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FORM 10-K

BELLSOUTH CORPORATION

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

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 x

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

At January 31, 2004, 1,831,522,713 shares of Common Stock and Preferred Stock Purchase Rights were outstanding.

At June 30, 2003, the aggregate market value of the voting and non-voting stock held by nonaffiliates was $49,193,148,101.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement dated March 10, 2004, issued in connection with the 2004

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(a) Subsequently merged with and into BellSouth Corporation.

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*	All or a portion of the referenced sections have been included in BellSouth Corporation’s definitive proxy statement dated March 10, 2004 and incorporated herein by reference.

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PART I

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.

	•	a change in economic conditions in domestic or international markets where we operate or have material investments which could affect demand for our services;
	•	changes in US or foreign laws or regulations, or in their interpretations, which could result in the loss, or reduction in value, of our licenses, concessions or markets, or in an increase in competition, compliance costs or capital expenditures;
	•	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 wholesale services to our competitors;
	•	continued successful penetration of the interLATA long distance market;
	•	the unwillingness of banks or other lenders to lend to our international operations or to restructure existing debt, particularly in Latin America;
	•	consolidation in the wireline and wireless industries in which we operate;
	•	higher than anticipated start-up costs or significant up-front investments associated with new business initiatives;
	•	the outcome of pending litigation;
	•	unanticipated higher capital spending from, or delays in, the deployment of new technologies;
	•	continued deterioration in foreign currencies relative to the US Dollar in foreign countries in which we operate, particularly in Latin America;
	•	the impact of terrorist attacks on our business;
	•	the impact and the success of the wireless joint venture with SBC Communications, Inc., known as Cingular Wireless, including marketing and product development efforts, technological changes, financial capacity and closing and integration of the pending acquisition of AT&T Wireless Services, Inc.; and
	•	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 proposed acquisition of AT&T Wireless as a result of technical, logistical, regulatory and other factors.

Business

OVERVIEW

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

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	•	Communications Group;
	•	Domestic Wireless;
	•	Latin America Group; and
	•	Advertising and Publishing Group.

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

Communications Group

OVERVIEW

We are the predominant telecommunications service provider in the southeastern US, serving substantial portions of the population within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. BellSouth Telecommunications, Inc. (BST), a wholly owned subsidiary, provides wireline communications services, including local exchange, network access, intraLATA long distance services and Internet services. BellSouth Long Distance (BSLD), our long distance subsidiary, provides intraLATA and interLATA long distance services in our nine southeastern states, wholesale long distance primarily to wireless communications providers, smaller wireline telecommunications providers and unaffiliated long distance providers, and prepaid calling card services through agreements with unaffiliated long distance providers. Communications Group operations generated 81% of our total operating revenues for 2003 and 2002 and 79% for 2001.

	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 2003, 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 2003, the small business unit represented 12% of Communications Group revenues.
	Large Business. This unit provides a wide range of standard and highly specialized services and products to large and complex business customers. In addition to traditional 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 2003, the large business unit represented 18% 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 telecommunications carriers, such as AT&T, Sprint, MCI (formerly known as WorldCom) and other long distance and competitive local exchange carriers. In addition to interconnection services, we provide services such as voice and data transport services. During 2003, the interconnection services unit represented 24% of Communications Group revenue and generated 48% of our reported data revenues. The unit provides services to both affiliated and nonaffiliated customers in six different carrier markets: wireless service providers, competitive local exchange carriers, competitive switched and special access providers, long distance carriers, information service providers and public payphone service providers.

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

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	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 amounts received from the universal service fund for support of high cost areas.

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).

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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 and 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 through a separate subsidiary of BST. Due to our gradual phase-out of the business, we do not expect any material financial impact on results of operations with respect to exiting this business. 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, and we offer prepaid calling card services through agreements with an unaffiliated long distance provider. Other Communications Group services provided approximately 6% of BellSouth’s total operating revenues for 2003 and 8% for 2002 and 2001.

REGULATORY ENVIRONMENT

Our wireline business is regulated by the FCC and state public commissions.

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 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 rules

Under the 1996 Act, the FCC is obliged 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 elements, the FCC can order access only when failure to do so will impair the ability of the requesting carrier to provide services.

Pricing of network elements

The FCC also establishes the pricing policy for elements. The policy currently in effect is TELRIC (an acronym for

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Price regulation

The FCC regulates interstate prices using a price regulation plan, generally known as a “price cap” plan. The FCC’s price cap plan limits aggregate price changes to the rate of inflation, minus 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.

Universal service

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

Number portability

In 1996, the FCC ordered certain local number portability requirements for both wireline and wireless carriers. The order required wireline carriers to enable customers remaining in the same location to choose a different wireline carrier while retaining their same telephone number. This wireline requirement was implemented in 1997. Wireless number portability received several extensions, and was implemented in November 2003.

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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. The FCC’s previous rules and rates remain in effect while it reconsiders them. A change in the rules or rates could increase our expenses.

Broadband regulation

In the Triennial Review Order, the FCC eliminated the high frequency portion of the loop (“HFPL”) as a UNE. Competitive local exchange carriers have used the HFPL to provide DSL over the same loop on which the incumbent local exchange carrier provides voice services. This is known as Line Sharing. The FCC grandfathered existing Line Sharing arrangements, and allowed new Line Sharing arrangements to exist for one additional year. The FCC also clarified that packet switching is not a UNE.

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.

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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 payments in all states in 2002 and 2003, and likely will make payments in 2004. The plans are reviewed regularly for necessary changes.

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.

TRADITIONAL TELECOMMUNICATION SERVICE PROVIDERS

The state public service commissions with jurisdiction over our services have granted numerous applications to competitive local exchange carriers for authority to offer local telephone service. As a result, substantial competition has developed in the marketplace. 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, including major carriers, resell our local services, use separate unbundled network elements (UNE) or provide services over their own facilities.

BROADBAND SERVICE PROVIDERS

We continue to face intense competition from cable broadband providers who are not subject to the same rigorous regulatory scrutiny for their broadband services. Recent state regulatory rulings requiring BellSouth to provide FastAccess® (DSL) over UNE lines adds costs and complexity to delivery of service that inhibits our efforts to compete with cable on a level playing field.

OTHER TYPES OF COMPETITORS

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. Furthermore, wireless voice and paging services increasingly compete with wireline communications services to provide both voice and data services. In addition, 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. 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.

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Domestic Wireless

OVERVIEW

Our domestic wireless business consists of our proportionate share of Cingular Wireless. Cingular is a joint venture that was formed by the combination of most of the former domestic wireless operations of BellSouth and SBC Communications. We have an approximate 40 percent economic interest in Cingular, and SBC has an approximate 60 percent economic interest. Cingular is operated independently from both parents, currently with a four-seat Board of Directors comprised of two directors from each parent. BellSouth and SBC share control of Cingular. Cingular is a SEC registrant by virtue of its publicly traded debt securities. Accordingly, it files separate reports with the SEC.

	•	Cingular has access to licenses, either through owned licenses or licenses owned by joint ventures and affiliates, to provide cellular or PCS wireless communications services covering an aggregate of 236 million in population (POPs), or approximately 81% of the US population, including in 45 of the 50 largest US metropolitan areas.
	•	Cingular provides cellular or PCS services in 43 of the 50 largest US metropolitan areas.
	•	100% of Cingular’s networks utilize digital technology.
	•	At December 31, 2003, 95% of Cingular’s cellular and PCS customers were using digital service, and in December 2003, over 99% of Cingular’s cellular and PCS minutes of use were digital.

    Cingular provides a wide array of wireless services for individual, business and governmental users. Cingular’s data services are offered over its cellular/PCS networks and its separate Mobitex network. On a combined basis, Cingular had approximately 5.5 million active users of its data services at December 31, 2002 and approximately 6.6 million at December 31, 2003.

BUSINESS STRATEGY

Cingular’s business strategy is to:

	•	expand its customer base profitably by continuing to promote the Cingular brand, by expanding and taking advantage of its extensive distribution capabilities and by cross-selling its products and services through bundling arrangements with its parents;
	•	capture economies through its large scale and national scope, allowing it to further realize the significant revenue and cost synergies offered by its formation;
	•	increase the capacity, speed and functionality of its cellular and PCS networks by deploying common voice and high-speed data technologies throughout its network;
	•	develop and promote advanced wireless data applications over multiple communications devices; and
	•	expand its existing footprint and its network capacity where economical by obtaining access to additional spectrum, primarily through acquisitions, ventures, alliances, spectrum exchanges and purchases and possible industry consolidation.

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NETWORK

Licenses

Cingular has licenses to provide cellular and PCS wireless services on the 850 MHz and 1900 MHz portions of the radio spectrum. Cingular provides both analog and digital cellular services on the 850 MHz band and digital services on the 1900 MHz band. Cingular also has 900 MHz licenses to provide data services.

Coverage

Cingular has access to wireless licenses to provide voice and data services over cellular/PCS networks in 45 of the 50 top wireless markets across the country. Cingular has also signed roaming agreements to ensure its customers can receive such wireless service in virtually all areas in the United States where cellular/PCS wireless service is available. Cingular’s cellular/PCS networks are substantially built out. Cingular also provides wireless data services over its 900 MHz network, covering over 90% of the US metropolitan POPs, including the 50 largest US metropolitan areas.

Technology

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.

COMPETITION

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

	•	by participating in FCC auctions, such as the auction that ended in January 2001 that resulted in Cingular acquiring access, through Salmon PCS LLC, to an additional 45 licenses;
	•	by acquiring licenses from other carriers, either by direct purchases, as in Salt Lake City and the pending acquisition of licenses from NextWave, or by swaps for licenses, as in the New York metropolitan markets, in exchange for licenses for spectrum where Cingular has excess capacity; and
	•	by joint venturing with other carriers to pool spectrum or share network infrastructure, as in Cingular’s AT&T and T-Mobile ventures.

    In addition, because Cingular is in the process of overlaying its TDMA network with GSM/GPRS/EDGE technology and in the process of transitioning its TDMA customers to that new technology, Cingular will operate at somewhat of a disadvantage to other carriers (e.g., Verizon Wireless, Sprint PCS, Nextel and T-Mobile) that utilize a common technology throughout their networks. Cingular is meeting these challenges by offering cellular and PCS phones that will operate on both TDMA and GSM networks as well as the standard GSM and TDMA only handsets and negotiating roaming agreements to allow its customers to use TDMA or GSM networks of other carriers. At the end of 2003, Cingular had 93% of its operational POPs covered by GSM/GPRS and 20% covered by EDGE.

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	•	reduce prices for its services and products;
	•	restructure its service packages to provide more services without increasing prices;
	•	further upgrade its network infrastructure and the handsets Cingular offers;
	•	increase its advertising, promotional spending, commissions and other customer acquisition costs; and
	•	increase its spending to retain customers.

    As previously discussed, on February 17, 2004, Cingular announced an agreement to acquire AT&T Wireless. We expect that this acquisition will enhance Cingular’s ability to compete by strengthening its network coverage and quality and improving customer service and offerings.

REGULATORY ENVIRONMENT

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

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

    Licenses are issued for only a fixed period of time, typically 10 years. Consequently, Cingular must periodically seek renewal of those licenses. The FCC will award a renewal expectancy to a wireless licensee that has provided substantial service during its past license term and has substantially complied with applicable FCC rules and policies and the Communications Act of 1934. The FCC has routinely renewed wireless licenses in the past. However, 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 competing renewal applications for licenses will be considered in comparative hearings, and establish the qualifications for competing applications and the standards to be applied in hearings.

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Latin America Group

OVERVIEW

Our Latin America Group operations consist primarily of wireless service providers operating in 10 countries. We own less than 100% of most of these companies; adjusting customer data to reflect this partial ownership, our licensed service areas had a population of approximately 144.2 million and provided wireless services to approximately 8.4 million customers, each as of November 30, 2003. The operations in Latin America generated 10% of our total operating revenues in 2003 and 2002 and 12% of our total operating revenues in 2001.

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

BUSINESS STRATEGY

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

	•	grow the core wireless business by offering innovative voice and data services like fixed wireless, short messaging and mobile Internet applications to our existing customer base and by profitably increasing penetration in the markets we serve;

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	•	improve profitability through cost and capital efficiencies from integration, scale and new technology; and
	•	increase focus on value generation by building our competitive position and reducing debt.

    During 2002 and much of 2003, Latin America economies were impacted by negative economic and difficult political conditions. Much of this is attributed to currency devaluations and sharp recessions in Argentina, Uruguay and Venezuela, civil unrest in Venezuela, declines in gross domestic product within specific countries, as well as economic conditions within the US market. These deteriorating conditions made it difficult for us to continue to meet our strategic and financial goals. Many of these conditions continued to exist at the end of 2003, particularly in Venezuela. However, economic conditions began to improve in much of Latin America in 2003. In particular, Argentina’s currency rebounded 16% by the end of 2003 and several countries in the region are projected to have had modest GDP growth for 2003. Nonetheless, there are still significant economic risks in 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operating Environment – Latin America Economic Trends and Foreign Risks.”

TECHNOLOGY

All of our international wireless markets utilize digital technology in their wireless service offerings. We select the type of digital technology for each international market based on cost, quality and capacity available at the time in that part of the world. CDMA2000 (Code Division Multiple Access 2000) has been selected for our Latin America affiliates’ migration to third generation cellular networks. CDMA’s spectrum efficiency provides higher capacity for voice services and provides a wide array of new services like wireless data and high-speed Internet access. Four of our Latin America operations (Argentina, Uruguay, Venezuela and Guatemala) already had CDMA technology in place. CDMA 2000 overlays were completed during 2002 in Ecuador and Panama and during 2003 in Colombia, Nicaragua, Peru and Chile. In addition, Venezuela, Argentina and Guatemala were upgraded to CDMA2000 in 2003. As a result of these activities, we have the latest technology available in nine out of the ten countries we serve. We plan to upgrade Uruguay to CDMA2000 in the first quarter of 2004.

COMPETITION

Each of our international wireless operations is subject to competition, generally from at least one other wireless provider and, increasingly, from new PCS providers and resellers.

LICENSES AND REGULATION

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

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FOREIGN RISKS

Our reporting currency is the US Dollar. However, most of our Latin America revenues are generated in the currencies of the countries in which we operate. In addition, many of our operations and equity investees hold US Dollar denominated short- and long-term debt. The currencies of many Latin America countries have recently experienced substantial volatility and depreciation. Specifically, Venezuela experienced significant currency devaluation in 2003. The Venezuelan Bolivar devalued an additional 17% in 2003 after having devalued 44% in 2002. The Argentine Peso, which had devalued in 2002 by 71%, rebounded in 2003, strengthening 16%. Also in 2002, the Uruguayan Peso devalued 49% and the Brazilian Real devalued 30%.

Advertising and Publishing Group

OVERVIEW

We own a group of companies that publish, print, sell advertising and perform related services concerning alphabetical and classified telephone directories in both paper and electronic formats. Advertising and Publishing Group revenues are derived primarily from sales of directory advertising, and represented approximately 9% of our total operating revenues in each of 2003, 2002 and 2001.

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BUSINESS STRATEGY

We are committed to providing a comprehensive source for linking buyers and sellers in the local 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
	•	achieve optimal operational efficiency by improving sales force effectiveness.

COMPETITION

Competition in the yellow pages industry continues to intensify. Industry consolidation and market expansion of other publishers was at an all time high in 2002 and 2003. 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, and R.H. Donnelly, while new competitors, such as Verizon, continue to enter our markets. 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, localized pricing changes and promotions, increased advertising, and sales enhancements.

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.

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, 2003, we employed almost 76,000 individuals. About 60% of BellSouth’s employees at December 31, 2003 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 2001. These three-year contracts cover approximately 45,000 employees. The contracts included basic wage increases totaling 13% compounded over a three year term. In addition, the agreements provided for a standard incentive award of two percent of base salary and overtime compensation, which is subject to adjustment based on company performance measures. Other terms of the agreements included pension band increases and pension plan cash balance improvements for active employees.

Properties

Our properties do not lend themselves to description by character or location of principal units. Our investment in

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    These properties are divided among our operating segments as follows: Communications Group, 93.8%; Latin America Group, 4.8%; Advertising and Publishing Group, 0.5%; and other, 0.9%.

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 at any time since April 29, 1998, and a class of all African-American salaried workers employed by BellSouth 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 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 on or about July 15, 2003 and named four outside directors as additional defendants. The Consolidated and Amended Class Action Complaint alleges that during the period November 7, 2000 through February 19, 2003, the Company (1) overstated the unbilled receivables balance of its advertising and publishing subsidiary; (2) failed to properly implement SAB 101 with regard to its recognition of advertising and 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. 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.

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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. The plaintiffs purport to represent putative classes consisting of all BellSouth local telephone service subscribers and/or all subscribers of competitive local exchange carriers in nine southeastern states since 1996. The plaintiffs allege that BellSouth engaged in unlawful anticompetitive conduct in violation of state and federal antitrust laws by, among other things, (1) denying competitors access to certain essential facilities necessary for competitors to provide local telephone service; (2) using its monopoly power in the wholesale market for local telephone service as leverage to maintain a monopoly in the retail market; and (3) failing to provide the same quality of service, access and billing to competitors that it provides its own retail customers. The plaintiffs are seeking an unspecified amount of treble damages, injunctive relief, as well as attorneys’ fees and costs. At this time, the likely outcome of the cases cannot be predicted, nor can a reasonable estimate of loss, if any, be made.

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, 2003, our recorded liability related to these matters was approximately $15 million. We continue to believe that expenditures in connection with additional remedial actions under the current environmental protection laws or related matters would not be material to our results of operations, financial position or cash flows.

OTHER MATTERS

We are also subject to claims arising in the ordinary course of business involving allegations of personal injury, breach of contract, anti-competitive conduct, employment law issues, regulatory matters and other actions. BST is also subject to claims attributable to pre-divestiture events involving environmental liabilities, rates, taxes, contracts and torts. Certain contingent liabilities for pre-divestiture events are shared with AT&T Corp. While complete assurance cannot be given as to the outcome of any legal claims, we believe that any financial impact would not be material to our results of operations, financial position or cash flows. See Note 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, 2003.

Additional Information – Description of BellSouth Stock

GENERAL

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

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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.

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.

PREFERRED STOCK PURCHASE RIGHTS

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

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

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BOARD CLASSIFICATION; REMOVAL OF DIRECTORS

Board classification provisions adopted by the shareholders and contained in the By-laws prescribe a shareholder vote for approximately one-third of the directors, instead of all directors, at each annual meeting of shareholders for a three-year term. The proxy statement dated March 10, 2004 includes a management proposal that asks the shareholders to amend the By-laws to eliminate the classified board structure. 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.

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.

Executive Officers

The executive officers of BellSouth Corporation are listed below:

    All of the executive officers of BellSouth, other than Mr. Feidler, 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.

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.

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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, 2004, there were 730,185 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.

The following table contains information about our purchases of equity securities during the fourth quarter of 2003.

Issuer Purchases of Equity Securities

    In July 2002, we announced our intention to purchase up to $2 billion of our outstanding common stock through December 31, 2003. Since the announcement, we have purchased 49.8 million shares for an aggregate of $1,214 million and an average price per share of $24.39. We will not purchase any additional shares under that repurchase program.

Stock Transfer Agent and Registrar

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

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Selected Financial and Operating Data

(DOLLARS 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.

    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 2001, 2002 and 2003.

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BELLSOUTH CORPORATION

THROUGHOUT THIS SECTION, DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED.

Overview

We are a Fortune 100 company with annual revenues of nearly $23 billion. Our core business is wireline communications and our largest customer segment is the retail consumer. We have significant interests in wireless communications through our ownership of approximately 40 percent of Cingular Wireless (Cingular), the nation’s second largest wireless company, and wireless operations in 10 countries in Latin America. 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.

INDUSTRY DYNAMICS

The telecommunications industry has experienced a very difficult period of contraction brought on by over-investment in the late 1990s that created significant excess capacity and too 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.

REGULATION AND COMPETITION

The wireline communications business is heavily influenced by government regulation. Historically, we operated as a monopoly in our geographic area with rates determined by state service commissions based on cost plus a rate of return. Although we now operate under price regulation in all of our markets, where prices for regulated products are monitored by the service commissions, historical prices and policies still influence today’s business. For example, we continue to operate as a provider of last resort, which carries with it requirements for a minimum level of capital spend and network maintenance support.

HIGHLIGHTS AND OUTLOOK

Consolidated revenues for 2003 were essentially flat compared to 2002 reflecting top line pressures caused by the loss of 1.5 million retail access lines to UNE-P competitors and technology substitution. Revenue contraction due to line loss and pricing pressures to remain competitive were offset by solid revenue growth in long distance and DSL, which together generated nearly $800 in new revenue in 2003. Beyond our traditional wireline business, wireless operations at Cingular and in Latin America both experienced accelerating growth in 2003 and have potential for future growth with upgrades to their networks in process. We remain cautious regarding the political situation in Venezuela, where we have our largest operation in Latin America, and its effect on the value of the local currency and our ability to repatriate capital.

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BELLSOUTH CORPORATION

to offer telephone service bundled with other services. We also expect increased competitive pressures as cable providers begin expected launches of voice over Internet protocol (VoIP) telephony to complement their video and data bundle. We will respond by continuing to offer a portfolio of services enhanced by bundling strategies enabling us to retain, acquire and reacquire customers. This ability will be further strengthened in 2004 as we add a video component to our product portfolio by offering satellite television.

Consolidated Results of Operations

Key selected financial and operating data for the three years ended December 31, 2001, 2002 and 2003 are as follows. 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.

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2003 COMPARED TO 2002

Operating revenues

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 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.

Operating expenses

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

	•	$788 in lower charges related to restructuring and asset impairments as we rationalized our business in 2002;
	•	$492 of lower depreciation expense associated with the declines in capital expenditures and a change in accounting for plant retirements;
	•	$287 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 $53 of lower cost of goods related to the de-emphasis of paging equipment and wholesale long distance; 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.

These decreases were partially offset by:

	•	$373 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;
	•	$155 of volume-related increases in the Latin America Group associated with customer growth partially offset by the currency devaluation in Venezuela; and
	•	$108 of variable cost of goods for the provision of long distance service in the Communications Group.

Interest expense

Interest expense declined $140 in comparison to the prior year, reflecting reductions in average debt of approximately $2.6 billion, as rates were relatively stable.

Gain (loss) on sale of operations

Gain (loss) on sale of operations in 2003 relates to losses incurred from the sale of our interests in two Brazilian wireless companies. The gain in 2002 includes $1,335 related to the exit from E-Plus partially offset by a loss of $74 associated with the disposal of Listel, our Brazilian advertising and publishing company.

Net earnings (losses) of equity affiliates

Earnings from Cingular in 2003 were down compared to 2002 primarily due to significant growth in customers and

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the costs related to that growth and due to slightly lower average revenue per customer (see “Results by Segment – Domestic Wireless” for further discussion of Cingular results). Losses from our Brazilian wireless affiliates in 2002 include recognition of other-than-temporary impairments of $383. Earnings from other equity investees increased $72 in 2003 as compared to 2002. The increase is the result of an other-than-temporary impairment during 2002 of $62 related to our investment in a Guatemalan wireless partnership.

Other income (expense), net

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 and gains on sales of Telecentro Oeste Celular Participacoes SA (TCO) shares. See Note D to our consolidated financial statements for additional details on these investments. As of December 31, 2003, we no longer hold any interest in Qwest or TCO.

Foreign currency transaction gains and losses

Foreign currency transaction activity of consolidated subsidiaries, which relate primarily to US dollar-denominated debt in Latin America, improved $838 in 2003. Gains in 2003 were primarily driven by improvement in the Argentine Peso and the Chilean Peso. The majority of the losses in 2002 were driven by the devaluation of the Argentine Peso.

Provision for income taxes

The effective tax rate decreased to 35.9% in 2003 from 40.9% in 2002. The recording of a foreign tax valuation allowance, deferring recognition of the tax benefits generated by losses at our operations in Argentina, substantially increased the rate in 2002. In 2003, partial reversal of this valuation allowance decreased the effective rate as foreign currency gains were realized in Argentina. The 2003 rate was further decreased by reversal of valuation allowances on net operating losses in Ecuador and by income tax benefits relating to inflation adjustments deductible for Venezuelan tax purposes. The decreases were partially offset by additional book losses on the sale of our Brazilian investments for which no tax benefit was recognized.

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. See Note C to our consolidated financial statements for further discussion of this change.

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. See Note C to our consolidated financial statements for further discussion of this change.

2002 COMPARED TO 2001

Operating revenues

The decrease in total operating revenues in 2002 is attributable to 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. These decreases were slightly offset by revenue

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growth in DSL which generated nearly $250 in incremental revenue in 2002.

Operating expenses

Operating expenses declined by nearly $300 in 2002 driven by:

	•	a decline in total operating expenses of $708 in the Latin America Group almost entirely attributable to local currency devaluation;
	•	$185 decrease in labor related costs at the Communications Group due to a reduction in our workforce since the beginning of 2002 driven by weak demand and increased productivity; and
	•	$215 in one-time charges in 2001 related to an accrual for reciprocal compensations and curtailment related to the transfer of employees to Cingular.

These decreases were partially offset by:

	•	$639 of higher charges related to restructuring and asset impairments as we rationalized our business in 2002; and
	•	$263 of higher uncollectibles expense due to customer bankruptcies and non-paying customers associated with a weak economy.

Interest expense

Interest expense decreased $127 in 2002. The decrease in 2002 was the result of both lower short-term interest rates and lower average principal amounts outstanding on short-term and long-term borrowings.

Gain (loss) on sale of operations

The gain in 2002 includes $1,335 related to the exit from E-Plus partially offset by a loss of $74 associated with the disposal of Listel, our Brazilian advertising and publishing company. In 2001, we recognized a gain of $24 from the sale of a 24.5% ownership interest in Skycell, an Indian wireless venture, and $14 from the sale of BellSouth International Wireless Services, an international wireless roaming clearinghouse.

Net earnings (losses) of equity affiliates

Cingular

Earnings from Cingular in 2002 were down compared to 2001 due to higher total operating expenses impacted by higher network usage and high uncollectible expense. (See “Results by Segment – Domestic Wireless” for further discussion of Cingular results.)

Brazilian wireless affiliates

Losses from our Brazilian wireless affiliates in 2002 include a pre-tax loss of $383 related to the recognition of other-than-temporary impairments. Earnings excluding the impairments were $(19) which represents an improvement of $212 compared to 2001, primarily resulting from cessation of losses subsequent to the impairment.

Other equity investees

Earnings from other equity investees declined $38 in 2002 as compared to 2001. The decline is the result of an other-than-temporary impairment of $62 related to our investment in a Guatemalan wireless partnership partially offset by the cessation of losses related to E-Plus that resulted in year-over-year improvement of $39.

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Other income (expense), net