BellSouth Reports Fourth Quarter Earnings

ATLANTA, Jan. 25 /PRNewswire-FirstCall/ -- BellSouth Corporation announced fourth quarter 2005 earnings per share (EPS) from continuing operations of 34 cents, up 36 percent compared to the fourth quarter of 2004. Normalized EPS from continuing operations was 53 cents, a 36 percent increase compared to the fourth quarter of 2004.

A list of normalizing items is provided in the table below.

"BellSouth is delivering solid revenue growth and strong earnings growth," said Duane Ackerman, Chairman and Chief Executive Officer. "BellSouth's earnings for the quarter reflect the value of our asset mix as the industry continues to undergo a transition to new services and new competition emerges."

Normalized Results from Continuing Operations

Normalized results from continuing operations include BellSouth's 40 percent proportionate share of Cingular's revenues and expenses. Cingular completed its acquisition of AT&T Wireless on October 26, 2004. Results prior to the acquisition date have not been restated. The Company is conforming its normalized financial reporting to align to industry peers for the treatment of purchased intangible assets. Normalized results exclude the non-cash amortization of purchased intangibles created in Cingular's acquisition of AT&T Wireless. Prior periods have been recast for the change. (Reconciliation attached).

For the fourth quarter of 2005, normalized revenue was $8.7 billion. Normalized revenue for the quarter was up nearly 2 percent sequentially driven by DSL growth and Cingular customer growth. Normalized net income of $965 million grew $27 million compared to the third quarter of 2005.

For the full year of 2005, BellSouth normalized revenues reached $34 billion, over 40 percent of which came from Cingular Wireless. Full year 2005 normalized EPS was $2.00, a 7 percent increase compared to 2004 as higher contribution from the combined Cingular/AT&T Wireless offset financing costs associated with this transaction and pressures in the wireline business.

Reported Results from Continuing Operations

For the fourth quarter of 2005, BellSouth's consolidated reported revenue from continuing operations totaled $5.2 billion, up nearly 2 percent compared to the same quarter of 2004. Income from continuing operations was $618 million compared to $453 million in the same quarter of the previous year. For the full year of 2005, income from continuing operations was $2.9 billion compared to $3.4 billion for the full year of 2004. Reported results for the quarter and for the year include the financial impacts associated with the damage from Hurricane Katrina.

BellSouth finished 2005 with strong cash flow and a solid balance sheet. For the full year of 2005, operating free cash flow (defined as net cash provided by operating activities less capital expenditures) was $3.3 billion. Capital expenditures for the year amounted to $3.5 billion, including expenditures related to restoration for damages from Hurricane Katrina. The Company reduced debt by $3.4 billion in 2005 and repurchased nearly $1 billion of its outstanding shares during the fourth quarter. In October 2005, the board of directors authorized the repurchase of up to $2 billion of common stock through the end of 2007. The dividend for the fourth quarter was 29 cents per share or $1.16 per share annualized.

Summary of Impacts from Hurricane Katrina

During the fourth quarter of 2005, revenue was reduced by $48 million due to Katrina-related billing credits and the Company estimates approximately 60,000 access lines were disconnected in the affected area. The Company incurred $244 million of incremental expense and $189 million of incremental capital during the fourth quarter.

For the full year, revenue credits totaled $111 million across all three business segments. The Company estimates approximately 100,000 access lines have been disconnected as a result of the hurricane. We have seen some above trend inward movement in other wire centers, presumably from customers relocating within our markets and from businesses migrating to New Orleans to participate in reconstruction, but it is difficult to estimate the extent of this impact.

For the year, incremental expenses for wireline network restoration and capital are approximately $500 million. On Sept. 6, 2005, BellSouth made an initial estimate of the future cost for network restoration, including capital and expense, of $400 million to $600 million. Based on current assessments to complete the restoration effort, the Company now expects this amount to total $700 million to $900 million. We expect a portion of the cost associated with the Hurricane Katrina recovery effort to be covered by insurance. While the exact amount has not been determined, our current estimate of the amount of covered losses, net of our deductible, is approximately $250 million. The actual recovery will vary depending on the outcome of the insurance loss adjustment effort.

Communications Group

In the fourth quarter of 2005, Communications Group revenue was $4.7 billion, nearly a 1 percent increase compared to the same quarter of 2004. Operating margin was 21.9 percent compared to 21.6 percent for the same quarter of the previous year.

For the full year of 2005, Communications Group revenue held steady at $18.5 billion. The Consumer and Small Business market segments delivered solid revenue growth with DSL and long distance service revenue outpacing revenue declines from residential access line loss. Full year operating margin was 23.0 percent compared to 25.0 percent for the full year of 2004. The 2005 operating margin was impacted by higher retiree medical expense, overtime expenses from severe weather and Katrina billing credits.

BellSouth is focused on driving broadband penetration and served nearly 2.9 million broadband DSL customers at year-end. During the fourth quarter of 2005, the Company added 204,000 net DSL customers driven by the continued success of BellSouth's new simplified pricing and improving churn. To meet market demand for faster broadband speeds, BellSouth introduced an up to 6 Mbps DSL service in limited areas during the quarter and, in early January 2006, lowered the price on the up to 3 Mbps DSL service to $37.95. Both actions offer customers opportunities to increase their broadband speed at attractive price points.

For the fourth quarter, network data revenue was $1.25 billion, up 7.7 percent from the same period of the prior year. Retail data revenue grew 15.9 percent from the same period last year driven by a 32.5 percent increase in retail DSL revenue and 4.4 percent growth in revenue from other retail data services. Wholesale data declined 2.8 percent as growth in wholesale services to wireless carriers partially offset declines in traditional wholesale data transport services. For the year, network data revenue grew 5.1 percent totaling more than $4.7 billion.

BellSouth customers continue to want simple, reliable communications services conveniently combined in a package. Customers can bundle DSL, long distance, DIRECTV(R) and Cingular Wireless under the BellSouth Answers(R) bundles. By the end of 2005, more than 4.9 million residential customers combined their services under BellSouth Answers(R), a more than 43 percent penetration of its retail residential lines. In addition, BellSouth now serves almost 7.2 million long distance customers, a 57.7 percent penetration of its mass-market customer base, and a total of 523,000 customers have included DIRECTV(R) services in their communications packages at year-end.

While access lines were down 6.2 percent for the year, revenues grew as a result of higher penetration of broadband and long distance services. As of Dec. 31, 2005, total access lines were 20.0 million, down 409,000 compared to Sept. 30, 2005. Other than the 60,000 estimated disconnects associated with Hurricane Katrina, access line loss continues to be primarily driven by wireless substitution and, to a lesser extent, by competition from cable telephony providers. Retail residential access lines were down 189,000. Retail business access lines increased 12,000 driven by Small Business gains. As expected, Commercial Agreement/UNE-P (Unbundled Network Elements-Platform) access lines resold by BellSouth competitors were down compared to Sept. 30, 2005.

Cingular Wireless

Cingular's strong results were a key driver of BellSouth's earnings growth. The nation's largest wireless carrier ended the fourth quarter of 2005 with 54.1 million cellular/PCS subscribers, an increase of 5 million compared to the year-ago fourth quarter. During the quarter, Cingular delivered record net customer additions of 1.8 million. Retail customer additions were approximately 840,000 reflecting steady growth in postpaid customers and an increase in GoPhone(R) prepaid subscribers. Seasonal reseller promotional activity drove strong resale customer additions. Monthly subscriber churn was 2.1 percent - Cingular's best-ever overall churn results. Postpaid churn improved to 1.9 percent.

In the fourth quarter of 2005, Cingular's revenues were $8.8 billion, up 9.4 percent over fourth quarter 2004 pro forma revenue and up 1.2 percent sequentially.

Average revenue per user (ARPU) in the fourth quarter of 2005 was $48.86, a decline of 2.2 percent from fourth quarter 2004 pro forma ARPU, reflecting pressure on voice revenues partially offset by continued increases in data services. ARPU from data services showed strong growth in the fourth quarter of 2005, reaching $4.71, a nearly 9 percent increase compared to the third quarter of 2005. The increasing popularity and availability of downloadable games, ringtones, and text messaging is driving data ARPU.

Normalized operating income before depreciation and amortization (OIBDA) margin for the fourth quarter of 2005 was 31.0 percent, which was an improvement of 760 basis points compared to year-ago fourth quarter results but a sequential decline of 60 basis points due to anticipated seasonal factors. The year-over-year margin improvement reflects the addition of 5 million customers, progress on merger synergies including increased productivity, economies of scale and lower churn.

In the fourth quarter of 2005, Cingular became the first carrier in the world to operate a commercial UMTS/HSDPA network, which provides industry- leading data throughputs with speeds of 400 to 700 Kbps. Cingular deployed UMTS/HSDPA in 16 markets during the quarter and plans to have most of the top 100 markets launched by the end of 2006. In addition, Cingular brought a Push-to-Talk (PTT) offer to market during the fourth quarter of 2005.

Advertising & Publishing

In the fourth quarter of 2005, Advertising & Publishing revenue was $529 million, up slightly compared to the same quarter of 2004. Adjusting for $16 million in billing credits associated with Hurricane Katrina, revenue grew 3.2 percent.

For the full year of 2005, Advertising & Publishing revenue was up 2 percent compared to 2004 (3.2 percent when adjusted for the full year Katrina billing credits). Revenue growth was driven by increasing online advertising and new print services. For the full year of 2005, online advertising revenue grew 39 percent to more than $100 million. During the quarter the Company enhanced its online services by completing the rollout of YELLOWPAGES.COM(TM) from BellSouth(R). Advertising & Publishing operating margins remained strong at 46.3 percent for the full year.

Normalizing Items

For the fourth quarter and for the full year of 2005, the difference between reported (GAAP) EPS from continuing operations and normalized EPS is shown in the following table:

4Q05 FY05 GAAP Diluted EPS - Income from continuing operations $0.34 $1.59 Hurricane-related expenses: $0.08 $0.19 Asset impairment $0.00 $0.06 Uncollectibles $0.00 $0.01 Other $0.01 $0.02 Restoration $0.07 $0.10 Wireless merger integration costs $0.04 $0.11 Wireless merger intangible amortization $0.05 $0.20 Gain on sale of Cellcom ($0.12) Debt extinguishment costs $0.01 Severance costs $0.03 $0.03 Deferred revenue adjustment ($0.02) ($0.02) Normalized Diluted EPS - Income from continuing operations (1) $0.53 $2.00 (1) Does not sum due to rounding

Hurricane-related expenses - Represents asset impairment charges, incremental labor and material costs related to service restoration and network repairs and incremental uncollectible expense. These expenses are comprised of Hurricane Katrina charges related to BellSouth's wireline business and its 40 percent share of Cingular Wireless' hurricane expenses.

Wireless merger integration costs - Represents BellSouth's 40 percent share of wireless merger integration costs in connection with the Cingular/AT&T Wireless merger. Integration costs include one-time cash outlays or specified non-cash charges, including accelerated depreciation, directly related to rationalization of the wireless network, sales distribution channels, the workforce, information technology systems and real estate.

Wireless merger intangible amortization - Represents BellSouth's 40 percent share of the non-cash amortization of intangibles, primarily customer lists that were created in Cingular's acquisition of AT&T Wireless.

Gain on sale of Cellcom - Gain related to sale of Cellcom, a cellular communications operator in Israel.

Debt extinguishment costs - Represents one-time expenses associated with the early extinguishment of long-term debt in the first and second quarters of 2005.

Severance costs - Represents the net severance-related costs recorded in the fourth quarter of 2005 associated with workforce reductions.

Deferred revenue adjustment - Represents the current recognition of $47 million of previously deferred revenue in the Communications Group segment. The adjustment relates to a system coding error that resulted in underreporting revenues in prior periods. The amount accumulated over multiple years and did not affect any one year by more than $9 million.

About BellSouth Corporation

BellSouth Corporation is a Fortune 100 communications company headquartered in Atlanta, Georgia. BellSouth has joint control and 40 percent ownership of Cingular Wireless, the nation's largest wireless voice and data provider with 54.1 million customers.

Backed by award-winning customer service, BellSouth offers the most comprehensive and innovative package of voice and data services available in the market. Through BellSouth Answers(R), residential and small business customers can bundle their local and long distance service with dial-up and high-speed DSL Internet access, satellite television and Cingular(R) Wireless service. For businesses, BellSouth provides secure, reliable local and long distance voice and data networking solutions. BellSouth also offers print and online directory advertising through The Real Yellow Pages(R) and YELLOWPAGES.COM(TM) from BellSouth(R).

BellSouth believes that diversity and fostering an inclusive environment are critical in maintaining a competitive advantage in today's global marketplace. More information about BellSouth can be found at http://www.bellsouth.com/.

Further information about BellSouth and Cingular's fourth quarter earnings can be accessed at http://www.bellsouth.com/investor. The press release, financial statements and Investor News summarizing highlights of the quarter are available at http://www.bellsouth.com/investor starting today at 8 a.m. Eastern Time (ET).

BellSouth will host a conference call with investors today at 10 a.m. (ET).

Dial-in information for the conference call is as follows: Domestic: 888-370-1863 International: 706-634-1735

The conference call will also be webcast live beginning at 10 a.m. (ET) on our Web site at http://www.bellsouth.com/investor. The webcast will be archived on our Web site beginning at approximately 1 p.m. (ET) today.

A replay of the call will be available beginning at approximately 1 p.m. (ET) today, through Feb. 1, 2006, and can be accessed by dialing:

Domestic: 800-642-1687 - Conference ID: 3339634 International: 706-645-9291 - Conference ID: 3339634

In addition to historical information, this document may contain forward- looking statements regarding events and financial trends. Factors that could affect future results and could cause actual results to differ materially from those expressed or implied in the forward-looking statements include: (i) a change in economic conditions in markets where we operate or have material investments which would affect demand for our services; (ii) the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings; (iii) higher than anticipated cash requirements for investments, new business initiatives and acquisitions; (iv) unfavorable regulatory actions; and (v) those factors contained in the Company's periodic reports filed with the SEC. The forward-looking information in this document is given as of this date only, and BellSouth assumes no duty to update this information.

This document may also contain certain non-GAAP financial measures. The most directly comparable GAAP financial measures, and a full reconciliation of non-GAAP to GAAP financial information, are attached hereto and provided on the Company's investor relations website, http://www.bellsouth.com/investor.

BellSouth Corporation Consolidated Statements of Income - Reported Basis (unaudited) (amounts in millions, except per share data) Note to Readers: See Normalization Earnings Summary and Reconciliation to GAAP results on pages 3 and 4 for a summary of unusual items included in Reported Basis results. 4Q05 4Q04 Growth 3Q05 Growth Operating Revenues Communications group $4,702 $4,613 1.9% $4,558 3.2% Advertising and publishing 525 524 0.2% 506 3.8% All other 15 9 66.7% 8 87.5% Total Operating Revenues 5,242 5,146 1.9% 5,072 3.4% Operating Expenses Cost of services and products 2,205 2,052 7.5% 2,017 9.3% Selling, general & administrative expenses 1,040 1,072 -3.0% 996 4.4% Depreciation and amortization 905 916 -1.2% 922 -1.8% Provision for restructuring and asset impairments 95 18 * 166 -42.8% Total Operating Expenses 4,245 4,058 4.6% 4,101 3.5% Operating Income 997 1,088 -8.4% 971 2.7% Interest Expense 274 270 1.5% 274 0.0% Other Income (Expense), net 144 (177) 181.4% 512 -71.9% Income from Continuing Operations before Income Taxes and Discontinued Operations 867 641 35.3% 1,209 -28.3% Provision for Income Taxes 249 188 32.4% 392 -36.5% Income from Continuing Operations 618 453 36.4% 817 -24.4% Income (Loss) from Discontinued Operations, net of tax - 911 * - * Net Income $618 $1,364 -54.7% $817 -24.4% Diluted: Weighted Average Common Shares Outstanding 1,818 1,836 -1.0% 1,836 -1.0% Earnings Per Share: Income from Continuing Operations $0.34 $0.25 36.0% $0.44 -22.7% Income from Discontinued Operations $0.00 $0.50 * $0.00 * Net Income $0.34 $0.74 -54.1% $0.44 -22.7% * - Not meaningful. Selected Financial and Operating Data Operating income $997 $1,088 -8.4% $971 2.7% Operating margin 19.0% 21.1% -210bps 19.1% -10bps Declared dividends per share $0.29 $0.27 7.4% $0.29 0.0% Capital expenditures excluding Hurricane Katrina $803 $1,059 -24.2% $864 -7.1% Total capital expenditures $992 $1,059 -6.3% $886 12.0% Common shares outstanding 1,796 1,831 -1.9% 1,831 -1.9% Book value per share $13.08 $12.60 3.8% $13.28 -1.5% Year-to-Date 2005 2004 Growth Operating Revenues Communications group $18,451 $18,256 1.1% Advertising and publishing 2,046 2,005 2.0% All other 50 39 28.2% Total Operating Revenues 20,547 20,300 1.2% Operating Expenses Cost of services and products 8,067 7,520 7.3% Selling, general & administrative expenses 3,873 3,816 1.5% Depreciation and amortization 3,661 3,636 0.7% Provision for restructuring and asset impairments 276 39 * Total Operating Expenses 15,877 15,011 5.8% Operating Income 4,670 5,289 -11.7% Interest Expense 1,124 916 22.7% Other Income (Expense), net 756 813 -7.0% Income from Continuing Operations before Income Taxes and Discontinued Operations 4,302 5,186 -17.0% Provision for Income Taxes 1,389 1,792 -22.5% Income from Continuing Operations 2,913 3,394 -14.2% Income (Loss) from Discontinued Operations, net of tax 381 1,364 -72.1% Net Income $3,294 $4,758 -30.8% Diluted: Weighted Average Common Shares Outstanding 1,829 1,836 -0.4% Earnings Per Share: Income from Continuing Operations $1.59 $1.85 -14.1% Income from Discontinued Operations $0.21 $0.74 -71.6% Net Income $1.80 $2.59 -30.5% Selected Financial and Operating Data Operating income $4,670 $5,289 -11.7% Operating margin 22.7% 26.1% -340 bps Declared dividends per share $1.14 $1.06 7.5% Capital expenditures excluding Hurricane Katrina $3,246 $3,193 1.7% Total capital expenditures $3,457 $3,193 8.3% BellSouth Corporation Consolidated Statements of Income - Normalized Basis (unaudited) (amounts in millions, except per share data) Note to Readers: Our reported results, as shown on page 1, are prepared in accordance with generally accepted accounting principles (GAAP). The normalized results presented below exclude the impact of certain non-recurring or non-operating items, the details of which are provided on pages 3 and 4 of this release. In addition, the normalized results reflect our 40% proportionate share of Cingular's results, the presentation of which is not allowed under GAAP. Normalized results exclude discontinued operations from all periods. Certain reclassifications have been made to prior periods to conform to the current presentation. 4Q05 4Q04 Growth 3Q05 Growth Operating Revenues Communications group $4,576 $4,548 0.6% $4,480 2.1% Wireless 3,539 2,848 24.3% 3,499 1.1% Advertising and publishing 525 524 0.2% 506 3.8% All other 16 9 77.8% 9 77.8% Total Operating Revenues 8,656 7,929 9.2% 8,494 1.9% Operating Expenses Cost of services and products 3,370 3,039 10.9% 3,250 3.7% Selling, general, & administrative expenses 2,135 2,148 -0.6% 2,084 2.4% Depreciation and amortization 1,359 1,313 3.5% 1,343 1.2% Total Operating Expenses 6,864 6,500 5.6% 6,677 2.8% Operating Income 1,792 1,429 25.4% 1,817 -1.4% Interest Expense 377 368 2.4% 374 0.8% Other Income (Expense), net 48 35 37.1% 38 26.3% Income Before Income Taxes 1,463 1,096 33.5% 1,481 -1.2% Provision for Income Taxes 498 376 32.4% 543 -8.3% Net Income $965 $720 34.0% $938 2.9% Diluted: Weighted Average Common Shares Outstanding 1,818 1,836 -1.0% 1,836 -1.0% Earnings Per Share $0.53 $0.39 35.9% $0.51 3.9% * - Not meaningful. Selected Financial and Operating Data Operating income $1,792 $1,429 25.4% $1,817 -1.4% Operating margin 20.7% 18.0% 270 bps 21.4% -70 bps Declared dividends per share $0.29 $0.27 7.4% $0.29 0.0% Capital expenditures excluding Hurricane Katrina $803 $1,059 -24.2% $864 -7.1% Total capital expenditures $992 $1,059 -6.3% $886 12.0% Common shares outstanding 1,796 1,831 -1.9% 1,831 -1.9% Book value per share $13.08 $12.60 3.8% $13.28 -1.5% Total employees 63,066 62,564 0.8% 63,049 0.0% Year-to-Date 2005 2004 Growth Operating Revenues Communications group $18,114 $18,091 0.1% Wireless 13,773 7,826 76.0% Advertising and publishing 2,046 2,005 2.0% All other 51 39 30.8% Total Operating Revenues 33,984 27,961 21.5% Operating Expenses Cost of services and products 13,119 10,180 28.9% Selling, general, & administrative expenses 8,369 6,641 26.0% Depreciation and amortization 5,439 4,709 15.5% Total Operating Expenses 26,927 21,530 25.1% Operating Income 7,057 6,431 9.7% Interest Expense 1,546 1,184 30.6% Other Income (Expense), net 218 54 * Income Before Income Taxes 5,729 5,301 8.1% Provision for Income Taxes 2,068 1,862 11.1% Net Income $3,661 $3,439 6.5% Diluted: Weighted Average Common Shares Outstanding 1,829 1,836 -0.4% Earnings Per Share $2.00 $1.87 7.0% Selected Financial and Operating Data Operating income $7,057 $6,431 9.7% Operating margin 20.8% 23.0% -220 bps Declared dividends per share $1.14 $1.06 7.5% Capital expenditures excluding Hurricane Katrina $3,246 $3,193 1.7% Total capital expenditures $3,457 $3,193 8.3% BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Fourth Quarter 2005 Discontinued Continuing Operations Operations GAAP C (GAAP - C) Operating Revenues $5,242 $- $5,242 Operating Expenses 4,245 - 4,245 Operating Income 997 - 997 Interest Expense 274 - 274 Other Income (Expense), net 144 - 144 Income from Continuing Operations before Income Taxes 867 - 867 Provision for Income Taxes 249 - 249 Income from Continuing Operations 618 - 618 Income (Loss) from Discontinued Operations, net of tax - - - Net Income $618 $0 $618 Diluted Earnings Per Share * $0.34 $- $0.34 * Normalized earnings per share for fourth quarter 2005 does not sum due to rounding. Normalizing Items Wireless Merger Merger Hurri- Integra- Intangible Debt cane tion Amortiz- Exting. related Cingular Costs ation Costs Expenses A E L F G Operating Revenues $3,461 $- $- $- $- Operating Expenses 3,242 (131) (152) - (244) Operating Income 219 131 152 - 244 Interest Expense 103 - - - - Other Income (Expense), net (96) - - - - Income from Continuing Operations before Income Taxes 20 131 152 - 244 Provision for Income Taxes 20 53 62 - 95 Income from Continuing Operations - 78 90 - 149 Income (Loss) from Discontinued Operations, net of tax - - - - - Net Income $0 $78 $90 $0 $149 Diluted Earnings Per Share * $- $0.04 $0.05 $- $0.08 Normalizing Items Sale Deferred of Revenue Cellcom Severance Adjustment I J K Normalized Operating Revenues $- $- $(47) $8,656 Operating Expenses - (96) - 6,864 Operating Income - 96 (47) 1,792 Interest Expense - - - 377 Other Income (Expense), net - - - 48 Income from Continuing Operations before Income Taxes - 96 (47) 1,463 Provision for Income Taxes - 37 (18) 498 Income from Continuing Operations - 59 (29) 965 Income (Loss) from Discontinued Operations, net of tax - - - - Net Income $0 $59 $(29) $965 Diluted Earnings Per Share * $- $0.03 $(0.02) $0.53 Year-to-Date 2005 Discontinued Continuing Operations Operations GAAP C (GAAP - C) Operating Revenues $20,547 $- $20,547 Operating Expenses 15,877 - 15,877 Operating Income 4,670 - 4,670 Interest Expense 1,124 - 1,124 Other Income (Expense), net 756 - 756 Income from Continuing Operations before Income Taxes 4,302 - 4,302 Provision for Income Taxes 1,389 - 1,389 Income from Continuing Operations 2,913 - 2,913 Income (Loss) from Discontinued Operations, net of tax 381 (381) - Net Income $3,294 $(381) $2,913 Diluted Earnings Per Share * $1.80 $(0.21) $1.59 * Normalized earnings per share for year-to-date 2005 does not sum due to rounding. Normalizing Items Wireless Merger Merger Hurri- Integra- Intangible Debt cane tion Amortiz- Exting. related Cingular Costs ation Costs Expenses A E L F G Operating Revenues $13,484 $- $- $- $- Operating Expenses 12,753 (350) (685) - (572) Operating Income 731 350 685 - 572 Interest Expense 422 - - - - Other Income (Expense), net (229) - - 42 - Income from Continuing Operations before Income Taxes 80 350 685 42 572 Provision for Income Taxes 80 153 311 16 223 Income from Continuing Operations - 197 374 26 349 Income (Loss) from Discontinued Operations, net of tax - - - - - Net Income $0 $197 $374 $26 $349 Diluted Earnings Per Share * $- $0.11 $0.20 $0.01 $0.19 Normalizing Items Sale Deferred of Revenue Cellcom Severance Adjustment I J K Normalized Operating Revenues $- $- $(47) $33,984 Operating Expenses - (96) - 26,927 Operating Income - 96 (47) 7,057 Interest Expense - - - 1,546 Other Income (Expense), net (351) - - 218 Income from Continuing Operations before Income Taxes (351) 96 (47) 5,729 Provision for Income Taxes (123) 37 (18) 2,068 Income from Continuing Operations (228) 59 (29) 3,661 Income (Loss) from Discontinued Operations, net of tax - - - - Net Income $(228) $59 $(29) $3,661 Diluted Earnings Per Share * $(0.12) $0.03 $(0.02) $2.00 BellSouth Corporation Normalized Earnings Summary and Reconciliation to Reported Results (amounts in millions, except per share data) Fourth Quarter 2004 (1) Discontinued Continuing Operations Operations GAAP C (GAAP - C) Operating Revenues $5,146 $- $5,146 Operating Expenses 4,058 - 4,058 Operating Income 1,088 - 1,088 Interest Expense 270 - 270 Other Income (Expense), net (177) - (177) Income from Continuing Operations before Income Taxes 641 - 641 Provision for Income Taxes 188 - 188 Income from Continuing Operations 453 - 453 Income (Loss) from Discontinued Operations, net of tax 911 (911) - Net Income $1,364 $(911) $453 Diluted Earnings Per Share * $0.74 $(0.50) $0.25 * Normalized earnings per share for fourth quarter 2004 does not sum due to rounding. Normalizing Items Merger Integration Hurricane- / FV Adj related / Lease Cingular Expenses Acctg. Adj A G H Operating Revenues $2,783 $- $- Operating Expenses 2,905 (126) (149) Operating Income (122) 126 149 Interest Expense 98 - - Other Income (Expense), net 193 - 19 Income from Continuing Operations before Income Taxes (27) 126 168 Provision for Income Taxes (27) 49 76 Income from Continuing Operations - 77 92 Income (Loss) from Discontinued Operations, net of tax - - - Net Income $0 $77 $92 Diluted Earnings Per Share * $- $0.04 $0.05 Normalizing Items Wireless Merger Severance/ Intangible Lease Term. Amortization Payments L J Normalized Operating Revenues $- $- $7,929 Operating Expenses (159) (29) 6,500 Operating Income 159 29 1,429 Interest Expense - - 368 Other Income (Expense), net - - 35 Income from Continuing Operations before Income Taxes 159 29 1,096 Provision for Income Taxes 79 11 376 Income from Continuing Operations 80 18 720 Income (Loss) from Discontinued Operations, net of tax - - - Net Income $80 $18 $720 Diluted Earnings Per Share * $0.04 $0.01 $0.39 Year-to-Date 2004 (1) Discontinued Continuing Operations Operations GAAP C (GAAP - C) Operating Revenues $20,300 $- $20,300 Operating Expenses 15,011 - 15,011 Operating Income 5,289 - 5,289 Interest Expense 916 - 916 Other Income (Expense), net 813 - 813 Income from Continuing Operations before Income Taxes 5,186 - 5,186 Provision for Income Taxes 1,792 - 1,792 Income from Continuing Operations 3,394 - 3,394 Income (Loss) from Discontinued Operations, net of tax 1,364 (1,364) - Net Income $4,758 $(1,364) $3,394 Diluted Earnings Per Share $2.59 $(0.74) $1.85 (1) Certain items have been reclassified since the initial report in January 2005. Normalizing Items Hurri- Sale Regulatory cane of Settlement related Cingular Sonofon Expenses A B D G Operating Revenues $7,611 $- $50 $- Operating Expenses 7,052 - (3) (164) Operating Income 559 - 53 164 Interest Expense 268 - - - Other Income (Expense), net (316) (462) - - Income from Continuing Operations before Income Taxes (25) (462) 53 164 Provision for Income Taxes (25) (167) 20 64 Income from Continuing Operations - (295) 33 100 Income (Loss) from Discontinued Operations, net of tax - - - - Net Income $0 $(295) $33 $100 Diluted Earnings Per Share $- $(0.16) $0.02 $0.05 Normalizing Items Merger Integration Wireless / FV Adj Merger Severance/ / Lease Intangible Lease Term. Acctg. Adj Amortization Payments H L J Normalized Operating Revenues $- $- $- $27,961 Operating Expenses (178) (159) (29) 21,530 Operating Income 178 159 29 6,431 Interest Expense - - - 1,184 Other Income (Expense), net 19 - - 54 Income from Continuing Operations before Income Taxes 197 159 29 5,301 Provision for Income Taxes 88 79 11 1,862 Income from Continuing Operations 109 80 18 3,439 Income (Loss) from Discontinued Operations, net of tax - - - - Net Income $109 $80 $18 $3,439 Diluted Earnings Per Share $0.06 $0.04 $0.01 $1.87 BellSouth Corporation Notes to Normalized Financial and Operating Data (pages 3 and 4) (amounts in millions, except per share data) Our normalized earnings have been adjusted for the following: (a) The periods presented have been adjusted to include our 40% proportional share of Cingular Wireless' operating results, net of eliminations for amounts charged by other BellSouth companies to Cingular. (b) Gain related to the sale of our operations in Denmark. (c) Discontinued Operations - In March 2004, we announced our intention to sell our Latin American properties. Accordingly, the prior period results have been recast to reflect the Latin American operations as Discontinued Operations and thus excluded from normalized results. The 1st quarter 2005 results include an after-tax gain of $390 related to the final 2 of the 10 properties that were closed in January. The 4th quarter 2004 results include an after-tax gain of $915 related to the 8 properties closed prior to year end. The year-to-date period in 2004 includes $336 in net income tax benefit representing the recognition of book over tax basis differential in connection with the announced sale of these properties. (d) Regulatory Settlement - In April 2004, BellSouth entered into a settlement agreement with respect to previously disclosed litigation (See 2004 10K for further discussion). (e) Wireless Merger Integration Costs - Represents BellSouth's 40% share of tax-effected wireless merger integration costs of $326 incurred during the 4th quarter of 2005 and $876 for the full year of 2005 in connection with the Cingular/AT&T Wireless merger. Integration costs include one-time cash outlays or specified non-cash charges, including accelerated depreciation, directly related to rationalization of the wireless network, sales distribution channels, the workforce, information technology systems and real estate. (f) Debt Extinguishment Costs - Represents one-time expenses associated with the early extinguishment of $400 of long-term debt in the 1st quarter of 2005 and one-time expenses associated with the early extinguishment of $300 of long-term debt in the 2nd quarter of 2005. (g) Hurricane-related Expenses - Represents 2005 hurricane-related charges of $149 after-tax in the 4th quarter of 2005 and $349 for year-to-date 2005 and consists of asset impairment charges, incremental labor and material costs related to service restoration and network repairs and incremental uncollectible expense. These expenses are comprised of Hurricane Katrina charges related to BellSouth's wireline business and its 40% share of Cingular Wireless' hurricane expenses. The 2004 charges in the 4th quarter and year-to-date period represent incremental labor and material costs in the wireline business due to Hurricanes Charley, Frances, Ivan and Jeanne. (h) Wireless Merger Integration Planning Costs, Fair Value Adjustment and Lease Accounting Adjustment - Represents BellSouth's 40% share of (1) tax-effected wireless merger integration planning costs of $43 incurred during the 3rd quarter of 2004 and costs of $245 in the 4th quarter of 2004 in connection with the Cingular/AT&T Wireless merger, (2) a tax-effected fair value adjustment of $31 for the announced sale of Cingular Interactive during the 3rd quarter of 2004 and (3) a tax- effected charge of $171 in the 4th quarter of 2004 reflecting the correction of an error relating to the lease accounting practices of Cingular Wireless, LLC. (i) Gain related to the sale of Cellcom, a cellular communications operator in Israel. (j) Severance Costs/Lease Termination Payments - Represents tax-effected severance-related costs of $96 recorded in the 4th quarter of 2005 associated with workforce reductions. 2004 charges represent 4th quarter net severance-related costs and a provision related to surplus office space under long-term leases. (k) Deferred Revenue Adjustment - Represents the current recognition of $47 of previously deferred revenue in the Communications Group segment. The adjustment relates to a system coding error that resulted in underreporting revenues in prior periods. The amount accumulated over multiple years and did not affect any one year by more than $9. (l) Wireless Merger Intangible Amortization - Represents BellSouth's 40% share of the non-cash amortization of intangibles, primarily customer lists, that were created in Cingular's acquisition of AT&T Wireless. BellSouth Corporation Consolidated Balance Sheets (unaudited) (amounts in millions, except per share data) December December Change September Change 31, 31, vs. 30, vs. Prior Prior 2005 2004 Year 2005 Quarter Assets Current Assets: Cash and cash equivalents $427 $680 $(253) $2,030 $(1,603) Short-term investments - 16 (16) - - Accounts receivable, net of allowance for uncollectibles of $289, $317, and $297 2,555 2,559 (4) 2,443 112 Material and supplies 385 321 64 336 49 Other current assets 928 1,055 (127) 859 69 Assets of discontinued operations - 1,068 (1,068) - - Total Current Assets 4,295 5,699 (1,404) 5,668 (1,373) Investment in and advances to Cingular Wireless 21,274 22,771 (1,497) 21,084 190 Property, plant and equipment, net 21,723 22,039 (316) 21,670 53 Other assets 7,889 7,400 489 7,611 278 Intangible assets, net 1,533 1,587 (54) 1,517 16 Total Assets $56,714 $59,496 $(2,782) $57,550 $(836) Liabilities and Shareholders' Equity Current Liabilities: Debt maturing within one year $4,109 $5,475 $(1,366) $2,582 $1,527 Accounts payable 1,040 1,047 (7) 1,030 10 Other current liabilities 3,407 3,018 389 4,081 (674) Liabilities of discontinued operations - 830 (830) - - Total Current Liabilities 8,556 10,370 (1,814) 7,693 863 Long-Term Debt 13,079 15,108 (2,029) 14,374 (1,295) Noncurrent Liabilities: Deferred income taxes 6,833 6,492 341 6,465 368 Other noncurrent liabilities 4,754 4,460 294 4,704 50 Total Noncurrent Liabilities 11,587 10,952 635 11,169 418 Shareholders' Equity: Common stock, $1 par value 2,020 2,020 - 2,020 - Paid-in capital 7,960 7,840 120 7,861 99 Retained earnings 20,383 19,267 1,116 20,326 57 Accumulated other comprehensive income (14) (157) 143 (28) 14 Shares held in trust and treasury (6,857) (5,904) (953) (5,865) (992) Total Shareholders' Equity 23,492 23,066 426 24,314 (822) Total Liabilities and Shareholders' Equity $56,714 $59,496 $(2,782) $57,550 $(836) BellSouth Corporation Consolidated Statements of Cash Flows (unaudited) (amounts in millions, except per share data) Year-To-Date 4Q05 4Q04 3Q05 2005 2004 Cash Flows from Operating Activities: Income from Continuing Operations $618 $453 $817 $2,913 $3,394 Adjustments to income from continuing operations: Depreciation and amortization 905 916 922 3,661 3,636 Provision for uncollectibles 90 99 93 348 384 Net losses (earnings) of equity affiliates (80) 260 (97) (165) (68) Deferred income taxes 255 341 (66) 306 1,081 Asset impairments - - 166 166 - Pension income (133) (121) (133) (532) (484) Stock-settled compensation expense 24 29 22 94 116 Loss on extinguishment of debt - - - 42 14 (Gain) loss on sale/disposal of operations - - (351) (351) (462) Net change in: Accounts receivable and other current assets (179) (148) (11) (353) (419) Accounts payable and other current liabilities (781) (668) 618 228 (644) Deferred charges and other assets (49) (10) (39) (128) (43) Other liabilities and deferred credits 103 117 133 440 184 Other reconciling items, net 1 45 40 39 112 Net cash provided by operating activities 774 1,313 2,114 6,708 6,801 Cash Flows from Investing Activities: Capital expenditures (992) (1,059) (886) (3,457) (3,193) Purchase of short-term investments (734) (560) (76) (822) (3,770) Proceeds from sale of short-term investments 734 924 76 838 5,363 Investments in debt and equity securities (129) (129) (53) (285) (632) Investments in and advances to equity affiliates - (14,445) (2) (4) (14,445) Net (advances to) repayments from Cingular (109) (666) 949 1,627 (646) Proceeds from sale of securities and operations 42 3,113 656 1,642 3,678 Other investing activities, net 11 (4) (23) (22) 85 Net cash provided by (used for) investing activities (1,177) (12,826) 641 (483) (13,560) Cash Flows from Financing Activities: Net borrowing (repayments) of short-term debt 247 2,004 (480) (1,863) 1,738 Proceeds from long-term debt - 2,389 - - 6,078 Repayments of long-term debt (13) (14) (233) (1,513) (759) Dividends paid (531) (494) (532) (2,051) (1,901) Purchase of treasury shares (959) (47) (54) (1,096) (146) Other financing activities, net 56 13 89 160 61 Net cash used for financing activities (1,200) 3,851 (1,210) (6,363) 5,071 Net Increase/(Decrease) in Cash from Continuing Operations (1,603) (7,662) 1,545 (138) (1,688) Net Increase/(Decrease) in Cash from Discontinued Operations - (478) - (115) (579) Net Increase/(Decrease) in Cash and Cash Equivalents (1,603) (8,140) 1,545 (253) (2,267) Cash and Cash Equivalents at Beginning of Period 2,030 8,820 485 680 2,947 Cash and Cash Equivalents at End of Period $427 $680 $2,030 $427 $680 BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Communications Group (1) 4Q05 4Q04 Growth 3Q05 Growth Operating Revenues Voice $3,131 $3,165 -1.1% $3,136 -0.2% Data 1,252 1,163 7.7% 1,166 7.4% Other 298 311 -4.2% 286 4.2% Total Operating Revenues 4,681 4,639 0.9% 4,588 2.0% Operating Expenses Cost of services and products 1,908 1,846 3.4% 1,860 2.6% Selling, general, & administrative expenses 847 884 -4.2% 793 6.8% Depreciation and amortization 899 909 -1.1% 914 -1.6% Total Operating Expenses 3,654 3,639 0.4% 3,567 2.4% Segment Operating Income 1,027 1,000 2.7% 1,021 0.6% Interest Expense 99 96 3.1% 94 5.3% Other Income (Expense), net 23 12 91.7% 14 64.3% Income Before Income Taxes 951 916 3.8% 941 1.1% Provision for Income Taxes 343 317 8.2% 330 3.9% Segment Net Income(1) $608 $599 1.5% $611 -0.5% * - Not meaningful. Selected Financial and Operating Data (amounts in millions) Segment operating income $1,027 $1,000 2.7% $1,021 0.6% Segment operating margin 21.9% 21.6% 30 bps 22.3% -40 bps DSL revenues $353 $275 28.4% $305 15.7% Long distance revenues $629 $533 18.0% $608 3.5% Switched Access MOUs 15,310 16,459 -7.0% 15,511 -1.3% BSLD MOUs 6,539 5,864 11.5% 6,660 -1.8% Total Access minutes of use 21,849 22,323 -2.1% 22,171 -1.5% Capital expenditures excluding Hurricane Katrina $794 $1,047 -24.2% $856 -7.2% Total capital expenditures $983 $1,047 -6.1% $878 12.0% (amounts in thousands) Wholesale lines 2,224 2,964 -25.0% 2,454 -9.4% DSL customers 2,882 2,096 37.5% 2,678 7.6% LD customers 7,179 6,015 19.4% 6,993 2.7% Consumer ARPU (3) $60.53 $57.16 5.9% $58.53 3.4% Year-To-Date 2005 2004 Growth Operating Revenues Voice $12,576 $12,609 -0.3% Data 4,743 4,513 5.1% Other 1,193 1,291 -7.6% Total Operating Revenues 18,512 18,413 0.5% Operating Expenses Cost of services and products 7,471 7,089 5.4% Selling, general, & administrative expenses 3,153 3,118 1.1% Depreciation and amortization 3,633 3,609 0.7% Total Operating Expenses 14,257 13,816 3.2% Segment Operating Income 4,255 4,597 -7.4% Interest Expense 391 374 4.5% Other Income (Expense), net 68 30 126.7% Income Before Income Taxes 3,932 4,253 -7.5% Provision for Income Taxes 1,389 1,526 -9.0% Segment Net Income(1) $2,543 $2,727 -6.7% * - Not meaningful. Selected Financial and Operating Data (amounts in millions) Segment operating income $4,255 $4,597 -7.4% Segment operating margin 23.0% 25.0% -200 bps DSL revenues $1,238 $985 25.7% Long distance revenues $2,396 $1,976 21.3% Switched Access MOUs 62,589 70,061 -10.7% BSLD MOUs 25,511 21,109 20.9% Total Access minutes of use 88,100 91,170 -3.4% Capital expenditures excluding Hurricane Katrina $3,218 $3,158 1.9% Total capital expenditures $3,429 $3,158 8.6% BellSouth Corporation Results by Segment (unaudited) Supplemental Operating Data (in thousands) Communications Group - Network Access Lines In Service Reported (a) 4Q05 4Q04 Growth 3Q05 Growth Access lines Residence Retail Primary 11,319 11,770 -3.8% 11,465 -1.3% Additional 1,163 1,346 -13.6% 1,206 -3.6% Total Retail Residence 12,482 13,116 -4.8% 12,671 -1.5% Wholesale Resale 182 117 55.6% 167 9.0% Commercial Agreement/UNE-P 1,306 1,972 -33.8% 1,507 -13.3% Total Wholesale Residence 1,488 2,089 -28.8% 1,674 -11.1% Total Residence 13,970 15,205 -8.1% 14,345 -2.6% Business Retail Total Retail Business 5,306 5,242 1.2% 5,294 0.2% Wholesale Resale 54 60 -10.0% 54 0.0% Commercial Agreement/UNE-P 614 751 -18.2% 658 -6.7% Total Wholesale Business 668 811 -17.6% 712 -6.2% Total Business 5,974 6,053 -1.3% 6,006 -0.5% Other Retail/Wholesale Lines Retail 25 34 -26.5% 27 -7.4% Wholesale 68 64 6.3% 68 0.0% Total Other Retail/Wholesale Lines 93 98 -5.1% 95 -2.1% Total Access Lines in Service 20,037 21,356 -6.2% 20,446 -2.0% ISDN line equivalents Residence 6 9 -33.3% 7 -14.3% Business 1,465 1,459 0.4% 1,440 1.7% Total ISDN Adjusted ALIS 21,508 22,824 -5.8% 21,893 -1.8% Access Line Equivalents (b) Selected digital data services: Unbundled Loops 306 276 10.9% 279 9.7% DS0 & ADSL 17,558 12,863 36.5% 16,333 7.5% DS1 8,214 7,695 6.7% 8,163 0.6% DS3 & higher 34,925 32,745 6.7% 33,639 3.8% Total digital data lines in service 61,003 53,579 13.9% 58,414 4.4% Total equivalent access lines in service 82,511 76,403 8.0% 80,307 2.7% * - Not meaningful. (a) Prior period operating data are often revised at later dates to reflect updated information. The above information reflects the latest data available for the periods indicated. (b) Access line equivalents represent a conversion of non-switched data circuits to a switched access line basis and is presented for comparability purposes. Equivalents are calculated by converting high-speed/high-capacity circuits to the equivalent of a switched access line based on transport capacity. While the revenues generated by access line equivalents have a directional relationship with these counts, revenue growth rates cannot be compared to line growth rates on an equivalent basis. BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Wireless Segment (1)(a) 4Q05 4Q04 Growth 3Q05 Growth Operating Revenues Service revenues (2) $3,111 $2,526 23.2% $3,089 0.7% Equipment and other revenues 428 322 32.9% 410 4.4% Total Operating Revenues 3,539 2,848 24.3% 3,499 1.1% Operating Expenses Cost of services and products 1,467 1,181 24.2% 1,395 5.2% Selling, general, & administrative expenses 1,108 1,084 2.2% 1,128 -1.8% Depreciation and amortization 454 397 14.4% 421 7.8% Total Operating Expenses 3,029 2,662 13.8% 2,944 2.9% Segment Operating Income 510 186 174.2% 555 -8.1% Interest Expense 117 121 -3.3% 122 -4.1% Other Income (Expense), net (3) (35) 91.4% (9) 66.7% Income Before Income Taxes 390 30 * 424 -8.0% Provision for Income Taxes 166 23 * 182 -8.8% Segment Net Income (1) $224 $7 * $242 -7.4% Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $510 $186 174.2% $555 -8.1% Segment operating margin 14.4% 6.5% 790 bps 15.9% -150 bps Cellular/PCS Operating Metrics (100% Cingular): Total Customers (7) 54,144 49,132 10.2% 52,292 3.5% Net Customer Additions 1,820 1,699 7.1% 867 109.9% Partitioned Customers and/or Adjustments 32 21,761 * (17) 288.2% Churn (8) 2.1% 2.6% -50 bps 2.3% -20 bps Wireless Service ARPU (3) $48.86 $49.51 -1.3% $49.65 -1.6% Minutes Of Use Per Subscriber (4) 727 617 17.8% 727 0.0% Licensed POPs (5) 294 291 1.0% 294 0.0% Penetration (6) 18.9% 17.2% 170 bps 18.3% 60 bps * - Not meaningful. PROFORMA 4Q05 4Q04 Growth 3Q05 Growth Service Revenue 3,111 2,878 8.1% 3,089 0.7% Total Revenue (40%) 3,539 3,235 9.4% 3,499 1.1% Net Adds (100%) 1,820 1,743 4.4% 867 109.9% ARPU $48.86 $49.97 -2.2% $49.65 -1.6% (a) The wireless segment is comprised of BellSouth's 40% share of the reported results of Cingular Wireless. Year-To-Date 2005 2004 Growth Operating Revenues Service revenues (2) $12,255 $7,041 74.1% Equipment and other revenues 1,518 785 93.4% Total Operating Revenues 13,773 7,826 76.0% Operating Expenses Cost of services and products 5,638 3,032 85.9% Selling, general, & administrative expenses 4,546 2,826 60.9% Depreciation and amortization 1,778 1,073 65.7% Total Operating Expenses 11,962 6,931 72.6% Segment Operating Income 1,811 895 102.3% Interest Expense 504 360 40.0% Other Income (Expense), net (12) (180) 93.3% Income Before Income Taxes 1,295 355 264.8% Provision for Income Taxes 594 146 * Segment Net Income (1) $701 $209 235.4% Selected Financial and Operating Data (amounts in millions, except customer data in thousands) Segment operating income $1,811 $895 102.3% Segment operating margin 13.1% 11.4% 170 bps Cellular/PCS Operating Metrics (100% Cingular): Total Customers (7) 54,144 49,132 10.2% Net Customer Additions 5,006 3,338 50.0% Partitioned Customers and/or Adjustments 6 21,767 * Churn (8) 2.2% 2.7% -50 bps Wireless Service ARPU (3) $49.65 $49.68 -0.1% Minutes Of Use Per Subscriber (4) 701 584 20.0% Licensed POPs (5) 294 291 1.0% Penetration (6) 18.9% 17.2% 170 bps BellSouth Corporation Results by Segment (amounts in millions) (unaudited) Advertising & Publishing (1) 4Q05 4Q04 Growth 3Q05 Growth Operating Revenues Advertising and publishing revenues $475 $475 0.0% $477 -0.4% Commission revenues 54 53 1.9% 32 68.8% Total Operating Revenues 529 528 0.2% 509 3.9% Operating Expenses Cost of services 91 94 -3.2% 94 -3.2% Selling, general, & administrative expenses 186 188 -1.1% 175 6.3% Depreciation and amortization 7 7 0.0% 7 0.0% Total Operating Expenses 284 289 -1.7% 276 2.9% Segment Operating Income 245 239 2.5% 233 5.2% Interest Expense 4 2 100.0% 3 33.3% Other Income (Expense), net (1) (1) 0.0% - * Income Before Income Taxes 240 236 1.7% 230 4.3% Provision for Income Taxes 86 91 -5.5% 84 2.4% Segment Net Income(1) $154 $145 6.2% $146 5.5% Segment operating income $245 $239 2.5% $233 5.2% Segment operating margin 46.3% 45.3% 100 bps 45.8% 50 bps * - Not meaningful. Year-To-Date 2005 2004 Growth Operating Revenues Advertising and publishing revenues $1,908 $1,878 1.6% Commission revenues 152 141 7.8% Total Operating Revenues 2,060 2,019 2.0% Operating Expenses Cost of services 374 353 5.9% Selling, general, & administrative expenses 704 684 2.9% Depreciation and amortization 28 28 0.0% Total Operating Expenses 1,106 1,065 3.8% Segment Operating Income 954 954 0.0% Interest Expense 12 8 50.0% Other Income (Expense), net (1) - * Income Before Income Taxes 941 946 -0.5% Provision for Income Taxes 346 363 -4.7% Segment Net Income(1) $595 $583 2.1% Segment operating income $954 $954 0.0% Segment operating margin 46.3% 47.3% -100 bps BellSouth Corporation Notes (1) Segment net income (loss) is based on normalized results which exclude certain one-time transactions and certain corporate intercompany billings. Certain intersegment revenues are not eliminated for purposes of management reporting. (2) Wireless service revenues include activation fees, access, airtime, roaming, long distance and value added services. Roaming revenues are included on a gross basis for the Wireless segment. Average monthly revenue per customer is calculated by dividing average monthly service revenue by average customers. (3) Management uses average revenue per unit (ARPU) as an indicator of operating performance of the business. Consumer ARPU is defined as consumer revenues during the period divided by average primary access lines during the period. Wireless Service 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 our network to prior periods and internal targets. We believe that each of these metrics provides useful information concerning the performance of our initiatives to attract and retain high value customers and the use of our network. (4) Total Minutes of Use per Cellular/PCS Subscriber definition was changed effective with the 2Q05 reporting period. Prior to the change, the numerator was defined as Local Minutes of Use. Effective with this change, the numerator is now defined as including Local Minutes of Use and Outcollect Minutes of Use. (5) Licensed POPs refers to the number of people residing in areas where Cingular and its partners have licenses to provide cellular or PCS service including areas where Cingular has not yet commenced service. Licensed POPs have been restated in periods 4Q04 through 2Q05 due to a reconciliation of respective licenses. Licensed POPs are based on an estimated 2005 total US POPs of 297 million. (6) Penetration calculation for 3Q05 and 4Q05 is based on licensed "operational" POPs of 286 million for each quarter. (7) Cellular/PCS customers include customers served through reseller agreements. Cingular has revised its customer counts and related data for the 4Q04 through 2Q05 reporting periods to correct reporting of certain subscriber activity. (8) Cellular/PCS churn is calculated by dividing the aggregate number of Cellular/PCS customers who cancel service during each month in a period by the total number of Cellular/PCS customers at the beginning of each month in that period. BellSouth Corporation Non-GAAP Measures - Reconciliation (amounts in millions) (unaudited) Segment Net Income Reconciliation to GAAP Net Income Year-to-Date 4Q05 4Q04 3Q05 2005 2004 Communications group segment net income $608 $599 $611 $2,543 $2,727 Wireless group segment net income 224 7 242 701 209 Advertising and publishing group segment net income 154 145 146 595 583 Corporate, eliminations and other (21) (31) (61) (178) (80) Normalized net income 965 720 938 3,661 3,439 Add back Excluded non-recurring or non-operational items (a) (347) 644 (121) (367) 1,319 Consolidated GAAP net income $618 $1,364 $817 $3,294 $4,758 Free Cash Flow Year-to-Date 4Q05 4Q04 3Q05 2005 2004 Net cash provided by operating activities $774 $1,313 $2,114 $6,708 $6,801 Less Capital Expenditures (992) (1,059) (886) (3,457) (3,193) Operating Free Cash Flow $(218) $254 $1,228 $3,251 $3,608 Net Debt December 31, December 31, September 30, 2005 2004 2005 Total Debt $17,188 $20,583 $16,956 Less Cash (427) (680) (2,030) Net Debt $16,761 $19,903 $14,926 Communications Group Operating Income before Depreciation and Amortization Year-to-Date 4Q05 4Q04 3Q05 2005 2004 Operating Revenues $4,681 $4,639 $4,588 $18,512 $18,413 Operating Income 1,027 1,000 1,021 4,255 4,597 Add back Depreciation and Amortization 899 909 914 3,633 3,609 Operating Income before Depreciation and Amortization $1,926 $1,909 $1,935 $7,888 $8,206 Margin 41.1% 41.2% 42.2% 42.6% 44.6% Wireless Operating Income before Depreciation and Amortization Year-to-Date 4Q05 4Q04 3Q05 2005 2004 Service Revenues $3,111 $2,526 $3,089 $12,255 $7,041 Equipment and Other Revenues 428 322 410 1,518 785 Operating Revenues 3,539 2,848 3,499 13,773 7,826 Operating Income 510 186 555 1,811 895 Operating Margin (Operating income divided by Operating Revenues) (b) 14.4% 6.5% 15.9% 13.1% 11.4% Add back Depreciation and Amortization 454 397 421 1,778 1,073 Operating Income before Depreciation and Amortization $964 $583 $976 $3,589 $1,968 Margin (Operating Income before Depr & Amort divided by Service Revenues) (b) 31.0% 23.1% 31.6% 29.3% 28.0% Wireless Proforma Revenue Year-to-Date 4Q05 4Q04 3Q05 2005 2004 Operating Revenue $3,539 $2,848 $3,499 $13,773 $7,826 Add back Proforma Adjustments (c) - 387 - - 5,097 Total Operating Revenue (Proforma) $3,539 $3,235 $3,499 $13,773 $12,923 Wireless Proforma ARPU 4Q05 4Q04 3Q05 Service revenues $3,111 $2,526 $3,089 Less Mobitex data revenues 7 14 7 Add back Proforma Adjustments (c) - 352 - Service revenue used to calculate Proforma ARPU $3,104 $2,864 $3,082 ARPU (Proforma) $48.86 $49.97 $49.65 (a) See pages 3 and 4 for detail of excluded items. (b) Margin calculations for our wireless segment represent 40% of Cingular's margin calculations adjusted for the related normalized items as presented on pages 3-4. (c) These adjustments are consistent in nature with those set forth in Cingular's Form 8-K/A dated November 29, 2004. BellSouth Corporation Hurricane Katrina Revenue Impacts (amounts in millions, except per share data) Communications Group: 4Q05 4Q04 Growth 3Q05 Growth As reported (with Katrina customer bill credits): Operating revenues $4,681 $4,639 0.9% $4,588 2.0% Pro forma (without Katrina customer bill credits): Operating revenues $4,713 $4,639 1.6% $4,632 1.7% Impact of Hurricane Katrina bill credits on: Operating revenues $(32) $- -70 bps $(44) 30 bps Communications Group: Full Year 2005 2004 Growth As reported (with Katrina customer bill credits): Operating revenues $18,512 $18,413 0.5% Pro forma (without Katrina customer bill credits): Operating revenues $18,588 $18,413 1.0% Impact of Hurricane Katrina bill credits on: Operating revenues $(76) $- -40 bps Wireless: 4Q05 4Q04 Growth 3Q05 Growth As reported (with Katrina customer bill credits): Operating revenues $3,539 $2,848 24.3% $3,499 1.1% Pro forma (without Katrina customer bill credits): Operating revenues $3,539 $2,848 24.3% $3,511 0.8% Impact of Hurricane Katrina bill credits on: Operating revenues $- $- 0 bps $(12) 30 bps Wireless: Full Year 2005 2004 Growth As reported (with Katrina customer bill credits): Operating revenues $13,773 $7,826 76.0% Pro forma (without Katrina customer bill credits): Operating revenues $13,785 $7,826 76.1% Impact of Hurricane Katrina bill credits on: Operating revenues $(12) $- -20 bps Advertising & Publishing: 4Q05 4Q04 Growth 3Q05 Growth As reported (with Katrina customer bill credits): Operating revenues $529 $528 0.2% $509 3.9% Pro forma (without Katrina customer bill credits): Operating revenues $545 $528 3.2% $516 5.6% Impact of Hurricane Katrina bill credits on: Operating revenues $(16) $- -300 bps $(7) -170 bps Advertising & Publishing: Full Year 2005 2004 Growth As reported (with Katrina customer bill credits): Operating revenues $2,060 $2,019 2.0% Pro forma (without Katrina customer bill credits): Operating revenues $2,083 $2,019 3.2% Impact of Hurricane Katrina bill credits on: Operating revenues $(23) $- -110 bps BellSouth Corporation Cingular Amortization Reconciliation (amounts in millions, except per share data) Consolidated 4Q04 2004 1Q05 2Q05 3Q05 Normalized D&A - as originally disclosed $1,472 $4,868 $1,588 $1,524 $1,501 Wireless merger intangible amortization $(159) $(159) $(196) $(179) $(158) Normalized D&A $1,313 $4,709 $1,392 $1,345 $1,343 Normalized Operating Income - as originally disclosed $1,270 $6,272 $1,439 $1,634 $1,659 Wireless merger intangible amortization $159 $159 $196 $179 $158 Normalized Operating Income $1,429 $6,431 $1,635 $1,813 $1,817 Normalized Operating Margin - as originally disclosed 16.0% 22.4% 17.3% 19.2% 19.5% Wireless merger intangible amortization 2.0% 0.6% 2.4% 2.1% 1.9% Normalized Operating Margin 18.0% 23.0% 19.7% 21.3% 21.4% Normalized Earnings Per Share - as originally disclosed $0.35 $1.83 $0.39 $0.46 $0.46 Wireless merger intangible amortization $0.04 $0.04 $0.06 $0.05 $0.05 Normalized Earnings Per Share $0.39 $1.87 $0.45 $0.51 $0.51 Wireless Segment 4Q04 2004 1Q05 2Q05 3Q05 Normalized D&A - as originally disclosed $556 $1,232 $670 $608 $579 Wireless merger intangible amortization $(159) $(159) $(196) $(179) $(158) Normalized D&A $397 $1,073 $474 $429 $421 Normalized Operating Income - as originally disclosed $27 $736 $88 $283 $397 Wireless merger intangible amortization $159 $159 $196 $179 $158 Normalized Operating Income $186 $895 $284 $462 $555 Normalized Operating Margin - as originally disclosed 0.9% 9.4% 2.7% 8.2% 11.3% Wireless merger intangible amortization 5.6% 2.0% 5.9% 5.2% 4.6% Normalized Operating Margin 6.5% 11.4% 8.6% 13.4% 15.9% Wireless merger intangible amortization - Represents BellSouth's 40 percent share of the non-cash amortization of intangibles, primarily customer lists, that were created in Cingular's acquisition of AT&T Wireless.