
 
    BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long  distance services of AT&T and  several
other  Interexchange Carriers. The agreement with  AT&T extends through the year
2000, subject to the right of AT&T to assume billing and collection for  certain
of  its services prior  to the expiration  of the agreement.  Revenues from such
services have been decreasing and this trend is expected to continue as AT&T and
other carriers  assume more  direct billing  for their  own services.  BellSouth
Enterprises  also provides  limited billing  and collection  services in foreign
countries.
 
OPERATOR SERVICES
 
    Directory assistance and local  and toll operator  services are provided  by
BellSouth  Telecommunications  in  its  service  areas.  Toll  operator services
include alternate  billing arrangements,  such as  collect calls,  third  number
billing,   person-to-person  and  calling   card  calls;  dialing  instructions;
pre-billed credit; and  rate information. In  addition, directory assistance  is
provided for some other carriers which do not directly provide such services for
their own customers.
 
                  OTHER TELECOMMUNICATIONS BUSINESS OPERATIONS
 
DIRECTORY ADVERTISING AND PUBLISHING
 
    BellSouth  Enterprises owns  a group of  companies which  publish, print and
sell advertising in, and perform  related services concerning, alphabetical  and
classified  telephone directories. Directory advertising and publishing revenues
represented approximately 9% of BellSouth's total operating revenues for each of
the last  three  years. Two  of  BellSouth's directory  companies  also  provide
publishing  and  related products  and services  to other  directory publishers.
During 1996, such  BellSouth companies published  approximately 500  directories
for   BellSouth  Telecommunications   and  contracted   with  approximately  170
nonaffiliated companies to sell advertising space in approximately 490 of  their
publications.
 
WIRELESS COMMUNICATIONS
 
    BellSouth  Enterprises provides wireless communications services, which have
consisted mainly of cellular  telephone and, through  1995, paging services.  In
January  1996, BellSouth  sold its interest  in its  paging subsidiary. Revenues
from wireless  communications  comprised  approximately  15%,  14%  and  12%  of
BellSouth's total operating revenues for the years ended December 31, 1996, 1995
and  1994, respectively. In addition, BellSouth Enterprises has a noncontrolling
financial interest in  a number of  wireless businesses whose  revenues are  not
reflected in operating revenues because of the method of
accounting required for such investments.
 
    Under  the  MFJ,  the  Holding  Companies  generally  were  prohibited  from
providing  interLATA   wireless  communications.   The  1996   Act  lifts   this
prohibition,  and  in  February  1996, BellSouth  began  offering  the interLATA
component of  its  wireless  communications in  conjunction  with  its  wireless
offerings.  Approximately  1.5  million customers  subscribe  to  such interLATA
service. In areas  where it does  not have long  distance telephone  facilities,
BellSouth connects with the networks of the Interexchange Carriers.
 
    The  1996  Act allows  BellSouth to  market  wireless services  jointly with
wireline local exchange services;  previously, separate marketing was  required.
This  change  has  enabled  BellSouth  to  more  efficiently  offer  and provide
integrated telecommunications. In March 1996, BellSouth began joint marketing of
wireless and wireline services in selected markets.
 
                                       8
<PAGE>
    DOMESTIC CELLULAR OPERATIONS
 
    The predominant part of the  wireless communications business operations  is
cellular  telephone service. Cellular radio  telephone systems provide customers
with high-quality  and readily  available two-way  communications services  that
interconnect with the wireline and other cellular telephone networks.
 
    The   domestic  cellular   telephone  business  has   become  a  significant
contributor to BellSouth's operations, primarily due to the continued  expansion
of the customer base for mobile communications services. BellSouth maintains and
operates   cellular  systems  through  wholly-owned  subsidiaries  and  business
arrangements with other  entities. Cellular  service and  related equipment  are
marketed  to consumers, directly and through authorized agents and to businesses
that resell the service.
 
    The rates charged by cellular carriers are not regulated by the FCC nor  the
states  in  which BellSouth's  cellular operations  are  located. Pursuant  to a
federal statute  enacted  into law  in  1993, state  governments  are  generally
preempted from regulating the rates charged by cellular carriers.
 
    At  December 31, 1996, businesses in  which BellSouth had an equity interest
provided cellular  service  to  a  total  of  approximately  4,880,000  domestic
customers in 17 states. BellSouth's proportionate share of such total customers,
based   on  its   percentage  ownership   interests  of   such  businesses,  was
approximately 3,612,000 customers. (See  "Consolidated Financial Statements  and
Supplementary   Data  --  Domestic   Cellular  Proportionate  Operating  Data.")
BellSouth's proportionate interest in the aggregate population (POPs) served  by
its  domestic cellular systems was  approximately 40,696,000 persons at December
31, 1996, and its penetration rate  was approximately 9%. Within its  nine-state
wireline service territory, BellSouth and its partners offer cellular service in
cities  including Atlanta,  Miami, New Orleans,  Memphis, Louisville, Birmingham
and Orlando, while  outside its  wireline service territory  it offers  cellular
service  in cities  including Los  Angeles, Houston,  Indianapolis, Honolulu and
Richmond, Virginia.
 
    In February 1997, BellSouth signed a definitive agreement with United States
Cellular Corporation to exchange cellular properties. BellSouth would trade  its
ownership  interests in cellular properties in Wisconsin and Illinois for new or
increased equity  ownership of  cellular properties  located in  or adjacent  to
BellSouth's  nine-state wireline service  territory. The exchange  is subject to
regulatory approval.
 
    PERSONAL COMMUNICATIONS SERVICE
 
    In 1995, the  FCC began  auctioning available radio  spectrum for  providing
digital   mobile  communications  service,  commonly  referred  to  as  personal
communications service,  or PCS.  Because PCS  service is  digital, it  provides
greater  security and clarity than existing analog cellular systems. BellSouth's
PCS system has  been constructed utilizing  a technology standard  known as  GSM
(Global  Systems for Mobile communications). GSM is widely used by international
systems.  Some   domestic   PCS  systems   utilize   different,   non-compatible
technologies.  As a result,  cellular services currently  offer greater seamless
roaming characteristics across systems than  PCS. However, as more PCS  networks
are  deployed across the  United States utilizing GSM  technology, and as analog
cellular systems are augmented with digital capability, PCS systems will be able
to offer roaming capabilities comparable to existing cellular services.
 
    BellSouth owns interests in two PCS licenses, one that covers most of  North
Carolina  and  South  Carolina  and another  that  covers  eastern  Tennessee. A
BellSouth consortium  is building  and operating  the network  in the  Carolinas
while  BellSouth  alone  is  building  and  operating  the  network  in  eastern
Tennessee. BellSouth's proportionate POPs covered by these licensed  territories
is 7,600,000. The systems became operational in the summer of 1996.
 
    In  January 1997, BellSouth won  an additional 39 licenses  in 37 markets in
the FCC's  D- and  E-block  auctions. These  markets  cover 11,800,000  POPs  in
smaller areas within or adjacent to BellSouth's wireline service territory.
 
                                       9
<PAGE>
    INTERNATIONAL WIRELESS OPERATIONS
 
    Outside  the United States, BellSouth owns  interests in consortia that hold
licenses for, and are building  and/or operating, wireless telephone systems  in
Argentina,  Australia,  Denmark, Germany,  India,  Israel, New  Zealand, Panama,
Peru, Uruguay and Venezuela. Through a wholly-owned subsidiary, BellSouth  holds
a  license for a wireless telephone system in Chile. At December 31, 1996, these
systems provided cellular or PCS service  to a total of approximately  3,603,000
international  customers.  BellSouth's  proportionate share  of  such customers,
based on its percentage ownership  interests in such systems, was  approximately
1,244,000  customers. BellSouth's  proportionate interest in  the aggregate POPs
covered by  its  international  wireless systems  was  approximately  57,641,000
persons  at December  31, 1996, and  its penetration rate  was approximately 2%.
BellSouth offers  wireless  service  under regional  licenses  to  areas  within
Argentina,  India, Peru,  Uruguay and  Chile and  offers wireless  service under
nationwide licenses in Australia, Denmark, Germany, Israel, New Zealand,  Panama
and  Venezuela.  Service  in  Australia  is  also  currently  being  provided by
reselling service  obtained  from  the  government-owned  carrier.  (See  "Other
International Operations.")
 
    MOBILE DATA
 
    BellSouth, through its subsidiary BellSouth Mobile Data (BSMD), is an equity
investor  in five wireless data communications networks worldwide utilizing L.M.
Ericsson's Mobitex technology.  The countries in  which BSMD currently  provides
service  consist  of the  United States,  the  United Kingdom,  The Netherlands,
Belgium and Singapore. These networks enable wireless data applications such  as
computer-aided dispatch, electronic mail, transaction processing and remote data
entry  and retrieval. They  are also well-suited for  fixed applications such as
credit card validation and telemetry.
 
OTHER INTERNATIONAL OPERATIONS
 
    BellSouth holds a 24.5% interest in Optus Communications Pty. Ltd.  (Optus),
which  is building and operating  Australia's second telecommunications network.
In  addition  to  its  wireline  and  wireless  networks,  Optus  operates  four
satellites  which  were purchased  from  AUSSAT, Australia's  national satellite
communications carrier.  Optus offers  a range  of telecommunications  services,
including national and international long-distance, digital and analog cellular,
switched network, enhanced wireline and satellite-based services.
 
    In  July 1994,  Optus formed a  business (Optus Vision)  with Australian and
United States  companies  to  develop  a  high  capacity  broadband  network  in
Australia.  Optus and U S West, Inc. (U  S West) each own 46.5% of Optus Vision.
Two television stations now hold 2% and 5%, respectively, and have the option to
increase their respective ownership  interests to 15%  and 20%. Local  telephone
service,  which  is  marketed under  the  Optus  brand name,  was  only recently
launched.
 
    BellSouth  holds  a   concession  to  operate   a  competing  domestic   and
international  long distance  business in Chile.  In addition,  in January 1997,
BellSouth purchased an  interest in  a company  that offers  wired and  wireless
cable television and paging services in Peru.
 
DOMESTIC BROADBAND SERVICES
 
    The  1996  Act  eliminates  previous  prohibitions  on  telephone companies'
providing cable television services in their service territories, although  many
federal  courts had  already held  such prohibitions  unconstitutional. Although
ILECs may  not  acquire  or  joint venture  with  established  cable  television
providers  in  their wireline  territories,  they may  provide  cable television
service over their own facilities.
 
    BellSouth has constructed  several networks, and  provided cable  television
service   to  a   limited  degree,   in  several   areas  within   its  wireline
telecommunications service areas  to assess  the extent  to which  it wishes  to
enter  this business. It  has obtained and is  negotiating to acquire franchises
and licenses in several metropolitan  areas, including New Orleans, Atlanta  and
Miami,  that would enable it  to provide video services  over wired and wireless
networks.
 
                                       10
<PAGE>
INTERNET ACCESS
 
    In 1996,  BellSouth Telecommunications  began providing  Internet access,  a
customized  version  of  Netscape Navigator-TM-,  electronic  mail,  an optional
site-blocking feature,  and a  gateway  to local  and national  information  and
electronic Yellow Pages.
 
SELLING AND MAINTAINING EQUIPMENT
 
    To  a  limited  extent,  BellSouth  sells  and  maintains telecommunications
equipment in  the nine  Southeastern states  where BellSouth  Telecommunications
provides  wireline  telephone service.  The  Holding Companies,  AT&T  and other
substantial enterprises compete in the provision of these services and products.
In May 1996, BellSouth Telecommunications sold its interest in DataServ Computer
Maintenance Inc., a wholly-owned subsidiary that performed computer maintenance.
 
                                  COMPETITION
 
GENERAL
 
    BellSouth is subject to increasing competition in all areas of its business.
Regulatory, legislative and judicial actions and technological developments have
expanded the  types  of  available  services and  products  and  the  number  of
companies  that may  offer them.  Increasingly, this  competition is  from large
companies which have substantial capital, technological and marketing resources.
 
NETWORK AND RELATED SERVICES
 
    LOCAL SERVICE
 
    Over  the   past  several   years,   a  number   of  states   in   BellSouth
Telecommunications'  wireline  territory have  passed legislation  providing for
local service competition. Even if a state has not passed legislation, the  1996
Act  requires elimination  of barriers to  local service  competition. The state
public service commissions have  granted or are in  the process of  considering,
applications  filed  by  a number  of  carriers  for authority  to  compete with
BellSouth Telecommunications. Many of these commissions have also determined the
bases, including  prices,  on  which the  ILECs  must  furnish  interconnection,
wholesale  local  service  and  unbundled local  service  elements  to competing
carriers. BellSouth expects that it will experience greater competition for  its
business  customers,  which  provide  a higher  concentration  of  higher margin
revenues than do its residential customers.
 
    An increasing number  of voice  and data  communications networks  utilizing
fiber  optic lines  have been  and are  being constructed  by telecommunications
providers in metropolitan  areas, including Atlanta,  Georgia, Charlotte,  North
Carolina  and Jacksonville, Miami and Orlando, Florida, and these networks offer
certain high volume users  a competitive alternative to  the public and  private
line  offerings of the ILECs. In addition, the networks of some cable television
systems will be capable of carrying  two-way interactive data messages and  will
be  configured to provide voice  communications. Furthermore, wireless services,
such as cellular, PCS  and paging services,  increasingly compete with  wireline
communications services.
 
    AT&T's  domestic  cellular communications  business  serves customers  in 10
cities in  BellSouth's  local  wireline  territory and  seven  cities  in  which
BellSouth   provides  cellular   communications.  This  allows   AT&T  to  carry
telecommunications traffic  that  otherwise could  have  been carried  over  the
public switched and private line networks of BellSouth Telecommunications.
 
    As technological and regulatory developments make it more feasible for cable
television  to carry data and voice  communications, it is increasingly probable
that BellSouth Telecommunications will face  competition within its region  from
cable  television  ventures. Alliances  are being  formed between  other Holding
Companies and large corporations that  operate cable television systems in  many
localities  throughout the  United States --  for example, U  S West/Time Warner
Communications and  NYNEX Corporation  (NYNEX)/Viacom, Inc.  U S  West and  Time
Warner  have announced  plans to  upgrade certain of  their cable  TV systems to
full-service networks which would support new interactive and telephone services
that would compete  with the ILECs.  Time Warner and  U S West  have made  major
cable system
 
                                       11
<PAGE>
acquisitions  that  are  expected  to provide  voice  and  video  competition in
BellSouth Telecommunications' service areas. U S West has acquired Atlanta's two
largest cable operators and, in November 1996, acquired Continental Cablevision,
Inc., a  provider  with a  major  presence in  Florida.  In addition,  the  1996
acquisition  by  Time Warner  of Turner  Broadcasting Corporation  will increase
concentration in the cable and programming industries.
 
    Joint ventures and mergers  between major telecommunications companies  will
result   in  large,  well-capitalized  carriers  that  will  provide  formidable
competition to BellSouth across  a number of markets,  including local and  long
distance  telephone service. Such  transactions include the  proposed mergers of
SBC Communications Inc. and  Pacific Telesis Group and  NYNEX and Bell  Atlantic
Corporation   (Bell   Atlantic)  and   the   proposed  acquisition   by  British
Telecommunications plc of MCI.
 
    Competition for local  service revenues could  adversely affect  BellSouth's
results  of  operations. However,  the existence  of competitive  local service,
among other things, can allow BellSouth to qualify to offer in-region  interLATA
service,   as  contemplated  in  the   1996  Act.  (See  "BellSouth  Competitive
Strategy.")
 
    ACCESS SERVICE
 
    The FCC has adopted rules requiring ILECs to offer expanded  interconnection
for   interstate  special  and  switched   transport.  As  a  result,  BellSouth
Telecommunications is required to permit  competitive carriers and customers  to
terminate their transmission lines on BellSouth's facilities through collocation
arrangements.  The effects of  the rules are to  increase competition for access
transport.
 
    TOLL SERVICE
 
    A  number  of  firms  compete  with  BellSouth  Telecommunications  in   its
nine-state  region  for  intraLATA  toll  business  by  reselling  toll services
obtained at  bulk rates  from BellSouth  Telecommunications or,  subject to  the
approval  of  the applicable  state  public utility  commission,  providing toll
services over  their own  facilities.  Commissions in  the states  in  BellSouth
Telecommunications'   operating  territory  have  allowed  the  latter  type  of
intraLATA toll  calling,  whereby  the Interexchange  Carriers  are  assigned  a
multiple  digit access code (10XXX) which  customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislature or
commissions in  three  states  have authorized  competing  carriers  to  provide
intraLATA  toll  presubscribed calling  with a  single  digit access  code (1+),
giving them dialing parity  with the ILEC in  that area. Commissions in  several
other  states  are  considering  how  and  when  such  authorization  should  be
implemented.  However,  the  1996  Act   prohibits  states  from  ordering   the
implementation  of new toll dialing parity until  the earlier of (a) three years
from the enactment of the 1996 Act  or (b) such time as the Operating  Telephone
Company has qualified to provide in-region interLATA services.
 
    The  1996 Act permits the other Holding Companies to offer BellSouth's local
service customers interLATA  toll service. BellSouth  expects Holding  Companies
and other carriers to compete for such interLATA toll service. For example, Bell
Atlantic  has begun offering interLATA toll service to BellSouth's local service
customers and other Holding Companies may  do likewise. AT&T, MCI, Sprint and  a
number  of other carriers  currently provide toll  services to BellSouth's local
service customers.
 
DIRECTORY ADVERTISING AND PUBLISHING
 
    In  BellSouth's  advertising  and   publishing  business,  competition   for
advertising  revenues has expanded. Many different media compete for advertising
revenues, and  some  newspaper  organizations and  other  companies  have  begun
publishing  their  own  directories.  Competition  for  directory  sales  agency
contracts for the sale of advertising in publications of nonaffiliated companies
also continues to be strong. Directory listings are now offered in various media
besides paper books, including  CD ROM, the Internet  and other electronic  data
bases  through telephone  company and  third party  networks. As  such offerings
expand and are enhanced through interactivity and other features, BellSouth will
experience heightened competition  in its directory  advertising and  publishing
businesses. BellSouth has
 
                                       12
<PAGE>
responded  to the increased competition and its changing market environment with
new directory  products,  product enhancements,  multi-media  delivery  options,
pricing   changes,   competitive   advertising,   local   promotions,  directory
redeliveries and extended distributions.
 
WIRELESS COMMUNICATIONS
 
    The  FCC's  PCS  licensing  process  allows  multiple  new  competitors  for
BellSouth's  businesses.  Licenses  to provide  PCS  services have  been  won in
auction by AT&T, Holding Company consortia and other large and  well-capitalized
entities.  PCS  will  provide  competition  to  BellSouth's  local  wireline and
wireless  telephone  businesses.  Several   competitive  PCS  systems  are   now
operational.
 
    The  FCC  has  jurisdiction  over the  licensing  of  cellular  mobile radio
services in domestic  markets. The FCC  limits entry for  providers of  cellular
mobile  telecommunications  to  two  licensees  for  each  defined  metropolitan
statistical area (MSA)  and each rural  service area (RSA)  within the  country.
Each  MSA and RSA in  which BellSouth participates in  the provision of cellular
mobile communications  has  a  competing  service  provider.  In  many  markets,
competing  cellular service is  provided by businesses owned  or controlled by a
Holding Company, AT&T or a major  telephone company. In addition, Bell  Atlantic
and  NYNEX have combined  their cellular businesses,  and U S  West and AirTouch
Communications have announced that they plan to merge their cellular businesses.
Those four companies have  also formed a  joint venture to  provide PCS in  many
domestic markets.
 
    BellSouth's  international wireless joint ventures  are generally subject to
competition from at  least one  other wireless service  provider, and  sometimes
more than one other provider. For example, in Germany there are two competitors.
These competing service providers are generally supported by partners who are at
least  as  well-capitalized as  BellSouth and  its partners.  In some  cases the
competing provider is owned by the state-owned telephone company, which may have
access to the financial resources of the government.
 
    BellSouth's wireless data businesses experience competition from private and
public wireless data  networks, specialized mobile  radio networks and  cellular
networks.  The  degree and  type of  competition vary  from country  to country.
BellSouth's wireless data companies all utilize the Mobitex technology which  is
flexible for targeting both specialized and general market segments.
 
    BellSouth's   primary  mobile  data  competitor  is  ARDIS,  a  wholly-owned
subsidiary of Motorola, Inc. The ARDIS network,  which was started in 1983 as  a
private  network for  IBM, has historically  had greater  coverage, an advantage
which BellSouth considers  has been neutralized.  Future competition could  come
from  companies offering Cellular  Digital Packet Data  (CDPD), a cellular-based
system  specifically  designed  for  packet  data  applications  and   PCS-based
services.  There  are  many network  and  product development  issues  that CDPD
operators must still address before they can offer a fully competitive service.
 
    Other competitive  threats to  each of  BellSouth's overseas  wireless  data
holdings  are GSM operators, which may  offer an integrated packet data standard
around the turn of the century. In Singapore, BellSouth's wireless data property
competes  against  operators  of   technologies  related  to  Motorola's   ARDIS
technology.
 
    The  FCC  has approved  construction  of enhanced  specialized  mobile radio
(ESMR)  systems  in  many  cities  around  the  country.  These  digital  mobile
communications  systems are expected to provide service very similar to cellular
telephone service. There has  been a consolidation of  the licenses required  to
provide  ESMR service, so that  control of this business  is concentrated in the
hands of a few
potential operators, giving them the  ability to offer services like  nationwide
roaming  once the systems  are built. ESMR became  available commercially in Los
Angeles during second quarter of  1994 in competition with BellSouth's  cellular
telephone partnership.
 
BELLSOUTH COMPETITIVE STRATEGY
 
    BellSouth  has  developed three  main  strategies that  govern  its business
decisions in the  increasingly competitive  telecommunications industry.  First,
BellSouth will strengthen its leadership position
 
                                       13
<PAGE>
throughout  its nine-state wireline territory by  (a) enhancing and building its
brand strength and distribution  channels; (b) providing full-service  offerings
including  wireline  and  wireless,  local  and  long-distance,  and  video  and
electronic commerce services; and (c) controlling costs. Second, BellSouth  will
continue  to grow  profitably its  domestic wireless  business by  (a) deploying
value-added products and services and competitive technology; (b)  strengthening
and  expanding distribution  channels including  joint marketing  with BellSouth
Telecommunications;  and  (c)  expanding  in-region  wireless  coverage  through
successfully  bidding for PCS licenses  and other acquisitions. Third, BellSouth
will continue to  grow and develop  its Latin American  and other  international
operations.
 
    MARKETING
 
    A  substantial  portion  of  the  growth  in  BellSouth  Telecommunications'
revenues from local  services is  derived from  the sale  of second  residential
lines  and optional calling services. These  offerings are marketed in a variety
of packages with varying pricing features that are designed to appeal to a  wide
variety  of the Company's customer base. A substantial number of these sales are
made by customer service representatives who are  on call 24 hours a day,  seven
days a week, as they are contacted by subscribers on other matters.
 
    Many  of BellSouth's other  services and products, such  as cellular and PCS
services and including the long  distance component of these wireless  services,
Internet  service and video services,  are sold by BellSouth Telecommunications'
service representatives. The marketing of many of these services is enhanced  by
alliances  with other  service providers  and suppliers.  For instance, Netscape
Communications Corporation  provides BellSouth's  Internet  users with  its  Web
browser,  and persons who visit  the Netscape Web site  are offered a convenient
way to sign up  for BellSouth's Internet  service. Additional arrangements  with
Yahoo!  Inc  and Wired  Ventures  Limited further  enhance  BellSouth's Internet
service marketing strategy.
 
    In  addition   to  utilizing   BellSouth  Telecommunications'   distribution
channels,  BellSouth's  wireless offerings  are  sold through  approximately 275
company-owned stores, 300 kiosks located in retail stores and shopping  centers,
and  non-affiliated retail outlets such as  Radio Shack and Circuit City stores.
In addition, BellSouth's  services are made  available through BellSouth's  home
page  on the worldwide web, through  a telemarketing organization which contacts
over 1 million potential customers each  month and through a direct sales  force
of  nearly  4,000 persons.  BellSouth's  PCS service  in  the Carolinas  is also
marketed through  BellSouth's  partners in  that  system, including  Duke  Power
Company,  when its service representatives receive inquiries and other calls for
electric service.  BellSouth was  the  first operational  PCS provider  in  this
market,  giving it  a marketing  advantage over  other rivals  who purchased PCS
licenses covering the same territory. BellSouth's PCS service offers a number of
packages of  optional features  with pricing  enhancements intended  to  attract
cellular customers from the incumbent wireless carriers in that territory.
 
    BellSouth  Telecommunications'  business services  are marketed  by customer
service representatives through varied pricing and service options.  BellSouth's
products   and  services,   such  as   video  conferencing,   ISDN  service  and
telecommunications equipment and systems, are also demonstrated and sold through
marketing arrangements with other retailers  of office products, such as  Office
Depot.  BellSouth Telecommunications markets its  services and products to large
and complex  business customers  through  highly specialized  applications  and,
where  appropriate, through  pricing enhancements varying  according to business
volumes and  length of  service. In  addition to  telephone lines,  product  and
service  offerings to these customers include Internet access, special networks,
high-speed data  transmission, business  teleconferencing and  industry-specific
communications configurations.
 
    Advertising  and  publishing  products  are  marketed  to  organizations and
companies with unique  directory needs. Export  directories, a home  improvement
guide,  a  health  and  medical  guide,  consumer  tips  and  a  restaurant  and
entertainment guide  are  examples of  such  directories. Directories  are  also
marketed to non-affiliated telephone companies.
 
                                       14
<PAGE>
    While  BellSouth Telecommunications continues to use the names South Central
Bell and Southern Bell for various purposes, its services were unified under the
BellSouth brand  name in  October 1995  to give  BellSouth Telecommunications  a
clear, consistent identity in the marketplace. BellSouth believes that its brand
name  is widely recognized and  held in high esteem  by its customers. A primary
marketing strategy is  to enhance the  recognition and reputation  of this  mark
throughout  its  service  territory, thereby  facilitating  the  joint marketing
efforts described  above. Accordingly,  significant increases  in marketing  and
advertising  costs have been  and will be incurred.  BellSouth advertises in the
various media in its territory and in connection with major events, such as  the
Olympics,  the Super  Bowl and its  sponsored PGA golf  tournaments, which offer
BellSouth a broader platform to showcase its products and services.
 
    With a few exceptions, BellSouth's  international services are not  marketed
under  its brand  name, in  part because  the name  recognition is  less than in
domestic  markets.  Nevertheless,  the  appeal  of  the  wireless  offerings  is
significant   because  the  wireline  service  in  many  international  markets,
especially in Latin America, is less reliable or available.
 
    REGULATORY AND LEGISLATIVE CHANGES
 
    BellSouth's primary regulatory focus has been directed toward modifying  the
regulatory  process to  one that  is more  closely aligned  with changing market
conditions and overall public policy objectives. As an alternative to regulation
of intrastate earnings, BellSouth has sought price regulation, whereby prices of
basic service are regulated and the  pricing of other products and services  are
based  on market factors.  While price regulation  plans do not  provide for the
direct recovery through basic service  rates of cost increases or  extraordinary
expenses,  they generally provide  more flexibility to  meet competitive pricing
levels. BellSouth  Telecommunications has  price  regulation plans  approved  or
authorized  in all states in its wireline territory, although the implementation
of the Tennessee plan has been stayed by a court pending resolution of a  number
of issues.
 
    NEW SERVICES
 
    Notwithstanding  the inevitable  loss of  local service  customers and other
risks associated with increased competition, BellSouth will have the opportunity
to benefit from entry  into new business markets.  For example, the presence  of
competition,  among  other  things,  can allow  BellSouth  to  qualify  to offer
interLATA wireline service under provisions contained in the 1996 Act. BellSouth
believes that in order to remain competitive in the future, it must aggressively
pursue a corporate strategy  of expanding its  offerings beyond its  traditional
businesses  and markets. These offerings include interLATA services, information
services and video and electronic commerce services. BellSouth has entered  some
of  these  businesses  through  investments  in,  strategic  alliances  with and
acquisitions of  established  companies  in  such  industries  and  through  the
development  of some of these services and capabilities internally. For example,
among other  initiatives, BellSouth  has acquired  several cable  TV rights,  is
conducting  a  trial  of cable  TV  service  and is  providing  Internet access.
BellSouth also intends to continue to pursue certain foreign  telecommunications
licenses as they are offered.
 
    WORK FORCE REDUCTION
 
    In  1995, BellSouth  Telecommunications completed  the restructuring  of its
telephone   operations   that   was   announced   in   1993.   Also,   BellSouth
Telecommunications  announced  in  1995  a  plan to  reduce  its  work  force by
approximately 11,300 additional employees by the  end of 1997. For a  discussion
of  the work force  reduction, see "MD&A  -- Results of  Operations -- Operating
Expenses -- Work Force Reduction Charge."
 
                            RESEARCH AND DEVELOPMENT
 
    The majority of BellSouth's research  and development activity is  conducted
at  Bell Communications Research, Inc. (Bellcore), one-seventh of which is owned
by BellSouth, through BellSouth Telecommunications, with the remainder owned  by
the  other  Holding Companies.  Bellcore provides  research and  development and
other services  for  its  owners  and  is  the  central  point  of  contact  for
coordinating  the Federal government's  telecommunications requirements relating
to national security and emergency preparedness.
 
                                       15
<PAGE>
    In  November 1996, Science Applications  International Corporation agreed to
purchase Bellcore. BellSouth has contracted with Bellcore for ongoing support of
engineering and systems. In addition, the Holding Companies formed the  National
Telecommunications Alliance to support their commitment to national security and
emergency preparedness.
 
                            LICENSES AND FRANCHISES
 
    BellSouth  Telecommunications' local exchange business is typically provided
under certificates of public convenience and necessity granted pursuant to state
statutes and public interest findings of the various public utility  commissions
of  the  states  in  which  BellSouth  Telecommunications  does  business. These
certificates provide  for a  franchise of  indefinite duration,  subject to  the
maintenance of satisfactory service at reasonable rates.
 
    The  domestic cellular, PCS, wireless cable and mobile data systems in which
BellSouth has an  interest are  operated under licenses  granted by  the FCC.  A
carrier  holding a  license to  provide cellular service  in a  territory is not
eligible for a PCS  license covering the same  territory. Prior approval of  the
FCC  is required for the assignment of a license or the transfer of control of a
license. The licenses are generally issued for up to 10-year periods. At the end
of the license period, a renewal  application must be filed. BellSouth  believes
renewal  will generally  be granted on  a routine basis  upon showing compliance
with FCC  regulations and  continuing service  to the  public. Licenses  may  be
revoked and license renewal applications may be denied for cause. With regard to
cellular  licenses, the  FCC has  established the  procedures and  standards for
conducting comparative renewal  proceedings, including the  award of a  "renewal
expectancy"   that  effectively  eliminates  the   need  to  consider  competing
applicants when the incumbent meets specified criteria.
 
    The wired  cable  systems  over  which  BellSouth  provides  domestic  cable
services   are  operated  under   cable  franchises  granted   by  the  city  or
unincorporated county  government  with  local  franchising  authority  for  the
geographic service area in question. These cable franchises are generally issued
for 10 to 15 year periods. They typically require the payment of cable franchise
fees  to the local franchising  authority, capped by federal  law at 5% of gross
cable related revenues, and  various forms of  financial and facilities  support
for a limited number of government, education and public access channels.
 
    International systems also operate under licenses granted by the governments
in the countries where such systems are located. The foreign licenses are issued
for  varied terms and are generally renewable  at the end of the initial license
period. As  is  the case  with  BellSouth's domestic  wireless  properties,  the
foreign  licenses may be revoked and  license renewal applications may be denied
for cause.
 
    BellSouth believes  that  it  owns  or has  licenses  to  use  all  patents,
copyrights,  trademarks  and other  intellectual  property necessary  for  it to
conduct its present business operations. It is not anticipated that any of  such
property  will be  subject to  expiration or  non-renewal of  rights which would
materially and adversely affect BellSouth or its subsidiaries.
 
                                   EMPLOYEES
 
    At December 31, 1996, 1995 and 1994 BellSouth and its subsidiaries  employed
approximately  81,200, 87,600 and 92,100 persons, respectively. Of these amounts
at these dates, approximately 62,400, 68,600, and 73,800 persons were  telephone
employees of BellSouth Telecommunications. About 63% of BellSouth's employees at
December 31, 1996 were represented by the Communications Workers of America (the
CWA),  which is affiliated with the AFL-CIO. In October 1995, members of the CWA
ratified new three-year contracts with BellSouth. These contracts were effective
in August 1995. The contracts include basic wage increases of 10.9% (compounded)
over three years. In addition, the  agreement provided a cash payment of  $1,100
to  each eligible  employee upon ratification  and further  provides payments of
$1,100 per eligible employee in cash or $1,210 in BellSouth stock, at the option
of the employee, on the 1996 and 1997 contract anniversary dates. Other terms of
the agreement include discontinuance of annual wage adjustments based on cost of
living increases and discontinuance of annual incentive payments.
 
                                       16
<PAGE>
    During 1995, BellSouth Telecommunications completed the 1993 plan to  reduce
its  work force by  approximately 10,200 employees.  Also during 1995, BellSouth
Telecommunications announced  a  plan  to  further  reduce  its  work  force  by
approximately  11,300 employees  by the  end of  1997. Including  a reduction of
approximately  800  employees   which  occured  in   December  1995,   BellSouth
Telecommunications  has reduced its work  force by approximately 7,000 employees
under the  1995  plan  through December  31,  1996.  (See "MD&A  --  Results  of
Operations -- Operating Expenses -- Work Force Reduction Charge.")
 
ITEM 2.  PROPERTIES
 
                                    GENERAL
 
    BellSouth's  properties do not  lend themselves to  description by character
and location of principal units.  BellSouth's investment in property, plant  and
equipment,  91% of which  is held by  BellSouth Telecommunications, consisted of
the following at December 31:
 
<TABLE>
<CAPTION>
                                                                   1996   1995
                                                                   ----   ----
<S>                                                                <C>    <C>
Outside plant....................................................   42%    43%
Central office equipment.........................................   35     34
Operating and other equipment....................................    8      8
Land and buildings...............................................    8      7
Furniture and fixtures...........................................    6      6
Plant under construction.........................................    1      2
                                                                   ----   ----
                                                                   100%   100%
                                                                   ----   ----
                                                                   ----   ----
</TABLE>
 
    Outside plant consists of connecting  lines (aerial, underground and  buried
cable)  not on customers' premises, the majority of which are on or under public
roads, highways or streets, while the remainder is on or under private property.
BellSouth currently  self-insures  all of  its  outside plant  against  casualty
losses.  Central office  equipment substantially consists  of digital electronic
switching  equipment  and   circuit  equipment.  Land   and  buildings   consist
principally  of  central  offices.  Operating and  other  equipment  consists of
wireless network equipment,  embedded intrasystem wiring  (substantially all  of
which  is on  the premises  of customers),  motor vehicles  and other equipment.
Central  office  equipment,  buildings,  furniture  and  fixtures  and   certain
operating  and other  equipment are insured  under a  blanket property insurance
program. This  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 and
administrative offices are located in buildings  and on land owned by  BellSouth
Telecommunications. Many garages, business offices and telephone service centers
are in leased quarters.
 
    BellSouth   Telecommunications'  customers  are  now  served  by  electronic
switching  systems.   The   BellSouth  Telecommunications   network   has   been
transitioned  from an analog  to a digital  network, which provides capabilities
for BellSouth  Telecommunications  to  furnish advanced  data  transmission  and
information  management services.  BellSouth has  substantially completed adding
digital technology to certain cellular systems which were operating with  analog
technology at or near capacity.
 
                              CAPITAL EXPENDITURES
 
    Capital  expenditures  consist of  gross  additions to  property,  plant and
equipment having  an  estimated service  life  of one  year  or more,  plus  the
incidental costs of preparing the asset for its intended use.
 
    The  total investment  in property, plant  and equipment  has increased from
$37,155 million at January 1, 1992 to $50,059 million at December 31, 1996,  not
including  deductions  of  accumulated  depreciation.  Significant  additions to
property,  plant   and  equipment   will  be   required  to   meet  the   demand
 
                                       17
<PAGE>
for  telecommunications  services  and  to further  modernize  and  improve such
services to  meet  competitive demands.  Population  and economic  expansion  is
projected  by BellSouth  in certain  growth centers  within its  nine-state area
during the next five to  ten years. Expansion of the  network will be needed  to
accommodate such projected growth.
 
    BellSouth's capital expenditures for 1992 through 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                              MILLIONS
                                                              --------
<S>                                                           <C>
1996........................................................   $ 4,455
1995........................................................     4,203
1994........................................................     3,600
1993........................................................     3,486
1992........................................................     3,189
</TABLE>
 
    BellSouth  projects capital  expenditures of  approximately $4.7  billion to
$5.2  billion   for   1997,   consisting   of   $3.4   billion   for   BellSouth
Telecommunications'  and $1.3 billion to  $1.8 billion primarily for BellSouth's
wireless and international businesses. A majority of the expenditures will be to
expand, enhance  and  modernize  its  current  wireline  and  domestic  cellular
operating  systems, to develop  international wireless and  other businesses and
for property additions  to complete construction  of PCS systems  in the  United
States.
 
    In  1996, BellSouth  generated substantially  all of  its funds  for capital
expenditures internally. In 1997, such  capital expenditures are expected to  be
financed  primarily  through  internally  generated  funds  and,  to  the extent
necessary, from external sources.
 
                             ENVIRONMENTAL MATTERS
 
    BellSouth is subject to a number of environmental matters as a result of its
operations and the shared liability  provisions related to the divestiture  from
AT&T. As a result, BellSouth expects that it will be required to expend funds to
remedy  certain facilities, including those  Superfund sites for which BellSouth
has been named as a potentially responsible party, for the remediation of  sites
with   underground  fuel  storage  tanks  and  other  expenses  associated  with
environmental compliance. At December  31, 1996, BellSouth's recorded  liability
related primarily to remediation of these sites was approximately $35 million.
 
    BellSouth  monitors its  operations with respect  to potential environmental
issues,  including  changes  in  legally  mandated  standards  and   remediation
technologies.  BellSouth's  recorded  liability reflects  those  specific issues
where remediation activities are currently deemed  to be probable and where  the
cost   of  remediation  is  estimable.   BellSouth  continues  to  believe  that
expenditures in connection  with additional remedial  actions under the  current
environmental  protection laws or  related matters would not  be material to its
financial position or annual operating results or cash flows.
 
ITEM 3.  LEGAL PROCEEDINGS
 
    BellSouth and its subsidiaries are subject to claims arising in the ordinary
course of business involving allegations of personal injury, breach of contract,
anti-competitive conduct, employment  law issues, regulatory  matters and  other
actions. While complete assurance cannot be given as to the outcome of any legal
claims,  BellSouth believes that  any financial impact would  not be material to
its financial position or annual operating results or cash flows. See Note O  to
the Consolidated Financial Statements.
 
                                       18
<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
 
    No  matter was submitted to a vote  of shareholders in the fourth quarter of
the fiscal year ended December 31, 1996.
                            ------------------------
 
ADDITIONAL INFORMATION
 
                         DESCRIPTION OF BELLSOUTH STOCK
 
GENERAL
 
    The Articles  of  Incorporation  of  BellSouth  authorize  the  issuance  of
2,200,000,000 shares of common stock, par value $1 per share (the Common Stock),
and  100,000,000 shares of  cumulative, first preferred stock,  par value $1 per
share (the  Preferred Stock).  BellSouth's  Board of  Directors (the  Board)  is
authorized  to provide  for the  issuance, from time  to time,  of the Preferred
Stock in series  and, as to  each series, to  fix the number  of shares in  such
series  and  the  voting,  dividend,  redemption,  liquidation,  retirement  and
conversion provisions applicable  to the  shares of  such series.  No shares  of
Preferred  Stock are outstanding. The Board has created Series A First Preferred
Stock consisting  of  30 million  shares  (the  Series A  Preferred  Stock)  for
possible  issuance under  BellSouth's Shareholder  Rights Plan.  (See "Preferred
Stock Purchase Rights" and  "Market for Registrant's  Common Equity and  Related
Stockholder Matters.")
 
DIVIDEND RIGHTS
 
    The  holders of  Common Stock  are entitled  to receive,  from funds legally
available for the payment thereof, dividends when and as declared by  resolution
of  the Board. While any series of  Preferred Stock is outstanding, no dividends
(other than dividends payable solely in Common Stock) may be declared or paid on
Common Stock,  and no  Common  Stock may  be  purchased, redeemed  or  otherwise
acquired  for value, (a) unless dividends on all outstanding shares of Preferred
Stock for the current and all past  dividend periods have been paid or  declared
and  provision made  for payment  thereof and  (b) unless  all requirements with
respect to any purchase, retirement or  sinking fund or funds applicable to  all
outstanding  series of  Preferred Stock  have been  satisfied. Dividends  on the
Preferred Stock would be cumulative.
 
VOTING RIGHTS
 
    Except in  connection  with the  "business  combinations" and  "fair  price"
provisions  discussed below, holders  of shares of Common  Stock are entitled to
one vote, in person or  by proxy, for each share  held on the applicable  record
date  with  respect  to  each  matter  submitted  to  a  vote  at  a  meeting of
shareholders, but such holders do not have cumulative voting rights. The holders
of any series of Preferred Stock, when issued, may receive the right to vote  as
a  class on certain amendments  to the Articles of  Incorporation and on certain
other matters,  including the  election of  directors in  the event  of  certain
defaults, which may include non-payment of Preferred Stock dividends.
 
LIQUIDATION RIGHTS
 
    In  the event of voluntary or  involuntary liquidation of BellSouth, holders
of the Common Stock will be entitled to receive, after creditors have been  paid
and  the holders of the Preferred Stock, if any, have received their liquidation
preferences and accumulated and  unpaid dividends, all  the remaining assets  of
BellSouth.
 
PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS; REDEMPTION
 
    No  shareholders of any class shall be entitled to any pre-emptive rights to
subscribe for or purchase  any shares or other  securities issued by  BellSouth.
The Common Stock has no conversion rights and is not subject to redemption.
 
PREFERRED STOCK PURCHASE RIGHTS
 
    The  Board has  declared a  dividend of  one preferred  stock purchase right
(Right) for each  share of  Common Stock from  time to  time outstanding.  Under
certain circumstances, each Right will entitle the
 
                                       19
<PAGE>
holder  to purchase one  one-hundredth of a  share of Series  A Preferred Stock,
$1.00 par value (Common Equivalent Preferred Stock), which unit is substantially
equivalent in voting and dividend rights to one whole share of the Common Stock,
at a price of $87.50  per whole share (the Purchase  Price). The Rights are  not
presently  exercisable and may be  exercised only if a  person or group acquires
10% of the outstanding voting stock  of BellSouth without the prior approval  of
the  Board (Acquiring Person) or announces a tender or exchange offer that would
result in ownership of 25% or more of the Common Stock.
 
    If an Acquiring Person becomes such without prior Board approval, the Rights
are adjusted, and  each holder, other  than the Acquiring  Person, then has  the
right  to receive,  on payment of  the Purchase  Price, the number  of shares of
Common Stock, units  of the Common  Equivalent Preferred Stock  or other  assets
having a market value equal to twice the Purchase Price.
 
    The Rights currently trade with the Common Stock and expire in 1999.
 
BUSINESS COMBINATIONS
 
    The  Georgia legislature has enacted legislation which generally prohibits a
corporation which has  adopted a by-law  electing to be  covered thereby  (which
BellSouth has done) from engaging in any "business combination" (i.e., a merger,
consolidation  or  other specified  corporate  transaction) with  an "interested
shareholder" (i.e., a 10% shareholder or  an affiliate of the corporation  which
was  a 10% shareholder at any time within  the preceding two years) for a period
of five  years from  the date  such person  becomes an  interested  shareholder,
unless   the  interested  shareholder  (a)   prior  to  becoming  an  interested
shareholder, obtained the  approval of  the Board  of Directors  for either  the
business  combination  or  the  transaction which  resulted  in  the shareholder
becoming an interested shareholder, (b) becomes the owner of at least 90% of the
outstanding voting stock of the corporation in the same transaction in which the
interested shareholder became an interested shareholder, excluding for  purposes
of  determining the number of shares outstanding those shares owned by officers,
directors, subsidiaries and certain employee  stock plans of the corporation  or
(c) subsequent to the acquisition of 10% or more of the outstanding voting stock
of  the corporation,  acquires additional  shares resulting  in ownership  of at
least 90%  of  the outstanding  voting  stock  of the  corporation  and  obtains
approval  of the business combination by the holders of a majority of the shares
of voting  stock  of  the  corporation,  other than  those  shares  held  by  an
interested  shareholder, officers, directors,  subsidiaries and certain employee
stock plans of the corporation.  BellSouth's "business combinations" by-law  may
be  repealed  only  by  an  affirmative vote  of  two-thirds  of  the continuing
directors and a majority of the votes  entitled to be cast by the  shareholders,
other  than interested shareholders, and shall  not be effective until 18 months
after such  shareholder  vote. The  Georgia  statute provides  that  a  domestic
corporation which has thus repealed such a by-law may not thereafter readopt the
by-law as provided therein.
 
FAIR PRICE PROVISIONS
 
    "Fair  price" provisions contained in the Articles of Incorporation require,
generally, in connection with a merger or similar transaction between  BellSouth
and  an "interested shareholder" (a 10% shareholder or an affiliate of BellSouth
which was a 10%  shareholder at any  time within the  preceding two years),  the
unanimous  approval of BellSouth's directors  not affiliated with the interested
shareholder or  the affirmative  vote  of two-thirds  of  such directors  and  a
majority  of the outstanding  shares held by  disinterested shareholders, unless
(a) within  the  past  three  years  the  shareholder  has  been  an  interested
shareholder  and has not increased its shareholdings by more than one percent in
any  12-month  period  or  (b)  all  shareholders  receive  at  least  the  same
consideration  for their shares  as the interested  shareholder previously paid.
Additionally, these  provisions  may  be  revised or  rescinded  only  upon  the
affirmative  vote of at least two-thirds of the directors not affiliated with an
interested shareholder  and  a  majority  of  the  outstanding  shares  held  by
disinterested shareholders.
 
BOARD CLASSIFICATION
 
    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
 
                                       20
<PAGE>
directors from office, with or without cause, amend the By-laws with respect  to
the number of directors or amend the board classification provisions only by the
affirmative  vote  of the  holders of  at  least 75%  of the  outstanding shares
entitled to vote for the election of directors.
 
REMOVAL OF DIRECTORS
 
    BellSouth's Articles  of  Incorporation  provide that  the  shareholders  of
BellSouth  may remove a director, with or without cause, by the affirmative vote
of the holders  of at  least 75%  of the  voting power  of all  shares of  stock
entitled  to vote generally in  the election of directors,  voting together as a
single class.
 
LIMITATION ON SHAREHOLDERS' PROCEEDINGS
 
    BellSouth's  By-laws  require   60  days  advance   notice  of   shareholder
nominations  for  directors and  of other  matters to  be brought  before annual
shareholders' meetings. Such By-laws also  provide that a special  shareholders'
meeting  may not be  called by fewer  than two-thirds of  the outstanding shares
entitled to vote at the meeting.
 
                            ------------------------
 
    The provisions  discussed  under  the six  preceding  sub-headings  and  the
ability to issue Preferred Stock, such as the Series A Preferred Stock described
above,  with characteristics established by the Board and without the consent of
the holders of Common Stock and the ability to issue additional shares of Common
Stock may have the  effect of discouraging takeover  attempts and may also  have
the  effect of  maintaining the position  of incumbent  management. In addition,
these provisions may have a significant effect on the ability of shareholders of
BellSouth to benefit from certain kinds  of transactions that may be opposed  by
the incumbent Board.
 
                                       21
<PAGE>
                               EXECUTIVE OFFICERS
 
    The executive officers of BellSouth Corporation are listed below:
 
<TABLE>
<CAPTION>
                                                                                                        THIS
                                                                                              OFFICER  OFFICE
          NAME             AGE                             OFFICE                              SINCE   SINCE
-------------------------  ---  ------------------------------------------------------------  -------  ------
<S>                        <C>  <C>                                                           <C>      <C>
F. Duane Ackerman*          54  President and Chief Executive Officer                            1983    1996
Walter H. Alford            58  Executive Vice President and General Counsel                     1983    1988
C. Sidney Boren             53  Senior Vice President -- Corporate Planning and Development      1984    1996
Keith O. Cowan              40  Vice President -- Corporate Development                          1996    1996
Mark E. Droege              43  Vice President -- Financial Management and Treasurer             1996    1996
Ronald M. Dykes             50  Executive Vice President and Chief Financial Officer             1988    1995
H. C. Henry, Jr.            53  Executive Vice President -- Corporate Relations                  1984    1993
David J. Markey             56  Vice President -- Governmental Affairs                           1986    1993
Charles C. Miller, III      44  President -- International                                       1990    1995
W. Patrick Shannon          34  Vice President and Controller                                    1997    1997
Arlen G. Yokley             59  Senior Vice President, Executive Staff Officer and Corporate     1984    1996
                                 Secretary
</TABLE>
 
    The  following  officers of  the  companies indicated  may  be deemed  to be
executive officers of BellSouth Corporation:
 
<TABLE>
<S>                        <C>  <C>                                                           <C>      <C>
Jere A. Drummond            57  President and Chief Executive Officer -- BellSouth               1982    1995
                                 Telecommunications, Inc.
Earle Mauldin               56  President and Chief Executive Officer -- BellSouth               1987    1995
                                 Enterprises, Inc.
</TABLE>
 
    All of the executive officers of  BellSouth, other than Mr. Shannon and  Mr.
Cowan,  have for  at least  the past  five years  held high  level management or
executive positions  with  BellSouth  or  its  subsidiaries.  Prior  to  joining
BellSouth in 1997, Mr. Shannon was employed by U S West, Inc. as Chief Financial
Officer  of MediaOne, a company that provides cable TV services. Mr. Cowan was a
partner at the law firm of Alston & Bird before joining BellSouth in 1996.
 
    All officers serve until their successors have been elected and qualified.
------------------------
* John L. Clendenin retired as President and Chief Executive Officer at the  end
  of 1996, and was succeeded by Mr. Ackerman. Mr. Clendenin will remain Chairman
  of  the Board of  Directors through 1997  but, since his  retirement, he is no
  longer deemed to be an officer of BellSouth.
 
                                       22
<PAGE>
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
    The principal market for trading in  BellSouth common stock is the New  York
Stock  Exchange,  Inc. (NYSE).  BellSouth  common stock  is  also listed  on the
Boston, Chicago, Pacific and Philadelphia exchanges in the United States and the
London,  Frankfurt.  Amsterdam  and  Swiss  exchanges.  The  ticker  symbol  for
BellSouth common stock is BLS. At February 1, 1997, there were 1,084,146 holders
of  record of BellSouth common stock.  The market price and dividend information
listed below has  been adjusted  for the  two-for-one stock  split effective  in
November  1995. Market  price data were  obtained from the  NYSE Composite Tape,
which encompasses trading on the principal United States stock exchanges as well
as off-board trading. High and low prices represent the highest and lowest sales
prices for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                                     MARKET PRICES      PER SHARE
                                                                                   ------------------   DIVIDENDS
                                                                                    HIGH        LOW      DECLARED
                                                                                   -------    -------   ----------
<S>                                                                                <C>        <C>       <C>
1996
First Quarter...................................................................   $45 7/8    $36       $     .36
Second Quarter..................................................................    42 3/8     35 1/4         .36
Third Quarter...................................................................    43 3/8     35 1/4         .36
Fourth Quarter..................................................................    44         36 1/4         .36
 
1995
First Quarter...................................................................   $30 3/8    $26 7/8   $     .345
Second Quarter..................................................................    32 1/4     29 1/8         .345
Third Quarter...................................................................    36 7/8     31             .36
Fourth Quarter..................................................................    43 7/8     36 3/8         .36
 
1994
First Quarter...................................................................   $30 3/4    $26 1/2   $     .345
Second Quarter..................................................................    31 3/4     27 3/4         .345
Third Quarter...................................................................    31 3/4     27 3/8         .345
Fourth Quarter..................................................................    28 1/8     25 1/4         .345
</TABLE>
 
STOCK TRANSFER AGENT AND REGISTRAR
 
    ChaseMellon Shareholder Services, L.L.C. is BellSouth's stock transfer agent
and registrar.
 
                                       23
<PAGE>
ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                      1996        1995       1994       1993       1992
                                                    ---------   --------   --------   --------   --------
<S>                                                 <C>         <C>        <C>        <C>        <C>
Operating Revenues................................  $19,040     $17,886    $16,845    $15,880    $15,202
Operating Expenses (1)............................   14,261      14,594     12,787     13,593     12,041
                                                    ---------   --------   --------   --------   --------
Operating Income..................................    4,779       3,292      4,058      2,287      3,161
Interest Expense..................................      721         724        666        689        746
Gain on Sale of Paging Business (2)...............      442       --         --         --         --
Other Income, net.................................      108          20         11          8        178
                                                    ---------   --------   --------   --------   --------
Income Before Income Taxes, Extraordinary Losses
 and Accounting Change............................    4,608       2,588      3,403      1,606      2,593
Provision for Income Taxes........................    1,745       1,024      1,243        572        934
                                                    ---------   --------   --------   --------   --------
Income Before Extraordinary Losses and Accounting
 Change...........................................    2,863       1,564      2,160      1,034      1,659
Extraordinary Losses, net of tax (3)..............    --         (2,796)     --           (87)       (41)
Accounting Change, net of tax.....................    --          --         --           (67)     --
                                                    ---------   --------   --------   --------   --------
  Net Income (Loss)...............................  $ 2,863     $(1,232)   $ 2,160    $   880    $ 1,618
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
Earnings (Loss) Per Share:
  Income Before Extraordinary Losses and
   Accounting Change..............................  $  2.88     $  1.57    $  2.18    $  1.04    $  1.69
  Extraordinary Losses, net of tax (3)............    --          (2.81)     --          (.09)      (.04)
  Accounting Change, net of tax...................    --          --         --          (.06)     --
                                                    ---------   --------   --------   --------   --------
  Net Income (Loss)...............................  $  2.88     $ (1.24)   $  2.18    $   .89    $  1.65
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
Dividends Declared Per Common Share...............  $  1.44     $  1.41    $  1.38    $  1.38    $  1.38
Book Value Per Share..............................  $ 13.37     $ 11.90    $ 14.48    $ 13.60    $ 13.97
Return to Average Common Equity...................     22.4%       (9.2%)     15.4%       6.3%      11.9%
Weighted Average Common Shares Outstanding........      994         993        992        991        981
Return on Average Total Capital...................     15.0%       (2.7%)     11.5%       6.1%       9.8%
Total Assets......................................  $32,568     $31,880    $34,397    $32,873    $31,463
Capital Expenditures..............................  $ 4,455     $ 4,203    $ 3,600    $ 3,486    $ 3,189
Long-Term Debt....................................  $ 8,116     $ 7,924    $ 7,435    $ 7,381    $ 7,360
Debt Ratio at End of Period (4)...................     43.5%       46.7%      39.3%      40.2%      39.0%
Ratio of Earnings to Fixed Charges................     6.55        4.24       5.34       2.98       4.00
Total Employees...................................   81,241      87,571     92,121     95,084     97,112
Telephone Employees (5)...........................   62,425      68,585     73,764     77,958     79,453
Telephone Employees per 10,000 Access Lines.......     28.2        32.5       36.5       40.3       42.6
Business Volumes: (6)
  Network Access Lines in Service (thousands).....   22,135      21,133     20,220     19,333     18,650
  Access Minutes of Use (millions):
    Interstate....................................   67,690      62,411     57,778     53,345     50,546
    Intrastate....................................   21,171      19,197     16,888     15,261     13,994
  Toll Messages (millions)........................    1,023       1,374      1,559      1,511      1,462
  Cellular Customers (thousands): (7)
    Domestic......................................    3,612       2,847      2,156      1,559      1,118
    International.................................    1,244         655        361        192         78
                                                    ---------   --------   --------   --------   --------
      Total Cellular Customers....................    4,856       3,502      2,517      1,751      1,196
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
</TABLE>
 
------------------------------
 
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
    which reduced net income by $663.  See Note J to the Consolidated  Financial
    Statements.  Operating Expenses for 1993  include a charge for restructuring
    of $1,136, which reduced net income by $697.
 
(2) Represents the pre-tax  gain on the sale  of BellSouth's paging business  in
    January  1996,  which  increased net  income  by  $344. See  Note  B  to the
    Consolidated Financial Statements.
 
(3)  For  1995,  reflects   charges  of  $2,718  ($2.73   per  share)  for   the
    discontinuance  of  Statement  of  Financial  Accounting  Standards  No. 71,
    "Accounting for the Effects of Certain  Types of Regulation," and $78  ($.08
    per  share) related to the refinancing of long-term debt issues. See Notes E
    and L to the Consolidated Financial Statements.
 
(4) The debt ratio  at December 31,  1995 has been adjusted  to exclude $485  of
    debentures redeemed in January 1996.
 
(5) Telephone employees exclude those employees in BellSouth Telecommunications'
    subsidiaries which are unrelated to telephone operations.
 
(6)  Prior period operating data are revised  at later dates to reflect the most
    current  information.  The  above  information  reflects  the  latest   data
    available for the periods indicated.
 
(7)  Calculated on  the equity basis,  which includes customers  served based on
    BellSouth's ownership percentage in all markets served.
 
                                       24
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
       (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
    BellSouth Corporation  (BellSouth) is  a  holding company  headquartered  in
Atlanta,   Georgia  whose  operating  telephone  company  subsidiary,  BellSouth
Telecommunications,  Inc.   (BellSouth   Telecommunications)  serves,   in   the
aggregate,  approximately  two-thirds  of  the population  and  one-half  of the
territory within Alabama,  Florida, Georgia,  Kentucky, Louisiana,  Mississippi,
North  Carolina,  South  Carolina  and  Tennessee.  BellSouth Telecommunications
primarily provides  local  exchange  service and  toll  communications  services
within  geographic areas, called  Local Access and  Transport Areas (LATAs), and
provides network access  services to enable  interLATA communications using  the
long-distance  facilities of interexchange carriers. Through subsidiaries, other
telecommunications services  and  products  are provided  primarily  within  the
nine-state  BellSouth  Telecommunications  region.  BellSouth  Enterprises, Inc.
(BellSouth  Enterprises),  another  wholly-owned  subsidiary,  owns   businesses
providing wireless and international communications services and advertising and
publishing products.
 
    Approximately  70%, 70% and 72% of  BellSouth's Total Operating Revenues for
the years  ended December  31,  1996, 1995  and  1994, respectively,  were  from
wireline  services provided by BellSouth  Telecommunications. Charges for local,
access and toll  services for  the year ended  December 31,  1996 accounted  for
approximately  61%, 33% and 6%, respectively, of the wireline revenues discussed
above. Revenues  from consolidated  wireless  communications services  and  from
directory  advertising and  publishing services accounted  for approximately 15%
and 9%, respectively, of  Total Operating Revenues for  the year ended  December
31,  1996. The remainder of such revenues was derived principally from sales and
maintenance of  customer  premises  equipment and  other  nonregulated  services
provided by BellSouth Telecommunications.
 
RESULTS OF OPERATIONS
 
    All  per share amounts herein reflect a two-for-one stock split effective in
November 1995. See Note G to the Consolidated Financial Statements.
 
<TABLE>
<CAPTION>
                                                                         PERCENT CHANGE
                                                                     ----------------------
                                                                      1996 VS.    1995 VS.
                                      1996       1995       1994        1995        1994
                                    ---------  ---------  ---------  ----------  ----------
<S>                                 <C>        <C>        <C>        <C>         <C>
Income Before Extraordinary
 Losses...........................  $   2,863  $   1,564  $   2,160     83.1%      (27.6%)
Extraordinary Loss for
 Discontinuance of SFAS No. 71,
 net of tax.......................     --         (2,718)    --          --          --
Extraordinary Loss on Early
 Extinguishment of Debt, net of
 tax..............................     --            (78)    --          --          --
                                    ---------  ---------  ---------
Net Income (Loss).................  $   2,863  $  (1,232) $   2,160      --          --
                                    ---------  ---------  ---------
                                    ---------  ---------  ---------
</TABLE>
 
                                       25
<PAGE>
<TABLE>
<S>                                 <C>        <C>        <C>        <C>         <C>
Earnings (Loss) Per Share:
<CAPTION>
 
                                                                         PERCENT CHANGE
                                                                     ----------------------
                                                                      1996 VS.    1995 VS.
                                      1996       1995       1994        1995        1994
                                    ---------  ---------  ---------  ----------  ----------
<S>                                 <C>        <C>        <C>        <C>         <C>
Income Before Extraordinary
 Losses...........................  $    2.88  $    1.57  $    2.18     83.4%      (28.0%)
Extraordinary Loss for
 Discontinuance of SFAS No. 71,
 net of tax.......................     --          (2.73)    --          --          --
Extraordinary Loss on Early
 Extinguishment of Debt, net of
 tax..............................     --           (.08)    --          --          --
                                    ---------  ---------  ---------
Earnings (Loss) Per Share.........  $    2.88  $   (1.24) $    2.18      --          --
                                    ---------  ---------  ---------
                                    ---------  ---------  ---------
</TABLE>
 
    For a discussion  of the  extraordinary losses in  1995, see  "Extraordinary
Losses" below.
 
    Income  Before Extraordinary  Losses for  1996 increased  $1,299 (83.1%) and
$1.31 per  share (83.4%),  respectively, compared  to 1995.  The increases  were
primarily attributable to the effect of an after-tax work force reduction charge
in  1995  of  $663  ($.67 per  share).  For  a discussion  of  such  charge, see
"Operating Expenses -- Work Force Reduction Charge" below. Also contributing  to
the  increases  were  the  $344  ($.35 per  share)  after-tax  gain  on  sale of
BellSouth's  paging  business  (see  Note   B  to  the  Consolidated   Financial
Statements)  as  well as  growth in  key business  volumes, driven  by continued
growth of access lines and the cellular customer base, and cost control measures
at BellSouth Telecommunications, including salary and wage savings  attributable
to  the work force reduction and restructuring plans initiated in 1995 and 1993,
respectively.
 
    Income Before Extraordinary Losses for 1995 decreased $596 (27.6%) and  $.61
per  share (28.0%), respectively, compared to 1994. The decreases were primarily
due to the after-tax work force reduction charge of $663 ($.67 per share).  Also
contributing to the decreases were the effects of gains in 1994 aggregating $108
($.11  per share) related to the sale of two international cellular investments.
The decreases  were partially  offset  by revenue  growth, driven  by  continued
growth of access lines and the cellular customer base, and cost control measures
at  BellSouth Telecommunications, including salary and wage savings attributable
to a restructuring plan initiated in 1993 and completed in 1995.
 
                                       26
<PAGE>
VOLUMES OF BUSINESS
 
    Network Access Lines in Service at December 31 (thousands):
 
<TABLE>
<CAPTION>
                                                                                PERCENT CHANGE
                                                                            ----------------------
                                                                             1996 VS.    1995 VS.
                                             1996       1995       1994        1995        1994
                                           ---------  ---------  ---------  ----------  ----------
<S>                                        <C>        <C>        <C>        <C>         <C>
By Type:
  Residence..............................     15,136     14,653     14,195       3.3%        3.2%
  Business...............................      6,732      6,225      5,771       8.1         7.9
  Other..................................        267        255        254       4.7         0.4
                                           ---------  ---------  ---------
    Total Access Lines...................     22,135     21,133     20,220       4.7         4.5
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
By State:
  Florida................................      5,899      5,597      5,350       5.4         4.6
  Georgia................................      3,772      3,550      3,354       6.3         5.8
  Tennessee..............................      2,544      2,435      2,337       4.5         4.2
  North Carolina.........................      2,213      2,101      1,994       5.3         5.4
  Louisiana..............................      2,178      2,108      2,037       3.3         3.5
  Alabama................................      1,857      1,792      1,726       3.6         3.8
  South Carolina.........................      1,344      1,292      1,244       4.0         3.9
  Mississippi............................      1,193      1,158      1,118       3.0         3.6
  Kentucky...............................      1,135      1,100      1,060       3.2         3.8
                                           ---------  ---------  ---------
    Total Access Lines...................     22,135     21,133     20,220       4.7         4.5
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
</TABLE>
 
    The total  number of  access  lines in  service increased  by  approximately
1,002,000  (4.7%) to 22,135,000 since December 31, 1995, compared to a 4.5% rate
of increase in 1995. Business and  residence access lines increased by 8.1%  and
3.3%,  respectively, compared  to growth  rates of  7.9% and  3.2% in  1995. The
number of second residence lines,  included in total residence lines,  increased
by 285,000 (22.4%) to 1,556,000 and accounted for 59.0% and 28.4% of the overall
increase  in residence access lines and  total access lines, respectively, since
December 31,  1995. Such  second residence  lines are  generally used  for  home
office  purposes, access to on-line computer services and children's phones. The
growth in all categories of access lines was primarily attributable to continued
economic improvement in the Southeast and successful marketing programs.
 
    Access Minutes of Use (millions):
 
<TABLE>
<CAPTION>
                                                                                  PERCENT CHANGE
                                                                            --------------------------
                                                                              1996 VS.      1995 VS.
                                             1996       1995       1994         1995          1994
                                           ---------  ---------  ---------  ------------  ------------
<S>                                        <C>        <C>        <C>        <C>           <C>
Interstate...............................     67,690     62,411     57,778         8.5%          8.0%
Intrastate...............................     21,171     19,197     16,888        10.3          13.7
                                           ---------  ---------  ---------
  Total Access Minutes of Use............     88,861     81,608     74,666         8.9           9.3
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
</TABLE>
 
    Access  minutes  of  use  represent   the  volume  of  traffic  carried   by
interexchange  carriers  between LATAs,  both  interstate and  intrastate, using
BellSouth Telecommunications' local facilities. In 1996, total access minutes of
use increased by 7,253 million (8.9%) compared  to an increase of 9.3% in  1995.
The  increases in  access minutes of  use were primarily  attributable to access
line growth,  promotions  by  the  interexchange  carriers  and  intraLATA  toll
competition,  which has  the effect  of increasing  access minutes  of use while
reducing toll messages carried  over BellSouth Telecommunications' network.  The
growth  rate in  total minutes  of use  continues to  be negatively  impacted by
competition and the migration of
 
                                       27
<PAGE>
interexchange carriers to categories of service (e.g., special access) that have
a fixed  charge  as opposed  to  a volume-driven  charge  and to  high  capacity
services, which causes a decrease in minutes of use.
 
<TABLE>
<CAPTION>
                                                                                                PERCENT CHANGE
                                                                                          --------------------------
                                                                                            1996 VS.      1995 VS.
                                                           1996       1995       1994         1995          1994
                                                         ---------  ---------  ---------  ------------  ------------
<S>                                                      <C>        <C>        <C>        <C>           <C>
Toll Messages (millions)...............................      1,023      1,374      1,559       (25.5%)       (11.9%)
</TABLE>
 
    Toll  messages are comprised of  Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 351 million  (25.5%)
in  1996 compared  to a  decrease of  11.9% in  1995. The  decrease in  1996 was
primarily attributable to the expansion of  local area calling plans (LACPs)  in
Florida,  Georgia  and  North  Carolina  and,  to  a  lesser  extent,  increased
competition from interexchange carriers in the intraLATA toll market. While  the
respective  impacts of  such factors  cannot be  precisely quantified, BellSouth
estimates that about  70% of the  decline in toll  messages was attributable  to
expanded  LACPs and about 30% was due  to increased competition. The decrease in
1995 was also attributable  to LACPs in Florida,  Georgia and North Carolina  as
well as South Carolina and Mississippi. These plans and future implementation of
other  such plans in BellSouth  Telecommunications' service region, coupled with
competition from the interexchange carriers  in the intraLATA toll market,  will
adversely  impact future toll  message volumes. The expansion  of LACPs and some
effects of competition result in  the transfer of calls  from toll to the  local
service  and access categories, respectively, but the corresponding revenues are
not generally shifted at commensurate rates.
 
    Cellular and Paging Customers -- Equity Basis (thousands):
 
<TABLE>
<CAPTION>
                                                                                                PERCENT CHANGE
                                                                                          --------------------------
                                                                                            1996 VS.      1995 VS.
                                                           1996       1995       1994         1995          1994
                                                         ---------  ---------  ---------  ------------  ------------
<S>                                                      <C>        <C>        <C>        <C>           <C>
Domestic Cellular......................................      3,612      2,847      2,156        26.9%         32.1%
International Cellular.................................      1,244        655        361        89.9          81.4
Paging Customers (all domestic)........................     --          1,777      1,614       --             10.1
</TABLE>
 
    Domestic cellular customers increased by 765,000 (26.9%) since December  31,
1995.  While  the  rate  of  increase  has  declined  since  1995,  the  overall
penetration rate (number of customers as a percentage of the total population in
the service  territory) increased  from 7.1%  at December  31, 1995  to 8.9%  at
December  31,  1996.  Total minutes  of  use  have also  continued  to increase,
although average minutes of use  per cellular customer have remained  relatively
flat in 1996.
 
    Since  December  31, 1995,  the number  of international  cellular customers
increased by 589,000 (89.9%)  to 1,244,000. Growth in  total minutes of use  for
international  cellular properties remained  strong due to  demand stimulated by
competitive programs, enhanced services and underdeveloped land-line service.
 
    In January  1996,  BellSouth  sold  its  paging  business  to  Mobile  Media
Communications Inc. See Note B to the Consolidated Financial Statements.
 
OPERATING REVENUES
 
    For  a discussion  of the impact  of impending local  service competition on
revenues and volumes of business, see  "Operating Environment and Trends of  the
Business."
 
    Total  Operating Revenues  increased $1,154  (6.5%) in  1996 compared  to an
increase of $1,041  (6.2%) during 1995.  The increases resulted  from growth  in
revenues  from BellSouth's wireline telephone business, coupled with significant
increases in revenues from the cellular communications business. The increase in
1996 was partially offset by the effect of the January 1996 sale of  BellSouth's
paging  business. Excluding  paging revenues  in 1995,  Total Operating Revenues
increased $1,503 (8.6%) in 1996.
 
                                       28
<PAGE>
    The components of Total Operating Revenues were as follows:
 
<TABLE>
<CAPTION>
                                                                                      PERCENT CHANGE
                                                                                  ----------------------
                                                                                   1996 VS.    1995 VS.
                                                   1996       1995       1994        1995        1994
                                                 ---------  ---------  ---------  ----------  ----------
<S>                                              <C>        <C>        <C>        <C>         <C>
Local Service..................................  $   8,082  $   7,294  $   6,863       10.8%        6.3%
Interstate Access..............................      3,553      3,275      3,127        8.5         4.7
Intrastate Access..............................        812        884        908       (8.1)       (2.6)
Toll...........................................        794      1,009      1,190      (21.3)      (15.2)
Wireless Communications........................      2,799      2,592      2,067        8.0        25.4
Directory Advertising and Publishing...........      1,742      1,677      1,556        3.9         7.8
Other Services.................................      1,258      1,155      1,134        8.9         1.9
                                                 ---------  ---------  ---------
  Total Operating Revenues.....................  $  19,040  $  17,886  $  16,845        6.5         6.2
                                                 ---------  ---------  ---------
                                                 ---------  ---------  ---------
</TABLE>
 
    LOCAL  SERVICE  revenues  reflect  amounts  billed  to  customers  for local
exchange  services,  which  include  connection  to  the  network  and  optional
services,  such as  custom calling features  and custom  dialing packages. Local
Service revenues for 1996 increased $788 (10.8%) compared to an increase of $431
(6.3%) in 1995.
 
    The increase in 1996  was due primarily to  an increase of 1,002,000  access
lines since December 31, 1995. Also contributing were an increase of $248 due to
higher customer demand for optional services and net rate increases of $88 which
include benefits related to the effects of expanded LACPs.
 
    The  1995 increase was due primarily to  an increase of 913,000 access lines
since December 31, 1994 and  an increase of $107  due to higher customer  demand
for  optional services. The  increase in 1995  was partially offset  by net rate
reductions since  December  31, 1994  of  approximately  $46 which  are  net  of
benefits related to the effects of expanded LACPs.
 
    INTERSTATE  ACCESS revenues result from the  provision of access services to
interexchange carriers to provide telecommunications services between states and
from  end-user  charges  collected  from  residential  and  business  customers.
Interstate Access revenues increased $278 (8.5%) in 1996 compared to an increase
of $148 (4.7%) in 1995.
 
    The  1996 increase was due primarily to growth in minutes of use of 8.5%, an
increase of $69 due to higher demand for special access services and an increase
in end-user charges of $58 attributable to growth in the number of access  lines
in service. Such increases were offset by net rate reductions since December 31,
1995 of $25.
 
    The increase for 1995 was due primarily to growth in minutes of use of 8.0%,
an  increase in end-user charges of $52  attributable to growth in the number of
access lines in service and an increase of $42 due to higher demand for  special
access  services. The 1995 increase was  partially offset by net rate reductions
since December 31, 1994 of approximately $58.
 
    INTRASTATE ACCESS revenues result from  the provision of access services  to
interexchange  carriers which provide  telecommunications services between LATAs
within a  state.  In  1996,  Intrastate Access  revenues  decreased  $72  (8.1%)
compared to a decrease of $24 (2.6%) in 1995.
 
    The decreases for 1996 and 1995 were due primarily to net rate reductions of
$160  and $100, respectively,  partially offset by  growth in minutes  of use of
10.3% and 13.7%, respectively.
 
    TOLL revenues  are received  from the  provision of  long-distance  services
within  (but not between) LATAs. These services include intraLATA service beyond
the local  calling  area; Wide  Area  Telecommunications Service  (WATS  or  800
services)  for customers with highly  concentrated demand; and special services,
such as transport of voice, data and video. Toll revenues decreased $215 (21.3%)
in 1996 compared to a decrease of $181 (15.2%) in 1995.
 
                                       29
<PAGE>
    The decrease for 1996 was primarily  attributable to the expansion of  LACPs
and  increased  competition from  interexchange carriers,  the effects  of which
reduced toll  messages  by  25.5%.  The  decrease  was  partially  offset  by  a
retroactive independent company settlement in 1995 which reduced revenues by $31
in that period.
 
    In  1995, the decrease  was due primarily  to a decline  in toll messages of
11.9%. The  decline  in  toll  messages reflects  the  expansion  of  LACPs  and
increased  competition from  interexchange carriers. The  decrease also includes
the effect of the retroactive independent company settlement.
 
    The overall decline in intraLATA toll revenues is expected to continue  over
the long term.
 
    WIRELESS COMMUNICATIONS revenues include revenues from consolidated wireless
communications  businesses  (primarily  domestic cellular  and,  prior  to 1996,
paging within BellSouth Enterprises) as  well as revenues from  interconnections
by  unaffiliated cellular  carriers with  BellSouth Telecommunications' network.
(BellSouth's interests in the net income or loss of the unconsolidated  wireless
businesses  within  BellSouth Enterprises,  which  are accounted  for  under the
equity method of accounting, are recorded in Other Income, net.)
 
    Wireless Communications revenues increased $207  (8.0%) in 1996 compared  to
an  increase of  $525 (25.4%)  in 1995.  The increases  for both  years resulted
primarily from continued growth  of the customer base  for wireless services  in
domestic  and international markets.  The 1996 increase  was partially offset by
the effect of  the January 1996  sale of BellSouth's  paging business.  Revenues
from  such paging services were  $349 and $276, respectively,  in 1995 and 1994.
Excluding  such  paging  revenues  in  1995,  Wireless  Communications  revenues
increased 24.8% in 1996.
 
    Consistent  with  anticipated  growth  in  the  overall  wireless  industry,
BellSouth's  revenues  from  wireless  services  are  expected  to  continue  to
increase.  However, the  rate of  growth of  revenues from  BellSouth's existing
cellular businesses  could be  adversely affected  by competitive  pressures  on
service  pricing, the continuing effect  of an increasingly diversified customer
base with  lower  average  usage  and the  emergence  of  new  wireless  service
providers offering personal communications service (PCS).
 
    DIRECTORY  ADVERTISING AND PUBLISHING revenues include revenues derived from
publishing, printing and selling advertising in, and performing related services
concerning,  alphabetical  and   classified  telephone  directories.   Directory
Advertising  and Publishing revenues increased $65  (3.9%) in 1996 compared to a
$121 (7.8%) increase in 1995.
 
    The increase  for 1996  was primarily  due to  increases in  the volume  and
prices  of advertising sold. The increase was  partially offset by the effect of
BellSouth Telecommunications' adoption of  issue basis accounting for  directory
revenues,  which  increased revenues  in  1995 by  $41,  in connection  with the
discontinuance of Statement  of Financial  Accounting Standards  (SFAS) No.  71,
"Accounting  for the Effects of Certain Types  of Regulation." See Note L to the
Consolidated Financial Statements.
 
    The  1995  increase  was  due  primarily  to  increases  in  the  volume  of
advertising  sold and  the impact  of BellSouth  Telecommunications' adoption of
issue basis accounting for directory revenues.
 
    OTHER SERVICES revenues are principally comprised of revenues from  customer
premises  equipment (CPE) sales and  maintenance services and other nonregulated
services (primarily  inside wire,  billing and  collection and  voice  messaging
services)  offered  by  BellSouth  Telecommunications.  Other  Services revenues
increased $103 (8.9%) in 1996 compared to an increase of $21 (1.9%) in 1995.
 
    The 1996 increase was primarily attributable to higher demand and prices for
nonregulated services, product sales and  fees totalling $132. In addition,  the
increase  was also due to incremental  rate impacts related to potential sharing
under certain state regulatory plans. The  increase was partially offset by  the
sale in 1996 of a subsidiary which performed computer maintenance.
 
    The  increase  in  1995  was  due primarily  to  reduced  levels  of revenue
reduction accruals related to potential  sharing under certain state  regulatory
plans  coupled  with  the reclassification  of  certain such  accruals  to Local
Service revenues, the combined effect of which increased Other Services revenues
by
 
                                       30
<PAGE>
approximately $76. The increase was also due to approximately $41 resulting from
higher demand for  voice messaging and  inside wire services.  The increase  was
partially  offset by a reduction of $37  in revenues from billing and collection
services and by approximately $33 related to the sale in April 1994 of BellSouth
Telecommunications' out-of-region CPE sales and service operations.
 
OPERATING EXPENSES
 
    Total Operating  Expenses  decreased $333  (2.3%)  in 1996  compared  to  an
increase of $1,807 (14.1%) in 1995. The 1996 decrease was primarily attributable
to the effects of the 1995 work force reduction charge of $1,082 and the sale of
BellSouth's  paging  business in  January 1996.  Excluding these  effects, Total
Operating Expenses  increased $1,049  (7.9%) in  1996. The  components of  Total
Operating Expenses were as follows:
 
<TABLE>
<CAPTION>
                                                                                       PERCENT CHANGE
                                                                                  ------------------------
                                                                                   1996 VS.     1995 VS.
                                                   1996       1995       1994        1995         1994
                                                 ---------  ---------  ---------  -----------  -----------
<S>                                              <C>        <C>        <C>        <C>          <C>
Depreciation and Amortization..................  $   3,719  $   3,455  $   3,259         7.6%         6.0%
                                                 ---------  ---------  ---------
Other Operating Expenses:
  Cost of Services and Products................      6,072      6,184      6,043        (1.8)         2.3
  Selling, General and Administrative..........      4,470      3,873      3,485        15.4         11.1
                                                 ---------  ---------  ---------
                                                    10,542     10,057      9,528         4.8          5.6
                                                 ---------  ---------  ---------
    Subtotal...................................     14,261     13,512     12,787         5.5          5.7
Work Force Reduction Charge....................     --          1,082     --          --           --
                                                 ---------  ---------  ---------
    Total Operating Expenses...................  $  14,261  $  14,594  $  12,787        (2.3)        14.1
                                                 ---------  ---------  ---------
                                                 ---------  ---------  ---------
</TABLE>
 
    DEPRECIATION  AND AMORTIZATION increased  $264 (7.6%) in  1996 compared to a
$196 (6.0%) increase in 1995.
 
    The increase for 1996 was due primarily to higher levels of property,  plant
and  equipment and shorter depreciable lives subsequent to the discontinuance of
SFAS No. 71. The  higher levels of property,  plant and equipment resulted  from
continued  growth in  the customer base  for wireless and  wireline services and
modernization of the networks. The increase was partially offset by the sale  of
BellSouth's   paging  business  in  January  1996  which  had  depreciation  and
amortization of $44 in 1995.
 
    The 1995 increase was due primarily to higher levels of property, plant  and
equipment  since  December  31,  1994 resulting  from  sustained  growth  in the
customer base for wireless and wireline services and continued modernization  of
the networks.
 
    OTHER  OPERATING EXPENSES are comprised of Cost of Services and Products and
Selling, General  and Administrative.  Cost of  Services and  Products  includes
employee  and  employee-related  expenses  associated  with  network  repair and
maintenance, material  and supplies  expense, cost  of tangible  goods sold  and
other   expenses  associated  with  providing  services.  Selling,  General  and
Administrative includes expenses related to  sales activities such as  salaries,
commissions,   benefits,   travel,  marketing   and  advertising   expenses  and
administrative expenses.
 
    Other Operating  Expenses  increased $485  (4.8%)  in 1996  compared  to  an
increase  of $529 (5.6%) in 1995. The increase for 1996 was primarily related to
growth in the wireless and wireline  businesses, partially offset by the  effect
of  the  January  1996  sale  of  BellSouth's  paging  business.  Excluding such
paging-related expenses in 1995, Other Operating Expenses increased $741  (7.6%)
in 1996.
 
    For 1996, expenses related to the cellular and PCS businesses increased $342
and  $69, respectively, as a result of sustained growth in the cellular customer
base and the initiation of PCS services. At BellSouth Telecommunications,  Other
Operating  Expenses increased $202  due principally to  higher business volumes,
new service offerings  and intensified marketing  and advertising. The  increase
was  partially offset by  a decrease of  approximately $162 for employee-related
costs in the wireline telephone operations, and the sale in 1996 of a subsidiary
which performed computer maintenance. The decrease
 
                                       31
<PAGE>
in employee-related  costs  reflects  employee reductions  attributable  to  the
restructuring  and  work  force  reduction  plans,  partially  offset  by annual
compensation increases  for  management  and  represented  employees.  The  1996
increase  in Other Operating expenses also included an increase of approximately
$50 in expenses related to the directory advertising and publishing business.
 
    The 1995 increase was due  primarily to increased expenses of  approximately
$310  related  to sustained  growth in  the  cellular customer  base, reflecting
additional marketing  and operational  costs associated  with higher  levels  of
sales  and expanded operations. At BellSouth Telecommunications, Other Operating
Expenses increased $114, which reflected volume growth that was partially offset
by a decrease of  approximately $130 for  employee-related costs. Such  decrease
was  attributable to the  restructuring plan begun in  1993, partially offset by
annual compensation increases for management and represented employees. The 1995
increase in Other Operating Expenses was also attributable to approximately  $55
related to growth in the volume of directory advertising sold.
 
    WORK  FORCE  REDUCTION CHARGE.   In  the fourth  quarter of  1995, BellSouth
recognized a pretax charge of $1,082  ($663 after tax), comprised of $942  ($577
after tax) related to planned work force reductions by the end of 1997, $85 ($52
after tax) for expected severance benefit payments after 1997 and $55 ($34 after
tax)  for additional net curtailment losses related to employee reductions under
a restructuring plan initiated in 1993 and completed in 1995.
 
    1995 WORK  FORCE  REDUCTION.    The $942  pretax  charge  was  comprised  of
approximately  $561 under the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," related to employees expected to receive severance
benefits  under  preexisting  separation  plans,  and  approximately  $381   for
curtailment  losses under the provisions of  SFAS No. 88, "Employers' Accounting
for Settlements  and  Curtailments of  Defined  Benefit Pension  Plans  and  for
Termination   Benefits,"   and  SFAS   No.   106,  "Employers'   Accounting  for
Postretirement  Benefits  Other  Than   Pensions."  Substantially  all  of   the
curtailment losses relate to postretirement benefits other than pensions.
 
    Under  this plan,  BellSouth Telecommunications  expects to  reduce the work
force of the wireline telephone operations by approximately 11,300 employees  by
the  end of  1997. The  work force  reduction will  be accomplished  through the
separation of approximately  13,200 employees, partially  offset by the  planned
hiring  of new employees primarily to replace  those not expected to relocate in
connection with the consolidation  of work locations.  Including a reduction  of
approximately   800  employees  which  occurred   in  December  1995,  BellSouth
Telecommunications has reduced its work  force by approximately 7,000  employees
under the 1995 plan through December 31, 1996.
 
    Once  the plan to reduce 11,300  employees is completed, annual net employee
cost savings are estimated to be approximately $500 after considering  increased
costs for outsourced services.
 
    POSTEMPLOYMENT  BENEFITS  AND  OTHER  CHARGES.  The  pretax  charge  of  $85
represented estimated future postemployment severance benefits to be paid  after
1997, also in accordance with the provisions of SFAS No. 112. This component was
based  on  BellSouth's belief  that work  force  reductions will  continue under
existing separation plans, although at reduced separation benefit levels.
 
    A pretax  charge  of  $55  was  also  recorded  related  to  additional  net
curtailment losses in connection with a restructuring plan initiated in 1993 and
completed  in  1995. This  charge resulted  primarily from  a greater  number of
retirement-eligible employees  separating under  the  plan than  was  originally
expected.
 
                                       32
<PAGE>
OTHER INCOME STATEMENT ITEMS
 
<TABLE>
<CAPTION>
                                                                                         PERCENT CHANGE
                                                                                    ------------------------
                                                                                     1996 VS.     1995 VS.
                                                     1996       1995       1994        1995         1994
                                                   ---------  ---------  ---------  -----------  -----------
<S>                                                <C>        <C>        <C>        <C>          <C>
Interest Expense.................................  $     721  $     724  $     666       (0.4)%        8.7%
Gain on Sale of Paging Business..................        442     --         --          --           --
Other Income, net................................        108         20         11      440.0         81.8
Provision for Income Taxes.......................      1,745      1,024      1,243       70.4        (17.6)
</TABLE>
 
    INTEREST   EXPENSE  includes   interest  on  debt,   certain  other  accrued
liabilities and capital leases,  partially offset by  interest capitalized as  a
cost  of installing equipment and constructing plant. Interest expense decreased
$3 (0.4%) in 1996 compared to an increase of $58 (8.7%) in 1995.
 
    The decrease for 1996 was  primarily attributable to lower average  interest
rates on borrowings due in part to refinancings during 1995, partially offset by
higher average debt balances in 1996.
 
    The  1995  increase was  primarily attributable  to higher  average interest
rates on  short-term borrowings  and higher  average debt  levels for  long-term
borrowings. The average interest rate on long-term borrowings was slightly lower
in   1995  compared  to  1994,  reflecting  the  initial  impact  of  1995  debt
refinancings at more favorable interest rates.
 
    GAIN ON SALE OF PAGING BUSINESS represents  the pre-tax gain on the sale  of
BellSouth's paging business in January 1996.
 
    OTHER   INCOME,  NET  includes  earnings   and  losses  from  unconsolidated
subsidiaries, businesses and partnerships;  income and losses  from the sale  of
operations;   interest  and  dividend  income;  minority  interests;  and  other
nonoperating items.  Other Income,  net increased  $88 in  1996 compared  to  an
increase of $9 in 1995.
 
    The  1996 increase resulted primarily from a $55 increase in interest income
and lower net minority interest deductions of $35. Equity in losses was ($76) in
1996, an improvement  of $10 since  1995. The lower  1996 losses were  primarily
attributable  to improved operating results  at unconsolidated domestic cellular
operations and  certain  international  businesses,  principally  operations  in
Israel  and  Venezuela. Such  improvements  were partially  offset  by increased
losses attributable to the continuing development of German cellular operations.
 
    The increase  in  Other Income,  net  in 1995  included  a $43  increase  in
interest  income, an improvement of $24 in equity in losses and $18 in lower net
minority interest  deductions.  The  increase  in Other  Income,  net  was  also
attributable  to a $34 increase in  miscellaneous income related to nonstrategic
business activities. The increases in Other Income were partially offset by  the
effect  of a gain  of $108 in 1994  from the sale  of two international cellular
investments.
 
    Equity in losses of unconsolidated affiliates was $(86) in 1995 compared  to
$(110)  in 1994.  The lower  1995 losses  reflect a  reduction in  losses in the
mobile data  communications businesses  and  higher income  from  unconsolidated
domestic  cellular operations, partially offset by increased losses from certain
developing international  businesses,  principally  operations  in  Germany  and
Israel.
 
    PROVISION  FOR INCOME  TAXES increased  $721 (70.4%)  in 1996  compared to a
decrease of $219 (17.6%)  in 1995. BellSouth's effective  tax rates were  37.9%,
39.6%  and 36.5% in 1996,  1995 and 1994, respectively.  The lower effective tax
rate for 1996 compared to 1995 was due primarily to a higher tax than book basis
for the paging business, which  resulted in a lower  gain on sale for  computing
tax expense. A reconciliation of the statutory Federal income tax rates to these
effective  tax  rates  is  provided  in Note  K  to  the  Consolidated Financial
Statements.
 
EXTRAORDINARY LOSSES
 
    DISCONTINUANCE OF SFAS  NO. 71.   In  1995, as  a result  of its  continuing
regulatory  and marketplace assessments,  BellSouth Telecommunications concluded
that it was required to discontinue SFAS No. 71
 
                                       33
<PAGE>
for financial  reporting  purposes.  Accordingly,  BellSouth  Telecommunications
recorded a noncash extraordinary charge of $2,718 (net of a deferred tax benefit
of  $1,731). The extraordinary charge reflects  $3,002 (after tax) to reduce the
recorded value of  long-lived telephone plant  and equipment, all  of which  was
within  the  regulatory framework,  to  the level  appropriate  for nonregulated
enterprises. The overall  charge was  partially offset  by $194  related to  the
method  by which BellSouth Telecommunications  reported its directory publishing
revenues, $71 related to  the elimination of  regulatory assets and  liabilities
and  $19  for the  partial acceleration  of  unamortized investment  tax credits
associated with the reductions in asset carrying values and in asset lives.
 
    See Note L to the Consolidated Financial Statements.
 
    EARLY EXTINGUISHMENT  OF DEBT.   During  1995, BellSouth  Telecommunications
recognized  extraordinary losses of  $78 (net of  a current tax  benefit of $49)
related to the early  extinguishment of outstanding debt  issues. See Note E  to
the Consolidated Financial Statements.
 
FINANCIAL CONDITION
 
    BellSouth  uses  the net  cash generated  from  its operations  and external
financing to invest in and  operate its existing and  new businesses and to  pay
dividends.  While current liabilities  exceeded current assets  at both December
31, 1996 and  1995, BellSouth's sources  of funds --  primarily from  operations
and,  to  the  extent  necessary,  from  readily  available  external  financing
arrangements --  are sufficient  to meet  all current  obligations on  a  timely
basis.  BellSouth believes that such sources of funds will be sufficient to meet
the needs of its business for the foreseeable future.
 
<TABLE>
<CAPTION>
                                                                                           PERCENT CHANGE
                                                                                      ------------------------
                                                                                       1996 VS.     1995 VS.
                                                       1996       1995       1994        1995         1994
                                                     ---------  ---------  ---------  -----------  -----------
<S>                                                  <C>        <C>        <C>        <C>          <C>
Net Cash Provided by Operating Activities..........  $   5,863  $   5,443  $   5,172        7.7%         5.2%
</TABLE>
 
    OPERATING ACTIVITIES.  Net cash  provided by operating activities  increased
$420 (7.7%) in 1996 compared to an increase of $271 (5.2%) in 1995. The increase
in  1996  was primarily  attributable  to a  $669  increase in  operating income
excluding depreciation, amortization  and the work  force reduction charge.  The
1996 increase was partially offset by higher cash expenditures for reductions of
accounts payable.
 
    The  increase  in 1995  was  primarily attributable  to  a $512  increase in
operating  income  excluding  depreciation,  amortization  and  the  work  force
reduction  charge.  The  1995  increase  was  partially  offset  by  higher cash
expenditures of $258 related to a restructuring plan begun in 1993.
 
<TABLE>
<CAPTION>
                                                                                        PERCENT CHANGE
                                                                                   ------------------------
                                                                                    1996 VS.     1995 VS.
                                                    1996       1995       1994        1995         1994
                                                  ---------  ---------  ---------  -----------  -----------
<S>                                               <C>        <C>        <C>        <C>          <C>
Net Cash Used for Investing Activities..........  $  (4,199) $  (4,384) $  (3,935)      (4.2%)       11.4%
</TABLE>
 
    INVESTING  ACTIVITIES.    BellSouth's  primary  use  of  capital   resources
continues  to be for capital expenditures to support development of the wireline
and wireless networks.  Net cash  used for investing  activities decreased  $185
(4.2%)  in 1996 compared to an increase of $449 (11.4%) in 1995. The decrease in
1996 was primarily  due to $930  in cash received  from the sale  of the  paging
business.  The decrease was  partially offset by  higher capital expenditures of
$252 related substantially to  wireline and wireless  network development and  a
decrease of $324 in proceeds from other investment dispositions and repayment of
advances.
 
    Capital   expenditures  were  $4,455  in  1996   and  are  projected  to  be
approximately $4,700 to $5,200 in 1997. Such capital expenditures for 1996  were
financed internally and, for 1997, are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
 
                                       34
<PAGE>
    The   increase  in  1995  was   primarily  attributable  to  higher  capital
expenditures of  $603 related  substantially to  wireline and  wireless  network
development,  partially offset by  higher cash proceeds  of $188 from investment
dispositions and  repayment of  advances. Substantially  all cash  required  for
capital expenditures in 1995 was provided internally.
 
<TABLE>
<CAPTION>
                                                                                             PERCENT CHANGE
                                                                                         ----------------------
                                                                                          1996 VS.    1995 VS.
                                                        1996        1995        1994        1995        1994
                                                      ---------     -----     ---------  ----------  ----------
<S>                                                   <C>        <C>          <C>        <C>         <C>
Net Cash Provided by (Used for) Financing
 Activities.........................................  $  (2,197)  $      46   $  (1,132)     --          --
</TABLE>
 
    FINANCING  ACTIVITIES.    During  1996, financing  activities  used  cash of
$(2,197) while in 1995 financing activities provided cash of $46. The  increased
use  of cash from 1995 to 1996 of $2,243 primarily reflects higher levels of net
proceeds from all borrowing activities in 1995 compared to 1996.
 
    In September  1995,  BellSouth's Board  of  Directors raised  the  quarterly
dividend  by $.015 per share to a total  of $.36 per share and declared the same
$.36 per share dividend again in November 1995 and for each quarter in 1996.
 
    The change  in cash  used for  financing activities  from 1994  to 1995  was
primarily  attributable  to higher  levels of  net  proceeds from  all borrowing
activities in 1995 compared to 1994.
 
    DEBT ACTIVITIES.  During 1996, BellSouth issued $300 of long term debt  and,
with  net proceeds as well as cash on hand, redeemed outstanding short-term debt
and long-term debentures of $417 and $485, respectively.
 
    During 1995, BellSouth issued $500 of long-term debt and, with net proceeds,
refinanced outstanding  short-term  debt.  Also during  1995,  BellSouth  issued
approximately  $1,900  of  long-term  debt to  refinance  $1,885  of outstanding
long-term debentures, including $485 of debentures redeemed in January 1996. The
funds to redeem the $485 of debentures in January 1996 are included in Cash  and
Cash  Equivalents in  the Consolidated  Balance Sheet  at December  31, 1995. In
addition, Cash and Cash Equivalents at December 31, 1995 includes $500 which was
used to reduce commercial paper on January 2, 1996.
 
    BellSouth has committed credit lines aggregating $1,951 with various  banks.
Borrowings  under the committed  credit lines totaled $92  at December 31, 1996.
BellSouth also maintains uncommitted  lines of credit of  $650. At December  31,
1996,  there were no borrowings under the  uncommitted lines. As of February 14,
1997, shelf  registration  statements  were  on file  with  the  Securities  and
Exchange  Commission under  which $1,927  of debt  securities could  be publicly
offered.
 
    BellSouth's debt to total capitalization ratio, adjusted in 1995 to  exclude
the  $485 of debentures redeemed in January 1996, decreased to 43.5% at December
31, 1996 from 46.7% at December 31, 1995. The decrease was primarily caused by a
reduction in short-term borrowings and  an increase in shareholders' equity  due
to earnings during 1996.
 
    DERIVATIVE  ACTIVITIES.    BellSouth enters  into  foreign  exchange forward
contracts, currency swap  agreements and  interest rate swap  agreements in  its
normal  course of business for hedging purposes. These financial instruments are
used to mitigate foreign currency and interest rate risks, although to a limited
extent they expose  the company  to market and  credit risks.  The credit  risks
associated  with  these instruments  are controlled  through the  evaluation and
continual monitoring of the creditworthiness of the counterparties. In the event
that a  counterparty  fails  to meet  the  terms  of a  contract  or  agreement,
BellSouth's  exposure is limited to the then  current value of the currency rate
or interest rate differential, not the full notional amount. Such contracts  and
agreements  have been  executed with  creditworthy financial  institutions whose
credit ratings are generally AA/Aa or  higher. As such, BellSouth considers  the
risk  of nonperformance to be  remote. See Note N  to the Consolidated Financial
Statements for additional information.
 
                                       35
<PAGE>
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
 
    REGULATORY ENVIRONMENT.  In providing telecommunications services, BellSouth
is subject to regulation  by both state and  federal regulators with respect  to
rates,  services, competition  and other issues.  BellSouth's primary regulatory
focus has been directed toward modifying  the regulatory process to one that  is
more  closely aligned with changing market  conditions and overall public policy
objectives. As an  alternative to regulation  of intrastate earnings,  BellSouth
has  sought price regulation, whereby prices  of basic service are regulated and
the pricing of other  products and services are  based on market factors.  While
price  regulation plans  do not  provide for  the direct  recovery through basic
service rates  of  cost  increases or  extraordinary  expenses,  they  generally
provide   more  flexibility  to  meet   competitive  pricing  levels.  BellSouth
Telecommunications has  price regulation  plans approved  or authorized  in  all
states  in its wireline territory, although  the implementation of the Tennessee
plan has been stayed by a court pending resolution of a number of issues. At the
federal  level,  BellSouth  Telecommunications   is  operating  under  a   price
regulation  plan established by  the Federal Communications  Commission (FCC) in
1995.This   plan    provided   a    productivity   option,    which    BellSouth
Telecommunications  selected,  that  eliminated  both  earnings  limitations and
sharing requirements.
 
    ECONOMY.  The  nation's output  of goods and  services, which  grew 2.0%  in
1995,  grew at a moderate  rate of 2.3% in  1996. Employment in nonfarm business
establishments grew  2.2% during  the year  and the  unemployment rate  averaged
5.4%.   The   economy   of   the   nine-state   region   served   by   BellSouth
Telecommunications' wireline telephone  business grew slightly  faster than  the
national  economy. The  number of  jobs in nonfarm  businesses grew  2.3% as the
unemployment rate  averaged  5.0% for  the  year.  Real income  expanded  at  an
estimated  3.7%. Net  migration added approximately  400,000 persons, accounting
for half of the  region's population growth.  The demand for  telecommunications
services  in the  region reflected the  strength of its  economic and population
growth. Moderate  economic expansion  is expected  during 1997,  as tight  labor
markets, slow labor force growth and modest productivity growth act to constrain
the pace of growth. The region's cost advantages and strong net migration should
bring an economic growth rate comparatively better than the nation's and further
increase  the demand for telecommunications  services. The increased competition
faced by BellSouth  Telecommunications and  the growing  percentage of  revenues
from   unregulated  businesses  make   BellSouth's  financial  performance  more
susceptible to changes in the economy than previously, as its operations reflect
the more competitive  business environment and  the greater demand  elasticities
for its products and services.
 
    COMPETITION.  BellSouth is subject to increasing competition in all areas of
its  business. Regulatory,  legislative and  judicial actions  and technological
developments have expanded the types of available services and products and  the
number  of companies that may offer them. Increasingly, this competition is from
large companies  which have  substantial  capital, technological  and  marketing
resources.
 
    THE  1996 ACT.  The  1996 Act requires the  elimination of state legislative
and regulatory barriers to competition for local telephone service, subject only
to competitively neutral requirements to preserve and advance universal service,
protect   the   public   safety   and   welfare,   maintain   the   quality   of
telecommunications  services and safeguard the rights of customers. The 1996 Act
also includes  requirements that  BellSouth negotiate  with other  carriers  for
interconnection,  use of  network elements on  an unbundled basis  and resale of
local services. If a  negotiated agreement cannot be  reached, either party  may
seek  arbitration with the  state regulatory authority  or the FCC  if the state
fails to act. If rates are disputed, the arbitrator must set rates for access to
network elements  on an  unbundled basis,  based on  cost, which  may include  a
reasonable  profit. BellSouth  is also required  to negotiate  to provide retail
services at wholesale rates for the purposes of resale by competing carriers. If
agreement cannot be  reached, the arbitrator  shall set the  wholesale rates  at
BellSouth's  retail rates less costs to be avoided. BellSouth Telecommunications
has executed over 40 interconnection or resale agreements with such carriers and
is currently  involved  in  arbitration  proceedings  with  a  number  of  other
carriers,  including  AT&T,  MCI and  Sprint.  The arbitration  results  for the
wholesale discount rates vary by state from approximately 15% to 21%.
 
                                       36
<PAGE>
    In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open  competition
in   the  local  telephone  service  industry  (the  Order).  Among  the  issues
specifically addressed by the Order are the network elements that BellSouth must
make available; pricing standards to be followed by states in setting rates  for
interconnection;  access to  network elements on  an unbundled  basis and resold
services. BellSouth and several other incumbent local exchange carriers  (ILECs)
joined  in an appeal of the Order to  the United States Court of Appeals for the
Eighth Circuit (the Court). Upon request of several state commissions and ILECs,
the Court stayed the Order in part, pending appeal. Such stay relates to pricing
prescriptions and certain other terms. The Court heard oral arguments in January
1997, and a decision is pending. Notwithstanding these developments, however, as
discussed above,  BellSouth Telecommunications  and a  number of  carriers  have
negotiated  interconnection  agreements  and  state  regulatory  commissions are
arbitrating or have approved various terms of interconnection between  BellSouth
Telecommunications and other carriers. These terms may be revised, depending on,
among other things, the outcome of the appeal of the Order.
 
    The  1996 Act also  requires the FCC  to identify the  local service subsidy
provided by access  charges; to  provide for the  removal of  such subsidy  from
access  rates in order that access  charges reflect underlying costs; to arrange
for a universal service  fund to ensure the  continuation of universal  service;
and to develop the arrangements for payments into that fund by all carriers. The
FCC  is currently engaged in this proceeding. In addition, the FCC has commenced
a proceeding to revise its access charge rules. Until final orders are issued by
the FCC and any judicial appeals have been concluded, it will not be possible to
determine the  impact on  access  charge revenues;  however, an  interim  access
charge  plan provides  for lower access  charges paid by  carriers that purchase
unbundled network elements  from ILECs or  that connect wireless  communications
with the wireline networks of the ILECs.
 
    In  attempting to comply with the technical requirements of interconnection,
BellSouth expects to incur significant costs associated with the development  or
modification of systems necessary to make interconnection possible. For example,
BellSouth  Telecommunications will be  required to provide  for long-term number
portability whereby customers switching to competing local carriers will be able
to retain their telephone numbers without interruption. It is unclear as to what
degree BellSouth will be able to recover these costs.
 
    Until the  FCC  issues  final  orders on  matters  such  as  access  reform,
universal  service and  number portability,  as well  as other  matters, and any
judicial appeals have been concluded, it  will not be possible to determine  the
impact  the  1996 Act  will  have on  BellSouth's  financial position  or annual
operations results or cash flows.
 
    WIRELESS SERVICES.   The  FCC's PCS  licensing process  allows multiple  new
competitors  for BellSouth's businesses.  Licenses to provide  PCS services have
been won in auction by AT&T, Bell Holding Company consortia and other large  and
well-capitalized  entities. PCS  will provide  competition to  BellSouth's local
wireline and wireless telephone businesses. Several competitive PCS systems  are
now operational.
 
    In  many markets, competing cellular service is provided by businesses owned
or controlled by a Bell Holding Company,  AT&T or a major telephone company.  In
addition,  Bell Atlantic Corporation  and NYNEX Corporation  have combined their
cellular businesses,  and  U  S  West, Inc.  and  AirTouch  Communications  have
announced  that  they  plan  to  merge  their  cellular  businesses.  Those four
companies have  also formed  a joint  venture to  provide PCS  in many  domestic
markets.
 
    BELLSOUTH   COMPETITIVE  STRATEGY.    BellSouth  has  developed  three  main
strategies that govern  its business decisions  in the increasingly  competitive
telecommunications  industry.  First, BellSouth  will strengthen  its leadership
position throughout  its  nine-state wireline  territory  by (a)  enhancing  and
building   its  brand   strength  and   distribution  channels;   (b)  providing
full-service offerings including wireline and wireless, local and long-distance,
and video and electronic commerce  services; and (c) controlling costs.  Second,
BellSouth will continue to grow profitably its domestic wireless business by (a)
deploying  value-added  products and  services  and competitive  technology; (b)
strengthening and
 
                                       37
<PAGE>
expanding  distribution  channels  including  joint  marketing  with   BellSouth
Telecommunications;  and  (c)  expanding  in-region  wireless  coverage  through
successful bidding for  PCS licenses  and other  acquisitions. Third,  BellSouth
will  continue to  grow and develop  its Latin American  and other international
operations.
 
    NEW  SERVICES.    Notwithstanding  the  inevitable  loss  of  local  service
customers  and other risks associated with increased competition, BellSouth will
have the  opportunity to  benefit  from entry  into  new business  markets.  For
example, the presence of competition, among other things, can allow BellSouth to
qualify  to offer interLATA  wireline service under  provisions contained in the
1996 Act. BellSouth believes that in order to remain competitive in the  future,
it  must aggressively  pursue a  corporate strategy  of expanding  its offerings
beyond its traditional businesses and markets. These offerings include interLATA
services, information  services  and  video and  electronic  commerce  services.
BellSouth has entered some of these businesses through investments in, strategic
alliances  with and acquisitions of established companies in such industries and
through the development of some  of these services and capabilities  internally.
For  example, among other  initiatives, BellSouth has  acquired several cable TV
rights, is conducting  a trial  of cable TV  service and  is providing  Internet
access.   BellSouth  also  intends   to  continue  to   pursue  certain  foreign
telecommunications licenses as they are offered.
 
    BellSouth plans to begin offering interLATA wireline service in each of  its
in-region  states as soon  as the FCC  approves its application  for each state.
BellSouth has  filed  documents  with  the  Georgia  Public  Service  Commission
requesting  that  the  Georgia  Commission  approve  a  statement  of  generally
available terms and conditions as provided for in the 1996 Act and to  establish
that  such terms and  conditions meet the  competitive checklist. BellSouth will
file an application for  each state as  soon as it  believes the conditions  are
met.  Because of the  proceedings required to obtain  approval and the potential
challenges of competitors  and others, it  is uncertain when  BellSouth will  be
authorized  to commence  interLATA service in  any of its  in-region states. The
1996 Act  requires  that  in-region  interLATA service  be  provided  through  a
subsidiary separate from BellSouth Telecommunications.
 
    JOINT MARKETING.  The 1996 Act allows BellSouth to market wireless and other
services jointly with its wireline local exchange services; previously, separate
marketing  was required. This  change has enabled  BellSouth to more efficiently
offer and provide integrated telecommunications. In March 1996, BellSouth  began
joint  marketing  of  wireless and  wireline  services in  selected  markets. In
addition, as permitted  by the  1996 Act,  BellSouth intends  to jointly  market
other services such as video, internet access and, eventually, interLATA service
with its wireline and wireless services.
 
    1995  WORK FORCE  REDUCTION.  As  another part of  its competitive strategy,
BellSouth Telecommunications announced in 1995 a  plan to reduce its work  force
by  approximately 11,300 employees by the end  of 1997. Also, in 1995, BellSouth
Telecommunications completed the restructuring of its telephone operations  that
had been announced in 1993.
 
                                       38
<PAGE>
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                              REPORT OF MANAGEMENT
 
    To the Shareholders of BellSouth Corporation:
 
    These  financial statements have been  prepared in conformity with generally
accepted accounting  principles  and have  been  audited by  Coopers  &  Lybrand
L.L.P., independent accountants, whose report is contained herein.
 
    The  integrity and  objectivity of  the data  in these  financial statements
including estimates and judgments relating to  matters not concluded by the  end
of  the year, are the responsibility  of the management of BellSouth. Management
has also  prepared  all  other information  included  therein  unless  indicated
otherwise.
 
    Management  maintains  a system  of  internal accounting  controls  which is
continuously reviewed  and evaluated.  However, there  are inherent  limitations
that  should be recognized in considering  the assurances provided by any system
of internal accounting controls. The concept of reasonable assurance  recognizes
that  the cost of a system of internal accounting controls should not exceed, in
management's judgment,  the benefits  to be  derived. Management  believes  that
BellSouth's  system does provide reasonable  assurance that the transactions are
executed in accordance with management's general or specific authorizations  and
are  recorded properly to  maintain accountability for assets  and to permit the
preparation of  financial  statements  in  conformity  with  generally  accepted
accounting  principles.  Management  also  believes  that  this  system provides
reasonable assurance that access to assets is permitted only in accordance  with
management's  authorizations,  that the  recorded  accountability for  assets is
compared with the existing assets  at reasonable intervals and that  appropriate
action is taken with respect to any differences. Management also seeks to assure
the  objectivity and integrity of its financial data by the careful selection of
its  managers,  by  organizational  arrangements  that  provide  an  appropriate
division of responsibility and by communications programs aimed at assuring that
its policies, standards and managerial authorities are understood throughout the
organization.  Management is also  aware that changes  in operating strategy and
organizational structure  can give  rise to  disruptions in  internal  controls.
Special attention is given to controls while the changes are being implemented.
 
    Management  maintains a strong internal  auditing program that independently
assesses the  effectiveness of  the internal  controls and  recommends  possible
improvements  thereto.  In addition,  as part  of its  audit of  these financial
statements, Coopers  &  Lybrand L.L.P.  completed  a review  of  the  accounting
controls  to establish a  basis for reliance thereon  in determining the nature,
timing and extent of  audit tests to be  applied. Management has considered  the
internal auditor's and Coopers & Lybrand L.L.P.'s recommendations concerning the
system  of  internal  controls  and  has  taken  actions  that  it  believes are
cost-effective  in  the   circumstances  to  respond   appropriately  to   these
recommendations. Management believes that as of December 31, 1996, the system of
internal controls was adequate to accomplish the objectives discussed herein.
 
    Management also recognizes its responsibility for fostering a strong ethical
climate  so  that BellSouth's  affairs are  conducted  according to  the highest
standards of personal and corporate conduct. This responsibility is communicated
to all  employees through  policies  and guidelines  addressing such  issues  as
conflict   of  interest,  safeguarding  of  BellSouth's  real  and  intellectual
properties, providing equal employment opportunities and ethical relations  with
customers,  suppliers  and governmental  representatives. BellSouth  maintains a
program to  assess compliance  with  these policies  and our  ethical  standards
through  its  Senior  Vice  President,  Executive  Staff  Officer  and Corporate
Secretary.
 
<TABLE>
<S>                                            <C>
                      /s/ F. Duane Ackerman                          /s/ Ronald M. Dykes
</TABLE>
 
<TABLE>
<S>                                         <C>
F. Duane Ackerman                           Ronald M. Dykes
PRESIDENT AND CHIEF EXECUTIVE OFFICER       EXECUTIVE VICE PRESIDENT AND
                                            CHIEF FINANCIAL OFFICER
</TABLE>
 
February 3, 1997
 
                                       39
<PAGE>
                       AUDIT COMMITTEE CHAIRMAN'S LETTER
 
    The  Audit Committee of the Board of  Directors consists of four members who
are neither officers nor employees  of BellSouth Corporation. Information as  to
these  persons, as well as their duties, is provided in the Proxy Statement. The
Audit Committee met six times during 1996 and reviewed with the Chief  Corporate
Auditor, Coopers & Lybrand L.L.P. and management current audit activities, plans
and  the results of selected internal  audits. The Audit Committee also reviewed
the objectivity of the financial reporting process and the adequacy of  internal
controls.  The Audit Committee recommended, subject to shareholder ratification,
the appointment of the independent  accountants and considered factors  relating
to  their independence.  In addition, the  Audit Committee  provided guidance in
matters regarding  ethical considerations  and  business conduct,  reviewed  the
operations of political action committees and monitored compliance with laws and
regulations.  The Chief Corporate Auditor and  Coopers & Lybrand L.L.P. each met
privately with  the  Audit  Committee  on  occasion  to  encourage  confidential
discussions as to any auditing matters.
                                          /s/ Marshall M. Criser
                                          Marshall M. Criser
                                          CHAIRMAN, AUDIT COMMITTEE
February 3, 1997
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
BellSouth Corporation
Atlanta, Georgia
 
    We  have audited the  accompanying consolidated balance  sheets of BellSouth
Corporation as  of December  31, 1996  and 1995,  and the  related  consolidated
statements  of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are  the
responsibility  of BellSouth's management.  Our responsibility is  to express an
opinion on these financial statements based on our audits.
 
    We conducted  our  audits in  accordance  with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence  supporting
the  amounts and disclosures in the financial statements. An audit also includes
assessing the  accounting  principles used  and  significant estimates  made  by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial  statements referred to above present  fairly,
in  all  material respects,  the  consolidated financial  position  of BellSouth
Corporation as of December  31, 1996 and 1995,  and the consolidated results  of
its  operations and  its cash flows  for each of  the three years  in the period
ended December  31,  1996,  in conformity  with  generally  accepted  accounting
principles.
 
    As  discussed in Note L to  the consolidated financial statements, BellSouth
discontinued accounting for the operations of BellSouth Telecommunications, Inc.
in  accordance  with  Statement  of  Financial  Accounting  Standards  No.   71,
"Accounting  for the Effects of Certain Types of Regulation," effective June 30,
1995.
                                          /s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 3, 1997
 
                                       40
<PAGE>
                             BELLSOUTH CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                                            -----------------------------------
                                                                              1996         1995         1994
                                                                            ---------    ---------    ---------
<S>                                                                         <C>          <C>          <C>
Operating Revenues:
  Network and related services:
    Local service.......................................................    $   8,082    $   7,294    $   6,863
    Interstate access...................................................        3,553        3,275        3,127
    Intrastate access...................................................          812          884          908
    Toll................................................................          794        1,009        1,190
  Wireless communications...............................................        2,799        2,592        2,067
  Directory advertising and publishing..................................        1,742        1,677        1,556
  Other services........................................................        1,258        1,155        1,134
                                                                            ---------    ---------    ---------
    Total Operating Revenues............................................       19,040       17,886       16,845
                                                                            ---------    ---------    ---------
Operating Expenses:
  Cost of services and products.........................................        6,072        6,184        6,043
  Depreciation and amortization.........................................        3,719        3,455        3,259
  Selling, general and administrative...................................        4,470        3,873        3,485
  Work force reduction charge (Note J)..................................       --            1,082       --
                                                                            ---------    ---------    ---------
    Total Operating Expenses............................................       14,261       14,594       12,787
                                                                            ---------    ---------    ---------
Operating Income........................................................        4,779        3,292        4,058
Interest Expense........................................................          721          724          666
Gain on Sale of Paging Business (Note B)................................          442       --           --
Other Income, net.......................................................          108           20           11
                                                                            ---------    ---------    ---------
Income Before Income Taxes and Extraordinary Losses.....................        4,608        2,588        3,403
Provision for Income Taxes (Note K).....................................        1,745        1,024        1,243
                                                                            ---------    ---------    ---------
Income Before Extraordinary Losses......................................        2,863        1,564        2,160
Extraordinary Loss for Discontinuance of SFAS No. 71,
 net of tax (Note L)....................................................       --           (2,718)      --
Extraordinary Loss on Early Extinguishment of Debt,
 net of tax (Note E)....................................................       --              (78)      --
                                                                            ---------    ---------    ---------
      Net Income (Loss).................................................    $   2,863    $  (1,232)   $   2,160
                                                                            ---------    ---------    ---------
                                                                            ---------    ---------    ---------
 
Weighted Average Common Shares Outstanding (Note G).....................          994          993          992
Dividends Declared Per Common Share (Note G)............................    $    1.44    $    1.41    $    1.38
 
Earnings (Loss) Per Share: (Note G)
  Income Before Extraordinary Losses....................................    $    2.88    $    1.57    $    2.18
  Extraordinary Loss for Discontinuance of SFAS No. 71,
   net of tax (Note L)..................................................       --            (2.73)      --
  Extraordinary Loss on Early Extinguishment of Debt,
   net of tax (Note E)..................................................       --             (.08)      --
                                                                            ---------    ---------    ---------
      Net Income (Loss).................................................    $    2.88    $   (1.24)   $    2.18
                                                                            ---------    ---------    ---------
                                                                            ---------    ---------    ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       41
<PAGE>
                             BELLSOUTH CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,
                                                                                                   --------------------
                                                                                                     1996       1995
                                                                                                   ---------  ---------
<S>                                                                                                <C>        <C>
ASSETS
Current Assets:
  Cash and cash equivalents......................................................................  $   1,178  $   1,711
  Temporary cash investments.....................................................................         51         71
  Accounts receivable, net of allowance for uncollectibles of $180 and $171......................      4,087      3,772
  Material and supplies..........................................................................        451        430
  Other current assets...........................................................................        531        521
                                                                                                   ---------  ---------
    Total Current Assets.........................................................................      6,298      6,505
                                                                                                   ---------  ---------
Investments and Advances (Note B)................................................................      2,430      2,418
Property, Plant and Equipment, net (Note C)......................................................     21,825     21,092
Deferred Charges and Other Assets................................................................        610        338
Intangible Assets, net...........................................................................      1,405      1,527
                                                                                                   ---------  ---------
    Total Assets.................................................................................  $  32,568  $  31,880
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Debt maturing within one year (Note E).........................................................  $   2,124  $   2,951
  Accounts payable...............................................................................      1,446      1,724
  Other current liabilities (Note D).............................................................      2,871      2,715
                                                                                                   ---------  ---------
    Total Current Liabilities....................................................................      6,441      7,390
                                                                                                   ---------  ---------
Long-Term Debt (Note E)..........................................................................      8,116      7,924
                                                                                                   ---------  ---------
Deferred Credits and Other Liabilities:
  Accumulated deferred income taxes..............................................................      1,899      1,650
  Unamortized investment tax credits.............................................................        278        355
  Other liabilities and deferred credits (Note F)................................................      2,585      2,736
                                                                                                   ---------  ---------
    Total Deferred Credits and Other Liabilities.................................................      4,762      4,741
                                                                                                   ---------  ---------
Shareholders' Equity:
  Common stock, $1 par value (2,200 shares authorized; 991 and 994 shares outstanding)...........      1,009      1,007
  Paid-in capital................................................................................      7,697      7,619
  Retained earnings..............................................................................      5,541      4,099
  Shares held in trust and treasury (Note G).....................................................       (532)      (374)
  Guarantee of ESOP debt (Note H)................................................................       (466)      (526)
                                                                                                   ---------  ---------
    Total Shareholders' Equity...................................................................     13,249     11,825
                                                                                                   ---------  ---------
    Total Liabilities and Shareholders' Equity...................................................  $  32,568  $  31,880
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       42
<PAGE>
                             BELLSOUTH CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN MILLIONS)
<TABLE>
<CAPTION>
                                              NUMBER OF SHARES                              AMOUNT
                                           ----------------------   ------------------------------------------------------
                                                       SHARES                                       SHARES       GUARANTEE
                                           COMMON   HELD IN TRUST    PAR    PAID-IN   RETAINED   HELD IN TRUST    OF ESOP
                                           STOCK    AND TREASURY    VALUE   CAPITAL   EARNINGS   AND TREASURY      DEBT
                                           ------   -------------   ------  -------   --------   -------------   ---------
<S>                                        <C>      <C>             <C>     <C>       <C>        <C>             <C>
Balance at December 31, 1993.............    502          (6)       $  502  $ 8,010   $ 5,919        $(293)        $(643)
Net income...............................                                               2,160
Dividends declared.......................                                              (1,370)
Shares issued for:
  Employee benefit plans.................                                         6
  Grantor trusts.........................      1          (1)            1       42                    (43)
ESOP activities and related tax
 benefit.................................                                                  12                         59
Foreign currency translation
 adjustment..............................                                         6
                                           ------        ---        ------  -------   --------      ------       ---------
Balance at December 31, 1994.............    503          (7)          503    8,064     6,721         (336)         (584)
Two-for-one stock split (Note G).........    503          (6)          503     (503)
Net loss.................................                                              (1,232)
Dividends declared.......................                                              (1,400)
Shares issued for:
  Employee benefit plans.................      1                         1       30
  Grantor trusts.........................                                        38                    (38)
ESOP activities and related tax
 benefit.................................                                                  10                         58
Foreign currency translation
 adjustment..............................                                       (10)
                                           ------        ---        ------  -------   --------      ------       ---------
Balance at December 31, 1995.............  1,007         (13)        1,007    7,619     4,099         (374)         (526)
Net income...............................                                               2,863
Dividends declared.......................                                              (1,430)
Shares issued for:.......................
  Employee benefit plans.................      1                         1       14                     11
  Grantor trusts.........................      1          (1)            1       34                    (35)
Shares purchased for:
  Treasury...............................                 (3)                                          (85)
  Grantor trusts.........................                 (1)                                          (49)
ESOP activities and related tax
 benefit.................................                                                   9                         60
Foreign currency translation
 adjustment..............................                                        30
                                           ------        ---        ------  -------   --------      ------       ---------
Balance at December 31, 1996.............  1,009         (18)       $1,009  $ 7,697   $ 5,541        $(532)        $(466)
                                           ------        ---        ------  -------   --------      ------       ---------
                                           ------        ---        ------  -------   --------      ------       ---------
 
<CAPTION>
 
                                            TOTAL
                                           -------
<S>                                        <C>
Balance at December 31, 1993.............  $13,495
Net income...............................    2,160
Dividends declared.......................   (1,370)
Shares issued for:
  Employee benefit plans.................        6
  Grantor trusts.........................       --
ESOP activities and related tax
 benefit.................................       71
Foreign currency translation
 adjustment..............................        6
                                           -------
Balance at December 31, 1994.............   14,368
Two-for-one stock split (Note G).........       --
Net loss.................................   (1,232)
Dividends declared.......................   (1,400)
Shares issued for:
  Employee benefit plans.................       31
  Grantor trusts.........................       --
ESOP activities and related tax
 benefit.................................       68
Foreign currency translation
 adjustment..............................      (10)
                                           -------
Balance at December 31, 1995.............   11,825
Net income...............................    2,863
Dividends declared.......................   (1,430)
Shares issued for:.......................
  Employee benefit plans.................       26
  Grantor trusts.........................       --
Shares purchased for:
  Treasury...............................      (85)
  Grantor trusts.........................      (49)
ESOP activities and related tax
 benefit.................................       69
Foreign currency translation
 adjustment..............................       30
                                           -------
Balance at December 31, 1996.............  $13,249
                                           -------
                                           -------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       43
<PAGE>
                             BELLSOUTH CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                                                            ---------------------------------
                                                                                              1996        1995        1994
                                                                                            ---------  ----------  ----------
<S>                                                                                         <C>        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).......................................................................  $   2,863  $   (1,232) $    2,160
  Adjustments to net income (loss):
    Gain on sale of paging business.......................................................       (442)     --          --
    Depreciation and amortization.........................................................      3,719       3,455       3,259
    Provision for uncollectibles..........................................................        254         213         175
    Deferred income taxes and unamortized investment tax credits..........................        120      (1,971)        (19)
    Pension expense in excess of funding/(pension income).................................        (14)        (53)         28
    Dividends from unconsolidated affiliates..............................................        130         149         122
    Losses from unconsolidated affiliates, net............................................         76          86         110
    Extraordinary loss for discontinuance of SFAS No. 71..................................     --           4,449      --
    Extraordinary loss on early extinguishment of debt....................................     --             127      --
    Payment of call premium...............................................................     --             (74)     --
    Work force reduction charge...........................................................     --           1,082      --
    Net change in:
      Accounts receivable and other current assets........................................       (645)       (770)       (741)
      Accounts payable and other current liabilities......................................       (708)       (283)       (187)
      Deferred charges and other assets...................................................       (126)        (28)        (34)
      Other liabilities and deferred credits..............................................        581         315         437
    Other reconciling items, net..........................................................         55         (22)       (138)
                                                                                            ---------  ----------  ----------
    Net cash provided by operating activities.............................................      5,863       5,443       5,172
                                                                                            ---------  ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures....................................................................     (4,455)     (4,203)     (3,600)
  Proceeds from sale of paging business...................................................        930      --          --
  Proceeds from disposition of short-term investments.....................................        355         187         107
  Purchases of short-term investments.....................................................       (336)       (207)       (108)
  Proceeds from investment dispositions and repayments of advances........................        102         426         238
  Investments in and advances to unconsolidated affiliates................................       (620)       (521)       (623)
  Other investing activities, net.........................................................       (175)        (66)         51
                                                                                            ---------  ----------  ----------
    Net cash used for investing activities................................................     (4,199)     (4,384)     (3,935)
                                                                                            ---------  ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from short-term borrowings.....................................................     23,942      21,075      22,489
  Repayments of short-term borrowings.....................................................    (24,439)    (20,565)    (22,306)
  Proceeds from long-term debt............................................................        392       2,488         191
  Repayments of long-term debt............................................................       (544)     (1,555)       (129)
  Dividends paid..........................................................................     (1,430)     (1,385)     (1,369)
  Other financing activities, net.........................................................       (118)        (12)         (8)
                                                                                            ---------  ----------  ----------
    Net cash provided by (used for) financing activities..................................     (2,197)         46      (1,132)
                                                                                            ---------  ----------  ----------
Net Increase (Decrease) in Cash and Cash Equivalents......................................       (533)      1,105         105
Cash and Cash Equivalents at Beginning of Period..........................................      1,711         606         501
                                                                                            ---------  ----------  ----------
Cash and Cash Equivalents at End of Period................................................  $   1,178  $    1,711  $      606
                                                                                            ---------  ----------  ----------
                                                                                            ---------  ----------  ----------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       44
<PAGE>
                             BELLSOUTH CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ACCOUNTING POLICIES
 
    ORGANIZATION.    BellSouth  Corporation  (BellSouth)  is  a  holding company
headquartered in Atlanta, Georgia whose operating telephone company  subsidiary,
BellSouth  Telecommunications, Inc.  (BellSouth Telecommunications),  serves, in
the aggregate, approximately two-thirds  of the population  and one-half of  the
territory  within Alabama,  Florida, Georgia,  Kentucky, Louisiana, Mississippi,
North Carolina,  South  Carolina  and  Tennessee.  BellSouth  Telecommunications
primarily  provides  local  exchange service  and  toll  communications services
within geographic areas, called  Local Access and  Transport Areas (LATAs),  and
provides  network access services  to enable interLATA  communications using the
long-distance facilities of interexchange carriers. Through subsidiaries,  other
telecommunications  services  and  products are  provided  primarily  within the
nine-state BellSouth  Telecommunications  region.  BellSouth  Enterprises,  Inc.
(BellSouth   Enterprises),  another  wholly-owned  subsidiary,  owns  businesses
providing wireless and international communications services and advertising and
publishing products.
 
    Substantially  all  of  BellSouth's  operating  revenues  are  derived  from
domestic  operations. For the year ended December 31, 1996, approximately 70% of
BellSouth's operating revenues were from wireline and network services, 15% were
from wireless communications services and 9% were from directory advertising and
publishing services.  The  remainder  of such  operating  revenues  was  derived
principally   from   other   nonregulated   services   provided   by   BellSouth
Telecommunications.
 
    BASIS OF PRESENTATION.   The consolidated  financial statements include  the
accounts  of BellSouth and subsidiaries in  which it has a controlling financial
interest. Investments in certain  partnerships, joint ventures and  subsidiaries
are  accounted  for  using  the  equity  method.  All  significant  intercompany
transactions and accounts  have been  eliminated. Certain amounts  in the  prior
period  consolidated financial statements  have been reclassified  to conform to
the current year's presentation.
 
    BASIS OF  ACCOUNTING.   BellSouth's consolidated  financial statements  have
been  prepared in accordance with generally accepted accounting principles. Such
financial statements include estimates and assumptions that affect the  reported
amounts   of  assets  and  liabilities,  disclosure  of  contingent  assets  and
liabilities and  the amounts  of  revenues and  expenses. Actual  results  could
differ from those estimates.
 
    Effective  June 30, 1995, BellSouth discontinued application of Statement of
Financial Accounting Standards  (SFAS) No.  71, "Accounting for  the Effects  of
Certain  Types of Regulation." See Note L  for further discussion of the impacts
of discontinuance of SFAS No. 71.
 
    CASH  AND  CASH  EQUIVALENTS.     BellSouth  considers  all  highly   liquid
investments  with  an original  maturity  of three  months  or less  to  be cash
equivalents. Investments with an original maturity  of over three months to  one
year  are not  considered cash  equivalents and  are included  as temporary cash
investments  on  the  consolidated  balance  sheets.  Interest  income  on  cash
equivalents,  temporary cash investments  and other interest-bearing instruments
was $163, $108 and  $65 for the  years ended December 31,  1996, 1995 and  1994,
respectively.
 
    MATERIAL  AND SUPPLIES.  New and  reusable material is carried in inventory,
principally at average original cost, except that specific costs are used in the
case of large  individual items.  Nonreusable material is  carried at  estimated
salvage value.
 
    PROPERTY,  PLANT  AND  EQUIPMENT.   The  investment in  property,  plant and
equipment is stated at original cost. For plant dedicated to providing regulated
telecommunications services, depreciation is based on the remaining life  method
of  depreciation and  straight-line composite rates  determined on  the basis of
equal life groups of certain categories  of telephone plant acquired in a  given
year.  When depreciable telephone  plant is disposed of,  the original cost less
net salvage value  is charged  to accumulated  depreciation. The  cost of  other
property, plant and equipment is depreciated using either
 
                                       45
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
straight-line  or accelerated  methods over  the estimated  useful lives  of the
assets. Gains or  losses on disposal  of other depreciable  property, plant  and
equipment  are recognized  in the  year of  disposition as  an element  of other
non-operating income.
 
    INTANGIBLE ASSETS.   Intangible assets consist  of the excess  consideration
paid  over  the fair  value  of net  assets  acquired in  business combinations,
acquired licenses  and customer  lists. Intangible  assets are  being  amortized
using  the straight-line and  accelerated methods over  periods of benefit. Such
periods do  not exceed  40 years.  The carrying  value of  intangible assets  is
periodically  reviewed  on  the  basis of  whether  such  intangibles  are fully
recoverable from projected, discounted  net cash flows  of the related  business
unit.  Amortization of such intangibles was $49, $50 and $53 for the years ended
December 31, 1996, 1995 and 1994,  respectively. At December 31, 1996 and  1995,
accumulated amortization of intangibles was $220 and $228, respectively.
 
    FOREIGN CURRENCY.  Assets and liabilities of foreign subsidiaries and equity
investees with a functional currency other than U.S. dollars are translated into
U.S.  dollars at exchange  rates in effect  at the end  of the reporting period.
Foreign entity revenues  and expenses are  translated into U.S.  dollars at  the
average  rates that prevailed  during the period.  The resulting net translation
gains and losses  are reported  as foreign currency  translation adjustments  in
Shareholders' Equity as a component of Paid-In Capital.
 
    Exchange  gains and  losses on  transactions of  the company  and its equity
investees denominated in  a currency  other than their  functional currency  are
generally  included in results of operations as incurred unless the transactions
are hedged (see  "Derivative Financial Instruments"  below). The exchange  gains
and  losses  for the  years  ended December  31, 1996,  1995  and 1994  were not
material.
 
    DERIVATIVE FINANCIAL INSTRUMENTS.   Foreign exchange  forward contracts  are
carried  at fair value in  the consolidated balance sheets.  Gains and losses on
foreign exchange forward contracts used as currency hedges of existing assets or
liabilities are  deferred  and offset  the  deferred  losses and  gains  of  the
underlying asset or liability. The net effect is ultimately recognized in income
as  the underlying transaction  matures. Gains and  losses related to qualifying
hedges of firm commitments also are deferred and are recognized in income or  as
adjustments of carrying amounts when the hedged transaction occurs.
 
    Currency  swap  contracts  entered into  as  hedges of  existing  assets and
liabilities are carried at fair value in the consolidated balance sheets.  Gains
and  losses  on currency  swaps  are deferred  and  offset against  the deferred
currency losses and gains of the  underlying asset or liability. The net  effect
is ultimately recognized in income as the underlying transaction matures.
 
    Interest  rate swap  agreements are  treated as  off-balance sheet financial
instruments.  Receipts  or  payments   resulting  from  these  instruments   are
recognized as adjustments to interest expense as received or paid.
 
    REVENUE  RECOGNITION.  Revenues are recognized when earned. Certain revenues
derived from local telephone and wireless services are billed monthly in advance
and are recognized  the following  month when services  are provided.  Directory
advertising  and publishing revenues and  related directory costs are recognized
upon publication of directories. Revenues derived from other  telecommunications
services,  principally  network access,  toll  and cellular  airtime  usage, are
recognized monthly as services are provided. Allowances for uncollectible billed
services are adjusted monthly. The provision for such uncollectible accounts was
$254, $213  and $175  for the  years ended  December 31,  1996, 1995  and  1994,
respectively.
 
    Revenues from services provided to AT&T Corp., BellSouth's largest customer,
were  approximately 9%, 10% and 11% of consolidated operating revenues for 1996,
1995 and 1994, respectively.
 
                                       46
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
    MAINTENANCE AND REPAIRS.   The  cost of  maintenance and  repairs of  plant,
including   the  cost  of  replacing   minor  items  not  effecting  substantial
betterments, is charged to operating expenses.
 
    INCOME TAXES.  The balance  sheet reflects deferred tax balances  associated
with  the anticipated tax impact of future  income or deductions implicit in the
balance sheet  in  the  form of  temporary  differences.  Temporary  differences
primarily  result  from the  use  of accelerated  methods  and shorter  lives in
computing depreciation for tax purposes.
 
    For  financial  reporting   purposes,  BellSouth   is  amortizing   deferred
investment  tax credits earned  prior to the  1986 repeal of  the investment tax
credit and also some transitional credits  earned after the repeal. The  credits
are  being amortized as a  reduction to the provision  for income taxes over the
estimated useful lives of the assets to which the credits relate.
 
    EARNINGS PER SHARE.  Earnings per common share are computed on the basis  of
the  weighted average number  of shares of common  stock outstanding during each
year.
 
NOTE B -- INVESTMENTS, ADVANCES AND SALES OF OPERATIONS
    Investments and advances as of December 31 consist of the following:
 
<TABLE>
<CAPTION>
                                                                                       1996       1995
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Investments accounted for under the equity method..................................  $   1,676  $   1,845
Advances to and notes receivable from affiliates...................................        675        477
Other investments..................................................................         79         96
                                                                                     ---------  ---------
  Total Investments and Advances...................................................  $   2,430  $   2,418
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
    BellSouth's equity method investments primarily include various partnerships
in domestic  and  international  wireless  properties  and  other  international
communications  consortiums. Losses  related to investments  accounted for under
the equity  method  were $(76),  $(86)  and $(110)  for  the three  years  ended
December  31, 1996, 1995 and 1994, respectively, and are included as a component
of Other Income, net.
 
    DOMESTIC  CELLULAR.    BellSouth's  domestic  cellular  investments  consist
primarily  of  a 60.0%  non-controlling financial  interest  in the  Los Angeles
Cellular Telephone  Company  and  a  43.8%  interest  in  the  Houston  Cellular
Telephone  Company. At  December 31,  1996, BellSouth's  aggregate investment in
these entities exceeded the underlying book  value of the investees' net  assets
by  $880. The excess of  consideration paid over net  assets acquired along with
other intangible  assets  is  being  amortized  using  either  straight-line  or
accelerated methods over periods of benefit, which do not exceed 40 years.
 
    INTERNATIONAL   COMMUNICATIONS.     BellSouth  has   equity  investments  in
international cellular  operations in  Latin America,  Europe, the  Asia-Pacific
region  and other  international markets  with ownership  ranging from  22.5% to
53.3%. Telcel Cellular C.A.  (TelCel), in which  BellSouth has a  noncontrolling
53.3% interest, provides cellular telephone service in Venezuela. BellSouth is a
24.5%  participant in Optus,  an international consortium  which provides a full
spectrum of telecommunications services in Australia, including switched network
and enhanced services,  wireless and  satellite based services.  BellSouth is  a
22.5%  participant in the  E-Plus Mobilfunk consortium  (E-Plus), which provides
cellular telephone service in Germany.
 
    OTHER INVESTMENTS.  BellSouth has noncontrolling financial interests ranging
from 70% to 80% in  the CSL Ventures and  1155 Peachtree Associates real  estate
partnerships.  BellSouth  had  notes  receivable  from  and  advances  to  these
partnerships totaling $193 and $188 at December 31, 1996 and 1995, respectively.
The notes bear interest at rates ranging from 6.31% to 9.31% while the  advances
bear
 
                                       47
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE B -- INVESTMENTS, ADVANCES AND SALES OF OPERATIONS (CONTINUED)
interest  at the federal funds rate  plus .30%. Principal amounts outstanding at
December 31, 1996 are due and payable to BellSouth between January 15, 1998  and
August  8, 2002. The  instruments require periodic payments  of interest and are
collateralized by various real estate holdings.
 
    BellSouth has a credit agreement with Prime South Diversified, Inc.  (Prime)
to  provide up to $250 in financing, of which $250 and $185 had been borrowed by
Prime as of December 31, 1996 and 1995, respectively. The loan is collateralized
by the stock of Prime,  which indirectly wholly owns  Community Cable TV in  Las
Vegas, and its wholly-owned subsidiary Prime South Holdings, Inc. The loan bears
interest at a variable rate of 10% to 11% and matures in 2001.
 
    BellSouth  and RAM Communications Group, Inc. are partners in an entity that
owns and  operates  certain mobile  data  communications networks.  Through  its
investment,  BellSouth holds  a 49%  interest in  the United  States mobile data
operations and various interests in foreign mobile data operations ranging  from
6% to 72.5%.
 
    In 1996, BellSouth initiated a tender offer for a controlling interest in an
entity  that provides  cellular telephone  service in  Peru. BellSouth deposited
$148 in escrow arrangements pending the outcome of the tender offer. Such amount
is  included  in  Deferred  Charges   and  Other  Assets  in  the   accompanying
consolidated  balance sheet.  In January 1997,  BellSouth successfully completed
the tender offer, acquiring a 58.7% interest in the entity.
 
    Minority interests of consolidated subsidiaries, included as a component  of
Other  Income, net, were $(27), $(62) and $(80) for the years ended December 31,
1996, 1995 and 1994, respectively.
 
    SALES OF  OPERATIONS.   In  January 1996,  BellSouth  sold to  Mobile  Media
Communications, Inc. its paging subsidiary, Mobile Communications Corporation of
America  (MCCA), and  its two-way nationwide  narrowband personal communications
services license for a total of approximately $930. The pretax gain on such sale
was $442. MCCA's operating  revenues were $349 and  $276, respectively, for  the
years  ended December 31, 1995 and 1994.  Total operating expenses were $300 and
$245, respectively, for the years ended December 31, 1995 and 1994. Total assets
at December 31, 1995 were $355.
    In  1994,  BellSouth  disposed  of  its  interests  in  cellular   telephone
businesses   in  Mexico  and  France.  BellSouth  recognized  gains  from  these
dispositions aggregating $108, which are included in Other Income, net.
 
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
    Property, plant and equipment is summarized as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                                     1996       1995
                                                                                   ---------  ---------
<S>                                                                                <C>        <C>
Outside plant....................................................................  $  20,866  $  20,092
Central office equipment.........................................................     17,442     16,132
Building and building improvements...............................................      3,595      3,303
Operating and other equipment....................................................      3,595      2,952
Furniture and fixtures...........................................................      3,017      2,791
Plant under construction.........................................................        716        782
Station equipment................................................................        638        626
Land.............................................................................        190        191
                                                                                   ---------  ---------
                                                                                      50,059     46,869
  Less: Accumulated depreciation.................................................     28,234     25,777
                                                                                   ---------  ---------
    Total Property, Plant and Equipment, net.....................................  $  21,825  $  21,092
                                                                                   ---------  ---------
                                                                                   ---------  ---------
</TABLE>
 
    See Note L for  a discussion of  the discontinuance of SFAS  No. 71 and  its
effect on Property, Plant and Equipment.
 
                                       48
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE D -- OTHER CURRENT LIABILITIES
    Other current liabilities are summarized as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                                       1996       1995
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Advanced billing and customer deposits.............................................  $     539  $     493
Taxes accrued......................................................................        517        382
Dividends payable..................................................................        363        363
Salaries and wages payable.........................................................        335        325
Postemployment benefits (see Note J)...............................................        303        273
Interest and rents accrued.........................................................        293        282
Compensated absences...............................................................        244        317
Other..............................................................................        277        280
                                                                                     ---------  ---------
  Total Other Current Liabilities..................................................  $   2,871  $   2,715
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
NOTE E -- DEBT
    DEBT  MATURING WITHIN ONE YEAR:  Debt maturing within one year is summarized
as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                                       1996       1995
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Debentures Redeemed in January 1996................................................  $  --      $     485
Short-term notes payable:
  Bank loans.......................................................................         73         85
  Commercial paper.................................................................      1,885      2,302
Current maturities of long-term debt...............................................        166         79
                                                                                     ---------  ---------
  Total Debt Maturing Within One Year..............................................  $   2,124  $   2,951
                                                                                     ---------  ---------
                                                                                     ---------  ---------
Weighted average interest rate at end of period:
  Bank loans.......................................................................       7.40%      7.50%
  Commercial paper.................................................................       5.50%      5.81%
</TABLE>
 
    BellSouth has committed credit lines aggregating $1,951 with various  banks.
Borrowings  under  the committed  lines totaled  $92  and $66,  respectively, at
December 31, 1996 and 1995. BellSouth also maintains uncommitted lines of credit
aggregating $650.  At December  31, 1996,  there were  no borrowings  under  the
uncommitted  lines. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
 
                                       49
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE E -- DEBT (CONTINUED)
    LONG-TERM:  Long-term  debt,   summarized  below,   consists  primarily   of
debentures  and notes issued by BellSouth Telecommunications. Interest rates and
maturities in the table  below are for the  amounts outstanding at December  31,
1996.
 
<TABLE>
<CAPTION>
                                                   CONTRACTUAL
                                                  INTEREST RATES      MATURITIES      1996       1995
                                                ------------------  --------------  ---------  ---------
<S>                                             <C>                 <C>             <C>        <C>
BellSouth Telecommunications Debentures:           4 3/8% - 6 3/4%     1997 - 2045  $   1,905  $   1,915
                                                        6.65% - 7%            2095        635        626
                                                       7% - 8 1/4%     2010 - 2035      2,050      2,535
                                                                                    ---------  ---------
                                                                                        4,590      5,076
BellSouth Telecommunications Notes............         5 1/4% - 7%     1998 - 2008      2,175      2,175
BellSouth Capital Funding Corporation Notes...       4.89% - 9.25%     1997 - 2026        820        544
Guarantee of ESOP debt........................      9.125% - 9.19%            2003        594        647
Other.........................................                                            136         79
Unamortized discount, net of premium..........                                            (33)       (33)
                                                                                    ---------  ---------
                                                                                        8,282      8,488
Current maturities............................                                           (166)      (564)
                                                                                    ---------  ---------
  Total Long-Term Debt........................                                      $   8,116  $   7,924
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    Maturities of long-term debt outstanding (principal amounts) at December 31,
1996 are summarized below. Maturities after the year 2001 include $500 principal
amount  6.65% debentures due in 2095. At  December 31, 1996, such debentures had
an accreted book value of $135.
 
<TABLE>
<CAPTION>
                                1997       1998       1999       2000       2001     THEREAFTER     TOTAL
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
<S>                           <C>        <C>        <C>        <C>        <C>        <C>          <C>
Maturities..................  $     166  $     798  $     265  $     473  $     182   $   6,796   $   8,680
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
</TABLE>
 
    Notes issued by BellSouth Capital Funding Corporation (Capital Funding)  are
used  to finance  the businesses  of BellSouth  Enterprises and  the unregulated
subsidiaries of BellSouth Telecommunications. BellSouth has agreed to ensure the
timely payment of principal, premium, if any, and interest on Capital  Funding's
debt securities.
 
    During  1995, BellSouth Telecommunications refinanced certain long-term debt
issues at more favorable interest  rates. The approximate $1,900 gross  proceeds
of  debentures  issued  during the  year  to accomplish  these  refinancings are
included in Long-Term Debt.  Of the total $1,885  aggregate principal amount  of
debentures  called for redemption during 1995, $1,400 had actually been redeemed
as of December 31, 1995. The  remaining $485 of debentures, redeemed in  January
1996,  are included in  the Consolidated Balance  Sheet at December  31, 1995 in
Debt Maturing Within One Year. As a result of the early extinguishment of  these
issues,  including the issues redeemed in January 1996, an extraordinary loss of
$78 ($.08 per share),  net of a  current tax benefit of  $49, was recognized  in
1995.
 
    At  December 31, 1996,  shelf registration statements were  on file with the
Securities and Exchange Commission under  which $1,927 of debt securities  could
be offered.
 
                                       50
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE F -- OTHER LIABILITIES AND DEFERRED CREDITS
    Other liabilities and deferred credits are summarized as follows at December
31:
 
<TABLE>
<CAPTION>
                                                                                       1996       1995
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Postretirement benefits other than pensions (see Notes H and J)....................  $     744  $     675
Accrued pension cost (see Notes H and J)...........................................        581        469
Compensation related...............................................................        522        421
Minority interests.................................................................        439        347
Postemployment benefits (see Note J)...............................................        144        494
Sharing accrual under FCC price cap plan...........................................         39        186
Other..............................................................................        116        144
                                                                                     ---------  ---------
  Total Other Liabilities and Deferred Credits.....................................  $   2,585  $   2,736
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
NOTE G -- SHAREHOLDERS' EQUITY
    STOCK  SPLIT.  In September 1995,  BellSouth's Board of Directors approved a
two-for-one stock split effected in the  form of a stock dividend, whereby  each
shareholder  of record as of  October 11, 1995 received  on November 8, 1995 one
additional share of common stock for each share owned as of the record date.  As
a  result of the split, 503,555,084 shares  were issued and $503 was transferred
from Paid-In Capital to Common Stock. Also in September 1995, BellSouth's  Board
of  Directors approved an increase in the  number of authorized shares of common
stock to  2,200,000,000  from  1,100,000,000.  Weighted  average  common  shares
outstanding  and per share  amounts for 1994  have been restated  to reflect the
stock split.
 
    PREFERRED STOCK AUTHORIZED.  BellSouth's Articles of Incorporation authorize
100 million shares of cumulative First Preferred Stock having a par value of  $1
per share, of which 30 million shares have been reserved and designated Series A
for  possible issuance under BellSouth's Shareholder Rights Plan. As of December
31, 1996, no preferred shares had been issued.
 
    SHAREHOLDER RIGHTS PLAN.   In 1989, BellSouth  adopted a Shareholder  Rights
Plan  by declaring a dividend  of one right for each  share of common stock then
outstanding and to be issued thereafter. Each right entitles shareholders to buy
one one-hundredth of a share  of Series A First  Preferred Stock for $87.50  per
share. The rights may be exercised only if a person or group acquires 10% of the
common  stock of BellSouth without the prior  approval of the Board of Directors
or announces a tender or exchange offer that would result in ownership of 25% or
more of the common stock. If a person or group acquires 10% of BellSouth's stock
without prior Board approval,  other shareholders are  then allowed to  purchase
BellSouth  common stock at half price. The rights currently trade with BellSouth
common stock and  may be redeemed  by the Board  of Directors for  one cent  per
right until they become exercisable, and thereafter under certain circumstances.
The rights expire in 1999.
 
    SHARES  HELD IN TRUST AND  TREASURY.  During 1994,  1995 and 1996, BellSouth
issued shares to  grantor trusts  to provide  partial funding  for the  benefits
payable under certain nonqualified benefit plans. The trusts are irrevocable and
assets  contributed to  the trusts can  only be  used to pay  such benefits with
certain exceptions. At December 31, 1996 and 1995, the assets held in the trusts
consist of cash and 15,796,782 and 13,753,204 shares, respectively, of BellSouth
common stock. Of the total shares of BellSouth common stock held by the  trusts,
14,586,782  were issued by  BellSouth directly to the  trusts, out of previously
unissued shares and 1,210,000 shares  were acquired in open market  transactions
through use of the trusts' funds.
 
    The  total cost of the shares issued by  BellSouth as of the date of funding
the trusts is  included in Common  Stock and Paid-In  Capital; however,  because
these  shares are not  considered outstanding for  financial reporting purposes,
the  shares  are  included  within  Shares   Held  in  Trust  and  Treasury,   a
 
                                       51
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
reduction  to Shareholders' Equity. In addition,  there is no earnings per share
impact of these shares. The cost of shares acquired in open market purchases  by
the trust are also included in Shares Held in Trust and Treasury.
 
    In  addition to shares held by the  grantor trusts, Shares Held in Trust and
Treasury includes  treasury  shares  purchased in  connection  with  BellSouth's
announced  plans to  repurchase shares of  its common stock.  In 1996, BellSouth
purchased 2,207,152 treasury shares for an aggregate of $85. A total of  276,168
shares were reissued under various employee benefit plans.
 
    Shares  Held in  Trust and  Treasury as  of December  31, 1996  and 1995 are
comprised of the following:
 
<TABLE>
<CAPTION>
                                                                  1996                        1995
                                                       --------------------------  --------------------------
                                                          SHARES        AMOUNT        SHARES        AMOUNT
                                                       -------------  -----------  -------------  -----------
<S>                                                    <C>            <C>          <C>            <C>
Shares held by Grantor Trusts........................     15,796,782   $     458      13,753,204   $     374
Shares held in Treasury..............................      1,930,984          74        --            --
                                                       -------------       -----   -------------       -----
    Total Shares Held in Trust and Treasury..........     17,727,766   $     532      13,753,204   $     374
                                                       -------------       -----   -------------       -----
                                                       -------------       -----   -------------       -----
</TABLE>
 
    GUARANTEE OF  ESOP DEBT.   Financial  reporting practices  require that  the
amount equivalent to BellSouth's guarantee of the amortizing notes issued by its
ESOP  trusts be  presented as  a reduction  to Shareholders'  Equity. The amount
recorded  as  a  decrease  in  Shareholders'  Equity  represents  the  cost   of
unallocated BellSouth common stock purchased with the proceeds of the amortizing
notes  and the timing difference resulting  from the shares allocated accounting
method. See Note H.
 
NOTE H -- EMPLOYEE BENEFIT PLANS
    PENSION PLANS.   Substantially  all employees  of BellSouth  are covered  by
noncontributory  defined benefit  pension plans.  Principal plans  are discussed
below; other plans are not significant individually or in the aggregate.
 
    The plan  covering nonrepresented  employees is  a cash  balance plan  which
provides  pension  benefits determined  by  a combination  of compensation-based
service and additional  credits and individual  account-based interest  credits.
The cash balance plan is subject to a minimum benefit determined under a plan in
existence  for nonrepresented  employees prior  to July  1, 1993  which provided
benefits based upon credited service  and employees' average compensation for  a
specified  period. The  minimum benefit  under the  prior plan  is applicable to
employees retiring  through  2005. Both  the  1996 and  1995  projected  benefit
obligations  assume  interest and  additional credits  greater than  the minimum
levels specified in the written plan. Pension benefits provided for  represented
employees  are  based on  specified  benefit amounts  and  years of  service and
include the projected effect of future bargained-for improvements.
 
    BellSouth's funding policy is to make contributions to trust funds with  the
objective  of accumulating  sufficient assets  to pay  all pension  benefits for
which BellSouth is  liable. Contributions are  actuarially determined using  the
aggregate   cost  method,  subject   to  ERISA  and   Internal  Revenue  Service
limitations. Pension  plan assets  consist primarily  of equity  securities  and
fixed income investments.
 
                                       52
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
    The components of net pension (income) cost are summarized below:
 
<TABLE>
<CAPTION>
                                                                          1996       1995       1994
                                                                        ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>
Service cost -- benefits earned during the year.......................  $     288  $     239  $     272
Interest cost on projected benefit obligation.........................        799        812        778
Actual (return) loss on plan assets...................................     (1,957)    (3,041)       136
Net amortization and deferral.........................................        856      1,937     (1,158)
                                                                        ---------  ---------  ---------
  Net pension (income) cost...........................................  $     (14) $     (53) $      28
                                                                        ---------  ---------  ---------
                                                                        ---------  ---------  ---------
</TABLE>
 
    Effective  January 1, 1994, the nonrepresented cash balance plan was divided
from one into four cash  balance plans which allowed  for costs to be  accounted
for more precisely based upon specific company demographic information. The plan
division  had no material impact on BellSouth in 1994. Net pension (income) cost
is affected by changes in the discount rate and other actuarial assumptions. The
consolidated net pension (income) cost amounts reflected above are exclusive  of
curtailment  effects  reflected in  the work  force reduction  and restructuring
activities (see Note J) and  do not reflect curtailment  gains in the amount  of
$43 in 1996.
 
    The  following table sets forth  the funded status of  the plans at December
31:
 
<TABLE>
<CAPTION>
                                                                                     1996       1995
                                                                                   ---------  ---------
<S>                                                                                <C>        <C>
Actuarial present value of:
  Vested benefit obligation......................................................  $   9,321  $   8,853
                                                                                   ---------  ---------
                                                                                   ---------  ---------
  Accumulated benefit obligation.................................................  $   9,824  $   9,961
                                                                                   ---------  ---------
                                                                                   ---------  ---------
  Projected benefit obligation...................................................  $  11,303  $  11,994
Plan assets at fair value........................................................     15,614     14,613
                                                                                   ---------  ---------
Plan assets in excess of projected benefit obligation............................      4,311      2,619
Unrecognized net gain due to past experience different from assumptions made.....     (4,286)    (2,738)
Unrecognized prior service cost..................................................       (304)      (199)
Unrecognized net asset at transition.............................................       (130)      (151)
                                                                                   ---------  ---------
  Accrued pension cost...........................................................  $    (409) $    (469)
                                                                                   ---------  ---------
                                                                                   ---------  ---------
</TABLE>
 
    The significant actuarial assumptions at December 31, 1996 and 1995 were  as
follows:
 
<TABLE>
<CAPTION>
                                                                                           1996         1995
                                                                                        -----------  -----------
<S>                                                                                     <C>          <C>
Weighted average discount rate........................................................       7.5 %         7.0%
Weighted average rate of compensation increase........................................       5.8 %         5.7%
Expected long-term rate of return on plan assets......................................       8.25%         8.0%
</TABLE>
 
    POSTRETIREMENT   BENEFITS   OTHER   THAN  PENSIONS.      BellSouth  sponsors
postretirement  health  and  life  insurance  welfare  plans  for  most  of  its
nonrepresented   and  represented  employees.   BellSouth's  transition  benefit
obligation is  being amortized  over  15 years,  the average  remaining  service
period  of active plan  participants at adoption. The  accounting for the health
care  plan  does   not  anticipate  future   adjustments  to  the   cost-sharing
arrangements  provided for  in the written  plan for employees  who retire after
December 31, 1991.
 
    BellSouth's funding policy is to make contributions to trust funds with  the
objective  of accumulating sufficient assets to pay all health and life benefits
for which BellSouth is liable. Contributions are
 
                                       53
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
actuarially determined using  the aggregate  cost method, subject  to ERISA  and
Internal  Revenue  Service  limitations. Assets  in  the health  and  life plans
consist primarily of equity securities and fixed income investments.
 
    Net postretirement benefit cost  (income) for the  years ended December  31,
1996, 1995 and 1994, respectively, is composed of the following:
<TABLE>
<CAPTION>
                                                                              1996                  1995            1994
                                                                      --------------------  --------------------  ---------
                                                                       HEALTH      LIFE      HEALTH      LIFE      HEALTH
                                                                      ---------  ---------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>        <C>        <C>
Service cost -- benefits earned during the year.....................  $      35  $      12  $      27  $      10  $      35
Interest on accumulated postretirement benefit obligation...........        225         43        223         38        211
Actual (return) loss on plan assets.................................       (163)      (103)      (185)      (125)        14
Amortization of transition liability (asset)........................         96        (13)       110        (13)       112
Other amortization and deferral, net................................        115         58        115         77        (65)
                                                                      ---------  ---------  ---------  ---------  ---------
Net postretirement benefit cost (income)............................  $     308  $      (3) $     290  $     (13) $     307
                                                                      ---------  ---------  ---------  ---------  ---------
                                                                      ---------  ---------  ---------  ---------  ---------
 
<CAPTION>
 
                                                                        LIFE
                                                                      ---------
<S>                                                                   <C>
Service cost -- benefits earned during the year.....................  $      13
Interest on accumulated postretirement benefit obligation...........         37
Actual (return) loss on plan assets.................................        (12)
Amortization of transition liability (asset)........................        (13)
Other amortization and deferral, net................................        (30)
                                                                      ---------
Net postretirement benefit cost (income)............................  $      (5)
                                                                      ---------
                                                                      ---------
</TABLE>
 
    The  consolidated net postretirement benefit cost (income) amounts reflected
above are exclusive of curtailment effects reflected in the work force reduction
and restructuring activities discussed in Note J.
 
    The following table sets forth the plans' funded status at December 31, 1996
and 1995, respectively:
 
<TABLE>
<CAPTION>
                                                                     1996                  1995
                                                             --------------------  --------------------
                                                              HEALTH      LIFE      HEALTH      LIFE
                                                             ---------  ---------  ---------  ---------
<S>                                                          <C>        <C>        <C>        <C>
Accumulated postretirement benefit obligation:
  Retirees.................................................  $   1,994  $     318  $   1,909  $     305
  Fully eligible active plan participants..................        437        135        712        178
  Other active plan participants...........................        541        164        687        137
                                                             ---------  ---------  ---------  ---------
                                                                 2,972        617      3,308        620
Plan assets at fair value..................................      1,379        778      1,159        692
                                                             ---------  ---------  ---------  ---------
Accumulated postretirement benefit obligation less than (in
 excess of) plan assets....................................     (1,593)       161     (2,149)        72
Unrecognized prior service cost............................         71         17        103          5
Unrecognized net (gains) losses............................       (279)         7        218        117
Unrecognized transition obligation (asset).................      1,057       (144)     1,153       (157)
                                                             ---------  ---------  ---------  ---------
(Accrued) prepaid postretirement benefit cost..............  $    (744) $      41  $    (675) $      37
                                                             ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------
</TABLE>
 
    The significant actuarial assumptions at December 31, 1996 and 1995 were  as
follows:
 
<TABLE>
<CAPTION>
                                                                                           1996         1995
                                                                                        -----------  -----------
<S>                                                                                     <C>          <C>
Weighted average discount rate........................................................       7.5 %         7.0%
Weighted average rate of compensation increase........................................       5.8 %         5.7%
Health care cost trend rate (1).......................................................       8.5 %         9.0%
Expected long-term rate of return on plan assets (2)..................................       8.25%         8.0%
</TABLE>
 
------------------------
(1)  Trend rate used to value  the accumulated postretirement obligation in 1996
    and 1995 is assumed to decrease gradually to 5% in 2003.
 
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
    trust for 1996 and 1995.
 
                                       54
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
    The health care cost trend rate  assumption affects the amounts reported.  A
one-percentage-point  increase in the  assumed health care  cost trend rates for
each  future  year  would   increase  the  accumulated  postretirement   benefit
obligation  by $190 at December 31, 1996 and the estimated aggregate service and
interest cost components of the 1996 postretirement benefit cost by $17.
 
    DEFINED  CONTRIBUTION  PLANS.    BellSouth  maintains  several  contributory
savings  plans  which  cover substantially  all  employees. In  April  1996, the
BellSouth Management Savings and Employee Stock Ownership Plan and the BellSouth
Enterprises Retirement  Savings Plan  merged to  form the  BellSouth  Retirement
Savings  Plan. The BellSouth  Retirement Savings Plan  and the BellSouth Savings
and Security Plan  (collectively, the Savings  Plans) are tax-qualified  defined
contribution  plans. Assets  of the  plans are held  by two  trusts (the Trusts)
which, in turn, are part of the BellSouth Master Savings Trust.
 
    In 1990, a leveraged Employee  Stock Ownership Plan (ESOP) was  incorporated
into  the Savings  Plans. The Trusts  borrowed $850 by  issuing amortizing notes
which are  guaranteed  by BellSouth  (see  Note E).  The  Trusts used  the  loan
proceeds  to purchase shares of BellSouth common stock in the open market. These
shares are held in suspense accounts in the Trusts; a scheduled number of shares
is released for allocation to participants  as each semi-annual loan payment  is
made.  The Trusts  service the debt  with contributions from  BellSouth and with
dividends paid on the shares held by the Trusts. None of the shares held by  the
Trusts is subject to repurchase.
 
    A  portion  of employees'  eligible contributions  to  the Savings  Plans is
matched by BellSouth  at rates determined  annually by the  Board of  Directors.
BellSouth's  matching  obligation is  fulfilled  with shares  released  from the
suspense accounts semi-annually  for allocation to  participants. The number  of
shares  allocated to each participant's account is  based on the market price of
the shares at the time of allocation.  If shares released for allocation do  not
fulfill  BellSouth's matching obligation,  BellSouth makes further contributions
to the Trusts to fund  the purchase of additional shares  in the open market  to
fulfill the remaining obligation.
 
    BellSouth  recognizes expense using the  shares allocated accounting method,
which combines the  cost of the  shares allocated for  the period plus  interest
incurred,  reduced by the dividends used to  service the ESOP debt. Dividends on
all ESOP shares are recorded  as a reduction to  retained earnings and all  ESOP
shares are included in the computation of earnings per share.
 
<TABLE>
<CAPTION>
                                                             1996            1995            1994
                                                        --------------  --------------  --------------
<S>                                                     <C>             <C>             <C>
Compensation cost.....................................             $58             $75             $77
Interest expense......................................             $33             $37             $39
Actual interest on ESOP Notes.........................             $56             $62             $66
Cash contributions, excluding dividends paid to the
 Trusts...............................................             $91            $101            $100
Dividends paid to the Trusts, used for debt service...             $44             $44             $42
Shares allocated to participants......................      14,305,917      11,942,278       9,621,034
Shares committed to be released.......................        --              --              --
Shares unallocated....................................      17,472,807      19,836,446      22,157,690
</TABLE>
 
                                       55
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE I -- STOCK COMPENSATION PLANS
    At  December 31, 1996, BellSouth has stock options outstanding under several
stock-based compensation plans. The BellSouth Corporation Stock Plan (the  Stock
Plan)  provides for grants to  key employees of stock  options and various other
stock-based awards.  One  share of  BellSouth  common stock  is  the  underlying
security for any award. The aggregate number of shares of BellSouth common stock
which  may be  granted in  any calendar  year cannot  exceed one  percent of the
shares outstanding at the time  of grant. Prior to  adoption of the Stock  Plan,
stock  options were granted  under the BellSouth  Corporation Stock Option Plan.
Stock options granted under both plans entitle an optionee to purchase shares of
BellSouth common stock within prescribed periods at a price either equal to,  or
in  excess of, the fair market value on the date of grant. Options granted under
these plans generally become  exercisable at the  end of five  years and have  a
term of 10 years.
 
    BellSouth  applies APB Opinion 25  and related Interpretations in accounting
for its stock plans. Accordingly, no  compensation cost has been recognized  for
grants  of  stock options.  Had  compensation cost  for  BellSouth's stock-based
compensation plans been determined in accordance with the provisions of SFAS No.
123, "Accounting  for  Stock-Based  Compensation," BellSouth's  net  income  and
earnings  per share would have  been reduced to the  pro forma amounts indicated
below:
 
<TABLE>
<CAPTION>
                                                                                       1996       1995
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Net income (loss) -- as reported...................................................  $   2,863  $  (1,232)
Net income (loss) -- pro forma.....................................................  $   2,852  $  (1,235)
Earnings (loss) per share -- as reported...........................................  $    2.88  $   (1.24)
Earnings (loss) per share -- pro forma.............................................  $    2.87  $   (1.24)
</TABLE>
 
    The pro forma amounts reflected above are not representative of the  effects
on  reported net income in future years because, in general, the options granted
in 1996 and 1995 do  not vest for several years  and additional awards are  made
each year.
 
    The following table summarizes the activity for stock options outstanding:
 
<TABLE>
<CAPTION>
                                                             1996            1995            1994
                                                        --------------  --------------  --------------
<S>                                                     <C>             <C>             <C>
Options outstanding at January 1......................      14,287,748      10,345,924       7,308,284
Options granted.......................................       5,376,513       5,269,040       3,525,722
Options exercised.....................................        (692,545)     (1,226,040)       (374,278)
Options forfeited.....................................        (400,324)       (101,176)       (113,804)
Options outstanding at December 31....................      18,571,392      14,287,748      10,345,924
Weighted-average option prices per common share:
  Outstanding at January 1............................          $30.56          $28.65          $26.14
  Granted at fair market value........................          $42.50          $30.85          $30.20
  Granted at above fair market value..................             N/A          $41.34          $41.79
  Exercised...........................................          $26.24          $24.46          $23.58
  Forfeited...........................................          $33.71          $30.10          $29.08
  Outstanding at December 31..........................          $34.11          $30.56          $28.65
Weighted-average fair value of options granted at fair
 market value during the year.........................           $7.66           $5.60           $7.50
Weighted-average fair value of options granted at
 above fair market value during the year..............             N/A           $2.48           $1.70
Options exercisable at December 31....................       6,523,291       5,242,258       4,667,262
Shares available for grant at December 31.............       9,910,692      10,074,447      10,050,096
</TABLE>
 
                                       56
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE I -- 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:
 
<TABLE>
<CAPTION>
                                                                          1996         1995         1994
                                                                       -----------  -----------  -----------
<S>                                                                    <C>          <C>          <C>
Expected life (years)................................................          7            7            7
Dividend yield.......................................................       3.39%        4.55%        4.59%
Expected volatility..................................................       15.4%        15.8%        16.4%
Risk-free interest rate..............................................       5.56%        7.21%        5.75%
</TABLE>
 
    The following table summarizes  information about stock options  outstanding
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                    ----------------------------------------------------  -----------------------------
                       NUMBER           WEIGHTED-           WEIGHTED-        NUMBER        WEIGHTED-
     RANGE OF        OUTSTANDING    AVERAGE REMAINING        AVERAGE      EXERCISABLE       AVERAGE
 EXERCISE PRICES     AT 12/31/96     CONTRACTUAL LIFE    EXERCISE PRICE   AT 12/31/96   EXERCISE PRICE
------------------  -------------  --------------------  ---------------  ------------  ---------------
<S>                 <C>            <C>                   <C>              <C>           <C>
   $18.50 - $25.99      1,466,990       4.66 years          $   24.65       1,466,990      $   24.65
   $26.00 - $27.99      2,819,677       5.24 years          $   27.23       1,839,895      $   27.27
   $28.00 - $29.99      3,668,220       7.05 years          $   29.44       1,229,828      $   29.28
   $30.00 - $38.99      3,259,373       7.56 years          $   30.98         819,337      $   31.41
   $39.00 - $44.50      7,357,132       8.77 years          $   42.34       1,167,241      $   42.08
   $18.50 - $44.50     18,571,392       7.36 years          $   34.11       6,523,291      $   30.23
</TABLE>
 
NOTE J -- WORK FORCE REDUCTION CHARGE
    In  the  fourth quarter  of 1995,  BellSouth recognized  a pretax  charge of
$1,082 related to work  force reductions. The primary  component of the  charge,
$942  for planned work force reductions in the core wireline business by the end
of 1997, consists  of $561  under the provisions  of SFAS  No. 112,  "Employers'
Accounting  for  Postemployment Benefits,"  related to  those employees  who are
expected to receive severance benefits  under preexisting separation plans,  and
$381  for curtailment  losses under the  provisions of SFAS  No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for  Termination  Benefits"  and  SFAS  No.  106,  "Employers'  Accounting   for
Postretirement   Benefits  Other  Than  Pensions."   Substantially  all  of  the
curtailment losses relate  to postretirement benefits  other than pensions.  The
remaining  components  of  the charge  are  $85 for  expected  severance benefit
payments after  1997,  also under  SFAS  No. 112,  and  $55 for  additional  net
curtailment  losses related  to employee  reductions under  a restructuring plan
initiated in 1993 and completed in 1995.
 
    Under the  1995  work  force reduction  plan,  BellSouth  Telecommunications
expects  to  reduce  the work  force  of  the wireline  telephone  operations by
approximately 11,300 employees by the end of 1997. The work force reduction will
be accomplished  through  the  separation  of  approximately  13,200  employees,
partially  offset by  the planned hiring  of new employees  primarily to replace
those not expected  to relocate  in connection  with the  consolidation of  work
locations.  Including a reduction of  approximately 800 employees which occurred
in December 1995,  BellSouth Telecommunications  has reduced its  work force  by
approximately 7,000 employees under the 1995 plan through December 31, 1996.
 
NOTE K -- INCOME TAXES
    In  accordance with SFAS No. 109, "Accounting for Income Taxes," the balance
sheet reflects the anticipated tax impact of future taxable income or deductions
implicit in  the balance  sheet  in the  form  of temporary  differences.  These
temporary  differences reflect  the difference between  the basis  in assets and
liabilities as measured in the financial statements and as measured by tax  laws
using enacted tax rates.
 
                                       57
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                (Dollars in Millions, Except Per Share Amounts)
 
NOTE K -- INCOME TAXES (CONTINUED)
 
    The provision for income taxes is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                             1996       1995       1994
                                                                           ---------  ---------  ---------
<S>                                                                        <C>        <C>        <C>
Federal:
  Current................................................................  $   1,390  $   1,061  $   1,082
  Deferred, net..........................................................        170       (148)        34
  Investment tax credits, net............................................        (77)       (69)       (73)
                                                                           ---------  ---------  ---------
                                                                               1,483        844      1,043
                                                                           ---------  ---------  ---------
State:
  Current................................................................        235        203        180
  Deferred, net..........................................................         27        (23)        20
                                                                           ---------  ---------  ---------
                                                                                 262        180        200
                                                                           ---------  ---------  ---------
    Total provision for income taxes.....................................  $   1,745  $   1,024  $   1,243
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
</TABLE>
 
    Extraordinary  losses in 1995 are presented in the Consolidated Statement of
Income net of tax benefits totaling $1,780,  of which $49 is current and  $1,731
is deferred.
 
    Temporary   differences  which  gave   rise  to  deferred   tax  assets  and
(liabilities) at December 31 were as follows:
 
<TABLE>
<CAPTION>
                                                                                      1996       1995
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
  Compensation related............................................................  $     707  $     627
  Work force reduction charge.....................................................        210        370
  Allowance for uncollectibles....................................................         87         89
  Regulatory sharing accruals.....................................................         32        114
  Other...........................................................................        244        219
                                                                                    ---------  ---------
                                                                                        1,280      1,419
  Valuation allowance.............................................................        (64)       (55)
                                                                                    ---------  ---------
  Deferred Tax Assets.............................................................      1,216      1,364
                                                                                    ---------  ---------
  Depreciation....................................................................     (2,110)    (2,042)
  Equity investments..............................................................       (354)      (361)
  Issue basis accounting..........................................................       (197)      (207)
  Licenses........................................................................       (187)      (190)
  Other...........................................................................       (133)      (129)
                                                                                    ---------  ---------
    Deferred Tax Liabilities......................................................     (2,981)    (2,929)
                                                                                    ---------  ---------
      Net Deferred Tax Liability..................................................  $  (1,765) $  (1,565)
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    The valuation allowance, which increased by $9 in 1996, primarily relates to
state net operating  losses that will  not be utilized  during the  carryforward
period.  Of the Net Deferred  Tax Liability at December  31, 1996 and 1995, $134
and $85, respectively, was current and $(1,899) and $(1,650), respectively,  was
noncurrent.
 
                                       58
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE K -- INCOME TAXES (CONTINUED)
    A  reconciliation of  the Federal statutory  income tax  rate to BellSouth's
effective tax rate follows:
 
<TABLE>
<CAPTION>
                                                                               1996       1995       1994
                                                                             ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>
Federal statutory tax rate.................................................       35.0%      35.0%      35.0%
State income taxes, net of Federal income tax benefit......................        3.7        4.5        4.0
Amortization of investment tax credits.....................................       (1.7)      (2.7)      (2.1)
Equity of unconsolidated subsidiaries......................................        1.6        2.0        0.6
Benefit of capital loss carryforward.......................................         --       (0.4)      (1.1)
Basis difference in disposed subsidiary....................................       (1.5)        --         --
Miscellaneous items, net...................................................        0.8        1.2         .1
                                                                             ---------  ---------  ---------
  Effective tax rate.......................................................       37.9%      39.6%      36.5%
                                                                             ---------  ---------  ---------
                                                                             ---------  ---------  ---------
</TABLE>
 
NOTE L -- DISCONTINUANCE OF SFAS NO. 71
    In  1995,  as  a  result  of  its  continuing  regulatory  and   marketplace
assessments,  BellSouth  Telecommunications concluded  that  it was  required to
discontinue SFAS  No.  71, "Accounting  for  the  Effects of  Certain  Types  of
Regulation,"   for   financial   reporting   purposes.   Accordingly,  BellSouth
Telecommunications recorded a noncash extraordinary  charge of $2,718 (net of  a
deferred tax benefit of $1,731). The components of the charge are as follows:
 
<TABLE>
<CAPTION>
                                                                                     PRETAX    AFTER TAX
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Reduction in recorded value of long lived telephone plant.........................  $  (4,896) $  (3,002)
Full adoption of issue basis accounting...........................................        317        194
Elimination of regulatory assets and liabilities..................................        111         71
Partial adjustment to unamortized investment tax credits..........................         19         19
                                                                                    ---------  ---------
  Total...........................................................................  $  (4,449) $  (2,718)
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    The  reduction  of  telephone plant,  $4,896  (pretax), was  recorded  as an
increase to the  related accumulated depreciation  accounts, the categories  and
amounts of which are as follows:
 
<TABLE>
<S>                                                                          <C>
Central Office Equipment:
  Digital switching........................................................  $   1,305
  Circuit-other............................................................      1,291
                                                                             ---------
    Total Central Office Equipment.........................................      2,596
                                                                             ---------
Outside Plant:
  Buried metallic cable....................................................      1,345
  Aerial metallic cable....................................................        630
  Underground metallic cable...............................................        325
                                                                             ---------
    Total Outside Plant....................................................      2,300
                                                                             ---------
  Total....................................................................  $   4,896
                                                                             ---------
                                                                             ---------
</TABLE>
 
    Such  reduction  of  plant was  determined  by an  impairment  analysis that
identified estimated amounts not recoverable from future discounted cash  flows.
The  analysis  considered projected  effects of  future  competition as  well as
changes in technology and capital requirements. The plant-related charge, all of
which related to assets within  the regulatory framework, was further  supported
by  depreciation  studies  that  identified  inadequate  levels  of  accumulated
depreciation for certain asset categories. These studies give recognition to the
historical   underdepreciation    of    assets    resulting    primarily    from
regulator-prescribed  asset  lives that  exceeded  the estimated  economic asset
lives.
 
                                       59
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE L -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
    For financial reporting purposes, the average depreciable lives of  affected
categories  of  long lived  telephone plant  have been  reduced to  more closely
reflect   the   economic   and   technological   lives.   Differences    between
regulator-approved  asset lives and  the current estimated  economic asset lives
are as follows:
 
<TABLE>
<CAPTION>
                                                                       COMPOSITE OF             ESTIMATED
                                                                    REGULATOR-APPROVED       ECONOMIC ASSET
CATEGORY                                                                ASSET LIVES               LIVES
----------------------------------------------------------------  -----------------------  -------------------
                                                                                   (IN YEARS)
<S>                                                               <C>                      <C>
Digital switching...............................................              17.0                   10.0
Circuit-other...................................................              10.5                    9.1
Buried metallic cable...........................................              20.0                   14.0
Aerial metallic cable...........................................              20.0                   14.0
Underground metallic cable......................................              25.0                   12.0
</TABLE>
 
    The remaining components of the extraordinary charge, which partially offset
the plant-related  portion  of the  overall  charge, include  $194  (after  tax)
related   to  the  adoption  by  BellSouth  Telecommunications  of  issue  basis
accounting  for  its  directory  publishing  revenues.  BellSouth's  unregulated
subsidiaries  already  recognized directory  publishing revenues  and production
expenses using issue basis accounting.
 
    The overall extraordinary  charge was  also reduced  by $71  (after tax)  to
reflect the removal of regulatory assets and liabilities that were recorded as a
result  of previous  actions by  regulators. Virtually  all of  these regulatory
assets and  liabilities  arose  in  connection with  the  incorporation  of  new
accounting  standards into the ratemaking process and were transitory in nature.
In addition, the overall extraordinary charge was reduced by $19 (after tax) for
the partial acceleration of unamortized  investment tax credits associated  with
the reductions in asset carrying values and in asset lives.
 
NOTE M -- SUPPLEMENTAL CASH FLOW INFORMATION
 
<TABLE>
<CAPTION>
                                                                             1996       1995       1994
                                                                           ---------  ---------  ---------
<S>                                                                        <C>        <C>        <C>
CASH PAID FOR:
Income Taxes.............................................................  $   1,427  $   1,231  $   1,375
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
Interest.................................................................  $     740  $     760  $     665
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Shares Issued to Grantor Trusts..........................................  $      35  $      38  $      43
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
</TABLE>
 
NOTE N -- FINANCIAL INSTRUMENTS
 
    The   recorded  amounts  of  cash   and  cash  equivalents,  temporary  cash
investments, bank loans and commercial paper  approximate fair value due to  the
short-term   nature  of  these   instruments.  The  fair   value  for  BellSouth
Telecommunications Debentures  and  Notes are  estimated  based on  the  closing
market prices for each issue at December 31, 1996 and 1995. Fair value estimates
for  the Guarantee  of ESOP Debt,  BellSouth Capital  Funding Corporation Notes,
foreign exchange contracts, foreign currency  swaps and interest rate swaps  are
based  on  quotes  from  dealers.  Since judgment  is  required  to  develop the
estimates, the estimated amounts presented herein  may not be indicative of  the
amounts that BellSouth could realize in a current market exchange.
 
                                       60
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE N -- FINANCIAL INSTRUMENTS (CONTINUED)
    Following is a summary of financial instruments where the fair values differ
from the recorded amounts as of December 31, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                                          1996                      1995
                                                                ------------------------  ------------------------
                                                                              ESTIMATED                 ESTIMATED
                                                                 RECORDED       FAIR       RECORDED       FAIR
                                                                  AMOUNT        VALUE       AMOUNT        VALUE
                                                                -----------  -----------  -----------  -----------
<S>                                                             <C>          <C>          <C>          <C>
BALANCE SHEET FINANCIAL INSTRUMENTS
  Long-Term Debt:
    BellSouth Telecommunications Debentures...................   $   4,590    $   4,422    $   5,076    $   5,079
    BellSouth Telecommunications Notes........................       2,175        2,141        2,175        2,216
    BellSouth Capital Funding Corporation Notes...............         820          856          544          587
    Guarantee of ESOP Debt....................................         594          675          647          803
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
  Interest Rate Swaps.........................................      --               (5)      --              (10)
</TABLE>
 
    DERIVATIVE FINANCIAL INSTRUMENTS.  BellSouth is, from time to time, party to
currency  swap agreements,  interest rate  swap agreements  and foreign exchange
forward contracts  in its  normal course  of business  for purposes  other  than
trading.  These financial instruments are used  to mitigate foreign currency and
interest rate risks, although to some  extent they expose the company to  market
risks  and credit risks. The credit  risks associated with these instruments are
controlled  through   the   evaluation   and   continual   monitoring   of   the
creditworthiness  of the counterparties. In the  event that a counterparty fails
to meet the terms of a contract or agreement, BellSouth's exposure is limited to
the then current value of the  currency rate or interest rate differential,  not
the  full notional amount. Such contracts and agreements have been executed with
creditworthy financial institutions.  As such, BellSouth  considers the risk  of
nonperformance to be remote.
 
    CURRENCY  SWAP.   BellSouth entered  into a currency  swap in  1994 to hedge
European Currency Units (ECU)  125,000,000 debt issued  by Capital Funding.  The
currency  swap and related debt  mature in February 1999.  At December 31, 1996,
the net currency swap receivable, which equals  the fair value of the swap,  was
$23  and the related net interest receivable  was $7, both of which are included
in accounts receivable in the consolidated balance sheet at December 31, 1996.
 
    INTEREST RATE SWAPS.  BellSouth enters into interest rate swap agreements to
exchange fixed  and  variable  rate interest  payment  obligations  without  the
exchange of the underlying principal amounts. As of December 31, 1996, BellSouth
was  a party to various interest rate swaps with an aggregate notional amount of
$120. Under these swaps, BellSouth paid fixed rates averaging 7.13% and received
variable rates averaging 5.52%. These swaps mature at dates ranging from 2001 to
2002.
 
    At December 31, 1995, BellSouth  was a party to  two types of interest  rate
swaps  with aggregate notional  amounts of $96 and  $75, respectively. Under the
$96 swaps,  BellSouth paid  fixed rates  averaging 7.38%  and received  variable
rates  averaging  6.05%.  Under the  $75  swaps, BellSouth  paid  variable rates
averaging 5.96% and received fixed rates averaging 4.86%.
 
    OTHER.  BellSouth has also issued letters of credit and financial guarantees
which approximate $322 at December 31, 1996. Of this total, $169 represents  the
U.S.  Dollar equivalent of the outstanding  balance of E-Plus debt guaranteed by
BellSouth. BellSouth has  agreed to  guarantee E-Plus  borrowings up  to a  U.S.
Dollar equivalent of $341 (530 million German Marks) at December 31, 1996.
 
    Since  there is  no market  for the  instruments, it  is not  practicable to
estimate their fair value.
 
    CONCENTRATIONS OF  CREDIT RISK.    Financial instruments  which  potentially
subject   BellSouth  to  credit  risk  consist  principally  of  trade  accounts
receivable. Concentrations of credit risk with respect to
 
                                       61
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE N -- FINANCIAL INSTRUMENTS (CONTINUED)
these receivables, other than those from interexchange carriers, are limited due
to the  composition of  the customer  base,  which includes  a large  number  of
individuals  and businesses. At  December 31, 1996  and 1995, approximately $492
and $520, respectively,  of trade  accounts receivable  were from  interexchange
carriers.
 
NOTE O -- COMMITMENTS AND CONTINGENCIES
 
    LEASES.   BellSouth  has entered  into operating  leases for  facilities and
equipment used in operations.  Rental expense under  operating leases was  $269,
$252 and $311 for 1996, 1995 and 1994, respectively. Capital leases currently in
effect are not significant.
 
    The  following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1996:
 
<TABLE>
<CAPTION>
                                1997       1998       1999       2000       2001     THEREAFTER     TOTAL
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
<S>                           <C>        <C>        <C>        <C>        <C>        <C>          <C>
Minimum rentals.............  $     181  $     143  $     121  $     101  $      88   $     483   $   1,117
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
</TABLE>
 
    OUTSIDE PLANT.  BellSouth  currently self-insures all  of its outside  plant
against  casualty losses.  The net  book value of  outside plant  was $7,621 and
$8,080 at December 31, 1996 and 1995, respectively. Such outside plant,  located
in  the  nine Southeastern  states  served by  BellSouth  Telecommunications, is
susceptible to damage from severe weather conditions and other perils, including
hurricanes.
 
    LEGAL CLAIMS.  BellSouth and its subsidiaries are subject to claims  arising
in  the ordinary  course of business  involving allegations  of personal injury,
breach of contract, anti-competitive conduct, employment law issues,  regulatory
matters  and  other actions.  BellSouth  Telecommunications is  also  subject to
claims  attributable   to   pre-divestiture   events   involving   environmental
liabilities,  rates, taxes, contracts and  torts. Certain contingent liabilities
for pre-divestiture events are shared with AT&T Corp.
 
    With respect  to  regulatory  matters, the  South  Carolina  Public  Service
Commission has ordered BellSouth Telecommunications to refund approximately $29,
plus  interest, based on an  investigation of its 1992  earnings. The refund was
stayed pending judicial  review of  the decision.  In 1996,  the South  Carolina
Court  of Common Pleas entered an order  affirming the Commission's order of the
refund. BellSouth  Telecommunications  intends  to  pursue  an  appeal  of  this
decision.  The Commission has postponed  review of BellSouth Telecommunications'
earnings in 1993 and 1994 until a resolution of the 1992 period is reached.
 
    While complete assurance  cannot be  given as to  the outcome  of any  legal
claims,  BellSouth believes that  any financial impact would  not be material to
its financial position or annual operating results or cash flows.
 
                                       62
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE P -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
    In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included. The results  for
first  quarter 1996  include a gain  on sale  of paging business  of $442, which
increased net income by $344. The results for fourth quarter 1995 include a work
force reduction charge of $1,082, which reduced net income by $663.
 
<TABLE>
<CAPTION>
                                                                 FIRST     SECOND      THIRD     FOURTH
                                                                QUARTER    QUARTER    QUARTER    QUARTER
                                                               ---------  ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>        <C>
1996
Operating Revenues...........................................  $   4,541  $   4,620  $   4,829  $   5,050
Operating Income.............................................  $   1,183  $   1,188  $   1,201  $   1,207
Net Income...................................................  $     970  $     629  $     631  $     633
Earnings Per Share...........................................  $     .98  $     .63  $     .63  $     .64
 
1995
Operating Revenues...........................................  $   4,299  $   4,390  $   4,432  $   4,765
Operating Income.............................................  $   1,095  $   1,096  $   1,058  $      43
Income (Loss) Before Extraordinary Losses....................  $     547  $     557  $     559  $     (99)
Extraordinary Loss for Discontinuance of SFAS No. 71, net of
 tax.........................................................     --         (2,718)    --         --
Extraordinary Loss on Early Extinguishment of Debt, net of
 tax.........................................................     --            (16)    --            (62)
                                                               ---------  ---------  ---------  ---------
Net Income (Loss)............................................  $     547  $  (2,177) $     559  $    (161)
                                                               ---------  ---------  ---------  ---------
                                                               ---------  ---------  ---------  ---------
EARNINGS (LOSS) PER SHARE:
Income (Loss) Before Extraordinary Losses....................  $     .55  $     .56  $     .56  $    (.10)
Extraordinary Loss for Discontinuance of SFAS No. 71, net of
 tax.........................................................     --          (2.73)    --         --
Extraordinary Loss on Early Extinguishment of Debt, net of
 tax.........................................................     --           (.02)    --           (.06)
                                                               ---------  ---------  ---------  ---------
Net Income (Loss)............................................  $     .55  $   (2.19) $     .56  $    (.16)
                                                               ---------  ---------  ---------  ---------
                                                               ---------  ---------  ---------  ---------
</TABLE>
 
                                       63
<PAGE>
SUPPLEMENTARY DATA
 
                             BELLSOUTH CORPORATION
                               DOMESTIC CELLULAR
                          PROPORTIONATE OPERATING DATA
                             (DOLLARS IN MILLIONS)
                                  (UNAUDITED)
 
    The  following table sets  forth unaudited, supplemental  financial data for
BellSouth's domestic cellular operations reflecting proportionate  consolidation
of  entities in which BellSouth has  an interest. This presentation differs from
the consolidation methodology  used to prepare  BellSouth's principal  financial
statements  in  accordance with  generally  accepted accounting  principles. The
proportionate  operating  data  reflect  BellSouth's  ownership  percentage   of
entities consolidated for financial reporting purposes and BellSouth's ownership
percentage  in the  entities which  are accounted for  on the  equity method for
financial  reporting  purposes.  The  data  exclude  gains  (losses)  from   the
disposition of property interests and include equipment revenue, net of cost.
 
<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED
                                                                                                 DECEMBER 31,
                                                                                             --------------------
                                                                                               1996       1995
                                                                                             ---------  ---------
<S>                                                                                          <C>        <C>
Cellular Revenue, net......................................................................  $   2,312  $   1,888
                                                                                             ---------  ---------
Operating Expenses.........................................................................      1,308      1,065
Depreciation and Amortization..............................................................        364        298
                                                                                             ---------  ---------
    Total Operating Expenses...............................................................      1,672      1,363
                                                                                             ---------  ---------
Operating Income...........................................................................        640        525
Other Expenses, net (including interest and taxes).........................................        277        233
                                                                                             ---------  ---------
    Net Income.............................................................................  $     363  $     292
                                                                                             ---------  ---------
                                                                                             ---------  ---------
Operating Margins as a Percentage of Revenue:
  Including Depreciation and Amortization..................................................       27.7%      27.8%
  Excluding Depreciation and Amortization..................................................       43.4%      43.6%
Operational Comparisons (thousands):
  Proportionate Cellular Population Served.................................................     40,696     39,937
  Proportionate Cellular Customers.........................................................      3,612      2,847
</TABLE>
 
                                       64
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
    No  change in  accountants or disagreements  on the  adoption of appropriate
accounting standards or  financial disclosure  has occurred  during the  periods
included in this report.
 
                                    PART III
 
ITEMS 10 THROUGH 13.
 
    Information  regarding executive officers required by Item 401 of Regulation
S-K is furnished in a  separate disclosure on page 22  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 11, 1997 as follows, and is
herein incorporated by reference pursuant to General Instruction G(3):
 
<TABLE>
<CAPTION>
                                                                                                    PAGE(S) IN
                                                                                                    DEFINITIVE
                                                                                                       PROXY
      ITEM                                         DESCRIPTION                                       STATEMENT
-----------------  ----------------------------------------------------------------------------  -----------------
<S>                <C>                                                                           <C>
       10.         Directors and Executive Officers of the Registrant..........................       5 - 12
       11.         Executive Compensation......................................................     21 - 28 (a)
       12.         Security Ownership of Certain Beneficial
                    Owners and Management......................................................         12
       13.         Certain Relationships and Related Transactions..............................       21 (b)
<FN>
------------------------
    (a)  Beginning   with  "Compensation   Committee  Interlocks   and   Insider
        Participation"   through  but  not   including  "Five  Year  Performance
        Comparison"
    (b)  Includes   only   "Compensation  Committee   Interlocks   and   Insider
        Participation"
</TABLE>
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
                                                                                                    PAGE(S) IN THIS
                                                                                                       FORM 10-K
                                                                                                   -----------------
<S>                                                                                                <C>
a. Documents filed as a part of the report:
    (1) Financial Statements:
        Report of Independent Accountants........................................................         40
        Consolidated Statements of Income........................................................         41
        Consolidated Balance Sheets..............................................................         42
        Consolidated Statements of Shareholders' Equity..........................................         43
        Consolidated Statements of Cash Flows....................................................         44
        Notes to Consolidated Financial Statements...............................................        45-64
    (2) Financial statement schedules have been omitted because the required information is
        contained in the financial statements and notes thereto or because such schedules are not
        required or applicable.
    (3) Exhibits: Exhibits identified in parentheses below, on file with the SEC, are
        incorporated herein by reference as exhibits hereto. All management contracts or
        compensatory plans or arrangements required to be filed as exhibits to this Form 10-K
        Report pursuant to Item 14(c) are filed as Exhibits 10a through 10y inclusive.
</TABLE>
 
                                       65
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
<S>        <C>
 3a        Articles of Incorporation of BellSouth Corporation. (Exhibit 3a to Form 10-K for the year ended December
           31, 1990, File No. 1-8607).
 3a-1      Articles of Amendment to Articles of Incorporation of BellSouth Corporation. (Exhibit 3a-1 to Form 10-Q
           for the quarter ended September 30, 1995, File No. 1-8607).
 3b        Bylaws of BellSouth Corporation. (Exhibit 3b to Form 10-Q for the quarter ended September 30, 1994, File
           No. 1-8607).
 4         BellSouth Corporation Shareholder Rights Agreement. (Exhibit 4-b to Form 8-K. Date of report November
           27, 1989).
 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.
10h        BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective November
           25, 1996.
10i        BellSouth Corporation Supplemental Executive Retirement Plan as amended on May 18, 1995. (Exhibit 10j-1
           to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10j        BellSouth Corporation Directors Retirement Plan. (Exhibit 10qq to Form 10-K for the year ended December
           31, 1986, File No. 1-8607).
10k        BellSouth Corporation Financial Counseling Plan. (Exhibit 10r to Form 10-K for the year ended December
           31, 1992, File No. 1-8607).
10k-1      Amendment dated November 3, 1995 to the BellSouth Corporation Financial Counseling Plan for Executives.
           (Exhibit 10l-1 to Form 10-K for the year ended December 31, 1995, File No. 1-8607).
10l        BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors. (Exhibit 10gg to
           Registration Statement No. 2-87846).
10m        BellSouth Corporation Executive Life Insurance Plan. (Exhibit 10v to Form 10-K for the year ended
           December 31, 1992, File No. 1-8607).
10n        BellSouth Corporation Non-Employee Directors' Stock Option Plan. (Exhibit 10z to Form 10-Q for the
           quarter ended September 30, 1996, File No. 1-8607).
10o        Form of Executive Officer Successor and Retirement Agreement. (Exhibit 10aa to Form 10-Q for the quarter
           ended September 30, 1996, File No. 1-8607).
10p        BellSouth Non-Employee Directors Charitable Contribution Program. (Exhibit 10z to Form 10-K for the year
           ended December 31, 1992, File No. 1-8607).
</TABLE>
 
                                       66
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
10q        BellSouth Personal Retirement Account Pension Plan, as amended and restated effective July 1, 1996.
           (Exhibit 10r to Form 10-Q for the quarter ended September 30, 1996, File No. 1-8607).
<S>        <C>
10r        BellSouth Corporation Trust Under Executive Benefit Plan(s) as amended April 28, 1995. (Exhibit 10u-1 to
           Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10r-1      Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Executive Benefit Plan(s).
           (Exhibit 10s-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10s        BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) as amended April 28, 1995.
           (Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10s-1      Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit
           Plan(s). (Exhibit 10t-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10t        BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended April 28, 1995. (Exhibit
           10w-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10t-1      Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board Directors Benefit Plan(s).
           (Exhibit 10u-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10u        BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended April 28,
           1995. (Exhibit 10x-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607).
10u-1      Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors
           Benefit Plan(s). (Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607).
10v        BellSouth Corporation Stock Plan as amended on September 23, 1996 and November 24, 1996.
10w        BellSouth Retirement Savings Plan as amended and restated effective July 1, 1996. (Exhibit 10x to Form
           10-Q for the quarter ended September 30, 1996, File No. 1-8607).
10x        BellSouth Corporation Officer Estate Enhancement Plan and Agreement.
10y        BellSouth Change in Control Executive Severance Agreements.
11         Computation of Earnings Per Share.
12         Computation of Ratio of Earnings to Fixed Charges.
21         Subsidiaries of BellSouth.
24         Powers of Attorney.
27         Financial Data Schedule.
99a        Annual report on Form 11-K for BellSouth Retirement Savings Plan for the fiscal year ended December 31,
           1996 (to be filed as an amendment hereto within 180 days of the end of the period covered by this
           report).
</TABLE>
 
<TABLE>
<S>        <C>
99b        Annual report on Form 11-K for BellSouth Savings and Security ESOP Plan for the
           fiscal year ended December 31, 1996 (to be filed as an amendment hereto within 180
           days of the end of the period covered by this report).
</TABLE>
 
b. Reports on Form 8-K:
 
<TABLE>
<CAPTION>
   DATE OF EVENT                                      SUBJECT
--------------------  ------------------------------------------------------------------------
<S>                   <C>
January 23, 1997                        Fourth Quarter 1996 Earnings Release
</TABLE>
 
                                       67
<PAGE>
                                   SIGNATURES
 
    Pursuant  to  the requirements  of  Section 13  or  15(d) of  the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
                                          BELLSOUTH CORPORATION
 
                                            /s/ RONALD M. DYKES
     ---------------------------------------------------------------------------
                                          Ronald M. Dykes
                                          EXECUTIVE VICE PRESIDENT AND
                                          CHIEF FINANCIAL OFFICER
                                          February 25, 1997
 
    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*
PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
PRINCIPAL FINANCIAL OFFICER:
Ronald M. Dykes*
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
 
PRINCIPAL ACCOUNTING OFFICER:
W. Patrick Shannon*
VICE PRESIDENT AND CONTROLLER
 
<TABLE>
<S>                                            <C>
DIRECTORS:
F. Duane Ackerman*                             Phyllis Burke Davis*
Reuben V. Anderson*                            John G. Medlin, Jr.*
James H. Blanchard*                            Robin B. Smith*
J. Hyatt Brown*                                C. Dixon Spangler, Jr.*
John L. Clendenin*                             Ronald A. Terry*
Armando M. Codina*                             Thomas R. Williams*
Marshall M. Criser*                            J. Tylee Wilson
 
                                               *By: /s/ RONALD M. DYKES
                                               ---------------------------------
</TABLE>
 
                                                  Ronald M. Dykes
                                       (INDIVIDUALLY AND AS ATTORNEY-IN-FACT)
                                                 February 25, 1997
 
                                       68
<PAGE>
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
    We consent to the incorporation by reference in the registration  statements
of  BellSouth  Corporation  on  Form  S-3  (Nos.  33-29411,  33-48929, 33-49461,
33-51449, 33-63173  and  333-21233)  and  Form  S-8  (Nos.  33-38265,  33-38264,
33-38263,  33-30773, 33-30772, 33-26518, 33-12165, 2-94802, 33-49459, 333-01427,
333-01429 and 333-13783) of our report,  dated February 3, 1997, which  includes
an  explanatory paragraph stating  that the Company  discontinued accounting for
the  operations  of  BellSouth  Telecommunications,  Inc.  in  accordance   with
Statement  of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation", effective June  30, 1995, on our audits of  the
consolidated  financial statements of  BellSouth Corporation as  of December 31,
1996 and 1995, and for each of the three years in the period ended December  31,
1996, which report is included in this Annual Report on Form 10-K.
 
                                    /s/ Coopers & Lybrand L.L.P.
 
Atlanta, Georgia
February 25, 1997
 
                                       69