10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

BELLSOUTH CORPORATION

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes         No ü

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ü  No     

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

annual meeting of shareholders (Part III).

TABLE OF CONTENTS

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

ATTACHMENT

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

(a) As of filing date.

(b) Subsequently merged with and into BellSouth Corporation.

BELLSOUTH 2004      1

TABLE OF CONTENTS

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

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

2      BELLSOUTH 2004

PART I

Cautionary Language Concerning

Forward-Looking Statements

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

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

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

•  a change in economic conditions in the markets where we operate or have material investments which could affect demand for our services;

•  the impact and the success of Cingular Wireless, our wireless joint venture with SBC Communications, Inc. (SBC), including marketing and product development efforts, technological changes and financial capacity;

•  Cingular Wireless’ failure to realize, in the amounts and within the timeframe contemplated, the capital and expense synergies and other financial benefits expected from its acquisition of AT&T Wireless as a result of technical, logistical, regulatory and other factors;

•  changes in laws or regulations, or in their interpretations, which could result in the loss, or reduction in value, of our licenses, concessions or markets, or in an increase in competition, compliance costs or capital expenditures;

•  continued pressures on the telecommunications industry from a financial, competitive and regulatory perspective;

•  the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings;

•  changes in the federal and state regulations governing the terms on which we offer retail and wholesale services;

•  continued successful penetration of the interLATA long distance market;

•  the impact on our business of consolidation in the wireline and wireless industries in which we operate;

•  the issuance by the Financial Accounting Standards Board or other accounting bodies of new accounting standards or changes to existing standards;

•  changes in available technology that increase the likelihood of our customers choosing alternate technology to the products offered by BellSouth (technology substitution);

•  higher than anticipated start-up costs or significant up-front investments associated with new business initiatives;

•  the outcome of pending litigation; and

•  unanticipated higher capital spending from, or delays in, the deployment of new technologies.

Business

OVERVIEW

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

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

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

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

•  Communications Group;

•  Domestic Wireless; and

•  Advertising & Publishing Group.

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

BELLSOUTH 2004      3

Communications Group

OVERVIEW

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

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

Consumer. This unit serves the largest segment of the market within our region, the residential customer. While traditional local and long distance telephone service remains the core of this market, customer demands are rapidly broadening to include an expanded range of services, from convenience features such as caller ID, call forwarding and voice mail, to dial-up access to the Internet, high-speed DSL and video services. During 2004, the Consumer unit represented 43% of Communications Group revenues.

Small Business. This unit focuses on providing, in addition to traditional local and long distance voice services, advanced voice, data, Internet and networking solutions to small and medium-sized businesses. It offers a full selection of standard and customized communications services to this market. During 2004, the Small Business unit represented 12% of Communications Group revenues.

Large Business. This unit, known as BellSouth Business, provides a wide range of standard and highly specialized services and products to large and complex business customers. In addition to traditional local and long distance voice services, product and service offerings to these customers include Internet access, private networks, high-speed data equipment and transmission, conferencing and industry-specific communications arrangements for industries such as banking, healthcare and manufacturing. During 2004, the Large Business unit represented 17% of Communications Group revenues.

Interconnection Services. This unit provides interconnection to our network and other related wholesale services to telecommunications carriers for use in providing services to their customers. Interconnection refers to the link between our telecommunications network and the telecommunications network of other service providers. In addition to interconnection services, we provide services such as voice and data transport services. During 2004, the Interconnection Services unit represented 24% of Communications Group revenues and generated 45% of our reported data revenues. The unit provides services to both affiliated and nonaffiliated customers in five different carrier markets: wireless service providers, competitive local exchange carriers, competitive switched and special access providers, long distance carriers and information service providers.

BUSINESS STRATEGY

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

      We intend to:

      •  optimize our portfolio of retail and wholesale products and services by utilizing marketing approaches targeted to our different customer segments, by providing superior service and by offering flexible packages of voice, data and multimedia applications through improved distribution channels and systems;

      •  become the leading provider of local broadband/Internet Protocol (IP) services in the southeast by deploying new broadband/IP platforms that support both voice and data services as well as applications; and

      •  reduce our cost structure by managing the utilization of existing assets and redirecting spending to focus new investment on high-growth products and services.

BUSINESS OPERATIONS

Voice services

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

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

4      BELLSOUTH 2004

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

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

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

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

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

Broadband and data services

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

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

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

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

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

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

      •  a suite of VoIP network based IP products, including Centrex IP service for Large Business customers, Internet Protocol Telephone Gateway (IPTG) service and VoIP Conversion service for Interconnection Service customers;

      •  a VoIP service specifically designed for Large Business customers and known as BellSouth Converged Solutions; and

      •  a number of PBX equipment-based IP voice and data services.

BELLSOUTH 2004      5

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

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

Video

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

Other Communications Group revenues

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

WIRELINE REGULATORY ENVIRONMENT

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

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

COMPETITION

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

Wireless providers

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

Traditional telecommunication service providers

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

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

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

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

6      BELLSOUTH 2004

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

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

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

Broadband service providers

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

FRANCHISES AND LICENSES

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

Domestic Wireless

OVERVIEW

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

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

•  Cingular reported US wireless cellular service and personal communication services (PCS) customers totaling 49.1 million;

•  Cingular had access to licenses to provide cellular or PCS wireless communications services covering an aggregate of 290 million in population (POPs), or approximately 98% of the US population, including all of the 100 largest US metropolitan areas;

•  Cingular’s primary digital networks utilize Global System for Mobile Communication (GSM) technology and Time Division Multiple Access (TDMA) technology;

•  65% of Cingular’s subscriber base was GSM equipped and 79% of its total minutes were carried on its GSM network; and

•  Cingular had over 17 million active users of its data services.

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

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

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

    In 2001, Cingular and T-Mobile USA exchanged FCC licenses, and subsequently formed a joint venture, to share infrastructure covering the metropolitan New York market, most of California and parts of Nevada. In May 2004, Cingular and T-Mobile entered into an agreement to dissolve the joint venture, distribute the related network assets, sell to T-Mobile certain assets and spectrum and exchange certain spectrum, since Cingular determined that the AT&T Wireless acquisition would provide spectrum and network infrastructure in areas missing from Cingular’s

BELLSOUTH 2004      7

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

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

BUSINESS STRATEGY

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

•  build the best network by integrating the Cingular and AT&T Wireless networks, accelerating the build out of the network to improve coverage in suburban and neighborhood areas and strengthen the in-building penetration in urban areas, deploying its 3rd generation cellular/PCS system in major markets across the country and working with its rural roaming partners to improve and expand coverage outside of its footprint and assist them in providing consistent products and services to its customers that roam across their networks;

•  deliver exceptional customer service through the implementation of policies and procedures at every point of contact with its customers to improve the customer experience;

•  rationalize its direct and indirect distribution channels and expand sales locations opportunistically to create an unmatched distribution network;

•  continue to offer compelling products and services, including devices, features and pricing plans, that differentiate Cingular from its competitors; and

•  efficiently integrate AT&T Wireless’ business and operations.

OPERATIONS

Voice services

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

POSTPAID VOICE SERVICE

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

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

PREPAID VOICE SERVICE

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

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

8      BELLSOUTH 2004

Data services

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

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

Equipment sales

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

NETWORK

Licenses

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

Technology

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

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

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

    Although many advances are still underway for enhanced capacity, performance and features in all of the deployed technologies, Cingular, through its acquisition of AT&T Wireless, operates its 3rd generation cellular/PCS system using the Universal Mobile Telecommunications System (UMTS) standard in six cities (Dallas, San Francisco, Detroit, Phoenix, Seattle and San Diego). UMTS, like GSM, is the dominant world standard that has been accepted and deployed in Europe and Asia. Cingular’s currently deployed 3rd generation UMTS systems allow user average data download speeds between 220-300 kilobits per second (kbps), providing the capability for a variety of services such as streaming audio, video, and simultaneous voice and data applications. Much like Cingular’s EDGE system, UMTS allows for packet data enabling “always on” connectivity, which is useful for receiving email when it arrives versus the need to set aside time for an email download, allowing billing based on the amount of data transferred, rather than the amount of time a given device is connected.

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

BELLSOUTH 2004      9

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

Spectrum capacity and coverage

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

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

Network integration

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

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

COMPETITION

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

    Cingular’s competitors are principally the other largest national providers of cellular, PCS and other wireless communications services – Verizon Wireless Inc., Sprint PCS, Nextel Communications Inc. and T-Mobile, which together with Cingular served over 90% of the US wireless customers. Cingular’s competitors also include regional carriers, such as U.S. Cellular and Alltel Corporation, niche carriers, such as MetroPCS and Cricket Communications Inc. and resellers. Some of the indirect retailers who sell Cingular’s services also sell its competitors’ services. Cingular ranks first among the five national carriers in terms of customers served as of December 31, 2004, and second in 2004 revenues. Verizon Wireless ranks second in terms of customers served and first in terms of revenues for 2004.

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

    Consolidation, alliances and business ventures may increase competition. Consolidation and the formation of alliances and business ventures within the wireless communications industry have occurred and Cingular expects that this trend will continue. Consolidation may create larger, better-capitalized competitors with substantial financial, technical, marketing, distribution and other resources to compete with Cingular’s product and service offerings. In addition, global combinations of wireless carriers – such as the joint venture between Sprint PCS and Virgin Group Ltd., Verizon Wireless, which is a joint venture between Verizon Communications and Vodafone Group Plc, and mergers and acquisitions, such as the ownership of T-Mobile by Deutsche Telekom AG and proposed mergers of Sprint Corporation and Nextel, and Alltel and Western Wireless Corporation – may give some domestic competitors better access to international technologies, marketing expertise and strategies and diversified sources of capital. Other large, national wireless carriers have affiliations with a number of smaller, regional wireless carriers that offer wireless services under the same national brand, thereby expanding the national carrier’s perceived national scope.

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

10      BELLSOUTH 2004

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

•  increase its spending to retain customers;

•  restructure its service packages to include more compelling products and services;

•  further upgrade its network infrastructure and the handsets it offers; and

•  increase its advertising, promotional spending, commissions and other customer acquisition costs.

WIRELESS REGULATORY ENVIRONMENT

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

Advertising & Publishing Group

OVERVIEW

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

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

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

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

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

BUSINESS STRATEGY

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

•  maintain product leadership by reinvesting in our products and making strategic investments to promote our products;

•  grow revenues through new products and product enhancements, including the development and increased distribution of Internet and niche products and by expanding our existing markets through new market overlays and traditional market re-scoping;

•  attract new customers and retain our existing customer base by offering competitive pricing and incentive programs to encourage new customers and to reward current customers for their tenure; and

•  continue to improve operational efficiency.

COMPETITION

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

Latin American Group

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

BELLSOUTH 2004      11

Intellectual Property

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

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

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

Research and Development

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

Employees

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

Properties

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

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

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

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

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

Legal Proceedings

EMPLOYMENT CLAIM

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

12      BELLSOUTH 2004

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

SECURITIES AND ERISA CLAIMS

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

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

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

ANTITRUST CLAIMS

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

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

BELLSOUTH 2004      13

ENVIRONMENTAL MATTERS

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

OTHER MATTERS

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

Submission of Matters to a Vote of Shareholders

No matter was submitted to a vote of shareholders in the fourth quarter of the fiscal year ended December 31, 2004.

Additional Information – Description of BellSouth Stock

GENERAL

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

DIVIDEND RIGHTS

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

VOTING RIGHTS

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

LIQUIDATION RIGHTS

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

DIRECTORS

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

PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS; REDEMPTION

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

14      BELLSOUTH 2004

PREFERRED STOCK PURCHASE RIGHTS

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

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

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

BUSINESS COMBINATIONS

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

FAIR PRICE PROVISIONS

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

LIMITATION ON SHAREHOLDERS’ PROCEEDINGS

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

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

BELLSOUTH 2004      15

Executive Officers

The executive officers of BellSouth Corporation are listed below:

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

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

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

Website Access

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

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

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

PART II

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

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

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

16      BELLSOUTH 2004

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

Issuer Purchases of Equity Securities

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

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

Stock Transfer Agent and Registrar

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

BELLSOUTH 2004      17

SELECTED FINANCIAL AND OPERATING DATA

DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS

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

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

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

    See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations” for a discussion of unusual items affecting the results for 2002, 2003 and 2004.

18      BELLSOUTH 2004

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

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

BELLSOUTH CORPORATION

Overview

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

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

INDUSTRY DYNAMICS

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

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

REGULATION AND COMPETITION

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

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

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

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

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

ACQUISITIONS AND DISPOSITIONS

On October 26, 2004, Cingular completed its previously announced acquisition of AT&T Wireless. With the close of the transaction, Cingular management moved immediately to begin integrating the two companies. Key focus areas included customer communications, immediate training for all sales and service personnel, relaunch of the Cingular brand, transitioning to a common order system, and beginning the work that over time will integrate support systems and network functions. This acquisition will substantially increase BellSouth’s participation in the domestic wireless industry.

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

BELLSOUTH 2004      19

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

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

BELLSOUTH CORPORATION

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

HIGHLIGHTS AND OUTLOOK

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

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

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

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

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

20      BELLSOUTH 2004

Consolidated Results of Operations

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

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

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

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

* Not meaningful

2004 compared to 2003

OPERATING REVENUES

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

BELLSOUTH 2004      21

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

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

BELLSOUTH CORPORATION

OPERATING EXPENSES

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

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

INTEREST EXPENSE

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

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

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

NET EARNINGS (LOSSES) OF EQUITY AFFILIATES

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

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

GAIN (LOSS) ON SALE OF OPERATIONS

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

OTHER INCOME (EXPENSE), NET

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

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

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

22      BELLSOUTH 2004

PROVISION FOR INCOME TAXES

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

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

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX

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

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

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE

Asset retirement obligations

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

Revenue recognition for publishing revenues

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

2003 compared to 2002

OPERATING REVENUES

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

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

OPERATING EXPENSES

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

•  $785 in lower charges related to restructuring and asset impairments as we rationalized our business in 2002;

•  $391 of lower depreciation expense associated with the declines in capital expenditures and a change in accounting for plant retirements;

•  $272 of improvements in uncollectibles expense due to a steadily improving economy, lower bankruptcy rates and operational improvements;

•  $86 of lower cost of goods related to equipment sales in the Communications Group due to a change in the presentation for drop shipments from gross to net, which had no impact on operating margin, and paging and equipment costs decreased $53 driven by lower volumes; and

•  $121 in lower labor related costs in the Communications Group due to a nearly 12% reduction in our workforce since the beginning of 2002 driven by weak demand and increased productivity.

BELLSOUTH 2004      23

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

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

BELLSOUTH CORPORATION

These decreases were partially offset by:

•  $379 of incremental expense associated with pension and postretirement benefits plans (pension and retiree medical costs) driven by rising health care costs, unfavorable returns on pension assets due to weak capital markets over the past few years, changes to plan assumptions regarding expected asset returns, and a lower discount rate used to calculate service and interest cost;

•  $350 of customer acquisition costs related to competitive response in the Communications Group; and

•  $108 of variable cost of goods for the provision of long distance service in the Communications Group.

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

INTEREST EXPENSE

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

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

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

GAIN ON SALE OF OPERATIONS

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

NET EARNINGS (LOSSES) OF EQUITY AFFILIATES

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

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

OTHER INCOME (EXPENSE), NET

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

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

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

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

PROVISION FOR INCOME TAXES

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

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

24      BELLSOUTH 2004

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

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX

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

Results by Segment

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

•  Communications Group;

•  Domestic Wireless; and

•  Advertising & Publishing Group.

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

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

BELLSOUTH 2004      25

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

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

BELLSOUTH CORPORATION

COMMUNICATIONS GROUP

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

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

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

* Not meaningful

26      BELLSOUTH 2004

2004 compared to 2003

SEGMENT OPERATING REVENUES

Voice

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

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

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

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

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

Data

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

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

BELLSOUTH 2004      27

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

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

BELLSOUTH CORPORATION

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

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

Other

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

SEGMENT OPERATING EXPENSES

Cost of services and products

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

Selling, general, and administrative expenses

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

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

Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET INCOME

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

2003 compared to 2002

SEGMENT OPERATING REVENUES

Voice

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

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

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

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

28      BELLSOUTH 2004

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

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

Data

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

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

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

Other

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

SEGMENT OPERATING EXPENSES

Cost of services and products

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

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

Selling, general, and administrative expenses

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

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

BELLSOUTH 2004      29

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

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

BELLSOUTH CORPORATION

Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET INCOME

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

Domestic Wireless

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

    On October 26, 2004, Cingular completed the acquisition of AT&T Wireless, creating the largest wireless carrier in the United States based on number of customers. Data revenue played an increasingly important role in revenue composition in 2003 and 2004 and those impacts are expected to increase in 2005. Further, competition continues to be intense, with up to five competitors in most of Cingular’s significant markets.

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

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

30      BELLSOUTH 2004

2004 compared to 2003

SEGMENT OPERATING REVENUES

Cingular had 49.1 million cellular/PCS customers at December 31, 2004, representing growth of 25.1 million in its cellular/PCS customer base from a year ago. This growth was primarily due to a 21.7 million cellular/ PCS customer base increase, related to Cingular’s acquisition of AT&T Wireless in October 2004. Additionally, for 2004, Cingular’s cellular/ PCS customer net additions were 3.4 million, up from 2.1 million a year ago, with 1.7 million of the current year’s cellular/ PCS customer net additions occurring in the fourth quarter of the year. This fourth quarter increase represents the highest cellular/ PCS customer net additions total ever when compared with the combined historical results of Cingular and AT&T Wireless. The strong performance in cellular/ PCS customer net additions during the fourth quarter was driven by the re-launch of the Cingular brand, the offering of new common rate plans and the larger distribution network of the newly combined Cingular/ AT&T Wireless company subsequent to the acquisition. Also favorably impacting customer net additions throughout 2004 were the promotion and success of Cingular’s new GSM service offerings and the continued promotion of its FamilyTalk® service offering and its Rollover® rate plans. Excluding the impact to the prepaid customer base due to the AT&T Wireless acquisition, the prepaid customer count was reduced from the prior year, in part due to the successful promotion of the postpaid FamilyTalk® plan, which competes for customers at a similar price point but with enhanced services. The increase in reseller customer net additions compared with the prior year can be attributed to continued growth by Cingular’s primary reseller.

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

    Total operating revenues, consisting of service revenue and equipment sales, increased $1,581 in 2004. The primary driver behind the year over year increases in almost every component of total operating revenues was Cingular’s acquisition of AT&T Wireless in late October 2004 and the inclusion of 67 days of AT&T Wireless operating results. Additionally, total operating revenues continue to be favorably impacted by growth in service revenue as a result of a higher average cellular/PCS customer base and the continued growth in data revenues. Equipment sales contributed $281 to the increase in total operating revenues, driven by both strong customer growth and handset upgrade activity.

Service revenues

Service revenue, comprised of local voice and data services, roaming, long distance and other revenue, increased $1,300 in 2004 compared to 2003. The local service component of total service revenue includes recurring monthly access charges, airtime usage, including prepaid service, and charges for optional features and services, such as voice mail, mobile-to-mobile calling, roadside assistance, caller ID, handset insurance and data services. It also includes billings to customers for the Universal Service Fund (USF) and other regulatory fees. The primary driver of the increase in local service revenue for 2004 was the inclusion of the former AT&T Wireless operating results as a result of Cingular’s acquisition in late October 2004. Aside from this impact, increases in local service revenue are a function of the higher average customer base partially offset by the impact of a lower Average Revenue Per User (ARPU). Strong growth in data revenue, including the impact of the AT&T wireless acquisition, continues to favorably impact local service revenue driven primarily by increased data service penetration and usage of text messaging and other data services by cellular/PCS customers. Incollect and outcollect roaming revenues were essentially flat, when compared with the corresponding prior year. Roaming revenue continues to be unfavorably impacted by the bundling of “free” roaming minutes with all-inclusive regional and national rate plans and lower negotiated rates with Cingular’s roaming partners. Prior to the acquisition, AT&T Wireless was Cingular’s largest national roaming partner. Effective with the acquisition, Cingular’s consolidated outcollect revenue reflects elimination of roaming revenue between the now combined Cingular and former AT&T Wireless properties along with a corresponding elimination of incollect roaming costs. Although net income neutral, this elimination will significantly reduce the new combined company outcollect revenue when compared to the combination of prior historical stand-alone results. The increase in long distance revenue compared with 2003 was primarily related to the incremental impact of the additional long distance revenue contributed as a result of the AT&T Wireless acquisition. Higher international long distance revenue in 2004 also contributed, to a lesser extent, to the overall increase compared with the prior year.

BELLSOUTH 2004      31

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

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

BELLSOUTH CORPORATION

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

Equipment revenues

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

SEGMENT OPERATING EXPENSES

Cost of services and products

The cost of services and products increase of $707 for 2004 compared to 2003 was due to increases in local network system costs and in third party system costs (i.e., roaming and long distance costs). Over half of the increase in local network system costs can be attributed to the incremental costs related to the acquired AT&T Wireless network. Excluding this impact, the overall drivers of increased local network costs are primarily related to increased network system usage and associated network system expansion costs. Increased local network system costs in 2004 versus the prior year attributable to historical pre-merger Cingular activities included increased costs billed to its customers related to payments into the USF and certain other regulatory funds and higher costs related to its handset insurance program due to increased claims. For 2004, third party network system costs were lower as continued decreases in incollect roaming costs were partially offset by higher long distance costs. Lower incollect roaming costs were a result of lower negotiated roaming rates with Cingular’s roaming partners, which more than offset increased volumes of roaming minutes. Also, as a result of the AT&T Wireless acquisition, Cingular’s consolidated incollect expenses reflect elimination of intra-company incollect roaming costs between the now combined Cingular and former AT&T Wireless properties along with a corresponding elimination of outcollect revenue. Although net income neutral, this elimination will significantly reduce the new combined company incollect roaming expenses when compared to the combination of prior historical stand-alone results. The increase in long distance costs was primarily volume driven, impacted by the inclusion of “free long distance” in many of Cingular’s regional and national rate plan offerings. In addition, approximately one-third of the increase in long distance costs versus 2003 was related to the incremental long distance expenses incurred as a result of the AT&T Wireless acquisition. For 2004, the cost of equipment sales increased, primarily driven by overall higher handset sales including the impact of a significant increase in customer gross additions and customer migration to Cingular rate plans due to the acquisition of AT&T Wireless.

Selling, general, and administrative expenses

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

32      BELLSOUTH 2004

Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET INCOME

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

2003 compared to 2002

SEGMENT OPERATING REVENUES

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

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

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

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

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

BELLSOUTH 2004      33

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

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

BELLSOUTH CORPORATION

SEGMENT OPERATING EXPENSES

Cost of services and products

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

Selling, general, and administrative expenses

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

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

Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET INCOME

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

Advertising & Publishing Group

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

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

34      BELLSOUTH 2004

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

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

* Not meaningful

2004 compared to 2003

SEGMENT OPERATING REVENUES

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

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

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

SEGMENT OPERATING EXPENSES

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET INCOME

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

2003 compared to 2002

SEGMENT OPERATING REVENUES

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

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

BELLSOUTH 2004      35

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

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

BELLSOUTH CORPORATION

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

SEGMENT OPERATING EXPENSES

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET INCOME

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

Liquidity and Financial Condition

DESCRIPTION OF CASH FLOWS

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

* Not meaningful

Continuing Operations

NET CASH PROVIDED BY OPERATING ACTIVITIES

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

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

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

NET CASH USED FOR INVESTING ACTIVITIES

Capital expenditures

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

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

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

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

36      BELLSOUTH 2004

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

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

Other investing activities

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

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

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

NET CASH USED FOR FINANCING ACTIVITIES

Net borrowings of short-term and long-term debt of $7,057 during 2004 increased $9,337 over 2003, primarily due to financing our share of the purchase price of Cingular’s acquisition of AT&T Wireless. Cash used for the purchase of treasury shares declined $712 due to the expiration of the Company’s stock repurchase program in December 2003. Dividend payments increased $293 as compared to 2003 due to an increase in the annual dividend rate to $1.04 per share from $.87 per share in 2003. In December 2004, we called $400 of debt, which was redeemed in January 2005.

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

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

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

Discontinued Operations

    The following table includes cash flows from our discontinued operations:

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

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

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

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

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

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

BELLSOUTH CORPORATION

ANTICIPATED SOURCES AND USES OF FUNDS

General

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

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

    At December 31, 2004, our long-term debt rating was A2 from Moody’s Investor Service and A from Standard and Poor’s. Our short-term debt rating at December 31, 2004 was P-1 from Moody’s and A-1 from Standard and Poor’s. During 2004, Moody’s reduced our long-term debt rating from A1 to A2. Moody’s indicated the rating was reduced because of the loss of financial flexibility due to the significantly increased debt levels associated with Cingular’s acquisition of AT&T Wireless, increasing competition that continues to erode profitability and the ability to generate free cash flow, and increasing capital expenditures associated with network upgrades which will negatively impact our ability to reduce debt over the near term. Moody’s outlook on both our short and long-term ratings remains negative. The reasons cited were our expanded competitive challenges in the wireline business which could erode our ability to reduce debt levels as planned and the possibility of lower earnings and cash flow at Cingular if the AT&T Wireless integration is more expensive and time consuming than anticipated. Standard and Poor’s also has a negative outlook on our long-term debt rating. The reasons given are increasing competition in our wireline business from the cable television companies, which could drive down pricing and squeeze operating margins, and near term pressures from the integration of AT&T Wireless.

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

Domestic wireless

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

Cash management

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

Debt instruments

PUBLICLY HELD INDEBTEDNESS

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

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

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

38      BELLSOUTH 2004

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

DISCONTINUED OPERATIONS

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

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

OFF-BALANCE SHEET ARRANGEMENTS

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

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

CONTRACTUAL OBLIGATIONS

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

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

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

Pensions and other retiree benef its

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

OTHER POTENTIAL OBLIGATIONS

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

BELLSOUTH 2004      39

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

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

BELLSOUTH CORPORATION

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

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

RELATED PARTY TRANSACTIONS

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

Quantitative and Qualitative Disclosure About Market Risk

DESCRIPTION OF RISK

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

Interest rate risk

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

Risk sensitivity

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

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

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

PROPORTIONAL DEBT

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

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

40      BELLSOUTH 2004

Operating Environment

DOMESTIC ECONOMIC TRENDS

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

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

WIRELINE REGULATORY ENVIRONMENT

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

Regulatory Reform

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

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

Federal Regulatory Matters

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

FCC INTERCONNECTION, UNBUNDLING AND PRICING RULES

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

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

BELLSOUTH 2004      41

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

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

BELLSOUTH CORPORATION

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

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

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

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

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

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

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

PRICE REGULATION

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

ACCESS CHARGE REFORM

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

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

42      BELLSOUTH 2004

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

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

UNIVERSAL SERVICE

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

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

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

RECIPROCAL COMPENSATION

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

BROADBAND REGULATION

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

SECTION 272 CLAIM

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

BELLSOUTH 2004      43

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

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

BELLSOUTH CORPORATION

believe that any such claims would be barred in whole or in part by various provisions of law. At this time, however, neither the likely outcome of the appeal nor AT&T’s potential damages claim can be predicted, and therefore no reasonable estimate of loss, if any, can be made.

State Regulatory Matters

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

PRICE REGULATION

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

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

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

OTHER STATE REGULATORY MATTERS

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

WIRELESS REGULATORY ENVIRONMENT

Overview

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

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

•  regulate Cingular’s ability to acquire and hold radio spectrum licenses or to lease spectrum;

•  impose technical obligations on the operation of Cingular’s network;

•  impose requirements on the ways Cingular provides service to and communicates with its customers;

•  regulate the interconnection of Cingular’s network with the networks of other carriers;

•  obligate Cingular to permit resale of its services by resellers, if it offers resale opportunities, and to serve roaming customers of other wireless carriers; and

•  impose a variety of fees and charges on Cingular’s business that are used to finance numerous regulatory programs and a substantial part of the FCC’s budget.

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

44      BELLSOUTH 2004

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

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

Recent Regulatory Developments

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

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

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

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

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

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

BELLSOUTH 2004      45

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

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

BELLSOUTH CORPORATION

State Regulation and Local Approvals

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

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

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

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

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

COMPETITION

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

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

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

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

•  increase its spending to retain customers;

•  restructure its service packages to include more compelling products and services;

•  further upgrade its network infrastructure and the handsets Cingular offers; and

46      BELLSOUTH 2004

•  increase its advertising, promotional spending, commissions and other customer acquisition costs.

TECHNOLOGY

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

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

LEGAL MATTERS

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

NEW ACCOUNTING PRONOUNCEMENTS

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

Critical Accounting Policies

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

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

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT

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

Nature of estimates required

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

Sensitivity analysis

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

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

PENSIONS

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

Nature of estimates required

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

Assumptions and approach used

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

•  Discount rates

•  Inflation

•  Salary growth

•  Expected return on plan assets

•  Retirement rates

•  Mortality rates

BELLSOUTH 2004      47

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

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

BELLSOUTH CORPORATION

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

Sensitivity analysis

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

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

OTHER POSTRETIREMENT BENEFITS

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

Nature of estimates required

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

Assumptions and approach used

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

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

•  Discount rates

•  Health care cost trends

•  Inflation

•  Expected return on plan assets

•  Retirement rates

•  Mortality rates

•  Actuarial equivalence for purposes of the Medicare Prescription Drug, Improvement and Modernization Act

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

48      BELLSOUTH 2004

accordance with the other postretirement benefits accounting rules.

Sensitivity analysis

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

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

OTHER LOSS CONTINGENCIES

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

OTHER SIGNIFICANT ACCOUNTING POLICIES

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

Cautionary Language Concerning
Forward-Looking Statements

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

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

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

•  a change in economic conditions in the markets where we operate or have material investments which could affect demand for our services;

•  the impact and the success of Cingular Wireless, our wireless joint venture with SBC, including marketing and product development efforts, technological changes and financial capacity;

•  Cingular Wireless’ failure to realize, in the amounts and within the timeframe contemplated, the capital and expense synergies and other financial benefits expected from its acquisition of AT&T Wireless as a result of technical, logistical, regulatory and other factors;

•  changes in laws or regulations, or in their interpretations, which could result in the loss, or reduction in value, of our licenses, concessions or markets, or in an increase in competition, compliance costs or capital expenditures;

•  continued pressures on the telecommunications industry from a financial, competitive and regulatory perspective;

•  the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings;

•  changes in the federal and state regulations governing the terms on which we offer retail and wholesale services;

•  continued successful penetration of the interLATA long distance market;

•  the impact on our business of consolidation in the wireline and wireless industries in which we operate;

•  the issuance by the Financial Accounting Standards Board or other accounting bodies of new accounting standards or changes to existing standards;

•  changes in available technology that increase the impacts of technology substitution;

•  higher than anticipated start-up costs or significant up-front investments associated with new business initiatives;

•  the outcome of pending litigation; and

•  unanticipated higher capital spending from, or delays in, the deployment of new technologies.

BELLSOUTH 2004      49

CONSOLIDATED STATEMENTS OF INCOME

BELLSOUTH CORPORATION

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

* Net income per share may not sum due to rounding

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

50      BELLSOUTH 2004

CONSOLIDATED BALANCE SHEETS

BELLSOUTH CORPORATION

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

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

BELLSOUTH 2004      51

CONSOLIDATED STATEMENTS OF CASH FLOWS

BELLSOUTH CORPORATION

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

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

52      BELLSOUTH 2004

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

EQUITY AND COMPREHENSIVE INCOME

BELLSOUTH CORPORATION

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

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

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

BELLSOUTH 2004      53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

BELLSOUTH CORPORATION

Note A – Accounting Policies

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

ORGANIZATION

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

BASIS OF PRESENTATION

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

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

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

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

SHORT-TERM INVESTMENTS

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

MATERIAL AND SUPPLIES

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

PROPERTY, PLANT AND EQUIPMENT

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

54      BELLSOUTH 2004

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

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

VALUATION OF LONG-LIVED ASSETS

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

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

FOREIGN CURRENCY

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

COST METHOD INVESTMENTS

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

REVENUE RECOGNITION

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

BELLSOUTH 2004      55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

DEFERRED ACTIVATION AND INSTALLATION EXPENSES

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

ADVERTISING

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

INCOME TAXES

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

EARNINGS PER SHARE

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

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

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

GOODWILL AND INTANGIBLE ASSETS

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

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

Note B –   Recently Issued Accounting Pronouncements

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

Note C –  Changes in Accounting Principle

ASSET RETIREMENT OBLIGATIONS

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

56      BELLSOUTH 2004

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

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

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

REVENUE RECOGNITION FOR PUBLISHING REVENUES

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

BELLSOUTH 2004      57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

PRO FORMA IMPACT OF ACCOUNTING CHANGES

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

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

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

Note D –  Discontinued Operations

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

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

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

58      BELLSOUTH 2004

SUMMARY OF SALE TRANSACTIONS

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

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

SUMMARY FINANCIAL INFORMATION

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

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

Summarized results for the discontinued operations are as follows:

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

TAX OVER BOOK BASIS DIFFERENTIAL

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

BUYOUT OF MINORITY PARTNERS

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

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

VENEZUELAN ARBITRATION AND SETTLEMENT

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

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

BELLSOUTH 2004      59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

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

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

VENEZUELA CURRENCY

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

ARGENTINA CURRENCY

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

Note E –  Investments in and Advances to Cingular

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

INVESTMENT

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

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

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

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

    On October 26, 2004, Cingular completed its previously announced acquisition of AT&T Wireless, creating the largest wireless carrier in the United States based on the number of customers. Cingular’s cash purchase price for AT&T Wireless shares totaled approximately $41 billion. That amount was funded by equity contributions from Cingular’s two owners in proportion to their equity ownership of Cingular — 60% for SBC and 40% for BellSouth — with the remainder provided from cash on hand at AT&T Wireless. BellSouth’s portion of the funding, which was reflected as an increase in our investment in Cingular, was approximately $14.4 billion.

60      BELLSOUTH 2004

ADVANCE

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

REVOLVING LINE OF CREDIT

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

PROVISION OF SERVICES

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

INTEREST AND REVENUE EARNED FROM CINGULAR

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

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

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

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

Note F – Other Assets

Other assets at December 31 consist of the following:

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

DEFERRED ACTIVATION AND INSTALLATION EXPENSES

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

EQUITY METHOD INVESTMENTS OTHER THAN CINGULAR

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

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

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

COST METHOD INVESTMENTS

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

BELLSOUTH 2004      61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

ADVANCE TO SONOFON

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

INVESTMENT IN DEBT SECURITIES

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

Note G – Intangible Assets

Intangible assets are summarized as follows:

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

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

Aggregate amortization expense:

    For the year ended December 31, 2004                 $597

Expected amortization expense:

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

INTANGIBLE ASSET IMPAIRMENTS

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

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

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

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

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

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

62      BELLSOUTH 2004

OTHER IMPAIRMENTS OF INTANGIBLE ASSETS

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

Note H –  Supplemental Balance Sheet and Cash Flow Information

PROPERTY, PLANT AND EQUIPMENT

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

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

OTHER CURRENT LIABILITIES

Other current liabilities are summarized as follows at December 31:

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

OTHER NONCURRENT LIABILITIES

Other noncurrent liabilities are summarized as follows at December 31:

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

SUPPLEMENTAL CASH FLOW FROM CONTINUING OPERATIONS INFORMATION

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

Note I – Debt

DEBT MATURING WITHIN ONE YEAR

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

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

Weighted-average interest rate at end of period:

	2003		2004
Bank loans		5.25%		–%
Commercial paper		1.04%		2.26%

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

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

BELLSOUTH 2004      63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

LONG-TERM DEBT

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

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

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

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

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

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

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

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

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

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

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

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

Subsequent Event

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

Note J – Income Taxes

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

64      BELLSOUTH 2004

    The provision for income taxes is summarized as follows:

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

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

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

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

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

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

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

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

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

Note K –   Workforce Reduction and Restructuring

WORKFORCE REDUCTION CHARGES

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

BELLSOUTH 2004      65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

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

ASSET IMPAIRMENTS

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

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

RESTRUCTURING LIABILITY

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

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

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

Note L – Employee Benefit Plans

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

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

Pension Plans

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

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

Other Benefits

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

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

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

66      BELLSOUTH 2004

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

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

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

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

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

Medicare Prescription Drug, Improvement and Modernization Act of 2003

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

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

BELLSOUTH 2004      67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

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

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

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

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

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

68      BELLSOUTH 2004

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

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

Curtailments and Settlements

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

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

Expected Return on Assets Assumption

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

Plan Assets

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

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

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

•  ensure that funds are available to pay benefits as they become due;

•  maximize the trusts total return subject to prudent risk taking; and

•  preserve and/or improve the funded status of the trusts over time.

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

BELLSOUTH 2004      69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

Cash Flows

CONTRIBUTIONS

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

ESTIMATED FUTURE BENEFIT PAYMENTS

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

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

Cash-Balance Pension Plan

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

Supplemental Executive Retirement Plan

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

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

DEFINED CONTRIBUTION PLANS

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

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

70      BELLSOUTH 2004

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

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

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

Note M – Financial Instruments

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

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

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

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

INTEREST RATE SWAPS

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

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

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

BELLSOUTH 2004      71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

CONCENTRATIONS OF CREDIT RISK

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

Note N – Shareholders’ Equity

COMMON STOCK AUTHORIZED

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

PREFERRED STOCK AUTHORIZED

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

SHAREHOLDER RIGHTS PLAN

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

SHARES HELD IN TRUST AND TREASURY

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

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

Treasury Shares

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

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

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

Grantor Trusts

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

72      BELLSOUTH 2004

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

OTHER COMPREHENSIVE INCOME

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

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

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

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

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

Note O – Stock Compensation Plans

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

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

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

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

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BELLSOUTH CORPORATION

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

STOCK OPTION AWARDS

Stock options granted under the plans entitle recipients to purchase shares of BellSouth common stock within prescribed periods at a price either equal to, or in excess of, the fair market value on the date of grant. Options generally become exercisable at the end of three to five years, have a term of ten years, and provide for accelerated vesting if there is a change in control (as defined in the plans). A summary of option activity under the plans is presented below:

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

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

   The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

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

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

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

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

RESTRICTED STOCK AWARDS

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

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

74      BELLSOUTH 2004

PERFORMANCE SHARE UNIT AWARDS

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

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

Note P – Segment Information

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

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

    The following table provides information for each operating segment:

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

RECONCILIATION TO

CONSOLIDATED FINANCIAL INFORMATION

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

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BELLSOUTH CORPORATION

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

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

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

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

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

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

Note Q –   Commitments and Contingencies

LEASES

We have entered into operating leases for facilities and equipment used in operations. Rental expense under operating leases was $300 for 2002, $309 for 2003 and $232 for 2004. Capital leases currently in effect are not significant. The following table summarizes the approximate future minimum rentals under noncancelable operating leases in effect at December 31, 2004:

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

OUTSIDE PLANT

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

GUARANTEES

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

76      BELLSOUTH 2004

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

PURCHASE OBLIGATIONS

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

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

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

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

REGULATORY MATTERS

AT&T Prepaid Card

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

South Carolina Price Regulation

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

Section 272 Claim

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

BELLSOUTH 2004      77

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BELLSOUTH CORPORATION

neither the likely outcome of the appeal nor AT&T’s potential damages claim can be predicted, and therefore no reasonable estimate of loss, if any, can be made.

LEGAL PROCEEDINGS

Employment Claim

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

Securities and ERISA Claims

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

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

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

78      BELLSOUTH 2004

Antitrust Claims

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

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

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

OTHER CLAIMS

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

Note R –   Subsidiary Financial Information

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

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

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

BELLSOUTH 2004      79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

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

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

80      BELLSOUTH 2004

CONDENSED CONSOLIDATING BALANCE SHEETS

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

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

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

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

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

BELLSOUTH 2004      81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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

BELLSOUTH CORPORATION

Note S –   Quarterly Financial Information (Unaudited)

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

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

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

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

2003

•  We recorded losses related to our workforce reduction of approximately 3,400 positions, which reduced net income by $74, or $0.04 per share, in the first quarter; by $12, or $0.01 per share, in the second quarter; and by $10, or $0.01 per share in the fourth quarter.

•  Third quarter includes a charge for an asset impairment, which reduced net income by $32, or $0.02 per share.

•  We recorded income (losses) related to our Discontinued Operations which impacted net income by $65, or $0.03 per share, in the first quarter; by $43, or $0.02 per share, in the second quarter; by $42, or $0.02 per share, in the third quarter; and by $(49), or $(0.03) per share, in the fourth quarter.

2004

•  First quarter includes a gain related to the sale of our operations in Denmark, which increased net income by $295, or $0.16 per share.

•  First quarter also includes a charge for a settlement with the South Carolina Consumer Advocate, which decreased net income by $33, or 0.02 per share.

•  We recorded losses related to service repairs in the wireline business due to Hurricanes Charley, Frances,

82      BELLSOUTH 2004

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

BELLSOUTH 2004      83

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BELLSOUTH CORPORATION

To the Shareholders BellSouth Corporation:

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

Consolidated financial statements

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

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

Internal control over financial reporting

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

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

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

Atlanta, Georgia

March 4, 2005

84      BELLSOUTH 2004

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BELLSOUTH CORPORATION

Board of Directors and Shareowners

Cingular Wireless Corporation, Manager of

Cingular Wireless LLC

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

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

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

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

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

Atlanta, Georgia

March 4, 2005

REPORT OF MANAGEMENT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

BELLSOUTH CORPORATION

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

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

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

March 4, 2005

BELLSOUTH 2004      85

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

BELLSOUTH CORPORATION

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

Item 9A.     Controls and Procedures

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

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

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

Item 9B.     Other Information

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

PART III

Item 10. Directors and Executive Officers of the Registrant

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

•  The second and third paragraph under the heading “Structure and Practices of the Board of Directors — Corporate Governance Philosophy”

•  The information under the heading “Structure and Practices of the Board of Directors — Independence of Committee Members”

•  The information under the heading “Structure and Practices of the Board of Directors — Audit Committee Financial Experts”

•  The information under the heading “Matters to Be Voted On — Directors’ Proposal 1: Election of Directors”

•  The information under the heading “General Information — Section 16(a) Beneficial Ownership Reporting Compliance”

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

Item 11. Executive Compensation

The information under the headings “Executive Compensation” and “Structure and Practices of the Board

86      BELLSOUTH 2004

of Directors — Director Compensation” and “— Compensation Committee Interlocks and Insider Participation” contained in the Company’s definitive proxy statement dated March 11, 2005 are incorporated herein by reference.

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

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

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Equity compensation plan information

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

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

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

Equity compensation plans not approved by security holders

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

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

Item 13. Certain Relationships and Related Transactions

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

Item 14. Principal Accountant Fees and Services

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

BELLSOUTH 2004      87

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

BELLSOUTH CORPORATION

PART IV

Item 15. Exhibits and Financial Statement Schedules

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

3b	By-laws of BellSouth Corporation adopted April 26, 2004 (incorporated by reference to Exhibit 3b to Form 10-Q for the quarter ended March 31, 2004, File No. 1-8607.)
4a	BellSouth Corporation Shareholder Rights Agreement dated November 22, 1999 (incorporated by reference to Exhibit 1 to Report on Form 8-A dated November 23, 1999, File No. 1-8607.)
4a-1	Amendment No. 1 to BellSouth Corporation Shareholder Rights Agreement, dated as of March 2, 2005 (incorporated by reference to Exhibit 4a to Current Report on Form 8-K dated February 28, 2005, File No. 1-8607.)
4b	No instrument which defines the rights of holders of long and intermediate term debt of BellSouth Corporation is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A) Pursuant to this regulation, BellSouth Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon request.
10a	Agreement and Plan of Merger by and among AT&T Wireless, Inc., Cingular Wireless Corporation, Cingular Wireless LLC and Links I Corporation, and, solely with respect to Sections 5.3, 6.1(b), 6.5(b) and Article IX of the Agreement and Plan of Merger, SBC Communications Inc. and BellSouth Corporation dated as of February 17, 2004 (incorporated by reference to Exhibit 99.1 from the Current Report on Form 8-K/A of Cingular Wireless LLC dated February 17, 2004 and filed on February 18, 2004, File No. 001-31673.)
10b	Investment Agreement dated February 17, 2004 between BellSouth Corporation and SBC Communications Inc. (incorporated by reference to Exhibit 10nn to Form 10-K for the year ended December 31, 2003, File No. 1-8607.)
10c	Investment and Reorganization Agreement, dated as of October 25, 2004, by and among BellSouth Corporation, SBC Communications Inc., Cingular Wireless Corporation, Cingular Wireless LLC, Links I Corporation, Cingular Wireless II, Inc., BLS Cingular Holding, LLC, SBC Alloy Holdings, Inc., BellSouth Enterprises, Inc., BellSouth Mobile Systems, Inc., BellSouth Mobile Data, Inc. and SBC Long Distance, Inc. (incorporated by reference to Exhibit 99.01 of the Form 8-K of Cingular Wireless LLC filed on October 28, 2004, File No. 001-31673.)
10d	Revolving Credit Agreement by and among BellSouth Corporation, SBC Communications, Inc. and Cingular Wireless LLC, dated as of August 1, 2004 (incorporated by reference to Exhibit 10pp to the Form 10-Q for the quarter ended June 30, 2004, File No. 1-8607.)
10e	Credit Agreement dated as of October 4, 2004 among BellSouth Corporation, the Lenders Party Thereto and JPMorgan Chase Bank, as Administrative Agent (incorporated by reference to Exhibit 10xx to BellSouth’s Form 8-K dated October 4, 2004, File No. 1-8607.)
10f	BellSouth Corporation Executive Long Term Disability and Survivor Protection Plan as amended and restated effective January 1, 1994 (incorporated by reference to Exhibit 10c-1 to Form 10-K for the year ended December 31, 1993, File No. 1-8607.)
10g	BellSouth Corporation Executive Transfer Plan (incorporated by reference Exhibit 10ee to Registration Statement No. 2-87846.)
10h	BellSouth Corporation Death Benefit Program (incorporated by reference to Exhibit 10ff to Form 10-K for the year ended December 31, 1989, File No. 1-8607.)
10i	BellSouth Corporation Executive Incentive Award Deferral Plan as amended and restated effective September 23, 1996 (incorporated by reference to Exhibit 10g to Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10j	BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective November 25, 1996 (incorporated by reference to Exhibit 10h to Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10k	BellSouth Corporation Supplemental Executive Retirement Plan as amended on March 23, 1998 (incorporated by reference to Exhibit 10i to Form 10-Q for the quarter ended March 31, 1998, File No. 1-8607.)

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES CONTINUED

BELLSOUTH CORPORATION

10k-1	Amendment to BellSouth Corporation Supplemental Executive Retirement Plan, as amended on March 23, 1998, dated as of December 23, 2004.
10l	BellSouth Corporation Executive Financial Services Plan, effective January 1, 2004.
10m	BellSouth Split-Dollar Life Insurance Plan, as amended and restated and effective as of November 24, 2003.
10n	BellSouth Officer Compensation Deferral Plan as amended and restated effective January 1, 2002 (incorporated by reference to Exhibit 10z to Form 10-Q for the quarter ended September 30, 2001, File No. 1-8607.)
10o	BellSouth Officer Personal Vehicle Perquisite Plan, effective January 1, 2004.
10p	BellSouth Supplemental Life Insurance Plan, as amended and restated effective April 1, 2004.
10q	BellSouth Officer Compensation Deferral Plan, as Amended and Restated Effective January 1, 2005.
10r	BellSouth Executive Stock Ownership Program, as revised September 27, 2004.
10s	BellSouth Corporation Officer Short Term Incentive Award Plan (incorporated by reference to Exhibit 10y to Form 10-Q for the quarter ended September 30, 1996, File No. 1-8607.)
10t	2005 Named Executive Officer Compensation Term Sheet.
10u	BellSouth Corporation Plan For Non-Employee Directors’ Travel Accident Insurance (incorporated by reference to Exhibit 10ii to Registration Statement No. 2-87846, File No. 1-8607.)
10v	BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors, as amended and restated effective March 9, 1984 (incorporated by reference to Exhibit 10gg to Registration Statement No. 2-87846, File No. 1-8607.)
10w	BellSouth Corporation Director’s Compensation Deferral Plan as Amended and Restated effective May 1, 2001 (incorporated by reference from Exhibit 101-1 to Form 10-Q for the quarter ended March 31, 2001, File No. 1-8607.)
10w-1	First Amendment to BellSouth Corporation Director’s Compensation Deferral Plan dated as of February 6, 2004.
10x	BellSouth Non-Employee Directors Charitable Contribution Program (incorporated by reference to Exhibit 10z to Form 10-K for the year ended December 31, 1992, File No. 1-8607.)
10y	BellSouth Personal Retirement Account Pension Plan, as amended and restated effective January 1, 1998 (incorporated by reference to Exhibit 10q to Form 10-K for the year ended December 31, 1998, File No. 1-8607.)
10y-1	Amendment dated December 22, 1998 to the BellSouth Personal Retirement Account Pension Plan (incorporated by reference to Exhibit 10q-1 to Form 10-K for the year ended December 31, 1998, File No. 1-8607.)
10y-2	Amendment dated March 22, 1999 to the BellSouth Personal Retirement Account Pension Plan (incorporated by reference to Exhibit 10q-2 to Form 10-Q for the quarter ended March 31, 1999, File No. 1-8607.)
10y-3	Amendment dated April 7, 1999 to the BellSouth Personal Retirement Account Pension Plan (incorporated by reference to Exhibit 10q-3 to Form 10-Q for the quarter ended March 31, 1999, File No. I-8607.)
10y-4	Amendment dated May 6, 1999 to the BellSouth Personal Retirement Account Pension Plan (incorporated by reference to Exhibit 10q-4 to Form 10-Q for the quarter ended June 30, 1999, File No. 1-8607.)
10y-5	Amendment dated May 6, 1999 to the BellSouth Personal Retirement Account Pension Plan (incorporated by reference to Exhibit 10q-5 to Form 10-Q for the quarter ended June 30, 1999, File No. 1-8607.)
10y-6	Amendment dated May 7, 1999 to the BellSouth Personal Retirement Account Pension Plan (incorporated by reference to Exhibit 10q-6 to Form 10-Q for the quarter ended June 30, 1999, File No. 1-8607.)

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

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES CONTINUED

BELLSOUTH CORPORATION

10aa-2	Second Amendment dated July 8, 2002 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) (incorporated by reference to Exhibit 10s-2 to Form 10-Q for the quarter ended September 30, 2002, File No. 1-8607.)
10aa-3	First Amendment dated November 1, 2003 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) (incorporated by reference to Exhibit 10s-3 to Form 10-K for the year ended December 31, 2003, File No. I-8607.)
10aa-4	Second Amendment dated December 17, 2003 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) (incorporated by reference to Exhibit 10s-4 to Form 10-K for the year ended December 31, 2003, File No. 1-8607.)
10aa-5	Third Amendment dated March 15, 2004 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) (incorporated by reference to Exhibit 10s-5 to the Form 10-Q for the quarter ended March 31, 2004, File No. 1-8607.)
10bb	BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended April 28, 1995 (incorporated by reference to Exhibit 10w-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10bb-1	Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board Directors Benefit Plan(s) (incorporated by reference to Exhibit 10u-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10bb-2	First Amendment dated November 1, 2003 to the BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10t-2 to Form 10-K for the year ended December 31, 2003, File No. 1-8607.)
10bb-3	Second Amendment dated December 17, 2003 to the BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10t-3 to Form 10-K for the year ended December 31, 2003, File No. 1-8607.)
10bb-4	Third Amendment dated March 15, 2004 to the BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10t-4 to the Form 10-Q for the quarter ended March 31, 2004, File No. 1-8607.)
10cc	BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended April 28, 1995 (incorporated by reference to Exhibit 10x-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10cc-1	Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10cc-2	First Amendment dated November 1, 2003 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10u-2 to the Form 10-K for the year ended December 31, 2003, File No. 1-8607.)
10cc-3	Second Amendment dated December 17, 2003 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10u-3 to the Form 10-K for the year ended December 31, 2003, File No. 1-8607.)
10cc-4	Third Amendment dated March 15, 2004 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) (incorporated by reference to Exhibit 10u-4 to the Form 10-Q for the quarter ended March 31, 2004, File No. 1-8607.)
10dd	Amended and Restated BellSouth Corporation Stock Plan Effective April 24, 1995 (incorporated by reference to Exhibit 10v-1 to Form 10-K for the year ended December 31, 2000, File No. 1-8607.)
10ee	BellSouth Corporation Stock and Incentive Compensation Plan as amended June 28, 2004 (incorporated by reference to Exhibit 10v-3 to the Form 10-Q for the quarter ended June 30, 2004, File No. 1-8607.)
10ff	Non-Employee Director Non-Qualified Stock Option Terms and Conditions (incorporated by reference to Exhibit 10-qq to BellSouth’s Form 8-K dated September 30, 2004, File No. 1-8607.)
10gg	2004 Non-Qualified Stock Option Terms and Conditions (incorporated by reference to Exhibit 10-rr to BellSouth’s Form 8-K dated September 30, 2004, File No. 1-8607.)

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

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES CONTINUED

BELLSOUTH CORPORATION

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

SIGNATURES

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

BELLSOUTH CORPORATION

/s/ W. PATRICK SHANNON

W. Patrick Shannon

Senior Vice President — Finance and Controller

March 7, 2005

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

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

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

PRINCIPAL EXECUTIVE OFFICER:

F. Duane Ackerman*

CHAIRMAN OF THE BOARD, PRESIDENT

AND CHIEF EXECUTIVE OFFICER

PRINCIPAL FINANCIAL OFFICER:

Ronald M. Dykes*.

CHIEF FINANCIAL OFFICER

PRINCIPAL ACCOUNTING OFFICER:

W. Patrick Shannon*

Senior Vice President — Finance and Controller

DIRECTORS:

F. Duane Ackerman*

Reuben V. Anderson*

James H. Blanchard*

J. Hyatt Brown*

Armando M. Codina*

Kathleen F. Feldstein*

James P. Kelly*

Leo F. Mullin*

Robin B. Smith*

William S. Stavropoulos*

*By:  /s/ W. PATRICK SHANNON

W. Patrick Shannon

(INDIVIDUALLY AND AS ATTORNEY-IN-FACT)

March 7, 2005

EX-10.K1

                                                                   EXHIBIT 10k-1
                     AMENDMENT TO THE BELLSOUTH CORPORATION
                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

      THIS AMENDMENT to the BellSouth Corporation Supplemental Executive
Retirement Plan (the "Plan") is made effective as of the dates set forth herein.

                              W I T N E S S E T H:

      WHEREAS, BellSouth Corporation (the "Company") sponsors the Plan, which
was amended and restated effective November 1, 1997; and

      WHEREAS, the BellSouth Board of Directors' Nominating and Compensation
Committee (the "Committee") approved a provision at its November 24, 2003
meeting to amend the Plan to provide for a lump sum optional form of payment
that was effective beginning January 1, 2004; and

      WHEREAS, the Committee also approved a provision at its June 28, 2004
meeting to amend the Plan to provide for an enhanced pre-retirement survivor
benefit that was effective immediately; and

      WHEREAS, the Committee authorized appropriate officers of the Company to
do such further acts and to execute such documents as may be necessary or
advisable to effectuate the purposes of such Plan amendments;

      NOW, THEREFORE, pursuant to the authority delegated by the Committee, the
authorized officer approves the following revisions to the Plan document to
reflect these amendments:

                                       1.

      Effective as of January 1, 2004, Section 4 of the Plan is hereby amended
by adding to subparagraph 3(a) the following:

                  "Notwithstanding the preceding, with respect to any
                  Participant who has made a valid lump sum election under the
                  Plan, such lump sum shall be paid in the applicable time
                  period set forth under subsection 6 of Section 5 of the Plan."



                                       2.

      Effective as of January 1, 2004, Section 4 of the Plan is hereby amended
by adding to subparagraph 3(b) the following:

                  "(v) Notwithstanding the preceding, with respect to any
                  Participant who has made a valid lump sum election under the
                  Plan, such lump sum shall be paid in the applicable time
                  period set forth under subsection 6 of Section 5 of the Plan."

                                       3.

            Effective June 28, 2004, Section 4 of the Plan is hereby amended by
deleting subparagraph 4(e) and replacing it with the following paragraphs:

            "(e)  Survivor/Death Benefits.

            (i)   Benefit Payable Before Benefit Commencement.

                  If a Participant who has not made a valid lump sum election
                  dies prior to termination of employment (and prior to election
                  of his Pension Plan benefit for a Participant with a deferred
                  benefit) and leaves a surviving spouse at the time of his
                  death, a pre-retirement survivor benefit is payable to the
                  surviving spouse as an immediate life annuity equal to 100% of
                  the service benefit or deferred benefit that the Participant
                  would have received had he survived and terminated employment
                  on the date of his death and commenced benefit payments. If
                  such Participant does not have a surviving spouse at the time
                  of his death, the pre-retirement survivor benefit described in
                  this paragraph shall be paid to the Participant's estate as
                  soon as administratively feasible following the Participant's
                  death (even if the Participant was a Band BB officer or above)
                  in the form of a single sum payment which is the actuarial
                  equivalent of the benefit calculated in accordance with the
                  provisions of subparagraph (c) of Section 5.5 hereof.

            (ii)  Benefit Payable After Benefit Commencement.

                  If the Participant was receiving benefits in the form of an
                  annuity (or was eligible to receive benefits because of
                  retirement or election under the Pension Plan), and leaves a
                  surviving spouse at the time of his/her death, then such
                  surviving spouse shall automatically receive a survivor
                  annuity for life equal to 50% of the net pension benefit that
                  the Participant was receiving (or eligible to receive) just
                  prior to his death.



            (iii) Lump Sum Election.

                  In the event of the death of a Participant who has made a
                  valid lump sum election under the Plan, his surviving spouse
                  (or his estate if there is no surviving spouse) shall be
                  entitled to receive 100% of the lump sum payment that would
                  have been payable to the Participant had he survived and
                  terminated employment on the date of his death, and such lump
                  sum shall be payable as soon as administratively feasible
                  following the Participant's death (even if the Participant was
                  an Executive designated as a Band BB officer or above).

            (iv)  Lump Sum Settlement.

                  If a Participant has already received a lump sum settlement of
                  his benefit under the Plan, then no further benefits are
                  payable under this subparagraph (e).

                                       4.

            Effective as of January 1, 2004, Section 5 of the Plan is hereby
amended by deleting subparagraph 5 in its entirety and replacing it with the
following:

            "5.   Benefit Payments

                 (a)   Monthly Payments.

                  With respect to a Participant who has not made a valid lump
                  sum election in accordance with subparagraph (b) hereof,
                  benefits shall be paid in monthly disbursements or at such
                  other periods as the Committee may determine in each case.
                  Notwithstanding the foregoing, if at the time of the
                  Participant's termination of employment, the present value of
                  the benefit of a Participant, whether payable as a service
                  benefit, a deferred benefit, or a survivor's benefit, is less
                  than $20,000, such benefit shall be paid in the form of a
                  single lump sum payment which is the actuarial equivalent of
                  the benefit otherwise payable calculated in accordance with
                  the provisions of subparagraph (c) hereof.

                 (b) Lump Sum Benefit Payment.

                  A Participant may elect to receive his benefit hereunder,
                  whether payable as a service benefit, a deferred benefit or a
                  survivor's benefit, paid in the form of a single lump sum
                  payment which is the actuarial equivalent of the benefit
                  otherwise payable calculated in accordance with the provisions
                  of subparagraph (c) hereof;



            provided, any such election must be made in accordance with
            procedures established by the Company and must be on file with the
            Company, or its designee, for at least 12 consecutive calendar
            months prior to the Participant's termination of employment or death
            in order to be valid and in effect.

            (c) Lump Sum Calculation.

            Benefits payable in a lump sum in accordance with the Plan shall be
            the amount that is the actuarial present value of the Participant's
            benefit and shall be determined using (i) the applicable interest
            rate then in effect under the Pension Plan, and (ii) the applicable
            mortality table then in effect under the Pension Plan."

                                       5.

      Effective as of January 1, 2004, Section 5 of the Plan is hereby amended
by adding to subsection 6 the following:

            "Notwithstanding the preceding sentence, a Participant (other than
            an Executive who is a Band BB officer or above) who has made a valid
            lump sum election in accordance with subparagraph 5(b) of this
            Section 6 shall receive the lump sum payment of his benefit as soon
            as administratively feasible following his date of retirement or
            other termination of employment. An Executive who is a Band BB
            officer or above and who has made a valid lump sum election shall
            receive the lump sum payment (including interest accrued annually at
            the applicable interest rate in effect under the Pension Plan) as
            soon as administratively feasible following the date that is 2 years
            following his date of retirement or other termination of
            employment."

                                       6.

      Any other provisions of the Plan not amended herein shall remain in full
force and effect.

EX-10.L

                                                                    EXHIBIT 10 l
                              BELLSOUTH CORPORATION
                        EXECUTIVE FINANCIAL SERVICES PLAN


                                                                               .
                                                                               .
                                                                               .

                              BELLSOUTH CORPORATION

                        EXECUTIVE FINANCIAL SERVICES PLAN

                                TABLE OF CONTENTS
                                                                     
SECTION 1        GENERAL                                                   3

SECTION 2        FINANCIAL COUNSELING SERVICES                             3

SECTION 3        PREPARATION OF TAX RETURNS                                4

SECTION 4        LEGAL SERVICES FOR ESTATE PLANNING                        4

SECTION 5        SERVICES FOLLOWING RETIREMENT, DEATH OR SEPARATION        5

SECTION 6        BILLING                                                   5



                             BellSouth Corporation
                       Executive Financial Services Plan

                                     Page 2                             1/1/2004



                              BELLSOUTH CORPORATION

                        EXECUTIVE FINANCIAL SERVICES PLAN

SECTION 1 - GENERAL

1.    The Executive Financial Services Plan applies to Executives who are
      defined as employees of the Company (or a subsidiary company) who hold a
      position which the Board of Directors has designated to be within that
      company's Executive Management Group.

      The purpose of financial counseling for Executives is to provide
      professional assistance to carry out their financial planning in the most
      efficient manner. By using this service, the Executive spends less time on
      the details of financial planning while still meeting his/her personal
      financial responsibilities. This enables the Executive to dedicate more
      time and energies to the job.

2.    The BellSouth Plan was effective January 1, 1984 and incorporates complete
      financial counseling services (including financial planning, tax planning,
      estate planning), legal services to implement recommendations of financial
      counselors, and income tax preparation.

SECTION 2 - FINANCIAL COUNSELING SERVICES

1.    Negotiations with and approval of suppliers for BellSouth financial
      counseling services is the responsibility of the Vice President - Human
      Resources of BellSouth Corporation. There are two approved suppliers: the
      AYCO Company, and Creative Financial Group.

2.    The Executive selects one of the firms and an individual counselor.
      (Attachment A) A preliminary meeting is scheduled during which the
      services offered by the firm are explained and the documents and personal
      information required from the Executive are identified. These documents
      include such things as deeds, stock certificates, wills, insurance
      policies, trust analyses. All of this information remains strictly
      confidential between the counselor and the Executive.

3.    A second interview is then arranged at which time there is an in-depth
      examination of the financial goals and objectives of the Executive and his
      or her spouse.

                             BellSouth Corporation
                       Executive Financial Services Plan

                                     Page 3                             1/1/2004



4.    All of the information gathered by the counselor is then analyzed and a
      comprehensive report is prepared for the Executive. It presents his or her
      present financial situation and areas requiring adjustment for future
      financial planning.

5.    The types of services generally performed by the financial counseling
      firms consist of a review of Company-provided benefit plans, and estate,
      insurance, investment, and income tax planning.

6.    The fees and expenses for these services are covered by contractual
      arrangements which are reviewed annually and re-negotiated, as
      appropriate, by the BellSouth Corporation Executive Compensation Group.

7.    Although BellSouth identifies the firms to be used for financial
      counseling, it does not guarantee the advice of the firm selected.
      Therefore, letters of indemnity are required from the Executive before he
      or she undertakes the service. (Attachment B).

SECTION 3 - PREPARATION OF TAX RETURNS

1.    Tax returns may be prepared by the financial counseling firm or by an
      accounting firm selected by the individual Executive.

2.    Effective January 1, 2004, the Company has established a three-year
      account for each Executive of $8,500 to cover the total fees and expenses
      incurred for legal services as described in Section 4 below and for tax
      preparation. The Executive Compensation Group tracks reimbursements over
      the three-year account period to ensure that they are within the account
      balance. Quarterly reports are provided to the Executive showing
      reimbursements and funds remaining in their accounts.

SECTION 4 - LEGAL SERVICES FOR ESTATE PLANNING

1.    Only those fees and expenses for legal services resulting from the
      implementation of recommendations of an approved financial counseling firm
      will be approved for Company reimbursement. Services may be provided by
      any attorney chosen by the Executive.

                             BellSouth Corporation
                       Executive Financial Services Plan

                                     Page 4                             1/1/2004



SECTION 5 - SERVICES FOLLOWING RETIREMENT, DEATH OR SEPARATION

1.    Financial counseling services are available under this plan to retiring
      Executives, and to the spouses of Executives who die while actively
      employed, for the twelve month period following retirement or death.

2.    Tax preparation services are available to retiring Executives, and to the
      spouses of Executives who die while actively employed, for the tax year in
      which retirement or death occurs, and for the following tax year, up to
      the remaining account balance available to the employee at retirement or
      prior to death.

3.    Legal services for estate planning are available to retiring Executives,
      and to the spouses of Executives who die while actively employed, for the
      year in which retirement or death occurs, and for the following tax year,
      up to the remaining account balance available to the employee at
      retirement or prior to death.

4.    At Separation (other than retirement or death), financial planning, tax
      preparation and legal services that were provided prior to the separation
      date are covered under this plan, up to the remaining account balance for
      the 3-year period.

SECTION 6 - BILLING

1.    Financial counseling service fees are directly invoiced to BellSouth in
      accordance with the billing terms of the negotiated contract. The
      Executive Compensation Group processes these payments.

2.    Suppliers of tax preparation and legal services should issue bills in the
      name of the individual to whom the services were provided. The Executive
      should review all charges, pay this expense directly to the provider, and
      mail or fax (404-249-3830) the invoice to the Executive Compensation Group
      at 1155 Peachtree Street, Room 13K06, Atlanta, Georgia 30309 for
      reimbursement processing.

3.    Fees and expenses paid by the Company for financial counseling, tax
      preparation and legal services are considered "wages" subject to FICA,
      FUTA and income tax withholding. Annually, imputed income is added to each
      executive's Form W-2; this amount is grossed up for Federal taxes at the
      maximum rate, for state and local taxes in accordance with each
      individual's residence location, and for FICA, as appropriate.

                             BellSouth Corporation
                       Executive Financial Services Plan

                                     Page 5                             1/1/2004



                                                                    ATTACHMENT A

                       FINANCIAL PLANNER SELECTION LETTER

Date: __________________

TO: (  )  THE AYCO COMPANY
    (  )  CREATIVE FINANCIAL GROUP

SUBJECT: Request for Personal Financial Planning Service

As an employee eligible for participation in the BellSouth Executive Financial
Services Plan, I have accepted the Company's offer to provide me with the
services available under the plan. After consideration of the firms approved
under the plan, I have selected ( ) THE AYCO COMPANY OR ( ) CREATIVE FINANCIAL
GROUP to provide the services as outlined in your brochure.

While the Company will pay your fees in connection with the preparation of
financial planning reports and related counseling services, I understand that
any fees or expenses other than for legal services incurred in connection with
the implementation of any recommendations will be borne by me.

I understand that your services are completely personal and confidential and
that the Company will in no way be involved with, or know of, my personal
affairs. Moreover, I understand that the Company does not, and will not endorse
any recommendations of suggestions that I may receive from you.

I authorize the Company to release to you detailed information concerning my
compensation, employee benefits in which I now or will participate, and any
other financial data which may have a bearing on my personal financial planning.

I understand that any fees or expenses paid by the Company for the provision of
such consulting services will be reported by the Company as additional
compensation and, therefore, will be subject to the various federal and state
withholding requirements.

Please contact me to commence arrangements for my financial planning.

Print Name ________________________________

Signature _________________________________

Date ______________________________________

Contact Number ____________________________

                             BellSouth Corporation
                       Executive Financial Services Plan

                                     Page 6                             1/1/2004



                                                                    ATTACHMENT B

                              BELLSOUTH CORPORATION

                        EXECUTIVE FINANCIAL SERVICES PLAN

                          CONDITIONS FOR PARTICIPATION

TO: BELLSOUTH EXECUTIVE COMPENSATION
    1155 PEACHTREE STREET, NE, ROOM 13K06
    ATLANTA, GA  30309

Personal financial counseling is made available by BellSouth Corp. and its
subsidiaries as a service to certain of its selected key employees through ( )
THE AYCO COMPANY OR ( ) CREATIVE FINANCIAL GROUP. Such services are offered with
the understanding that participation is voluntary and the option to rely on, to
act on, or refrain from acting on, in whole or in part, any advice,
recommendations or information provided by the financial planner noted above,
its employees or agents is the individual and personal decision of the
undersigned.

In consideration of BellSouth's undertaking to pay the fees and charges of the
financial planner noted above for financial counseling services rendered to me,
I on my own behalf and on behalf of my heirs, executors or administrators do
hereby release and forever discharge BellSouth and its subsidiaries, its
officers, agents, assigns and their successors of and from all losses, debts,
demands, actions, causes of action, suits accounts, covenants, contracts,
agreements, damages and any and all claims, law and equity attributable directly
or indirectly, in whole or in part, to my acting on, failure to act on, or
reliance on advice, recommendations or information furnished to me by the
financial planner noted above, its employees or agents.

Print Name _________________________________

Signature ___________________________________

Date _______________________________________

                             BellSouth Corporation
                       Executive Financial Services Plan

                                     Page 7                             1/1/2004



                                    APPROVED

                      EXECUTIVE FINANCIAL COUNSELING FIRMS

                      The AYCO Company, L.P.
                      Suite 650
                      2839 Paces Ferry Road
                      Atlanta, GA 30339

                            Ingrid Short
                            (770) 438-4031

                      Creative Financial Group
                      1000 Abernathy Road, North Park
                      Building 400
                      Suite 1500
                      Atlanta, GA 30328

                             Robert Law
                             Drew Klepchick
                             (770) 913-9704

                             BellSouth Corporation
                      Executive Financial Services Plan

                                 Page 8                             1/1/2004

EX-10.M

                                                                     EXHIBIT 10m

                   BELLSOUTH SPLIT-DOLLAR LIFE INSURANCE PLAN

                             AS AMENDED AND RESTATED
                        EFFECTIVE AS OF NOVEMBER 24, 2003

1. PURPOSE

      The purpose of the BellSouth Split-Dollar Life Insurance Plan (the "Plan")
      is to provide a split-dollar insurance arrangement under which BellSouth
      Corporation and its subsidiaries and affiliates can assist key employees
      in acquiring and financing life insurance coverage. This Plan incorporates
      the provisions of the BellSouth Corporation Executive Life Insurance Plan
      and the BellSouth Corporation Senior Manager Life Insurance Plan, as
      amended as of the effective date of this Plan (the "Prior Plans"), and, as
      of such effective date, shall be deemed to constitute a complete
      restatement of both Prior Plans, as amended (except to the extent
      otherwise specifically provided in Section 3.1 of this Plan).

2. DEFINITIONS

      For purposes of this Plan, the following terms have the meanings set forth
      below:

      2.1   "AGREEMENT" means the agreement executed between the Employer and a
            Participant implementing the terms of this Plan, substantially in
            the form attached hereto as Exhibit "A".

      2.2   "ASSIGNMENT" means the collateral assignment executed by the Policy
            Owner, substantially in the form attached hereto as Exhibit "B".

      2.3   "COVERAGE AMOUNT" means the face amount of the insurance death
            benefit provided to a Participant under the Plan, as specified in
            the Participant's Agreement.

      2.4   "DISABILITY" means that the Participant is receiving disability
            benefits under any long-term disability plan sponsored by the
            Employer or an affiliated entity.

      2.5   "EFFECTIVE DATE" means the effective date of the Plan, which is
            January 1, 1998.

      2.6   "EMPLOYEE" means an employee or former employee of the Employer who
            is eligible to participate in the Plan.

                                      -1-



      2.7   "EMPLOYER" means BellSouth Corporation and any subsidiary or
            affiliate of BellSouth Corporation which is authorized by the Plan
            Administrator to participate in this Plan.

      2.8   "EMPLOYER ACCOUNT" means, with respect to a Participant's Policy, a
            bookkeeping entry maintained by the Employer pursuant to Section 6
            of the Plan, equal to the lesser of (1) the cash value of the
            Policy, or (2) the amount of Policy premiums paid by the Employer
            (and not collected from the Participant). With respect to a
            Replacement Policy, the amount of Policy premiums paid by the
            Employer shall be deemed to include the total of all such premiums
            paid on the Replacement Policy and the Replaced Policy, reduced by
            an amount equal to that portion of the Replaced Policy Cash Value,
            if any, paid to the Employer at the time the Replacement Policy is
            issued.

      2.9   "EMPLOYER PREMIUM" means, with respect to a Participant's Policy,
            the total Policy premium payable for the Policy Year by the Company
            as specified in the Participant's Agreement, less the portion of the
            premium to be paid by the Participant pursuant to Section 5.1 of the
            Plan.

      2.10  "ENROLLMENT AGE" means the Participant's age at the time of
            enrollment in the Prior Plans as to the Participant's initial
            Coverage Amount, and it means the Participant's age at a subsequent
            enrollment for an increased Coverage Amount as to the increased
            Coverage Amount; provided, however, that with respect to a
            Replacement Policy, the age at enrollment shall mean the age at the
            time of enrollment for the Replaced Policy.

      2.11  "INSURANCE COST" means, with respect to a Participant, the annual
            cost for the Participant's Coverage Amount determined pursuant to
            the Insurance Cost schedule maintained by the Plan Administrator.
            The Insurance Cost for a Participant shall be determined as of the
            time of the Participant's enrollment in the Prior Plan(s), based on
            the Participant's Coverage Amount and Enrollment Age, and shall not
            change thereafter. A smoker rate shall be used to determine the
            Insurance Cost for any Participant who smoked cigarettes at any time
            during the twelve month period immediately preceding the
            Participant's enrollment; a nonsmoker rate shall be used for all
            other Participants. However, notwithstanding the previous sentence,
            if a Replacement Policy is issued for a Participant and the
            Participant qualifies as a nonsmoker for the Replacement Policy, the
            nonsmoker rate shall thereafter be used to determine the Insurance
            Cost for the Participant.

            If a Participant's coverage is in effect for a period of less than
            twelve (12) months during any Policy Year, the Participant's
            Insurance Cost for that

                                      -2-



            year shall be determined by multiplying the annual cost as
            determined from the insurance cost schedule by a fraction, the
            numerator of which is the number of full months that the coverage is
            in effect and the denominator of which is twelve (12).

      2.12  "INSURER" means, with respect to a Participant's Policy, the
            insurance company issuing the insurance policy or group policy
            certificate on the Participant's life (or on the joint lives of the
            Participant and the Participant's spouse) pursuant to the provisions
            of the Plan.

      2.13  "PARTICIPANT" means an Employee who is participating in the Plan.

      2.14  "PARTICIPANT ACCOUNT" means, with respect to a Participant's Policy,
            a bookkeeping entry maintained by the Employer pursuant to Section 6
            of the Plan, equal to the excess, if any, of the cash value of the
            Policy over the Employer Account.

      2.15  "PARTICIPANT PREMIUM" means, with respect to each Policy Year (or
            portion thereof) for a Participant, the greater of (1) the
            Participant's Insurance Cost; or (2) the one year term cost for the
            Policy Year (or portion thereof) determined based on the
            Participant's age at the beginning of the Policy Year, the Insurer's
            published one year term rates in effect at the beginning of the
            Policy Year, and the Participant's Coverage Amount under the Plan.
            The one year term cost amount shall be determined pursuant to the
            guidelines set forth in Revenue Ruling 66-110, 1966-1 C.B. 12, and
            Revenue Ruling 67-154, 1967-1 C.B. 11, and shall be conclusively
            determined by the Plan Administrator.

      2.16  "PERMANENT POLICY" means a Participant's Policy having cash values
            which are projected to be sufficient to continue to provide death
            benefit coverage at least equal to the Participant's Coverage Amount
            until the policy maturity date specified in the Participant's Policy
            (determined without regard to any Policy rider which extends the
            maturity date beyond the originally scheduled policy maturity date),
            and which is projected to have a cash accumulation value equal to at
            least ninety-five percent (95%) of the Policy Coverage Amount at the
            maturity date specified in such Policy, with no further premium
            payments, following a withdrawal by the Employer of all amounts to
            which it is entitled pursuant to Section 8.2e or Section 8.3. A
            determination as to whether a Policy is at a given time a Permanent
            Policy shall be made by the Plan Administrator, and shall be based
            on Policy projections provided by the Insurer or its agent utilizing
            the Policy's then current mortality rates and Policy expenses, and
            the following Policy interest crediting rates. For the Policy Year
            of the Employer withdrawal made pursuant to Section 8.2e or Section
            8.3, the

                                      -3-



            projections shall reflect the actual Policy interest crediting rate
            in effect for such year (or, if such rate is not known when the
            determination is made, the actual rate in effect for the preceding
            Policy Year). For each of the ten (10) succeeding Policy Years, the
            projections shall reflect that rate decreased ratably such that the
            rate in the tenth Policy Year following the Policy Year in which the
            Employer withdrawal occurs will be five percent (5%). For all
            successive Policy Years, the projections shall reflect a five
            percent (5%) Policy interest crediting rate. Notwithstanding the
            foregoing, if the actual Policy interest crediting rate in effect
            when the determination is made is less than five percent (5%), the
            projections shall reflect such lower rate for the Policy Year of the
            Employer withdrawal and all subsequent Policy Years.

      2.17  "PLAN" means the BellSouth Split-Dollar Life Insurance Plan. Except
            as otherwise provided in Section 3.1, with respect to each
            Participant who participated in the BellSouth Corporation Executive
            Life Insurance Plan, the Plan shall be construed and interpreted as
            a restatement of the provisions of such plan, as amended; and, with
            respect to each Participant who participated in the BellSouth
            Corporation Senior Manager Life Insurance Plan, the Plan shall be
            construed and interpreted as a restatement of such plan, as amended.

      2.18  "PLAN ADMINISTRATOR" means the Chief Executive Officer of BellSouth
            Corporation and any individual or committee he designates to act on
            his behalf with respect to any or all of his responsibilities
            hereunder; provided, the Board of Directors of BellSouth Corporation
            may designate any other person or committee to serve in lieu of the
            Chief Executive Officer as the Plan Administrator with respect to
            any or all of the administrative responsibilities hereunder.

      2.19  "POLICY" means the life insurance coverage acquired on the life of
            the Participant (or on the joint lives of the Participant and the
            Participant's spouse) by the Participant or other Policy Owner,
            which may be issued as a separate insurance policy or a certificate
            under a group policy.

      2.20  "POLICY OWNER" means the Participant or that person or entity to
            whom the Participant has assigned his interest in the Policy. In the
            case of a Replacement Policy issued to replace a Policy for which
            the Policy Owner is other than the Participant, the Policy Owner of
            the Replacement Policy shall be the same as the Policy Owner of the
            Policy being replaced, unless elected otherwise by such Policy
            Owner.

      2.21  "POLICY YEAR" means the twelve month period (and each successive
            twelve month period) beginning on the effective date of the
            Agreement.

                                      -4-



      2.22  "PREMIUM PAYMENT YEARS" means, with respect to a Participant's
            Policy, the number of consecutive Policy Years (including, for a
            Replacement Policy, the number of Policy Years during which the
            Replaced Policy was in force), beginning with the first Policy Year,
            during which the Employer is required to pay a Policy premium, as
            specified in the Participant's Agreement.

      2.23  "REPLACED POLICY" means a Policy which has been replaced by a
            Replacement Policy. If a Participant's Policy has been replaced more
            than one time, then the term Replaced Policy shall include all prior
            Policies.

      2.24  "REPLACED POLICY CASH VALUE" means the cash value of the Replaced
            Policy on the Effective Date.

      2.25  "REPLACEMENT POLICY" means a Policy issued to replace a Policy
            previously issued under the Plan.

      2.26  "RETIREMENT" means a termination of the Participant's employment
            with the Employer under circumstances where the Participant is
            immediately eligible to receive pension benefits under the
            Supplemental Executive Retirement Plan (SERP) maintained by the
            Employer or one of its subsidiaries.

      2.27  "SINGLE LIFE COVERAGE" means life insurance coverage on the life of
            the Participant.

      2.28  "SURVIVORSHIP COVERAGE" means life insurance coverage on the lives
            of the Participant and the Participant's spouse, with the life
            insurance death benefit to be payable at the death of the last
            survivor of the Participant and the Participant's spouse.

      2.29  "TERMINATED FOR CAUSE" means, with respect to a Participant, the
            termination of the Participant's employment with the Employer due
            to: (i) fraud, misappropriation, embezzlement, or intentional
            material damage to the property or business of the Employer; (ii)
            commission of a felony involving moral turpitude of which the
            Participant is finally adjudicated guilty; or (iii) continuance of
            either willful and repeated failure or grossly negligent and
            repeated failure by the Participant to materially perform his
            duties.

3. ELIGIBILITY

      3.1   GENERAL. Each Employee with a Prior Plan Agreement in effect on the
            day preceding the Effective Date shall be eligible to participate in
            the Plan,

                                      -5-



            provided that the Employee (and any other appropriate party, such as
            the Employee's spouse or a Policy Owner other than the Employee, as
            determined by the Plan Administrator) executes an Agreement
            consenting to the terms of this Plan, as amended, and completes such
            other forms as the Plan Administrator shall require. Any Employee
            eligible to participate who fails to execute (or secure execution
            of) an enrollment form consenting to the terms of this Plan, as
            amended, within the time period prescribed by the Plan
            Administrator, shall not be eligible for coverage under the Plan,
            but shall remain subject to the terms and conditions of the Prior
            Plan(s) in which such Employee participates as in effect on the day
            preceding the Effective Date, as amended thereafter from time to
            time. Effective November 24, 2003, any Employee who is, or becomes,
            an executive officer or director of BellSouth Corporation (as such
            terms are used in Section 402 of the Sarbanes-Oxley Act of 2002)
            shall be ineligible to participate in the Plan and any Agreement
            previously executed by such Employee shall be terminated pursuant to
            Section 8 of the Plan.

      3.2   TYPE OF COVERAGE. The type(s) of coverage for a Participant on the
            Effective Date shall be the type(s) of coverage in place on the day
            preceding the Effective Date pursuant to the Participant's
            Agreement(s) under the Prior Plan(s). Provided, however, that the
            Policy Owner may make a one-time election to exchange Survivorship
            Coverage for Single Life Coverage (equal to fifty percent (50%) of
            the Participant's Survivorship Coverage Amount), or to exchange
            Single Life Coverage for Survivorship Coverage (equal to two hundred
            percent (200%) of the Participant's Single Life Coverage Amount),
            subject to any proof of insurability required by the Insurer. Such
            an election must be made within the time period prescribed by the
            Plan Administrator. If an unmarried Participant enrolls for Single
            Life Coverage and subsequently marries, then, subject to the
            approval of the Plan Administrator, the Participant (or other Policy
            Owner) shall have the right to make an election, exercisable no
            later than one hundred eighty (180) days following the marriage, to
            convert (subject to any proof of insurability required by the
            Insurer) the Single Life Coverage to Survivorship Coverage (with the
            Coverage Amount equal to two hundred percent (200%) of the Single
            Life Coverage Amount). If a married Participant enrolls for
            Survivorship Coverage and subsequently divorces, then, subject to
            the approval of the Plan Administrator, the Participant (or other
            Policy Owner) shall have the right to make an election, exercisable
            no later than one hundred eighty (180) days following the
            finalization of the divorce, to convert (subject to any proof of
            insurability required by the Insurer) the Survivorship Coverage to
            Single Life Coverage (with the Coverage Amount equal to fifty
            percent (50%) of the Survivorship Coverage Amount). Under no other

                                      -6-



            circumstances shall a Participant (or other Policy Owner) have any
            right to change an election as to type of coverage after the
            coverage becomes effective. Any Insurer charges or tax liability
            resulting from a conversion shall be borne by the Participant or
            other Policy Owner.

4.    AMOUNT OF COVERAGE

      The Coverage Amount for a Participant shall be the amount specified in the
      Participant's Agreement.

5.    PAYMENT OF PREMIUMS; PAYMENT OF CERTAIN TAXES

      5.1   PARTICIPANT PREMIUM PAYMENTS. A Participant shall pay the
            Participant Premium for each Policy Year which is a Premium Payment
            Year for the Participant. The amount shall be paid by the
            Participant to the Employer by payroll (or retirement income)
            deductions of equal installments during the Policy Year, or in such
            other manner as may be agreed to between the Plan Administrator and
            the Participant. The Employer shall pay the Participant Premium
            amount to the Insurer, and can do so as collected from the
            Participant or can advance payments to the Insurer for a Policy Year
            at any time during the Policy Year or up to thirty (30) days in
            advance of the Policy Year. If a Participant terminates employment
            with the Employer, and the Employer has made such an advance payment
            of the Participant Premium to the Insurer, the Employer may withhold
            any uncollected portion of the advanced Participant Premium from any
            amount payable to the Participant by the Employer to the extent
            permitted by law. Notwithstanding the other provisions of this
            paragraph, no Participant Premium shall be required with respect to
            Survivorship Coverage after the death of the Participant, and no
            Participant Premium shall be required after termination of the
            Participant's Agreement pursuant to Section 8.1.

      5.2   EMPLOYER PREMIUM PAYMENTS. THE EMPLOYER SHALL PAY THE EMPLOYER
            Premium for a Participant's Policy within thirty (30) days of the
            beginning of each Policy Year which is a Premium Payment Year.
            However, no Employer Premium shall be required: (1) after the
            Participant's Agreement terminates pursuant to Section 8.1; or, (2)
            for a Policy Year if the Employer withdrawal and release of
            Assignment under Section 8.3 would have occurred at the end of the
            prior Policy year but for the requirement in Section 8.3 that the
            Policy not constitute a Modified Endowment Contract following such
            withdrawal. Also, if the payment of the Employer Premium for a
            Policy year would cause the Participant's Policy to constitute a
            Modified Endowment Contract (as such term is defined in Section
            7702A of the Internal Revenue Code), then the Employer Premium
            amount for

                                      -7-



            such Policy year shall be reduced to the largest such amount that
            can be paid without causing the Policy to constitute a Modified
            Endowment Contract. The Employer may, but shall not be required to,
            make additional premium payments with respect to a Participant's
            Policy after the last Premium Payment Year.

5.3         Additional Employer Payments.

            a.    If, during any year participation in the Plan results in the
                  recognition of income for tax purposes by the Participant as a
                  result of BellSouth's election to treat premium payments as
                  loans for federal tax purposes and to impute interest thereon
                  to affected Participants, the Employer shall pay to the
                  Participant an amount determined by the Plan Administrator
                  which is designed to approximate the (1) sum of the total
                  federal and state income taxes and additional payroll taxes
                  which would be payable by the Participant at the highest
                  marginal rate provided for under applicable federal income tax
                  laws, and at the highest marginal rate provided for under
                  applicable state income tax laws for the state of the
                  Participant's tax domicile, on the additional income so
                  recognized for the year, plus (2) the total federal and state
                  income taxes and additional payroll taxes which would be
                  payable by the Participant on the payment described in clause
                  (1). Any payment to be made under this subsection a. shall be
                  made no later than April 1 of the year following the year to
                  which the payment relates.

            b.    If, with respect to Survivorship Coverage after the death of
                  the Participant, participation in the Plan results in the
                  recognition of income for tax purposes by the Participant's
                  spouse or other Policy Owner as a result of BellSouth's
                  election to treat premium payments as loans for federal tax
                  purposes and to impute interest thereon to affected
                  Participants, the Employer shall pay to the Participant's
                  spouse or other Policy Owner an amount determined by the Plan
                  Administrator which is designed to approximate the total
                  federal and state income taxes which would be payable by the
                  Participant's spouse or other Policy Owner at the highest
                  marginal rate provided for under applicable federal income tax
                  laws, and the highest marginal rate provided for under
                  applicable state income tax laws for the state of the tax
                  domicile of the Participant's spouse or other Policy Owner, on
                  the income so recognized. Any payment to be made under this
                  subsection b. shall be made no later than April 1 of the year
                  following the year to which the payment relates.

                                      -8-



            c.    If the termination of the Employer's interest in a
                  Participant's Policy pursuant to Section 8.3 of the Plan
                  results in the recognition of income for tax purposes by the
                  Participant, the Employer shall pay to the Participant an
                  amount determined by the Plan Administrator which is designed
                  to approximate the total federal and state income taxes which
                  would be payable by the Participant at the highest marginal
                  rate provided for under applicable federal income tax laws,
                  and at the highest marginal rate provided for under applicable
                  state income tax laws for the state of the Participant's tax
                  domicile, attributable to such termination. Such payment shall
                  be made immediately following the termination of the
                  Employer's interest in the Policy or, if later, at such time
                  as a determination is made that such a tax is payable.

            d.    For purposes of this Section 5.3, a tax shall be deemed
                  payable or income shall be deemed recognized, if either (i) it
                  is finally determined by the Internal Revenue Service, or (ii)
                  an opinion is given by the Employer's counsel, that the tax is
                  payable.

            e.    Any amount to be paid to a Participant, a Participant's
                  spouse, or other Policy Owner under this Section, and the
                  amounts payable, shall be conclusively determined by the Plan
                  Administrator, based on generally applicable tax rates and not
                  based upon the unique tax situation of each Participant,
                  Participant's spouse, or other Policy Owner.

6.    ACCOUNTS

      With respect to each Policy covered by an Agreement made under this Plan,
      the Employer shall maintain bookkeeping entries reflecting the Employer
      Account and Participant Account values.

7.    POLICY OWNERSHIP

      7.1   OWNERSHIP. Except as otherwise provided in this Plan, the Policy
            Owner shall be the sole and exclusive owner of a Participant's
            Policy and shall be entitled to exercise all of the rights of
            ownership including, but not limited to, the right to designate the
            beneficiary or beneficiaries to receive payment of the portion of
            the death benefit under the Policy equal to the Coverage Amount, and
            the right to assign any part or all of the Policy Owner's interest
            in the Policy (subject to the Employer's rights, the terms and
            conditions of the Assignment specified in Section 7.2 of the Plan,
            and the terms and conditions of this Plan) to any person, entity or
            trust by the execution of a written instrument delivered to the
            Employer.

                                      -9-



      7.2   EMPLOYER'S RIGHTS. In exchange for the Employer's agreement to pay
            the amounts described in Sections 5.2 and 5.3 of this Plan, the
            Policy Owner shall execute an Assignment to the Employer of the
            rights provided to the Employer under this Plan. The Employer shall
            have the right to direct the Policy Owner in writing to take any
            action required consistent with these rights, and upon the receipt
            of such written direction from the Employer, the Policy Owner shall
            promptly take such action as is necessary to comply therewith. The
            Employer agrees that it shall not exercise any rights assigned to it
            in the Assignment in any way that might impair or defeat the rights
            and interest of the Policy Owner under this Plan. The Employer shall
            have the right to assign any part or all of its interest in the
            Policy (subject to the Policy Owner's rights and the terms and
            conditions of this Plan) to any person, entity or trust by the
            execution of a written instrument delivered to the Policy Owner.

      7.3   DELIVERY AND POSSESSION OF POLICY. Any Policy issued pursuant to an
            Agreement under the Plan shall be delivered by the Insurer directly
            to the Employer, and the Employer shall accept delivery of any such
            Policy on behalf of the Participant or other Policy Owner and shall
            have the authority to execute any forms or procedures required by
            the Insurer in order to complete the issue and delivery of such
            Policy. Thereafter, the Employer shall keep possession of the Policy
            as long as there is an Assignment in effect with respect to the
            Policy. The Employer agrees to make the Policy available to the
            Policy Owner or to the Insurer from time to time for the purposes of
            endorsing or filing any change of beneficiary on the Policy or
            exercising any other rights as the owner of the Policy, but the
            Policy shall promptly be returned to the Employer.

      7.4   POLICY LOANS. Except as otherwise specifically provided for in
            Section 8 of this Plan, neither the Employer nor the Policy Owner
            may borrow against the Policy cash values.

      7.5   WITHDRAWALS AND SURRENDER. Except as otherwise specifically provided
            for in Section 8 of this Plan, neither the Employer nor the Policy
            Owner may withdraw Policy cash values or surrender all or a portion
            of the Policy. Provided, however, that a cancellation or exchange of
            a Replaced Policy in connection with the acquisition of a
            Replacement Policy shall not be deemed a withdrawal from or
            surrender of the Replaced Policy.

8. TERMINATION OF AGREEMENT

      8.1   TERMINATION EVENTS. Notwithstanding anything herein to the contrary,
            the Participant's Agreement, and the Employer's obligation to pay
            premiums with respect to the Participant's Policy acquired pursuant
            to the

                                      -10-



            Agreement, shall terminate upon the first to occur of any of the
            following events:

            a.    Termination of employment of the Participant with the Employer
                  prior to the Participant's death for reasons other than
                  Retirement or Disability; or upon termination of a disabled
                  Participant's Disability prior to the Participant's death for
                  reasons other than Retirement or return to active status.

            b.    Termination of the Participant's Agreement by mutual agreement
                  of the Participant and the Employer.

            c.    A unilateral election by the Participant to terminate the
                  Participant's Agreement; provided, however, that such an
                  election may be made by a Participant only within sixty (60)
                  days following the end of the last Premium Payment Year for
                  the Participant's Policy.

            d.    The written notice by the Employer to the Participant
                  following a resolution by the Board of Directors of BellSouth
                  Corporation to terminate this Plan and all Agreements made
                  under the Plan.

            e.    As to Single Life Coverage only, the death of the Participant.

            f.    As to Survivorship Coverage only, the death of the last
                  survivor of the Participant and the Participant's spouse.

            g.    After the release of Assignment pursuant to Section 8.3.

            h.    Upon becoming an executive officer or director of BellSouth
                  Corporation (as such terms are used in Section 402 of the
                  Sarbanes-Oxley Act of 2002).

      8.2 DISPOSITION OF POLICY

            a.    In the event of a termination of a Participant's Agreement
                  under Section 8.1a or b of the Plan, the Policy Owner shall be
                  entitled to acquire the Employer's rights under the
                  Participant's Policy by paying to the Employer an amount equal
                  to the Employer Account; alternatively, the Policy Owner can
                  require the Employer to withdraw a portion of the cash values
                  from the Participant's Policy, partially surrender the Policy,
                  or borrow a portion of the cash values from the Participant's
                  Policy, with the amount to be specified by the Policy Owner,
                  and the Policy Owner's required payment to the Employer under
                  this Section shall thereby be reduced to an amount equal to
                  the excess of the Employer Account over the amount

                                      -11-



                  withdrawn, received upon partial surrender, or borrowed by the
                  Employer (for these purposes, the amount withdrawn, received
                  upon partial surrender, or borrowed shall refer to the amount
                  actually received by the Employer after the application of any
                  charges, such as surrender charges, applicable to the
                  withdrawal, partial surrender, or borrowing). The Policy Owner
                  may exercise this right to acquire the Employer's interest in
                  the Policy by so notifying the Employer within ninety (90)
                  days after an event of termination under Section 8.1a or b of
                  this Plan has occurred. Within thirty (30) days after receipt
                  of such notice, the Employer shall make any required
                  withdrawal, partial surrender, or policy loan and the Policy
                  Owner shall pay the Employer the applicable payment, if any.
                  Upon receipt of payment from the Policy Owner, or immediately
                  following the withdrawal, partial surrender, or policy loan if
                  no payment is required, the Employer shall release the
                  Assignment and the Policy Owner shall have all rights, title,
                  and interest in the Policy free of all provisions and
                  restrictions of the Assignment, the Agreement and this Plan.

            b.    Notwithstanding the provisions of Section 8.2a, if the
                  Participant is Terminated for Cause by the Employer, then the
                  Policy Owner shall have no right to acquire the Employer's
                  interest in the Policy.

            c.    If the Policy Owner fails to exercise his right to acquire the
                  Employer's interest in the Policy pursuant to Section 8.2a or
                  is precluded from exercising such right pursuant to Section
                  8.2b, the Policy Owner shall transfer title to the Policy to
                  the Employer, free of all provisions and restrictions of the
                  Assignment, the Participant's Agreement and this Plan.

            d.    In the event of a termination of a Participant's Agreement
                  pursuant to the Participant's election under Section 8.1c, the
                  Employer shall receive from the Participant's Policy an amount
                  equal to the Employer Account, with such amount to be received
                  through a withdrawal, partial surrender, policy loan, or some
                  combination thereof, as determined by the Employer.
                  Immediately thereafter, the Employer shall release the
                  Assignment and the Policy Owner shall have all rights, title
                  and interest in the Policy free of all provisions and
                  restrictions of the Assignment, the Participant's Agreement,
                  and this Plan.

            e.    Notwithstanding the provisions of Section 2.8 to the contrary,
                  in the event of a termination of a Participant's Agreement
                  under Section 8.1d, prior to the application of Section 8.2,
                  the Employer Account

                                      -12-



                  shall be reduced to an amount equal to the excess, if any, of
                  the cash values of the Policy over the amount of cash value
                  necessary in order for such Policy to immediately qualify as a
                  Permanent Policy after withdrawal of such excess amount. The
                  Employer shall receive from the Policy the reduced Employer
                  Account value and, with such amount to be received through a
                  withdrawal, partial surrender, policy loan, or some
                  combination thereof, as determined by the Employer, and shall,
                  within thirty (30) days of the Plan termination, release the
                  Assignment and the Policy Owner shall have all rights, title,
                  and interest in the Policy free of all provisions and
                  restrictions of the Assignment, the Agreement and this Plan.

            f.    In the event of a termination of a Participant's Agreement
                  under Section 8.1h of this Plan, the Employer Account shall be
                  reduced to an amount equal to the excess, if any, of the cash
                  values of the Policy over the amount of cash value necessary
                  in order for such Policy to immediately qualify as a Permanent
                  Policy after withdrawal of such excess amount. The Employer
                  shall receive from the Policy the reduced Employer Account
                  value and, with such amount to be received through a
                  withdrawal, partial surrender, policy loan, or some
                  combination thereof, as determined by the Employer, and shall
                  release the Assignment and the Policy Owner shall have all
                  rights, title and interest in the Policy free of all
                  provisions and restrictions of the Assignment, the Agreement
                  and this Plan.

      8.3   RELEASE OF ASSIGNMENT. At the end of each Policy Year for a
            Participant's Policy, the Plan Administrator shall determine whether
            a withdrawal from the Policy by the Employer of an amount equal to
            the Employer Account, and a release of the Assignment, shall occur
            with respect to the Participant's Policy. Such withdrawal and
            release shall be made within ninety (90) days after the end of the
            first Policy Year as of the end of which: (1) the Participant's
            Policy would qualify as a Permanent Policy following such withdrawal
            by the Employer; and, (2) the Participant's Policy would not
            constitute a Modified Endowment Contract (as such term is defined in
            Section 7702A of the Internal Revenue Code) following such
            withdrawal. The Employer withdrawal shall be made though a
            withdrawal, partial surrender, or policy loan, or some combination
            thereof, as determined by the Employer. Immediately after receiving
            the proceeds of the withdrawal, partial surrender, or policy loan,
            the Employer shall release the Assignment and the Policy Owner shall
            have all rights, title and interest in the Policy free of all
            provisions and restrictions of the Assignment, the Participant's
            Agreement and this Plan.

                                      -13-



      8.4   ALLOCATION OF DEATH BENEFIT. In the event of a termination under
            Section 8.1e or 8.1f of the Plan, the death benefit under the
            Participant's Policy shall be divided as follows:

            a.    The beneficiary or beneficiaries of the Policy Owner shall be
                  entitled to receive an amount equal to the Coverage Amount.

            b.    The Employer shall be entitled to receive the balance of the
                  death benefit.

      8.5   EMPLOYER UNDERTAKINGS. Upon the death of the Participant (or, in the
            case of Survivorship Coverage, the death of the last survivor of the
            Participant and the Participant's spouse) while the Participant's
            Agreement is in force, the Employer agrees to take such action as
            may be necessary to obtain payment from the Insurer of the death
            benefit to the beneficiaries, including, but not limited to,
            providing the Insurer with an affidavit as to the amount to which
            the Employer is entitled under the Agreement and this Plan.

9. GOVERNING LAWS AND NOTICES

      9.1   GOVERNING LAW. This Plan shall be governed by and construed in
            accordance with the laws of the State of Georgia.

      9.2   NOTICES. All notices hereunder shall be in writing and sent by first
            class mail with postage prepaid. Any notice to the Employer shall be
            addressed to BellSouth Corporation at its office at 1155 Peachtree
            Street, N.E., Atlanta, GA 30367-6000, ATTENTION: Human
            Resources-Director Executive Benefits. Any notice to the Employee
            shall be addressed to the Employee at the address following such
            party's signature on his Agreement. Any party may change the address
            for such party herein set forth by giving notice of such change to
            the other parties pursuant to this Section.

10. NOT A CONTRACT OF EMPLOYMENT

      This Plan and any Agreement executed hereunder shall not be deemed to
      constitute a contract of employment between an Employee and the Employer
      or a Participant and the Employer, nor shall any provision restrict the
      right of the Employer to discharge an Employee or Participant, or restrict
      the right of an Employee or Participant to terminate employment.

                                      -14-



11.   AMENDMENT, TERMINATION, ADMINISTRATION, CONSTRUCTION AND SUCCESSORS

      11.1  AMENDMENT. The Board of Directors of BellSouth Corporation, or its
            delegate, shall have the right in its sole discretion, to amend the
            Plan in whole or in part at any time and from time to time. In
            addition, the Plan Administrator shall have the right, in its sole
            discretion, to amend the Plan at any time and from time to time so
            long as such amendment is not of a material nature. Notwithstanding
            the foregoing, no modification or amendment shall be effective so as
            to decrease any benefits of a Participant unless the Participant
            consents in writing to such modification or amendment. Written
            notice of any material modification or amendment shall be given
            promptly to each Participant.

      11.2  TERMINATION. The Board of Directors of BellSouth Corporation may
            terminate the Plan without the consent of the Participants or
            Employees. Provided, however, in the event of a termination of the
            Plan by the Employer, the Participants will have those rights
            specified in Section 8.2e of the Plan.

      11.3  INTERPRETATION. As to the provisions of the Assignment, the
            Agreement and the Plan, the provisions of the Assignment shall
            control. As between the Agreement and the Plan, the provisions of
            the Agreement shall control.

      11.4  SUCCESSORS. The terms and conditions of this Plan shall enure to the
            benefit of and bind the Employer, the Participant, their successors,
            assignees, and representatives. If, subsequent to the Effective Date
            of the Plan, substantially all of the stock or assets of the
            Employer are acquired by another corporation or entity or if the
            Employer is merged into, or consolidated with, another corporation
            or entity, then the obligations created hereunder shall be
            obligations of the acquirer or successor corporation or entity.

12.   PLAN ADMINISTRATION

      12.1  INDIVIDUAL ADMINISTRATOR. If the Plan Administrator is an
            individual, he shall act and record his actions in writing. Any
            matter concerning specifically such individual's own benefit or
            rights hereunder shall be determined by the Board of Directors of
            BellSouth Corporation or its delegate.

      12.2  ADMINISTRATIVE COMMITTEE. If the Plan Administrator is a committee,
            or if any of the duties or responsibilities of the Plan
            Administrator are vested in

                                      -15-



            a committee, action of the Plan Administrator may be taken with or
            without a meeting of committee members; provided, action shall be
            taken only upon the vote or other affirmative expression of a
            majority of the committee members qualified to vote with respect to
            such action. If a member of the committee is a Participant, he shall
            not participate in any decision which solely affects his own benefit
            under the Plan. For purposes of administering the Plan, the Plan
            Administrator shall choose a secretary who shall keep minutes of the
            committee's proceedings and all records and documents pertaining to
            the administration of the Plan. The secretary may execute any
            certificate or other written direction on behalf of the Plan
            Administrator.

      12.3  RIGHTS AND DUTIES OF THE PLAN ADMINISTRATOR. The Plan Administrator
            shall administer the Plan and shall have all powers necessary to
            accomplish that purpose, including (but not limited to) the
            following:

            a.    to construe, interpret and administer the Plan;

            b.    to make determinations required by the Plan, and to maintain
                  records regarding Participants' benefits hereunder;

            c.    to compute and certify the amount and kinds of benefits
                  payable to Participants, and to determine the time and manner
                  in which such benefits are to be paid;

            d.    to authorize all disbursements pursuant to the Plan;

            e.    to maintain all the necessary records of the administration of
                  the Plan;

            f.    to make and publish such rules and procedures for the
                  regulation of the Plan as are not inconsistent with the terms
                  hereof;

            g.    to designate to other individuals or entities from time to
                  time the performance of any of its duties or responsibilities
                  hereunder; and

            h.    to hire agents, accountants, actuaries, consultants and legal
                  counsel to assist in operating and administering the Plan.

            The Plan Administrator shall have the exclusive right to construe
            and interpret the Plan, to decide all questions of eligibility for
            benefits and to determine the amount of benefits, and its decisions
            on such matters shall be final and conclusive on all parties.

      12.4  BOND; COMPENSATION. The Plan Administrator and (if applicable) its
            members shall serve as such without bond and without compensation
            for services hereunder.

                                      -16-



13.   CLAIMS PROCEDURE

      13.1  NAMED FIDUCIARY. The Plan Administrator is hereby designated as the
            named fiduciary under this Plan.

      13.2  CLAIMS PROCEDURES. Any controversy or claim arising out of or
            relating to this Plan shall be filed with the Plan Administrator
            which shall make all determinations concerning such claim. Any
            decision by the Plan Administrator denying such claim shall be in
            writing and shall be delivered to all parties in interest in
            accordance with the notice provisions of Section 9.2 hereof. Such
            decision shall set forth the reasons for denial in plain language.
            Pertinent provisions of the Plan shall be cited and, where
            appropriate, an explanation as to how the Employee can perfect the
            claim will be provided. This notice of denial of benefits will be
            provided within 90 days of the Plan Administrator's receipt of the
            Employee's claim for benefits. If the Plan Administrator fails to
            notify the Employee of its decision regarding the claim, the claim
            shall be considered denied, and the Employee shall then be permitted
            to proceed with the appeal as provided in this Section.

            An Employee who has been completely or partially denied a benefit
            shall be entitled to appeal this denial of his/her claim by filing a
            written statement of his/her position with the Plan Administrator no
            later than sixty (60) days after receipt of the written notification
            of such claim denial. The Plan Administrator shall schedule an
            opportunity for a full and fair review of the issue within thirty
            (30) days of receipt of the appeal. The decision on review shall set
            forth specific reasons for the decision, and shall cite specific
            references to the pertinent Plan provisions on which the decision is
            based.

            Following the review of any additional information submitted by the
            Employee, either through the hearing process or otherwise, the Plan
            Administrator shall render a decision on the review of the denied
            claim in the following manner:

            a.    The Plan Administrator shall make its decision regarding the
                  merits of the denied claim within 60 days following receipt of
                  the request for review (or within 120 days after such receipt,
                  in a case where there are special circumstances requiring
                  extension of time for reviewing the appealed claim). The Plan
                  Administrator shall deliver the decision to the claimant in
                  writing. If an extension of time for reviewing the appealed
                  claim is required because of special circumstances, written
                  notice of the extension shall be furnished to the Employee
                  prior to the commencement of the extension. If the

                                      -17-



                  decision on review is not furnished within the prescribed
                  time, the claim shall be deemed denied on review.

            b.    The decision on review shall set forth specific reasons for
                  the decision, and shall cite specific references to the
                  pertinent Plan provisions on which the decision is based.

                                      -18-



                                   EXHIBIT "A"

                   BELLSOUTH SPLIT-DOLLAR LIFE INSURANCE PLAN

                                    AGREEMENT

This Agreement is made effective as of January 1, 1998, by and between the
Employer and _______________________ (the "Participant").

WHEREAS, the Employer and the Participant executed an agreement (the "Prior
Agreement") under the [BellSouth Corporation Executive Life Insurance Plan]
[BellSouth Corporation Senior Manager Life Insurance Plan] (the "Prior Plan");
and

WHEREAS, the Prior Plan has been amended and restated as the BellSouth
Split-Dollar Life Insurance Plan (the "Plan"); and

WHEREAS, in exchange for coverage under the Plan as amended and restated, the
Participant consents and agrees to the terms of the Plan, as amended and
restated;

NOW, THEREFORE, in consideration of the promises contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Employer and the Participant hereby mutually covenant and
agree as follows:

1.    This Agreement shall constitute an amendment and restatement of the Prior
      Agreement and, as of the effective date of this Agreement, the Prior Plan
      and Prior Agreement shall be terminated and replaced by the Plan and this
      Agreement.

2.    The Policy subject to this Agreement is Policy number ______________,
      issued by Pacific Life Insurance Company (the "Replacement Policy"), which
      replaces the Replaced Policy. As of the effective date of this Agreement,
      no further benefits will be provided to the Participant or Employer under
      the Replaced Policy, and such Policy will be canceled. 3. The Replaced
      Policy Cash Value shall be transferred directly to the Replacement Policy
      as of the effective date of this Agreement.

4.    The Coverage Amount shall be $ __________ of [Single Life] [Survivorship]
      Coverage.

5.    The Premium Payment Years shall be _______ consecutive Policy Years.

6.    For each Policy Year beginning after 1998, the total Policy premium for
      each year which is a Premium Payment Year shall be $__________, and the
      Employer Premium shall equal such total Policy premium reduced by the
      Participant Premium payable by the Participant for such Policy Year.

                                      -19-



7.    The Policy Owner for the Replacement Policy shall be the same as the
      Policy Owner for the Replaced Policy.

8.    The Participant agrees to pay the Participant Premium contribution as
      specified in the Plan, and consents to paying such amount to the Employer
      through regular payroll (or retirement income) deductions.

9.    The Participant has read and understands the provisions of the Plan, and
      agrees that all of the terms and conditions specified in the Plan are
      hereby incorporated by reference herein and form a part of this Agreement.

10.   Subject to the terms of the Plan, this Agreement shall not be amended or
      modified without the written consent of the Participant and the Employer.

11.   This Agreement shall be governed by the laws of the State of Georgia.

______________________________    ____________________________________
DATE                              FOR THE EMPLOYER

______________________________    ____________________________________
DATE                              SIGNATURE OF PARTICIPANT

                                  ____________________________________

                                  ____________________________________

                                  ____________________________________
                                  ADDRESS OF PARTICIPANT

                                      -20-



                                   EXHIBIT "B"

                   BELLSOUTH SPLIT-DOLLAR LIFE INSURANCE PLAN

                                   ASSIGNMENT

This Assignment is made by the undersigned Policy Owner effective January 1,
1998.

DEFINITIONS:

                           
ASSIGNEE:                     BellSouth Corporation

PARTICIPANT:                  _________________________________________________________

POLICY OWNER:                 _________________________________________________________

INSURED(S):                   _________________________________________________________

                              _________________________________________________________

INSURER:                      Pacific Life Insurance Company

POLICY:                       Policy #                    issued by the Insurer.

REPLACED POLICY:              Policy #                    issued by the Insurer.

SPLIT-DOLLAR LIFE             That certain Agreement executed to be effective on
INSURANCE PLAN AGREEMENT      January 1, 1998, between the Participant and the Assignee.

(THE "AGREEMENT"):

COVERAGE AMOUNT:              That portion of the death benefit coverage under the Policy
                              equal to $___________________.



                                      -21-



RECITALS:

1.    The benefits provided to the Policy Owner under the Policy replace those
      previously provided under the Replaced Policy.

2.    Under the Agreement, the Assignee has agreed to assist the Policy Owner in
      the payment of premiums on the Policy issued by the Insurer.

3.    In consideration of such premium payments by the Assignee, the undersigned
      Policy Owner intends to grant the Assignee certain limited interests in
      the Policy.

THEREFORE, for value received, it is agreed:

1.    ASSIGNMENT. The Policy Owner hereby assigns, transfers, and sets over to
      the Assignee, its successors and assigns, the following specific rights in
      the Policy and subject to the following terms and conditions:

      a.    the sole right to make withdrawals or borrow against the cash value
            of the Policy, as provided in Sections 8.2a, 8.2d, 8.2e and 8.3 of
            the Plan;

      b.    the right to receive from the Insurer upon the death of the
            Insured(s) the proceeds of the Policy in excess of the Coverage
            Amount;

      c.    the sole right to surrender all or a portion of the Policy and
            receive the surrender value thereof, as provided in Sections 8.2a,
            8.2d, 8.2e and 8.3 of the Plan.

2.    RETAINED RIGHTS. Except as expressly provided in Section 1, the Policy
      Owner retains all rights under the Policy including but not limited to:

      a.    the right to designate and change the beneficiary; and

      b.    the right to elect any optional mode of settlement permitted by the
            Policy or Insurer, subject only to the Assignee's right in Section
            1.(b).

3.    AUTHORIZATION. For purposes of Sections 1 and 2, the signature of either
      the Assignee or the Policy Owner shall be sufficient. Both the Assignee
      and the Policy Owner acknowledge that between themselves, they are bound
      by the limitations of this Assignment and that the Insurer will recognize
      the signature of either.

                                      -22-



4.    INSURER. The Insurer is hereby authorized to recognize, and is fully
      protected in recognizing the claims of the Assignee to rights hereunder,
      without investigating the reasons for such action by the Assignee, or the
      validity or the amount of such claims, nor giving notice to the Policy
      Owner of such claims of rights or interest to exercise such rights.
      Insurer reserves the right to require signatures of both the Assignee and
      the Policy Owner to exercise any or all ownership rights, as is their
      normal procedure.

5.    DEATH PROCEEDS. The Insurer shall pay to the Assignee that portion of the
      death benefit to which it is entitled. Payment by the Insurer of any or
      all of the death proceeds to the Assignee in reliance upon a signed
      authorization by any officer of the Assignee as to the share of death
      proceeds due it shall be a full discharge of the Insurer for such share
      and shall be binding on all parties claiming any interest in the Policy.

6.    RELEASE OF ASSIGNMENT. Upon payment to the Assignee of those amounts due
      to it under the terms of the Agreement, the Assignee shall execute a
      written release of this Assignment to the Insurer who may then treat the
      Policy Owner of the Policy as the sole Policy Owner for all purposes.

7.    ASSIGNMENT CONTROLS. In the event of any conflict between the provisions
      of this Assignment and provisions of the Agreement with respect to the
      Policy or rights of collateral assignment therein, the provisions of this
      Assignment shall prevail.

8.    CANCELLATION OF REPLACED POLICY. The Policy Owner agrees that no further
      benefits will be provided under the Replaced Policy, and that benefits
      provided under the Policy are in lieu of the benefits previously provided
      under the Replaced Policy.

IN TESTIMONY WHEREOF, the Policy Owner has executed this Assignment to be
effective January 1, 1998.

                                                ________________________________
                                                SIGNATURE OF POLICY OWNER

                                                ________________________________
                                                DATE

                                      -23-

EX-10.O

                                                                     EXHIBIT 10o

                                    BELLSOUTH

                                     OFFICER

                        PERSONAL VEHICLE PERQUISITE PLAN

                                    1/1/2004

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 1



                                      INDEX



SECTION                                                                  PAGE
- -------                                                                  ----
                                                                      
PURPOSE OF PLAN                                                            3
               -------------------------------------------------------

OFFICER PERSONAL VEHICLE SUPPORT                                           3
                                --------------------------------------

SAFETY                                                                     3
      ----------------------------------------------------------------

MONTHLY ALLOWANCE PAYMENTS                                                 4
                          --------------------------------------------

NEW PLAN PARTICIPANTS                                                      4
                     -------------------------------------------------

BENEFITS/LEAVE OF ABSENCE/MILITARY LEAVE                                   4
                                        ------------------------------

TERMINATION OF SERVICE                                                     5
                      ------------------------------------------------
DEMOTIONS/DOWNGRADES                                                       5
                    --------------------------------------------------

VEHICLE REQUIREMENTS                                                       5
                    --------------------------------------------------

INSURANCE REQUIREMENTS                                                     6
                      ------------------------------------------------

INCOME TAX CONSIDERATIONS                                                  7
                         ---------------------------------------------

OTHER CONSIDERATIONS                                                       7
                    --------------------------------------------------

RATES                                                                      8
     -----------------------------------------------------------------

ENROLLMENT FORM RF 0002-OFFICER                                            9
                               ---------------------------------------


               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 2



PURPOSE OF PLAN

The Officer Personal Vehicle Perquisite Plan is designed to reimburse officers
for the provision and use of their personal vehicle when conducting company
business. The plan authorizes a fixed dollar amount per month.

OFFICER PERSONAL VEHICLE SUPPORT

At the officer's request, Tim and Tom Parker are available to ensure that the
officer's personal vehicle has fuel, is washed, and is transported to and from
maintenance appointments scheduled by the officer. A DUPLICATE KEY TO THE
VEHICLE SHOULD BE PROVIDED BY THE OFFICER IF THIS PERSONAL VEHICLE SUPPORT IS
DESIRED. The duplicate key will be stored by Tim and Tom Parker at Campanile.

Officers will be assigned a WEX card to be used for FUELING AND WASHING the
vehicle covered under this plan. Any charges to the WEX card will be included in
the officer's year-end earnings and taxed at the supplemental rate. Maintenance
for the personal vehicle, as well as the cost associated with extra keys, are
considered a personal expense and the officer should make payment arrangements
with the service provider. PLEASE NOTE THAT IN THE EVENT THAT TIM OR TOM PARKER
ARE NOT AVAILABLE TO PROVIDE OFFICER PERSONAL VEHICLE SUPPORT ON A PARTICULAR
DAY, AN EXTERNAL VENDOR IS USED AS BACK-UP.

When using the WEX card, officers will be prompted for their PIN Code (the last
6 characters of their SSN) and the current mileage on their vehicle. A mileage
entry is not mandatory, a "1" entered is acceptable. The officer will be
provided with a report at the end of the year for their records that details
their WEX card transactions as well as any vehicle mileage entered when using
the WEX card.

Lost WEX cards should be reported to BellSouth Executive Compensation on
404-249-4167.

SAFETY

Participants are responsible for following all laws and regulations regarding
safe motor vehicle operation. When operating a vehicle covered by the plan, seat
belts must be used by the driver and all passengers.

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 3



MONTHLY ALLOWANCE PAYMENTS

Reimbursement rates will be reviewed periodically and may be modified if
appropriate. The rates are based on periodic studies done on the cost of
operating a current model automobile in areas where company work locations
exist. Participants in this plan will receive a fixed monthly rate paid to
reimburse the officer for the cost of providing a vehicle to be used under the
plan. The amount is determined as a percentage of the cost of a current model
automobile, including tags and insurance. Also factored in are amounts designed
to reimburse the officer for the cost of operating a vehicle as well as an
amount to compensate for the taxes that are withheld from the allowance. The
current Monthly Allowance amount is included on Attachment 1.

To enroll in this plan the officer should submit Form RF 0002-Officer
(Attachment 2) to BellSouth Executive Compensation to activate the fixed Monthly
Allowance payment.

NEW PLAN PARTICIPANTS

Newly promoted or hired officers are eligible to enrolled in the Officer
Personal Vehicle Reimbursement Plan upon appointment to an officer position.
Form RF 0002-Officer should be submitted to BellSouth Executive Compensation to
activate the fixed monthly payments.

BENEFITS/LEAVE OF ABSENCE/MILITARY LEAVE

If an officer is on Short Term Disability, a leave of absence or on military
leave for a period of six weeks or less, reimbursement for the Monthly Allowance
should not be interrupted provided the officer continues to meet the
requirements of the plan. If the officer is out for a period of more than six
weeks, reimbursement for the Monthly Allowance will not be paid for any calendar
month beginning after the six week period has passed. The supervisor should
advise BellSouth Executive Compensation that the allowance is to be stopped.
Reimbursement for the Monthly Allowance will be resumed upon return provided the
officer meets all of the plan requirements. The officer should advise BellSouth
Executive Payroll to reactivate monthly fixed payments.

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 4



TERMINATION OF SERVICE

Officers who terminate service with the company will receive a full Monthly
Allowance with their payroll check for the last month of employment.

DEMOTIONS/DOWNGRADES

An officer who becomes ineligible to participate in the Officer PVPP as a result
of a demotion or downgrade will transition to the Senior Manager PVPP, if
applicable, on the effective date of the payroll activity, providing that they
meet the requirements of the Senior Manager PVPP.

VEHICLE REQUIREMENTS

Officers on this plan must furnish a vehicle which projects a good image of the
company. Participating officers must ensure that a covered vehicle is clean,
reliable, undamaged, and safe to operate. The vehicle is expected to be less
than four years old.

Vehicle Restrictions: 4-door, 5 or 6 passenger automobiles or sport-utility
vehicles are acceptable. The vehicle should be suitable for business use,
serving as an extension of the image BellSouth officers are expected to
demonstrate.

Following are EXAMPLES of vehicles that are NOT considered appropriate: Large
SUVs (i.e. Surburban, Navigator, Expedition, Excursion, Escalade, Range Rover,
LX470, Hummer); 4-door pickups; Super Luxury (i.e., Bentley, Rolls Royce), any
convertible (even if 4-door). These examples are not all inclusive, but are
intended to illustrate the general types of vehicle not considered appropriate.
The officer should understand that he/she will be subject to scrutiny by
employees, regulators, the press, and others. The officer should apply good
judgment in the type of vehicle they select to be covered by the plan. If there
is a question of whether a vehicle is appropriate, the officer should discuss
with their supervisor.

To change the vehicle driven under the Plan, Form RF 0002-Officer should be
submitted to BellSouth Executive Compensation and the new vehicle should be
insured as required by the Plan.

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 5



INSURANCE REQUIREMENTS

Officers must furnish proof of insurance to BellSouth Executive Compensation
when being placed on the plan and must maintain a valid liability policy for as
long as they remain on the plan. They must notify the insurance carrier that
their vehicle will be used for business purposes and should provide BellSouth
Executive Compensation's address (1155 Peachtree Street, NE, Room 13K06,
Atlanta, GA 30303) to the insurance company for use when mailing copies of
policies, cancellations, reinstatement notices, semi-annual renewals, or other
evidence of active coverage. BellSouth Executive Compensation will maintain
current copies of these records for each participating officer. In order for
there to be no gap between the officer's personal coverage and the BellSouth
Group Excess Liability insurance program for officers, personal insurance
coverage requirements for the vehicle covered under this plan are as follows:

      1.    The officer's personal insurance policy must provide at a minimum
            the following levels of coverage for vehicle liability and
            uninsured/underinsured motorist liability:

            a)    $250,000 bodily injury per person, $500,000 bodily injury per
                  accident, and $50,000 property damage per accident

                  or,

            b)    $300,000 combined single limit

      2.    The insurance policy should stipulate that the officer's company
            must receive written notification (10) ten days prior to
            cancellation of the policy. Upon notification that a policy has been
            or will be cancelled, a policy must be immediately reinstated or the
            officer will jeopardize his/her rights to continue to participate in
            the plan.

      3.    BellSouth Corporation must be named as an "additional insured" on
            the insurance policy so that the policy will provide primary
            coverage for both the officer and the company in the event that the
            officer is involved in an accident while using the vehicle for
            company business. Many insurance companies will add an "interested
            party' endorsement rather than use the term "additional insured".
            This is acceptable but is not the preferred endorsement. Without
            additional documentation from the insurance company, terms other
            than "additional insured" or "interested party" do not meet the
            insurance requirements of this plan.

            If the insurance carrier refuses to comply with the requested
            wording, a letter to this effect should be provided by the insurance
            agent, who should also provide a Certificate of Insurance naming the
            officer's company as the certificate holder. A copy of this document
            should be provided to BellSouth Executive Compensation.

            If compliance with the above requirements cannot be obtained, it may
            be necessary that the officer be carried as an exception.
            Exceptions, however, must be documented by the officer and approved
            by the VP - Human Resources. A copy of the exception will be
            maintained by BellSouth Executive Compensation.

            The officer will be responsible for paying all insurance costs and
            property damage or loss to the vehicle arising in connection with
            using the vehicle for company business. They may receive
            reimbursement for an insurance deductible due to an accident while
            their vehicle was being used for company business. This approval
            will rest with BellSouth Executive Compensation subject to normal
            approval requirements.

            [Failure on the part of the officer to maintain continuous insurance
            coverage as described herein is a serious violation of company
            policy. Such a violation could result in disciplinary action.]

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 6



INCOME TAX CONSIDERATIONS

Federal, state and local income tax laws require that reimbursement received for
use of a personal automobile be reported on Form W-2, Wage and Tax Statement,
unless the participant has accounted to the employer for such expenses in
accordance with strict Internal Revenue Service regulations concerning
accountable plans. Since the fixed Monthly Allowance payments of this plan do
not conform to these regulations, they are reported as income on Form W-2. These
payments will be subject to appropriate income tax withholdings.

Further, the fuel and washing expenses paid on behalf of the participant are
also reported as income on Form W-2. However, BellSouth has elected to follow
the special accounting rule allowed by IRS Announcement 85-113. Under this rule,
BellSouth will treat the value of fuel and washing expenses provided during the
months of November and December as income in the subsequent calendar year. All
other fuel and washing expenses are reported as income in the year in which they
are incurred. The imputed income will be subject to appropriate income tax
withholdings which will be collected from the participant's December paycheck.

Under current tax laws, participants who use their personal automobile for
business use may qualify for an income tax deduction. The deductible items
include the cost of insurance, tax, license and registration, depreciation, etc.
If the automobile is used for both business and personal use, the expenses must
be prorated. The taxpayer must keep thorough records of business use to
substantiate any deductions taken on their personal tax returns.

Many of the Internal Revenue Service regulations are complex and future
legislation could at any time alter the regulations. Tax information outlined in
this plan description is general information. The company is not responsible for
its application in any particular case. Officers are cautioned to consult their
tax advisors to determine the consequences of any reimbursement made to them
under this plan or any deduction they wish to claim as a result of using their
personal vehicle for business purposes.

OTHER CONSIDERATIONS

BellSouth Executive Compensation has the overall responsibility for
administration of this plan. It will be audited periodically for uniform and
correct application of its provisions. For questions regarding this Plan please
contact Jeannette Butler on 404-249-4167.

APPROVED:  RICHARD D. SIBBERNSEN               W. PATRICK SHANNON
           --------------------------------    ------------------------
           VICE PRESIDENT - HUMAN RESOURCES    VICE PRESIDENT - FINANCE

DATE:      MARCH 28, 2002                      MARCH 29, 2002

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 7



                                                                    ATTACHMENT 1

                                    BELLSOUTH

                                     OFFICER

                        PERSONAL VEHICLE PERQUISITE PLAN

                   MONTHLY ALLOWANCE RATE EFFECTIVE 4/1/2002:

                       BAND B AND ABOVE: $1,800 PER MONTH

                       BAND C AND BELOW: $1,500 PER MONTH

               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 8



                                                                    ATTACHMENT 2
                                                          Form RF 0002 - Officer

                                                           REQUEST FOR RECURRING
                                              PAYMENTS OF FIXED PERSONAL VEHICLE
                                                                   REIMBURSEMENT



                                        
Company

- ------------------------------------------------------------------------------------------------------
       REFERENCE DATA                                  INDICATIVE DATA
- ------------------------------------------------------------------------------------------------------
Name                                       Source Code | 2 | 3 | 0 |
- ------------------------------------------------------------------------------------------------------
Payroll ID                                 Soc Sec No  |__|__|__|__|__|__|__|__|__|
EXECUTIVE PAYROLL
- -----------------------------------------
Responsibility Code/Tracking Unit          Effective Date |__|__| / |__|__|  / |__|__||__|__|
                                                           M  M       D  D       Y  Y   Y  Y
- ------------------------------------------------------------------------------------------------------
Job Grade        Title                                        Comptrollers Use Only
OFFICER                                    Serial Number  |__|__|__|__|__|__|__|      Co Code  |__|__|
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Home Address

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Business Location

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This Form is Being Submitted to: (Check Only One)

        1.        Initiate A Recurring Fixed PVR Payment

        2.        Change The Amount Of The Recurring Payment

        3.        Cancel Current Recurring PVR Payment

        4.        Change Vehicle Driven Under The Plan

                                                 
                                                         D     D    D      D       C    C
THE FIXED AMOUNT OF THE RECURRING PVR PAYMENT IS:   $|      ,    |  0  |   0   -   0 |  0 |
                                                     --------------------------------------



                                                                            
                       MAKE                    MODEL                     YEAR           NO. DOORS
VEHICLE



FAX TO:         BELLSOUTH EXECUTIVE COMPENSATION
                404-249-3830

                                                                              
APPROVED:       ________________________________________________________________    ______________
                               BELLSOUTH EXECUTIVE COMPENSATION                         DATE



               BellSouth Officer Personal Vehicle Perquisite Plan
                                    1/1/2004

                                     Page 9

EX-10.P

                                                                     EXHIBIT 10p

                                  PLAN DOCUMENT

This section includes a general information summary (first 3 pages) and the plan
document for the BellSouth Supplemental Life Insurance Plan. The plan document
and the general information summary together are intended to serve as both the
full text of the BellSouth Supplemental Life Insurance Plan as well as a summary
plan description of such plan.

April 1, 2004



                     GENERAL INFORMATION ABOUT THE BELLSOUTH
                        SUPPLEMENTAL LIFE INSURANCE PLAN

NAME OF PLAN

      BellSouth Supplemental Life Insurance Plan

NAME AND ADDRESS OF EMPLOYER

      Various BellSouth companies participate in this Plan. BellSouth
      Corporation's address is:

      1155 Peachtree Street, N.E.
      Suite 13C09
      Atlanta, Georgia 30309

EMPLOYER IDENTIFICATION NUMBER

      58-1533433

PLAN NUMBER

      589

TYPE OF PLAN

      This Plan is a welfare benefit plan in which participants are given the
      opportunity to receive life insurance coverage purchased with a
      combination of employer and employee contributions.

TYPE OF ADMINISTRATION

      Benefits are provided through insurance contracts purchased under the
      terms of the Plan. The Plan is administered by BellSouth Corporation.

CLAIMS PROCEDURE

      Claims for insurance benefits under the Plan are handled by and should be
      directed to the Plan Administrator.

PLAN YEAR

      The Plan Year is the period beginning each January 1 and ending each
      December 31 during which the Plan is in effect.

END OF YEAR FOR FISCAL YEAR PURPOSES

      December 31

April 1, 2004



NAME, BUSINESS ADDRESS AND TELEPHONE NUMBER OF
PLAN ADMINISTRATOR

      BellSouth Corporation
      1155 Peachtree Street, N.E.
      Atlanta, Georgia 30309-3610
      Attn.: Director Executive Benefits
      (404) 249-2228

SERVICE OF LEGAL PROCESS

      Service of legal process may be made upon the Plan Administrator.

EFFECTIVE DATE

      The Effective Date of the Plan is January 1, 1998 and was amended and
      restated April 1, 2004.

PARTICIPANT'S RIGHTS UNDER ERISA

      Participants in the Plan are entitled to certain rights and protections
      under the Employee Retirement Income Security Act of 1974 ("ERISA"). ERISA
      provides that each Plan participant may:

      (1)   Examine, without charge, all Plan documents, and copies of all
            documents files by the Plan with the U.S. Department of Labor, such
            as detailed annual reports and Plan descriptions, if applicable.

      (2)   (2) Obtain copies of all Plan documents and other Plan information
            upon written request to the Plan Administrator. The Administrator
            may make a reasonable charge for copies;

      (3)   Receive a summary of the Plan's annual financial report. The Plan
            Administrator is required by law to furnish each participant with a
            copy of this summary annual report;

      You should also be aware of the following protections afforded by ERISA:

      (1)   The people who operate the Plan, called "fiduciaries," must act
            prudently and in the interest of you and other Plan participants and
            beneficiaries.

      (2)   No one may interfere with the exercise of any rights which you have
            under the Plan or ERISA.

      (3)   If your claim for a benefit is denied in whole or in part, you must
            receive a written explanation of the reason for denial.

      (4)   You have the right to have the Plan Administrator review and
            reconsider your claim.

    Under ERISA, there are steps you can take to enforce the above rights. If
    you request materials from the Plan and do not receive them within 30 days,
    you may choose to file suit in a federal court. If the court finds that you
    are entitled to receive those materials, it may require the Plan
    Administrator to provide the materials and pay you a daily penalty until you
    receive them. However, if the documents were not

April 1, 2004




    sent because of reasons beyond the control of the Plan Administrator, he
    will not be penalized. If you have a claim for benefits which is denied or
    ignored, in whole or in part, you may choose to file suit in a state or
    federal court. If it should happen that Plan fiduciaries misuse the Plan's
    money, or if you are discriminated against for asserting your rights, you
    may seek assistance from the U. S. Department of Labor, or you may file suit
    in a federal court. The court will decide who should pay court costs and
    legal fees. If you lose, the court may order you to pay these costs and
    fees, if, for example, it finds your claim frivolous.

    If you have any questions about this statement or about your rights under
    ERISA, you should contact the nearest Area Office of the U.S. Labor --
    Management Services Administration Department of Labor.

April 1, 2004



                   BELLSOUTH SUPPLEMENTAL LIFE INSURANCE PLAN
                       AMENDED AND RESTATED APRIL 1, 2004

1.    PURPOSE

      The purpose of the BellSouth Supplemental Life Insurance Plan (the "Plan")
      is to provide an insurance arrangement under which BellSouth Corporation
      and its subsidiaries and affiliates can assist key employees in acquiring
      and financing life insurance coverage.

2.    DEFINITIONS

      For purposes of this Plan, the following terms have the meanings set forth
      below:

      2.01  "COVERAGE AMOUNT" means the Policy death benefit payable under the
            Participant's Policy.

      2.02  COVERAGE EFFECTIVE DATE" means the Policy Date as determined by the
            Insurer.

      2.03  "COVERAGE LEVEL" means the Single Life Coverage insurance death
            benefit the Employee is eligible for under the Plan, determined
            based on the Employee's job classification, in accordance with the
            schedule of Coverage Levels maintained by the Plan Administrator.
            Provided, however, that to determine the amount of insurance death
            benefit for which an Employee is eligible, the applicable amount
            from the schedule of Coverage Levels shall be reduced by one hundred
            percent (100%) of the amount of any Single Life Coverage insurance
            death benefit and by fifty percent (50%) of the amount of any
            Survivorship Coverage insurance death benefit provided to the
            Employee under the BellSouth Split-Dollar Life Insurance Plan, the
            BellSouth Corporation Executive Life Insurance Plan, or the
            BellSouth Corporation Senior Manager Life Insurance Plan.

      2.04  "DISABILITY" means that the Participant is receiving disability
            benefits under any long-term disability plan sponsored by the
            Employer or an affiliated entity.

      2.05  "EMPLOYEE" means an employee or former employee of the Employer who
            is eligible to participate in the Plan.

      2.06  "EMPLOYER" means BellSouth Corporation and any subsidiary or
            affiliate of BellSouth Corporation which is authorized by the Plan
            Administrator to participate in this Plan.

April 1, 2004

                                       1


      2.07  "EMPLOYER PREMIUM" means, with respect to a Participant's Policy,
            the Total Policy Premium payable for the year, less the portion of
            the premium to be paid by the Participant pursuant to Section 5.01
            of the Plan.

      2.08  "ENROLLMENT AGE" means the Participant's age at the time of
            enrollment in the Plan as to the Participant's initial Coverage
            Amount under the Plan, and it means the Participant's age at a
            subsequent enrollment for an increased Coverage Amount as to the
            increased Coverage Amount.

      2.09  "INSURANCE COST" means, with respect to a Participant, the annual
            cost for the Participant's Coverage Amount determined pursuant to
            the Insurance Cost schedule maintained by the Plan Administrator.
            The Insurance Cost for a Participant shall be determined at the time
            of the Participant's enrollment in the Plan, based on the
            Participant's Coverage Amount and Enrollment Age, and shall not
            change thereafter. A smoker rate shall be used to determine the
            Insurance Cost for any Participant who is deemed a smoker by the
            Insurer; a nonsmoker rate shall be used for all other Participants.
            A change in the Insurance Cost schedule will be effective only as to
            Plan enrollments occurring after the effective date of the change;
            it shall not affect the Insurance Cost for a Participant with
            respect to any Coverage Amount in effect for the Participant prior
            to the effective date of the change.

            If a Participant's coverage is in effect for a period of less than
            twelve (12) months during any Policy Year, the Participant's
            Insurance Cost for that year shall be determined by multiplying the
            annual cost as determined from the Insurance Cost schedule by a
            fraction, the numerator of which is the number of full months that
            the coverage is in effect and the denominator of which is twelve
            (12).

      2.10  "INSURER" means, with respect to a Participant's Policy, the
            insurance company issuing the insurance policy on the Participant's
            life (or on the joint lives of the Participant and the Participant's
            spouse, in the case of a Survivorship Policy) pursuant to the
            provisions of the Plan.

      2.11  "PARTICIPANT" means an Employee who is participating in the Plan.

      2.12  "PARTICIPANT PREMIUM" means, with respect to each Policy Year (or
            portion thereof) for a Participant, the Participant's Insurance
            Cost.

April 1, 2004

                                       2


      2.13  "PERMANENT POLICY" means a Participant's Policy having cash values
            which are projected to be sufficient to continue to provide death
            benefit coverage at least equal to the Participant's Coverage Amount
            until the policy maturity date specified in the Participant's Policy
            (determined without regard to any Policy rider which extends the
            maturity date beyond the originally scheduled policy maturity date),
            and which is projected to have a cash accumulation value equal to at
            least ninety-five percent (95%) of the Policy Coverage Amount at the
            maturity date specified in such Policy, with no further premium
            payments. The determination of whether a Policy is at a given time a
            Permanent Policy shall be made by the Plan Administrator, based on
            Policy projections provided by the Insurer or its agent utilizing
            the Policy's then current mortality rates and Policy expenses, and
            the following Policy interest crediting rates. For the Policy Year
            in which the determination is made and for all prior Policy years,
            if any, the Policy projection shall be based on the actual interest
            crediting rates in effect for the Policy (or, if such rate is not
            known when the determination is made, the actual rate in effect for
            the preceding Policy Year). For each of the ten (10) succeeding
            Policy Years, the projections shall reflect that rate decreased
            ratably such that the rate for the tenth Policy Year following the
            Policy Year in which the determination is made shall be five percent
            (5%). For all successive Policy Years, the projection shall reflect
            a five percent (5%) Policy interest crediting rate. Notwithstanding
            the foregoing, if the interest crediting rate in effect for the
            Policy Year in which the determination is made is less than five
            percent (5%), the projections shall reflect such lower rate for all
            Policy Years thereafter.

      2.14  "PLAN" means the BellSouth Supplemental Life Insurance Plan,
            embodied herein.

      2.15  "PLAN ADMINISTRATOR" means the Chief Executive Officer of BellSouth
            Corporation and any individual or committee he designates to act on
            his behalf with respect to any or all of his responsibilities
            hereunder; provided, the Board of Directors of BellSouth Corporation
            may designate any other person or committee to serve in lieu of the
            Chief Executive Officer as the Plan Administrator with respect to
            any or all of the administrative responsibilities hereunder.

      2.16  "PLAN EFFECTIVE DATE" means the effective date of the Plan, which is
            January 1, 1998.

      2.17  "POLICY" means the life insurance coverage acquired on the life of
            the Participant (or on the joint lives of the Participant and the
            Participant's spouse, in the case of a Survivorship Policy) by the

April 1, 2004

                                       3


            Participant or other Policy Owner issued pursuant to the terms of
            this Plan. The Plan Administrator shall determine the specific
            policies which may be acquired under the Plan, and shall maintain a
            list of approved policies.

      2.18  "POLICY OWNER" means the Participant or that person or entity to
            whom the Participant has assigned his interest in the Policy.

      2.19  "POLICY YEAR" means the twelve month period (and each successive
            twelve month period) beginning on the Coverage Effective Date.

      2.20  "PREMIUM PAYMENT YEARS" means, with respect to a Participant's
            Policy, the number of consecutive Policy Years, beginning with the
            first Policy Year, and continuing for the longer of: (1) all Policy
            Years ending at the end of the Policy Year during which the
            Participant attains age sixty-two (62) (or, if the Participant dies
            before such time, the end of the Policy Year during which the
            Participant would have attained such age); or (2) five (5) Policy
            Years. Notwithstanding the foregoing, if prior to the end of such
            period the Policy qualifies as a Permanent Policy, the Premium
            Payment Years shall end at such earlier time.

      2.21  "RETIREMENT" means a termination of the Participant's employment
            with the Employer under circumstances where the Participant is
            immediately eligible to receive pension benefits under the
            Supplemental Executive Retirement Plan (SERP) maintained by the
            Employer or one of its subsidiaries.

      2.22  "SINGLE LIFE COVERAGE" means life insurance coverage on the life of
            the Participant.

      2.23  "SURVIVORSHIP COVERAGE" means life insurance coverage on the lives
            of the Participant and the Participant's spouse, with the life
            insurance death benefit to be payable at the death of the last
            survivor of the Participant and the Participant's spouse.

      2.24  "TOTAL POLICY PREMIUM" means the level annual premium amount for the
            Participant's Single Life Coverage Policy that is projected to
            result in the Policy qualifying as a Permanent Policy if the annual
            premium amount is paid each year for all scheduled Premium Payment
            Years, assuming the Participant qualifies for the Insurer's
            guaranteed issue nonsmoker rates, or if the Participant is deemed by
            the Insurer to be a smoker, the Insurer's guaranteed issue smoker
            rates. The determination as to the amount of the Total Policy
            Premium shall be based on Single Life Coverage even if the
            Participant elects Survivorship Coverage. If more than one type of

April 1, 2004

                                       4


            Single Life Coverage Policy is available under the Plan, the Plan
            Administrator shall determine the Single Life Coverage Policy to be
            used to determine the Total Policy Premium. The Total Policy Premium
            for a Participant shall be determined when the Participant enrolls
            for coverage under the Plan, and shall not be changed thereafter; it
            shall be based on the Participant's Coverage Level, or, if less, the
            actual Coverage Amount elected by the Participant.

3.    ELIGIBILITY

      3.01  GENERAL. Each Employee who is designated by the Plan Administrator
            as a member of the Employer's "executive compensation group" or as a
            "senior manager" shall be eligible to participate in the Plan,
            provided that the Employee (and any other appropriate party, such as
            the Employee's spouse or a Policy Owner other than the Employee, as
            determined by the Plan Administrator) relinquishes any rights to or
            interests in any policies providing interim coverage during the
            rehabilitation of Confederation Life Insurance Company under the
            BellSouth Corporation Executive Life Insurance Plan or the BellSouth
            Corporation Senior Manager Life Insurance Plan and completes such
            other forms as the Plan Administrator may require. Each such
            Employee on the Plan Effective Date shall be eligible to participate
            in the Plan as of the Plan Effective Date. Each Employee
            subsequently satisfying such eligibility requirements shall be
            eligible to participate in the Plan effective as of the first day of
            January following the date on which such eligibility requirements
            are satisfied.

      3.02  TYPE OF COVERAGE. If an Employee is married at the time the Employee
            enrolls in the Plan, the Employee can elect to participate in either
            Single Life Coverage or Survivorship Coverage. An Employee who is
            unmarried at the time the Employee enrolls in the Plan shall be
            eligible for Single Life Coverage only. The election of one type of
            coverage shall not preclude the Participant from electing the other
            type of coverage as to any increased Coverage Level the Participant
            becomes eligible for pursuant to Section 4.02 of the Plan.

      3.03  CONVERSION OF COVERAGE. Subject to any proof of insurability
            required by the Insurer, a Participant (or other Policy Owner) can
            elect to convert Survivorship Coverage to Single Life Coverage, and
            with respect to a married Participant, the Participant (or other
            Policy Owner) can elect to convert Single Life Coverage to
            Survivorship Coverage. Provided, however, that the number of Premium
            Payment Years for a Participant shall not be redetermined in
            connection with a conversion from one type of coverage to

April 1, 2004

                                       5


            another. Upon a conversion, the cash values of the replaced Policy
            shall be transferred to the new Policy in accordance with the
            Insurer's practices. Any Insurer charges or tax liability resulting
            from a conversion shall be borne by the Participant or other Policy
            Owner.

4.    AMOUNT OF COVERAGE

      4.01  GENERAL. An Employee who is eligible to participate in the Plan
            under Section 3.01 of the Plan shall be eligible for the full
            Coverage Level as specified in the Plan under Section 2.03. However,
            within sixty (60) days of the distribution of the enrollment
            materials, a Participant can elect a Coverage Amount which is less
            than the applicable Coverage Level; provided, however, that the
            Coverage Amount elected must be an even multiple of $100,000. If a
            Participant elects a Coverage Amount less than the Participant's
            Coverage Level (or fails to elect any Coverage), the Participant
            cannot later increase the Coverage Amount except in connection with
            a promotion under Section 4.02 of the Plan.

      4.02  PROMOTIONS. Employees promoted to a job classification or position
            eligible for an increased Coverage Level shall be eligible for the
            increased Coverage Level effective as of the first day of January
            following the promotion. The additional Coverage Amount available to
            the Participant under this Section shall be equal to the applicable
            Coverage Level after the promotion reduced by any Coverage Amounts
            already in effect for a Participant. In order to be effective, any
            election for an increase in the Coverage Amount must be made within
            the time period prescribed by the Plan Administrator in enrollment
            materials provided to the Employee.

      4.03  SURVIVORSHIP COVERAGE. If a Participant elects Survivorship
            Coverage, the amount of Survivorship Coverage will be determined by
            the Plan Administrator based on the Participant's age and smoker or
            nonsmoker status, the age and insurability of the Participant's
            spouse, and based on the Participant's Total Policy Premium. The
            Coverage Amount shall be the highest amount such that the Policy
            will qualify as a Permanent Policy if the Total Policy Premium is
            paid for each year that is a scheduled Premium Payment Year.

      4.04  OTHER. Notwithstanding any provision herein to the contrary, any
            benefits payable under the Plan shall be limited to those provided
            by the applicable Policy and all the terms of such Policy
            (including, but not limited to, any requirements of insurability)
            shall apply under the Plan. Under no circumstances will the Employer
            be liable for any amount claimed to be due under any Policy or for
            any

April 1, 2004

                                       6


            Coverage amount or Coverage Level and any benefits due under the
            Plan shall be limited to those provided by the Insurer under the
            Policy.

      4.05  EXCLUSIONS. If a Participant commits suicide within two years of
            policy issue, or if a Participant makes any material misstatement of
            information (smoker and/or employment status) and dies within two
            years of policy issue, then no benefits will be paid to the
            beneficiary of such Participant.

5.    PAYMENT OF PREMIUMS

      5.01  PARTICIPANT PREMIUM PAYMENTS. A Participant shall pay the
            Participant Premium for each Policy Year which is a Premium Payment
            Year for the Participant. The amount shall be paid by the
            Participant to the Employer by payroll (or retirement income)
            deductions of equal installments during the Policy Year, or in such
            other manner as may be determined by the Plan Administrator. The
            Employer shall pay the Participant Premium amount to the Insurer,
            and can do so as collected from the Participant or can advance
            payments to the Insurer, except Section 16 insiders, for a Policy
            Year at any time during the Policy Year or up to thirty (30) days in
            advance of the Policy Year. If a Participant terminates employment
            with the Employer, and the Employer has made such an advance payment
            of the Participant Premium to the Insurer, the Employer may withhold
            any uncollected portion of the advanced Participant Premium from any
            amount payable to the Participant by the Employer to the extent
            permitted by law. Notwithstanding the other provisions of this
            paragraph, no Participant Premium shall be required with respect to
            Survivorship Coverage after the death of the Participant.

      5.02  EMPLOYER PREMIUM PAYMENTS. The Employer shall pay the Employer
            Premium for a Participant's Policy within thirty (30) days of the
            beginning of each Policy Year which is a Premium Payment Year.

      5.03  ADDITIONAL EMPLOYER PREMIUM PAYMENTS. For each of the last three (3)
            scheduled Premium Payment Years for a Participant, the Plan
            Administrator shall determine whether there will be any increased
            Employer premium payment with respect to a Participant's Policy. The
            Plan Administrator shall first determine whether the Participant's
            Policy is then projected to qualify as a Permanent Policy if the
            Total Policy Premium is paid each year for the remaining scheduled
            Premium Payment Years. If the Policy is projected to qualify as a
            Permanent Policy, no increased Employer Premium payment shall be
            required for such Premium Payment

April 1, 2004

                                       7


            Year. If the projections indicate that the Policy will not qualify
            as a Permanent Policy, then the amount payable by the Employer under
            Section 5.02 shall be increased by an amount which will result in
            the Policy qualifying as a Permanent Policy if such increased amount
            is paid for each remaining Premium Payment Year, but any such
            increase in Employer Premium shall be limited by the maximum premium
            amounts permissible for such Policy under Internal Revenue Code
            Sections 7702 and 7702A (or comparable successor sections) without
            forfeiting any of the favorable tax attributes associated with life
            insurance policies. The determination as to whether any increased
            amount is payable shall be made separately for each of the last
            three (3) Premium Payment Years. However, the Employer Premium
            payable under Section 5.02 shall not be reduced to an amount that is
            less than the amount which would have been payable by the Employer
            for a Premium Payment Year without regard to this Section 5.03.
            Regardless of the type of coverage actually provided to a
            Participant, and notwithstanding any changes in the type of coverage
            provided to the Participant under Section 3.03, the increased
            Employer Premium payable under this Section 5.03 shall be the amount
            that would be payable if the Participant had elected Single Life
            Coverage and maintained such coverage for all Policy Years; also, if
            more than one type of Single Life Coverage Policy is available under
            the Plan, the Single Life Coverage Policy used to determine Total
            Policy Premium under Section 2.24 shall be used to make the
            determination under this Section 5.03. In the event tax law limits
            preclude the Employer from qualifying a Policy as a Permanent Policy
            by the end of the last scheduled Premium Payment Year, then the
            Employer's obligation to pay premiums under Section 5.02 and 5.03
            (and make additional Employer payments under Section 5.04) shall be
            extended until projections indicate that the Policy qualifies as a
            Permanent Policy.

      5.04  ADDITIONAL EMPLOYER PAYMENTS.

            a.    If the payment of an Employer Premium under Section 5.02 (or
                  any increased amount under Section 5.03) results in the
                  recognition of income for tax purposes by the Participant in
                  any year, the Employer shall pay to the Participant an amount
                  determined by the Plan Administrator which is designed to
                  approximate (1) the sum of the total federal and state income
                  taxes and applicable payroll taxes which would be payable by
                  the Participant at the highest marginal rate provided for
                  under applicable federal income tax laws, and at the highest
                  marginal rate provided for under applicable state income tax
                  laws for the state of the Participant's tax domicile, on the
                  income so recognized, plus (2) the total

April 1, 2004

                                       8


            federal and state income taxes and applicable payroll taxes which
            would be payable by the Participant on the payment described in
            clause (1).

      b.    If the payment of any Employer Premium under Section 5.02 (or any
            increased amount under Section 5.03) on Survivorship Coverage after
            the death of the Employee results in the recognition of income for
            tax purposes by the Participant's spouse or other Policy Owner, the
            Employer shall pay to the Participant's spouse or other Policy Owner
            an amount determined by the Plan Administrator which is designed to
            approximate the total federal and state income taxes which would be
            payable by the Participant's spouse or other Policy Owner at the
            highest marginal rate provided for under applicable federal income
            tax laws, and at the highest marginal rate provided for under
            applicable state income tax laws for the state of the tax domicile
            of the Participant's spouse or other Policy Owner, attributable to
            such premium payment.

      c.    For purposes of this Section 5.04, a tax shall be deemed payable or
            income shall be deemed recognized if either (i) it is finally
            determined by the Internal Revenue Service, or (ii) an opinion is
            given by the Employer's counsel, that the tax is payable.

      d.    Any payment made to a Participant or a Participant's spouse under
            this Section shall be made no later than April 1 of the year
            following the year to which the payment relates.

      e.    Any amount to be paid to a Participant, a Participant's spouse, or
            other Policy Owner under this Section, and the amounts payable,
            shall be conclusively determined by the Plan Administrator based on
            generally applicable tax rates and not based upon the unique tax
            situation of each Participant, Participant's spouse, or other Policy
            Owner.

5.05  TERMINATION OF OBLIGATION TO PAY PREMIUMS. Notwithstanding anything herein
      to the contrary, the Employer's obligation to pay premiums (including any
      increased amounts under Section 5.03) with respect to the Participant's
      Policy, shall terminate upon the first to occur of any of the following
      events:

      a.    Termination of employment of the Participant with the Employer prior
            to the Participant's death for reasons other than Retirement or
            Disability.

April 1, 2004

                                        9


      b.    The written notice by the Employer to the Participant following a
            resolution by the Board of Directors of BellSouth Corporation to
            terminate this Plan.

      c.    As to Single Life Coverage only, the death of the Participant.

      d.    As to Survivorship Coverage only, the death of the last survivor of
            the Participant and the Participant's spouse.

      e.    The surrender or cancellation of the Participant's Policy, except
            that a Policy will not be considered surrendered or canceled if the
            surrender or cancellation is in connection with the replacement of
            the Policy with another Policy pursuant to the provisions of the
            Plan.

      f.    The withdrawal of any Policy cash values, or borrowing against the
            Policy cash values, by the Participant or other Policy Owner.

      g.    The reduction of the Participant's Policy death benefit to a level
            that is less than the initial Policy Coverage Amount, except that a
            conversion from Survivorship Coverage to Single Life Coverage shall
            not be considered a reduction in Policy death benefit for the
            purpose of this Section.

      h.    The determination by the Plan Administrator that the Policy will
            qualify as a Permanent Policy with no further Employer Premium
            payments.

6.    POLICY OWNERSHIP

      6.01  OWNERSHIP. The Policy Owner shall be the sole and exclusive owner of
            a Participant's Policy and shall be entitled to exercise all of the
            rights of ownership.

      6.02  POSSESSION OF POLICY. The Policy Owner shall keep possession of the
            Policy.

7.    GOVERNING LAWS & NOTICES

      7.01  GOVERNING LAW. This Plan shall be governed by and construed in
            accordance with the laws of the State of Georgia.

      7.02  NOTICES. All notices hereunder shall be in writing and sent by first
            class mail with postage prepaid. Any notice to the Employer shall be
            addressed to BellSouth Corporation at its office at 1155 Peachtree
            Street, N.E., Atlanta, GA 30367-6000, ATTENTION:

April 1, 2004

                                       10


            Human Resources - Director Executive Benefits. Any notice to the
            Employee shall be addressed to the Employee at the address for the
            Employee maintained in the Employer's records. Any party may change
            the address for such party herein set forth by giving notice of such
            change to the other parties pursuant to this Section.

8.    NOT A CONTRACT OF EMPLOYMENT

      This Plan shall not be deemed to constitute a contract of employment
      between an Employee and the Employer or a Participant and the Employer,
      nor shall any provision restrict the right of the Employer to discharge an
      Employee or Participant, or restrict the right of an Employee or
      Participant to terminate employment.

9.    AMENDMENT, TERMINATION, ADMINISTRATION, CONSTRUCTION ANDSUCCESSORS

      9.01  AMENDMENT. The Board of Directors of BellSouth Corporation, or its
            delegate, shall have the right in its sole discretion, to amend the
            Plan in whole or in part at any time and from time to time. In
            addition, the Plan Administrator shall have the right, in its sole
            discretion, to amend the Plan at any time and from time to time so
            long as such amendment is not of a material nature. Notwithstanding
            the foregoing, no modification or amendment shall be effective so as
            to decrease any benefits of a Participant unless the Participant
            consents in writing to such modification or amendment. Written
            notice of any material modification or amendment shall be given
            promptly to each Participant.

      9.02  TERMINATION. The Board of Directors of BellSouth Corporation may
            terminate the Plan without the consent of the Participants or
            Employees.

      9.03  SUCCESSORS. The terms and conditions of this Plan shall enure to the
            benefit of and bind the Employer, the Participant, their successors,
            assignees, and representatives. If, subsequent to the Effective Date
            of the Plan, substantially all of the stock or assets of the
            Employer are acquired by another corporation or entity or if the
            Employer is merged into, or consolidated with, another corporation
            or entity, then the obligations created hereunder shall be
            obligations of the acquirer or successor corporation or entity.

April 1, 2004

                                       11


10.    PLAN ADMINISTRATION

      10.01 INDIVIDUAL ADMINISTRATOR. If the Plan Administrator is an
            individual, he shall act and record his actions in writing. Any
            matter concerning specifically such individual's own benefit or
            rights hereunder shall be determined by the Board of Directors of
            BellSouth Corporation or its delegate.

      10.02 ADMINISTRATIVE COMMITTEE. If the Plan Administrator is a committee,
            or if any of the duties or responsibilities of the Plan
            Administrator are vested in a committee, action of the Plan
            Administrator may be taken with or without a meeting of committee
            members; provided, action shall be taken only upon the vote or other
            affirmative expression of a majority of the committee members
            qualified to vote with respect to such action. If a member of the
            committee is a Participant, he or she shall not participate in any
            decision which solely affects his or her own benefit under the Plan.
            For purposes of administering the Plan, the Plan Administrator shall
            choose a secretary who shall keep minutes of the committee's
            proceedings and all records and documents pertaining to the
            administration of the Plan. The secretary may execute any
            certificate or other written direction on behalf of the Plan
            Administrator.

      10.03 RIGHTS AND DUTIES OF THE PLAN ADMINISTRATOR. The Plan Administrator
            shall administer the Plan and shall have all powers necessary to
            accomplish that purpose, including (but not limited to) the
            following:

            a.    to construe, interpret and administer the Plan;

            b.    to make determinations required by the Plan, and to maintain
                  records regarding Participants' benefits hereunder;

            c.    to compute and certify the amount and kinds of benefits
                  payable to Participants, and to determine the time and manner
                  in which such benefits are to be paid;

            d.    to authorize all disbursements pursuant to the Plan;

            e.    to maintain all the necessary records of the administration of
                  the Plan;

            f.    to make and publish such rules and procedures for the
                  regulation of the Plan as are not inconsistent with the terms
                  hereof;

April 1, 2004

                                       12



            g.    to designate to other individuals or entities from time to
                  time the performance of any of its duties or responsibilities
                  hereunder; and

            h.    to hire agents, accountants, actuaries, consultants and legal
                  counsel to assist in operating and administering the Plan.

             The Plan Administrator shall have the exclusive right to construe
             and interpret the Plan, to decide all questions of eligibility for
             benefits and to determine the amount of benefits, and its decisions
             on such matters shall be final and conclusive on all parties.

      10.04 BOND; COMPENSATION. The Plan Administrator and (if applicable) its
            members shall serve as such without bond and without compensation
            for services hereunder.

11.   CLAIMS PROCEDURE

      11.01 NAMED FIDUCIARY. The Plan Administrator is hereby designated as the
            named fiduciary under this Plan.

      11.02 CLAIMS PROCEDURES. Any controversy or claim arising out of or
            relating to this Plan shall be filed with the Plan Administrator
            which shall make all determinations concerning such claim. Any
            decision by the Plan Administrator denying such claim shall be in
            writing and shall be delivered to all parties in interest in
            accordance with the notice provisions of Section 7.02 hereof. Such
            decision shall set forth the reasons for denial in plain language.
            Pertinent provisions of the Plan shall be cited and, where
            appropriate, an explanation as to how the Employee can perfect the
            claim will be provided. This notice of denial of benefits will be
            provided within 90 days of the Plan Administrator's receipt of the
            Employee's claim for benefits. If the Plan Administrator fails to
            notify the Employee of its decision regarding the claim, the claim
            shall be considered denied, and the Employee shall then be permitted
            to proceed with the appeal as provided in this Section.

            An Employee who has been completely or partially denied a benefit
            shall be entitled to appeal this denial of his/her claim by filing a
            written statement of his/her position with the Plan Administrator no
            later than sixty (60) days after receipt of the written notification
            of such claim denial. The Plan Administrator shall schedule an
            opportunity for a full and fair review of the issue within thirty
            (30) days of receipt of the appeal. The decision on review shall set
            forth specific reasons for the decision, and shall cite specific
            references to the pertinent Plan provisions on which the decision is
            based.

April 1, 2004

                                       13


            Following the review of any additional information submitted by the
            Employee, either through the hearing process or otherwise, the Plan
            Administrator shall render a decision on the review of the denied
            claim in the following manner:

            a.    The Plan Administrator shall make its decision regarding the
                  merits of the denied claim within sixty (60) days following
                  receipt of the request for review (or within 120 days after
                  such receipt, in a case where there are special circumstances
                  requiring extension of time for reviewing the appealed claim).
                  The Plan Administrator shall deliver the decision to the
                  claimant in writing. If an extension of time for reviewing the
                  appealed claim is required because of special circumstances,
                  written notice of the extension shall be furnished to the
                  Employee prior to the commencement of the extension. If the
                  decision on review is not furnished within the prescribed
                  time, the claim shall be deemed denied on review.

            b.    The decision on review shall set forth specific reasons for
                  the decision, and shall cite specific references to the
                  pertinent Plan provisions on which the decision is based.

April 1, 2004

                                       14

EX-10.Q

                                                                     EXHIBIT 10q

                                    BELLSOUTH
                       OFFICER COMPENSATION DEFERRAL PLAN

               (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2005)



                  BELLSOUTH OFFICER COMPENSATION DEFERRAL PLAN
                                TABLE OF CONTENTS

                                                                        
BACKGROUND AND PURPOSE.................................................    1

ARTICLE I DEFINITIONS..................................................    2

1.1      "Account".....................................................    2

1.2      "Affiliate"...................................................    2

1.3      "Annual Bonus"................................................    2

1.4      "Base Salary".................................................    2

1.5      "BellSouth"...................................................    2

1.6      "Beneficiary".................................................    2

1.7      "Board".......................................................    2

1.8      "Bonus Deferral Election".....................................    2

1.9      "Business Day"................................................    2

1.10     "Code"........................................................    2

1.11     "Company Stock"...............................................    3

1.12     "Compensation"................................................    3

1.13     "Credited Interest Rate"......................................    3

1.14     "Deferral Contributions"......................................    3

1.15     "Deferral Election"...........................................    3

1.16     "Effective Date"..............................................    3

1.17     "Election Deadline"...........................................    3

1.18     "Election Package"............................................    4

1.19     "Eligible Executive"..........................................    4



                                       -i-


                                                                     
1.20     "ERISA"....................................................    4

1.21     "Financial Hardship".......................................    4

1.22     "Interest Income Option"...................................    5

1.23     "Interest Income Subaccount"...............................    5

1.24     "Investment Election"......................................    5

1.25     "Investment Options".......................................    5

1.26     "Mutual Fund"..............................................    5

1.27     "Mutual Fund Option".......................................    5

1.28     "Mutual Fund Subaccount"...................................    5

1.29     "Participant"..............................................    5

1.30     "Participating Company"....................................    5

1.31     "Performance Period".......................................    5

1.32     "Performance Share Award"..................................    6

1.33     "Performance Share Deferral Election"......................    6

1.34     "Performance Share Payment"................................    6

1.35     "Plan"   ..................................................    6

1.36     "Plan Administrator".......................................    6

1.37     "Plan Year"................................................    6

1.38     "Short Term Bonus Plan"....................................    6

1.39     "Stock/Interest Option"....................................    6

1.40     "Stock Plan"...............................................    6

1.41     "Stock Unit"...............................................    6



                                      -ii-


                                                                        
1.42     "Stock Unit Option".............................................   6

1.43     "Stock Unit Subaccount".........................................   7

1.44     "Valuation Date"................................................   7

ARTICLE II ELIGIBILITY AND PARTICIPATION.................................   8

2.1      Annual Participation............................................   8

2.2      Interim Plan Year Participation.................................   8

2.3      Election Procedures.............................................   8

2.4      Cessation of Eligibility........................................   8

ARTICLE III PARTICIPANTS' ACCOUNTS; DEFERRAL CONTRIBUTIONS...............  10

3.1      Participants' Accounts..........................................  10
         (a)      Establishment of Accounts..............................  10
         (b)      Nature of Contributions and Accounts...................  10
         (c)      Several Liabilities....................................  10
         (d)      General Creditors......................................  10

3.2      Deferral Contributions..........................................  10
         (a)      Effective Date.........................................  11
                  (i)   Base Salary Deferral Election....................  11
                  (ii)  Bonus Deferral Election..........................  11
                  (iii) Performance Share Deferral Election..............  11
                  (iv) Other Requirements................................  11
         (b)      Term...................................................  11
         (c)      Base Salary Deferral Election Amount...................  11
         (d)      Bonus Deferral Election Amount.........................  12
         (e)      Performance Share Deferral Election Amount.............  12
         (f)      Revocation.............................................  12
         (g)      Crediting of Deferred Compensation.....................  13
                  (i)   Stock Unit Option and/or Interest Income Option..  13
                  (ii)  Mutual Fund Option...............................  13

3.3      Deferral Elections and Multiple Participating Companies.........  14

3.4      Termination Under Severance Arrangement.........................  14

3.5      Vesting.........................................................  14



                                      -iii-


                                                                        
3.6      Debiting of Distributions.......................................  14

ARTICLE IV DETERMINATION AND CREDITING OF INVESTMENT RETURN..............  15

4.1      General Investment Parameters...................................  15

4.2      Participant Direction of Deemed Investments.....................  15
         (a)      Nature of Participant Direction........................  15
         (b)      Investment of Contributions............................  15
                  (i)   Stock Unit Option and/or Interest Income Option..  15
                  (ii)  Mutual Fund Option...............................  16
         (c)      Investment of Existing Account Balances................  16
                  (i)   Stock/Interest Option............................  16
                  (ii)  Mutual Fund Option...............................  16
         (d)      Investment Subaccounts.................................  16

4.3      Stock Unit Option...............................................  17
         (a)      Stock Unit Subaccount..................................  17
         (b)      Cash Dividends.........................................  17
         (c)      Adjustments............................................  17

4.4      Interest Income Option..........................................  17
         (a)      Interest Income Subaccount.............................  17
         (b)      Crediting of Deemed Interest...........................  18
                  (i)   Amount Invested..................................  18
                  (ii)  Determination of Amount..........................  18

4.5      Mutual Fund Option..............................................  18
         (a)      Mutual Funds...........................................  18
         (b)      Mutual Fund Subaccount.................................  18
         (c)      Crediting of Earnings..................................  19

4.6      Good Faith Valuation Binding....................................  19

4.7      Errors and Omissions in Accounts................................  19

ARTICLE V PAYMENT OF ACCOUNT BALANCES....................................  20

5.1      Benefit Amounts.................................................  20
         (a)      Benefit Entitlement....................................  20
         (b)      Valuation of Benefit...................................  20
         (c)      Conversion of Stock Units into Dollars.................  20

5.2      Elections of Timing and Form....................................  20
         (a)      Timing.................................................  20



                                      -iv-


                                                                       
         (b)      Form of Distribution.................................   21
         (c)      Multiple Selections..................................   21

5.3      Benefit Payments to a Participant.............................   21
         (a)      Timing...............................................   21
         (b)      Form of Distribution.................................   21
         (c)      Valuation of Single Lump-Sum Payments................   21
         (d)      Valuation of Installment Payments....................   21

5.4      Death Benefits................................................   22
         (a)      General..............................................   22
         (b)      Valuation............................................   22

5.5      Withdrawals...................................................   22
         (a)      Hardship Withdrawals.................................   22
         (b)      Withdrawals with Forfeiture..........................   23

5.6      Beneficiary Designation.......................................   23
         (a)      General..............................................   23
         (b)      No Designation or Designee Dead or Missing...........   23
         (c)      Death of Beneficiary.................................   24

5.7      Taxes    .....................................................   24

ARTICLE VI CLAIMS......................................................   25

6.1      Initial Claim.................................................   25

6.2      Appeal   .....................................................   25

6.3      Satisfaction of Claims........................................   25

ARTICLE VII SOURCE OF FUNDS............................................   26

ARTICLE VIII PLAN ADMINISTRATION.......................................   27

8.1      Action by the Plan Administrator..............................   27
         (a)      Individual Administrator.............................   27
         (b)      Administrative Committee.............................   27

8.2      Rights and Duties of the Plan Administrator...................   27

8.3      Bond; Compensation............................................   28

ARTICLE IX AMENDMENT AND TERMINATION...................................   29



                                       -v-


                                                                       
9.1      Amendments...................................................     29

9.2      Termination of Plan..........................................     29

9.3      Limitation on Authority......................................     29
         (a)      Plan Amendments.....................................     29
         (b)      Plan Termination....................................     29
         (c)      Opinions of Counsel.................................     30

ARTICLE X MISCELLANEOUS...............................................     31

10.1     Taxation.....................................................     31

10.2     Withholding..................................................     31

10.3     No Employment Contract.......................................     31

10.4     Headings.....................................................     31

10.5     Gender and Number............................................     31

10.6     Assignment of Benefits.......................................     31

10.7     Legally Incompetent..........................................     31

10.8     Entire Document..............................................     31

10.9     Governing Law................................................     31

EXHIBIT A.............................................................    A-1



                                      -vi-


                  BELLSOUTH OFFICER COMPENSATION DEFERRAL PLAN

      Effective as of the 1st day of January, 2002, BellSouth Corporation
("BellSouth") established the BellSouth Officer Compensation Deferral Plan (the
"Plan"). The Plan is hereby amended and restated in its entirety effective as of
the 1st day of January, 2005.

                             BACKGROUND AND PURPOSE

      A.    GOAL. BellSouth desires to provide its executives, and those of its
Affiliates that participate in the Plan, with an opportunity (i) to defer the
receipt and income taxation of a portion of such executives' compensation; and
(ii) to receive an investment return on those deferred amounts based on either
(A) the return of BellSouth stock, an indexed rate of interest, or a combination
of the two, or (B) for executives who satisfy BellSouth's stock ownership
guidelines, the return of a selected group of mutual and other investment funds.

      B.    PURPOSE. The purpose of the Plan is to set forth the terms and
conditions under which these deferrals may be made and deemed invested and to
describe the nature and extent of the executives' rights to their deferred
amounts.

      C.    TYPE OF PLAN. The Plan constitutes an unfunded, nonqualified
deferred compensation plan that benefits certain designated employees who are
within a select group of key management or highly compensated employees. Each
Participating Company alone has the obligation to pay amounts payable under the
Plan to Plan Participants, and such payments are not, and will not be, an
obligation of any other Participating Company.

                                       -1-


                                    ARTICLE I
                                   DEFINITIONS

      For purposes of the Plan, each of the following terms, when used with an
initial capital letter, shall have the meaning set forth below unless a
different meaning plainly is required by the context.

      1.1   "ACCOUNT" shall mean, with respect to a Participant or Beneficiary,
the total dollar amount or value evidenced by the last balance posted in
accordance with the terms of the Plan to the account record established for such
Participant or Beneficiary with respect to the Deferral Contributions of such
Participant for any Plan Year.

      1.2   "AFFILIATE" shall mean at any time any corporation, joint venture or
partnership in which BellSouth owns directly or indirectly, (i) with respect to
a corporation, stock possessing at least ten percent (10%) of the total combined
voting power of all classes of stock in the corporation, or (ii) in the case of
a joint venture or partnership, a ten percent (10%) or greater interest in the
capital or profits of such joint venture or partnership.

      1.3   "ANNUAL BONUS" shall mean, with respect to each Eligible Executive
for a specified Plan Year, such Eligible Executive's actual award amount to be
paid under the Short Term Bonus Plan for such Plan Year (payable in the
succeeding year).

      1.4   "BASE SALARY" shall mean, with respect to each Eligible Executive
for a specified Plan Year, the gross regular, periodic base salary paid or
payable to the Eligible Executive for each payroll period during such Plan Year,
including any of the Eligible Executive's own before-tax and after-tax
contributions to, or deferrals under, any Code Section 401(k), Code Section 125,
nonqualified deferred compensation or other employee benefit plan or program,
maintained by a Participating Company from time to time, but excluding any
contributions or benefits paid under any such plan or program by a Participating
Company.

      1.5   "BELLSOUTH" shall mean BellSouth Corporation, a Georgia corporation.

      1.6   "BENEFICIARY" shall mean, with respect to a Participant, the
person(s) determined in accordance with Section 5.4 to receive any death
benefits that may be payable under the Plan upon the death of the Participant.

      1.7   "BOARD" shall mean the Board of Directors of BellSouth.

      1.8   "BONUS DEFERRAL ELECTION" shall mean an election in such form as is
provided by the Plan Administrator on which an Eligible Executive may elect to
defer a portion of such executive's Annual Bonus.

      1.9   "BUSINESS DAY" shall mean each day on which the New York Stock
Exchange operates and is open to the public for trading.

                                       -2-


      1.10  "CODE" shall mean the Internal Revenue Code of 1986, as amended.

      1.11  "COMPANY STOCK" shall mean the $1.00 par value per share voting
common stock of BellSouth.

      1.12  "COMPENSATION" shall mean, for any Plan Year, the Participant's
annualized Base Salary rate as in effect on November 15 preceding the beginning
of the Plan Year. Provided, however, that with respect to an Eligible Executive
whose eligibility to actively participate in the Plan commences after November
15 preceding the beginning of the Plan Year, such amount shall be the
Participant's annualized Base Salary rate as in effect on the first day of the
first payroll period after which the Eligible Executive is eligible to actively
participate in the Plan. Notwithstanding the foregoing, the Plan Administrator,
in its sole discretion, may specify dates other than those described above on
which a Participant's annualized Base Salary rate for a Plan Year is to be
determined. For any Participant employed by a Participating Company whose
compensation structure does not readily fit this definition, "Compensation"
shall mean cash compensation as defined by the Plan Administrator.

      1.13  "CREDITED INTEREST RATE" shall mean, for each Plan Year, the rate of
return equal to Moody's Monthly Average of Yields of Aa Corporate Bonds, as
published by Moody's Investors Service, Inc., for the month of July immediately
preceding such Plan Year. If such rate (or any alternative rate described in
this sentence) is at any time no longer available, the Plan Administrator shall
designate an alternative rate which, in the Plan Administrator's reasonable
judgment, is generally comparable to the rate described in the preceding
sentence, and such alternative rate shall thereafter be the Credited Interest
Rate.

      1.14  "DEFERRAL CONTRIBUTIONS" shall mean, as applicable, for each Plan
Year that portion of a Participant's Base Salary and/or Annual Bonus deferred,
and for each Performance Period that portion of a Participant's Performance
Share Payment deferred, under the Plan pursuant to Section 3.2.

      1.15  "DEFERRAL ELECTION" shall mean an election in such form as is
provided by the Plan Administrator on which an Eligible Executive may elect to
defer under the Plan a portion of such Eligible Executive's Base Salary.

      1.16  "EFFECTIVE DATE" shall mean January 1, 2005, the date this
restatement of the Plan is effective. The Plan initially was effective as of
January 1, 2002.

      1.17  "ELECTION DEADLINE" shall mean:

            (a)   With respect to a Deferral Election and a Bonus Deferral
Election, for an individual who is eligible to participate in the Plan for an
entire Plan Year and is employed by a Participating Company on such date, the
November 30 (or if November 30 is not a Business Day, the last Business Day
immediately preceding November 30) immediately preceding the first day of such
Plan Year. Notwithstanding the foregoing, with the approval of the Plan
Administrator, "Election Deadline" may mean, with respect to such an Eligible
Executive for a Plan Year, the

                                       -3-


December 31 (or if December 31 is not a Business Day, the last Business Day
immediately preceding December 31) immediately preceding the first day of such
Plan Year.

            (b)   With respect to a Deferral Election and a Bonus Deferral
Election, for an individual who becomes employed by a Participating Company as
an Eligible Executive after the November 30 (or such other date) described in
the preceding paragraph and on or before October 1 of a Plan Year and who is
eligible to participate in the Plan during the remainder of such Plan Year
pursuant to Section 2.2, the date which is thirty (30) days after the date the
individual first becomes eligible to participate in the Plan.

            (c)   With respect to a Performance Share Deferral Election, the
November 30 (or if November 30 is not a Business Day, the last Business Day
immediately preceding November 30) immediately preceding the final year of the
Performance Period.

      1.18  "ELECTION PACKAGE" shall mean a package consisting of a Deferral
Election, a Bonus Deferral Election, a Performance Share Deferral Election, an
Investment Election and such other forms and documents distributed to an
Eligible Executive by the Plan Administrator for the purpose of allowing such
Eligible Executive to elect to actively participate in the Plan for a Plan Year.

      1.19  "ELIGIBLE EXECUTIVE" shall mean, for each Plan Year, each management
employee of a Participating Company who (i) is a member of a select group of
highly compensated or key management employees, and (ii) is designated by the
Plan Administrator as a member of BellSouth's "executive compensation group," or
is otherwise designated by the Plan Administrator as eligible to participate in
the Plan.

      1.20  "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.

      1.21  "FINANCIAL HARDSHIP" shall mean a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident of the
Participant or of the Participant's dependent [as defined in Code Section
152(a)], loss of the Participant's property due to casualty, or other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the control of the Participant. Financial Hardship shall be determined by
the Plan Administrator on the basis of the facts of each case, including
information supplied by the Participant in accordance with uniform guidelines
prescribed from time to time by the Plan Administrator; provided, the
Participant will be deemed not to have a Financial Hardship to the extent that
such hardship is or may be relieved:

            (a)   through reimbursement or compensation by insurance or
otherwise;

            (b)   by liquidation of the Participant's assets, to the extent the
liquidation of assets would not itself cause severe financial hardship; or

            (c)   by cessation of deferrals under the Plan.

                                       -4-


Examples of what are not considered to be unforeseeable emergencies include the
need to send a Participant's child to college or the desire to purchase a home.

      1.22  "INTEREST INCOME OPTION" shall mean the Investment Option described
in Section 4.4, pursuant to which a Participant's deemed investment earnings are
determined on the basis of the Credited Interest Rate.

      1.23  "INTEREST INCOME SUBACCOUNT" shall mean a bookkeeping subaccount
reflecting that portion of a Participant's Account for each Plan Year which is
deemed to be invested in the Interest Income Option.

      1.24  "INVESTMENT ELECTION" shall mean an election in such form as is
provided by the Plan Administrator on which an Eligible Executive may elect to
have Deferral Contributions for a Plan Year (and all investment earnings
attributable thereto) deemed invested in the Stock Unit Option, the Interest
Income Option and/or the Mutual Fund Option (including the underlying Mutual
Funds).

      1.25  "INVESTMENT OPTIONS" shall mean the Stock Unit Option, the Interest
Income Option and the Mutual Fund Option (including the underlying Mutual
Funds).

      1.26  "MUTUAL FUND" shall mean the investment funds selected from time to
time by the Plan Administrator for purposes of determining the rate of return on
amounts deemed invested in the Mutual Fund Option pursuant to the terms of the
Plan.

      1.27  "MUTUAL FUND OPTION" shall mean the Mutual Fund Option described in
Section 4.5, pursuant to which a Participant's deemed investment earnings are
determined by the rate of return applicable to Mutual Funds.

      1.28  "MUTUAL FUND SUBACCOUNT" shall mean a bookkeeping subaccount
reflecting that portion of a Participant's Account for each Plan Year which is
deemed to be invested in the Mutual Fund Option.

      1.29  "PARTICIPANT" shall mean any person participating in the Plan
pursuant to the provisions of Article II.

      1.30  "PARTICIPATING COMPANY" shall mean BellSouth and each Affiliate
which, by action of its board of directors (or equivalent governing body),
adopts the Plan as a Participating Company with the approval of the Plan
Administrator. Such entities shall be listed on Exhibit A hereto, which shall be
updated from time to time to reflect the addition of new Participating Companies
and the effective dates of their participation, and the deletion of any entities
which are no longer Participating Companies.

      1.31  "PERFORMANCE PERIOD" shall mean the three consecutive calendar year
period (or other period of time) specified in a performance share award
agreement (or similar document)

                                       -5-


made pursuant to the Stock Plan with respect to which a Performance Share
Deferral Election is made.

      1.32  "PERFORMANCE SHARE AWARD" shall mean, with respect to each Eligible
Executive for a specified Performance Period, an award of "Performance Shares"
(as such term is defined in the Stock Plan) made pursuant to the Stock Plan with
respect to such Performance Period.

      1.33  "PERFORMANCE SHARE DEFERRAL ELECTION" shall mean an election in such
form as is provided by the Plan Administrator on which an Eligible Executive may
elect to defer a portion of such executive's Performance Share Payment.

      1.34  "PERFORMANCE SHARE PAYMENT" shall mean the aggregate of any and all
amounts to be paid with respect to a Performance Share Award.

      1.35  "PLAN" shall mean the BellSouth Officer Compensation Deferral Plan,
as contained herein and all amendments hereto.

      1.36  "PLAN ADMINISTRATOR" shall mean the Chief Executive Officer of
BellSouth and any individual or committee the Chief Executive Officer designates
to act on his or her behalf with respect to any or all of the Chief Executive
Officer's responsibilities hereunder; provided, the Board may designate any
other person or committee to serve in lieu of the Chief Executive Officer as the
Plan Administrator with respect to any or all of the administrative
responsibilities hereunder.

      1.37  "PLAN YEAR" shall mean the calendar year.

      1.38  "SHORT TERM BONUS PLAN" shall mean, effective April 26, 2004, the
BellSouth Corporation Stock and Incentive Compensation Plan, or any successor
plan. Prior to April 26, 2004, "Short Term Bonus Plan" referred to the BellSouth
Corporation Officer Short Term Incentive Award Plan.

      1.39  "STOCK/INTEREST OPTION" shall mean the investment option comprised
of the Stock Unit Option and/or the Interest Income Option, as described in
Section 4.2(b)(i).

      1.40  "STOCK PLAN" shall mean the BellSouth Corporation Stock and
Incentive Compensation Plan, or any successor plan.

      1.41  "STOCK UNIT" shall mean an accounting entry that represents an
unsecured obligation of a Participating Company to pay to a Participant an
amount which is based on the fair market value of one share of Company Stock as
set forth herein. A Stock Unit shall not carry any voting, dividend or other
similar rights and shall not constitute an option or any other right to acquire
any equity securities of BellSouth.

                                       -6-


      1.42  "STOCK UNIT OPTION" shall mean the Investment Option described in
Section 4.3, pursuant to which a Participant's deemed investment earnings are
determined by the rate of return applicable to Stock Units.

      1.43  "STOCK UNIT SUBACCOUNT" shall mean a bookkeeping subaccount
reflecting that portion of a Participant's Account for each Plan Year which is
deemed to be invested in the Stock Unit Option.

      1.44  "VALUATION DATE" shall mean each Business Day. Notwithstanding the
foregoing, for any specific purpose determined in the sole discretion of the
Plan Administrator, "Valuation Date" shall mean any day or days declared by the
Plan Administrator, in its sole discretion, to be a Valuation Date. If the Plan
provides for a valuation to be made on a day that is not a Valuation Date, such
valuation shall be made as of the Valuation Date immediately preceding such day.

                                       -7-


                                   ARTICLE II
                          ELIGIBILITY AND PARTICIPATION

      2.1 ANNUAL PARTICIPATION. Each individual who is an Eligible Executive as
of the first day of a Plan Year and is employed by a Participating Company
before the beginning of such Plan Year shall be eligible to defer a portion of
such Eligible Executive's Base Salary, Annual Bonus and Performance Share
Payment, if any, and thereby to actively participate in the Plan for such Plan
Year. Such individual's participation shall become effective as of the first day
of such Plan Year, provided that the Eligible Executive properly and timely
completes the election procedures described in Section 2.3. For purposes of the
Plan, references to "Plan Year" with respect to a Performance Share Deferral
Election shall mean the Plan Year that is the final calendar year of the
Performance Period.

      2.2 INTERIM PLAN YEAR PARTICIPATION. Each individual who becomes employed
by a Participating Company as an Eligible Executive on or before October 1 of a
Plan Year, and who is not otherwise eligible to participate in the Plan during
such Plan Year in accordance with Section 2.1, shall be immediately eligible
upon commencement of such employment to make a Deferral Election and/or Bonus
Deferral Election, and thereby to actively participate in the Plan, for the
remainder of such Plan Year. Such individual's participation shall become
effective as of the first day of the calendar month following the calendar month
in which such Deferral Election and/or Bonus Deferral Election is made, provided
that the Eligible Executive properly and timely completes the election
procedures described in Section 2.3.

      2.3 ELECTION PROCEDURES. Each Eligible Executive may elect to defer a
portion of such Eligible Executive's Base Salary, Annual Bonus and/or
Performance Share Payment, and thereby become an active Participant for a Plan
Year (or, if Section 2.2 is applicable, for the remainder of such Plan Year), by
delivering a completed Deferral Election, Bonus Deferral Election and/or
Performance Share Deferral Election and an Investment Election to the Plan
Administrator by the applicable Election Deadline for such Plan Year. Such an
election shall be effective only if the individual is actively employed as an
Eligible Executive at the time the individual delivers the completed Deferral
Election, Bonus Deferral Election and/or Performance Share Deferral Election and
Investment Election to the Plan Administrator. The Plan Administrator may also
require the Eligible Executive to complete other forms and provide other data,
as a condition of participation in the Plan.

      2.4 CESSATION OF ELIGIBILITY. An Eligible Executive's active participation
in the Plan shall terminate, and the Eligible Executive shall not be eligible to
make any additional Deferral Contributions, for any portion of a Plan Year
following the date the Eligible Executive's employment with BellSouth and all
Participating Companies terminates (unless such individual is reemployed as an
Eligible Executive later in such Plan Year). In addition, an individual who
actively participated in the Plan during prior Plan Years but who is not an
Eligible Executive or does not complete the election procedures, for a
subsequent Plan Year, shall cease active participation in the Plan for such
subsequent Plan Year. If an individual's active participation in the Plan ends,
such individual shall remain an inactive Participant in the Plan until the
earlier of (i) the date the full amount of such individual's Accounts is
distributed from the Plan, or (ii) the

                                      -8-



date the individual again becomes an Eligible Executive and recommences active
participation in the Plan. During the period of time that an individual is an
inactive Participant in the Plan, such individual's Accounts shall continue to
be credited with earnings as provided in the Plan.

                                      -9-



                                   ARTICLE III
                 PARTICIPANTS' ACCOUNTS; DEFERRAL CONTRIBUTIONS

      3.1 PARTICIPANTS' ACCOUNTS.

            (a) ESTABLISHMENT OF ACCOUNTS. The Plan Administrator shall
establish and maintain one or more Accounts on behalf of each Participant for
each Plan Year for which the Participant makes Deferral Contributions. The Plan
Administrator shall credit each Participant's Account with the Participant's
Deferral Contributions for such Plan Year and earnings attributable thereto, and
shall maintain such Account until the value thereof has been distributed to or
on behalf of such Participant or his or her Beneficiary.

            (b) NATURE OF CONTRIBUTIONS AND ACCOUNTS. The amounts credited to a
Participant's Accounts shall be represented solely by bookkeeping entries.
Except as provided in Article VII, no monies or other assets shall actually be
set aside for such Participant, and all payments to a Participant under the Plan
shall be made from the general assets of the Participating Companies.

            (c) SEVERAL LIABILITIES. Each Participating Company shall be
severally (and not jointly) liable for the payment of benefits under the Plan
under Deferral Elections, Bonus Deferral Elections and Performance Share
Deferral Elections executed by Eligible Executives with, and while employed by,
such Participating Company.

            (d) GENERAL CREDITORS. Any assets which may be acquired by a
Participating Company in anticipation of its obligations under the Plan shall be
part of the general assets of such Participating Company. A Participating
Company's obligation to pay benefits under the Plan constitutes a mere promise
of such Participating Company to pay such benefits, and a Participant or
Beneficiary shall be and remain no more than an unsecured, general creditor of
such Participating Company.

      3.2 DEFERRAL CONTRIBUTIONS. Each Eligible Executive may irrevocably elect
to have Deferral Contributions made on his or her behalf for a Plan Year (or, if
Section 2.2 is applicable, for the remainder of such Plan Year), by completing
in a timely manner a Deferral Election, Bonus Deferral Election and/or
Performance Share Deferral Election and an Investment Election, and following
other election procedures as provided in Section 2.3. Subject to any
modifications, additions or exceptions that the Plan Administrator, in its sole
discretion, deems necessary, appropriate or helpful, the following terms shall
apply to such Deferral Elections, Bonus Deferral Elections and Performance Share
Deferral Elections:

                                      -10-



            (a) EFFECTIVE DATE.

                  (i) BASE SALARY DEFERRAL ELECTION. Subject to Section
3.2(a)(iv), a Deferral Election made by a Participant shall be effective
beginning with the first regular, periodic paycheck earned and paid (A) with
respect to a Participant participating for the entire Plan Year, in such Plan
Year, and (B) with respect to a Participant participating for a portion of a
Plan Year, in accordance with Section 2.2, in the calendar month following the
calendar month in which the Participant makes his or her Deferral Election.

                  (ii) BONUS DEFERRAL ELECTION. Subject to Section 3.2(a)(iv), a
Bonus Deferral Election made by a Participant shall be effective (A) with
respect to a Participant participating for the entire Plan Year, for the Annual
Bonus earned during the Plan Year, and (B) with respect to a Participant
participating for a portion of Plan Year in accordance with Section 2.2, for the
Annual Bonus earned during such portion of the Plan Year.

                  (iii) PERFORMANCE SHARE DEFERRAL ELECTION. Subject to Section
3.2(a)(iv), a Performance Share Deferral Election shall be effective for the
Performance Share Payment earned during the Performance Period with respect to
which such election is made.

                  (iv) OTHER REQUIREMENTS. To be effective, a Participant's
Deferral Election, Bonus Deferral Election and/or Performance Share Deferral
Election, as applicable, must be made by the Election Deadline. If an Eligible
Executive fails to deliver a Deferral Election, a Bonus Deferral Election or a
Performance Share Deferral Election, or to complete any of the other requisite
election procedures for a Plan Year, in a timely manner, the Eligible Executive
shall be deemed to have elected not to participate in the Plan for that Plan
Year.

            (b) TERM. Each Deferral Election for a Plan Year that is made by a
Participant shall remain in effect with respect to the specified portion of all
Base Salary earned and paid or payable during such Plan Year (or, in the case of
a Participant participating for a portion of the Plan Year in accordance with
Section 2.2, with respect to the specified portion of all Base Salary paid or
payable during the remainder of such Plan Year) but shall not apply to any
subsequent Plan Year. Each Bonus Deferral Election for a Plan Year that is made
by a Participant shall be effective with respect to the specified portion of
Annual Bonus, if any, earned during such Plan Year (or, in the case of a
Participant participating for a portion of the Plan Year in accordance with
Section 2.2, for the specified portion of the Annual Bonus earned during the
remainder of such Plan Year), but shall not apply to any subsequent Plan Year.
Each Performance Share Deferral Election that is made by a Participant shall be
effective with respect to the specified portion of Performance Share Payment, if
any, under the Performance Share Award to which it relates, but shall not apply
to any subsequent Performance Share Award.

            (c) BASE SALARY DEFERRAL ELECTION AMOUNT. Each Eligible Executive's
Deferral Election for a Plan Year shall specify a whole percentage of his or her
Compensation to be deferred from his or her Base Salary for such year.
Notwithstanding the foregoing, the Plan Administrator, in its sole discretion,
may allow an Eligible Executive to complete a Deferral Election specifying
either (i) a whole dollar amount of his or her Base Salary to be deferred, with

                                      -11-



such amount being expressed in increments of $1,000 (or such other increments as
the Plan Administrator may determine), or (ii) a percentage of his or her Base
Salary paid or payable for each payroll period, with the amount of such deferral
to vary as the Eligible Executive's Base Salary changes. The maximum amount of
Base Salary that an Eligible Executive may defer for any Plan Year shall be
fifty-five percent (55%) of the Eligible Executive's Compensation for such Plan
Year rounded up to the next highest thousand dollars. The total amount elected
to be deferred shall be withheld from such Eligible Executive's regular,
periodic paychecks of Base Salary in substantially equal installments (except as
contemplated in clause (ii) above) throughout the Plan Year. If any election
would result in a fractional dollar amount to be withheld, the Plan
Administrator, in its sole discretion, may determine that such amount will be
rounded up to the next highest whole dollar. Notwithstanding any provision of
the Plan or a Deferral Election to the contrary, however, the amount withheld
from any payment of Base Salary shall be reduced automatically, if necessary, so
that it does not exceed the amount of such payment net of all withholding,
allotments and deductions, other than any reduction pursuant to such Deferral
Election. No amounts shall be withheld during any period an individual ceases to
receive Base Salary as an actively employed Eligible Executive for any reason
during the Plan Year except that, in the case of an individual on an approved
paid leave of absence as an Eligible Executive (including a paid leave of
absence under a short term disability plan of a Participating Company), amounts
shall be withheld from such leave of absence payments and otherwise treated in
the same manner as if such payments constituted Base Salary under the Plan. No
adjustment shall be made in the amount to be withheld from any subsequent
payment of Base Salary for a Plan Year to compensate for any missed or reduced
withholding amounts above.

            (d) BONUS DEFERRAL ELECTION AMOUNT. The Bonus Deferral Election of
each Eligible Executive shall specify a whole percentage of such Eligible
Executive's Annual Bonus to be deferred, not to exceed fifty percent (50%) and
not less than five percent (5%). Notwithstanding any provision of the Plan or a
Bonus Deferral Election to the contrary, the amount withheld from any bonus
payment shall be reduced automatically, if necessary, so that it does not exceed
the amount of such payment net of all withholding, allotments and deductions
other than any reduction pursuant to such Bonus Deferral Election.

            (e) PERFORMANCE SHARE DEFERRAL ELECTION AMOUNT. The Performance
Share Deferral Election of each Eligible Executive shall specify a whole
percentage of such Eligible Executive's Performance Share Payment to be
deferred, not less than five percent (5%) and not to exceed one hundred percent
(100%) of the amount actually payable to the Eligible Executive with respect to
the Performance Share Award. Notwithstanding any provision of the Plan or a
Performance Share Deferral Election to the contrary, the amount withheld from
any Performance Share Payment shall be reduced automatically, if necessary, so
that it does not exceed the amount of such payment net of all withholding,
allotments and deductions, other than any reduction pursuant to such Performance
Share Deferral Election.

            (f) REVOCATION. Once made, a Participant may not revoke a Deferral
Election or Bonus Deferral Election for a Plan Year, or a Performance Share
Deferral Election with respect to a Performance Share Award.

                                      -12-



            (g) CREDITING OF DEFERRED COMPENSATION.

                  (i) STOCK UNIT OPTION AND/OR INTEREST INCOME OPTION. If a
Participant elects to have all or any portion of his or her deferred Base Salary
for a Plan Year deemed invested in the Stock/Interest Option pursuant to Section
4.2(b), the Plan Administrator shall credit to the Participant's Account for
such Plan Year, as of the first day of such Plan Year (or, as of the effective
date of participation of a Participant described in Section 2.2), the entire
amount of the Participant's deferred Base Salary for such Plan Year. If a
Participant elects to have all or any portion of his or her deferred Annual
Bonus for a Plan Year deemed invested in the Stock/Interest Option pursuant to
Section 4.2(b), the Plan Administrator shall credit to the Participant's
Account, as of the first day of the Plan Year in which the Participant's Annual
Bonus for such Plan Year is actually paid under the Short Term Bonus Plan, the
entire amount deferred. If a Participant elects to have all or any portion of
his or her deferred Performance Share Payment for a Performance Period deemed
invested in the Stock/Interest Option pursuant to Section 4.2(b), the Plan
Administrator shall credit to the Participant's Account, as of the first day of
the Plan Year next following the end of the Performance Period, the entire
amount deferred. If for any reason the entire amount of the Participant's
Deferral Contributions so elected are not made, the Participant's Account shall
be automatically adjusted, retroactively to the first day of such Plan Year (or,
if applicable, the effective date of participation of a Participant described in
Section 2.2), to reflect the amount of Deferral Contributions actually made from
Base Salary (or pursuant to Section 3.4, if applicable), Annual Bonus and/or
Performance Share Payment during the Plan Year. Notwithstanding the foregoing,
if a Participant described in this Section 3.2(g)(i) is an "Executive Officer"
(as such term is defined in the Stock Plan), the Plan Administrator shall
instead credit to such Participant's Account for a Plan Year, as of the last day
of the applicable Plan Year, the entire amount of the Participant's Base Salary,
Annual Bonus and/or Performance Share Payment actually deferred, retroactively
to the first day of such Plan Year (or, if applicable, the effective date of
participation of a Participant described in Section 2.2).

                  (ii) MUTUAL FUND OPTION. If a Participant elects to have all
or any portion of his or her deferred Base Salary for a Plan Year deemed
invested in the Mutual Fund Option pursuant to Section 4.2(b), the Plan
Administrator shall credit to the Participant's Account, as of each Valuation
Date that is on (or as soon as administratively practicable after) a payroll
period payment date, the Deferral Contribution made from Base Salary for such
payroll period. If a Participant elects to have all or any portion of his or her
deferred Annual Bonus for a Plan Year deemed invested in the Mutual Fund Option
pursuant to Section 4.2(b), the Plan Administrator shall credit to the
Participant's Account, as of the Valuation Date that is on (or as soon as
administratively practicable after) the date the Participant's Annual Bonus for
the prior Plan Year is actually paid under the Short Term Bonus Plan, the amount
of such Annual Bonus that is deferred. If a Participant elects to have all or
any portion of his or her deferred Performance Share Payment for a Performance
Period deemed invested in the Mutual Fund Option pursuant to Section 4.2(b), the
Plan Administrator shall credit to the Participant's Account, as of each
Valuation Date that is on (or as soon as administratively practicable after) the
date that each separate payment to be made to the Participant with respect to
the Performance Share Award is actually payable, the amount of such Performance
Share Award that is deferred.

                                      -13-



      3.3 DEFERRAL ELECTIONS AND MULTIPLE PARTICIPATING COMPANIES. Any Deferral
Election, Bonus Deferral Election and/or Performance Share Deferral Election
which is timely executed and delivered to the Plan Administrator shall be
effective to defer Base Salary, Annual Bonus and/or a Performance Share Payment
earned by the Participant from the Participating Company employing such
Participant at the time of the Participant's election or any other Participating
Company employing such Participant during the Plan Year for which the Deferral
Election, Bonus Deferral Election is effective, or during the Performance Period
with respect to which a Performance Share Deferral Election is effective. In
particular, a Participant (i) who timely executes and delivers a Deferral
Election, Bonus Deferral Election and/or Performance Share Deferral Election
while employed by one Participating Company and subsequently transfers to
another Participating Company, or (ii) who terminates employment and
subsequently becomes employed by another Participating Company, shall have the
Base Salary, Annual Bonus and/or Performance Share Payment that is paid or
payable to such Participant by both Participating Companies reduced under the
terms of the Deferral Election, Bonus Deferral Election and/or Performance Share
Deferral Election and the Plan as if the transfer or termination and
reemployment had not occurred; provided that, as provided in Section 3.2(c), no
amounts of Base Salary shall be withheld to the extent they are attributable to
any portion of the Plan Year during which such Participant is not receiving Base
Salary as an Eligible Executive of a Participating Company.

      3.4 TERMINATION UNDER SEVERANCE ARRANGEMENT. Notwithstanding the
foregoing, a Participant eligible to participate in a severance plan or
arrangement sponsored by a Participating Company which provides for a lump-sum
severance payment upon termination of employment may elect, on such form and at
such time and in such manner as shall be prescribed by the Plan Administrator,
to reduce the amount of a lump-sum severance payment to which the Participant
may become entitled under such plan or arrangement. The amount of such reduction
shall not exceed the dollar amount by which the Participant's deferred Base
Salary for the Plan Year in which such termination occurs would not have been
made at the time of termination of employment, and the amount so elected shall
for all purposes be treated as Deferral Contributions made under the Plan.

      3.5 VESTING. A Participant shall at all times be fully vested in the
Participant's Deferral Contributions and all investment earnings attributable
thereto.

      3.6 DEBITING OF DISTRIBUTIONS. As of each Valuation Date, the Plan
Administrator shall debit each Participant's Account for any amount distributed
from such Account since the immediately preceding Valuation Date.

                                      -14-



                                   ARTICLE IV
                DETERMINATION AND CREDITING OF INVESTMENT RETURN

      4.1 GENERAL INVESTMENT PARAMETERS. The rate of return credited to each
Participant's Account shall be determined on the basis of the Investment
Option(s) selected by the Participant. The terms of this selection process and
the manner in which investment return is credited are set forth in this Article
IV.

      4.2 PARTICIPANT DIRECTION OF DEEMED INVESTMENTS. Each Participant
generally may direct that his or her Deferral Contributions for each Plan Year
shall be deemed invested in the Stock/Interest Option, the Mutual Fund Option or
both, and then may select among the options offered within that selection. The
Participant may make a separate election for his or her deferred Base Salary and
deferred Annual Bonus for each Plan Year and deferred Performance Share Payment
for each Performance Period. Notwithstanding the foregoing, the Mutual Fund
Option may be elected only by Participants who, as of June 30 of the year in
which the Investment Election is made, satisfy the BellSouth stock ownership
target then applicable to each such Participant under BellSouth's executive
stock ownership guidelines. Once made, a Participant may not revoke an election
between the Stock/Interest Option and the Mutual Fund Option.

            (a) NATURE OF PARTICIPANT DIRECTION. A Participant's election of the
deemed investments shall be for the sole purpose of determining the rate of
return to be credited to such Participant's Account for such Plan Year, and
shall not be treated or interpreted in any manner whatsoever as a requirement or
direction to actually invest assets in Company Stock, an interest income fund, a
mutual fund or any other investment media. The Plan, as an unfunded,
nonqualified deferred compensation plan, at no time shall have any actual
investment of assets relative to the benefits or Accounts hereunder.

            (b) INVESTMENT OF CONTRIBUTIONS. In conjunction with completing each
of a Deferral Election, Bonus Deferral Election and/or Performance Share
Deferral Election for a Plan Year, an Eligible Executive shall complete a
separate Investment Election in which he or she elects the whole percentages of
the amount deferred under such Deferral Election, such Bonus Deferral Election
or such Performance Share Deferral Election (as applicable) to be deemed
invested in (i) the Stock/Interest Option, and/or (ii) if available with respect
to the executive, the Mutual Fund Option; provided, the combined percentages
allocated to the Stock/Interest Option and the Mutual Fund Option shall equal
one hundred percent (100%). Once a Participant makes an election between the
Stock/Interest Option and the Mutual Fund Option for a Plan Year, he or she may
not change such election. If the Eligible Executive elects the Stock/Interest
Option, he or she must then select his or her investment mix as described in
subsection (i) hereinbelow; and if the Eligible Executive elects the Mutual Fund
Option, he or she must then select his or her investment mix as described in
subsection (ii) hereinbelow.

                  (i) STOCK UNIT OPTION AND/OR INTEREST INCOME OPTION. An
Eligible Executive who selects the Stock/Interest Option with respect to either
his or her deferred Base

                                      -15-



Salary, deferred Annual Bonus or deferred Performance Share Payment shall
specify any whole percentage to be invested in the Stock Unit Option and any
whole percentage to be invested in the Interest Income Option, such that the
total of the two percentages equals the total percentage of his deferred amount
allocated to the Stock/Interest Option.

                  (ii) MUTUAL FUND OPTION. An Eligible Executive, who as of June
30 of the year during which the Investment Election is made satisfies
BellSouth's stock ownership target applicable to such Executive under
BellSouth's executive stock ownership guidelines, and who selects the Mutual
Fund Option with respect to either his or her deferred Base Salary, deferred
Annual Bonus or deferred Performance Share Payment, shall specify the whole
percentage of such Deferral Contributions that will be deemed invested in each
Mutual Fund. Within the Mutual Fund Option, a Participant may make subsequent
Investment Elections to change the percentage of such Deferral Contributions
that will be deemed invested in each Mutual Fund, and any such election shall
apply to all such Deferral Contributions credited to his or her Account after
the election becomes effective. Any such election shall be effective on or as
soon as administratively practicable after the Plan Administrator's receipt of
the election. All such Investment Elections shall be (A) made in whole
percentages, (B) effected at the 4:00 p.m. Eastern Time closing price of the
applicable Mutual Fund on each applicable Valuation Date, and (C) subject to
such additional rules as the Plan Administrator may prescribe.

            (c) INVESTMENT OF EXISTING ACCOUNT BALANCES.

                  (i) STOCK/INTEREST OPTION. A Participant with all or part of
his or her Account deemed invested in the Stock/Interest Option may not make an
Investment Election (i) changing all or any portion of such deemed investment
among investment alternatives within the Stock/Interest Option, or (ii)
transferring all or any portion of such deemed investments to the Mutual Fund
Option. Thus, once an amount is deemed invested in the Stock/Interest Option, it
shall continue to be so invested until such amount is distributed.

                  (ii) MUTUAL FUND OPTION. A Participant with all or part of his
or her Account deemed invested in the Mutual Fund Option may make subsequent
Investment Elections changing the percentage of that portion of his or her
existing Account balance that will be deemed invested in each Mutual Fund. Any
such election shall be effected at the 4:00 p.m. Eastern Time closing price of
the applicable Mutual Fund on the Valuation Date that is coincident with or as
soon as administratively practicable after the Plan Administrator's receipt of
such election. All such Investment Elections shall be made in whole percentages,
and subject to such additional rules as the Plan Administrator may prescribe. No
Investment Election may be made changing a deemed investment from the Mutual
Fund Option to the Stock/Interest Option.

            (d) INVESTMENT SUBACCOUNTS. For the sole purpose of tracking a
Participant's Investment Elections and calculating deemed investment earnings
attributable to a Participant's Account for a Plan Year pursuant to the terms of
this Article IV, the Plan Administrator shall establish and maintain for such
Participant for such Plan Year a Stock Unit Subaccount, an Interest Income
Subaccount and a Mutual Fund Subaccount, as necessary, the total of which shall
equal such Participant's Account for such Plan Year.

                                      -16-



      4.3 STOCK UNIT OPTION.

            (a) STOCK UNIT SUBACCOUNT. To the extent an Eligible Executive makes
an Investment Election in accordance with Section 4.2 to have his or her
Deferral Contributions for a Plan Year deemed to be invested in the Stock Unit
Option, the Participant's Stock Unit Subaccount shall be credited (subject to
the adjustment described in subsection 3.2(g), if applicable) with the
applicable portion of each such Deferral Contribution at the time such Deferral
Contribution is credited to the Participant's Account under Section 3.2(g), with
a number of Stock Units equal to the number of full and fractional shares of
Company Stock that could have been purchased with such portion of the Eligible
Executive's Deferral Contribution at the average of the high and low sales
prices of one share of Company Stock on the New York Stock Exchange for the last
Business Day of each of the three (3) calendar months immediately preceding the
first day of such Plan Year.

            (b) CASH DIVIDENDS. As of each date on which BellSouth has paid a
cash dividend on Company Stock, the number of Stock Units credited to a
Participant's Stock Unit Subaccount shall be increased by a number of additional
Stock Units equal to the quotient of (i) the amount of dividends that would have
been paid on the number of shares of Company Stock equivalent to the number of
Stock Units credited to such subaccount on such dividend payment date, divided
by (ii) the 4:00 p.m. Eastern Time closing price of Company Stock on the New
York Stock Exchange on such dividend payment date.

            (c) ADJUSTMENTS. In the event of any change in outstanding shares of
Company Stock, by reclassification, recapitalization, merger, consolidation,
spinoff, combination, exchange of shares, stock split, reverse stock split or
otherwise, or in the event of the payment of a stock dividend on Company Stock,
or in the event of any other increase or decrease in the number of outstanding
shares of Company Stock, other than the issuance of shares for value received by
BellSouth or the redemption of shares for value, the Plan Administrator shall
adjust the number and/or form of Stock Units in the manner it deems appropriate
in its reasonable judgment to reflect such event, including substituting or
adding publicly traded shares of companies other than the Company as a basis for
determining Stock Units. The Plan Administrator similarly shall make such
adjustments as it deems are appropriate in its reasonable judgment in the form,
including the basis of measurement, of Stock Units in the event all shares of
Company Stock cease for any reason to be outstanding or to be actively traded on
the New York Stock Exchange. In the event the Plan Administrator determines in
its reasonable judgment that it would not be possible to appropriately reflect
an event under this paragraph (c) by adjusting the number and/or form of Stock
Units, the Plan Administrator shall establish a special Valuation Date
appropriate to such event for all Stock Unit Subaccounts and shall cause such
subaccounts, as so valued, automatically to be converted into Interest Income
Subaccounts, which thereafter shall be subject to Section 4.4.

                                      -17-



      4.4 INTEREST INCOME OPTION.

            (a) INTEREST INCOME SUBACCOUNT. To the extent that an Eligible
Executive makes an Investment Election in accordance with Section 4.2 to have
his or her Deferral Contributions for a Plan Year deemed to be invested in the
Interest Income Option, the Participant's Interest Income Subaccount shall be
credited (subject to the adjustment described in subsection 3.2(g), if
applicable) with the applicable portion of each such Deferral Contribution at
the time such Deferral Contribution is credited to the Participant's Account
under Section 3.2(g).

            (b) CREDITING OF DEEMED INTEREST. As of each Valuation Date, the
Plan Administrator shall credit a Participant's Interest Income Subaccounts with
the amount of earnings applicable thereto for the period since the immediately
preceding Valuation Date. Such crediting of earnings for each Interest Income
Subaccount shall be effected, as follows:

                  (i) AMOUNT INVESTED. The Plan Administrator shall determine
      the amount of (A) in the case of an Interest Income Subaccount established
      in connection with a Deferral Election or Bonus Deferral Election for the
      Plan Year, or established in connection with a Performance Share Deferral
      Election for the Performance Period, such Participant's Deferral
      Contributions credited to such Participant's Interest Income Subaccount as
      of the immediately preceding Valuation Date, plus any investment earnings
      credited to such Participant's Interest Income Subaccount since the
      immediately preceding Valuation Date; and (B) in the case of an Interest
      Income Subaccount for a prior Plan Year, the balance of such Participant's
      Interest Income Subaccount as of the immediately preceding Valuation Date,
      plus any investment earnings credited to such Participant's Interest
      Income Subaccount since the immediately preceding Valuation Date, minus
      the amount distributed from such Participant's Interest Income Subaccount
      since the immediately preceding Valuation Date; and

                  (ii) DETERMINATION OF AMOUNT. The Plan Administrator then
      shall apply the Credited Interest Rate for such Plan Year to such
      Participant's adjusted Interest Income Subaccount (as determined in
      subparagraph (i) hereof), and the total amount of investment earnings
      resulting therefrom shall be credited to such Participant's Interest
      Income Subaccount as of such Valuation Date.

      4.5 MUTUAL FUND OPTION.

            (a) MUTUAL FUNDS. From time to time, the Plan Administrator shall
select two (2) or more Mutual Funds for purposes of determining the rate of
return on amounts deemed invested in the Mutual Fund Option in accordance with
the terms of the Plan. The Plan Administrator may change, add or remove Mutual
Funds on a prospective basis at any time and in any manner it deems appropriate.

            (b) MUTUAL FUND SUBACCOUNT. To the extent that an Eligible Executive
makes an Investment Election in accordance with Section 4.2 to have his or her
Deferral Contributions for a Plan Year deemed to be invested in the Mutual Fund
Option, the Participant's

                                      -18-



Mutual Fund Subaccount shall be credited with the applicable portion of each
such Deferral Contribution at the time such Deferral Contribution is credited to
the Participant's Account under Section 3.2(g), with the investment in each
Mutual Fund based on the 4:00 p.m. Eastern Time closing price of the Mutual Fund
on such crediting date.

            (c) CREDITING OF EARNINGS. As of each Valuation Date, the Plan
Administrator shall determine the value of a Participant's Mutual Fund
Subaccount (as well as the earnings and/or losses thereof) by valuing the deemed
investments in the Mutual Funds as if such subaccount actually were invested
therein.

      4.6 GOOD FAITH VALUATION BINDING. In determining the value of Accounts,
the Plan Administrator shall exercise its best judgment, and all such
determinations of value (in the absence of bad faith) shall be binding upon all
Participants and their Beneficiaries.

      4.7 ERRORS AND OMISSIONS IN ACCOUNTS. If an error or omission is
discovered in the Account of a Participant or in the amount of a Participant's
Deferral Contributions, the Plan Administrator, in its sole discretion, shall
cause appropriate, equitable adjustments to be made as soon as administratively
practicable following the discovery of such error or omission.

                                      -19-



                                    ARTICLE V
                           PAYMENT OF ACCOUNT BALANCES

      5.1 BENEFIT AMOUNTS.

            (a) BENEFIT ENTITLEMENT. As the benefit under the Plan, each
Participant (or Beneficiary) shall be entitled to receive the total amount of
the Participant's Accounts, determined as of the most recent Valuation Date, and
payable at such times and in such forms as described in this Article V.

            (b) VALUATION OF BENEFIT. For purposes hereof, each Account of a
Participant as of any Valuation Date shall be equal to the total value such
Participant's Stock Unit Subaccount, Interest Income Subaccount and Mutual Fund
Subaccount.

            (c) CONVERSION OF STOCK UNITS INTO DOLLARS. For purposes of
converting some or all of a Participant's Stock Units into a dollar amount in
valuing the Participant's Accounts as of any Valuation Date, the value of each
Stock Unit shall be equal to the average of the high and low sales prices of one
share of Company Stock on the New York Stock Exchange for the last Business Day
of each of the three (3) months of the calendar quarter most recently completed
on or prior to such Valuation Date.

      5.2 ELECTIONS OF TIMING AND FORM. In conjunction with, and at the time of,
completing a Deferral Election and/or Bonus Deferral Election for each Plan
Year, or a Performance Share Deferral Election for each Performance Share Award,
an Eligible Executive shall select the timing and form of the distribution that
will apply to the Account for such Eligible Executive's Deferral Contributions
(and deemed investment earnings attributable thereto) for such Plan Year. The
terms applicable to this selection process are as follows:

            (a) TIMING. For a Participant's Account for each Plan Year, such
Participant may elect that distribution will be made or commence as of any
January 1 following the Plan Year of deferral; provided, a Participant may not
select a benefit payment or commencement date for such Account that is (i)
earlier than (A) in the case of a Deferral Election, the second January 1
following the end of the Plan Year for which the deferral is made, or (B) in the
case of a Bonus Deferral Election or a Performance Share Deferral Election, the
third January 1 following the end of the Plan Year for which the deferral is
made; or (ii) later than the twentieth (20th) January 1 following the end of the
Plan Year of deferral.

                                      -20-



            (b) FORM OF DISTRIBUTION. For a Participant's Account for each Plan
Year, such Participant may elect that distribution will be paid in one of the
following forms:

                  (i) a single lump-sum cash payment; or

                  (ii) substantially equal annual installments (adjusted for
      investment earnings between payments in the manner described in Article
      IV) over a period of two (2) to ten (10) years.

            (c) MULTIPLE SELECTIONS. An Eligible Executive may select a
different benefit payment or commencement date and/or a different form of
distribution with respect to his or her Account for each Plan Year. For ease of
administration, the Plan Administrator may combine Accounts and subaccounts of a
Participant to which the same benefit payment/commencement date and the same
form of distribution apply.

      5.3 BENEFIT PAYMENTS TO A PARTICIPANT.

            (a) TIMING. A Participant shall receive or begin receiving a
distribution of each of his or her Accounts as of the earlier of (i) the January
1 selected by such Participant with respect to each such Account pursuant to the
terms of Section 5.2(a); or (ii) the January 1 immediately following the date
that such Participant's employment with BellSouth and all Affiliates ends for
any reason, unless the Participant returns to employment with BellSouth or one
of the Affiliates before such January 1; provided, however, that with respect to
a Bonus Deferral Election or Performance Share Deferral Election of a
Participant whose employment has so terminated, distribution shall be made or
begin no sooner than the January 1 immediately following the date on which the
Annual Bonus or Performance Share Payment is payable. An amount payable "as of"
any January 1 shall be made as soon as practicable after such January 1 and,
unless extenuating circumstances arise, no later than January 31.

            (b) FORM OF DISTRIBUTION. A Participant shall receive or begin
receiving a distribution of each of his or her Accounts in cash in the form
selected by such Participant with respect to such Account pursuant to the terms
of Section 5.2(b).

            (c) VALUATION OF SINGLE LUMP-SUM PAYMENTS. The amount of a
Participant's single lump-sum distribution of any of his or her Accounts as of
any applicable January 1 shall be equal to the value of such Account as of the
Valuation Date immediately preceding the date on which such distribution is
paid.

            (d) VALUATION OF INSTALLMENT PAYMENTS. For purposes of determining
the amount of any installment payment to be paid as of a January 1 from an
Account, the following shall apply:

                  (i) for any amount of such Account attributable to an Interest
      Income Subaccount as of the immediately preceding Valuation Date, such
      amount shall be

                                      -21-



      divided by the number of remaining installments to be paid from such
      Account (including the current installment);

                  (ii) for any portion of such Account attributable to a Stock
      Unit Subaccount as of the immediately preceding Valuation Date, the total
      number of Stock Units constituting such portion shall be divided by the
      number of remaining installments to be paid from such Account (including
      the current installment), and the resulting number of Stock Units shall be
      converted into a dollar amount (pursuant to the terms of Section 5.1(c))
      as of such Valuation Date; and

                  (iii) for any amount of such Account attributable to a Mutual
      Fund Subaccount as of the immediately preceding Valuation Date, such
      amount shall be divided by the number of remaining installments to be paid
      from such Account (including the current installment).

      5.4 DEATH BENEFITS.

            (a) GENERAL. If a Participant dies before receiving the entire
amount of his or her benefit under the Plan, such Participant's Beneficiary
shall receive distribution of amounts remaining in the Participant's Accounts in
the form, as elected by the Participant on a Beneficiary designation form
described in Section 5.6, of either:

                  (i) a single lump-sum cash payment of the entire balance in
      the Participant's Accounts as of the January 1 immediately following the
      date of the Participant's death; or

                  (ii) (A) for Accounts with respect to which distribution has
      not commenced under Section 5.2 at the time of the Participant's death,
      substantially equal annual installments (adjusted for investment earnings
      between payments in the manner described in Article IV) over a period of
      two (2) to ten (10) years, commencing as of the January 1 immediately
      following the Participant's death; and (B) for Accounts with respect to
      which distribution has commenced in the form of installments described in
      Section 5.2(b)(ii) at the time of the Participant's death, continuation of
      such installment payment schedule.

An amount payable "as of" any January 1 shall be made as soon as practicable
after such January 1 and, unless extenuating circumstances arise, no later than
January 31.

            (b) VALUATION. The valuation rules described in subsections 5.3(c)
and 5.3(d) shall apply to payments described in this Section 5.4.

      5.5 WITHDRAWALS.

            (a) HARDSHIP WITHDRAWALS. Upon receipt of an application for a
hardship withdrawal and the Plan Administrator's decision, made in its sole
discretion, that a Participant

                                      -22-



has suffered a Financial Hardship, the Plan Administrator shall cause the
payment of a distribution to such Participant. Such distribution shall be paid
in a single-sum payment in cash as soon as administratively feasible after the
Plan Administrator determines that the Participant has incurred a Financial
Hardship. The amount of such single-sum payment shall be limited to the amount
reasonably necessary to meet the Participant's requirements resulting from the
Financial Hardship. The amount of such distribution shall reduce the
Participant's Account balance as provided in Section 3.6.

            (b) WITHDRAWALS WITH FORFEITURE. Notwithstanding any other
provisions of this Article V to the contrary, a Participant may elect, at any
time prior to the distribution of his or her entire benefit hereunder, to
withdraw all or a portion of (i) the remaining amount credited to one or more of
his or her Accounts, determined as of the Valuation Date on which such
distribution is processed, in twenty-five percent (25%) increments; plus (ii)
the amount of Deferral Contributions made since such Valuation Date. Such
distribution shall be made in the form of a single-sum payment in cash, as
prescribed in Section 5.2(b)(i), as soon as administratively feasible after the
date of the Participant's election under this subsection (b). At the time such
distribution is made, an amount equal to ten percent (10%) of the amount
distributed shall be permanently and irrevocably forfeited (and, if the
distribution request is more than ninety percent (90%) of such Participant's
Account, the forfeiture amount shall be deducted from his or her distribution
amount to the extent there otherwise will be an insufficient remaining Account
balance from which to deduct this forfeiture). In addition, the Participant
receiving such distribution shall immediately cease to make Deferral
Contributions with respect to a Deferral Election for the Plan Year in which
such withdrawal occurs, and any Bonus Deferral Election and/or Performance Share
Deferral Election with respect to such Plan Year shall be disregarded, and such
Participant shall not be eligible to resume Deferral Contributions until the
first day of the Plan Year coinciding with or immediately following the one year
anniversary of such distribution.

      5.6 BENEFICIARY DESIGNATION.

            (a) GENERAL. A Participant shall designate a Beneficiary or
Beneficiaries for all of his or her Accounts by completing the form prescribed
for this purpose for the Plan by the Plan Administrator and submitting such form
as instructed by the Plan Administrator. Once a Beneficiary designation is made,
it shall continue to apply until and unless such Participant makes and submits a
new Beneficiary designation form for this Plan.

            (b) NO DESIGNATION OR DESIGNEE DEAD OR MISSING. In the event that:

                (i) a Participant dies without designating a Beneficiary;

                (ii) the Beneficiary designated by a Participant is not
      surviving or in existence when payments are to be made or commence to such
      designee under the Plan, and no contingent Beneficiary, surviving or in
      existence, has been designated; or

                                      -23-



                  (iii) the Beneficiary designated by a Participant cannot be
      located by the Plan Administrator within 1 year from the date benefit
      payments are to be made or commence to such designee;

then, in any of such events, the Beneficiary of such Participant shall be the
Participant's surviving spouse, if any can then be located, and if not, the
estate of the Participant, and the entire balance in the Participant's Accounts
shall be paid to such Beneficiary in the form of a single lump-sum cash payment
described in Section 5.4(a)(i).

            (c) DEATH OF BENEFICIARY. If a Beneficiary who survives the
Participant, and to whom payment of Plan benefits commences, dies before
complete distribution of the Participant's Accounts, the entire balance in such
Accounts shall be paid to the estate of such Beneficiary in the form of a single
lump-sum cash payment as of the January 1 immediately following such
Beneficiary's death. An amount payable "as of" any January 1 shall be made as
soon as practicable after such January 1 and, unless extenuating circumstances
arise, no later than January 31. The valuation rules described in subsection
5.3(c) shall apply to any payments described in this subsection 5.6(c).

      5.7 TAXES. If the whole or any part of any Participant's or Beneficiary's
benefit hereunder shall become subject to any estate, inheritance, income,
employment or other tax which a Participating Company shall be required to pay
or withhold, the Participating Company shall have the full power and authority
to withhold and pay such tax out of any monies or other property in its hand for
the account of the Participant or Beneficiary whose interests hereunder are so
affected. Prior to making any payment, the Participating Company may require
such releases or other documents from any lawful taxing authority as it shall
deem necessary.

                                      -24-



                                   ARTICLE VI
                                     CLAIMS

      6.1 INITIAL CLAIM. Claims for benefits under the Plan may be filed with
the Plan Administrator on forms or in such other written documents, as the Plan
Administrator may prescribe. The Plan Administrator shall furnish to the
claimant written notice of the disposition of a claim within 90 days after the
application therefor is filed. In the event the claim is denied, the notice of
the disposition of the claim shall provide the specific reasons for the denial,
citations of the pertinent provisions of the Plan, and, where appropriate, an
explanation as to how the claimant can perfect the claim and/or submit the claim
for review.

      6.2 APPEAL. Any Participant or Beneficiary who has been denied a benefit
shall be entitled, upon request to the Plan Administrator, to appeal the denial
of his or her claim. The claimant (or his or her duly authorized representative)
may review pertinent documents related to the Plan and in the Plan
Administrator's possession in order to prepare the appeal. The request for
review, together with written statement of the claimant's position, must be
filed with the Plan Administrator no later than 60 days after receipt of the
written notification of denial of a claim provided for in Section 6.1. The Plan
Administrator's decision shall be made within 60 days following the filing of
the request for review. If unfavorable, the notice of the decision shall explain
the reasons for denial and indicate the provisions of the Plan or other
documents used to arrive at the decision.

      6.3 SATISFACTION OF CLAIMS. The payment of the benefits due under the Plan
to a Participant or Beneficiary shall discharge the Participating Company's
obligations under the Plan, and neither the Participant nor the Beneficiary
shall have any further rights under the Plan upon receipt by the appropriate
person of all benefits. In addition, (i) if any payment is made to a Participant
or Beneficiary with respect to benefits described in the Plan from any source
arranged by BellSouth or a Participating Company including, without limitation,
any fund, trust, insurance arrangement, bond, security device, or any similar
arrangement, such payment shall be deemed to be in full and complete
satisfaction of the obligation of the Participating Company under the Plan to
the extent of such payment as if such payment had been made directly by such
Participating Company; and (ii) if any payment from a source described in clause
(i) shall be made, in whole or in part, prior to the time payment would be made
under the terms of the Plan, such payment shall be deemed to satisfy such
Participating Company's obligation to pay Plan benefits beginning with the
benefit which would next become payable under the Plan and continuing in the
order in which benefits are so payable, until the payment from such other source
is fully recovered. The Plan Administrator or such Participating Company, as a
condition to making any payment, may require such Participant or Beneficiary to
execute a receipt and release therefor in such form as shall be determined by
the Plan Administrator or the Participating Company. If receipt and release is
required but the Participant or Beneficiary (as applicable) does not provide
such receipt and release in a timely enough manner to permit a timely
distribution in accordance with the general timing of distribution provisions in
the Plan, the payment of any affected distribution may be delayed until the Plan
Administrator or the Participating Company receives a

                                      -25-



proper receipt and release.

                                      -26-



                                   ARTICLE VII
                                 SOURCE OF FUNDS

      Each Participating Company shall provide the benefits described in the
Plan from its general assets. However, to the extent that funds in one or more
trusts, or other funding arrangement(s), allocable to the benefits payable under
the Plan are available, such assets may be used to pay benefits under the Plan.
If such assets are not sufficient or are not used to pay all benefits due under
the Plan, then the appropriate Participating Company shall have the obligation,
and the Participant or Beneficiary, who is due such benefits, shall look to such
Participating Company to provide such benefits. No Participant or Beneficiary
shall have any interest in the assets of any trust, or other funding
arrangement, or in the general assets of the Participating Companies other than
as a general, unsecured creditor. Accordingly, a Participating Company shall not
grant a security interest in the assets held by the trust in favor of the
Participants, Beneficiaries or any creditor.

                                      -27-



                                  ARTICLE VIII
                               PLAN ADMINISTRATION

      8.1 ACTION BY THE PLAN ADMINISTRATOR.

            (a) INDIVIDUAL ADMINISTRATOR. If the Plan Administrator is an
individual, such individual shall act and record his or her actions in writing.
Any matter concerning specifically such individual's own benefit or rights
hereunder shall be determined by the Board or its designee.

            (b) ADMINISTRATIVE COMMITTEE. If the Plan Administrator is a
committee, action of the Plan Administrator may be taken with or without a
meeting of committee members; provided, action shall be taken only upon the vote
or other affirmative expression of a majority of the committee members qualified
to vote with respect to such action. If a member of the committee is a
Participant or Beneficiary, such member shall not participate in any decision
which solely affects his or her own benefit under the Plan. For purposes of
administering the Plan, the Plan Administrator shall choose a secretary who
shall keep minutes of the committee's proceedings and all records and documents
pertaining to the administration of the Plan. The secretary may execute any
certificate or any other written direction on behalf of the Plan Administrator.

      8.2 RIGHTS AND DUTIES OF THE PLAN ADMINISTRATOR. The Plan Administrator
shall administer the Plan and shall have all powers necessary to accomplish that
purpose, including (but not limited to) the following:

            (a) to construe, interpret and administer the Plan;

            (b) to make determinations required by the Plan, and to maintain
records regarding Participants' and Beneficiaries' benefits hereunder;

            (c) to compute and certify to Participating Companies the amount and
kinds of benefits payable to Participants and Beneficiaries, and to determine
the time and manner in which such benefits are to be paid;

            (d) to authorize all disbursements by a Participating Company
pursuant to the Plan;

            (e) to maintain all the necessary records of the administration of
the Plan;

            (f) to make and publish such rules and procedures for the regulation
of the Plan as are not inconsistent with the terms hereof;

            (g) to delegate to other individuals or entities from time to time
the performance of any of its duties or responsibilities hereunder; and

                                      -28-



            (h) to hire agents, accountants, actuaries, consultants and legal
counsel to assist in operating and administering the Plan.

The Plan Administrator shall have the exclusive right to construe and interpret
the Plan, to decide all questions of eligibility for benefits and to determine
the amount of such benefits, and its decisions on such matters shall be final
and conclusive on all parties.

      8.3 BOND; COMPENSATION. The Plan Administrator and (if applicable) its
members shall serve as such without bond and without compensation for services
hereunder. All expenses of the Plan Administrator shall be paid by the
Participating Companies.

                                      -29-



                                   ARTICLE IX
                            AMENDMENT AND TERMINATION

      9.1 AMENDMENTS. Subject to Section 9.3, the Board shall have the right, in
its sole discretion, to amend the Plan in whole or in part at any time and from
time to time. In addition, the Plan Administrator shall have the right, in its
sole discretion, to amend the Plan at any time and from time to time so long as
such amendment is not of a material nature.

      9.2 TERMINATION OF PLAN. Subject to Section 9.3, BellSouth reserves the
right to discontinue and terminate the Plan at any time, for any reason. Any
action to terminate the Plan shall be taken by the Board and such termination
shall be binding on all Participating Companies, Participants and Beneficiaries.

      9.3 LIMITATION ON AUTHORITY. Except as otherwise provided in this Section
9.3, no contractual right created by and under any Deferral Election, Bonus
Deferral Election or Performance Share Deferral Election made prior to the
effective date of any amendment or termination shall be abrogated by any
amendment or termination of the Plan, absent the express, written consent of the
Participant who made the Deferral Election, Bonus Deferral Election or
Performance Share Deferral Election.

            (a) PLAN AMENDMENTS. The limitation on authority described in this
Section 9.3 shall not apply to any amendment of the Plan which is reasonably
necessary, in the opinion of counsel, (i) to preserve the intended income tax
consequences of the Plan described in Section 10.1, (ii) to preserve the status
of the Plan as an unfunded, nonqualified deferred compensation plan for the
benefit of a select group of management or highly compensated employees and not
subject to the requirements of Part 2, Part 3 and Part 4 of Title I of ERISA, or
(iii) to guard against other material adverse impacts on Participants and
Beneficiaries, and which, in the opinion of counsel, is drafted primarily to
preserve such intended consequences, or status, or to guard against such adverse
impacts.

            (b) PLAN TERMINATION. The limitation on authority described in this
Section 9.3 shall not apply to any termination of the Plan as the result of a
determination that, in the opinion of counsel, (i) Participants and
Beneficiaries generally are subject to federal income taxation on Deferral
Contributions or other amounts in Participant Accounts prior to the time of
distribution of amounts under the Plan, or (ii) the Plan is generally subject to
Part 2, Part 3 or Part 4 of Title I of ERISA, but in either case only if such
termination is reasonably necessary, in the opinion of counsel, to guard against
material adverse impacts on Participants and Beneficiaries, or BellSouth or
Participating Companies. Upon such termination, the entire amount in each
Participant's Accounts shall be distributed in a single lump-sum distribution as
soon as practicable after the date on which the Plan is terminated. In such
event, the Plan Administrator shall declare that the date of termination (or, if
such day is not a Business Day, the last Business Day immediately preceding such
day) shall be a Valuation Date and all distributions shall be made based on the
value of the Accounts as of such Valuation Date.

                                      -30-



            (c) OPINIONS OF COUNSEL. In each case in which an opinion of counsel
is contemplated in this Section 9.3, such opinion shall be in writing and
delivered to the Board, rendered by a nationally recognized law firm selected or
approved by the Board.

                                      -31-



                                    ARTICLE X
                                  MISCELLANEOUS

      10.1 TAXATION. It is the intention of BellSouth that the benefits payable
hereunder shall not be deductible by the Participating Companies nor taxable for
federal income tax purposes to Participants or Beneficiaries until such benefits
are paid by the Participating Company to such Participants or Beneficiaries.
When such benefits are so paid, it is the intention of the Participating
Companies that they shall be deductible by the Participating Companies under
Code Section 162.

      10.2 WITHHOLDING. All payments made to a Participant or Beneficiary
hereunder shall be reduced by any applicable federal, state or local withholding
or other taxes or charges as may be required under applicable law.

      10.3 NO EMPLOYMENT CONTRACT. Nothing herein contained is intended to be
nor shall be construed as constituting a contract or other arrangement between a
Participating Company and any Participant to the effect that the Participant
will be employed by the Participating Company or continue to be an employee for
any specific period of time.

      10.4 HEADINGS. The headings of the various articles and sections in the
Plan are solely for convenience and shall not be relied upon in construing any
provisions hereof. Any reference to a section shall refer to a section of the
Plan unless specified otherwise.

      10.5 GENDER AND NUMBER. Use of any gender in the Plan will be deemed to
include all genders when appropriate, and use of the singular number will be
deemed to include the plural when appropriate, and vice versa in each instance.

      10.6 ASSIGNMENT OF BENEFITS. The right of a Participant or Beneficiary to
receive payments under the Plan may not be anticipated, alienated, sold,
assigned, transferred, pledged, encumbered, attached or garnished by creditors
of such Participant or Beneficiary, except by will or by the laws of descent and
distribution and then only to the extent permitted under the terms of the Plan.

      10.7 LEGALLY INCOMPETENT. The Plan Administrator, in its sole discretion,
may direct that payment be made to an incompetent or disabled person, for
whatever reason, to the guardian of such person or to the person having custody
of such person, without further liability on the part of a Participating Company
for the amount of such payment to the person on whose account such payment is
made.

      10.8 ENTIRE DOCUMENT. This Plan document sets forth the entire Plan and
all rights and limits. Except for a formal amendment hereto, no document shall
modify the Plan or create any additional rights or benefits.

      10.9 GOVERNING LAW. The Plan shall be construed, administered and governed
in all respects in accordance with applicable federal law (including ERISA) and,
to the extent not

                                      -32-



preempted by federal law, in accordance with the laws of the State of Georgia.
If any provisions of this instrument shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.

                                      -33-



                                    EXHIBIT A

                             Participating Companies
                             (as of January 1, 2005)



            Participating Company Names                                 Effective Date
- -------------------------------------------------                       ---------------
                                                                     
1. BellSouth Advertising & Publishing Corporation                       January 1, 2002

2. BellSouth Corporation                                                January 1, 2002

3. BellSouth D.C., Inc.                                                 January 1, 2002

4. BellSouth International, Inc.                                        January 1, 2002

5. BellSouth Telecommunications, Inc.                                   January 1, 2002


                                    Exhibit A

                                       A-1

EX-10.R

                                                                     EXHIBIT 10r

                                      2004

                   BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM

1.    BellSouth Corporation has established target stock ownership levels for
      all BellSouth executives. To meet the target, an executive must own stock
      with a MARKET VALUE equal to a multiple of his/her January 1 base pay, as
      defined below:

               BellSouth CEO               4   times base salary

               Band AA                     3.5 times base salary

               Band A                      3   times base salary

               Band BB                     2.5 times base salary

               Band B                      2   times base salary

               Band C                      1.5 times base salary

               Band D                      1   time base salary

      If an individual is initially promoted or hired into an executive position
      on or before April 1, the base salary at the time of the promotion/hire
      will be used to compute the target market value. An individual who is
      promoted or hired into an executive position after April 1 will not have a
      target established until the following year.

2.    Shares in the following categories will count toward achievement of the
      target market value:

            -     Direct ownership

            -     Shares in dividend reinvestment accounts

            -     Share equivalents from the BellSouth Stock Fund of the various
                  savings plans

            -     Shares held by brokers or banks and listed in street name

            -     Shares or stock units that have been deferred under a deferral
                  plan.
                  NOTE: SALARY DEFERRAL COMMITMENTS MADE DURING THE 4TH QUARTER
                  FOR THE FOLLOWING YEAR WILL BE INCLUDED IN 4TH QUARTER
                  OWNERSHIP. SHORT TERM DEFERRALS WILL BE INCLUDED IN 1ST
                  QUARTER OWNERSHIP WHEN ACTUAL SHORT TERM PAYMENTS ARE MADE.

            -     Shares owned by a trust, provided that the executive or his or
                  her spouse contributed the shares (or the money or other
                  property used by the trustee to purchase the shares) and also
                  holds the power to vote and dispose of the shares.

3.    Direct Ownership information will be obtained from the BellSouth transfer
      agent. Shares from Deferrals and Savings Plans will be reported from
      internal systems. Shares held in Street Name must be reported quarterly by
      the executive. As a convenience to the executive, a report from the
      executive's financial counselor regarding shares held in a broker account
      is acceptable.

      Attachment 1 ( Street Name) should be used to submit information on the
      TOTAL number of BellSouth shares listed in Street Name. This form should
      be provided to the Executive Compensation staff within 30 days following
      the end of each quarter.

            PLEASE NOTE: SHARES IN A BROKER ACCOUNT CANNOT BE CONFIRMED BY OUR
            INTERNAL SYSTEMS. SHARES NOT REPORTED BY THE EXECUTIVE OR HIS OR HER
            FINANCIAL COUNSELOR ON A QUARTERLY BASIS WILL NOT BE INCLUDED IN THE
            QUARTERLY OWNERSHIP CALCULATIONS.

     Attachment 2 (Disposition of Shares) should be used to report the Sale or
     Gift of shares that should no longer be considered in the executive's
     ownership.

     Attachment 3 is an example of the Stock Ownership Report that will be
     provided to each executive and his or her financial counselor following the
     compilation of all data. This report should be available 6-8 weeks
     following the end of each quarter. Fractional shares will not be included
     in the calculation.


                                      2004

                   BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM

4.    Quarterly, the Executive Compensation staff will calculate each
      executive's Total Market Value of Ownership. The total market value of
      ownership is equal to:

                  # Shares Owned at the                     End of Quarter
                   End of the Quarter          X             Stock Price

                  The stock price is the average of the high and low
                  stock prices for a 10-day period, consisting of the
                  last 5 trading days of the quarter and the first 5
                  trading days of the following quarter.

      Each April, a report of the average quarterly market value for the prior
      year for each executive will be provided to the Chairman and the Executive
      Nominating and Compensation Committee of the BellSouth Board.

5.    For every THREE SHARES by which the average variance from the target for
      the year exceeds zero, the executive is eligible to receive ONE SHARE OF
      OWNERSHIP RESTRICTED STOCK (Minimum - 25 Shares). The maximum grant value
      under this plan is based on current Officer Bands as follows:



                                               MAXIMUM ANNUAL
                 OFFICER BAND                    SHARE VALUE
                 ------------                  ---------------
                                            
                     CEO                         $ 100,000
                     AA                          $  87,500
                     A                           $  75,000
                     BB                          $  62,500
                     B                           $  50,000
                     C                           $  37,500
                     D                           $  25,000


6.    After an executive has received an initial grant of Ownership Restricted
      Stock (ORS) to recognize exceeding his/her ownership target, eligibility
      for future grants will be based on exceeding the annual target (base
      salary x ownership target multiple) plus the ownership previously
      recognized and rewarded, which equals the Total Target for Ownership
      Restricted Stock. The number of shares to reach target will be determined
      as follows:

       Number of Shares       =               Total Target for ORS
                                      -------------------------------------
       To Reach Target                Stock Price at the End of the Quarter

      THE NUMBER OF SHARES TO REACH THE TARGET MARKET VALUE WILL FLUCTUATE EACH
      QUARTER, BASED ON THE CHANGES IN STOCK PRICE.

      The average of the four quarters will determine the year's average
      variance from the target for Ownership Restricted Stock.

      Ownership Restricted Stock will vest 1/3 per year over a 3-year period.

7.    Once the annual ownership target is achieved, an executive is expected to
      maintain his/her ownership level. The ownership target must be exceeded to
      be eligible for additional Ownership Restricted Stock.

8.    All grants are subject to the discretion of the Executive Nominating and
      Compensation Committee of the BellSouth Corporation Board of Directors.

                                        2


                                      2004

                   BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM

BAND C OFFICER EXAMPLE:
                              Salary    =    $250,000
                            Multiple    =         1.5
             Annual Ownership Target    =    $375,000 (Salary x Multiple)
   Grant Value of Previous Ownership
                    Restricted Stock    =    $ 37,500
                    Total Target for
          Ownership Restricted Stock    =    $412,500 (Target + Previous ORS)




                                                      1ST QUARTER    2ND QUARTER   3RD QUARTER   4TH QUARTER
                                                      -----------    -----------   -----------   -----------
                                                                                  

STOCK PRICE                                             $ 25.00        $ 26.00       $ 27.00       $ 29.00

# SHARES TO TARGET FOR           $412,500 /
OWNERSHIP RESTRICTED STOCK       Stock Price             16,500         15,866        15,278        14,225

# OF SHARES OWNED                                        16,900         17,745        18,590        19,511

                                 # Shares Owned  -
VARIANCE FROM TARGET             # Shares to Target         400          1,879         3,312         5,286

YEAR'S AVERAGE
VARIANCE FROM TARGET             2,719                    400+1,879+3,312+5,286 / 4 = 2,719

OWNERSHIP RESTRICTED STOCK       906                      2,719 / 3 = 906


Executives who are below their ownership target should increase their ownership
in order to meet the target over time. For planning purposes, achievement of
approximately 20% of the target market value would be appropriate progress
during each year. It is expected that an executive will meet or exceed his/her
ownership target within 5 years of becoming an officer.

NOTE: NO BELLSOUTH STOCK MAY BE SOLD OR OTHERWISE DISPOSED OF UNLESS THE
      INVOLVED EXECUTIVE'S CURRENT OWNERSHIP TARGET HAS BEEN MET, AND WILL
      CONTINUE TO BE MET AFTER THE SALE, WITH THE FOLLOWING EXCEPTIONS:

 [X]  RESTRICTED STOCK MAY BE ISSUED NET OF TAXES;

 [X]  OPTION SHARES MAY BE TRADED FOR TAXES DUE IN A CASH STOCK OPTION EXERCISE;

 [X]  CURRENTLY OWNED SHARES MAY BE SWAPPED TO COVER THE OPTION PRICE AND TAXES
      DUE IN A STOCK SWAP STOCK OPTION EXERCISE;

 [X]  STOCK OPTIONS MAY BE EXERCISED USING A SALE TO COVER STOCK OPTION EXERCISE
      WHERE SHARES ARE SOLD TO COVER THE OPTION PRICE AND TAXES DUE. REMAINING
      SHARES MUST BE ISSUED AND HELD BY THE EXECUTIVE.

ALL STOCK TRANSACTIONS MUST BE CLEARED BY BELLSOUTH LEGAL PRIOR TO ENTERING INTO
A TRANSACTION. CONTACT MARCY BASS AT 404-249-3875 TO REQUEST CLEARANCE.

                                        3


                                                                    ATTACHMENT 1

                   BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM

                               BROKER STREET NAME
                          SHARES OWNED AT THE END OF :

   1ST QUARTER         2ND QUARTER       3RD QUARTER           4TH QUARTER
      2004                 2004              2004                 2004


THE BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM ALLOWS RECOGNITION OF SHARES
HELD IN BROKER STREET NAME BY EITHER A BELLSOUTH EXECUTIVE OR HIS/HER SPOUSE. TO
FOR SUCH OWNERSHIP TO BE CONSIDERED IN DETERMINING WHETHER AN EXECUTIVE HAS MET
HIS OR HER TARGET OWNERSHIP GUIDELINES, THE INFORMATION REQUESTED BELOW SHOULD
BE FORWARDED TO THE BELLSOUTH EXECUTIVE COMPENSATION STAFF WITHIN 30 DAYS AFTER
THE END OF EACH QUARTER. THE DATA SHOULD BE MAILED TO JEANNETTE BUTLER,
BELLSOUTH EXECUTIVE COMPENSATION, 1155 PEACHTREE STREET, ROOM 13K06, ATLANTA, GA
30309-3610.

BROKER NAME             ________________________________________________________

ADDRESS                 ________________________________________________________

                        ________________________________________________________

TELEPHONE NUMBER        ________________________________________________________

CLIENT ACCOUNT NUMBER(S)________________________________________________________

                        ________________________________________________________

I HEREBY CERTIFY THAT AS OF THE DATE INDICATED BELOW, THE FOLLOWING BELLSOUTH
SHARES ARE HELD IN THE ABOVE BROKER'S STREET NAME ACCOUNT(S) FOR THE CLIENT(S)
LISTED BELOW.



                                              TOTAL
       NAME                SSN           NUMBER OF SHARES           DATE
- -------------------  ----------------  --------------------  -------------------
                                                    

___________________  ________________  ____________________  ___________________
   (EXECUTIVE)
___________________  ________________  ____________________  ___________________
     (SPOUSE)
___________________  ________________  ____________________  ___________________
(JOINT OWNERSHIP)

                         TOTAL:        ____________________  ___________________

EXECUTIVE OR AUTHORIZED REPRESENTATIVE

_____________________   _________________________________    ___________________
       (PRINT)                     (SIGNATURE)                      (DATE)


                                        4


                                                                    ATTACHMENT 2

                   BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM

                              DISPOSITION OF SHARES
                                     DURING:

  1ST QUARTER          2ND QUARTER         3RD QUARTER           4TH QUARTER
     2004                 2004                2004                  2004

THE INFORMATION REQUESTED BELOW SHOULD BE FORWARDED TO THE BELLSOUTH EXECUTIVE
COMPENSATION STAFF WITHIN 30 DAYS OF THE DISPOSITION OF SHARES. THE DATA SHOULD
BE MAILED TO JEANNETTE BUTLER, BELLSOUTH EXECUTIVE COMPENSATION, 1155 PEACHTREE
STREET, ROOM 13K06, ATLANTA, GA 30309-3610.

I HEREBY CERTIFY THAT AS OF THE DATE INDICATED BELOW, THE FOLLOWING BELLSOUTH
SHARES HAVE BEEN SOLD OR GIFTED AND ARE NO LONGER IN THE POSSESSION OF THE OWNER
LISTED BELOW.



                                  NUMBER
 OWNER NAME        SSN          OF SHARES       DISPOSITION         DATE
- ------------   ------------   --------------   -------------   -----------------
                                                   
____________   ____________   ______________   _____________   _________________
(EXECUTIVE)
____________   ____________   ______________   _____________   _________________
  (SPOUSE)

                   TOTAL:     ______________   _____________   _________________

EXECUTIVE OR AUTHORIZED REPRESENTATIVE

___________________________   ______________________________   _________________
          (PRINT)                       (SIGNATURE)                (DATE)


                                        5

EX-10.T

                                                                     EXHIBIT 10t

    2005 NAMED EXECUTIVE OFFICER COMPENSATION TERM SHEET

      The 2005 salary and short-term incentive award for 2004 performance, of
BellSouth Corporation's named executive officers (as listed in the 2005 Proxy
Statement dated March 11, 2005), as approved by the Executive Nominating and
Compensation Committee of the Board of Directors, is set forth below:



                                                 2004 SHORT-TERM
 NAME AND PRINCIPAL POSITION     2005 SALARY          AWARD
- -----------------------------   ------------     ----------------
                                           
F. DUANE ACKERMAN               $ 1,365,000(1)      $  2,701,000
     Chairman of the Board,
     President and Chief
     Executive Officer
RONALD M. DYKES                 $   692,700         $  1,200,000
     Chief Financial Officer
MARK L. FEIDLER                 $   725,000         $  1,070,900
     Chief Operating Officer
RICHARD A. ANDERSON             $   638,400         $  1,010,000
     Vice Chairman - Planning
     and Administration
FRANCIS A. DRAMIS, JR.          $   616,000         $  1,001,400
     Chief Information, E-
     Commerce and Security
     Officer
(1) Unchanged since 2001.

EX-10.W1

                                                                   EXHIBIT 10w-1

                                 FIRST AMENDMENT
                                       TO
                            THE BELLSOUTH CORPORATION
                      DIRECTORS' COMPENSATION DEFERRAL PLAN

      THIS FIRST AMENDMENT is made to the BellSouth Corporation Directors'
Compensation Deferral Plan (the "Plan"), as amended and restated as of the 1st
day of May, 2001;

      WHEREAS, Section 10.1 of the Plan provides that the Board of Directors of
BellSouth shall have the right, in its sole discretion, to amend the Plan at any
time and, further, that the Plan Administrator shall have the right, in its sole
discretion, to amend the Plan at any time and from time to time so long as such
amendment is not of a material nature; and

      WHEREAS, Section 1.24 of the Plan in pertinent part designates the Chief
Executive Officer of BellSouth (the "CEO") as Plan Administrator of the Plan;

      NOW, THEREFORE, pursuant to the authority vested in the CEO as Plan
Administrator to approve non-material amendments to the Plan, the Plan is hereby
amended as follows:

      Section 4.2(b) of the Plan is amended by inserting, immediately following
the first sentence thereof, the following:

        All deferrals of Compensation otherwise payable with respect
        to special meetings of the Board (or a committee of the Board)
        shall be deemed invested in the Interest Income Option.

Any other provisions of the Plan not amended herein shall remain in full force
and effect.

      This First Amendment shall be effective as of the 6th day of February,
2004.

                                By:         /s/ F. D. Ackerman
                                         ---------------------------------------
                                Title:   Chairman and Chief Executive Officer

EX-10.Y16

                                                                  EXHIBIT 10y-16

                       AMENDMENT TO THE BELLSOUTH PERSONAL
                         RETIREMENT ACCOUNT PENSION PLAN

      THIS AMENDMENT to the BellSouth Personal Retirement Account Pension Plan
(the "Plan") is made effective as of the dates specified herein.

                              W I T N E S S E T H:

      WHEREAS, BellSouth Corporation (the "Company") sponsors the Plan, which
was amended and restated effective January 1, 1998, and subsequently amended
from time to time; and

      WHEREAS, pursuant to Section 15.01 of the Plan, the BellSouth Board of
Directors' Nominating and Compensation Committee (the "Committee") is authorized
to amend the Plan: and

      WHEREAS, the Committee approved a provision at its February 23, 2004
meeting to amend the Plan to provide an additional credit for the 2001 Plan Year
equal to 1% of each Plan participant's 2004 compensation; and

      WHEREAS, the Committee authorized appropriate officers of the Company to
do such further acts and to execute such documents as may be necessary or
advisable to effectuate the purposes of such action; and

      WHEREAS, pursuant to Section 15.01 of the Plan, the Employees' Benefit
Committee (the "EBC") is authorized to adopt nonmaterial amendments to the Plan;
and

      WHEREAS, the EBC approved an amendment to the Plan at its December 15,
2004 meeting to eliminate the IRC Section 415 excess pension benefit; and

      WHEREAS, L.M. Berry and Company ("Berry") previously adopted the Plan
subject to certain modifications described in Schedule 2 of the Plan; and

      WHEREAS, the EBC approved an amendment to the Plan at its December 15,
2004 meeting to amend the Plan to provide the interest crediting rate of 5.12%
for the L.M. Berry and Company participants for the 2004 Plan Year; and

      NOW, THEREFORE, pursuant to the authority delegated by the Committee and
the EBC, the undersigned officer approves the following amendments to the Plan:



                                       1.

            Effective January 1, 2004, amend Section 3 of the Plan by adding the
following sentence at the end of Subparagraph 3.05(a):

            "The Board has approved an additional credit for the 2004 Plan Year
            equal to the Participant's Compensation multiplied by one percent,
            and this additional credit shall be credited to each Participant's
            account as of the last day of such Plan Year."

                                       2.

            Effective as of January 1, 2004, Schedule 2 of the Plan regarding
L.M. Berry and Company is hereby amended by adding to the end of Paragraph 4(f)
the following:

            "As of the last day of Plan Year 2004, each Participant's account
            shall be credited with interest at the rate of 5.12%, under the
            terms of the Plan."

                                       3.

            Effective as of January 1, 2005, Section 6.05 of the Plan is hereby
amended by deleting the second sentence and replacing it with the following:

            "The portion of any pension or survivor annuity, with respect to any
            Participant, that is (1) in excess of the applicable "maximum
            permissible amount", and (2) accrued as of December 31, 2004, shall
            be paid by the Participating Company which last employed such
            Participant. The benefit shall be paid directly to the Participant
            or beneficiary entitled thereto and shall be charged to its
            operating expense accounts when and as paid. No benefits accrued on
            or after January 1, 2005 in excess of the applicable "maximum
            permissible amount" shall be paid."

                                       4.

            Effective as of January 1, 2004, Section 8.03(b) of the Plan (as
previously amended on December 18, 2001) is hereby amended by deleting the last
sentence thereof and replacing it with the following:

            "If a terminated or retired Participant dies before his Pension
            Commencement Date and does not have a surviving spouse (or, he and
            his surviving spouse have not


            been married throughout the one-year period ending on the date of
            his death), then the amount determined in this lump sum section
            shall be paid to his estate."

                                       5.

            Any other provisions of the Plan not amended herein shall remain in
full force and effect.

            IN WITNESS WHEREOF, this Amendment has been executed by the duly
authorized officer of the Company.

                                 By:      /s/ Richard D. Sibbernsen
                                          -------------------------------------
                                          Richard D. Sibbernsen
                                          Vice President - Human Resources

                                 Date:    December 22, 2004

EX-10.HH5

                                                                  EXHIBIT 10hh-5

                        FIFTH AMENDMENT TO THE BELLSOUTH
                             RETIREMENT SAVINGS PLAN

      THIS FIFTH AMENDMENT to the BellSouth Retirement Savings Plan (the "Plan")
is made effective as of the dates specified herein, by the BellSouth Savings
Plan Committee (the "Committee").

      WHEREAS, BellSouth Corporation (the "Company") maintains the Plan for the
benefit of its employees and employees of certain of its affiliates;

      WHEREAS, Section 19.1 of the Plan provides that the Plan may be amended at
any time by action of the delegate of the Board of Directors of BellSouth
Corporation;

      WHEREAS, the Board has delegated the authority to approve amendments to
the Plan to the Executive Nominating and Compensation Committee, which in turn
has delegated this authority to the Committee; and

      WHEREAS, Section 22.4 of the Plan provides that any amendment to this Plan
automatically shall be effective as to each Participating Company without any
further action by any Participating Company; and

      WHEREAS, the Committee agreed at their December 15th, 2004 meeting to:

      1.    Declare the "special rules applicable in the even of certain natural
            disasters" to be automatically effective for eligible participants
            following the occurrence of a natural disaster, and

      2.    Allow certain eligible represented job titles to participate in the
            Plan, in accordance with the 2004 Benefits Memorandum of Agreement.

      NOW, THEREFORE, pursuant to the authority delegated by the Committee, the
undersigned officer approves the following amendments to the Plan:



                                       1.

            Effective as of September 1, 2004, amend Section 25 by deleting
subparagraph 1.a. and replacing it with the following:

            "In the event that the President of the United States declares that
            an area in which Participating Employees reside warrants assistance
            by the Federal Government under the Disaster Relief Act of 1974,
            Pub. L. No. 93-288, as amended, the special rules and procedures
            hereinafter described in this Section 25 shall apply with respect to
            each Participating Employee whose principal residence is located
            within an area covered by the President's declaration (hereinafter
            referred to as "Designated Participating Employees")."

                                       2.

            Effective as of September 1, 2004, amend Section 25 by deleting
subparagraph 1.c. and replacing it with the following:

            "The special rules and procedures of this Section 25 shall remain in
            effect for 180 days from the date of the President's declaration of
            a federal disaster area."

                                       3.

            Effective as of January 1, 2005, amend Section 2 of the Plan by
deleting the definition of "ELIGIBLE EMPLOYEE" and replacing it in its entirety
with the following:

            ""ELIGIBLE EMPLOYEE" shall mean an Employee (a) who has attained age
            18, (b) who is a regular Employee in the active service of a
            Participating Company (on a full-time or part-time basis) and (c)
            who has been employed for one full calendar month by either: (i) a
            Participating Company, Affiliate or Subsidiary which has adopted the
            Plan; or (ii) an Interchange Company (if the applicable Interchange
            Agreement covers such Employee and provides that this Plan shall
            recognize such Employee's service with that Interchange Company).

                  Any Non-Management Employee (including any Non-Management
            Employee serving as an Acting Manager) employed by a Participating
            Company who has adopted the Savings and Security Plan shall not be
            eligible to participate in this Plan with the exception of the
            Employees employed by BellSouth Advertising and Publishing
            Corporation in the following job classifications: (i) Directory
            Advertising Sales Representative - Expansion Market, (ii) Directory
            Special Account Representative, (iii) Premise Non-Billing
            Representative, (iv) Internet Sales Representative - Premise,



            (v) Directory Telephone Sales Representative, (vi) Telephone Sales
            Specialty Representative, (vii) Telephone Non-Billing Sales
            Representative, and (viii) Cyber Representative.

                  An Employee shall not be an Eligible Employee if he is (i) a
            "leased employee" within the meaning of Code section 414(n), (ii)
            otherwise paid by a leasing organization rather than by a
            Participating Company, (iii) treated as an independent contractor
            under the personnel policies and practices of his Participating
            Company, (iv) a nonresident alien employed outside the United States
            who receives no U.S. sourced income, or (v) unless otherwise
            provided in the applicable collective bargaining agreement, included
            in a unit of Employees covered by a collective bargaining agreement
            between employee representatives and an Affiliate or Subsidiary.

                  An Eligible Employee who has terminated employment and who is
            reemployed by a Participating Company shall become an Eligible
            Employee upon his reemployment. An Employee shall be deemed an
            Eligible Employee for the purpose of participating in this Plan if,
            (1) at any time prior to January 1, 1984, such Employee was eligible
            to participate in the Bell System Savings Plan for Salaried
            Employees or the Bell System Savings and Security Plan, or (2) at
            any time prior to the adoption of this Plan by the Employee's
            Participating Company, such Employee was eligible to participate in
            a Predecessor Plan or any other qualified defined contribution plan
            sponsored by the Employee's Participating Company and he is an
            Employee of such Participating Company immediately before its
            adoption of this Plan."

                                       4.

            Any other provisions of the Plan not amended herein shall remain in
full force and effect.

      IN WITNESS WHEREOF, this Amendment has been executed by the duly
authorized representative of the Committee.

                                        BELLSOUTH SAVINGS PLAN COMMITTEE

                                          /s/ Richard D. Sibbernsen
                                        ------------------------------------
                                        By:  Richard D. Sibbernsen, Chairman

                                          December 22, 2004
                                        ------------------------------------
                                        Date

EX-11

EXHIBIT 11

COMPUTATION OF EARNINGS PER SHARE

BELLSOUTH CORPORATION

	For the years ended December 31,
	2002			2003		2004
Earnings Per Share — Basic:
Income From Continuing Operations Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle	$	3,475		$	3,488	$	3,394
Discontinued Operations, net of tax		(867	)		101		1,364
Cumulative Effect of Changes in Accounting Principle, net of tax		(1,285	)		315		–
Net Income	$	1,323		$	3,904	$	4,758
Weighted Average Shares Outstanding		1,870			1,848		1,832
Earnings Per Common Share Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle	$	1.86		$	1.89	$	1.85
Discontinued Operations, net of tax		(0.46	)		0.05		0.74
Cumulative Effect of Changes in Accounting Principle, net of tax		(0.69	)		0.17		–
Earnings Per Share*	$	0.71		$	2.11	$	2.60
Earnings Per Share — Diluted:
Income From Continuing Operations Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle	$	3,475		$	3,488	$	3,394
Discontinued Operations, net of tax		(867	)		101		1,364
Cumulative Effect of Changes in Accounting Principle, net of tax		(1,285	)		315		–
Net Income	$	1,323		$	3,904	$	4,758
Weighted Average Shares Outstanding		1,870			1,848		1,832
Incremental shares from assumed exercise of stock options and payment of performance share awards		6			4		4
Diluted Shares Outstanding		1,876			1,852		1,836
Earnings Per Common Share Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principle	$	1.85		$	1.88	$	1.85
Discontinued Operations, net of tax		(0.46	)		0.05		0.74
Cumulative Effect of Changes in Accounting Principle, net of tax		(0.68	)		0.17		–
Earnings Per Share *	$	0.71		$	2.11	$	2.59

* Earnings per share may not sum due to rounding

EX-12

EXHIBIT 12

COMPUTATION OF EARNINGS TO FIXED CHARGES

BELLSOUTH CORPORATION

	For the years ended December 31,
(DOLLARS IN MILLIONS)	2000			2001			2002			2003			2004
Earnings
Income from continuing operations before provision for income taxes, minority interest, discontinued operations, and cumulative effect of accounting change	$	6,537		$	4,120		$	5,367		$	5,424		$	5,186
Equity in (earnings) losses of unconsolidated affiliates		(784	)		(681	)		(542	)		(452	)		(68	)
Fixed Charges		1,348			1,268			1,195			1,061			1,022
Distributed income of equity affiliates		156			369			8			4			1
Interest capitalized		(34	)		(31	)		(20	)		(8	)		(5	)
Income, as adjusted	$	7,223		$	5,045		$	6,008		$	6,029		$	6,136
Fixed Charges
Interest expense	$	1,182		$	1,145		$	1,066		$	947		$	916
Interest capitalized		34			31			20			8			5
Portion of rental expense representative of interest factor		132			92			109			106			101
Fixed Charges	$	1,348		$	1,268		$	1,195		$	1,061		$	1,022
Ratio of Earnings to Fixed Charges		5.36			3.98			5.03			5.68			6.00

EX-21

                                                                               .
                                                                               .
                                                                               .

                                                                     EXHIBIT 21



                       BELLSOUTH ORGANIZATION OF COMPANIES

                             As of December 31, 2004

Name of Entity                                                                   Jurisdiction        D/B/A
- --------------                                                                -----------------    ---------
                                                                                             
AB Cellular Holding, LLC......................................................         Delaware
B.A. Celular Inversora S.A.  .................................................        Argentina
Bell IP Holding L.L.C.........................................................         Delaware
BellSouth Accounts Receivable Management, Inc.................................         Delaware
BellSouth Advertising & Publishing Corporation ...............................          Georgia
BellSouth Argentina Holdings, LLC.............................................          Georgia
BellSouth Billing, Inc........................................................          Georgia
BellSouth Business Systems, Inc...............................................          Georgia
BellSouth Chile Holdings, Inc. ...............................................          Georgia
BellSouth Chile Investments, LLC..............................................         Delaware
BellSouth Chile S.A. .........................................................            Chile    BellSouth
BellSouth Chile, Inc..........................................................          Georgia
BellSouth Communication Systems, LLC .........................................          Georgia
BellSouth Comunicaciones S.A..................................................            Chile    BellSouth
BellSouth Credit and Collections Management, Inc..............................          Georgia
BellSouth Enterprises, Inc. ..................................................          Georgia
BellSouth Entertainment, LLC (f/k/a BellSouth Interactive Media Services, LLC)          Georgia
BellSouth Holdings B.V........................................................  The Netherlands
BellSouth Intellectual Property Corporation...................................         Delaware
BellSouth Intellectual Property Group, Inc....................................          Georgia
BellSouth Intellectual Property Management Corporation........................          Georgia
BellSouth Intellectual Property Marketing Corporation.........................          Georgia
BellSouth International Holdings, Inc.........................................         Delaware
BellSouth International Latin America, Inc....................................         Delaware
BellSouth Inversiones S.A.....................................................            Chile
BellSouth Inversora S.A.......................................................        Argentina
BellSouth Long Distance, Inc..................................................         Delaware






Name of Entity                                                                   Jurisdiction            D/B/A
- --------------                                                                -----------------    -----------------
                                                                                             
BellSouth MNS, Inc............................................................         Delaware
BellSouth Mobile Data, Inc....................................................          Georgia
BellSouth Mobile Systems, Inc.................................................         Delaware
BellSouth Products, Inc.......................................................          Georgia
BellSouth Technology Group, Inc...............................................          Georgia
BellSouth Telecommunications, Inc.............................................          Georgia
BLS Cingular Holdings, LLC ...................................................          Georgia
Cellcom (Holdings) 2001 Ltd...................................................           Israel
Cellcom Fixed Telecommunications Services ....................................           Israel        Cellcom
CellCom Israel, Ltd...........................................................           Israel
CellCom Real Estate (2001) Ltd................................................           Israel
Cingular Wireless Corporation.................................................         Delaware
Cingular Wireless II, LLC.....................................................         Delaware
Cingular Wireless, LLC........................................................         Delaware
Compania de Radiocomunicaciones Moviles S.A.  ................................        Argentina    Movicom-BellSouth
Compania de Telecomunicaciones Comtal Limitada................................            Chile
Compania de Telefonos del Plata S.A...........................................        Argentina
Corporate Media Partners......................................................         Delaware
Intelleprop, Inc..............................................................         Delaware
Intertel S.A..................................................................            Chile
Iray B.V......................................................................  The Netherlands
Lenox Park Holdings, L.L.C....................................................          Georgia
New Cingular Wireless Services, Inc...........................................         Delaware
Prime Enterprises II, L.P.....................................................         Delaware
RAM Broadcasting Corporation..................................................         New York
Tele-Man Netherlands B.V......................................................  The Netherlands
Wireless Telecommunications Investment Company, LLC...........................         Delaware


                                        2

EX-23.A

                                                                  EXHIBIT 23a

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference of our report dated March 4,
2005 relating to the financial statements, management's assessment of the
effectiveness of internal control over financial reporting and the effectiveness
of internal control over financial reporting of BellSouth Corporation, which
appears in this Form 10-K, in the following Registration Statements of BellSouth
Corporation:

- -     Form S-3 (File No. 333-117772)

- -     Form S-3 (File No. 333-120170)

- -     Form S-8 (File No. 333-115034)

- -     Form S-8 (File No. 333-115035)

- -     Form S-8 (File No. 333-115036)

- -     Form S-8 (File No. 333-105710)

- -     Form S-8 (File No. 333-75660)

/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 4, 2005

EX-23.B

                                                                     EXHIBIT 23b

            Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements
listed below of BellSouth Corporation:

      -     Form S-3 (File No. 333-120170),

      -     Form S-3 (File No. 333-117772),

      -     Form S-8 (File No. 333-115035),

      -     Form S-8 (File No. 333-115036),

      -     Form S-8 (File No. 333-105710),

      -     Form S-8 (File No. 333-115034),

      -     Form S-8 (File No. 333-75660);

of our report dated March 4, 2005, with respect to the consolidated financial
statements of Cingular Wireless LLC, included in this Annual Report (Form 10-K)
of BellSouth Corporation for the year ended December 31, 2004.

/s/ Ernst & Young LLP
Atlanta, Georgia
March 4, 2005

EX-23.C

                                                                    EXHIBIT 23c


           CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration
Statements listed below of BellSouth Corporation:

         -  Form S-3 (File No. 333-117772)

         -  Form S-3 (File No. 333-120170)

         -  Form S-8 (File No. 333-115034)

         -  Form S-8 (File No. 333-115035)

         -  Form S-8 (File No. 333-115036)

         -  Form S-8 (File No. 333-105710)

         -  Form S-8 (File No. 333-75660)

of our report dated March 3, 2005, with respect to the financial statements
of Omnipoint Facilities Network II, LLC (the "Company") (not included separately
herein), in the Annual Report (Form 10-K) of Cingular Wireless LLC for the years
ended December 31, 2004 and 2003, included in this Annual Report (Form 10-K) of
BellSouth Corporation for the year ended December 31, 2004.

Our report refers to the Company restating its financial statements as of and
for the years ended December 31, 2003 and 2002.

/s/ PricewaterhouseCoopers LLP

Seattle, Washington
March 7, 2005

EX-24

                                                                      EXHIBIT 24
                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand on
the date indicated.

/s/ F. Duane Ackerman                               February 28, 2005
- --------------------------------------       ------------------------------
         F. Duane Ackerman                                 Date
Chairman of the Board, President
Chief Executive Officer and Director
   (Principal Executive Officer)

/s/ Ronald M. Dykes                                 February 28, 2005
- --------------------------------------       ------------------------------
           Ronald M. Dykes                                 Date
       Chief Financial Officer
   (Principal Financial Officer)

/s/ W. Patrick Shannon                              February 28, 2005
- --------------------------------------       -------------------------------
         W. Patrick Shannon                                Date
     Senior Vice President - Finance
          and Controller



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

/s/ Reuben V. Anderson                                 February 28, 2005
- ---------------------------------------         --------------------------------
        Reuben V. Anderson                                    Date
           Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

/s/ James H. Blanchard                               February 28, 2005
- -----------------------------------         -----------------------------------
      James H. Blanchard                                  Date
          Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

      /s/ J. Hyatt Brown                             February  28, 2005
- ------------------------------------         -----------------------------------
         J. Hyatt Brown                                      Date
           Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

       /s/Armando M. Codina                              February 28, 2005
- ---------------------------------------         -------------------------------
         Armando M. Codina                                    Date
            Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

         /s/ Kathleen F. Feldstein                 February  28, 2005
- ------------------------------------         -----------------------------------
        Kathleen F. Feldstein                              Date
             Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

      /s/ James P. Kelly                              February 28, 2005
- ------------------------------------         -----------------------------------
          James P. Kelly                                    Date
            Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

      /s/ Leo F. Mullin                              February 28, 2005
- ------------------------------------         -----------------------------------
          Leo F. Mullin                                    Date
            Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

  /s/ Robin B. Smith                                   February 28, 2005
- ---------------------------                     --------------------------------
      Robin B. Smith                                         Date
        Director



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

      WHEREAS, BELLSOUTH CORPORATION, a Georgia corporation (the "Company"),
proposes to file with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for
the year ended December 31, 2004.

      NOW THEREFORE, each of the undersigned hereby constitutes and appoints F.
Duane Ackerman, Ronald M. Dykes, W. Patrick Shannon and Rebecca M. Dunn, and
each of them, as attorneys for him or her in his or her name, place and stead in
his or her capacities in the Company, to execute and cause to be filed the
Annual Report and thereafter to execute and file any amendment or supplement
thereto (including any Form 11-K) deemed by them to be necessary or desirable,
hereby giving and granting to said attorneys full power and authority (including
substitution and revocation) to do and perform all and every act and thing
whatsoever requisite and necessary to be done in and about the premises as
fully, to all intents and purposes, as he or she might or could do if personally
present at the doing thereof, hereby ratifying and confirming all that said
attorneys may or shall lawfully do, or cause to be done, by virtue hereof.

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated.

/s/ William S. Stavropoulos                          February 28, 2005
- ------------------------------------         -----------------------------------
    William S. Stavropoulos                                 Date
           Director

EX-31.A

                                                                     EXHIBIT 31a

CERTIFICATIONS

I, F. Duane Ackerman, certify that

1.    I have reviewed this report on Form 10-K of BellSouth Corporation;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      function):



      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

 Date: February 21, 2005                  /s/ F. Duane Ackerman
                                          ------------------------------------
                                           F. Duane Ackerman
                                           Chairman of the Board, Chief
                                           Executive Officer and President

EX-31.B

                                                                     EXHIBIT 31b
I, Ronald M. Dykes, certify that

1.    I have reviewed this report on Form 10-K of BellSouth Corporation;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      function):



      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: February 21, 2005                        /s/ Ronald M. Dykes
                                               ---------------------------------
                                               Ronald M. Dykes
                                               Chief Financial Officer

EX-32

                                                                      EXHIBIT 32

      STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certificate is being delivered pursuant to the requirements of Section 1350
of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the
United States Code and shall not be relied on by any other person for any other
purpose.

In connection with the Annual Report on Form 10-K of BellSouth Corporation (the
"Company") for the year ended December 31, 2004, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, F.
Duane Ackerman, Chairman of the Board, Chief Executive Officer and President of
the Company, and Ronald M. Dykes, Chief Financial Officer, of the Company,
certify that

      -     the Report fully complies with the requirements of section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      -     information contained in the Report fairly presents, in all material
            respects, the financial condition and results of operations of the
            Company.

/s/ F. Duane Ackerman
- ---------------------
F. Duane Ackerman

February 21, 2005

/s/ Ronald M. Dykes
- ---------------------
Ronald M. Dykes

February 21, 2005

A signed original of this written statement required by Section 906 has been
provided to BellSouth Corporation and will be retained by BellSouth Corporation
and furnished to the Securities and Exchange Commission or its staff upon
request.

EX-99.A

EXHIBIT 99a

CINGULAR WIRELESS LLC

PART II (Dollars in Millions)

Item 8. Financial Statements and Supplemental Data

CONSOLIDATED FINANCIAL STATEMENTS

CINGULAR WIRELESS LLC

Years Ended December 31, 2002 (restated), 2003 (restated) and 2004

with Report of Independent Registered Public Accounting Firm

79

CINGULAR WIRELESS LLC

PART II (Dollars in Millions)

Item 8. Financial Statements and Supplemental Data

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2002 (Restated), 2003 (Restated) and 2004

Contents
Report of Independent Registered Public Accounting Firm — Ernst & Young LLP	81
Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP	82
Audited Consolidated Financial Statements
Consolidated Balance Sheets	83
Consolidated Statements of Income	84
Consolidated Statements of Changes in Members’ Capital	85
Consolidated Statements of Comprehensive Income	86
Consolidated Statements of Cash Flows	87
Notes to Consolidated Financial Statements	88

80

CINGULAR WIRELESS LLC

PART II (Dollars in Millions)

Item 8. Financial Statements and Supplemental Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareowners

Cingular Wireless Corporation, Manager of

     Cingular Wireless LLC

We have audited the accompanying consolidated balance sheets of Cingular Wireless LLC as of December 31, 2003 and 2004 and the related consolidated statements of income, changes in members’ capital, comprehensive income and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Omnipoint Facilities Network II, LLC (Omnipoint), a wholly owned subsidiary of GSM Facilities, LLC (an equity investee in which the Company has an approximate 60% interest at December 31, 2004), have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to the 2003 and 2004 amounts included for Omnipoint, it is based solely on their report. In the consolidated financial statements, the Company’s indirect investment in Omnipoint is stated at $770 million and $880 million, respectively, at December 31, 2003 and 2004, and the Company’s equity in net losses of Omnipoint is stated at $100 million and $135 million, for the years then ended.

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

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

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

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

/s/ ERNST & YOUNG LLP

Atlanta, Georgia

March 4, 2005

81

CINGULAR WIRELESS LLC

PART II (Dollars in Millions)

Item 8.     Financial Statements and Supplemental Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Members and Board of Directors of GSM Facilities, LLC:

In our opinion, the accompanying balance sheets and the related statements of operations, of member’s equity and of cash flows (not presented separately herein) present fairly, in all material respects, the financial position of Omnipoint Facilities Network II, LLC (the Company) at December 31, 2004 and 2003, and the results of its operations and its cash flows for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Notes 1 and 5, the Company’s transactions are substantially with related parties, who are the Company’s member owners. Additionally, as described in Note 1, the Company relies on its member owners for funding requirements.

As described in notes 1 and 6, the Company’s assets were contributed to T-Mobile USA, Inc. (T-Mobile) on January 5^th, 2005, as part of an agreement between T-Mobile and Cingular Wireless LLC to unwind the operations of their joint venture, GSM Facilities, LLC.

As discussed in Note 2, the consolidated financial statements for the years ended December 31, 2003 and 2002 have been restated.

/s/ PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

March 3, 2005

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

CONSOLIDATED BALANCE SHEETS

		December 31,
		2003			2004
		(Dollars in millions)
		(Restated)
ASSETS
Current assets:
	Cash and cash equivalents	$	1,139		$	352
	Accounts receivable — net of allowance for doubtful accounts of $130 and $317		1,592			3,448
	Due from affiliates, net		—			138
	Inventories		273			690
	Prepaid assets		186			346
	Other current assets		110			596
Total current assets			3,300			5,570
Property, plant and equipment, net			10,962			21,958
Licenses, net			7,769			24,762
Goodwill			849			21,637
Customer relationship intangibles, net			150			4,698
Other intangible assets, net			5			241
Investments in and advances to equity affiliates			2,269			2,676
Other assets			226			696
Total assets		$	25,530		$	82,238
LIABILITIES AND MEMBERS’ CAPITAL
Current liabilities:
	Debt maturing within one year	$	95		$	2,158
	Accounts payable		904			1,383
	Due to affiliates, net		54			—
	Advanced billing and customer deposits		538			728
	Accrued liabilities		1,619			3,714
Total current liabilities			3,210			7,983
Long-term debt:
	Debt due to members		9,678			9,628
	Other long-term debt, net of premium		2,914			14,229
Total long-term debt			12,592			23,857
Deferred tax liabilities, net			190			3,997
Other noncurrent liabilities			546			1,256
Total liabilities			16,538			37,093
Commitments and contingencies (see Note 18)
Minority interests in consolidated entities			659			609
Members’ capital:
	Members’ capital		8,513			44,714
	Receivable for properties to be contributed		(178	)		(178	)
	Accumulated other comprehensive loss, net of taxes		(2	)		—
Total members’ capital			8,333			44,536
Total liabilities and members’ capital		$	25,530		$	82,238

See accompanying notes.

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

CONSOLIDATED STATEMENTS OF INCOME

		Year Ended December 31,
		2002			2003			2004
		(Dollars in millions)
		(Restated)			(Restated)
Operating revenues:
	Service revenues	$	13,922		$	14,223		$	17,473
	Equipment sales		981			1,260			1,963
Total operating revenues			14,903			15,483			19,436
Operating expenses:
	Cost of services (excluding depreciation of $1,393, $1,670 and $2,259, which is included below)		3,594			3,681			4,608
	Cost of equipment sales		1,535			2,031			2,874
	Selling, general and administrative		5,429			5,428			7,349
	Depreciation and amortization		1,849			2,089			3,077
Total operating expenses			12,407			13,229			17,908
Operating income			2,496			2,254			1,528
Other income (expenses):
	Interest expense		(911	)		(856	)		(900	)
	Minority interest in earnings of consolidated entities		(123	)		(101	)		(86	)
	Equity in net loss of affiliates		(274	)		(333	)		(415	)
	Other, net		29			41			16
Total other income (expenses)			(1,279	)		(1,249	)		(1,385	)
Income before provision for income taxes and cumulative effect of accounting change			1,217			1,005			143
Provision (benefit) for income taxes			12			28			(58	)
Income before cumulative effect of accounting change			1,205			977			201
Cumulative effect of accounting change, net of tax			(32	)		—			—
Net income		$	1,173		$	977		$	201

See accompanying notes.

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CINGULAR WIRELESS LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

		(Dollars in millions)
Balance at December 31, 2001, as originally reported		$	5,850
	Effect of restatement on periods ending on or prior to December 31, 2001		(72	)
Balance at December 31, 2001, as restated			5,778
	Net income, as restated		1,173
	Contributions from members		484
Balance at December 31, 2002, as restated			7,435
	Net income, as restated		977
	Distributions to members, net		(79	)
Balance at December 31, 2003, as restated			8,333
	Net income		201
	Contributions from members, net		36,000
	Other, net		2
Balance at December 31, 2004		$	44,536

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Item 8.     Financial Statements and Supplemental Data

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

				Year Ended December 31,
				2002			2003		2004
				(Restated)			(Restated)
				(Dollars in millions)
Comprehensive Income
Net income				$	1,173		$	977	$	201
	Other comprehensive income (loss):
		Minimum pension liability adjustment, net of taxes of $1 in 2004			(1	)		—		(4	)
		Net foreign currency translation adjustment, net of taxes of ($4)			—			—		6
		Net unrealized gain (loss) on securities:
			Reclassification adjustment for losses included in net income		1			—		—
Total comprehensive income				$	1,173		$	977	$	203

See accompanying notes.

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Year Ended December 31,
			2002			2003			2004
			(Dollars in millions)
			(Restated)			(Restated)
Operating activities
Net income			$	1,173		$	977		$	201
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			1,849			2,089			3,077
	Provision for doubtful accounts			404			259			423
	Asset impairments			151			—			4
	Minority interest in earnings of consolidated entities			123			101			86
	Equity in net loss of affiliates			274			333			415
	Cumulative effect of accounting change, net of tax			32			—			—
	Amortization of debt discount (premium), net			1			1			(43	)
	Deferred income taxes			(3	)		(1	)		(74	)
	Changes in operating assets and liabilities:
		Accounts receivable		(280	)		(331	)		(336	)
		Inventories		63			(147	)		(189	)
		Other current assets		(42	)		(83	)		(18	)
		Accounts payable and other current liabilities		(411	)		278			(512	)
		Pensions and post-employment benefits		91			55			88
	Other, net			167			155			198
Net cash provided by operating activities				3,592			3,686			3,320
Investing activities
Construction and capital expenditures				(3,085	)		(2,734	)		(3,449	)
Investments in and advances to equity affiliates, net				(450	)		(616	)		(422	)
Dispositions of assets				6			7			188
Acquisition of AT&T Wireless, net of cash received				—			—			(35,543	)
Acquisitions of other businesses and licenses, net of cash received				(6	)		(25	)		(1,632	)
Contractor engineering deposit				(50	)		—			—
Purchases of held-to-maturity investments				—			—			(219	)
Net cash used in investing activities				(3,585	)		(3,368	)		(41,077	)
Financing activities
Net borrowings under revolving credit agreement				—			—			1,667
Net repayment of commercial paper				(27	)		—			—
Net repayment of long-term debt				(59	)		(64	)		(530	)
Repayment of long-term debt due to members				—			—			(50	)
Net distributions to minority interests				(79	)		(33	)		(141	)
Contributions from members				499			10			36,024
Net cash provided by (used in) financing activities				334			(87	)		36,970
Net increase (decrease) in cash and cash equivalents				341			231			(787	)
Cash and cash equivalents at beginning of period				567			908			1,139
Cash and cash equivalents at end of period			$	908		$	1,139		$	352

See accompanying notes.

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2002, 2003, and 2004

(Dollars in Millions)

1. Summary of Significant Accounting Policies

Background and Basis of Presentation

Cingular Wireless LLC (the Company) is a Delaware limited liability company formed in 2000 by SBC Communications Inc. (SBC) and BellSouth Corporation (BellSouth) as the operating company for their U.S. wireless joint venture. SBC and BellSouth, through their wholly owned subsidiaries, respectively, own approximate 60% and 40% economic interests in the Company. Cingular Wireless Corporation (the Manager), which is directed equally by SBC and BellSouth, acts as the Company’s manager and controls the Company’s management and operations. The Company provides wireless voice and data communications services, including local, long-distance and roaming services using both cellular and personal communications services (PCS), and equipment to customers in 44 states, including service to all 100 of the largest U.S. metropolitan areas. All of the Company’s operations, which primarily serve customers in the U.S., are conducted through subsidiaries or joint ventures. Through roaming arrangements with other carriers, the Company provides its customers service in regions where it does not have network coverage and is thus able to serve customers in virtually the entire U.S. and over 170 foreign countries.

In October 2004, the Company acquired AT&T Wireless Services, Inc. (AT&T Wireless) for an aggregate consideration of approximately $41,000 in cash. AT&T Wireless, which has been renamed New Cingular Wireless Services, Inc. but will continue to be referred to herein as AT&T Wireless, is now a direct wholly owned subsidiary of the Company. The assets and operations of AT&T Wireless are being integrated with those of the Company, and the business is conducted under the “Cingular” brand name. See Note 3 for further discussion of the acquisition.

As provided for in the original Contribution and Formation Agreement between the Company, SBC and BellSouth, contributions of wireless operations and assets in certain markets were made during 2000 and 2001. The contribution by SBC of wireless operations and assets in the Arkansas markets, or an equivalent amount in cash if such assets are not contributed, was still pending as of December 31, 2004. The Company has recorded amounts to be contributed as “Receivable for properties to be contributed” in the consolidated balance sheets. Until such time as the contribution is made, the Company continues to manage the properties for a fee. Fees received for managing the Arkansas markets for the years ended December 31, 2002, 2003 and 2004 were $22, $30 and $40, respectively.

These consolidated financial statements include charges from SBC and BellSouth for certain expenses pursuant to various agreements (see Notes 12 and 17). These expenses are considered to be a reasonable reflection of the value of services provided or the benefits received by the Company.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires management to make estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. Estimates are used when accounting for certain items such as revenue, allowance for doubtful accounts, useful lives of property, plant and equipment and amortization periods for intangible assets, asset

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

impairments, inventory reserves, legal and tax contingencies, employee compensation programs, evaluation of minimum lease term for operating leases, fair values of investments and intangible assets, asset impairment charges and deferred income taxes, including income tax valuation allowances. Additionally, estimates are used when recording the fair values of assets acquired and liabilities assumed in a purchase business combination.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, variable interest entities in which the Company is the primary beneficiary as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51(FIN 46R), and voting interest entities in which the Company exercises control. Other parties’ interests in consolidated entities are reported as minority interests. All significant intercompany transactions are eliminated in the consolidation process.

The equity method is used to account for investments that are not consolidated but in which the Company exercises significant influence. Investments in which the Company does not have the ability to exercise significant influence are accounted for under the cost method.

Segments

The Company manages the business as one reportable business segment, wireless communications services, which also is a single operating segment. The Company operates primarily in the U.S.

Revenue Recognition

The Company earns service revenues by providing access to its wireless network (access revenue) and for usage of its wireless system (airtime revenue). Access revenue from postpaid customers is billed either in advance or arrears and recognized ratably over the service period. Airtime revenue, including roaming revenue and long-distance revenue, is billed in arrears based on minutes of use and is recognized when the service is rendered. Prepaid airtime sold to customers and revenue collected from pay-in-advance customers is recorded as deferred revenue prior to the commencement of services, and revenue is recognized when airtime is used or expires. Access and airtime services provided are billed throughout the month according to the bill cycle in which a particular subscriber is placed. As a result of bill cycle cut-off times, the Company is required to make estimates for service revenues earned but not yet billed at the end of each month, and for advanced billings. These estimates are based primarily upon historical minutes of use.

The Company’s ROLLOVER® rate plans include a feature whereby unused anytime minutes do not expire each month but rather are available, under certain conditions, for future use for a period not to exceed one year from the date of purchase. The Company defers revenue based on an estimate of the portion of unused minutes expected to be utilized prior to expiration. Historical subscriber usage patterns, which have been consistent and which the Company views to be reliable for purposes of gauging predictive behavior, allow the Company to estimate the number of unused minutes to be utilized, as well as those which are likely to expire or be forfeited. No deferral of revenue is recorded for the minutes that are expected to

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

expire or be forfeited, as no future performance is expected to be required by the Company, nor is there any obligation to refund or redeem for value expired minutes. During the second quarter of 2004, the Company modified its estimate for calculating the deferral to incorporate more refined customer data and usage patterns, which in the Company’s view more accurately reflects the estimate of future utilization of those minutes based on historical trends. This change in estimate resulted in a $63 decrease in the deferral recorded as of December 31, 2004, and a corresponding increase to services revenue, as compared to the deferral that would have been recorded prior to making the change. The balance of the deferral as of December 31, 2003 and 2004 was $103 and $146, respectively, and has been included in “Advanced billings and customer deposits” in the consolidated balance sheets.

Service revenues include revenues from Company customers who roam outside their selected home coverage area, referred to as “incollect” roaming revenues, and revenues from other wireless carriers for roaming by their customers on the Company’s network, referred to as “outcollect” roaming revenues.

The Company offers enhanced services including caller ID, call waiting, call forwarding, three-way calling, no answer/busy transfer, text messaging and voice mail. Generally, these enhanced features generate additional service revenues through monthly subscription fees or increased wireless usage through utilization of the features. Other optional services, such as mobile-to-mobile calling, roadside assistance and handset insurance, may also be provided for a monthly fee. These enhanced features and optional services may be bundled with package rate plans or sold separately. Revenues for enhanced services and optional features are recognized as earned. Service revenues also include billings to our customers for Universal Service Fund (USF) and other regulatory fees.

Equipment sales consist principally of revenues from the sale of wireless handsets and accessories to new and existing customers and to agents and other third-party distributors. The revenue and related expenses associated with the sale of wireless handsets and accessories through our indirect sales channels are recognized when the products are delivered and accepted by the agent or third-party distributor, as this is considered to be a separate earnings process from the sale of wireless services and probability of collection is likely. Shipping and handling costs for wireless handsets sold to agents and other third-party distributors are classified as costs of equipment sales.

Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which is being applied on a prospective basis. The consensus addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated among the separate units of accounting based on their relative fair values. The consensus also supersedes certain guidance set forth in Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number 104 (SAB 104).

The Company determined that the sale of wireless services through its direct sales channels with an accompanying handset constitutes a revenue arrangement with multiple deliverables. Upon adoption of EITF No. 00-21, the Company began dividing these arrangements into separate units of accounting,

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

including the wireless service and handset. Arrangement consideration received for the handset is recognized as equipment sales when the handset is delivered and accepted by the subscriber. Arrangement consideration received for the wireless service is recognized as service revenues when earned. As the non-refundable, up-front activation fee charged to the subscriber does not meet the criteria as a separate unit of accounting, the Company allocates the additional arrangement consideration received from the activation fee to the handset (the delivered item) to the extent that the aggregate handset and activation fee proceeds do not exceed the fair value of the handset. Any activation fees not allocated to the handset would be deferred upon activation and recognized as service revenue on a straight-line basis over the expected customer relationship period. The Company determined that the sale of wireless services through its indirect sales channels (agents) does not constitute a revenue arrangement with multiple deliverables. For indirect channel sales, the Company continues to defer non-refundable, up-front activation fees and associated costs to the extent of the related revenues in accordance with SAB 104. These deferred fees and costs are amortized on a straight line basis over the estimated customer relationship period, which is currently estimated to be three years. The Company has recorded deferred revenues and deferred expenses of equal amounts in the consolidated balance sheets. As of December 31, 2003 and 2004, SAB 104 deferred revenues and expenses were $104 and $124, respectively.

Income Taxes

The Company is not a taxable entity for federal income tax purposes. Federal taxable income or loss is included in our respective members’ federal income tax returns. The Company’s provision (benefit) for income taxes includes federal and state income taxes for our corporate subsidiaries, as well as for certain states which impose income taxes upon non-corporate legal entities. The acquisition of AT&T Wireless resulted in a significant increase in our pre-tax income (loss) from our corporate subsidiaries. AT&T Wireless retained its corporation status; however, after the acquisition, AT&T Wireless transferred the majority of its assets and liabilities to Cingular Wireless II, LLC (CW II), which it owns jointly with the Company. In exchange for the assets and liabilities transferred to CW II, AT&T Wireless received a 43% ownership interest in CW II, from which any income (loss) is allocated accordingly and is subject to federal and state income taxes. The remaining 57% of the income (loss) from CW II is allocated to the Company and flows through to the members or partners who are taxed at their level pursuant to federal and state income tax laws.

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory rates in effect for the year in which the differences are expected to reverse. Pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting For Income Taxes, the Company provides valuation allowances for deferred tax assets for which it does not consider realization of such assets to be more likely than not. See Note 16 for further information.

Required Distributions

The Company is required to make periodic distributions to its members on a pro rata basis in accordance with each member’s ownership interest in amounts sufficient to permit members to pay the tax liabilities resulting from allocations of income tax items from the Company. Since the Company did not generate

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

taxable income in 2002, 2003 or 2004, the Company made no distributions for tax liabilities in 2002, 2003 or 2004.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original maturities of three months or less. Outstanding checks and drafts of $74 and $169 have been included in “Accounts payable” in the consolidated balance sheets as of December 31, 2003 and 2004, respectively.

Short-Term Investments

Short-term investments primarily include investments with original maturities of generally more than three months and less than one year. The Company’s short-term investments primarily related to assets placed in trust for the redemption of certain debt acquired in the AT&T Wireless acquisition (see Note 9) and for employee benefit obligations (see Note 17). These investments, which are classified as held-to-maturity and totaled $233 as of December 31, 2004, are carried at cost, which approximates fair value, and are included in “Other current assets” in the consolidated balance sheets.

Accounts Receivable

Accounts receivable consist principally of trade accounts receivable from customers and are generally unsecured and due within 30 days. Credit losses relating to these receivables consistently have been within management’s expectations. Expected credit losses are recorded as an allowance for doubtful accounts in the consolidated balance sheets. Estimates of expected credit losses are based primarily on historical write-off experience, net of recoveries, and on the aging of the accounts receivable balances. The collection policies and procedures of the Company vary by credit class and prior payment history of customers. Provisions for uncollectible receivables are included in selling, general and administrative expenses.

Inventories

Inventories consist principally of wireless handsets and accessories and are valued at the lower of cost or market value. Market value is determined using replacement cost. The Company maintains inventory valuation reserves for obsolescence and slow moving inventory. These reserves are determined based on analysis of inventory agings.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization. The cost of additions and substantial improvements is capitalized. Interest expense and network engineering costs incurred during the construction phase of the Company’s wireless network are capitalized as part of property, plant and equipment until the projects are completed and the assets are placed into service. The cost of maintenance and repairs is charged to operating expenses. Property, plant and equipment are depreciated using the straight-line method over their estimated useful lives. Leasehold improvements, including cell site acquisition and other site construction improvements, are depreciated over the shorter of their estimated useful lives or lease terms that are reasonably assured. Depreciation lives may be

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

accelerated due to changes in technology, the rate of migration of the Company’s subscriber base from its Time Division Multiple Access (TDMA) network to its Global System for Mobile Communication (GSM) network or other industry conditions. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized and included in “Cost of services.”

Software Capitalization

The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Capitalized costs include direct development costs associated with internal use software, including internal direct labor costs and external costs of materials and services. These capitalized software costs are included in “Property, plant and equipment, net” in the consolidated balance sheets and are being amortized on a straight-line basis over a period not to exceed five years. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.

Intangible Assets

Intangible assets consist primarily of customer relationships, FCC spectrum licenses and the excess of consideration paid over the fair value of net assets acquired in purchase business combinations (goodwill). Additionally, in conjunction with the Company’s acquisition of AT&T Wireless in October 2004, the Company established intangible assets associated with trade names, trade marks and lease contracts.

Customer relationships represent values placed on customers of acquired businesses and have a finite life. The majority of the Company’s customer relationship intangible assets are amortized over a five-year period using the sum-of-the-years digits method.

Goodwill and other indefinite-lived intangible assets are not amortized in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). The Company has determined that its FCC spectrum licenses, except for those used in the Mobitex data business, which it sold in the fourth quarter of 2004 (see Note 3), and those held by foreign subsidiaries, should be treated as indefinite-lived intangible assets (see Note 5). The FCC issues spectrum licenses that authorize wireless carriers to provide service in specific geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993, the FCC adopted specific standards to apply to wireless renewals, concluding it will award a license renewal to a licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely. The licenses held by the Company expire at various dates. The Company believes that it will be able to meet all requirements necessary to secure renewal of its wireless licenses.

Finite-lived licenses, which included those formerly used in the Mobitex data business and those held by foreign subsidiaries, are amortized using the straight-line method over their estimated useful lives. Licenses held by foreign subsidiaries are not subject to FCC jurisdiction.

The Company tests goodwill and other indefinite-lived intangible assets for impairment on an annual basis. Additionally, goodwill will be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the Company’s fair value below its carrying

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

value. Indefinite-lived intangible assets will be tested between annual tests if events or changes in circumstances indicate that the asset might be impaired. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. See Note 5 for discussion of the goodwill and indefinite-lived intangible asset impairment tests.

Valuation of Long-lived Assets

Long-lived assets, including property, plant and equipment and intangible assets with finite lives, are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technological or other industry changes. In analyzing potential impairment, the Company uses projections of future cash flows from the asset group. These projections are based on the Company’s views of forecasted growth rates, anticipated future economic conditions, appropriate discount rates relative to risk and estimates of residual values. If the total of the expected future undiscounted cash flows from the asset group the Company intends to hold and use is less than the carrying amount of the asset group, a loss is recognized for the difference between the fair value and carrying amount of the asset group. The asset group to be held and used represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company has determined the lowest level for which cash flows are largely independent of the cash flows of other groups is the consolidated company level. For assets the Company intends to dispose of, a loss is recognized if the carrying amount of the assets in the disposal group is more than fair value, net of the costs of disposal. The Company principally uses the discounted cash flow method to estimate the fair value of its long-lived assets. The discount rate applied to the undiscounted cash flows is consistent with the Company’s weighted-average cost of capital.

The Company periodically evaluates the useful lives of its wireless network equipment and other equipment and finite-lived intangible assets based on technological and other industry changes to determine whether events or changes in circumstances warrant revisions to the useful lives (see Notes 4 and 13).

Valuation of Investments

The Company holds equity interests in certain entities (see Note 6). These investments are primarily accounted for under the equity method of accounting. In accordance with Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, the Company reviews its equity method investments for impairment. These reviews are performed to determine whether any decline in the fair value of an investment below its carrying value is deemed to be other than temporary, in which case an impairment charge would be recorded.

Deferred Financing Costs

Debt financing costs are capitalized and amortized over the terms of the underlying obligation using the straight-line method, which approximates the effective interest method. The net deferred financing costs

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

were $17 and $24 at December 31, 2003 and 2004, respectively. These deferred financing costs are included in “Other assets” in the consolidated balance sheets.

Asset Retirement Obligations

The Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations(SFAS 143) effective January 1, 2003. This statement requires the Company to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and capitalize that amount as part of the book value of the long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss.

The Company has certain legal obligations related to network infrastructure, principally tower assets, which fall within the scope of SFAS 143. These legal obligations include obligations to remediate leased land on which the Company’s network infrastructure assets are located. The significant assumptions used in estimating the Company’s asset retirement obligations include the following: a 25% to 80% probability, depending upon the type of operating lease, that the Company’s assets with asset retirement obligations will be remediated at the lessor’s directive; expected settlement dates that coincide with lease expiration dates plus estimates of lease extensions; remediation costs that are indicative of what third party vendors would charge the Company to remediate the sites; expected inflation rates that are consistent with historical inflation rates; and credit-adjusted risk-free rates that approximate the Company’s incremental borrowing rates.

Advertising Costs

Costs for advertising are expensed as incurred. Total advertising expenses were $549, $643 and $973 for the years ended December 31, 2002, 2003 and 2004, respectively. Advertising expenses for 2004 include integration costs associated with public relations activities and media coverage to promote the combined company (see Note 14).

Operating Leases

The Company accounts for its operating leases in accordance with SFAS No. 13, Accounting for Leases and FASB Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases. Rent expense is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and is included in “Accrued liabilities” and “Other noncurrent liabilities” in the consolidated balance sheets.

Derivative Financial Instruments

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133), the Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivative instruments will be recorded to earnings or other comprehensive income (loss) depending on the use of the derivative instrument and whether it qualifies for hedge accounting.

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

The Company also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are effective. Should it be determined that a derivative is not effective as a hedge, the Company would discontinue the hedge accounting prospectively.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). This statement amends and clarifies accounting for derivative instruments and for hedging activities under SFAS 133. The adoption of this statement on July 1, 2003 did not have a material impact on the Company’s results of operations, financial position and cash flows.

Guarantees

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN 45), which provides additional accounting guidance and disclosure requirements for most guarantees, including indemnifications. It requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee if that amount is reasonably estimable, and must disclose that information in its interim and annual financial statements. The provisions for initial recognition and measurement of the liability are to be applied on a prospective basis to guarantees issued or modified on or after January 1, 2003.

New Accounting Standards

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). This statement establishes standards for how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that instruments that are redeemable upon liquidation or termination of an issuing subsidiary that has a limited life are considered mandatorily redeemable shares in the financial statements of the parent. Accordingly, those non-controlling interests are required to be classified as liabilities and recorded at settlement value by SFAS 150. This statement was effective beginning July 1, 2003. As a result of concerns over implementation and measurement issues, on November 7, 2003, FASB Staff Position (FSP) FAS 150-3 was issued deferring indefinitely the effective date for the measurement provisions of paragraphs 9 and 10 of SFAS 150, as they apply to mandatorily redeemable non-controlling interests (e.g., minority interests) of limited-life entities that are consolidated in financial statements.

Certain of the Company’s consolidated entities with minority partners have finite lives. While there are no provisions in the entity charter agreements that require liquidation upon expiration of the entities’ stated lives, the guidance in SFAS 150 still requires the minority interest to be recorded on the balance sheet at settlement value as if the minority interest will be liquidated at that time. The impact on the Company’s results of operations, financial position and cash flows would not be material.

In September 2004, the EITF reached a consensus on Issue No. 04-01, Accounting for Pre-existing Contractual Relationships between the Parties to a Purchase Business Combination (EITF 04-01). The

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

consensus requires companies to evaluate pre-existing contractual relationships between two parties to a business combination to determine whether settlement of the pre-existing contractual relationship has occurred. Settlements of a pre-existing contractual relationship should be accounted for separately from the business combination. EITF 04-01 is effective for business combinations consummated for reporting periods beginning after October 2004 and is required to be adopted in the first quarter of 2005. The Company adopted this new pronouncement effective January 1, 2005. The impact to the Company’s ongoing results of operations and cash flows as a result of adopting this new statement is not material.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the third quarter of 2005. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

     Reclassifications

Certain amounts have been reclassified in the 2002 and 2003 consolidated financial statements to conform to the current year presentation.

2.     Restatements

On February 18, 2005, Company management and the Audit Committee of the board of directors of the Manager concluded that the Company’s financial statements for fiscal periods ending December 31, 2000 through December 31, 2003 and the first three interim periods of 2004 should be restated to correct certain errors relating to accounting for operating leases. While management believes that the impact of this error is not material to any previously issued financial statements, it determined that the cumulative adjustment required to correct this error was too large to record in 2004.

The Company has operating leases, principally for cell sites, that have escalating rentals during the initial lease term and during succeeding optional renewal periods. During the course of preparing its 2004 consolidated financial statements, the Company determined that its method of accounting for operating leases did not comply with the requirements of SFAS No. 13, Accounting for Leases and FASB Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases. Historically, the Company has not assumed the exercise of available renewal options in its accounting for operating leases. The Company reevaluated its accounting for operating leases and the related useful lives for depreciating leasehold improvements following publication of a letter issued by the Office of the Chief Accountant of the U.S. Securities and Exchange Commission on February 7, 2005. In light of the Company’s investment in each cell site, including acquisition costs and leasehold improvements, the Company has determined that the exercise of certain renewal options was reasonably assured at the inception of the leases. Accordingly, the Company has corrected its accounting to recognize rent expense, on a straight-line basis,

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

over the initial lease term and renewal periods that are reasonably assured, and to depreciate the associated leasehold improvements and other related assets over the lesser of their useful lives or their respective lease terms. These restated financial statements reflect these corrections.

The Company’s network infrastructure venture with T-Mobile USA, Inc. (T-Mobile), GSM Facilities LLC (GSMF), accounted for under the equity method, reached a similar conclusion with respect to operating leases, requiring correction and restatement of its previously issued financial statements for the years ended December 31, 2003 and 2002. Accordingly, the Company also revised and restated its equity accounting for the venture.

The impact of these restatements to the Company’s statements of income for the years ended December 31, 2002 and December 31, 2003 was a decrease to Net income of $34 and $45, respectively, as well as a decrease to Member’s capital of $72 as of December 31, 2001. The impact associated with correcting the Company’s accounting for operating leases was an increase to lease expense of $23 and $3, reflected in Costs of services and Selling, general and administrative expenses, respectively, for the year ended December 31, 2002 and of $29 and $6, respectively, for the year ended December 31, 2003. The impact associated with correcting the accounting for the operating leases and useful lives of the Company’s GSMF joint venture was an increase in Equity in net loss of affiliates of $9 and $10, respectively, for the same periods. The above correction also had a de minimus impact on Depreciation and amortization to adjust for the lives used to depreciate certain leasehold improvements. The restatements also impacted Property, plant and equipment, net; Investments in and advances to equity affiliates; Accrued liabilities; Other noncurrent liabilities; and Members’ capital on the consolidated balance sheet as of December 31, 2003.

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

The following schedules reconcile the amounts as originally reported in the Company’s consolidated balance sheet as of December 31, 2003 and the consolidated statements of income, comprehensive income, changes in members’ capital and cash flows for the years ended December 31, 2002 and 2003:

Consolidated Balance Sheet

		As of December 31, 2003
		(Reported)		Adjustments			(Restated)
		(Dollars in millions)
ASSETS
Current assets:
	Cash and cash equivalents	$	1,139		—		$	1,139
	Accounts receivable — net of allowance for doubtful accounts of $130		1,592		—			1,592
	Inventories		273		—			273
	Prepaid assets		186		—			186
	Other current assets		110		—			110
Total current assets			3,300		—			3,300
Property, plant and equipment, net			10,939		23			10,962
Licenses, net			7,769		—			7,769
Goodwill			849		—			849
Customer relationship intangibles, net			150		—			150
Other intangible assets, net			5		—			5
Investments in and advances to equity affiliates			2,288		(19	)		2,269
Other assets			226		—			226
Total assets		$	25,526		4		$	25,530
LIABILITIES AND MEMBERS’ CAPITAL
Current liabilities:
	Debt maturing within one year	$	95		—		$	95
	Accounts payable		904		—			904
	Due to affiliates, net		54		—			54
	Advanced billing and customer deposits		538		—			538
	Accrued liabilities		1,596		23			1,619
Total current liabilities			3,187		23			3,210

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

		As of December 31, 2003
		(Reported)			Adjustments			(Restated)
		(Dollars in millions)
Long-term debt:
	Debt due to members		9,678			—			9,678
	Other long-term debt, net of premium		2,914			—			2,914
Total long-term debt			12,592			—			12,592
Deferred tax liabilities, net			190			—			190
Other noncurrent liabilities			414			132			546
Total liabilities			16,383			155			16,538
Minority interests in consolidated entities			659			—			659
Members’ capital:
	Members’ capital		8,664			(151	)		8,513
	Receivable for properties to be contributed		(178	)		—			(178	)
	Accumulated other comprehensive loss, net of taxes of $0		(2	)		—			(2	)
Total members’ capital			8,484			(151	)		8,333
Total liabilities and members’ capital		$	25,526			4		$	25,530

Consolidated Statements of Income

		Year Ended December 31, 2002							Year Ended December 31, 2003
		(Reported)		Adjustments			(Restated)		(Reported)		Adjustments			(Restated)
		(Dollars in millions)
Operating revenues:
	Service revenues	$	13,922	$	—		$	13,922	$	14,223	$	—		$	14,223
	Equipment sales		981		—			981		1,260		—			1,260
Total operating revenues			14,903		—			14,903		15,483		—			15,483
Operating expenses:
	Cost of services		3,571		23			3,594		3,652		29			3,681
	Cost of equipment sales		1,535		—			1,535		2,031		—			2,031
	Selling, general and administrative		5,426		3			5,429		5,422		6			5,428
	Depreciation and amortization		1,850		(1	)		1,849		2,089		—			2,089
Total operating expenses			12,382		25			12,407		13,194		35			13,229
Operating income			2,521		(25	)		2,496		2,289		(35	)		2,254

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

		Year Ended December 31, 2002									Year Ended December 31, 2003
		(Reported)			Adjustments			(Restated)			(Reported)			Adjustments			(Restated)
		(Dollars in millions)
Other income (expenses):
	Interest expense		(911	)		—			(911	)		(856	)		—			(856	)
	Minority interest in earnings of consolidated entities		(123	)		—			(123	)		(101	)		—			(101	)
	Equity in net loss of affiliates		(265	)		(9	)		(274	)		(323	)		(10	)		(333	)
	Other, net		29			—			29			41			—			41
	Total other income (expenses)		(1,270	)		(9	)		(1,279	)		(1,239	)		(10	)		(1,249	)
Income before provision for income taxes and cumulative effect of accounting change			1,251			(34	)		1,217			1,050			(45	)		1,005
Provision for income taxes			12			—			12			28			—			28
Income before cumulative effect of accounting change			1,239			(34	)		1,205			1,022			(45	)		977
Cumulative effect of accounting change, net of tax			(32	)		—			(32	)		—			—			—
Net income		$	1,207		$	(34	)	$	1,173		$	1,022		$	(45	)	$	977

Consolidated Statements of Comprehensive Income

				Year Ended December 31, 2002									Year Ended December 31, 2003
				(Reported)			Adjustments			(Restated)			(Reported)		Adjustments			(Restated)
				(Dollars in millions)
Comprehensive Income
Net income				$	1,207		$	(34	)	$	1,173		$	1,022	$	(45	)	$	977
	Other comprehensive income (loss)
		Minimum pension liability adjustment, net of tax			(1	)		—			(1	)		—		—			—
		Net unrealized gain (loss) on securities:
			Reclassification adjustment for losses included in net income		1			—			1			—		—			—
Total comprehensive income				$	1,207		$	(34	)	$	1,173		$	1,022	$	(45	)	$	977

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

Consolidated Statements of Cash Flows

			Year Ended December 31, 2002									Year Ended December 31, 2003
			(Reported)			Adjustments			(Restated)			(Reported)			Adjustments			(Restated)
			(Dollars in millions)
Operating activities
Net income			$	1,207		$	(34	)	$	1,173		$	1,022		$	(45	)	$	977
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			1,850			(1	)		1,849			2,089			—			2,089
	Provision for doubtful accounts			404			—			404			259			—			259
	Asset impairments			151			—			151			—			—			—
	Minority interest in earnings of consolidated entities			123			—			123			101			—			101
	Equity in net loss of affiliates			265			9			274			323			10			333
	Cumulative effect of accounting change, net of tax			32			—			32			—			—			—
	Amortization of debt discount, net			1			—			1			1			—			1
	Deferred income taxes			(3	)		—			(3	)		(1	)		—			(1	)
	Changes in operating assets and liabilities:
		Accounts receivable		(280	)		—			(280	)		(331	)		—			(331	)
		Inventories		63			—			63			(147	)		—			(147	)
		Other current assets		(42	)		—			(42	)		(83	)		—			(83	)
		Accounts payable and other current liabilities		(420	)		9			(411	)		290			(12	)		278
		Pensions and post-employment benefits		91			—			91			55			—			55
	Other, net			150			17			167			108			47			155
Net cash provided by operating activities				3,592			—			3,592			3,686			—			3,686
Investing activities
Construction and capital expenditures				(3,085	)		—			(3,085	)		(2,734	)		—			(2,734	)
Investments in and advances to equity affiliates, net				(450	)		—			(450	)		(616	)		—			(616	)
Disposition of assets				6			—			6			7			—			7

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

	Year Ended December 31, 2002								Year Ended December 31, 2003
	(Reported)			Adjustments		(Restated)			(Reported)			Adjustments		(Restated)
	(Dollars in millions)
Acquisitions of businesses and licenses, net of cash received		(6	)		—		(6	)		(25	)		—		(25	)
Contractor engineering deposit		(50	)		—		(50	)		—			—		—
Net cash used in investing activities		(3,585	)		—		(3,585	)		(3,368	)		—		(3,368	)
Financing activities
Net repayment of commercial paper		(27	)		—		(27	)		—			—		—
Net repayment of long-term debt		(59	)		—		(59	)		(64	)		—		(64	)
Net distributions to minority interests		(79	)		—		(79	)		(33	)		—		(33	)
Contributions from members		499			—		499			10			—		10
Net cash provided by (used in) financing activities		334			—		334			(87	)		—		(87	)
Net increase in cash and cash equivalents		341			—		341			231			—		231
Cash and cash equivalents at beginning of period		567			—		567			908			—		908
Cash and cash equivalents at end of period	$	908		$	—	$	908		$	1,139		$	—	$	1,139

The restated consolidated statements of income by quarter for 2003 and 2004 are presented below:

		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
		(Restated)		(Restated)		(Restated)		(Restated)
		(Dollars in millions)
2003 (Unaudited)
Operating revenues:
	Service revenues	$	3,394	$	3,619	$	3,676	$	3,534
	Equipment sales		244		255		383		378
Total operating revenues			3,638		3,874		4,059		3,912
Operating expenses:
	Cost of services		829		897		1,010		945
	Cost of equipment sales		396		451		606		578
	Selling, general and administrative		1,218		1,271		1,442		1,497
	Depreciation and amortization		488		508		521		572
Total operating expenses			2,931		3,127		3,579		3,592
Operating income			707		747		480		320

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

		First			Second			Third			Fourth
		Quarter			Quarter			Quarter			Quarter
		(Restated)			(Restated)			(Restated)			(Restated)
		(Dollars in millions)
Other income (expenses):
	Interest expense		(225	)		(230	)		(197	)		(204	)
	Minority interest in earnings of consolidated entities		(24	)		(35	)		(25	)		(17	)
	Equity in net loss of affiliates		(74	)		(78	)		(90	)		(91	)
	Other, net		26			7			4			4
Total other income (expenses)			(297	)		(336	)		(308	)		(308	)
Income (loss) before provision for income taxes and cumulative effect of accounting change			410			411			172			12
Provision (benefit) for income taxes			2			12			6			8
Net income (loss)		$	408		$	399		$	166		$	4

The previously reported consolidated statements of income by quarter for 2003 are:

		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
		(Reported)		(Reported)		(Reported)		(Reported)
		(Dollars in millions)
2003 (Unaudited)
Operating revenues:
	Service revenues	$	3,394	$	3,619	$	3,676	$	3,534
	Equipment sales		244		255		383		378
Total operating revenues			3,638		3,874		4,059		3,912
Operating expenses:
	Cost of services		821		890		1,003		938
	Cost of equipment sales		396		451		606		578
	Selling, general and administrative		1,217		1,269		1,441		1,495
	Depreciation and amortization		488		508		521		572
Total operating expenses			2,922		3,118		3,571		3,583
Operating income			716		756		488		329

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Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

		First			Second			Third			Fourth
		Quarter			Quarter			Quarter			Quarter
		(Reported)			(Reported)			(Reported)			(Reported)
		(Dollars in millions)
Other income (expenses):
	Interest expense		(225	)		(230	)		(197	)		(204	)
	Minority interest in earnings of consolidated entities		(24	)		(35	)		(25	)		(17	)
	Equity in net loss of affiliates		(72	)		(76	)		(87	)		(88	)
	Other, net		26			7			4			4
Total other income (expenses)			(295	)		(334	)		(305	)		(305	)
Income (loss) before provision for income taxes and cumulative effect of accounting change			421			422			183			24
Provision (benefit) for income taxes			2			12			6			8
Net income (loss)		$	419		$	410		$	177		$	16

The effect of the restatement adjustments (unaudited) on the Company’s previously issued 2003 quarterly income statements are presented as follows:

		First			Second			Third			Fourth
		Quarter			Quarter			Quarter			Quarter
Net income as originally reported		$	419		$	410		$	177		$	16
Restatement adjustments:
	Cost of services		8			7			7			7
	Selling, general and administrative		1			2			1			2
	Equity in net loss of affiliates		(2	)		(2	)		(3	)		(3	)
Net income as restated		$	408		$	399		$	166		$	4

The impacts of these restatements to the Company’s statements of income for the quarters ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 were decreases to Net income of $11, $11, $11 and $12, respectively. The impact associated with correcting the Company’s accounting for operating leases on network facilities was as an increase to rent expense, reflected in Cost of services; for operating leases on retail and administrative facilities, such increases in rent expense are reflected in Selling, general and administrative expenses. The correction also had a de minimus impact on Depreciation and amortization to adjust for the lives used to depreciate certain leasehold improvements. The impact associated with correcting the accounting for the operating leases and useful lives of the Company’s GSMF joint venture was an increase in Equity in net loss of affiliates.

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(Dollars in Millions)

		First			Second			Third
		Quarter			Quarter			Quarter
		(Restated)			(Restated)			(Restated)
		(Dollars in millions)
2004 (Unaudited)
Operating revenues:
	Service revenues	$	3,558		$	3,801		$	3,838
	Equipment sales		384			354			419
Total operating revenues			3,942			4,155			4,257
Operating expenses:
	Cost of services		930			951			1,072
	Cost of equipment sales		537			505			585
	Selling, general and administrative		1,372			1,463			1,567
	Depreciation and amortization		553			565			573
Total operating expenses			3,392			3,484			3,797
Operating income			550			671			460
Other income (expenses):
	Interest expense		(198	)		(199	)		(200	)
	Minority interest in earnings of consolidated entities		(27	)		(41	)		(20	)
	Equity in net loss of affiliates		(108	)		(95	)		(98	)
	Other, net		4			1			—
Total other income (expenses)			(329	)		(334	)		(318	)
Income (loss) before provision for income taxes and cumulative effect of accounting change			221			337			142
Provision (benefit) for income taxes			6			(2	)		—
Net income (loss)		$	215		$	339		$	142

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(Dollars in Millions)

The previously reported consolidated statements of income by quarter for 2004 are presented below:

		First			Second			Third
		Quarter			Quarter			Quarter
		(Reported)			(Reported)			(Reported)
		(Dollars in millions)
2004 (Unaudited)
Operating revenues:
	Service revenues	$	3,558		$	3,801		$	3,838
	Equipment sales		384			354			419
Total operating revenues			3,942			4,155			4,257
Operating expenses:
	Cost of services		922			943			1,072
	Cost of equipment sales		537			505			585
	Selling, general and administrative		1,372			1,462			1,567
	Depreciation and amortization		552			565			572
Total operating expenses			3,383			3,475			3,796
Operating income			559			680			461
Other income (expenses):
	Interest expense		(198	)		(199	)		(200	)
	Minority interest in earnings of consolidated entities		(27	)		(41	)		(20	)
	Equity in net loss of affiliates		(105	)		(92	)		(96	)
	Other, net		4			1			—
Total other income (expenses)			(326	)		(331	)		(316	)
Income (loss) before provision for income taxes and cumulative effect of accounting change			233			349			145
Provision (benefit) for income taxes			6			(2	)		—
Net income (loss)		$	227		$	351		$	145

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(Dollars in Millions)

The effect of the restatement adjustments (unaudited) on the Company’s previously issued 2004 quarterly income statements are presented as follows:

		First			Second			Third
		Quarter			Quarter			Quarter
Net income as originally reported		$	227		$	351		$	145
Restatement adjustments:
	Cost of services		8			8			—
	Selling, general and administrative		—			1			—
	Depreciation and amortization		1			—			1
	Equity in net loss of affiliates		(3	)		(3	)		(2	)
Net income as restated		$	215		$	339		$	142

The impacts of these restatements to the Company’s statements of income for the quarters ended March 31, 2004, June 30, 2004, and September 30, 2004 were decreases to Net income of $12, $12, and $3, respectively. The impact associated with correcting the Company’s accounting for operating leases on network facilities was as an increase to rent expense, reflected in Cost of services; for operating leases on retail and administrative facilities, such increases in rent expense are reflected in Selling, general and administrative expenses. The correction also had a de minimus impact on Depreciation and amortization to adjust for the lives used to depreciate certain leasehold improvements. The impact associated with correcting the accounting for the operating leases and useful lives of the Company’s GSMF joint venture was an increase in Equity in net loss of affiliates.

3. Acquisitions and Dispositions

During 2004, 2003 and 2002, the Company completed certain transactions as part of its overall strategy to expand its wireless footprint and divest itself of nonstrategic assets, as well as divestitures required by regulatory agencies.

Acquisitions

AT&T Wireless

In October 2004, the Company acquired AT&T Wireless in a transaction accounted for under the purchase method under SFAS No. 141, Business Combinations (SFAS 141). AT&T Wireless was a provider of wireless voice and data services and products primarily in the U.S. and served nearly 22 million subscribers as of the acquisition date. AT&T Wireless also held equity interests in U.S. and international communications ventures, corporations and partnerships. The acquisition created the largest wireless communications company in the U.S., based upon the number of subscribers.

The aggregate consideration paid to AT&T Wireless shareholders to complete the AT&T Wireless acquisition was approximately $41,000 in cash. Under the merger agreement, each common shareholder of AT&T Wireless received $15 (whole dollars) in cash per common share and the AT&T Wireless preferred shareholders received the then applicable liquidation preference of their preferred shares. In addition, the Company incurred $42 of direct costs for legal, financial advisory and other services related to the

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(Dollars in Millions)

transaction, which costs were capitalized as part of the purchase price. The Company received $36,024 in equity funding from SBC and BellSouth to finance the acquisition in proportion to their respective economic interests. The remaining portion of the purchase price was funded with AT&T Wireless cash on hand. The results of AT&T Wireless’ operations have been included in the Company’s consolidated financial statements since the acquisition date.

The acquisition was structured as a merger of a wholly-owned subsidiary of the Manager with and into AT&T Wireless, following which AT&T Wireless became a direct wholly-owned subsidiary of the Manager, and as the surviving entity, AT&T Wireless retained all its assets and liabilities. Following the merger, the Manager sold all its interests in AT&T Wireless to the Company, and AT&T Wireless then became its direct wholly-owned subsidiary. Subsequently, a significant portion of the operations, including assets, liabilities and subsidiary entities, were transferred from the Company and AT&T Wireless to CW II. The Company and CW II executed supplemental indentures to AT&T Wireless’s two indentures under which its Senior Notes are outstanding to become co-obligated for all obligations thereunder, and AT&T Wireless and CW II executed supplemental indentures to the Company’s indenture under which the Company’s Senior Notes are outstanding to become co-obligated for all obligations thereunder. As a result, CW II, AT&T Wireless and the Company are co-obligated on all of the Company’s and AT&T Wireless’ Senior Notes.

The Company paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired for a number of reasons, including but not limited to the following:

•  AT&T Wireless fills in the Company’s licensed spectrum and network footprints by covering areas where it did not have licenses or network infrastructure;

•  AT&T Wireless adds depth to the Company’s licensed spectrum position in existing markets, enhancing the Company’s ability to offer future high-speed data services and reduce capital expenditures;

•  AT&T Wireless’ customer base, which has a stronger business customer component than that of the Company, adds a complementary customer mix to the Company’s customer base;

•  AT&T Wireless’ average revenue per user, or “ARPU”, had historically been higher than the ARPU of the Company’s customers;

•  AT&T Wireless gives the Company added size and scale to compete more effectively in the industry and to procure more significant cost economies from vendors; and

•  the acquisition will reduce the Company’s incollect roaming costs because of the broader post-acquisition footprint.

Allocation of Purchase Price

The application of purchase accounting under SFAS 141 requires that the total purchase price be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date. The allocation process requires an analysis of acquired contracts, customer relationships, contractual commitments and legal contingencies to identify and record the fair value of all assets acquired and liabilities assumed. In valuing acquired assets and assumed liabilities, fair values are based on, but are not

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(Dollars in Millions)

limited to: future expected cash flows; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; settlement plans for litigation and contingencies; and appropriate discount rates and growth rates.

The approach to the estimation of the fair values of the AT&T Wireless intangible assets involved the following steps:

•  Preparation of discounted cash flow analyses;

•  Deduction of the fair values of tangible assets;

•  Determination of the fair value of identified significant intangible assets;

•  Allocation of the excess purchase price over the fair value of the identifiable assets and liabilities acquired to goodwill; and

•  Reconciliation of the individual assets’ returns with the weighted average cost of capital.

Under the purchase method of accounting, the assets and liabilities of AT&T Wireless were recorded at their respective fair values as of the date of acquisition. The Company is in the process of obtaining third-party valuations of property, plant and equipment, intangible assets, debt and certain other liabilities. Given the size of the AT&T Wireless transaction and proximity to year end, the values of certain assets and liabilities are based on preliminary valuations and are subject to adjustment as additional information is obtained. Such additional information includes, but may not be limited to, the following: valuations and physical counts of property, plant and equipment, disposition of acquired inventory, plans relative to the disposition of certain assets acquired, exit from certain contractual arrangements and the involuntary termination of employees. Changes to the valuation of property, plant and equipment may result in adjustments to the fair value of certain identifiable intangible assets acquired. When finalized, adjustments to goodwill may result. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed and related deferred income taxes as of the respective acquisition date.

			AT&T
			Wireless
Assets acquired:
	Current assets		$	8,457	(1)
	Property, plant and equipment			10,314
	Intangible assets not subject to amortization
	— Licenses			15,540
	Intangible assets subject to amortization
	— Customer relationships			5,010
	— Other intangible assets			312
	Investments in unconsolidated subsidiaries			898
	Other assets			447
	Goodwill			20,468
		Total assets acquired		61,446

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

			AT&T
			Wireless
Liabilities assumed:
	Current liabilities, excluding current portion of long-term debt			3,261
	Long-term debt			12,172
	Deferred income taxes			3,938
	Other non-current liabilities			811
		Total liabilities assumed		20,182
Net assets acquired			$	41,264

(1)  Includes $5,240 of cash used to finance the acquisition.

Goodwill resulting from the acquisition of AT&T Wireless was assigned to the Company’s one reportable business segment. Goodwill includes a portion of value for assembled workforce which is not separately classified from goodwill in accordance with SFAS 141. None of the non-goodwill intangible assets are tax deductible; therefore, deferred tax liabilities were recorded on all intangible assets except goodwill. The deferred tax liabilities related to finite-lived intangible assets will be reflected as a tax benefit in the consolidated statements of income in proportion to and over the amortization period of the related intangible assets.

Substantially all of the licenses acquired have an indefinite life, and accordingly, are not subject to amortization. The majority of customer relationship intangible assets are being amortized over a weighted-average period of five years using the sum-of-the-years digits method. This method best reflects the estimated pattern in which the economic benefits will be consumed. Other intangible assets and other noncurrent liabilities include lease and sublease contracts, which are amortized over the remaining terms of the underlying leases and have a weighted-average amortization period of seven years. Other intangibles also includes the right to use the AT&T brand trade name, which is amortized over a six month period, and represents the use period under the Brand License Agreement with AT&T Corp., as amended. Trademarks are amortized over their expected remaining economic lives, ranging from five to six years, and have a weighted-average amortization period of 5.6 years. See Note 5 for disclosure of expected amortization expense related to intangible assets.

The Company has not identified any material pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available which would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.

Triton Wireless Properties

In September 2004, the Company and AT&T Wireless and Triton PCS Holdings, Inc. (Triton) signed an agreement providing for the acquisition by the Company of Triton’s wireless properties in Virginia (the “Virginia properties”) in exchange for certain of AT&T Wireless’ properties in North Carolina, Puerto

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(Dollars in Millions)

Rico and the U.S. Virgin Islands (the “NC/ PR properties”). In addition, the Company agreed to pay Triton $176 in cash. The exchange of network properties closed on December 1, 2004 and is accounted for as a purchase in accordance with SFAS 141. The FCC licenses were retained by the respective parties pending FCC approval for the transfer. Prior to FCC approval, each party will lease the retained FCC licenses to the other party. The results of the Virginia properties have been included in, and the results of the exchanged properties have been excluded from, the Company’s consolidated financial statements since the closing date. Upon completion of this transaction, the Company operates in all of the 100 largest markets in the U.S. The exchange of the FCC spectrum licenses will be effected following FCC approval, which the Company expects in the second quarter of 2005.

Under the purchase method of accounting, the assets and liabilities of the Virginia properties were recorded at their respective fair values as of the date of acquisition. The value of certain assets and liabilities of the Virginia properties are also based on preliminary valuations and are subject to adjustment. The following table summarizes the estimated fair values of the assets and liabilities exchanged as of the acquisition date.

			Virginia		NC/PR			Combined
			Properties		Properties			Totals
Assets acquired (disposed):
	Current assets		$	32	$	(62	)	$	(30	)
	Property, plant and equipment			147		(285	)		(138	)
	Intangible assets subject to amortization — Customer relationships			48		(68	)		(20	)
	Goodwill			438		(117	)		321
		Total assets acquired (disposed)		665		(532	)		133
Liabilities assumed (disposed):
	Current liabilities			13		4			17
	Noncurrent liabilities			—		(60	)		(60	)
		Total liabilities assumed (disposed)		13		(56	)		(43	)
Net assets acquired (disposed)			$	652	$	(476	)	$	176

In addition to the wireless property exchange, AT&T Wireless and Triton, through wholly-owned subsidiaries, signed an agreement in July 2004 to terminate their stockholders’ agreement which would terminate a market exclusivity arrangement between the parties. As of the close of the AT&T Wireless acquisition, the Company had wireless operations in markets where AT&T Wireless was prohibited from operating under the exclusivity arrangement. In exchange for the termination of the stockholders’ agreement, AT&T Wireless agreed to surrender to Triton its equity interest in Triton valued at $194. This transaction closed on October 26, 2004, immediately following the acquisition of AT&T Wireless. With the consummation of this agreement, the Company is able to provide on its network continuing service in areas where Triton currently has operations. The Company recognized no gain or loss on the transaction.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

     Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations of the Company for the years ended December 31, 2003 and 2004 assume that the acquisitions of AT&T Wireless and the Virginia properties were completed as of January 1 in each fiscal year shown below:

	Year Ended
	December 31,
	2003		2004
	(Unaudited)
Revenues	$	31,238	$	32,179
Income before provision for income taxes		1,626		232
Net income		1,353		193

The pro forma amounts represent the historical operating results of AT&T Wireless and the Virginia properties with appropriate adjustments that give effect to depreciation and amortization, interest expense, income taxes, and the elimination of intercompany roaming activity between the Company, AT&T Wireless and the Virginia properties. The effects of other non-acquisition related items discussed in Notes 14 and 20 are included in the pro forma amounts presented above. The pro forma amounts are not necessarily indicative of the operating results that would have occurred if the acquisitions and related transactions had been completed at the beginning of the applicable periods presented. In addition, the pro forma amounts are not necessarily indicative of operating results in future periods, in which the Company might realize revenue enhancements and cost savings.

     Acquisition of NextWave Licenses

In August 2003, the Company executed an agreement with NextWave Telecom, Inc. and certain of its affiliates for the purchase of FCC licenses for wireless spectrum in 34 markets for $1,400 in cash. The transaction closed in April 2004, and the Company recorded this cost as additional licenses in the consolidated balance sheet. The funding for this transaction consisted of $900 in existing cash on hand and $500 from commercial paper, which was repaid prior to December 31, 2004.

     Puerto Rico Joint Venture

In April 2002, the Company and an affiliate of SBC completed a transaction with T-Mobile in which T-Mobile contributed assets for a 6% equity interest in the Company’s Puerto Rico wireless communications operations. No gain or loss was recognized on this transaction. This transaction resulted in a decrease in the Company’s ownership interest in the Puerto Rico business from 50% to 47%. Due to the fact that all existing control provisions have been retained by the Company, consolidation of the financial statements of the Puerto Rico business continues. On each of the fifth, seventh and tenth anniversaries of this transaction, T-Mobile and the Company have fair market value put and call options, respectively, related to T-Mobile’s 6% equity interest.

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(Dollars in Millions)

Dispositions

     Investment in Cincinnati Bell Wireless

In August 2004, the Company and Cincinnati Bell Inc. (Cincinnati Bell) signed an agreement, amended in February 2005, that allows the Company the right to put to Cincinnati Bell, any time on or after January 31, 2006, AT&T Wireless’ 19.9% equity interest in Cincinnati Bell’s wireless subsidiary, Cincinnati Bell Wireless LLC (CBW), for $83. The agreement also allows Cincinnati Bell the right to call the equity any time before January 31, 2006, for $85 plus interest. On and after January 31, 2006, Cincinnati Bell has the right to call the equity for $83 plus interest.

Additionally, the Company, AT&T Wireless and Cincinnati Bell amended the CBW operating agreement to remove the exclusivity arrangement applicable to AT&T Wireless, which allows the Company to provide continuing service over its network following the closing of the Company’s acquisition of AT&T Wireless in areas where CBW currently has operations. By its terms, this amendment was effective on October 26, 2004, immediately following the Company’s acquisition of AT&T Wireless.

Upon consummation of the AT&T Wireless acquisition, the Company and Cincinnati Bell also amended certain provisions of the CBW operating agreement to eliminate the right of the Company to appoint any members of the member committee and limit the circumstances in which the Company will retain approval rights over the actions of CBW. As a result, the Company accounts for its investment in CBW under the cost method. This investment, which has a carrying amount of $81 at December 31, 2004, is included in “Other assets” in the consolidated balance sheets.

     Mobitex Data Business

Pursuant to an agreement signed in September 2004, the Company sold Cingular Interactive, L.P. (Cingular Interactive), a data messaging business utilizing the proprietary “Mobitex” packet switched network, to newly formed affiliates of Cerberus Capital Management, L.P. (Buyer) for $45. The Company retained Cingular Interactive’s direct e-mail customers, as well as several other major accounts. The Company will continue its involvement in this data business based upon “Mobitex” technology as a reseller of the Buyer’s services. The FCC licenses of Cingular Interactive were retained by the Company and leased to the Buyer pending FCC approval for the transfer. The sale transaction closed in October 2004 and the license transfer closed in December 2004.

In connection with its agreement to sell Cingular Interactive, the Company evaluated the Cingular Interactive long-lived asset carrying values, including property, plant and equipment and FCC licenses, for recoverability. Based on the results of the recoverability test, the Company adjusted the carrying values of the Cingular Interactive long-lived assets to their fair value in September 2004, resulting in a loss of $31. Fair value was determined using the agreed upon sale price for the Cingular Interactive assets, less costs to sell. The write-down of the long-lived assets is included in “Cost of services” in the consolidated statements of income and “Other, net” in the consolidated statements of cash flows. The loss recognized on sale of Cingular Interactive in October 2004 was not significant.

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(Dollars in Millions)

4.     Property, Plant and Equipment

Property, plant and equipment is summarized as follows:

			December 31,
	Estimated
	Useful Lives		2003			2004
	(In years)		(Restated)
Land		—	$	55		$	95
Buildings and building improvements		10-25		3,426			6,182
Operating and other equipment		2-15		15,844			25,388
Furniture and fixtures		3-10		348			450
Construction in progress		—		364			810
				20,037			32,925
Less accumulated depreciation and amortization				(9,075	)		(10,967	)
Property, plant and equipment, net			$	10,962		$	21,958

Depreciation expense, capitalized interest and network engineering costs incurred during the construction phase of the Company’s wireless network are summarized as follows:

	Year Ended December 31,
	2002		2003		2004
	(Restated)
Depreciation expense	$	1,661	$	1,927	$	2,562
Capitalized interest costs		27		15		16
Capitalized network engineering costs		127		103		134

The net book value of assets recorded under capital leases was $928 and $916 at December 31, 2003 and 2004, respectively. These capital leases principally relate to communications towers and other operating equipment. Amortization of assets recorded under capital leases is included in depreciation expense. Capital lease additions for the years ended December 31, 2002, 2003 and 2004 were $121, $143 and $94, respectively.

The Company’s cellular/PCS networks are currently equipped with GSM and TDMA digital transmission technologies. In the second quarter of 2004, the Company completed a two-year overlay of GSM equipment throughout its TDMA markets to provide a common voice standard. As a part of this project, the Company added high-speed technologies for data services known as General Packet Radio Service (GPRS) and Enhanced Data Rates for GSM Evolution (EDGE). Effective January 1, 2003, the Company implemented the results of a review of the estimated service lives of its remaining TDMA network assets. The Company determined that a reduction in the useful lives of TDMA assets was warranted based on the projected transition of network traffic to its GSM network. Useful lives were shortened to fully depreciate all TDMA equipment by December 31, 2008. Depreciation expense increased by $91 for the year ended December 31, 2003 as a result of the change in estimate.

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(Dollars in Millions)

Due to the accelerated migration of traffic to its GSM network experienced in 2004, the Company again evaluated the estimated useful lives of its TDMA equipment. This review was completed in the fourth quarter and, effective October 1, 2004, useful lives were further shortened to fully depreciate all TDMA equipment by December 31, 2007. This change in estimate increased depreciation expense in the fourth quarter of 2004 by $61 and is estimated to increase 2005 depreciation expense by approximately $246. The Company will continue to monitor the rate of transition of its existing customers and acquired AT&T Wireless customers to GSM, and, therefore, additional changes to shorten depreciable lives may be necessary. The finalization of certain AT&T Wireless integration plans in the first and second quarters of 2005 may also result in the need to shorten estimated useful lives of network and other property, plant and equipment.

During 2002, the Company provided a $50 security deposit to a contract engineering vendor that is being utilized to perform construction work on the Company’s network. The security deposit bears interest at LIBOR plus 10 basis points and is collateralized by a bank letter of credit. The security deposit, which was returned to the Company in January 2005, is included in “Other assets” in the consolidated balance sheets as of December 31, 2004.

5. Intangible Assets

Effective January 1, 2002, the Company adopted SFAS 142. In conjunction with this adoption, the Company reassessed the useful lives of previously recognized intangible assets. A significant portion of its intangible assets are FCC licenses that provide the Company with the exclusive right to utilize certain radio frequency spectrum to provide wireless communications services. While FCC licenses are issued for only a fixed time, generally 10 years, such licenses are subject to renewal by the FCC. Renewals of FCC licenses have occurred routinely and at nominal cost. Moreover, the Company has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of its FCC licenses. As a result, the FCC licenses are treated as an indefinite-lived intangible asset under the provisions of SFAS 142 and are not amortized but rather are tested for impairment annually or when events and circumstances warrant. The Company continues to reevaluate the useful life determination for FCC licenses each reporting period to determine whether events and circumstances continue to support an indefinite useful life.

The Company completed the transition impairment test of its indefinite-lived intangible assets as of January 1, 2002 and determined that no impairment existed. In accordance with EITF 02-7, Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets, this impairment test was performed on an aggregate basis, consistent with the Company’s management of the business on a national scope. The Company utilized a fair value approach, incorporating discounted cash flows, to complete the test. This approach determines the fair value of the FCC licenses and, accordingly, incorporates cash flow assumptions regarding the investment in a network, the development of distribution channels and other inputs for making the business operational. As these inputs are included in determining free cash flows of the business, the present value of the free cash flows is attributable to the licenses. The discount rate applied to the cash flows is consistent with the Company’s weighted-average cost of capital.

The Company completed the transition impairment test of goodwill as of January 1, 2002 using a two-step process. The first step screens for potential impairment, while the second step measures the amount of the impairment, if any. In the first quarter of 2002, the Company completed the first step of the goodwill impairment transition tests as of January 1, 2002 for its reporting units. For goodwill related to the

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(Dollars in Millions)

Company’s cellular/ PCS business, the first step indicated no impairment in value. For goodwill related to the Mobitex data business, the first step indicated an impairment in value. To measure any impairment, in the second quarter of 2002, the Company completed the second step of the goodwill impairment transition test for the Mobitex data business using a discounted cash flow approach. Based on the results of this test, the Company recognized an impairment of the entire goodwill balance related to its Mobitex data business, with a carrying value of $32, and reflected the impairment as a cumulative effect of a change in accounting principle in the first quarter of 2002. The Company believes that the decline in the fair value of its Mobitex business was due to the development of new wireless data technologies.

Using methodologies consistent with those applied for its transitional impairment tests performed as of January 1, 2002, the Company completed its annual impairment tests for goodwill and indefinite-lived FCC licenses during the fourth quarters of 2002, 2003 and 2004. These annual impairment tests, prepared as of October 1, resulted in no impairment of the Company’s goodwill or indefinite-lived FCC licenses. The annual impairment test conducted in 2004 did not include the goodwill and indefinite-lived FCC licenses that were recorded as a result of the Company’s acquisition of AT&T Wireless on October  26, 2004 (see Note 3).

Summarized below are the carrying values for the major classes of intangible assets that will continue to be amortized under SFAS 142, as well as the carrying values of those intangible assets deemed to have indefinite lives:

				December 31, 2003					December 31, 2004
		Estimated		Gross					Gross
		Useful		Carrying		Accumulated			Carrying		Accumulated
		Lives		Amount		Amortization			Amount		Amortization
		(In years)
Intangible assets subject to amortization:
	FCC licenses used in Mobitex business		4	$	28	$	(7	)	$	—	$	—
	Foreign licenses		9-18		—		—			14		—
	Customer relationships		5		1,070		(920	)		5,273		(575	)
	Other		1-10		147		(143	)		312		(73	)
Total				$	1,245	$	(1,070	)	$	5,599	$	(648	)
Intangible assets not subject to amortization:
	FCC licenses			$	7,748	$	—		$	24,748	$	—
	Goodwill			$	849	$	—		$	21,637	$	—

The weighted average estimated useful lives of intangible assets subject to amortization was 5.0 years for the year ended December 31, 2004, with remaining useful lives of approximately 4.8 years.

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(Dollars in Millions)

The changes in the carrying value of goodwill for the year ended December 31, 2004 are as follows; changes in goodwill for the year ended December 31, 2003 are immaterial.

Balance, December 31, 2003		$	849
	Goodwill acquired		20,906
	Goodwill disposed of		(118	)
Balance, December 31, 2004		$	21,637

The following table presents current and estimated amortization expense for each of the following periods:

Aggregate amortization expense for the year ended:
	2002	$	188
	2003		162
	2004		515
Estimated amortization expense for the year ending:
	2005		1,763
	2006		1,322
	2007		960
	2008		606
	2009 and thereafter		300

In addition to the SFAS 142 intangible assets noted above, the Company recorded $1 of intangible assets in each of 2003 and 2004 in connection with the recognition of an additional minimum liability for its bargained pension plan and/or other unqualified benefit plans as required by SFAS No. 87, Employers’ Accounting for Pensions, (SFAS 87) (see Note 17).

6. Investments in and Advances to Equity Affiliates

The Company has investments in affiliates and has made advances to entities that provide the Company access to additional U.S. and international wireless markets. The Company does not have a controlling interest in these investments, nor do these investments meet the criteria for consolidation under FIN 46R. Substantially all of these investments are accounted for under the equity method of accounting. The most significant of these investments was GSMF, a jointly controlled network infrastructure venture with T-Mobile for networks in the New York City metropolitan area, California and Nevada.

At December 31, 2004, the Company’s investments in equity method unconsolidated subsidiaries also included investments obtained in the Company’s purchase of AT&T Wireless (see Note 3). At December 31, 2003, the carrying value of the Company’s investments accounted for under the equity method was less than the Company’s share of the underlying reported net assets by $86; at December 31, 2004, the carrying value exceeded the Company’s share of the underlying reported net assets by $56. The Company received cash distributions from its equity method unconsolidated subsidiaries of $142 for the year ended December 31, 2004, primarily from Atlantic West B.V. as a result of the sale of its interest in Eurotel Bratislava a.s.

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(Dollars in Millions)

Investments in and advances to equity affiliates consist of the following:

	At December 31:
	2003		2004
	(Restated)
Investment in GSMF	$	2,234	$	2,108
Investment in Atlantic West B.V. (Netherlands)		—		349
Investment in IDEA Cellular Ltd. (India)		—		210
Other		35		9
	$	2,269	$	2,676

GSMF

In November 2001, the Company and T-Mobile formed GSMF and contributed to it portions of their existing network infrastructures in the California, Nevada and New York City metropolitan area markets. Management control of GSMF was vested in a four-member management committee, to which each company had the right to appoint two members. GSMF was not a variable interest entity as defined by FIN 46R nor did the Company have the unilateral ability to control any actions of GSMF. As a result, the Company’s interest in GSMF was accounted for as an equity method investment. Both companies bought network services from GSMF but retained ownership and control of their own licenses in those markets. The Company and T-Mobile independently marketed their services to customers using their respective brand names and utilized their own sales, marketing, billing and customer care operations. In July 2002, the Company began marketing its commercial service in the New York City market and T-Mobile began service in California and Nevada.

On May 25, 2004, the Company and T-Mobile announced their intent to terminate the network infrastructure joint venture, with the Company selling the California and Nevada network and certain licenses to T-Mobile. The transaction closed on January 5, 2005. See Note 20 for additional information.

The Company and T-Mobile jointly funded capital expenditures of GSMF. Pursuant to the operating agreements, the Company and T-Mobile procured services and network equipment on behalf of GSMF in the respective markets. Network equipment was contributed to GSMF at prices which were mutually agreed upon by the parties and which approximated fair value. The Company deferred any resulting profits and recorded them as part of the Company’s investments in and advances to equity affiliates. The Company recognized the intercompany profit over the estimated useful lives of the related assets as a reduction of equity in net loss of affiliates.

Capital contributions to GSMF were generally determined by the Company’s proportionate share of the annual capital expenditure requirements based on each party’s incremental growth in network usage, and such contributions were accounted for as an increase to the Company’s investment. During 2002, 2003 and 2004, the Company made net capital contributions to GSMF of $707, $612 and $290, respectively.

The Company had contractual commitments to contribute cash of $225 to GSMF in each of 2002 and 2003. The 2002 and 2003 capital contribution amounts above include $225 of cash contributions made in

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(Dollars in Millions)

each year by the Company in satisfaction of the Company’s contractual commitments. Upon dissolution of the joint venture, a portion of this contribution was distributed to T-Mobile (see Note 20).

The Company incurred and charged to GSMF certain network operating costs. The monthly operating expenses of GSMF, including monthly cash payments made on tower capital lease obligations, were then charged back to the Company and T-Mobile based upon each party’s proportionate share of licensed spectrum in each market. Through a separate reciprocal home roaming agreement, the Company and T-Mobile charged each other for usage that was not in the same proportion as the spectrum-based allocations. This usage charge was primarily based upon the Company’s and T-Mobile’s share of the total minutes of use on the respective networks. These charges for network services are included in “Cost of services” in the consolidated statements of income. These transactions are summarized as follows:

	Year Ended December 31,
	2002		2003		2004
Network operating costs charged to GSMF	$	225	$	320	$	385
Network services received based on usage		216		254		253

At December 31, 2003 and 2004, the “Due (to) from affiliates, net” caption in the consolidated balance sheets included the following amounts related to transactions between the Company and GSMF:

		At
		December 31,
		2003			2004
Due (to)/from for:
	Settlement of Capital Obligations	$	(17	)	$	125
	Settlement of Operating Expenses		20			13

GSMF incurred net losses due to depreciation, deferred rent and interest expense, which are not reimbursed by the Company or T-Mobile. For the years ended December 31, 2002, 2003 and 2004, the Company recorded equity in the net loss of GSMF of $250 (restated), $335 (restated) and $416, respectively. At December 31, 2004, the Company’s economic interest in GSMF approximated 60%.

At December 31, 2004, the Company remained obligated with respect to $31 of capital lease obligations included in the non-current liabilities caption of GSMF’s summarized balance sheet information below. These capital lease obligations relate to tower space leased from an affiliate of SBC (see Note 19).

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(Dollars in Millions)

Summarized financial information with respect to GSMF is as follows:

	December 31,
	2003		2004
	(Restated)
Balance Sheet Information:
Current assets	$	9	$	139
Property, plant and equipment		3,588		4,133
Current liabilities		9		139
Noncurrent liabilities		273		330
Members’ capital		3,315		3,803

	Year Ended December 31,
	2002			2003			2004
	(Restated)			(Restated)
Income Statement Information:
Revenues	$	325		$	451		$	554
Costs and expenses (excluding depreciation)		327			452			578
Depreciation expense		324			454			589
Operating loss		(326	)		(455	)		(613	)
Interest expense		17			19			20
Other expense		—			5			18
Net loss		(343	)		(479	)		(651	)

Current assets are comprised primarily of amounts due from T-Mobile. Current liabilities are comprised primarily of amounts due to the Company. Noncurrent liabilities are comprised primarily of capital lease obligations.

Atlantic West B.V.

Atlantic West B.V. (AWBV) is a 50/50 joint venture between the Company and Verizon Communications, Inc. (Verizon). AWBV owned a 49% interest in Eurotel Bratislava a.s. (Bratislava), a wireless operating entity in Slovakia prior to its sale in December 2004. In December 2004, AWBV sold its interest in Bratislava to Slovak Telecom a.s. for total cash proceeds of $315. The Company’s share of proceeds from the sale totaled $158. AWBV distributed $280 of the proceeds upon completion of the sale, of which $140 was distributed to the Company. AWBV holds the remaining $35 in cash, along with $662 in cash from a prior sale, which will be distributed equally to the Company and Verizon upon completion of a repatriation plan which qualifies under the American Jobs Creation Act of 2004 (see Note 16). The Company recognized no gain or loss on the sale transaction as the assumed fair value of the investment, in conjunction with its purchase of AT&T Wireless, equaled the transaction sale proceeds.

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(Dollars in Millions)

IDEA Cellular Ltd.

In December 2004, the Company signed an agreement to sell its indirect 32.9% interest in IDEA Cellular Ltd. (IDEA), a cellular telecommunications company in India, to a joint venture between STT Communications Ltd. and TM International Sdn, a wholly-owned subsidiary of Telekom Malaysia Berhd. The Company will, upon closing of the transaction, receive the U.S. dollar equivalent of Rupees 9,108,628,130 based upon the exchange rate two business days before the transaction closes. The U.S. dollar equivalent was approximately $210 as of December 31, 2004. The Company recorded a pretax currency translation adjustment of $10 within other comprehensive income (loss) at December 31, 2004 for the increase in the U.S. dollar equivalent which occurred between the Company’s acquisition of AT&T Wireless and December 31, 2004. The transaction is subject to, among other things, approval by several regulatory agencies in India as well as the lenders of IDEA Cellular Ltd.

See Note 3 for a discussion of the equity interest in Triton, which the Company received in conjunction with its acquisition of AT&T Wireless and which was subsequently surrendered to Triton.

7. Variable Interest Entities

The Company has variable interests in several entities for which it is deemed to be the primary beneficiary. These variable interests typically consist of a combination of any or all of voting equity interests, nonvoting equity interests, loans and put options that provide the other owners the right to require the Company to purchase their ownership interest if and when certain events occur. These entities were formed to acquire licenses that were restricted by FCC rule to businesses with limited assets and revenues, and to provide a means through which disqualified large businesses, such as the Company or AT&T Wireless, could invest in these licenses. To date, the activities of these entities have consisted primarily of acquiring licenses through acquisitions and FCC auctions and network construction.

Salmon

In November 2000, the Company and Crowley Digital Wireless, LLC (Crowley Digital) entered into an agreement, pursuant to which Salmon was formed to bid as a “very small business” for certain 1900 MHz band PCS licenses auctioned by the FCC. The auction ended in January 2001. Salmon was the successful bidder for, and at the conclusion of the auction proceedings was granted, 45 licenses, for which Salmon paid $241.

The Company made secured loans to Salmon to fund the purchase of the 45 licenses. Net advances and loans made for the year ended December 31, 2002 were $25. In 2002, the FCC refunded to Salmon the auction deposits pertaining to 34 additional licenses for which it was the highest bidder but the award of which was later invalidated by a decision of the U.S. Supreme Court. Salmon used these proceeds to repay $421 in principal and interest to the Company. The Company recognized interest income on the loan balance of $22 for the year ended December 31, 2002.

Crowley Digital has the right to put its approximate 20% economic interest in Salmon to the Company at a cash price equal to Crowley Digital’s initial investment plus a specified rate of return. The put right can be exercised at certain times, and the Company estimates that the earliest exercise period will begin in February 2006 and the latest exercise period will end in April 2008. The Company’s maximum liability for

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(Dollars in Millions)

the purchase of Crowley Digital’s interest in Salmon under this put right is $225. The fair values of this put obligation, estimated at $139 and $155 as of December 31, 2003 and 2004, respectively, are included in “Other noncurrent liabilities” in the consolidated balance sheets.

Management control of Salmon is vested in Crowley Digital under the terms of Salmon’s limited liability company agreement as Crowley Digital appoints three of the five members of Salmon’s management committee. The Company does not have the unilateral ability to control any actions by Salmon. As a result, the Company’s approximate 80% non-controlling economic interest in Salmon had historically been accounted for as an equity method investment through December 31, 2002. For the year ended December 31, 2002, the Company recorded equity losses of $29 associated with its investment in Salmon.

As described in Note 1, the Company adopted the provisions of FIN 46, effective January 1, 2003. The Company determined that Salmon meets the definition of a variable interest entity and that the Company is the primary beneficiary of the Salmon variable interests. Accordingly, the Company consolidated the financial position, results of operations and cash flows of Salmon, effective January 1, 2003. Consolidation of Salmon in the Company’s financial statements is solely for purposes of complying with FIN 46 and does not reflect any change in voting control over Salmon. The Company initially measured the assets, liabilities and noncontrolling interests of Salmon at their carrying amounts. The equity interest of Crowley Digital is included in “Minority interests in consolidated entities” in the accompanying consolidated balance sheets. The Company did not restate any previously issued financial statements. The income statement and cash flow impacts of the Salmon consolidation for the year ended December 31, 2002 would not have been material.

AT&T Wireless Variable Interest Entities

As a result of the AT&T Wireless acquisition, the Company’s consolidated financial statements include other variable interest entities, similar to Salmon, for which the Company is deemed to be the primary beneficiary. The Company’s maximum liability related to these entities as of December 31, 2004 was approximately $145, which represents the gross payment under the put options that provide the other owners the right to require the Company to purchase their ownership interests under certain circumstances. Also, through its acquisition of AT&T Wireless, the Company acquired a variable interest and was deemed to be the primary beneficiary in an entity engaged in leasing activities (see Note 9).

The Company has no significant variable interests for which it is not deemed to be the primary beneficiary.

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(Dollars in Millions)

8. Accrued Liabilities

Accrued liabilities are summarized as follows:

	December 31,
	2003		2004
	(Restated)
Accrued fixed asset purchases	$	498	$	822
Taxes, other than income		355		387
Payroll and other related liabilities		256		697
Agent commissions		170		329
Advertising		88		231
Accrued interest		6		232
Other		246		1,016
Total accrued liabilities	$	1,619	$	3,714

9. Debt

Debt Maturing Within One Year

Revolving Credit Agreement

Effective August 1, 2004, the Company entered into a revolving credit agreement with SBC and BellSouth for them to provide unsubordinated short-term financing on a pro rata basis at an interest rate of LIBOR plus .05% for the Company’s ordinary course operations based upon the Company’s budget and forecasted cash needs. The agreement provides that in the event that the Company has available cash (as defined) on any business day, such amount shall first be applied to the repayment of the revolving loans, and any remaining excess then shall be loaned to SBC and BellSouth, pro rata, and ultimately applied on the first day of the subsequent month to the repayment of the Subordinated Notes from SBC and BellSouth (member loans; see “Debt Due to Members” below) if the Company does not then require a cash advance under the agreement. In addition, the agreement provides that free cash flow (as defined) after repayment of the revolving loans and the member loans will be distributed to SBC and BellSouth. For the quarter ended September 30, 2004, the Company had advances to members of $50 under this agreement, which were used to repay a portion of the Company’s subordinated member loans in October 2004. As of December 31, 2004, the members had advanced $1,667 to the Company under the agreement to fund operations, of which $899 was repaid through February 2005. The initial term of the agreement expires in July 2005. The agreement provides that SBC and BellSouth may extend its term, and the Company expects them to do so for the foreseeable future. The weighted average annual interest rate under this agreement for the period August 1, 2004 through December 31, 2004 was 2.3%. At December 31, 2004, the rate was 2.4%.

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(Dollars in Millions)

Commercial Paper Program and Revolving Bank Credit Facility

At December 31, 2003, the Company had a commercial paper program and an unsecured 364-day revolving bank credit facility of $1,000 to support its commercial paper program. At December 31, 2003, the Company had no outstanding borrowings under the commercial paper program or the credit facility and was in compliance with all covenants under the credit facility. During 2004, the Company borrowed, and subsequently repaid, $500 under the commercial paper program to fund the purchase of NextWave licenses (see Note 3). Following the execution of the revolving credit agreement with SBC and BellSouth and the full repayment of outstanding commercial paper, the Company terminated both its commercial paper program and revolving bank credit facility.

Accounts Receivable Secured Borrowing

In December 2003, the Company established an accounts receivable secured borrowing program that it could use to obtain financing not to exceed $400, collateralized by customer trade accounts receivable and related contract rights. As of December 31, 2003, the Company was in compliance with the covenants and had no amounts outstanding under this financing arrangement. The Company never utilized this facility, and, effective June 29, 2004, the Company terminated its accounts receivable secured borrowing program.

Long-term Debt

Long-term debt is summarized as follows:

		December 31,
		2003		2004
Due to members — Subordinated Notes		$	9,678	$	9,628
Due to external parties — Cingular Wireless LLC, maker:
	5.625% Senior Notes, due December 2006		500		500
	6.5% Senior Notes, due December 2011		750		750
	7.125% Senior Notes, due December 2031		750		750
Due to external parties — AT&T Wireless Services, Inc., maker:
	6.875% Senior Notes, due April 2005		—		250
	7.35% Senior Notes, due March 2006		—		1,000
	7.5% Senior Notes, due May 2007		—		750
	7.875% Senior Notes, due March 2011		—		3,000
	8.125% Senior Notes, due May 2012		—		2,000
	8.75% Senior Notes, due March 2031		—		2,500

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

		December 31,
		2003			2004
Due to external parties — TeleCorp Wireless, Inc., maker:
	10.625% Senior Subordinated Notes, due July 2010		—			200
	Capital leases, 6.0% to 9.6%		908			1,007
	Capital leases, Japanese Yen and U.S. Dollar denominated, 4.86% — 7.08% in 2003 and 5.56% in 2004		47			4
	Other		64			52
Total long-term debt, including current maturities			12,697			22,391
Unamortized premium (discount) on Senior Notes and Senior Subordinated Notes, net			(11	)		1,963
Unamortized discount on other Notes			—			(3	)
Current maturities of long-term debt			(95	)		(491	)
Interest rate swap fair value adjustment (see Note 10)			1			(3	)
Total long-term debt		$	12,592		$	23,857

Debt Due to Members

The long-term debt due to members represents loans due to SBC and BellSouth. Interest accrues and is payable monthly. Interest expense on the member loans and the revolving credit agreement for the years ended December 31, 2002, 2003 and 2004 was $726, $653 and $586, respectively. As of July 1, 2003, the Company executed amended, restated and consolidated subordinated promissory notes to modify the terms of the Company’s member loans. The amendment reduced the fixed interest rate from 7.5% to 6.0% and extended the maturity date to June 30, 2008. The Company may, however, prepay the member loans at any time, subject to the provisions described below, and is obligated to prepay the member loans to the extent of excess cash from operations (as defined). See “Revolving Credit Agreement” above.

SBC and BellSouth have agreed to subordinate their repayment rights applicable to the member loans to the repayment rights of the Company’s senior debt. Senior debt includes the Company’s Senior Notes, including Senior Notes of AT&T Wireless and other borrowings from external parties designated as senior debt to which SBC and BellSouth have specifically agreed to be subordinate. The payment of principal and interest on the subordinated member loans by the Company is prohibited in the event of bankruptcy or an event of default in the payment or prepayment of any principal of or interest on any senior debt, or in the event of an acceleration of the subordinated debt upon its default, until the senior debt has been repaid in full.

Senior Notes of Cingular Wireless LLC

In December 2001, the Company completed the private placement of $2,000 of Senior Notes under Regulation D of the Securities Act of 1933. The Senior Notes are unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. In 2002, the Company filed with the SEC a registration statement on Form S-4 pertaining to the exchange of the private placement Senior Notes for

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(Dollars in Millions)

Senior Notes that are registered under the securities laws in identical principal amounts and with substantially identical terms. Interest on the Senior Notes is payable in arrears semi-annually on June 15 and December 15.

The Senior Notes are governed by an indenture with J.P. Morgan Trust Company, N.A., which acts as trustee. The indenture contains a “negative pledge” provision that the Company will not subject its property or assets to any mortgage or other encumbrance unless the Senior Notes are secured equally and ratably with other indebtedness that is secured by that property or assets, unless “secured debt” would not exceed 15% of “consolidated net tangible assets” (as such terms are defined in the indenture). There is no sinking fund or mandatory redemption applicable to the Senior Notes. The Senior Notes are redeemable, in whole or in part, at the Company’s option, at any time at a price equal to their principal amount plus any accrued interest and premium. CW II and AT&T Wireless became co-obligated on the Company’s Senior Notes following the Company’s acquisition of AT&T Wireless (see Note 3).

Senior Notes of AT&T Wireless

Following the Company’s acquisition of AT&T Wireless in October 2004 (see Note 3), the Company, along with CW II, became co-obligated on $9,500 of Senior Notes of AT&T Wireless (see further discussion below and in Note 3). Included in the Senior Notes of AT&T Wireless are $6,500 of unsecured and unsubordinated Senior Notes issued under a March 2001 private placement, with $1,000 maturing on March 1, 2006; $3,000 maturing on March 1, 2011; and $2,500 maturing on March 1, 2031. Fixed interest rates range from 7.35% to 8.75% per annum, payable semi-annually. Also included in the Senior Notes are $3,000 of unsecured and unsubordinated Senior Notes issued through an April 2002 registered public offering by AT&T Wireless, with $250 maturing on April 18, 2005; $750 maturing on May 1, 2007; and $2,000 maturing on May 1, 2012. Fixed interest rates range from 6.875% to 8.125% per annum, payable semi-annually.

The $9,500 of Senior Notes of AT&T Wireless are governed under two separate indentures with U.S. Bank N.A., successor to the Bank of New York, as trustee. The Senior Notes are unsecured unsubordinated obligations, ranking equally in right with all other unsecured and unsubordinated obligations of the Company. The Senior Notes are redeemable, as a whole or in part, at the Company’s option, at any time or from time to time, at a price equal to their principal amount plus any accrued interest and premium similar to that applicable to the Company’s Senior Notes. The Senior Notes are not subject to any sinking fund requirements. With respect to both indentures, covenants limit activity related to “sale and leaseback transactions” (as defined) under certain circumstances and contain a “negative pledge” provision similar to that applicable to the Company’s Senior Notes.

TeleCorp Wireless, Inc. and Tritel PCS, Inc. Senior Subordinated Notes

In conjunction with AT&T Wireless’ acquisition of TeleCorp PCS, Inc. (TeleCorp PCS) in February 2002, AT&T Wireless assumed the debt of TeleCorp PCS’ subsidiaries, TeleCorp Wireless, Inc. (TeleCorp) and Tritel PCS, Inc. (Tritel). At the time of the Company’s acquisition of AT&T Wireless, principal amounts outstanding associated with the senior subordinated notes of TeleCorp and Tritel were $200 of TeleCorp’s 10.625% Senior Subordinated Notes due July 2010 and $206 of Tritel’s 10.375% Senior

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(Dollars in Millions)

Subordinated Notes due January 2011. Neither the Company nor CW II became co-obligated on the TeleCorp and Tritel Senior Subordinated Notes.

Concurrently with the Company’s acquisition of AT&T Wireless, the Company irrevocably deposited with the TeleCorp trustee U.S. Treasury securities which upon maturity will be sufficient to fund the redemption of the principal amount and related premium of the TeleCorp Notes, along with interest due prior to the Notes’ redemption date (see Note 1). In compliance with the indenture, all of the U.S. Treasury securities mature prior to the redemption date of the TeleCorp Notes.

The trustee has been notified that the TeleCorp Notes are being called for redemption in July 2005; as such, the outstanding principal and related premium of these Notes is reflected within “Debt maturing within one year” on the consolidated balance sheets at December 31, 2004. In accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the TeleCorp Notes and corresponding assets placed in trust remain on the Company’s consolidated balance sheets as of December 31, 2004 as the Company has not met the criteria required to derecognize the liability.

The Company also irrevocably deposited with the Tritel trustee U.S. Treasury securities which upon maturity were sufficient to fund the redemption of the principal amounts and related premium of the Tritel Notes, along with amounts of interest due prior to the Notes’ redemption dates. In November 2004, the Tritel Notes were redeemed by the trustee pursuant to the exercise of the option on the acquisition date.

Other Long-term Debt

Also in conjunction with its acquisition of AT&T Wireless, the Company assumed $132 in bank debt and $63 of debt held by a variable interest entity engaged in leasing activities. The debts were repaid in December 2004.

Fair Values of Long-term Debt

At December 31, 2003 and 2004, the fair values of the Senior Notes and Senior Subordinated Notes were $2,156 and $13,879, respectively, based on their quoted market prices. The carrying value of the long-term debt due to members approximates fair value since the Company may prepay the debt at any time, as described above, without penalty.

The above Senior Notes and Senior Subordinated Notes assumed in the Company’s acquisition of AT&T Wireless were recorded at fair value on the acquisition date in accordance with the purchase accounting requirements of SFAS 141. The premium recorded at the acquisition date totaled $2,045, of which $1,973 remains outstanding as of December 31, 2004. The premium is being amortized under the effective interest method which reflects market interest rates on the date of the acquisition. Amortization of the premium is recorded in the Company’s financial statements as a reduction to interest expense. For the year ended December 31, 2004, this amortization totaled $44, which resulted in an effective annual interest rate of 4.7% for the acquired Senior Notes and Senior Subordinated Notes.

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(Dollars in Millions)

Capital Leases

The Company has entered into capital leases primarily for the use of communications towers. See Note 19 for further discussions regarding these towers.

Maturities of Long-Term Debt

Maturities of long-term debt outstanding, including capital lease obligations, at December 31, 2004 are summarized below:

		Debt		Capital Leases		Total
Maturities:
	2005	$	474	$	82	$	556
	2006		1,515		82		1,597
	2007		760		86		846
	2008		9,633		90		9,723
	2009		3		95		98
	Thereafter		9,005		2,485		11,490
Total minimum payments		$	21,390	$	2,920	$	24,310
	Less capital lease imputed interest		—		1,468		1,468
	Less capital lease executory costs		—		441		441
Total obligations		$	21,390	$	1,011	$	22,401
Less current portion			474		6		480
Total long-term obligations		$	20,916	$	1,005	$	21,921

Cash Paid for Interest

Cash paid for interest on debt for the years ended December 31, 2002, 2003 and 2004 was $905, $862 and $892, respectively. These amounts include cash paid for interest on member loans and the revolving credit agreement with the members of $726, $665 and $582 for the years ended December 31, 2002, 2003 and 2004, respectively.

10. Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, advanced billing and customer deposits and other current liabilities are reasonable estimates of their fair value due to the short-term nature of these instruments.

The Company uses interest rate swaps to manage its interest rate exposure on its debt obligations. The Company does not invest in derivative instruments for trading purposes. In March 2003, the Company entered into two interest rate swap contracts with banks to convert a portion of the fixed rate exposure on its five-year Senior Notes due December 15, 2006 to variable rates without an exchange of the underlying

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(Dollars in Millions)

principal amount. Under the terms of the interest rate swap contracts, the Company receives interest at a fixed rate of 5.625% and pays interest at a variable rate equal to the six-month LIBOR plus a specified margin, based on an aggregate notional amount of $250. The six-month LIBOR rate on each semi-annual reset date determines the variable portion of the interest rate swaps. For the years ended December 31, 2003 and 2004, the effective interest rate associated with this notional amount was 4.02% and 4.58%, respectively.

The Company has designated the swaps as fair value hedges of its fixed rate debt. The terms of the interest rate swap contracts and hedged items are such that effectiveness can be measured using the short-cut method as defined in SFAS 133. Hedge ineffectiveness, as determined in accordance with SFAS 133, had no impact on results of operations for the years ended December 31, 2003 and 2004.

In accordance with SFAS 133, the Company recorded a fair value adjustment to the portion of its fixed rate long-term debt that is hedged. This fair value adjustment is recorded as an increase or decrease to long-term debt, with the related value for the interest rate swaps’ non-current portion recorded in “Other assets” or “Other noncurrent liabilities” in the consolidated balance sheets. Interest rate differentials associated with these interest rate swaps are recorded as an adjustment to a current asset or liability, with the offset to interest expense over the life of the interest rate swaps.

11. Concentrations of Risk

The Company relies on local and long-distance telephone companies and other companies to provide certain communications services. Additionally, the Company relies on one vendor to provide billing services for the postpaid subscribers acquired in conjunction with the Company’s acquisition of AT&T Wireless (see Note 3). Although management believes alternative vendors could be found in a timely manner, any disruption of these services could potentially have an adverse impact on operating results.

The Company relies on roaming agreements with other wireless carriers to permit the Company’s customers to use their GSM/ GPRS/ EDGE and TDMA networks in areas not covered by the Company’s networks. If these providers decide not to continue those agreements due to a change in ownership or other circumstance, this could cause a loss of service in certain areas and possible loss of customers.

Although the Company attempts to maintain multiple vendors to the extent practicable, its handset inventory and network infrastructure equipment, which are important components of its operations, are currently acquired from only a few sources. If the suppliers are unable to meet the Company’s needs as it continues to build out and upgrade its network infrastructure and sell service and handsets, delays and increased costs in the expansion of the Company’s network infrastructure or losses of potential customers could result, which would adversely affect operating results.

Financial instruments that could potentially subject the Company to credit risks consist principally of trade accounts receivable. Concentrations of credit risk with respect to these receivables are limited due to the composition of the customer base, which includes a large number of individuals and businesses. No customer accounted for more than 10% of consolidated revenues in any year presented.

Approximately 22,000, or 31%, of the Company’s employees are represented by the Communications Workers of America (CWA), with contracts expiring on various dates between February 2005 and

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(Dollars in Millions)

February 2008. Approximately 5,700 of the Company’s employees are covered by contracts that expired in February 2005. On March 2, 2005, the Company and the CWA announced that they reached a tentative agreement on a labor contract that covers bargained-for employees in 37 states. The agreement is subject to ratification by union members. Most of the contracts contain no-strike clauses. In most areas of the country and with most job titles, the Company is contractually required to maintain a position of neutrality and to allow card-check balloting with respect to unionization and support the determination of its employees.

12. Related Party Transactions

In addition to the affiliate transactions described elsewhere in these financial statements, other significant transactions with related parties are summarized in the succeeding paragraphs.

In connection with the formation of Cingular, the Company entered into wireless agency agreements with subsidiaries of SBC and BellSouth. Such subsidiaries and any of their affiliates that make an election to do so may act as authorized agents exclusively on the Company’s behalf for the sale of its wireless services to customers in SBC’s and BellSouth’s respective incumbent service territories. The Company is free to contract with other agents, including retailers and other distributors, for the sale of its wireless services in these territories and elsewhere throughout the U.S. In addition to the unilateral rights of SBC and BellSouth and their affiliates to terminate and to the Company’s right to terminate in certain events, each wireless agency agreement terminates upon breach, mutual agreement of the parties or on December 31, 2050. Agent commissions and compensation charges are included in “Selling, general and administrative” in the consolidated statements of income.

The Company incurred local interconnect and long distance charges from SBC and BellSouth and their affiliates related to the provision of wireless services to its subscribers, which are included in “Cost of services” in the consolidated statements of income.

The Company incurred telecommunication and other charges from SBC and BellSouth and their affiliates in connection with its internal business operations, which are primarily included in “Selling, general and administrative” in the consolidated statements of income.

Related party charges incurred by the Company are summarized as follows:

	Year Ended December 31,
Type of Service:	2002		2003		2004
Agent commissions and compensation	$	46	$	103	$	67
Interconnect and long distance		663		815		927
Telecommunications and other charges		85		77		97

Additionally, the Company has purchase commitments to SBC, BellSouth and their affiliates of $258 for dedicated leased lines used to provide interconnection services and $142 for telecommunications and other services (see Note 18).

The Company had receivables from affiliates of $81 and $247 and payables to affiliates of $135 and $109 at December 31, 2003 and 2004, respectively, primarily with SBC, BellSouth and GSMF (see Note 6).

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

13. Impairment of Long-lived Assets

During the fourth quarter of 2002, the Company evaluated the recoverability of the long-lived assets, including property, plant, and equipment and FCC licenses, of its Mobitex data business. While the business continued to generate positive operating cash flows, the timing of the Company’s migration to data services over its cellular/PCS networks, as well as other competitive and technological factors, decreased the cash flows that the Company expected to generate from continuing to operate the Mobitex data network. In the fourth quarter of 2002, the Company determined that the estimated future undiscounted cash flows were less than the carrying value of the Mobitex data business long-lived assets. Accordingly, the Company adjusted the carrying values of the Mobitex data business long-lived assets to their estimated fair value, resulting in a non-cash impairment loss of $104. Fair value was determined using a discounted cash flow approach. The impairment loss is included in “Cost of services” in the consolidated statement of income. The impairment loss was comprised of $71 of property, plant and equipment and $33 of FCC licenses. In conjunction with the impairment test, the Company reviewed the remaining useful lives of the Mobitex data business long-lived assets and determined the lives to be appropriate. During the fourth quarter of 2003, the Company evaluated the recoverability of the long-lived assets of its Mobitex data business and determined no additional impairment existed. In connection with its agreement to sell its Mobitex data business, the Company adjusted the carrying values of the long-lived assets to their fair value in the third quarter of 2004, resulting in a loss of $31 (see Note 3).

The Company’s cellular/PCS networks utilize two digital transmission technologies, TDMA and GSM. The TDMA technologies are deployed over two different spectrum frequencies, 850 MHz (cellular) and 1900 MHz (PCS). As discussed in Note 4, in 2002 the Company began adding GSM equipment throughout its TDMA markets, to provide a common transmission standard, and adding technologies for high-speed data services. In the fourth quarter of 2002, the Company finalized market specific execution strategies concurrent with the development and approval of its 2003 capital budget. In several smaller PCS markets, where the Company has only 10 MHz of available spectrum, it did not have adequate spectrum depth to concurrently provide wireless services using both technologies. In these markets, the Company retired the TDMA network assets in order to deploy GSM technology. The TDMA network assets used in 1900 MHz markets are frequency specific and cannot be redeployed for use in the Company’s other 850 MHz markets. Due to the anticipated near-term removal of these assets from service during the period ranging from the third quarter of 2003 to the fourth quarter of 2004, the Company performed an impairment test as required by SFAS 144 to determine whether the future cash flows of these markets were sufficient to recover the carrying value of the related TDMA assets as of December 31, 2002. In the fourth quarter of 2002, the Company recognized a non-cash impairment charge of $47 related to its 1900 MHz TDMA assets in ten markets located in the southeastern and southwestern U.S. The impairment loss was measured as the difference between the carrying value of these assets at December 31, 2002 and their fair value. Fair value was determined using a discounted cash flow approach. The impairment loss is included in “Cost of services” in the consolidated statement of income.

14. Acquisition-Related, Integration and Other Costs

Management plans to exit certain activities of AT&T Wireless, including disposing of redundant facilities, interests in certain foreign operations and domestic wireless assets required to be divested by the FCC and

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CINGULAR WIRELESS LLC

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(Dollars in Millions)

the U.S. Department of Justice in connection with the acquisition (see Note 20), and to integrate the acquired business (see Note 3) with the Company. These plans affect many areas of the combined company, including sales and marketing, network, information technology, customer care, supply chain and general and administrative functions. In connection therewith, the Company expects to incur significant costs over the next several years associated with such dispositions and integration activities. Management is in the process of developing these plans and expects to complete them in the first and second quarters of 2005. The Company expects that the finalization of certain integration plans will result in adjustments to the purchase price allocation for the acquired assets and assumed liabilities of AT&T Wireless and may also result in the need to shorten the useful lives of certain network and other property, plant and equipment.

In the third and fourth quarters of 2004, the Company incurred $288 of integration costs, including $101 of costs to market the combined company, $75 of costs to prepare systems for the launch of the common customer interfacing systems and processes, $39 of costs to convert the branding of AT&T Wireless stores and agent locations to the Cingular brand, $17 related to employee retention and involuntary terminations and $56 of other integration planning and execution costs. These costs are primarily included in “Selling, general and administrative expenses” in the consolidated statements of income.

Employee termination benefits incurred in 2004 were $4 and include involuntary severance payments and related benefits for certain former Cingular employees who have been identified to be displaced in the first quarter of 2005. Employee termination benefits to be paid were recorded in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits (SFAS 112). Additional liabilities for termination benefits to be provided to former Cingular employees are expected to be recognized under SFAS 112 when such costs are probable and estimable. Additional liabilities for termination benefits to be provided to former AT&T Wireless employees are expected to be recognized under EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination (EITF 95-3), as liabilities assumed in the purchase business combination.

15. Reorganization Costs

In August 2002, the Company announced plans to reorganize its sales operations and to reduce its workforce in these and other functional areas of the business. It was expected that approximately 2,500 to 3,000 positions (employees, contractors and temporary personnel) would be eliminated, with more than one-third occurring through the elimination of temporary positions and normal attrition. Substantially all employees affected received notification in September 2002. Approximately 1,600 employees were terminated under this reorganization plan. Employee severance costs were accounted for in accordance with SFAS 112. For other costs of the reorganization, the Company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in 2002 and accounts for the costs of the reorganization when the liability is incurred. The costs associated with the reorganization, principally severance, lease termination and relocation, were not expected to exceed $70. Substantially all activities associated with this reorganization were complete as of June 30, 2003. Reorganization costs for the years ended December 31, 2002 and 2003 were $41 and $21, respectively, and are principally reflected in “Selling, general and administrative” expenses in the consolidated statements of income.

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

16. Income Taxes

The Company is not a taxable entity for federal income tax purposes. Federal taxable income or loss is included in the respective member’s federal income tax return. The majority of states follow this treatment. Certain states, however, impose taxes at the Company level and such taxes are the responsibility of the Company and are included in the Company’s income tax provision (benefit). The consolidated financial statements also include income tax provisions (benefits) for federal and state income taxes for all corporate subsidiaries of the Company.

Following the Company’s acquisition of AT&T Wireless and related restructuring, AT&T Wireless became a direct wholly-owned subsidiary of the Company. The Company and AT&T Wireless transferred significant portions of their respective assets and liabilities to CW II. Earnings or losses from CW II flow to its owners in accordance with their respective ownership interests. The structure retains AT&T Wireless as a tax-paying corporation that is a 43% owner of CW II. The Company owns the remaining 57% of CW II. The Company and CW II are generally both considered partnerships for federal and state income tax purposes. For partnerships, income tax items generally flow through to their members and are taxed at the member level pursuant to federal and state income tax laws.

Deferred income taxes are recorded using enacted tax law and rates for the years in which the taxes are expected to be paid or refunds received. Deferred income taxes are provided for items when there is a temporary difference in recording such items for financial reporting and income tax reporting. A majority of these deferred taxes were recorded through the required application of the purchase method of accounting for the Company’s acquisition of AT&T Wireless. As part of purchase accounting, a significant portion of the assets and liabilities acquired were recorded by the Company at fair value (see Note 3). The difference between the fair values recorded for these acquired assets (other than goodwill) and liabilities and the tax basis of those assets and liabilities determined the deferred income taxes that have been recorded in the Company’s financial statements. Additionally, the Company assumed significant tax net operating losses (NOLs) with its acquisition of AT&T Wireless.

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

The provision (benefit) for income taxes consists of the following:

		Year Ended
		December 31,
		2002			2003			2004
Current:
	Federal	$	10		$	26		$	14
	State and local		5			3			2
	International		—			—			—
			15			29			16
Deferred:
	Federal		(5	)		(3	)		(67	)
	State and local		2			2			(7	)
	International		—			—			—
		$	(3	)	$	(1	)	$	(74	)
Provision (benefit) for income taxes		$	12		$	28		$	(58	)

A reconciliation of the income tax provision (benefit) computed at the statutory tax rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2002			2003			2004
Federal statutory rate		35	%		35	%		35	%
Income tax provision (benefit) at statutory rate	$	426		$	352		$	50
State income taxes, net of federal U.S. tax benefit		49			40			6
LLC income not subject to federal or state income taxes		(463	)		(364	)		(114	)
Provision (benefit) for income taxes	$	12		$	28		$	(58	)
Effective income tax rate		0.99	%		2.79	%		(40.56	)%

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

Deferred taxes arise because of differences between the book and tax bases of certain assets and liabilities. The significant components of the Company’s deferred tax assets and (liabilities) are as follows:

			December 31,
			2003		2004
Current deferred tax assets:
	Other		$	—	$	2
Total current deferred tax assets				—		2
Noncurrent deferred tax assets:
	Noncurrent deferred income tax assets:
		Net operating loss/credit carryforwards		—		3,078
		Valuation allowances		—		(147	)
Total net noncurrent deferred tax assets				—		2,931
Noncurrent deferred tax liabilities:
	Investment in Cingular Wireless II			—		6,655
	FCC licenses and goodwill			178		216
	Investments in and advances to unconsolidated subsidiaries			—		41
Other				12		16
Total noncurrent deferred tax liabilities				190		6,928
Total noncurrent net deferred tax liabilities			$	190	$	3,997

The Company, through AT&T Wireless, has federal and state NOL carryforwards of approximately $7,555 and $9,341, respectively, which expire at various dates principally from December 31, 2007 through December 31, 2024. At December 31, 2004, the related tax effected NOLs for federal and state income tax purposes were $2,644 and $394, net of federal tax impacts, respectively. In addition, the Company had tax effected NOLs of $10 related to its Puerto Rico operations. The Company also has federal tax credit carryforwards of $26 which expire between 2007 and 2024, and $4, which are not subject to expiration. Internal Revenue Code Section 382 places certain limitations on the annual amount of NOL carryforwards that can be utilized if certain changes to a company’s ownership occur. The Company believes that its purchase of AT&T Wireless was a change in ownership pursuant to Section 382 of the Code, and that the NOL carryforwards of AT&T Wireless are limited but more likely than not will be used in future periods. As of December 31, 2004, the Company had valuation allowances of $130 for NOLs and $17 for tax credits which were more likely than not to expire unused. The majority of the Company’s deferred tax asset valuation allowance would be applied to reduce goodwill in the event that the tax benefits for the items are recognized.

On December 21, 2004, the FASB issued FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (the Act), to provide accounting and disclosure guidance for the repatriation provision of the Act. The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations that are repatriated in either an enterprise’s last tax year that began before the enactment date of October 22, 2004

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

or the first tax year that begins during the one-year period beginning on the date of enactment. The deduction is subject to a number of limitations and, as of December 31, 2004, uncertainty remained as to how to interpret numerous provisions in the Act. As of December 31, 2004, the Company had deferred tax liabilities of $108 related to undistributed foreign earnings totaling $350. Based on the Company’s analysis of the Act, although not yet finalized, it is reasonably possible that under the repatriation provision of the Act the Company may repatriate some amount of earnings estimated to be between $300 to $350. The related tax effects of such repatriation cannot reasonably be estimated at this time. The effects of the repatriation on deferred tax liabilities would result in adjustments to the purchase price allocations that were recorded in connection with the Company’s acquisition of AT&T Wireless. We expect the Company to be in a position to finalize its assessment during the second quarter of 2005. Until this evaluation is completed, the Company presumes that repatriation of those foreign earnings will occur and has accordingly recognized a deferred tax liability for the full amount of current and prior years’ unremitted earnings without giving effect to the repatriation provision of the Act.

At December 31, 2003 and 2004, the Company’s net assets at entities that are not taxpayers exceed their tax bases by approximately $12,900 and $14,000, respectively. For the year ended December 31, 2003, this basis difference is principally attributable to the tax rules used to determine depreciation and amortization of property, plant and equipment and intangible assets. For the year ended December 31, 2004, this basis difference principally relates to the Company’s investment in CW II.

Cash paid for income taxes for the years ended December 31, 2002, 2003 and 2004 was $14, $23 and $22, respectively.

17. Employee Benefits

Pensions and Post-Retirement Benefits

Approximately 43,000 of the Company’s employees are covered by one of two noncontributory qualified pension plans. Participation in the Company’s plans commenced November 1, 2001, following the initial contribution of employees and related obligations and liabilities by SBC and BellSouth to the Company. In connection with this contribution, SBC and BellSouth transferred pension assets from the qualified trusts to the trusts established for the Company’s pension plans. Current employees of the Company who were formerly employed by AT&T Wireless do not participate in the pension plans.

Nonbargained and some bargained employees participate in a cash balance plan, under which they can elect to receive their pensions in a lump sum. The pension benefit formula for many bargained employees is based on a flat dollar amount per year of service according to job classification, and these benefits are typically paid as an annuity.

The projected benefit obligation of the Company’s pension plans is the actuarial present value of all benefits attributed by the pension benefit formula to previously rendered employee service. It is measured based on assumptions concerning future interest rates, employee compensation levels, retirement date and mortality. Actual experience may differ from the actuarial assumptions, and the benefit obligation will be affected. The Company uses a December 31 measurement date for its plans.

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CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

Nonbargained employees and their covered dependents who meet certain eligibility requirements will be provided access to post-retirement medical and dental benefits at no cost to the Company. For bargained employees and a closed group of nonbargained transitional employees, the Company provides certain retiree medical, dental and life insurance benefits under various plans and accrues actuarially determined post-retirement benefit costs as active employees earn these benefits. These post-retirement plans are not funded. Current employees formerly employed by AT&T Wireless do not participate in the Company’s post-retirement benefit plans.

In accordance with FASB Staff Position No. FAS 106-2, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Modernization Act) has been reflected effective January 1, 2004. Due to expected future receipt of subsidies available under the Act for plans that are determined to be actuarially equivalent, the plans combined Accumulated Postretirement Benefit Obligation was reduced by approximately $8 as of January 1, 2004 and the combined 2004 Net Periodic Benefit Cost was reduced by approximately $2.

Obligations and Funded Status

The pension plan and post-retirement benefit plan funded status and amounts recognized in the consolidated balance sheets at December 31, 2003 and 2004 are as follows:

								Post-
		Pension						Retirement
		December 31,						December 31,
		2003			2004			2003			2004
Change in Benefit Obligation:
	Benefit obligation at beginning of year	$	413		$	456		$	84		$	114
	Service cost		61			65			9			10
	Interest cost		24			26			6			6
	Amendments		(1	)		2			(2	)		(12	)
	Impact of Medicare Modernization Act		—			—			—			(8	)
	Actuarial loss		18			18			17			7
	Benefits paid		(59	)		(31	)		—			—
Benefit obligation at end of year		$	456		$	536		$	114		$	117

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								Post-
		Pension						Retirement
		December 31,						December 31,
		2003			2004			2003		2004
Change in Plan Assets:
	Fair value of plan assets at beginning of year	$	450		$	510		$	—	$	—
	Actual return on plan assets		103			47			—		—
	Employer contribution		16			—			—		—
	Benefits paid		(59	)		(31	)		—		—
Fair value of plan assets at end of year		$	510		$	526		$	—	$	—

	Pension					Post-Retirement
	December 31,					December 31,
	2003		2004			2003			2004
Funded status	$	54	$	(10	)	$	(114	)	$	(117	)
Unrecognized prior service cost		15		14			6			(7	)
Unrecognized net actuarial loss		3		12			31			29
Prepaid pension cost and accrued post-retirement benefit obligation	$	72	$	16		$	(77	)	$	(95	)

The accumulated benefit obligation for the pension plans was $435 and $511 at December 31, 2003 and 2004, respectively. As of December 31, 2004, the bargained pension plan had an accumulated benefit obligation that exceeded the fair value of plan assets, and an additional minimum liability of $6 was recorded in accordance with the provisions of paragraphs 36 and 37 of SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS 87). Additional information for this plan is as follows:

	December 31,
	2003		2004
Projected benefit obligation	$	18	$	26
Accumulated benefit obligation		16		22
Fair value of plan assets		16		17
Increase in minimum liability included in other comprehensive income		—		4

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Components of Net Periodic Pension Cost

Net pension expense and post-retirement benefit expense recognized is comprised of the following:

	Pension									Post-Retirement
	2002			2003			2004			2002			2003		2004
Service cost	$	62		$	61		$	65		$	6		$	9	$	10
Interest cost		24			24			26			4			6		6
Expected return on plan assets		(27	)		(36	)		(38	)		—			—		—
Amortization of prior service cost		3			3			3			2			1		1
Recognized actuarial gain		—			—			—			—			1		1
Net expense	$	62		$	52		$	56		$	12		$	17	$	18
Curtailment and termination benefits											(1	)		—		—
Adjusted net post-retirement benefit expense										$	11		$	17	$	18

Assumptions

Significant weighted-average assumptions used in developing pension and post-retirement benefit obligations at December 31 include:

							Post-
	Pension						Retirement
	2003			2004			2003			2004
Discount rate		6.25	%		5.75	%		6.25	%		5.75	%
Composite rate of compensation increase		6.00	%		6.00	%		6.00	%		6.00	%

Significant weighted-average assumptions used to determine net periodic pension and post-retirement cost for the years ended December 31 include:

	Pension									Post-Retirement
	2002			2003			2004			2002			2003			2004
Discount rate		7.25	%		6.75	%		6.25	%		7.25	%		6.75	%		6.25	%
Expected long-term return on plan assets		8.50	%		8.50	%		8.50	%		—			—			—
Composite rate of compensation increase		7.00	%		6.00	%		6.00	%		7.00	%		6.00	%		6.00	%

The expected long-term rate of return on assets was derived using data from investment managers and reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. The Company considers many factors, which include current market information on long-term returns (e.g., long-term bond rates) and current and target asset allocations between asset categories. The target asset allocation is determined based on consultations with external investment advisors.

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(Dollars in Millions)

Assumed health care cost trend rates at December 31 are as follows:

	2003						2004
	Pre-Age			Post-Age			Pre-Age			Post-Age
	65			65			65			65
Health care cost trend rate assumed for next year		10.00	%		11.00	%		9.25	%		10.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.00	%		5.00	%		5.00	%		5.00	%
Year the rate reaches the ultimate trend rate		2011			2011			2011			2011

The assumed dental cost trend rate is 5.0% in 2004 and future years. A one percentage-point change in the assumed health care cost trend rate would have the following effects:

	One Percentage-		One Percentage-
	Point Increase		Point Decrease
Effect on total of service and interest cost components	$	4	$	(3	)
Effect on post-retirement benefit obligation		20		(16	)

     Plan Assets

The Company’s pension plans asset allocations at December 31, by asset category are as follows:

			Plan Assets at
			December 31,
			2003			2004
Asset Category
	Equity securities			66	%		62	%
	Debt securities			28			28
	Cash			1			—
	Other			5			10
		Total		100	%		100	%

The investment goal of the plans is to ensure the availability of funds for the liabilities as they become due and to meet the objectives with a prudent risk profile, diversification and diligent management in accordance with applicable statutory and regulatory constraints. Target allocations for the pension plans are 35% large cap equity (range of 30 — 40%), 10% small/mid cap equity (range of 5 — 15%), 15% international equity (range of 10 — 20%), 30% domestic fixed income (range of 25 — 30%), 10% alternative investments (range 5 — 15%) and 0% cash (0 — 2%) range. The alternative investment allocation is comprised of absolute return strategies. Absolute return strategies are designed to return cash plus a premium regardless of market direction and are included in the portfolio for diversification purposes. Prohibited investments are outlined in each individual manager’s agreement, and derivatives are allowed if in compliance with the Company’s internal derivative policy. Derivatives may be used as a substitute for physical investing or to manage duration and currency risk. Performance is reviewed on a monthly basis.

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     Contributions

The Company does not expect to make any contributions to its pension plans and its post-retirement benefit plans in 2005.

     Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Post-retirement benefit payments shown reflect estimated payment amounts before the Medicare subsidy. The Medicare subsidy for all years shown below totals less than $2 in aggregate.

			Post-
	Pension		retirement
	Benefits		Benefits
2005	$	86	$	1
2006		45		1
2007		49		2
2008		52		2
2009		54		3
2010-2014		308		26

     Defined Contribution Plans

The Company maintains several contributory savings plans which cover substantially all employees. Effective December 31, 2002, the plan covering bargained employees was merged into the plan covering nonbargained employees. Contributions made by the Company and the related costs are determined as a percentage of covered employees’ eligible contributions to the plans and totaled $56 in 2002, $46 in 2003 and $46 in 2004.

Current employees who were formerly employed by AT&T Wireless will continue to participate in a legacy savings plan until January 1, 2006. The plan matches a percentage of employee contributions up to certain limits and provides a fixed contribution percentage. The Company may also provide discretionary or profit-sharing contributions. Contributions under the plan totaled $13 from the acquisition date of October 26, 2004 through December 31, 2004.

     Stock Based Compensation Plans

AT&T Wireless sponsored the 2001 Long Term Incentive Plan, which provided for stock options, restricted stock and performance shares. All of these awards vested and accelerated upon the Company’s acquisition of AT&T Wireless and were settled in cash.

     Supplemental Retirement Plans

The Company also assumed the liabilities related to nonqualified, unfunded supplemental retirement plans for senior executives previously employed by SBC affiliates that were contributed to the Company. Expenses related to these plans were less than $2 in all years presented. Liabilities of $8 and $8 related to

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(Dollars in Millions)

these plans, which include an additional minimum pension liability of $2 and $3, have been included in “Other noncurrent liabilities” in the consolidated balance sheets at December 31, 2003 and 2004, respectively. The consolidated balance sheets also include $1 in “Other intangible assets, net” at December 31, 2003 and 2004 related to these plans.

Deferred Compensation Plan

The Company provides certain management employees with a nonqualified, unfunded deferred compensation plan. The plan allows eligible participants to defer some of their compensation on a pre-tax basis and receive a market-based interest rate of return. In addition, the plan provides for a stated matching contribution by the Company based on a percentage of the compensation deferred. Deferred compensation expenses for all years presented was not significant. The long-term portions of liabilities related to this plan of $22 and $30 have been included in “Other noncurrent liabilities” in the consolidated balance sheets at December 31, 2003 and 2004, respectively.

Certain management employees who previously were employees of AT&T Wireless are participants in a nonqualified, unfunded deferred compensation plan, which allows participants to defer a portion of their compensation on a pre-tax basis, with earnings calculated based on valuation funds selected by the participants. In addition, the plan provides for contributions by the Company to participants whose matching and profit sharing contributions to the qualified 401(k) plan were capped by operation of the limitations imposed by tax laws. The liability of the deferred compensation plan totaled $61 as of December 31, 2004, of which $24 and $37 have been classified as “Accrued liabilities” and “Other noncurrent liabilities”, respectively, in the consolidated balance sheets.

The liabilities associated with the AT&T Wireless deferred compensation plan, along with other benefit obligations, have been funded and are held in a grantor trust, subject to the claims of the Company’s creditors in the event of the Company’s insolvency. Upon the acquisition of AT&T Wireless by the Company, the trust became irrevocable, and the Company was required to contribute an amount to the grantor trust equal to the present value of the total amount owed to participants in the deferred compensation plan and other benefit obligations. As of December 31, 2004, the grantor trust held $110 in assets, of which $83 was invested in cash equivalents and short term investments. The remaining $27 represented the cash surrender value of Company owned life insurance policies. The assets held by the grantor trust were included in “Other assets” in the consolidated balance sheets as of December 31, 2004 (see Note 1).

Long-Term Compensation Plan

The Cingular Wireless Long-Term Compensation Plan, as amended (the Plan), provides for incentive compensation to eligible participants over periods that are two years or longer in the form of performance units, stock appreciation units and restricted stock units. Awards granted in any particular year may be comprised of any combination of award type provided for under the Plan, as approved by the plan administrator. All awards are ultimately settled in cash. Grants are made in April of the award year.

Performance units are tied to the achievement of specified financial objectives over a three-year performance period. The units have a stated value of $50 (whole dollars). Performance units granted at

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(Dollars in Millions)

inception of a three-year performance period are payable in the first quarter following the performance period, with payouts ranging from 0% to 200% of the stated value of the performance units for years prior to 2004 and 0% to 150% for 2004 grants. The number of performance units granted under the Plan total approximately 1.2 million units in 2002 and 540,000 units in 2003. During the year ended December 31, 2004, the Company granted approximately 732,000 performance units. As of December 31, 2004, the Company has approximately 2.0 million outstanding performance units. Expense is accrued ratably throughout the performance period based upon management’s estimate of the compensation that will ultimately be earned under the Plan. As performance is monitored against the financial objectives that have been established throughout the respective three-year performance periods, management may revise its estimate of the compensation that will ultimately be earned under the Plan and adjust its accrual accordingly.

Stock appreciation units granted under the Plan, which approximate 3.3 million in total, are indexed to an underlying share of BellSouth or SBC common stock. Each stock appreciation unit has a grant price equal to the closing price of BellSouth or SBC stock, as the case may be, based on the closing New York Stock Exchange price on the grant date. Stock appreciation units were granted to eligible employees on April 1, 2003, 50% of which vest two years after the grant date and the remaining 50% of which vest three years following the grant date. As of December 31, 2004, the Company had approximately 2.8 million outstanding stock appreciation units. The units expire 10 years from the grant date. Compensation cost is recognized over the period such units remain outstanding based upon the change in the fair value of the stock appreciation units at the end of each reporting period.

Restricted stock units granted under the Plan are indexed to an underlying share of BellSouth or SBC common stock. The value of the restricted stock units granted in 2004 will be paid in cash to holders in March 2007 based on the average of the closing stock prices of BellSouth and SBC common stock for the last ten trading days of February 2007. Dividend equivalents will be paid annually at the same rate as the dividend received by all SBC and BellSouth shareholders, respectively. During the year ended December 31, 2004, the Company granted approximately 339,000 BellSouth restricted stock units and 378,000 SBC restricted stock units with an aggregate value on the grant date of approximately $19. As of December 31, 2004, the Company had approximately 669,000 outstanding restricted stock units. The value of the restricted stock units, adjusted for changes in the value of the underlying BellSouth and SBC common stock, is recognized as compensation expense over the three year vesting period.

For the years ended December 31, 2003 and 2004, the Company recognized compensation expense of $14 and $26, respectively, associated with the Plan. Former AT&T Wireless employees who remain in the employment of the Company and meet certain eligibility requirements will participate in the Plan beginning in 2005.

18. Commitments and Contingencies

Leases

The Company entered into significant capital leases primarily for the use of communications towers (see Note 19). Capital lease obligations are included in Note 9.

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(Dollars in Millions)

The Company also entered into operating leases for facilities and equipment used in operations. These leases typically include renewal options and escalation clauses. In general, ground and collocation leases have five or ten year initial terms with three to five renewal terms of five years. Rental expense under operating leases for the years ended December 31, 2002, 2003 and 2004 was $456, $512 and $699, respectively.

The following table summarizes the approximate future minimum rentals under noncancelable operating leases, including renewals that are reasonably assured, in effect at December 31, 2004:

At December 31,
2005	$	1,251
2006		1,094
2007		899
2008		729
2009		619
Thereafter		3,511
Total	$	8,103

Commitments

The Company has unconditional purchase commitments for advertising and marketing, computer equipment and services, roaming, long distance services, network equipment and related maintenance, and software development and related maintenance. These commitments totaled approximately $1,326 at December 31, 2004. Included in this amount are commitments of $142 to SBC, BellSouth and their affiliates for telecommunications and other services. Also included are commitments to AT&T Corp. (AT&T) which were assumed by the Company in conjunction with its acquisition of AT&T Wireless, as well as network-related commitments associated with the brand license agreement. In August 2004, the Company, AT&T Wireless and AT&T entered into a definitive agreement to modify the brand license agreement between AT&T Wireless and AT&T to provide the Company with certain licensee rights to the AT&T brand for wireless services during a six-month transition period following the acquisition. As part of this agreement, the Company committed to purchase $100 in network services from AT&T through December 31, 2005, of which $33 remained outstanding as of December 31, 2004.

The Company has commitments with local exchange carriers for dedicated leased lines. The original terms of these commitments vary from month-to-month up to five years. The Company’s related commitment to its primary carriers as of December 31, 2004, was approximately $572, with payments due in each of the five succeeding fiscal years as follows: $225 in 2005, $171 in 2006, $108 in 2007, $60 in 2008 and $8 in 2009. Included in these amounts are commitments of $258 to SBC, BellSouth and their affiliates.

The Company has commitments to Crown Castle International for monitoring and maintenance services related to its communication towers (see Note 19). The Company’s commitment at December 31, 2004 was approximately $276, with payments due in each of the five succeeding fiscal years and thereafter as follows: $86 in 2005, $61 in 2006, $42 in 2007, $27 in 2008, $16 in 2009 and $44 thereafter.

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(Dollars in Millions)

As discussed in Note 7, the Company has interests in several variable interest entities which were formed to acquire licenses that were restricted by the FCC to businesses with limited assets and revenues. Two of these variable interest entities, including Salmon and Alaska Native Wireless, LLC (ANW), include terms within their venture agreements, such that the other owners may elect to require the Company to purchase their interests at specified time periods. The other owner of Salmon, Crowley Digital, has the right to put its approximate 20% economic interest in Salmon to the Company at a cash price equal to Crowley Digital’s initial investment plus a specified rate of return. The put right can be exercised at certain times, and the Company estimates that the earliest exercise period will begin in February 2006 and the latest exercise period will end in April 2008. The Company’s maximum liability for the purchase of Crowley Digital’s interest in Salmon under this put right is $225, of which $155 was reflected in “Other noncurrent liabilities” as of December 31, 2004. In accordance with the terms of the ANW venture agreement, in March 2007, the other owners of ANW may elect to require the Company to purchase their interests in ANW for $145, of which $118 was reflected within “Other noncurrent liabilities” as of December 31, 2004. Under certain circumstances, this right may be exercised earlier, in which case the amount payable would be reduced by 5 percent per annum.

In connection with the termination of the Company’s GSMF network infrastructure joint venture with T-Mobile (see Note 20), the Company has a $1,200 commitment to purchase a minimum number of minutes from T-Mobile. This commitment became effective in January 2005.

In November 2004, the Company and Edge Mobile Wireless, LLC entered into a definitive agreement, pursuant to which Edge Mobile, LLC (Edge) was formed to bid as an “entrepreneur” for certain 1900 MHz band PCS licenses auctioned by the FCC. The auction ended in February 2005. Edge was the successful bidder for, and, following the filing and review of the standard applications, expects to be granted 21 licenses. Edge’s total high bids for the licenses in which the Company will have an indirect economic interest amounted to $181, of which the Company is obligated to fund $174. In December 2004, the Company contributed $31 in equity to Edge, which will be used to pay for a portion of the licenses. The Company will contribute equity and make advances to Edge in March 2005 to cover its remaining obligation.

Contingencies

The Company and AT&T Wireless are defendants in a lawsuit brought by Freedom Wireless Inc. alleging patent infringement related to prepaid wireless service. The case is pending in the U.S. District Court for the District of Massachusetts, and the trial for this matter commenced in late February 2005. It is expected that the trial could last at least two months. The plaintiff is expected to seek approximately $250 in monetary damages from the Company and AT&T Wireless, as well as injunctive relief. Boston Communications Group, Inc. (BCGI), whose prepaid technology platform the Company has used and whose technology is alleged to infringe two patents held by Freedom Wireless, has agreed to indemnify the Company and AT&T Wireless with respect to the claims asserted in this litigation. Financial and other information regarding BCGI can be obtained at www.bcgi.net. (This website address is an inactive textual reference included for information only and is not intended to be an active link to or incorporate any website information into this document.)

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(Dollars in Millions)

The Company is 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. To the extent that management believes that a loss arising from litigation or regulatory proceedings is probable and can reasonably be estimated, an amount is accrued on the financial statements for the estimated loss. As additional information becomes available, the potential liability related to the matter is reassessed and the accruals are revised, if necessary. While complete assurance cannot be given as to the outcome of any legal claims, the Company believes that any financial impact would not be material to its business, financial position or cash flows.

19. Communications Towers

In June 1999, as part of an agreement with Crown Castle International (Crown), BellSouth subsidiaries leased to Crown all unused space on 2,623 of their communications towers. These subsidiaries were contributed to the Company on October 2, 2000. Under these transactions, Crown assumed all obligations for property taxes, insurance and maintenance for the towers and agreed to reimburse the Company for ground lease rentals. The Company has retained, outside of the leases, a portion of the towers for use in operating its wireless network and continues to own the towers and related communications components, including switching equipment, shelters and communications facilities. The Company entered into a monitoring and maintenance agreement with Crown for these towers. During 2002, 2003 and 2004, the Company paid $51, $50 and $60, respectively, to Crown for its monitoring and maintenance services. Monitoring and maintenance fees are escalated by 5% on the anniversary of each site commencement date. The Company has the right to withdraw from the monitoring and maintenance agreement for any tower on the tenth anniversary of the transaction date and on each five-year anniversary thereafter.

In August 2000, Southwestern Bell Mobile Systems, Inc., which SBC transferred to the Company on October 2, 2000, agreed to transfer approximately 3,900 of its communications towers (later reduced to 3,306), including those owned by consolidated partnerships, to another SBC affiliate, in connection with an agreement whereby the SBC affiliate would lease its rights to use and lease space on the towers to SpectraSite Inc. (SpectraSite, formerly SpectraSite Holdings, Inc.). Under the arrangement, SpectraSite then subleases back to the SBC affiliate space on the towers the Company uses. The SBC affiliate further subleases that space to the Company or its affiliates. The annual rent is escalated by 5% as of December 14 of every year. The term of the sublease is unique to each tower and ranges from 13 to 32 years. The Company (as lessee) has the right to withdraw from any lease on the tenth anniversary of the lease date and on each five-year anniversary thereafter. The Company accounts for its subleases of the tower space from the SBC affiliate as capital leases.

As part of the Crown and SpectraSite agreements, the Company had entered into build-to-suit (BTS) agreements that provided for the development and construction of towers on BTS sites and the performance of other services. In 2002, the Company terminated its BTS agreements with SpectraSite and Crown. Under the BTS agreement, 34 towers were completed and became capital leases with SpectraSite. Certain other towers under construction and other work-in-progress were transferred to the Company during the transition period.

In February 2003, a subsidiary of the Company acquired leasehold interests in 545 communication towers in California and Nevada from SpectraSite for $81 in cash. SpectraSite had previously acquired these

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(Dollars in Millions)

leasehold interests from an affiliate of SBC in 2000, and the Company had leased a portion of the tower space indirectly from SpectraSite. Subsequent to February 2003, the GSMF venture leased a portion of the space on these towers directly from a subsidiary of the Company. In connection with the dissolution of GSMF and the sale to T-Mobile of the California/ Nevada network assets and certain spectrum, the leasehold interests of the Company and GSMF in these 545 communications towers in California and Nevada were transferred to T-Mobile (see Note 20).

In 2002, 2003 and 2004, the Company transferred to the SBC affiliate 33, 94 and 187 towers, respectively. Through December 31, 2004, a total of 3,265 towers having an aggregate net book value of $190, have been transferred.

20. Subsequent Events

Termination of GSMF Network Infrastructure Joint Venture

In May 2004, the Company and T-Mobile entered into an agreement, subject to regulatory and other customary closing conditions and the closing of the acquisition of AT&T Wireless, to dissolve GSMF, sell to T-Mobile certain spectrum licenses and other assets and exchange certain other spectrum licenses. The first stage of these transactions closed in January 2005.

Pursuant to the agreement, the Company sold its ownership of the California/ Nevada Major Trading Area (MTA) network assets to T-Mobile for approximately $2,500 in cash. The proceeds from the sale will be used to fund capital expenditures through June 2005 in order to receive favorable tax treatment. In connection with the dissolution, the Company was required to contribute an additional $200 to the venture to equalize the capital accounts. The ownership of the New York Basic Trading Area (BTA) network assets returned to T-Mobile. The Company retained the right to utilize the California/ Nevada and New York networks during a four year transition period and has guaranteed to purchase a minimum number of minutes over this term with a minimum purchase of $1,200. The Company and T-Mobile retained all of their respective customers in each market. The Company also sold 10 MHz of spectrum to T-Mobile in each of the San Francisco, Sacramento and Las Vegas BTAs for $180.

As agreed to as part of the original joint venture agreement, the Company and T-Mobile were each to receive 50% of the spectrum used in the operation of the joint venture following its dissolution. Spectrum licenses were not contributed to the joint venture upon its formation in 2001 but rather were subject to a separate agreement governing their use. In connection with the dissolution, the Company and T-Mobile are contractually required to exchange certain spectrum licenses. The Company expects the spectrum licenses to be exchanged on January 1, 2007. The Company will receive 10 MHz of spectrum in New York BTA in addition to the 10MHz of spectrum the Company made available for use by GSMF and 2.5 MHz of spectrum in the Las Vegas BTA, and T-Mobile will receive 5 MHz of spectrum in each of nine BTAs in California, the largest of which is San Diego. T-Mobile also has the option to purchase an additional 10 MHz of spectrum in the Los Angeles and San Diego BTAs from the Company at the end of two years, under certain circumstances.

The Company expects to recognize a gain on these transactions, principally due to the value of the New York spectrum to be received in connection with the consummation of these transactions. The Company expects to recognize a gain upon the completion of the spectrum exchange in 2007.

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(Dollars in Millions)

Other Divestitures

In November 2004, in response to the Company’s agreement with the U.S. Department of Justice and the FCC to divest certain assets and spectrum in certain markets as a condition to receiving regulatory approval to acquire AT&T Wireless, the Company entered into a number of disposition agreements. An agreement with Alltel Corporation (Alltel) involves the sale by the Company of certain former AT&T Wireless assets and properties, including licenses, network assets, and subscribers that the Company currently operates in several markets, the largest of which is Oklahoma City, Oklahoma. As part of this agreement, the Company also agreed to sell 20 MHz of spectrum and the network assets formerly held by AT&T Wireless in Wichita, Kansas, which it was not required to divest. The Company also entered into a disposition agreement with MetroPCS to sell 10 MHz of former AT&T Wireless spectrum in each of Dallas, Texas and Detroit, Michigan for $230. The Company entered into a disposition agreement with Cellco Partnership (d/b/a Verizon Wireless) to sell 10 MHz of former AT&T Wireless spectrum in Knoxville, Tennessee for $20. Finally, the Company has entered into other disposition agreements pertaining to certain other former AT&T Wireless properties and assets in four smaller transactions involving the sale of various combinations of spectrum, network assets and accounts in specific rural regions of Arkansas, Mississippi, Missouri and Texas.

In February and March 2005, the Company closed its transactions with MetroPCS and Verizon Wireless and one of the four smaller transactions described above. The closings of the remaining divestiture transactions are contingent upon regulatory approval. The transaction with Alltel is expected to close by the second quarter of 2005. The Company does not anticipate recognizing any material gain or loss on these divestiture transactions as the Company’s assumed fair value of the net assets in conjunction with its purchase of AT&T Wireless equaled the sales proceeds from the respective transactions.

21. Selected Quarterly Financial Data (Unaudited)

The unaudited quarterly results presented below for 2003 and the first three quarters of 2004 have been restated to reflect the correction of the Company’s method of accounting for its operating leases. See Note 2 for further discussion of the restatement.

	First			Second		Third			Fourth
2003	Quarter			Quarter		Quarter			Quarter
Total operating revenues(a)	$	3,638		$	3,874	$	4,059		$	3,912	(c)
Operating income		707	(b)		747		480			320
Income (loss) before provision for income taxes and cumulative effect of accounting change		410			411		172			12
Net income (loss)		408			399		166	(d)		4	(d)

149

CINGULAR WIRELESS LLC

PART II (Dollars in Millions)

Item 8.     Financial Statements and Supplemental Data

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in Millions)

	First		Second		Third			Fourth
2004	Quarter		Quarter		Quarter			Quarter(e)
Total operating revenues	$	3,942	$	4,155	$	4,257		$	7,082
Operating income (loss)		550		671		460	(f)		(153	)(g)
Income (loss) before provision for income taxes and cumulative effect of accounting change		221		337		142	(f)		(557	)(g)
Net income (loss)		215		339		142	(f)		(495	)(g)

(a)	Includes a reclassification to reflect billings to our customers for the USF and other regulatory fees as “Operating revenues”. The amounts reclassified for the first, second, and third quarters of 2003 were $48, $88 and $105, respectively.
(b)	Includes a reduction of $24 due to reorganization (see Note 15).
(c)	Operating revenues in the fourth quarter of 2003 were $142 lower than the third quarter, due primarily to reduced roaming revenues as a result of lower negotiated rates and expected seasonality.
(d)	Net income in the third and fourth quarters of 2003 was impacted by increased customer acquisition costs associated with the two consecutive quarters of strong gross customer additions. Additionally, other cost increases impacting results included higher customer retention costs in preparation for wireless local number portability in the later part of 2003.
(e)	On October 26, 2004, the Company completed its acquisition of AT&T Wireless. Operating results for 2004 for AT&T Wireless have been included in the consolidated financial statements subsequent to that date.
(f)	Includes a reduction of $43 for integration planning costs and $31 loss on the writedown of the carrying value of the Company’s Mobitex business.
(g)	Fourth quarter 2004 operating results were impacted by an increase in customer acquisition costs associated with the highest gross and net customer additions in the Company’s history, purchase accounting adjustments and related amortization (see Notes 3 and 5) and $245 of acquisition-related and integration costs (see Note 14).

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