See Notes to Consolidated Financial Statements.

2

See Notes to Consolidated Financial Statements.

3

See Notes to Consolidated Financial Statements.

4

5

AT&T INC.

JUNE 30, 2006MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTSSTATEMENTS

Basis of Presentation Throughout this document, AT&T Inc. is referred to as “AT&T,” “we” or the “Company.” The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) that permit reduced disclosure for interim periods. We believe that these consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the interim periods shown. The results for the interim periods are not necessarily indicative of results for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2005.2006.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both domestically and internationally providing wireline and wireless telecommunicationscommunications services and equipment, as well asmanaged networking, wholesale services and directory advertising and publishing services.

All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships joint ventures, including Cingular Wireless (Cingular), and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. We accountPrior to the closing of the BellSouth Corporation (BellSouth) acquisition on December 29, 2006, we accounted for our 60% economic interest in Cingularjoint ventures with BellSouth under the equity method since we shared control equally. Thus, for 2006 we recorded as equity income our proportionate share control equally (i.e.of economic ownership in these joint ventures, namely, 60% of AT&T Mobility LLC (AT&T Mobility), 50/50) with our 40% economic partner in the joint venture. We have equal voting rightsformerly Cingular Wireless LLC and representation66% of YELLOWPAGES.COM (YPC). AT&T Mobility and YPC became wholly-owned subsidiaries of AT&T on the Board of Directors that controls Cingular.December 29, 2006. Earnings from certain foreign equity investments accounted for using the equity method are included for periods ended within up to three months of the dateone month of our Consolidated Statements of Income.year end.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates.

We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation. As a result

Employee Separations In accordance with Statement of our November 2005 acquisitionFinancial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” we establish obligations for expected termination benefits provided to former or inactive employees after employment but before retirement. These benefits include severance payments, workers’ compensation, disability, medical continuation coverage and other benefits. In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141), severance accruals recorded for BellSouth, AT&T Mobility and AT&T Corp. (ATTC), acquired employees were considered in the purchase price allocation (see Note 2). At March 31, 2007, we had severance accruals of $174, of which $143 were established as merger-related severance accruals. At December 31, 2006, we revised our segment reporting (see Note 5). In addition, we revised the product categories reported in operating revenue as follows: long-distance voice is now reported in voice revenue; integration services and customer premises equipment revenue, previously reported as voice and data revenue are now reported in other revenue; and directory revenues now reflect our traditional directory segment revenues.had severance accruals of $263.

New Accounting Standards

FIN 48 In June, 2006, the Financial Accounting Standards Board (FASB) issuedWe adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an interpretation ofenterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (FAS 109). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribingTaxes.” The Interpretation prescribes a recognition threshold for the financial statement recognition and measurement of a tax positionsposition taken or expected to be taken in awithin an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold. As required by FIN 48, we reclassified deferred income tax liabilities of $6,225 from our “Deferred income taxes” for unrecognized tax benefits, of which $6,100 was included in

6

AT&T INC.

MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

“Other noncurrent liabilities” and $175 was included in “Accrued taxes” on our Consolidated Balance Sheets and the remaining $50 was recorded as a reduction to the beginning of year retained earnings to reflect the cumulative effect of adoption of FIN 48.

The total amount of unrecognized tax benefits at January 1, 2007 was $6,275. Of this total, $1,913 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect income tax expense in future periods. This amount reflects the liabilities for unrecognized tax benefits net of certain deferred tax assets. We record interest and penalties related to federal, state and foreign unrecognized tax benefits in income tax expense. The January 1, 2007 liability for unrecognized tax benefits includes $1,380 for accrued interest and penalties. The total amount of unrecognized tax benefits at March 31, 2007 was $6,265.

It is effective for fiscal years beginning after December 15, 2006.reasonably possible that the total amount of unrecognized tax benefits may be reduced within the next 12 months as a result of ongoing discussions we are having with the IRS under their “Expedited Resolution of Uncertain Tax Positions Initiative.” In these discussions, during 2007, we expect to settle an issue related to capital losses claimed on our 2002 tax return, which may impact our income tax expense. We are currently evaluatingnot able to determine the impact FIN 48amount at this time.

The Company and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Our income tax returns are regularly audited and reviewed by the Internal Revenue Service (IRS) as well as state and foreign taxing authorities.

The IRS has completed field examinations of AT&T’s tax returns through 2002, and all periods prior to 1997 are closed for federal purposes. We were unable to reach agreement with the IRS on one issue in the 1997-1999 audit and as a result, during the first quarter of 2007, we filed a refund suit in U.S. District Court. We do not expect to resolve this dispute in the next twelve months. During 2006, the IRS completed its field examination of the 2000-2002 tax returns for AT&T. As some issues were not resolved, the case has been forwarded to the IRS Appeals Division (Appeals), and settlement meetings with Appeals will begin during 2007. We do not expect resolution of this cycle during 2007. Additionally, during 2006, the IRS began its field examination of the AT&T 2003-2005 tax returns and we do not expect the IRS to complete this examination during 2007. We do not expect resolution of these audit cycles to have on our financial position or resultsa material adverse impact.

The IRS has completed examination of operations.all acquired entity tax returns through 2001 (AT&T Mobility through 2003) and, other than for BellSouth all years are closed. Appeals has issued BellSouth an assessment for years 1999-2001 and we expect to make an additional payment of $175 in 2007 for these and subsequent years. We expect to continue to progress through the normal audit and appeals process for all entities during 2007, but do not expect the resolutions of these items to have a material adverse impact.

EITF 06-3 In June 2006, the Emerging Issues Task Force (EITF), a task force established to assist the FASB on significant emerging account issues, has ratified the consensus on EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”(EITF 06-3). EITF 06-3 provides that taxes imposed by a governmental authority on a revenue producing transaction between a seller and a customer should be shown in the income statement on either a gross or a net basis, based on the entity’s accounting policy, which should be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosure of Accounting Policies.” Amounts that are allowed to be charged to customers as an offset to taxes owed by a company are not considered taxes collected and remitted. If suchgovernment-imposed taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. EITF 06-3 will be effective for interim and annual reporting periods beginning after December 15, 2006. We are currently evaluating the impact EITF 06-3 will haveOur policy is to account for taxes collected from customers on our financial position or results of operations.a net basis.

6FAS 159 In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value, providing the opportunity to mitigate volatility in reported earnings caused by measuring related assets and

7

AT&T INC.

JUNE 30, 2006MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Employee SeparationsIn accordance with Statementliabilities differently without having to apply complex hedge accounting provisions. FAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact FAS 159 will have on our financial position and results of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” we establish obligations for expected termination benefits provided to former or inactive employees after employment but before retirement. These benefits include severance payments, workers’ compensation, disability, medical continuation coverage and other benefits. At June 30, 2006, for employees not affected by the change-in-control provisions of the ATTC merger, we had severance accruals of $321, of which $251 was established as merger-related severance accruals. In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141), severance accruals recorded for ATTC employees were included in the preliminary purchase price allocation (see Note 2).operations.

NOTE 2. ACQUISITIONS, DISPOSITIONS, VALUATION AND DISPOSITIONSOTHER ADJUSTMENTS

AT&T Corp.Acquisitions

BellSouth Corporation In November 2005,December 2006, we acquired ATTCBellSouth in a transaction accounted for under FAS 141, issuing 632 million2.4 billion shares. ATTCBellSouth was one of the nation’s largest businessleading communications service communications providers, offering a variety of globalprovider in the southeastern U.S., providing wireline communications services, including large domesticlocal exchange, network access, long-distance services and multinational businesses, small and medium-sized businesses and government agencies, and operated oneInternet services to substantial portions of the largest telecommunications networkspopulation across nine states. BellSouth also provided long-distance services to enterprise customers throughout the country.

We and BellSouth jointly owned AT&T Mobility and the Internet-based publisher YPC. In the AT&T Mobility joint venture, we held a 60% economic interest and BellSouth held a 40% economic interest and in the U.S. ATTC also provided domesticYPC joint venture we held a 66% economic interest and international long-distanceBellSouth held a 34% economic interest. For each joint venture, control was shared equally. We and usage-based-communications servicesBellSouth each accounted for the joint ventures under the equity method of accounting, recording the proportional share of AT&T Mobility’s and YPC’s income as equity in net income of affiliates on the respective consolidated statements of income and reporting the ownership percentage of AT&T Mobility’s net assets as “Investments in and Advances to consumer customers. ATTC is now a wholly owned subsidiaryAT&T Mobility” and the ownership percentage of YPC’s net assets as “Investments in Equity Affiliates” on the respective consolidated balance sheets. After the BellSouth acquisition, BellSouth, AT&T Mobility and YPC became wholly-owned subsidiaries of AT&T and the operational results of ATTC’s operationsthese companies have been included in our consolidated financial statements after the November 18, 2005December 29, 2006 acquisition date.

Under the purchase method of accounting, the transaction was valued, for accounting purposes, at $15,517 and theapproximately $66,800. The assets and liabilities of ATTC were recorded at their respective fair values as of the date of the acquisition. We obtained preliminaryBellSouth and AT&T Mobility have been appraised, based on third-party valuations, for inclusion in the balance sheet, adjusting 100% of BellSouth’s and 40% of AT&T Mobility’s values. Long-lived assets such as property, plant and equipment intangiblereflect a value of replacing the assets, (includingwhich takes into account changes in technology, usage, and relative obsolescence and depreciation of the AT&T trade name)assets, sometimes referred to as a “Greenfield approach.” This approach often results in differences, sometimes material, from recorded book values even if, absent the acquisition, the assets would not be impaired. In addition, assets and liabilities that would not normally be recorded in ordinary operations will be recorded at their acquisition values (i.e., debtcustomer relationships). Debt instruments and certaininvestments are valued in relation to current market conditions and other assets and liabilities. Because ofliabilities are valued based on the proximity of this transactionacquiring company’s estimates. After all values have been assigned to year-end, the values of certain assets and liabilities, were based on preliminary valuations andthe remainder of the purchase price is recorded as goodwill. These values are subject to adjustment for one year after the close of the transaction as additional information is obtained. Such additional information includes, but is not limited to: valuationsobtained, and physical counts of property, plant and equipment, valuation of investments and the involuntary termination of employees. We have 12 months from the closing of the acquisition to finalize our valuations. As these issues are identified, modified or resolved, resulting increases or decreases to the preliminary value of assets and liabilities are offset by a change to goodwill, which maythose adjustments could be material. Adjustments to the preliminary valuation will be recorded in the period finalized. Changes to the valuation of property, plant and equipment may result in adjustments to the fair value of certain identifiable intangible assets acquired. Additionally, as part of the final valuation of the acquisition, we will determine to which entities and to what extent the benefit of the acquisition applies, and as required by GAAP, record the appropriate goodwill to each entity.

7

8

AT&T INC.

JUNE 30, 2006MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table summarizes the preliminary estimated fair values of the ATTCBellSouth assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date and adjustments made thereto during the first quarterthree months of 2006. There2007.

Adjustments were no adjustments recordedprimarily related to finalization of participant count estimates used in the second quarter.

Purchase accounting rules require that as certain pre-merger issues are identified, modified or resolved, resulting increases or decreases to tax liabilities are offset by a change in goodwill. During the first quarter of 2006, modifications to various pre-merger tax estimates and the resolution of an ATTC Internal Revenue Service audit (an adjustment of $385opening balance sheet valuation for the years 1997-2001) resulted inpension and postretirement plans, a reduction in goodwill of $653gain on a contingency related to an insurance claim recovery for Hurricane Katrina damages and tax impacts related to AT&T Mobility’s purchase accounting adjustments. Deferred tax adjustments are reflected inassociated with the adjustments column above.above mentioned items.

ATTC maintained change-in-control provisions with its employees that required enhanced severance and benefit payments be paid to employees of ATTC when a change-in-control occurred. Included in the liabilities assumed at acquisition, were employee-related accruals of $1,543. Following is a summary of the accrual to be paid by the Company, from ATTC’s pension plans and from ATTC’s postemployment benefit plans.  

8

9

AT&T INC.

JUNE 30, 2006MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

BellSouth’s 40% economic ownership of AT&T Mobility has been recorded above as “Investment in AT&T Mobility,” and has been eliminated in our Consolidated Balance Sheets. We have recorded the consolidation of AT&T Mobility as a step acquisition, retaining 60% of AT&T Mobility’s prior book value and adjusting the remaining 40% to fair value. The following unaudited pro forma consolidated resultstable summarizes the preliminary estimated fair values (40%) and historical book values (60%) of operations assume thatthe AT&T Mobility assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date and adjustments made thereto during the first three months of 2007.

Adjustments were primarily related to valuation estimates that, due to the proximity of the merger to year-end, were based on data from periods prior to the close of the December 29, 2006 acquisition. Using the December 29, 2006 data, purchase price allocations decreased the opening balance sheet values of property, plant and equipment, trademark/names and other intangibles, offset by an increased value of licenses and customer lists and relationships acquired. Deferred tax adjustments are associated with the above mentioned items.

Valuation and Other Adjustments

As ATTC and BellSouth stock options that were converted at the time of the respective mergers are exercised, the tax effect on those options may further reduce goodwill. As of March 31, 2007, we had recorded $3 in related goodwill reductions for ATTC and $15 for BellSouth.

Included in the current liabilities reported on our Consolidated Balance Sheet are accruals established under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (EITF 95-3). The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of ATTC and BellSouth.

10

AT&T INC.

MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

In November 2005, we acquired ATTC, which maintained change-in-control provisions with its employees that required enhanced severance and benefit payments be paid to employees of ATTC if a change in control occurred. Included in the adjusted liabilities assumed at acquisition was completed as$927 accrued for such enhanced severance and benefits.

Included in the liabilities assumed for the December 2006 acquisition of January 1, 2005.BellSouth was accrued severance of $535 for BellSouth employees and $44 for AT&T Mobility employees, all of which will be paid from company cash. In addition to the severance accruals, we also maintained the accruals that were established by AT&T Mobility associated with their acquisition of AT&T Wireless, Inc. (AWE). The AWE related accruals are for plans affecting the integration of retail stores, administrative space and network acquired in AT&T Mobility’s acquisition of AWE. We will continue to evaluate these accruals through the end of the allocation period.

Following is a summary of the accruals recorded at December 31, 2006, cash payments made during the first three months of 2007 and the purchase accounting adjustments thereto.

11

AT&T INC.

MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. COMPREHENSIVE INCOME

The components of our comprehensive income for the three and six months ended June 30,March 31, 2007 and 2006 and 2005 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustment, net unrealized gain (loss) on available-for-sale securities, and net unrealized gain (loss) on cash flow hedges.hedges and defined benefit postretirement plans. The foreign currency translation adjustment was due to exchange rate fluctuations in our foreign affiliates’ local currencies. Thecurrencies and the reclassification adjustment on cash flow hedges was due to the amortization of losses from our interest rate forward contracts.

Following is our comprehensive income:

9

12

AT&T INC.

JUNE 30, 2006MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 4. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income for the three and six months ended June 30,March 31, 2007 and 2006 and 2005 isare shown in the table below:

At June 30,March 31, 2007 and 2006, we had issued and outstanding options to purchase 247approximately 281 and 264 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 217132 and 231 million shares in the second quarter and 224 million for the first six months exceeded the average market price of AT&T stock for the sixthree months ended June 30,March 31, 2007 and 2006. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods. At June 30, 2006,March 31, 2007, the exercise price of 31148 million share options were below market price, commonly referred to as “in the money.” Of these options, 4 million will expire by the end of 2007.price.

At June 30, 2005, we had issued and outstanding options to purchase 206 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 199 million shares in the second quarter and 198 million for the first six months exceeded the average market price of AT&T stock for the six months ended June 30, 2005. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods.

10

AT&T INC.

JUNE 30, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 5. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services and are managed accordingly. We analyze our various operating segments based on segment income.income before income taxes. Interest expense, interest income and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in the calculation of each segment’s percentage of our consolidated results. As a result of our November 18, 2005the December 29, 2006 acquisition of ATTCBellSouth we have revised our segment reporting to represent how we now manage our business, restating prior periods to conform to the current segments. We have four reportable segments: (1) wireline, (2) Cingular,wireless, (3) directoryadvertising & publishing and (4) other.

The wireline segment provides both retail and wholesale landline telecommunicationscommunications services, including local and long-distance voice, switched access, internetInternet protocol and internetInternet access data, messaging services, managed networking to business customers, AT&T U-verse^sm TV service (U-verse) and satellite television services through our agreementagreements with EchoStar Communications Corp. and the DIRECTV Group, Inc.

The Cingularwireless segment reflectsprovides voice, data and other cellular communications services, and includes 100% of the results reported by Cingular,of AT&T Mobility, which was our wireless joint venture. Althoughventure with BellSouth prior to the December 29, 2006 acquisition and is now a wholly-owned

13

AT&T INC.

MARCH 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

subsidiary of AT&T. In 2006, although we analyze Cingular’sanalyzed AT&T Mobility’s revenues and expenses under the Cingularwireless segment, we eliminateeliminated the Cingularwireless segment in our consolidated financial statements. In our 2006 consolidated financial statements we reportreported our 60% proportionate share of Cingular’sAT&T Mobility’s results as equity in net income of affiliates.

The directoryadvertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and internet-basedInternet-based advertising. OurThis segment also includes the results of YPC, which was a joint venture with BellSouth prior to the December 29, 2006 acquisition and is now a wholly-owned subsidiary of AT&T. In 2006, our portion of the results from YELLOWPAGES.COM (YPC), a joint venture with BellSouth Corporation (BellSouth), isYPC were recorded in this segment as equity in net income of affiliates. Results for this segment are shown under the amortization method, which means that revenues and direct expenses are recognized ratably over the life of the directory title, typically 12 months. However, directory operations acquired in our BellSouth acquisition are treated differently in accordance with FAS 141.

Under FAS 141, BellSouth deferred revenue and expenses from directories published during the twelve-month period ending with the December 29, 2006 acquisition date, which under the amortization method would have been deferred and recognized ratably over the life of the directory, are not recognized and therefore were not included in the opening balance sheet. Accordingly, our consolidated revenue and expenses in 2007 related to directory operations in the Southeast region will be lower than what they would have been absent the accounting treatment under FAS 141. Because management assesses the performance of the segment including the revenue and expenses associated with those directories, for segment reporting purposes, our advertising & publishing segment results include revenue of $409 and expenses of $108 in the first quarter of 2007 related to directories published in the Southeast region during 2006, prior to our acquisition of BellSouth. These amounts are eliminated in the consolidations and eliminations column in the reconciliation below.

The other segment includes results from Sterling Commerce Inc., customer information services and all corporate and other operations. This segment also includes our portion of the results from our international equity investments andinvestments. Prior to December 29, 2006, this segment also included our results from CingularAT&T Mobility as equity in net income of affiliates, as discussed above.