FORM 10-Q

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~(Mark One)~~

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the

~~Securities Exchange Act of 1934~~

~~For the quarterly period ended September 30, 2006~~

	o	Securities Exchange Act of 1934

		For the quarterly period ended September 30, 2007

		or

	o	Transition Report Pursuant to Section 13 or 15(d) of the
		Securities Exchange Act of 1934

~~Securities Exchange Act of 1934~~

For the transition period from to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number 43-1301883

175 E. Houston, San Antonio, Texas 78205

Telephone Number: (210) 821-4105

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. Yesx [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule ~~12-b2~~12b-2 of the Exchange Act. Large accelerated filerx [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] Nox

[X]

At October ~~31, 2006,~~29, 2007, common shares outstanding were ~~3,842,902,194.~~

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)

Three months ended

Nine months ended

September 30,

September 30,

2006

2005

2006

2005
Operating Revenues

Voice
$
8,464
$
5,743
$
25,725
$
17,355
Data

4,546

2,514

13,465

7,343
Directory

906

917

2,716

2,723
Other

1,722

1,130

5,258

3,434
Total operating revenues

15,638

10,304

47,164

30,855
Operating Expenses

Cost of sales (exclusive of depreciation and

amortization shown separately below)

6,664

4,364

20,641

13,153
Selling, general and administrative

3,620

2,175

11,396

7,229
Depreciation and amortization

2,437

1,803

7,415

5,437
Total operating expenses

12,721

8,342

39,452

25,819
Operating Income

2,917

1,962

7,712

5,036
Other Income (Expense)

Interest expense

(442)

(349)

(1,378)

(1,051)
Interest income

98

82

278

291
Equity in net income of affiliates

649

219

1,438

342
Other income (expense) – net

11

(70)

37

11
Total other income (expense)

316

(118)

375

(407)
Income Before Income Taxes

3,233

1,844

8,087

4,629
Income taxes

1,068

598

2,669

1,498
Net Income
$
2,165
$
1,246
$
5,418
$
3,131
Earnings Per Common Share:

Net Income
$
0.56
$
0.38
$
1.40
$
0.95
Earnings Per Common Share - Assuming Dilution:

Net Income
$
0.56
$
0.38
$
1.39
$
0.95
Weighted Average Number of Common

Shares Outstanding – Basic (in millions)

3,873

3,296

3,880

3,300
Dividends Declared Per Common Share
$
0.3325
$
0.3225
$
0.9975
$
0.9675

6,064,758,808.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Operating Revenues
Voice	$	10,164		$	8,400		$	30,997		$	25,524
Data		5,880			4,598			17,281			13,633
Wireless service		9,834			8			28,417			24
Directory		1,240			906			3,417			2,716
Other		3,014			1,726			8,467			5,267
Total operating revenues		30,132			15,638			88,579			47,164
Operating Expenses
Cost of sales (exclusive of depreciation and
amortization shown separately below)		11,591			6,923			34,321			21,450
Selling, general and administrative		7,915			3,361			22,992			10,587
Depreciation and amortization		5,322			2,437			16,354			7,415
Total operating expenses		24,828			12,721			73,667			39,452
Operating Income		5,304			2,917			14,912			7,712
Other Income (Expense)
Interest expense		(887	)		(442	)		(2,639	)		(1,378	)
Equity in net income of affiliates		162			649			545			1,438
Other income (expense) – net		(17	)		109			614			315
Total other income (expense)		(742	)		316			(1,480	)		375
Income Before Income Taxes		4,562			3,233			13,432			8,087
Income taxes		1,499			1,068			4,617			2,669
Net Income	$	3,063		$	2,165		$	8,815		$	5,418
Earnings Per Common Share
Net Income	$	0.50		$	0.56		$	1.43		$	1.40
Earnings Per Common Share - Assuming Dilution
Net Income	$	0.50		$	0.56		$	1.42		$	1.39
Weighted Average Number of Common
Shares Outstanding – Basic (in millions)		6,088			3,873			6,152			3,880
Dividends Declared Per Common Share	$	0.3550		$	0.3325		$	1.065		$	0.9975

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts

September 30,

December 31,

2006

2005
Assets

(Unaudited)

Current Assets

Cash and cash equivalents
$
1,251

$
1,224
Accounts receivable – net of allowances for

uncollectibles of $936 and $1,176

8,668

9,351
Prepaid expenses

1,038

1,029
Deferred income taxes

1,598

2,011
Other current assets

957

1,039
Total current assets

13,512

14,654
Property, plant and equipment

152,573

149,238
Less: accumulated depreciation and amortization

94,922

90,511
Property, Plant and Equipment – Net

57,651

58,727
Goodwill

13,385

14,055
Intangible Assets – Net

7,728

8,503
Investments in Equity Affiliates

2,222

2,031
Investments in and Advances to Cingular Wireless

33,029

31,404
Other Assets

16,365

16,258
Total Assets
$
143,892

$
145,632

Liabilities and Stockholders’ Equity

Current Liabilities

Debt maturing within one year
$
4,713

$
4,455
Accounts payable and accrued liabilities

14,789

17,088
Accrued taxes

3,122

2,586
Dividends payable

1,281

1,289
Total current liabilities

23,905

25,418
Long-Term Debt

26,799

26,115
Deferred Credits and Other Noncurrent Liabilities

Deferred income taxes

14,368

15,713
Postemployment benefit obligation

18,150

18,133
Unamortized investment tax credits

188

209
Other noncurrent liabilities

5,081

5,354
Total deferred credits and other noncurrent liabilities

37,787

39,409

Stockholders’ Equity

Common shares issued ($1 par value)

4,065

4,065
Capital in excess of par value

27,116

27,499
Retained earnings

30,653

29,106
Treasury shares (at cost)

(5,867)

(5,406)
Additional minimum pension liability adjustment

(218)

(218)
Accumulated other comprehensive income

(348)

(356)
Total stockholders’ equity

55,401

54,690
Total Liabilities and Stockholders’ Equity
$
143,892

$
145,632

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30,			December 31,
	2007			2006
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	2,714		$	2,418
Accounts receivable – net of allowances for
uncollectibles of $1,362 and $1,276		16,305			16,194
Prepaid expenses		1,900			1,477
Deferred income taxes		2,433			3,034
Other current assets		2,191			2,430
Total current assets		25,543			25,553
Property, plant and equipment		206,818			202,149
Less: accumulated depreciation and amortization		112,372			107,553
Property, Plant and Equipment – Net		94,446			94,596
Goodwill		66,847			67,657
Licenses		35,687			34,252
Customer Lists and Relationships – Net		15,361			18,922
Other Intangible Assets – Net		6,001			6,566
Investments in Equity Affiliates		2,403			1,995
Postemployment Benefit		14,779			14,228
Other Assets		6,901			6,865
Total Assets	$	267,968		$	270,634

Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	6,026		$	9,733
Accounts payable and accrued liabilities		20,239			22,106
Advanced billing and customer deposits		3,471			3,402
Accrued taxes		6,282			3,026
Dividends payable		2,156			2,215
Total current liabilities		38,174			40,482
Long-Term Debt		54,585			50,063
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		22,595			27,406
Postemployment benefit obligation		28,756			28,901
Unamortized investment tax credits		158			181
Other noncurrent liabilities		12,526			8,061
Total deferred credits and other noncurrent liabilities		64,035			64,549

Stockholders’ Equity
Common shares issued ($1 par value)		6,495			6,495
Capital in excess of par value		91,534			91,352
Retained earnings		32,606			30,375
Treasury shares (at cost)		(14,411	)		(7,368	)
Accumulated other comprehensive income		(5,050	)		(5,314	)
Total stockholders’ equity		111,174			115,540
Total Liabilities and Stockholders’ Equity	$	267,968		$	270,634

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)

Nine months ended

September 30,

2006

2005
Operating Activities

Net income
$
5,418
$
3,131
Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization

7,415

5,437
Undistributed earnings from investments in equity affiliates

(1,359)

(285)
Provision for uncollectible accounts

450

561
Amortization of investment tax credits

(21)

(17)
Deferred income tax expense (benefit)

(269)

(315)
Net gain on sales of investments

(10)

(104)
Changes in operating assets and liabilities:

Accounts receivable

249

(39)
Other current assets

42

(249)
Accounts payable and accrued liabilities

(1,819)

(242)
Stock-based compensation tax benefit

(10)

(3)
Other - net

507

508
Total adjustments

5,175

5,252
Net Cash Provided by Operating Activities

10,593

8,383
Investing Activities

Construction and capital expenditures

(6,158)

(3,743)
Receipts from (investments in) affiliates – net

(633)

2,603
Dispositions

72

126
Acquisitions

(115)

(169)
Maturities of held-to-maturity securities

3

98
Proceeds from note repayment

-

37
Other

5

-
Net Cash Used in Investing Activities

(6,826)

(1,048)
Financing Activities

Net change in short-term borrowings with original

maturities of three months or less

2,336

(1,656)
Repayment of other short-term borrowings

(3)

-
Issuance of long-term debt

1,491

-
Repayment of long-term debt

(2,882)

(2,123)
Purchase of treasury shares

(1,359)

(742)
Issuance of treasury shares

463

362
Dividends paid

(3,873)

(3,196)
Stock-based compensation tax benefit

10

3
Other

77

-
Net Cash Used in Financing Activities

(3,740)

(7,352)
Net increase (decrease) in cash and cash equivalents from continuing operations

27

(17)
Net Cash Used in Operating Activities from Discontinued Operations

-

(310)
Net increase (decrease) in cash and cash equivalents

27

(327)
Cash and cash equivalents beginning of year

1,224

760
Cash and Cash Equivalents End of Period
$
1,251
$
433

Cash paid during the nine months ended September 30 for:

Interest
$
1,503
$
1,198
Income taxes, net of refunds
$
2,249
$
1,535

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
	Nine months ended
	September 30,
	2007			2006
Operating Activities
Net income	$	8,815		$	5,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		16,354			7,415
Undistributed earnings from investments in equity affiliates		(434	)		(1,359	)
Provision for uncollectible accounts		1,142			450
Amortization of investment tax credits		(23	)		(21	)
Deferred income tax (benefit) expense		486			(269	)
Net gain on sales of investments		(29	)		(10	)
Gain on license exchange		(409	)		-
Changes in operating assets and liabilities:
Accounts receivable		(1,253	)		249
Other current assets		(661	)		42
Accounts payable and accrued liabilities		(46	)		(1,819	)
Stock-based compensation tax benefit		(149	)		(10	)
Other - net		427			507
Total adjustments		15,405			5,175
Net Cash Provided by Operating Activities		24,220			10,593
Investing Activities
Construction and capital expenditures		(12,124	)		(6,158	)
Net investments in affiliates		-			(633	)
Dispositions		993			72
Acquisitions, net of cash acquired		(233	)		(115	)
Proceeds from sale of marketable securities		471			-
Proceeds from sale of debt and equity securities		414			-
Investments in debt and equity securities		(301	)		-
Other		28			8
Net Cash Used in Investing Activities		(10,752	)		(6,826	)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less		(4,279	)		2,336
Issuance of long-term debt		7,898			1,491
Repayment of long-term debt		(3,008	)		(2,882	)
Purchase of treasury shares		(8,912	)		(1,359	)
Issuance of treasury shares		1,736			463
Dividends paid		(6,584	)		(3,873	)
Stock-based compensation tax benefit		149			10
Other		(172	)		74
Net Cash Used in Financing Activities		(13,172	)		(3,740	)
Net increase in cash and cash equivalents		296			27
Cash and cash equivalents beginning of year		2,418			1,224
Cash and Cash Equivalents End of Period	$	2,714		$	1,251

Cash paid during the nine months ended September 30 for:
Interest	$	2,518		$	1,503
Income taxes, net of refunds	$	2,028		$	2,249

See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Dollars and shares in millions, except per share amounts

(Unaudited)

Nine months ended

September 30, 2006

Shares
Amount
Common Stock

Balance at beginning of year
4,065
$
4,065
Balance at end of period
4,065
$
4,065

Capital in Excess of Par Value

Balance at beginning of year

$
27,499
Issuance of shares

(302)
Stock based compensation

(81)
Balance at end of period

$
27,116

Retained Earnings

Balance at beginning of year

$
29,106
Net income ($1.39 per diluted share)

5,418
Dividends to stockholders ($1.00 per share)

(3,865)
Other

(6)
Balance at end of period

$
30,653

Treasury Shares

Balance at beginning of year
(188)
$
(5,406)
Purchase of shares
(45)

(1,359)
Issuance of shares
21

898
Balance at end of period
(212)
$
(5,867)

Additional Minimum Pension Liability Adjustment

Balance at beginning of year

$
(218)
Balance at end of period

$
(218)

Accumulated Other Comprehensive Income, net of tax

Balance at beginning of year

$
(356)
Other comprehensive income (loss) (see Note 3)

8
Balance at end of period

$
(348)
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Dollars and shares in millions, except per share amounts
(Unaudited)
	Nine months ended
	September 30, 2007
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Balance at end of period		6,495		$	6,495

Capital in Excess of Par Value
Balance at beginning of year				$	91,352
Issuance of shares					134
Stock based compensation					48
Balance at end of period				$	91,534

Retained Earnings
Balance at beginning of year				$	30,375
Net income ($1.42 per diluted share)					8,815
Dividends to stockholders ($1.065 per share)					(6,525	)
Adoption of FIN 48					(50	)
Other					(9	)
Balance at end of period				$	32,606

Treasury Shares
Balance at beginning of year		(256	)	$	(7,368	)
Purchase of shares		(230	)		(8,912	)
Issuance of shares		63			1,869
Balance at end of period		(423	)	$	(14,411	)

Accumulated Other Comprehensive Income, net of tax
Balance at beginning of year				$	(5,314	)
Purchase accounting adjustment to apply FAS 158, net of tax					46
Other comprehensive income (loss) (see Note 3)					218
Balance at end of period				$	(5,050	)
See Notes to Consolidated Financial Statements	.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL ~~STATEMENTS~~STATEMENTS

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 and our Forms 10-Q for interim periods.

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 wireless and wireline ~~and wireless telecommunications~~communications services and equipment, ~~as well as~~managed 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 account~~Prior to the closing of the BellSouth Corporation (BellSouth) acquisition on December 29, 2006, we accounted for our ~~60% economic interest in Cingular~~joint 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 rights~~formerly Cingular Wireless LLC and ~~representation~~66% 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 date~~one month of our ~~Consolidated Statements of Income.~~

period 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 of our November 2005 acquisition of AT&T Corp. (ATTC), in 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; the majority of customer premises equipment and integration services revenue, previously reported as voice and data revenue are now reported in other revenue; and directory revenues now reflect our traditional directory segment revenues. Additionally, in assessing fair value of contracts in conjunction with the acquisition of ATTC (see Note 2) we reduced revenues and operating expenses by $18 in the post-acquisition 2005 period and by $79 for the first six months of 2006 to reflect settlements with foreign carriers for transport/carrying calls at the contract incremental/cash settlement rates rather than contract swap rates. Operating Income remained unchanged.

~~FIN 48~~ In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), an interpretation of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (FAS 109). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact FIN 48 will have on our financial position and results of operations.

~~EITF 06-3~~ In June 2006, the Emerging Issues Task Force (EITF), a task force established to assist the FASB on significant emerging accounting issues, 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

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued~~

~~Dollars in millions except per share amounts~~

owed by a company are not considered taxes collected and remitted. If such 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 have, but do not expect a material impact on our financial position and results of operations.~~

~~FAS 157~~In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurement. FAS 157 does not require any new fair value measurements and we do not expect the application of this standard to change our current practice. FAS 157 requires prospective application for fiscal years ending after November 15, 2007.

~~FAS 158~~In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (FAS 158), an amendment of Statement of Financial Accounting Standard No. 87 “Employers’ Accounting for Pensions” (FAS 87), Statement of Financial Accounting Standard No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” Statement of Financial Accounting Standard No. 106 “Employers’ Account for Postretirement Benefits Other Than Pensions” (FAS 106) and Statement of Financial Accounting Standard No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” FAS 158 will require us to recognize the funded status of defined benefit pension and postretirement plans as an asset or liability in our statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This standard will have no effect on our expense or benefit recognition, nor will it affect the funding requirements imposed under the Employee Retirement Income Security Act of 1974, as amended (ERISA). FAS 158 requires prospective application for fiscal years ending after December 15, 2006. Had FAS 158 been in effect at December 31, 2005, we would have reduced our pension assets approximately $8,700 and increased our postretirement benefit obligation approximately $7,300. The after tax reduction to our stockholders’ equity would have been approximately $10,000. We will adopt FAS 158 in the fourth quarter of 2006.

Employee SeparationsIn accordance with Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” (FAS 112) we establish obligations for ~~probable~~expected termination benefits provided under existing plans 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 September 30, ~~2006, for employees not affected by the change-in-control provisions of the ATTC benefit plans,~~2007, we had severance accruals under FAS 112 of ~~$276,~~$156, of which ~~$241~~$132 was established as merger-related severance accruals. InAt December 31, 2006, we had severance accruals of $263.

New Accounting Standards

FIN 48 We adopted Financial Accounting Standards Board (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 enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within 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 “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 in the first quarter. In May 2007, the FASB issued further guidance on whether a tax position is effectively settled, the adoption of which did not have a material impact.

AT&T INC.

SEPTEMBER 30, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The total amount of unrecognized tax benefits including interest and penalties at January 1, 2007 was $6,275, of which $1,913 would favorably affect income tax expense in future periods. The $1,913 is net of related deferred tax assets. During the third quarter, we reduced our unrecognized tax benefits by $390. The significant components of the reduction were a decrease of $261 as a result of settlement of an Internal Revenue Service (IRS) audit, a decrease of $229 due to a change in management’s measurement of benefits related to capital losses claimed on our 2002 tax return, and an increase of $116 due to interest accruals and current period unrecognized tax benefits. The total amount of unrecognized tax benefits including interest and penalties at September 30, 2007 was $5,791, of which $4,136 was included in “Other noncurrent liabilities” and $1,655 was included in “Accrued taxes” on our Consolidated Balance Sheets. Of our total unrecognized tax benefits balance of $5,791, we expect to pay $1,655 within one year. We cannot reasonably estimate the timing or amounts of additional cash payments, if any, at this time. Of the September 30, 2007 balance, $1,909 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect income tax expense in future periods. This amount is net of related deferred tax assets.

We record interest and penalties related to federal, state and foreign unrecognized tax benefits in income tax expense. Accrued interest and penalties included in unrecognized tax benefits were $1,380 and $1,364 as of January 1, 2007 and September 30, 2007, respectively.

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 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 audit periods prior to 1998 are closed for federal purposes. We were unable to reach agreement with the IRS on one issue related to our 1998 and 1999 tax returns and, as a result, we have filed a refund suit in U.S. District Court. We have withdrawn from the IRS “Expedited Resolution of Uncertain Tax Positions Initiative” with regard to capital losses claimed on our 2002 tax returns and have requested that this issue be included in the IRS Appeals Division (Appeals) settlement meetings regarding our 2000-2002 returns. We may reach a resolution of this examination cycle during the next twelve months but, at this time, we are not able to determine the impact that resolution may have on our unrecognized tax benefits. The IRS is currently examining the AT&T 2003-2005 tax returns, and we expect their fieldwork to be completed during 2008.

The IRS has completed the examination of all acquired entity tax returns through 2003 (AT&T Corp. through 2004) and, with the exception of BellSouth, all years through 2001 are closed. We expect to settle the AT&T Corp. 2005 examination within the next twelve months with an immaterial impact on our unrecognized tax benefits. Appeals has issued BellSouth an assessment for years 1999-2001 which was paid during the second quarter, and we are reviewing our options with this case.

FAS 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 liabilities 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 operations.

EITF 06-11 In June 2007, the Emerging Issues Task Force (EITF) ratified the consensus on EITF 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”. EITF 06-11 provides that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for nonvested equity-classified share-based awards and equity-classified outstanding share options should be recognized as an increase to additional paid-in capital rather than a reduction of income tax expense. EITF 06-11 applies prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal periods beginning after December 15, 2007. We are currently evaluating the impact EITF 06-11 will have on our financial position and results of operations.

AT&T INC.

SEPTEMBER 30, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. ACQUISITIONS, DISPOSITIONS, VALUATION AND OTHER ADJUSTMENTS

Acquisitions

BellSouth Corporation In December 2006, we acquired BellSouth in a transaction accounted for under Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141), ~~severance accruals recorded for ATTC employees were included~~issuing 2.4 billion shares. BellSouth was the leading communications service provider in the ~~preliminary purchase price allocation (see Note 2).~~

~~NOTE 2. ACQUISITIONS~~

~~AT&T Corp.~~In November 2005, we acquired ATTC in a transaction accounted for under FAS 141, issuing 632 million shares. ATTC was one of the nation’s largest business service communications providers, offering a variety of globalsoutheastern U.S., providing wireline communications services, including ~~large domestic~~local exchange, network access, long-distance services and ~~multinational businesses, small and medium-sized businesses and government agencies, and operated one~~Internet services to substantial portions of the ~~largest telecommunications networks~~population 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 domestic~~YPC joint venture, we held a 66% economic interest and ~~international long-distance~~BellSouth held a 34% economic interest. For each joint venture, control was shared equally. We and ~~usage-based-communications services~~BellSouth 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 subsidiary~~AT&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 operations~~these companies have been included in our consolidated financial statements ~~after~~since the ~~November 18, 2005~~December 29, 2006 acquisition date.

Under the purchase method of accounting, the transaction was valued, for accounting purposes, at ~~$15,517 and the~~approximately $66,800. The assets and liabilities of ~~ATTC were recorded at their respective fair values as of the date of the acquisition. At the time of the acquisition, we obtained preliminary~~BellSouth and AT&T Mobility have been preliminarily 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 ~~intangible~~reflect a value of replacing the assets, ~~(including~~which takes into account changes in technology, usage, and relative obsolescence and depreciation of the ~~AT&T trade name), debt~~

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 (i.e. customer relationships) will be recorded at their acquisition values. Debt instruments and investments are valued in relation to current market conditions and other assets and liabilities are valued based on the acquiring company’s estimates. After all values have been assigned to assets and liabilities, the 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, and those adjustments could be material.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

and certain other assets and liabilities. Because of the proximity of this transaction to year-end, the values of certain assets and liabilities were based on preliminary valuations and were subject to adjustment as additional information was obtained. Such additional information includes, but is not limited to: valuations and physical counts of property, plant and equipment, valuation of investments and the involuntary termination of employees. As of September 30, 2006, we have obtained additional information on many of the outstanding issues relating to the preliminary valuation, resulting in the adjustment of certain assets and liabilities, offset by a change to goodwill. We have 12 months from the closing of the acquisition to finalize our valuations; any remaining adjustments will be reflected in the fourth quarter.

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

Purchase Price Allocation

As of

As of

12/31/05

Adjustments

9/30/06
Assets acquired

Current assets
$
6,295
$
16
$
6,311
Property, plant and equipment

10,921

(662)

10,259
Intangible assets not subject to amortization:

Trade name

4,900

-

4,900
Licenses

40

-

40
Intangible assets subject to amortization:

Customer lists and relationships

3,050

-

3,050
Patents

150

-

150
Brand licensing agreements

70

-

70
Investments in unconsolidated subsidiaries

160

(90)

70
Other assets

4,247

165

4,412
Goodwill

12,343

(691)

11,652
Total assets acquired

42,176

(1,262)

40,914

Liabilities assumed

Current liabilities, excluding
current portion of long-term debt

6,740

63

6,803
Long-term debt

8,293

-

8,293
Deferred income taxes

531

(720)

(189)
Postemployment benefit obligation

8,807

(468)

8,339
Other noncurrent liabilities

2,288

(137)

2,151
Total liabilities assumed

26,659

(1,262)

25,397
Net assets acquired
$
15,517
$
-
$
15,517

2007.

	BellSouth Purchase Price Allocation
	As of					As of
	12/31/06		Adjustments			9/30/07
Assets acquired
Current assets	$	4,875	$	42		$	4,917
Property, plant and equipment		18,498		249			18,747
Intangible assets not subject to amortization:
Trademark/name		330		-			330
Licenses		214		100			314
Intangible assets subject to amortization:
Customer lists and relationships		9,230		145			9,375
Patents		100		-			100
Trademark/name		211		-			211
Investments in AT&T Mobility		32,759		-			32,759
Other investments		2,446		(3	)		2,443
Other assets		11,211		(97	)		11,114
Goodwill		26,467		(92	)		26,375
Total assets acquired		106,341		344			106,685

Liabilities assumed
Current liabilities, excluding current portion of long-term debt		5,288		(528	)		4,760
Long-term debt		15,628		(4	)		15,624
Deferred income taxes		10,318		797			11,115
Postemployment benefit obligation		7,086		(70	)		7,016
Other noncurrent liabilities		1,223		128			1,351
Total liabilities assumed		39,543		323			39,866
Net assets acquired	$	66,798	$	21		$	66,819

Adjustments were primarily related to ~~property, plant and equipment, head-count assumptions associated with payments for involuntary employee separations, pension asset valuations and the adjustment for certain tax items. Reductions~~finalization of participant count estimates used in the ~~value~~opening balance sheet valuation for the pension and postretirement plans, a gain on a contingency related to an insurance claim recovery for Hurricane Katrina damages, tax impacts related to AT&T Mobility’s purchase accounting adjustments, the valuation of certain licenses and a decrease in the estimate of relative obsolescence of property, plant and equipment ~~primarily reflects the reduction of estimated real estate values of property~~resulting in ~~use as well as a more comprehensive look at our fixed asset portfolio. Included~~an increase in our third-quarter 2006 operating results is a $71 reduction of depreciation expense related to the revaluation of these assets. The timing lag in valuation of certain pension assets (primarily real estate related) resulted in a $20 reduction of operating expense in the third quarter. In addition to the deferredvalue and longer average remaining economic life. Deferred tax ~~impacts~~adjustments are associated with ~~valuation adjustments, a net reduction in deferred taxes was recorded as a result of modifications to various pre-merger tax estimates and~~ the resolution of an ATTC Internal Revenue Service audit (an adjustment of $385 for the years 1997-2001). In total we recorded an increase of $97 in operating income, $70 of which related to periods prior to the third quarter of 2006.

above-mentioned items.

AT&T INC.

SEPTEMBER 30, ~~2006~~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 ~~completion~~following table summarizes the preliminary estimated fair values (40%) and historical book values (60%) of the ~~final valuation~~AT&T Mobility assets acquired and liabilities assumed and related deferred income taxes as of the ~~assets~~acquisition date and ~~liabilities~~adjustments made thereto during the first nine months of 2007.

	Fair Value Adjustments AT&T Mobility
	As of					As of
	12/31/06		Adjustments			9/30/07
Assets acquired
Current assets	$	6,988	$	3		$	6,991
Property, plant and equipment		19,687		(411	)		19,276
Intangible assets not subject to amortization:
Licenses		33,979		887			34,866
Intangible assets subject to amortization:
Customer lists and relationships		7,583		479			8,062
Trademark/names		343		(127	)		216
Other		176		(44	)		132
Other assets		1,086		2			1,088
Goodwill		27,429		(377	)		27,052
Total assets acquired		97,271		412			97,683

Liabilities assumed
Current liabilities, excluding current portion of long-term debt		7,014		384			7,398
Intercompany debt		9,043		-			9,043
Long-term debt		12,559		-			12,559
Deferred income taxes		5,459		71			5,530
Postemployment benefit obligation		301		93			394
Other noncurrent liabilities		2,007		(92	)		1,915
Total liabilities assumed		36,383		456			36,839
Net assets acquired	$	60,888	$	(44	)	$	60,844

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.

We continue to evaluate the overall integration and operation of our networks resulting from the acquisition. This may result in ~~further~~additional revisions during the purchase price allocation period and adjustments ~~to goodwill. Additionally, as ATTC~~could be material.

AT&T INC.

SEPTEMBER 30, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Valuation and Other Adjustments

As AT&T Corp. (ATTC) and BellSouth stock options that were converted at the time of the ~~merger~~respective mergers are exercised, the tax effect on those options may further reduce goodwill. As of September 30, ~~2006,~~2007, we had recorded ~~$11~~$8 in related ~~reductions.~~

goodwill reductions for ATTC ~~maintained change-in-control provisions~~and $28 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 ~~its employees that required enhanced~~a Purchase Business Combination” (EITF 95-3). The liabilities include accruals for severance, lease terminations and ~~benefit payments be paid to employees~~equipment removal costs associated with our acquisitions of ATTC ~~if a change-in-control occurred.~~ and BellSouth.

Included in the liabilities assumed for the December 2006 acquisition of 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 networks acquired in AT&T Mobility’s acquisition of AWE. During 2007, we recorded additional accruals for severance, lease terminations and equipment removal costs at ~~acquisition, was $1,543 accrued for such enhanced severance and benefits. As part~~AT&T Mobility. We will continue to evaluate these accruals through the end of the ~~opening balance sheet adjustments, a revised number of expected employee separations that will result in payments resulted in a decline in the change-in-control severance and benefit accrual of $477.~~ allocation period.

Following is a summary of the ~~accrual~~accruals recorded at December 31, ~~2005,~~2006, cash payments made during the first nine months of ~~2006~~2007 and the purchase accounting adjustments ~~thereto. We will continue to evaluate this accrual through~~thereto, for the ~~end of the allocation period.~~

Balance at
12/31/05
CashPayments for the Quarter Ended

Balance at

3/31/06
6/30/06
9/30/06
Adjustments
9/30/06
Paid out of:

Company funds
$
870
$
(46)
$
(59)
$
(86)
$
(97)
$
582
Pension and Postemployment
benefit plans

673

(5)

(27)

(18)

(380)

243
Total
$
1,543
$
(51)
$
(86)
$
(104)
$
(477)
$
825

~~The following unaudited pro forma consolidated results of operations assume that the acquisition~~acquisitions of ATTC ~~was completed as of January 1, 2005.~~

For the Quarter Ended

For the Year Ended

3/31/05

6/30/05

9/30/05

12/31/05

2005
Revenues
$
16,619
$
16,554
$
16,414
$
16,202
$
65,789

Net Income

1,319

1,257

1,729

1,862

6,167

As part of the process of coordinating benefits, we changed our management vacation pay policy for legacy SBC employees so vacation is earned ratably throughout the year rather than at the end of the preceding year. As a result, we recognized a decrease in operating expenses of $246 in the third quarter of 2006. We anticipate the expense reduction for the fourth quarter of 2006 to be approximately $80.

and BellSouth.

12/31/06 Cash Additional 9/30/07
Balance Payments Accruals Adj. Balance
Severance accruals paid from:
Company funds $ 986 $ (348 ) $ 16 $ (72 ) $ 582
Pension and postemployment
benefit plans
183 (39 ) - - 144
Lease terminations 146 (72 ) 220 24 318
Equipment removal and other related costs 117 (110 ) 152 (28 ) 131
Total
$ 1,432 $ (569 ) $ 388 $ (76 ) $ 1,175

AT&T INC.

SEPTEMBER 30, ~~2006~~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 nine months ended September 30, ~~2006~~2007 and ~~2005~~2006 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, 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:

Three months ended
Nine months ended

September 30,

September 30,

2006

2005

2006

2005
Net income
$
2,165
$
1,246

$
5,418
$
3,131
Other comprehensive income, net of tax:

Foreign currency translation adjustment

29

(2)

(16)

28
Net unrealized gains (losses) on securities:

Unrealized gains (losses)

(17)

2

17

(21)
Less reclassification adjustment realized
in net income

-

(4)

(8)

(37)
Net unrealized gains on cash flow hedges:
Unrealized gains, net of taxes

-

-

2

-
Reclassification adjustment for losses

on cash flow hedges included in net income

4

2

12

3
Other

-

(2)

1

(2)
Other comprehensive income (loss)

16

(4)

8

(29)
Total Comprehensive Income
$
2,181
$
1,242

$
5,426
$
3,102

Three months ended Nine months ended
September 30, September 30,

2007
2006
2007
2006
Net income $
3,063
$ 2,165 $
8,815
$ 5,418
Other comprehensive income, net of tax:
   Foreign currency translation adjustment (14 ) 29
4
(16 )
   Net unrealized gains (losses) on securities:
    Unrealized gains (losses)
(15 ) (17 )
134
17
    Reclassification adjustment for gains realized in net income

3
- (37 ) (8 )
   Net unrealized gains (losses) on cash flow hedges:
        Unrealized gains (losses)
(15 ) - (51 ) 2
        Reclassification adjustment for losses realized in net income
5
4
13
12
   Defined benefit postretirement plans:
       Amortization of net actuarial loss included in net income

87
-
262
-
       Amortization of prior service benefit included in net income
(35 ) - (106 ) -
   Other
-
- (1 ) 1
Other comprehensive income
16
16
218
8
Total Comprehensive Income
$
3,079
$ 2,181 $
9,033
$ 5,426

AT&T INC.

SEPTEMBER 30, ~~2006~~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 nine months ended September 30, ~~2006~~2007 and ~~2005~~2006 is shown in the table below:

Three months ended

Nine months ended

September 30,

September 30,

2006
2005

2006

2005
Numerators

Numerator for basic earnings per share:

Net income
$
2,165
$
1,246

$
5,418
$
3,131
Dilutive potential common shares:

Other stock-based compensation

2

5

5

8
Numerator for diluted earnings per share
$
2,167
$
1,251

$
5,423
$
3,139
Denominators (000,000)

Denominator for basic earnings per share:

Weighted-average number of common

shares outstanding

3,873

3,296

3,880

3,300
Dilutive potential common shares:

Stock options

5

-

4

1
Other stock-based compensation

14

10

16

10
Denominator for diluted earnings per share

3,892

3,306

3,900

3,311
Basic earnings per share

��

Net income
$
0.56
$
0.38

$
1.40
$
0.95
Diluted earnings per share

Net income
$
0.56
$
0.38

$
1.39
$
0.95

	Three months ended				Nine months ended
	September 30,				September 30,
	2007		2006		2007		2006
Numerators
Numerator for basic earnings per share:
Income from continuing operations	$	3,063	$	2,165	$	8,815	$	5,418
Dilutive potential common shares:
Other stock-based compensation		2		2		6		5
Numerator for diluted earnings per share	$	3,065	$	2,167	$	8,821	$	5,423
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common
shares outstanding		6,088		3,873		6,152		3,880
Dilutive potential common shares:
Stock options		26		5		25		4
Other stock-based compensation		15		14		19		16
Denominator for diluted earnings per share		6,129		3,892		6,196		3,900
Basic earnings per share
Net income	$	0.50	$	0.56	$	1.43	$	1.40
Diluted earnings per share
Net income	$	0.50	$	0.56	$	1.42	$	1.39

At September 30, 2007, we had issued and outstanding options to purchase approximately 241 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 73 million shares in the third quarter and 100 million for the first nine months exceeded the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods.

At September 30, 2006, we had issued and outstanding options to purchase ~~approximately~~ 234 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 189 million shares in the third quarter and 212 million for the first nine months exceeded the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods.

At September 30, ~~2006,~~2007, the exercise price of 47169 million share options ~~were~~was below market ~~price, commonly referred to as “in the money.” Of these options, 11 million will expire by the end of 2007.~~

At September 30, 2005, we had issued and outstanding options to purchase 202 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 191 million shares in the third quarter and 195 million for the first nine months exceeded the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods.

price.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

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, 2005~~the December 29, 2006 acquisition of ~~ATTC~~BellSouth, 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) ~~directory~~advertising & publishing and (4) other.

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

The ~~Cingular~~wireless segment ~~reflects~~provides voice, data and other wireless communications services, and includes 100% of the results ~~reported by Cingular,~~of AT&T Mobility, which was our wireless joint ~~venture. Although~~venture with BellSouth prior to the December 29, 2006 acquisition and is now a wholly-owned subsidiary of AT&T. In 2006, although we ~~analyze Cingular’s~~analyzed AT&T Mobility’s revenues and expenses under the ~~Cingular~~wireless segment, we ~~eliminate~~eliminated the ~~Cingular~~wireless segment in our consolidated financial statements. In our 2006 consolidated financial statements we ~~report~~reported our 60% proportionate share of ~~Cingular’s~~AT&T Mobility’s results as equity in net income of affiliates.

The ~~directory~~advertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and ~~internet-based~~Internet-based advertising. ~~Our portion of~~This segment also includes the results ~~from YELLOWPAGES.COM (YPC),~~of YPC, which was a joint venture with BellSouth ~~Corporation (BellSouth),~~prior to the December 29, 2006 acquisition and is ~~recorded~~now a wholly-owned subsidiary of AT&T. For segment reporting disclosure, we have carried forward the deferred revenue and deferred cost balances for BellSouth at the acquisition date in ~~this~~order to reflect how the segment is managed. This is different for consolidated reporting purposes as ~~equity~~under FAS 141, BellSouth deferred revenue and expenses from directories published during the twelve-month period ending with the December 29, 2006 acquisition date are not recognized and therefore were not included in ~~net income~~the opening balance sheet. For management reporting purposes, we continue to amortize these balances over the life of ~~affiliates.~~

the directory. Thus, our advertising & publishing segment results include revenue of $196 in the third quarter and $911 for the first nine months and expenses of $64 in the third quarter and $291 for the first nine months 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 and~~investments. Prior to December 29, 2006, this segment also included our results from ~~Cingular~~AT&T Mobility as equity in net income of affiliates, as discussed above.

In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP. The Wireline, ~~Cingular, Directory~~Wireless, Advertising & Publishing and Other columns represent the segment results of each such operating segment. The Wireline column includes revenues from services sold to Cingular (see Note 6). Since we account for Cingular using the equity method of accounting, these revenues are not eliminated upon consolidation and as such, remain in consolidated revenue. The Consolidation and Elimination column adds in those line items that we manage on a consolidated basis only: interest expense, interest income and other income (expense) – net. This column also eliminates any intercompany transactions included in each segment’s ~~results. Since~~results as well as the advertising & publishing revenue and expenses in 2007 related to directories published in the Southeast region during 2006, mentioned previously. In 2006, since our 60% share of the results from ~~Cingular~~AT&T Mobility is already included in the Other column, the ~~Cingular~~Wireless Elimination column removes the non-consolidated results ~~of Cingular~~ shown in the ~~Cingular~~wireless segment.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2006

Wireline

Cingular

Directory

Other

Consolidation
and Elimination

Cingular
Elimination

Consolidated
Results
Revenues from external customers
$
14,577
$
9,553
$
906
$
155
$
-
$
(9,553)
$
15,638
Intersegment revenues

9

-

15

49

(73)

-

-
Total segment operating revenues

14,586

9,553

921

204

(73)

(9,553)

15,638
Operations and support expenses

9,756

6,561

439

161

(72)

(6,561)

10,284
Depreciation and amortization expenses

2,376

1,576

1

60

-

(1,576)

2,437
Total segment operating expenses

12,132

8,137

440

221

(72)

(8,137)

12,721
Segment operating income

2,454

1,416

481

(17)

(1)

(1,416)

2,917
Interest expense

-

306

-

-

442

(306)

442
Interest income

-

6

-

-

98

(6)

98
Equity in net income (loss) of affiliates

-

-

(2)

651

-

-

649
Other income (expense) – net

-

(44)

-

-

11

44

11
Segment income before income taxes
$
2,454
$
1,072
$
479
$
634
$
(334)
$
(1,072)
$
3,233

At September 30, 2006 or for the nine months ended

Wireline

Cingular

Directory

Other

Consolidation
and Elimination

Cingular
Elimination

Consolidated
Results
Revenues from external customers
$
43,970
$
27,751
$
2,716
$
478
$
-
$
(27,751)
$
47,164
Intersegment revenues

25

-

53

126

(204)

-

-
Total segment operating revenues

43,995

27,751

2,769

604

(204)

(27,751)

47,164
Operations and support expenses

30,422

19,657

1,321

497

(203)

(19,657)

32,037
Depreciation and amortization expenses

7,233

4,854

2

181

(1)

(4,854)

7,415
Total segment operating expenses

37,655

24,511

1,323

678

(204)

(24,511)

39,452
Segment operating income

6,340

3,240

1,446

(74)

-

(3,240)

7,712
Interest expense

-

901

-

-

1,378

(901)

1,378
Interest income

-

13

-

-

278

(13)

278
Equity in net income (loss) of affiliates

-

-

(13)

1,451

-

-

1,438
Other income (expense) – net

-

(120)

-

-

37

120

37
Segment income before income taxes
$
6,340
$
2,232
$
1,433
$
1,377
$
(1,063)
$
(2,232)
$
8,087

Segment Assets
$
103,791
$
80,292
$
4,718
$
135,078
$
(99,695)
$
(80,292)
$
143,892

For the three months ended September 30, 2007

Consolidation
Wireline Wireless
Advertising &
Publishing
Other and Elimination
Consolidated
Results

Revenues from external customers $
17,471
$
10,911
$
1,436
$
510
$ (196 ) $
30,132

Intersegment revenues
469

26

21

52
(568 )
-

Total segment operating revenues
17,940

10,937

1,457

562
(764 )
30,132

Operations and support expenses
11,725

7,262

755

399
(635 )
19,506

Depreciation and amortization expenses
3,333

1,709

238

41

1

5,322

Total segment operating expenses
15,058

8,971

993

440
(634 )
24,828

Segment operating income
2,882

1,966

464

122
(130 )
5,304

Interest expense
-

-

-

-

887

887

Equity in net income (loss) of affiliates ¹

-
(40 )
-

159

43

162

Other income (expense) – net
-

-

-

-
(17 ) (17 )
Segment income before income taxes $
2,882
$
1,926
$
464
$
281
$ (991 ) $
4,562

¹ The Wireless column includes minority interest recorded as Other Income (Expense) – Net on the Consolidated Statements of Income

At September 30, 2007 or for the nine months ended

Consolidation
Wireline Wireless
Advertising &
Publishing
Other and Elimination
Consolidated
Results

Revenues from external customers $
52,425
$
31,254
$
4,328
$
1,483
$ (911 ) $
88,579

Intersegment revenues
1,494

75

50

181
(1,800 )
-

Total segment operating revenues
53,919

31,329

4,378

1,664
(2,711 )
88,579

Operations and support expenses
34,958

20,826

2,281

1,340
(2,092 )
57,313

Depreciation and amortization expenses
10,073

5,410

743

128

-

16,354

Total segment operating expenses
45,031

26,236

3,024

1,468
(2,092 )
73,667

Segment operating income
8,888

5,093

1,354

196
(619 )
14,912

Interest expense
-

-

-

-

2,639

2,639

Equity in net income (loss) of affiliates ¹

-
(131 )
-

533

143

545

Other income (expense) – net
-

-

-

-

614

614

Segment income before income taxes $
8,888
$
4,962
$
1,354
$
729
$ (2,501 ) $
13,432

Segment Assets $
170,477
$
96,158
$
9,508
$
172,455
$ (180,630 ) $
267,968

¹ The Wireless column includes minority interest recorded as Other Income (Expense) – Net on the Consolidated Statements of Income

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2005

Wireline

Cingular

Directory

Other

Consolidation
and Elimination

Cingular
Elimination

Consolidated
Results
Revenues from external customers
$
9,222
$
8,746
$
917
$
165
$
-
$
(8,746)
$
10,304
Intersegment revenues

7

-

15

17

(39)

-

-
Total segment operating revenues

9,229

8,746

932

182

(39)

(8,746)

10,304
Operations and support expenses

5,987

6,548

425

168

(41)

(6,548)

6,539
Depreciation and amortization expenses

1,747

1,541

1

54

1

(1,541)

1,803
Total segment operating expenses

7,734

8,089

426

222

(40)

(8,089)

8,342
Segment operating income

1,495

657

506

(40)

1

(657)

1,962
Interest expense

-

304

-

-

349

(304)

349
Interest income

-

8

-

-

82

(8)

82
Equity in net income (loss) of affiliates

-

1

-

219

-

(1)

219
Other income (expense) – net

-

(36)

-

-

(70)

36

(70)
Segment income before income taxes
$
1,495
$
326
$
506
$
179
$
(336)
$
(326)
$
1,844

For the nine months ended September 30, 2005

Wireline

Cingular

Directory

Other

Consolidation
and Elimination

Cingular
Elimination

Consolidated
Results
Revenues from external customers
$
27,645
$
25,584
$
2,723
$
487
$
-
$
(25,584)
$
30,855
Intersegment revenues

23

-

63

42

(128)

-

-
Total segment operating revenues

27,668

25,584

2,786

529

(128)

(25,584)

30,855
Operations and support expenses

18,733

19,464

1,301

475

(127)

(19,464)

20,382
Depreciation and amortization expenses

5,277

4,845

4

157

(1)

(4,845)

5,437
Total segment operating expenses

24,010

24,309

1,305

632

(128)

(24,309)

25,819
Segment operating income

3,658

1,275

1,481

(103)

-

(1,275)

5,036
Interest expense

-

968

-

-

1,051

(968)

1,051
Interest income

-

44

-

-

291

(44)

291
Equity in net income (loss) of affiliates

-

4

(1)

343

-

(4)

342
Other income (expense) – net

-

(76)

-

-

11

76

11
Segment income before income taxes
$
3,658
$
279
$
1,480
$
240
$
(749)
$
(279)
$
4,629

For the three months ended September 30, 2006

Consolidation
Wireline Wireless
Advertising &
Publishing
Other and Elimination
Wireless
Elimination

Consolidated
Results

Revenues from external customers $ 14,305 $ 9,561 $ 907 $ 418 $ - $ (9,553 ) $ 15,638
Intersegment revenues 1 - 6 51 (58 ) - -
Total segment operating revenues 14,306 9,561 913 469 (58 ) (9,553 ) 15,638
Operations and support expenses 9,563 6,561 431 349 (59 ) (6,561 ) 10,284
Depreciation and amortization expenses 2,387 1,582 1 42 2 (1,577 ) 2,437
Total segment operating expenses 11,950 8,143 432 391 (57 ) (8,138 ) 12,721
Segment operating income 2,356 1,418 481 78 (1 ) (1,415 ) 2,917
Interest expense - - - - 442 - 442
Equity in net income (loss) of affiliates ¹
- (36 ) (2 ) 644 1 42 649
Other income (expense) – net - - - - 109 - 109
Segment income before income taxes $ 2,356 $ 1,382 $ 479 $ 722 $ (333 ) $ (1,373 ) $ 3,233

¹ The Wireless column includes minority interest recorded as Other Income (Expense) – Net on the Consolidated Statements of Income

For the nine months ended September 30, 2006

Consolidation
Wireline Wireless
Advertising &
Publishing
Other and Elimination
Wireless
Elimination

Consolidated
Results

Revenues from external customers $ 43,161 $ 27,774 $ 2,716 $ 1,263 $ - $ (27,750 ) $ 47,164
Intersegment revenues 2 - 30 127 (159 ) - -
Total segment operating revenues 43,163 27,774 2,746 1,390 (159 ) (27,750 ) 47,164
Operations and support expenses 29,888 19,657 1,298 1,010 (159 ) (19,657 ) 32,037
Depreciation and amortization expenses 7,266 4,874 2 127 - (4,854 ) 7,415
Total segment operating expenses 37,154 24,531 1,300 1,137 (159 ) (24,511 ) 39,452
Segment operating income 6,009 3,243 1,446 253 - (3,239 ) 7,712
Interest expense - - - - 1,378 - 1,378
Equity in net income (loss) of affiliates ¹
- (99 ) (13 ) 1,421 2 127 1,438
Other income (expense) – net - - - - 315 - 315
Segment income before income taxes $ 6,009 $ 3,144 $ 1,433 $ 1,674 $ (1,061 ) $ (3,112 ) $ 8,087

¹ The Wireless column includes minority interest recorded as Other Income (Expense) – Net on the Consolidated Statements of Income

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 6. ~~TRANSACTIONS WITH CINGULAR~~

We and BellSouth, the two owners of Cingular, have each made a subordinated loan to Cingular (shareholder loans). Our shareholder loan to Cingular totaled $4,108 at September 30, 2006 and December 31, 2005. This loan bears interest at an annual rate of 6.0% and matures in June 2008. We earned interest income on this loan of $62 in the third quarter and $184 for the first nine months of 2006 and $74 in the third quarter and $248 for the first nine months of 2005.

We and BellSouth agreed to finance Cingular’s capital and operating cash requirements to the extent Cingular requires funding above the level provided by operations. We and BellSouth also entered into a revolving credit agreement with Cingular to provide short-term financing for operations on a pro rata basis at an interest rate of LIBOR (London Interbank Offered Rate) plus 0.05%, which expires July 31, 2007. This agreement provides for the repayment of our and BellSouth’s shareholder loans made to Cingular in the event there are no outstanding amounts due under the revolving credit agreement and to the extent Cingular has excess cash, as defined by the agreement.

Under the revolving credit agreement we received net repayments from Cingular totaling $91 in the third quarter and had net advances of $624 for the first nine months of 2006. Our share of advances to Cingular under the revolving credit agreement is reflected in “Investments in and Advances to Cingular Wireless” on our Consolidated Balance Sheets and totaled $931 at September 30, 2006 and $307 at December 31, 2005.

We generated revenues of $359 in the third quarter and $1,106 for the first nine months of 2006 and $220 in the third quarter and $607 for the first nine months of 2005 for services sold to Cingular. These revenues were primarily from access and long-distance services sold to Cingular on a wholesale basis, and commissions revenue related to customers added through AT&T sales sources. The offsetting expense amounts are recorded by Cingular, and 60% of these expenses are included in our “Equity in net income of affiliates” line on our Consolidated Statements of Income when we report our 60% proportionate share of Cingular’s results.

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued~~

~~Dollars in millions except per share amounts~~

~~NOTE 7.~~ PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of various noncontributory pension and death benefit plans. We also provide certain medical, dental and life insurance benefits to substantially all retired employees under various plans and accrue actuarially determined postretirement benefit costs as active employees earn these benefits. Our objective in funding these plans, in combination with the standards of ~~ERISA,~~the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to meet the plans’ obligations to provide benefits to employees upon their retirement. No significant cash contributions are required under ERISA regulations during ~~2006.~~

2007.

The following details pension and postretirement benefit costs included in operating expenses (in cost of sales and selling, general and administrative expenses) in the accompanying Consolidated Statements of Income. We account for these costs in accordance with ~~FAS~~Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and ~~FAS 106.~~Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In accordance with GAAP, combined pension and postretirement cost for 2007 includes costs for BellSouth and AT&T Mobility employees, whereas 2006 does not. In the following table, gains are denoted with parentheses and losses are not.

Three months ended

Nine months ended

September 30,

September 30,

2006
2005

2006

2005
Pension cost:

Service cost – benefits earned during the period
$
262
$
197

$
787
$
589
Interest cost on projected benefit obligation

627

403

1,881

1,210
Expected return on assets

(1,008)

(636)

(2,992)

(1,908)
Amortization of prior service cost and transition asset

37

47

112

140
Recognized actuarial loss

91

39

271

118
Net pension cost
$
9
$
50

$
59
$
149

Postretirement benefit cost:

Service cost – benefits earned during the period
$
108
$
95

$
326
$
290
Interest cost on accumulated postretirement

benefit obligation

485

355

1,457

1,077
Expected return on assets

(234)

(189)

(701)

(567)
Amortization of prior service benefit

(90)

(90)

(269)

(254)
Recognized actuarial loss

119

110

354

329
Postretirement benefit cost
$
388
$
281

$
1,167
$
875

Combined net pension and postretirement cost
$
397
$
331

$
1,226
$
1,024

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
Pension cost:
Service cost – benefits earned during the period	$	314		$	262		$	943		$	787
Interest cost on projected benefit obligation		803			627			2,411			1,881
Expected return on assets		(1,367	)		(1,008	)		(4,101	)		(2,992	)
Amortization of prior service cost		36			37			107			112
Recognized actuarial loss		61			91			181			271
Net pension cost (benefit)	$	(153	)	$	9		$	(459	)	$	59

Postretirement benefit cost:
Service cost – benefits earned during the period	$	127		$	108		$	381		$	326
Interest cost on accumulated postretirement
benefit obligation		644			485			1,931			1,457
Expected return on assets		(336	)		(234	)		(1,010	)		(701	)
Amortization of prior service benefit		(90	)		(90	)		(270	)		(269	)
Recognized actuarial loss		72			119			220			354
Postretirement benefit cost	$	417		$	388		$	1,252		$	1,167

Combined net pension and postretirement cost	$	264		$	397		$	793		$	1,226

Our combined net pension and postretirement cost ~~increased $66~~decreased $133 in the third quarter and ~~$202~~$433 for the first nine months of ~~2006 compared with the same periods in 2005.~~2007. Net pension and postretirement costs in ~~2006~~2007 reflect the ~~November 2005~~December 2006 acquisition of ~~ATTC,~~BellSouth, which, due to the funded status of the BellSouth pension plans, increased the pension assets on which we calculate our expected return on plan assets of 8.5% to a greater degree than the additional service and interest costs. Also contributing to the decreased combined pension and postretirement cost were changes in our actuarial assumptions, which included the ~~reduction~~increase of our discount rate from 5.75% to 6.00% ~~to 5.75% (an increase~~(a decrease to expense) and recent favorable asset returns, which decreased the recognition of net ~~losses on plan assets in prior years. For development~~losses.

We have varying types of pension programs providing benefits for substantially all of certain non-U.S. operations. In addition to the ~~expected return on assets, we recognize actual gains and losses on~~ pension and postretirement ~~plan assets equally over a period of five years.~~

~~As part of our acquisition of ATTC,~~costs above, we ~~acquired certain non-U.S. operations. Net~~recorded net pension cost for non-U.S. plans ~~which is not included~~of $3 in the ~~table above, was~~third quarter and $11 for the nine months of 2007 and $4 in the third quarter and $18 for the first nine months of 2006.

AT&T INC.

SEPTEMBER 30, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

We also provide senior- and middle-management ~~employees~~retirees with nonqualified, unfunded supplemental retirement ~~and savings~~ plans. Net supplemental retirement pension benefits cost, which is not included in the table above was $50 in the third quarter and $146 for the first nine months of 2007, of which $37 and $109 was interest cost, respectively. Net supplemental retirement pension benefits cost was $38 in the third quarter and $113 for the first nine months of 2006, of which $26 and $77 was interest cost, respectively. ~~Net supplemental retirement pension~~

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued~~
~~Dollars in millions except per share amounts~~
~~benefits cost was $27 in the third quarter and $81 for the first nine months of 2005, of which $17 and $51 was interest cost, respectively.~~
~~NOTE 8. PENDING ACQUISITION OF BELLSOUTH~~
On March 4, 2006, we agreed to acquire BellSouth in a transaction in which each share of BellSouth common stock will be exchanged for 1.325 shares of AT&T common stock. Based on the average closing price of AT&T shares for the two days prior to, including, and two days subsequent to the public announcement of the acquisition (March 5, 2006) of $27.32, the total transaction is valued, for purchase accounting purposes, at approximately $66,000.
We and BellSouth jointly own Cingular and the internet-based publisher YPC. In the Cingular joint venture, we hold a 60 percent economic interest and BellSouth holds a 40 percent economic interest and in the YPC joint venture we hold a 66 percent economic interest and BellSouth holds a 34 percent economic interest. For each joint venture control is shared equally (i.e., 50/50). We and BellSouth each account for the joint ventures under the equity method of accounting, recording the proportional share of Cingular’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 Cingular’s net assets as “Investments in and Advances to Cingular Wireless” 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, Cingular and YPC will be wholly-owned subsidiaries of AT&T.
Upon consolidation, the asset and liabilities of BellSouth and Cingular will be appraised, based on third-party valuations, for inclusion on the opening balance sheet, adjusting 100% of BellSouth’s and 40% of Cingular’s values. Long-lived assets such as property, plant and equipment will reflect a value of replacing the assets, which takes into account changes in technology, usage, and relative obsolescence and depreciation of the 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 be neither increased in value nor impaired. In addition, assets and liabilities that would not normally be recorded in ordinary operations will be recorded at their acquisition values (e.g., customer relationships that were developed by the acquired company). Debt instruments and investments are valued in relation to current market conditions and other assets and liabilities are valued based on the acquiring company’s estimates. After all identifiable assets and liabilities are valued, the 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.
The transaction has been approved by the Board of Directors and the stockholders of each company and various other regulatory authorities. In October 2006, the U.S. Department of Justice completed its review of the transaction without imposing any conditions. The acquisition remains subject to approval by the Federal Communications Commission. We expect the transaction to close in the fall of 2006.
17
~~AT&T INC.~~
~~SEPTEMBER 30, 2006~~

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation

Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T,” or the “Company” throughout this document and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications services industry, both domestically and internationally, providing wireless and wireline ~~and wireless telecommunications~~communications services and equipment, ~~as well as~~managed networking, wholesale services and directory advertising and publishing services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, ~~2005.~~2006. In the tables throughout this section, percentage increases and decreases that ~~equal or exceed 100%~~ are not considered meaningful ~~and~~ are denoted with a dash.

Consolidated ResultsWe completed our acquisition of BellSouth Corporation (BellSouth) on December 29, 2006. We thereby acquired BellSouth’s 40% economic interest in AT&T ~~Corp. (ATTC) on November 18, 2005. Consolidated results for the third quarter and nine month period ended September 30, 2006 include results from ATTC.~~Mobility LLC (AT&T Mobility), formerly Cingular Wireless LLC, resulting in 100% ownership of AT&T Mobility. In accordance with U.S. generally accepted accounting principles (GAAP), operating results for ~~ATTC~~BellSouth and AT&T Mobility prior to our acquisition ~~including~~(i.e., all but the ~~third quarter and nine months ended September 30, 2005, are~~final two days of 2006) were not included in our 2006 operating results and are therefore not discussed. Accordingly, the following discussion of changes in our operating revenues and expenses is significantly affected by the BellSouth acquisition. Prior to the BellSouth acquisition, our 60% share of AT&T Mobility’s results was included in our net income and reported as equity in net income of affiliates. Our financial results in the third quarter and for the first nine months of ~~2006~~2007 and ~~2005~~2006 are summarized as follows:

~~Third Quarter~~

~~Nine-Month Period~~

2006 2005 Percent
Change 2006 2005 Percent
Change
Operating revenues $15,638 $10,304 51 .8% $47,164 $30,855 52 .9%
Operating expenses 12,721 8,342 52 .5 39,452 25,819 52 .8
Operating income 2,917 1,962 48 .7 7,712 5,036 53 .1
Income before income taxes 3,233 1,844 75 .3 8,087 4,629 74 .7
Net Income 2,165 1,246 73 .8 5,418 3,131 73 .0

Third Quarter Nine-Month Period
Percent Percent

2007
2006 Change
2007
2006 Change
Operating revenues $
30,132
$ 15,638 92.7 % $
88,579
$ 47,164 87.8 %
Operating expenses
24,828
12,721 95.2
73,667
39,452 86.7
Operating income
5,304
2,917 81.8
14,912
7,712 93.4
Income before income taxes
4,562
3,233 41.1
13,432
8,087 66.1
Net Income
3,063
2,165 41.5
8,815
5,418 62.7

Overview

Operating income As noted above, 2006 revenues and expenses reflect the addition of ATTC’s results while our 2005 results do not include ATTC. Accordingly, the following discussion of changes in our revenues and expenses is significantly affected by the ATTC acquisition. Our operating income increased ~~$955, or 48.7%,~~$2,387 in the third quarter and ~~$2,676, or 53.1%,~~$7,200 for the first nine months, reflecting the addition of ~~2006~~BellSouth’s and ~~our~~AT&T Mobility’s operating results as noted above. Our operating income margin decreased ~~from 19.0% to 18.7%~~ in the third quarter from 18.7% in 2006 to 17.6% in 2007 and increased ~~from 16.3% to 16.4%~~ for the first nine ~~months. Operating income increased primarily~~months from 16.4% in 2006 to 16.8% in 2007. The third quarter of 2006 reflected expense reductions due to ~~expense reduction through merger synergies, partially offset by~~a change in our vacation policy. Results for the quarter and nine months ended reflected merger-related charges and the additional amortization expense on ~~those~~ intangibles identified atand recorded in connection with the ~~time of our acquisition of ATTC~~BellSouth and AT&T Corp. (ATTC) acquisitions, non-merger severance and non-recurring adjustments, partially offset by the negative effects of a continued decline in access lines. Since our merger with ATTC, our operating income margin has grown from 13.9% in the first quarter to 16.5% in the second quarter and 18.7% in the third quarter of 2006, reflecting realizedoperational improvements, merger synergies and athe addition of the higher-margined wireline operations at BellSouth. As we amortize several merger-related ~~change in~~intangible assets using the sum-of-the-months-digits method of amortization, amortization expense decreases as the amount of time we hold the assets increases.

The positive impact of the BellSouth acquisition was slightly offset by the continued decline of our ~~vacation policy (see Note 2).~~

~~Retail~~retail access lines ~~continued to decline~~ due to increased competition, as customers disconnected both primary and additional lines and ~~began using~~switched to competitors’ wireless, ~~and~~ Voice over Internet Protocol (VoIP) ~~technology offered by competitors~~ and cable ~~instead of phone lines~~offerings for voice and data. ~~Access line trends are further discussed in our Wireline segment discussion.~~

While we lose the voice revenues, we have the opportunity to increase wireless service revenue should customers choose AT&T Mobility as their alternative provider.

Operating revenues Our operating revenues increased ~~$5,334,~~$14,494, or ~~51.8%~~92.7%, in the third quarter and ~~$16,309,~~$41,415, or ~~52.9%~~87.8%, for the first nine months ~~of 2006~~ primarily due to our acquisition of ~~ATTC. The~~BellSouth and the resulting inclusion of BellSouth and wireless revenues in our operating revenues. Also contributing to the operating revenue increase was ~~slightly~~continuing growth in data, primarily related to Internet Protocol (IP) data, partially offset by the continued ~~pressure~~decline in voice ~~reflecting access line decreases in our traditional SBC Communications (SBC) 13-state region (“in-region”)~~revenues. Wireless data growth has also been strong and ~~decreased demand for wholesale services. (We changed our name~~is expected to ~~AT&T from SBC after our acquisition of ATTC.) Operating revenues in the third quarter were down about 1% from~~continue.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~the first two quarters of 2006. Operating revenue changes are discussed in greater detail in our “Segment Results” sections.~~

Operating expenses Our operating expenses increased ~~$4,379,~~$12,107, or ~~52.5%~~95.2%, in the third quarter and ~~$13,633,~~$34,215, or ~~52.8%~~86.7%, for the first nine months of ~~2006~~2007 primarily due to ~~our~~the above-mentioned acquisition of ~~ATTC, and also~~BellSouth. Operating expenses included merger integration costs of ~~$147~~$326 in the third quarter and ~~$569~~$891 for the first nine months, and amortization expense on intangible assets identified at the time of either the BellSouth or the ATTC ~~merger~~acquisitions of ~~$233~~$1,365 in the third quarter and ~~$740~~$4,607 for the first nine months. ~~Operating~~We are amortizing these intangibles using the sum-of-the-months-digits method, which means that we will record higher expenses in earlier periods. Partially offsetting these increases were merger synergies of approximately $670 in the third quarter and $2,000 for the first nine months, of 2006 were $246 lower than prior periods due to a change in our vacation policy (see Note 2). Our expenses in 2006 also include decreases related to workforce reductions, reflecting a decline of approximately 10,500 employees from December 31, 2005, of which 3,600 were in the third quarter. As of September 30, 2006, we were ahead of schedule with our targeted workforce reductions associated with the ATTC acquisition. Sequentially, expenses for the quarter decreased 2.9% in the second quarter and 3.4% in the third quarter, reflecting progress with the integration of BellSouth, AT&T Mobility and ATTC, workforce reductions and other cost-reduction ~~initiatives, as well as the merger-related change in our vacation policy. Our significant expense changes are discussed in greater detail in our “Segment Results” sections.~~initiatives.

Interest expense increased ~~$93, or 26.6%,~~$445 in the third quarter and ~~$327,~~$1,261, or ~~31.1%~~91.5%, for the first nine months of ~~2006.~~2007. The increase ~~in 2006~~ was primarily due to ~~interest expense~~higher average debt balances resulting from the inclusion of BellSouth and AT&T Mobility outstanding debt on ~~ATTC’s outstanding debt.~~our consolidated balance sheet.

~~Interest~~Equity in net income ~~increased $16,~~ of affiliates decreased $487, or ~~19.5%~~75.0%, in the third quarter and ~~decreased $13,~~$893, or ~~4.5%~~62.1%, for the first nine months of ~~2006. The increase in the quarter was primarily due to increased interest income from marketable securities.~~2007. The decrease is a result of the change in ~~interest income~~accounting for ~~the first nine months of 2006 was primarily due~~AT&T Mobility to a wholly-owned subsidiary. Prior to the pay-down by Cingular Wireless (Cingular) of our shareholder loan to them. This decrease was partially offset by our benefiting from the reduced interest expense at Cingular due to our 60% ownership in Cingular, which is reflected in equity in net income of affiliates.

~~Equity in net income of affiliates~~ increased $430 in the third quarter and $1,096 for the first nine months of 2006. The increase was primarily due to our proportionate share of Cingular’s improved results of $375 in the third quarter and $968 for the first nine months.

~~We account~~BellSouth acquisition (see Note 2), we accounted for our 60% economic interest in ~~Cingular~~AT&T Mobility under the equity method since we shared control equally with our joint-venture partner, BellSouth. As a result of ~~accounting~~the BellSouth acquisition, AT&T Mobility became a wholly-owned subsidiary of AT&T and ~~therefore include our proportionate share of Cingular’s results~~is reported in our ~~“Equity in net income of affiliates” line item on~~wireless segment and our Consolidated Statements of Income. ~~Cingular’s operating~~This decrease was slightly offset by improved results ~~are discussed~~from our investments in detail in the “Cingular Segment Results” section. Our accounting for Cingular is described in more detail in Note 5. Our equity investments are discussed in greater detail in the “Other Segment Results” section.

América Móvil S.A. de C.V. (América Móvil) and Teléfonos de México, S.A. de C.V. (Telmex).

Other income (expense) – net We had other ~~income of $11 in the third quarter and $37 for the first nine months of 2006, as compared to other~~ expense of ~~$70~~$17 in the third quarter and other income of ~~$11~~$614 for the first nine months of ~~2005.~~2007, as compared to other income of $109 in the third quarter and $315 for the first nine months of 2006. Results in the third quarter of 2007 primarily included $43 in minority interest expenses and $24 from the loss on sale of cost investments, partially offset by interest income of $44. Results in the third quarter of 2006 primarily consisted of $98 of interest income, $14 related to leveraged lease and royalty income and other expenses of $5 related to fair value adjustments on financial instruments.

Results for the first nine months of 2007 primarily included gains of $409 related to a wireless spectrum license exchange, $127 for the sale of administrative buildings and other non-strategic assets, $118 of interest income and $29 for the sale of cost investments. These gains were partially offset by $143 in minority interest expenses.

Results for the first nine months of 2006 primarily consisted of interest income of $278, royalty income of $15, ~~gains~~a gain of $10 on the sale of shares of Covad Communications Group, ~~Inc. shares of $10~~Inc, and leveraged lease income of $8. These gains were partially offset by other expenses of $20 related to fair value adjustments on financial instruments and net exchange rate losses.

Results in the third quarter of 2005 primarily consisted of other expenses of $82 due to an increase in value of a third-party minority holder’s interest in an SBC subsidiary’s preferred stock and $21 due to a call premium on early debt retirement, partially offset by a gain of $24 on the sale of a lease partnership. Other income for the first nine months of 2005 primarily included a gain of approximately $82 on the sale of shares of Amdocs Limited, SpectraSite, Inc and Yahoo!, a gain of $24 from the sale of a lease partnership and gains of $24 related to the transfer of wireless properties to Cingular. These gains were partially offset by other expenses of $82 and $21 mentioned above and a charge of $21 related to the other-than-temporary decline in the value of various cost investments.

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued~~

~~Dollars in millions except per share amounts~~

Income taxesincreased ~~$470,~~$431, or ~~78.6%~~40.4%, in the third quarter and ~~$1,171,~~$1,948, or ~~78.2%~~73.0%, for the first nine months of ~~2006.~~2007. The increase in income taxes in the third quarter and for the first nine months ~~of 2006~~ was primarily due to higher operating income ~~before income taxes.~~in 2007 reflecting the addition of BellSouth’s and its share of AT&T Mobility’s operating results. Our effective tax rates were 32.9% in the third quarter of 2007 compared to 33.0% in the third quarter of 2006, and 34.4% for the first nine months of ~~2006~~2007 compared to ~~32.4% in the third quarter and~~33.0% for the first nine months of ~~2005.~~2006. The increase in our effective tax rate for the first nine months of 2007 was primarily due to the consolidation of AT&T Mobility and an increase in income before income taxes. The effective tax rate for the third quarter of 2007 reflects a benefit related primarily to adjustments to our unrecognized tax benefits partially offset by the impact of a state law change.

AT&T INC.

SEPTEMBER 30, 2007

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued
Dollars in millions except per share amounts

Selected Financial and Operating Data

September 30,

2006

2005
Debt ratio¹
36.3%

36.6%
In-region network access lines in service (000)²
47,087

50,217
In-region wholesale lines (000)²
3,972

5,423
In-region broadband connections (000)^{2, 3}
8,155

6,496
Number of AT&T employees⁴
179,420

154,500
Cingular Wireless customers (000)⁵
58,666

52,292

(September 30, 2006 amounts do not include BellSouth)

	September 30,
	2007			2006
Wireless customers (000)¹		65,666			58,666
In-region consumer revenue connections (000)^2,7		49,639			33,197
In-region network access lines in service (000)³		62,871			47,087
In-region wholesale lines (000)^3,7		3,849			4,493
In-region broadband connections (000)^3,4,7		13,760			8,155
In-region video connections (000)^3,5,7		2,112			643
Debt ratio⁶		35.3	%		36.3	%
Number of AT&T employees		303,670			179,420

¹ ~~See our “Liquidity~~Amounts represent 100% of the wireless customers of AT&T Mobility.

²Consumer revenue connections include retail access lines, broadband and ~~Capital Resources” section for discussion.~~video.

²³In-region represents access lines served by AT&T’s incumbent local exchange companies (ILECs).

³⁴Broadband connections include DSL, ~~lines of 8,148 in 2006 and 6,496 in 2005,~~ U-verse ~~high-speed internet~~high speed Internet access and satellite broadband.

⁴ ~~Number of employees at December 31, 2005 was 189,950.~~

⁵ ~~Amounts~~Video connections include customers that have satellite service under our agency and resale agreements

with EchoStar and DIRECTV and U-verse video connections.

⁶See our “Liquidity and Capital Resources” section for discussion.

⁷Prior year amounts restated to conform to current year methodology.

Supplemental Information

To provide improved comparability versus previous results, below is a supplemental table providing pro forma consolidated operating revenues assuming the closing date for the BellSouth acquisition was January 1, 2005.

Supplemental Consolidated Operating Revenues Information

	Third Quarter							Nine-Month Period
	Actual		Pro Forma		Percent			Actual		Pro Forma		Percent
	2007		2006		Change			2007		2006		Change
Segment operating revenues
Voice	$	10,164	$	10,850		(6.3	)%	$	30,997	$	32,955		(5.9	)%
Data		5,880		5,579		5.4			17,281		16,521		4.6
Wireless service		9,834		8,646		13.7			28,417		24,910		14.1
Directory		1,240		1,456		(14.8	)		3,417		4,332		(21.1	)
Other		3,014		2,861		5.3			8,467		8,778		(3.5	)
Total Operating Revenues	$	30,132	$	29,392		2.5	%	$	88,579	$	87,496		1.2	%

The pro forma voice revenue decline is consistent with trends in recent quarters and is due to access line declines reflecting competition and substitution of alternative technologies, pricing pressures due to competition, anticipated shifts of traffic by major consolidated carriers to their own networks and a continuing decline in the number of ATTC’s mass-market customers, which represent consumer and small business.

Pro forma data growth was led by an increase in IP data revenues of 12.8% in the third quarter and 12.1% for the first nine months of 2007, with strength in high speed Internet, managed Internet, Virtual Private Network (VPN) and hosting services. Data transport service revenues were up 0.8% in the third quarter and 1.4% for the first nine months, and packet switched data revenues, which include frame relay and asynchronous transfer mode (ATM) services, were down 5.4% and 6.6%, respectively, consistent with industry trends and results of recent quarters.

Pro forma wireless service growth was driven by subscriber growth and strong increases in data usage, including increased messaging, browsing, downloads, media bundles and laptop and smart phone connectivity. Since we have historically discussed our wireless segment results on a basis that included 100% of AT&T Mobility results, a detailed wireless service revenue discussion can be found in our “Wireless segment results” section.

AT&T INC.

SEPTEMBER 30, 2007

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued

Dollars in millions except per share amounts

Pro forma directory results are lower in 2007 due to the purchase accounting treatment of directories delivered by BellSouth’s advertising and publishing businesses in the 12 months prior to the merger (see Note 5). In accordance with GAAP, the deferred revenues from these books were not included in the opening balance sheet and are therefore not included in the 2007 directory revenues. Had those deferred revenues been included in 2007, directory revenues would have increased by $196 in the third quarter and $911 for the first nine months.

Pro forma other revenues are higher in the third quarter reflecting improved wireless ~~customers of Cingular.~~

handset sales, and lower for the first nine months in 2007 due to a decline in demand for integration services and customer premises equipment.

Segment Results

Our segments represent strategic business units that offer different products and services and are managed accordingly. Our operating segment results presented in Note 5 and discussed below for each segment follow our internal management reporting. 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 total segment income.~~ As a result of our acquisition of ~~ATTC,~~BellSouth, 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) ~~directory;~~advertising & publishing; and (4) other.

The wireline segment provides both retail and wholesale landline ~~telecommunications~~communications services, including local and long-distance voice, switched access, ~~internet protocol (IP)~~IP and ~~internet~~Internet access data, messaging services, managed networking to business customers, ~~our~~AT&T U-verse^sm ~~video service~~ TV services (U-verse) and satellite television services through our ~~agreement~~agency agreements with EchoStar Communications Corp. ~~(“AT~~(Echostar or “AT&T | DISH Network” offering) and the DIRECTV Group, Inc. (DIRECTV).

The ~~Cingular~~wireless segment provides voice, data and other wireless communications services, and reflects 100% of the results ~~reported by Cingular,~~of AT&T Mobility, which was our wireless joint ~~venture.~~venture with BellSouth prior to the December 29, 2006 acquisition and is now a wholly-owned subsidiary of AT&T. In our 2006 consolidated financial statements, we ~~report~~reported our 60% proportionate share of ~~Cingular’s~~AT&T Mobility’s results as equity in net income of affiliates.

Our advertising & publishing segment results include revenue of $196 in the third quarter and $911 for the first nine months and expenses of $64 in the third quarter and $291 for the first nine months of 2007, related to directories published in the Southeast region during 2006, prior to our acquisition of BellSouth (see Note 5).

The other segment includes results from Sterling Commerce Inc. (Sterling), customer information services and all corporate and other operations. The other segment ~~also~~ includes our portion of the results from our international equity ~~investments and~~investments. In 2006, this segment also included our results from ~~Cingular~~AT&T Mobility as equity in net income of affiliates, as discussed above. ~~Although we analyze Cingular’s revenues and expenses under the Cingular segment, we record our portion of Cingular’s results as equity in net income of affiliates in the other segment.~~

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

The following tables show components of results of operations by segment. A discussion of significant segment results is also presented following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

Wireline

Segment Results

Third Quarter

Nine-Month Period

Percent

Percent

2006

2005

Change

2006

2005

Change
Segment operating revenues

Voice
$
8,464
$
5,743

47.4%

$
25,725
$
17,355

48.2%
Data

4,546

2,514

80.8

13,465

7,343

83.4
Other

1,576

972

62.1

4,805

2,970

61.8
Total Segment Operating Revenues

14,586

9,229

58.0

43,995

27,668

59.0
Segment operating expenses

Cost of sales

6,399

4,096

56.2

19,830

12,358

60.5
Selling, general and administrative

3,357

1,891

77.5

10,592

6,375

66.1
Depreciation and amortization

2,376

1,747

36.0

7,233

5,277

37.1
Total Segment Operating Expenses

12,132

7,734

56.9

37,655

24,010

56.8
Segment Income
$
2,454
$
1,495

64.1%

$
6,340
$
3,658

73.3%

Third Quarter Nine-Month Period
Percent Percent

2007
2006 Change
2007
2006 Change
Segment operating revenues
Voice $
10,356
$ 8,400 23.3 % $
31,619
$ 25,524 23.9 %
Data
6,076
4,598 32.1
17,918
13,633 31.4
Other
1,508
1,308 15.3
4,382
4,006 9.4
Total Segment Operating Revenues
17,940
14,306 25.4
53,919
43,163 24.9
Segment operating expenses
Cost of sales
7,620
6,495 17.3
22,801
20,072 13.6
Selling, general and administrative
4,105
3,068 33.8
12,157
9,816 23.8
Depreciation and amortization
3,333
2,387 39.6
10,073
7,266 38.6
Total Segment Operating Expenses
15,058
11,950 26.0
45,031
37,154 21.2
Segment Income $
2,882
$ 2,356 22.3 % $
8,888
$ 6,009 47.9 %

Operating Income and Margin Trends

Our wireline segment operating income increased $526 in the third quarter and $2,879 for the first nine months reflecting the addition of BellSouth’s operating results in 2007. Our wireline segment operating income margin ~~was 16.8%~~decreased in the third quarter offrom 16.5% in 2006 ~~compared~~ to ~~16.2%~~16.1% in ~~the third quarter of 2005,~~2007 and ~~14.4%~~increased for the first nine months offrom 13.9% in 2006 ~~compared~~ to ~~13.2%~~16.5% in 2007. Our third-quarter expenses reflect charges related to legal proceedings, contract termination and severance charges. Results for ~~the first nine months of 2005. Our wireline segment operating income increased $959 in~~ the third quarter ~~of 2006~~ and ~~$2,682 for the first~~ nine months ~~of 2006 primarily reflecting incremental revenue and expenses from our acquisition of ATTC. Operating income and margins increased primarily due to~~ended reflect lower expenses as a result of merger synergies and the addition of higher-margined operations of BellSouth, partially offset by merger-related charges and additional amortization expense on those intangibles identified at the time of our ~~acquisition~~acquisitions of ~~ATTC~~BellSouth and ~~lower voice revenue as a result of~~ATTC. Our operating income continued ~~in-region~~to be pressured by access line declines due to increased competition, as customers disconnected both primary and additional lines and switched to ~~competitors’~~ alternative technologies, such as wireless, VoIP and cable for voice and data.

Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video and voice. For example, we have the opportunity to increase wireless segment revenues if customers choose AT&T Mobility as an alternative provider.

Wireline Operating Results

All changes other than those specifically stated as being due to the ~~ATTC~~BellSouth acquisition are related to ~~in-region~~pre-acquisition wireline operations.

Voice revenues increased ~~$2,721,~~$1,956, or ~~47.4%~~23.3%, in the third quarter of 2007 and ~~$8,370,~~$6,095, or ~~48.2%~~23.9%, for the first nine months of ~~2006~~2007 primarily due to the acquisition of ~~ATTC.~~BellSouth. Included in voice revenues are revenues from ~~long-distance,~~ local voice, long-distance and local wholesale services. Voice revenues do not include ~~any of our~~ VoIP revenues, which are included in data revenues. ~~Voice revenues previously reported for the first six months of 2006 were reduced by $79 based on a review of certain international billing arrangements (see Note 1).~~

Long-distance revenues increased $2,579 in the third quarter and $8,044 for the first nine months of 2006 driven almost entirely by the increase in long-distance customers due to the acquisition of ATTC. Also contributing to the increases were higher long-distance penetration levels. However, our long-distance revenue growth continued to slow, decreasing approximately 4.0% from second-quarter 2006 results, reflecting continuing market maturity since we began providing service to all of our in-region states in late 2003 and a continuing decline in ATTC’s mass-market customers.

Local voice revenues increased $1,661, or 37.4%, in the third quarter and $5,230, or 39.1%, for the first nine months of 2007 due to the acquisition of BellSouth, which increased local voice revenues approximately $1,990 in the third quarter and $6,070 for the first nine months of 2007. Local voice revenues also increased in the third quarter due to pricing increases for regional telephone service, custom calling features and inside wire maintenance agreements. These increases were partially offset by expected declines in revenues from ATTC’s mass-market customers to which no proactive marketing occurs. Local voice revenues were also negatively impacted by continued declines in customer demand for sales of calling features and inside wire agreements. We expect our local voice revenue to continue to be negatively affected by increased competition, including customers shifting to competitors’ alternative technology and the disconnection of additional lines for DSL service and other reasons.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~Local voice~~

Long-distance revenues increased $230, or 6.4%, in the third quarter and $594, or 5.4%, for the first nine months of 2007 due to the acquisition of BellSouth, which increased long-distance revenues approximately $535 and $1,555 respectively. Contributing to the increases were continuing higher long-distance penetration levels in our original 13 states in the third quarter. These increases were primarily offset by a continuing decrease in demand for long-distance service, mostly due to an expected decline in ATTC’s mass-market customers, mentioned previously. Our long-distance revenue increase was also partially offset in the third quarter by competitive pricing for large-business customers and a decrease in demand for prepaid calling cards.

Local wholesale revenues increased $65, or 17.2%, in the third quarter and $271, or 23.1%, for the first nine months of 2007 primarily due to the acquisition of BellSouth, which increased local wholesale revenues approximately $150 in the third quarter and $470 for the first nine months. This increase was partially offset by lower demand for local wholesale services primarily due to the decreased demand for resold lines provided to competitors. However, this decrease in demand for our local wholesale lines was partially offset by price increases as we negotiate long-term contracts.

Data revenues increased $273 in the third quarter and $783 for the first nine months of 2006 primarily reflecting our acquisition of ATTC. However, we expect that revenues from ATTC’s mass-market customers will continue to decline on a sequential quarterly basis. Local voice revenues were also negatively impacted by continued declines in customer demand, calling features (e.g., Caller ID and voice mail), inside wire and retail payphone revenues. We expect our local voice revenue to continue to be negatively affected by increased competition, including customers shifting to competitors’ wireless, VoIP technology and cable offerings for voice, and the disconnection of additional lines for DSL service and other reasons. Partially offsetting these demand-related declines were revenue increases related to pricing increases for regional telephone service and calling features.

Lower demand for local wholesale services, primarily due to the decline in Unbundled Network Element-Platform (UNE-P) lines provided to competitors, decreased revenue $131 in the third quarter and $457 for the first nine months of 2006. Lines provided under the former UNE-P rules (which ended in March 2006) declined, as competitors moved to alternate arrangements to serve their customers$1,478, or their customers chose an alternative technology. These lines are classified as wholesale in the “Access Line Summary” table. Competitors who represented a majority of our UNE-P lines have signed commercial agreements with us and therefore remain our wholesale customers. For the remaining UNE-P lines, we believe, based on marketing research, that customers primarily switched to competitors using alternative technologies or their own networks as opposed to returning as our retail customers. While we lose some revenue when a wireline customer shifts from one of our retail lines to a competitor that relies on a resale or wholesale product, we lose all revenue when a wireline customer shifts to a competitor using an alternative technology such as cable, wireless or VoIP, or their own network facilities.

~~Data~~ ~~revenues increased $2,032, or 80.8%~~32.1%, in the third quarter and ~~$6,122,~~$4,285, or ~~83.4%~~31.4%, for the first nine months of 2006. The increase in data revenues was due to increases in IP data of $792 in the third quarter and $2,346 for the first nine months, increases in transport of $651 in the third quarter and $1,998 for the first nine months and increases in packet switched services of $589 in the third quarter and $1,778 for the first nine months, all of which increased almost entirely due to the acquisition of ATTC.2007. Data revenues accounted for approximately ~~29%~~33% of our wireline operating revenues in the third quarter and for the first nine months of ~~2006~~2007 and ~~24%~~over 31% of wireline operating revenues in the third quarter and for the first nine months of ~~2005.~~2006. Data revenues include transport, IP and packet switched data services.

IP data revenues increased $779, or 47.4%, in the third quarter and $2,213, or 46.3%, for the first nine months of 2007, primarily due to the acquisition of BellSouth, which increased IP data approximately $565 and $1,640, respectively. Included in IP data revenues are DSL, dedicated ~~internet~~Internet access, ~~virtual private network~~VPN and other hosting services. ~~Contributing~~VPN and dedicated Internet access services contributed to ~~the increase in~~ IP data ~~services was~~growth in 2007 due to continued growth in ~~DSL, our broadband internet-access service. DSL internet service increased data revenues $109 in~~ the ~~third quarter~~customer base and ~~$313 for the first nine months of 2006, reflecting an increase in DSL lines in service, which was partially driven by lower-priced promotional offerings as a response to competitive pricing pressures.~~

migration from other traditional circuit-based products.

Our transport services, which include DS1s and DS3s (types of dedicated high-capacity lines), and SONET (a dedicated high-speed solution for multi-site businesses), ~~represented approximately 49% of total data revenues~~increased $679, or 30.7%, in the third quarter and ~~50%~~$2,031, or 30.7%, for the first nine months of ~~2006,~~2007, almost entirely due to the acquisition of BellSouth.

Our packet switched services, which include frame relay, ATM and ~~63% of total data revenues~~managed packet services, increased $20, or 2.7%, in the third quarter and ~~64%~~$41, or 1.8%, for the first nine months of ~~2005.~~

~~Our~~2007 primarily due to the acquisition of BellSouth, which increased packet switched services ~~includes frame relay, asynchronous transfer mode (ATM)~~revenue approximately $80 in the third quarter and ~~managed packet services. As~~$205 for the first nine months of 2007. This increase was almost entirely offset by both competitive pricing and lower demand as customers continue to shift ~~from this traditional technology~~ to IP-based ~~technology, we~~technology. We expect these services to continue to decline as a percentage of our overall data revenues.

Otheroperating revenues increased ~~$604,~~$200, or ~~62.1%~~15.3%, in the third quarter and ~~$1,835,~~$376, or ~~61.8%~~9.4%, for the first nine months of ~~2006, primarily~~2007, due to ~~incremental revenue from~~ our acquisition of ~~ATTC.~~BellSouth, which increased other operating revenue approximately $220 in the third quarter and $680 for the first nine months. Major items included in other operating revenues are integration services and customer premises equipment, ~~outsourcing, directory and operator assistance services and~~ government-related services, state and municipal fees, outsourcing and international data bundles, which account for over ~~72%~~76% of total other operating revenue for all periods. ~~Our co-branded AT&T | DISH Network satellite TV service increased revenue $8~~Equipment sales and related network integration and management services decreased $29 in the third quarter and ~~$33~~$205 for the first nine months primarily due to less emphasis on the sale of lower-margin equipment. Revenue also decreased by $70 for the first nine months of ~~2006. Revenue also increased $70 from an~~2007 due to the recognition of intellectual property license fees in 2006.

Cost of sales expenses increased $1,125, or 17.3%, in the third quarter and $2,729, or 13.6%, for the first nine months of ~~2006.~~2007, due to the acquisition of BellSouth, which increased expenses approximately $1,160 in the third quarter and $3,570 for the first nine months. Cost of sales consists

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~Cost of sales~~ ~~expenses increased $2,303, or 56.2%, in the third quarter and $7,472, or 60.5%, for the first nine months of 2006, primarily related to the acquisition of ATTC. Cost of sales consists~~

of costs we incur in order to provide our products and services, including costs of operating and maintaining our networks. Costs in this category include our repair technicians and repair services, certain network planning and engineering expenses, operator services, information technology and property taxes related to elements of our ~~network and payphone operations.~~network. Pension and postretirement costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are allocated to our network labor force and other employees who perform the functions listed in this paragraph.

~~In-region benefit expenses, consisting primarily~~

In addition to the impact of ~~our combined net pension and postretirement~~the BellSouth acquisition, cost ~~increased $47~~of sales in ~~the third quarter and $106 for the first nine months of 2006, primarily~~2007 increased due to ~~changes in our actuarial assumptions, which included~~ the reduction of our discount rate from 6.00% to 5.75% (which increases expense), and net losses on plan assets in prior years. In addition, expenses increased $20 for the first nine months of 2006 related to changes in 2005 to phone concessions for out-of region retirees which reduced expenses in 2005. Nonemployee-related expenses such as contract services, agent commissions and materials and supplies costs, increased $102 in the third quarter and $67 for the first nine months. Traffic compensation expense (for access to another carrier’s network), up slightly in the third quarter, increased $110 for the first nine months of 2006, due primarily to growth in long-distance service, and as a result of decreased costs recorded in the first quarter of 2005 related to a carrier settlement. Salary and wage merit increases and other employee related expenses increased $29 in the third quarter and $58 for the first nine months of 2006.

~~Partially offsetting~~following:

·	Higher expenses of $165 in the third quarter and for the first nine months due to a change in our policy regarding the timing for earning vacation days made in the third quarter of 2006, which reduced expense in 2006.

·	Higher nonemployee-related expenses, such as contract services, agent commissions and materials and supplies costs, of $75 in the third quarter and $351 for the first nine months.

·	Contract termination and severance charges of $48 incurred in the third quarter and for the first nine months of 2007.

·	Salary and wage merit increases and other bonus accrual adjustments of $19 in the third quarter and $174 for the first nine months.

Offsetting these increases, ~~were lower costs associated with equipment~~cost of sales ~~and related network integration services, which~~in 2007 decreased ~~$137 in the third quarter and $317 for the first nine months of 2006 primarily~~ due to lower demand and as a result of the September 2005 amendment of our agreement for our co-branded AT&T | DISH Network satellite TV service. Prior to restructuring our relationship with EchoStar in September 2005, our co-branded AT&T | DISH Network satellite TV service had relatively high initial acquisition costs. Costs associated with equipment for large-business customers (as well as DSL and, previously, satellite video) typically are greater than costs associated with services that are provided over multiple years.

Lower employee levels decreased expenses, primarily salary and wages, $83 in the third quarter and $203 for the first nine months of 2006. Expenses in the third quarter and for the first nine months of 2006 were $165 lower than prior periods due to a change in our policy regarding the timing for earning vacation days. Expenses also decreased for the first nine months of 2006 resulting from repair costs of approximately $100 incurred in the first quarter of 2005 related to severe weather in-region. Expenses previously reported for the first six months of 2006 were reduced by $79 based on a review of certain international billing arrangements (see Note 1).

to:

·	Lower traffic compensation expenses (for access to another carrier’s network) of $165 in the third quarter and $662 for the first nine months primarily due to migration of long-distance calls onto our network and a lower volume of national mass-market customers.

Lower benefit expenses, consisting primarily of our combined net pension and postretirement cost, of $106 in the third quarter and $395 for the first nine months, primarily due to the increase of our discount rate from 5.75% to 6.00% (a decrease to expense) and favorable asset returns resulting in a decrease in the recognition of net losses. Other benefits decreased primarily due to workforce reductions.

Lower cost of equipment sales and related network integration services of $178 for the first nine months primarily due to less emphasis on sales of lower-margin equipment. Costs associated with equipment for large-business customers (as well as DSL) typically are greater than costs associated with services that are provided over multiple years.

·	Lower expenses of $30 in the third quarter and $163 for the first nine months due to the discontinuance of DSL Universal Service Fund fees, which began in the third quarter of 2006.

Selling, general and administrativeexpenses increased ~~$1,466,~~$1,037, or ~~77.5%~~33.8%, in the third quarter and ~~$4,217,~~$2,341, or ~~66.1%~~23.8%, for the first nine months of ~~2006,~~2007, primarily due to the ~~ATTC acquisition.~~acquisition of BellSouth, which increased expenses approximately $580 in the third quarter and $1,880 for the first nine months of 2007. Selling, general and administrative expenses consist of our provision for uncollectible accounts; advertising costs; sales and marketing functions, including our retail and wholesale customer service centers; ~~centrally managed~~centrally-managed real estate costs, including maintenance and utilities on all owned and leased buildings; credit and collection functions; and corporate overhead costs, such as finance, legal, human resources and external affairs. Pension and postretirement costs are also included to the extent that they relate to employees who perform the functions listed in this paragraph.

~~Other in-region wireline segment costs~~

In addition to the impact of the BellSouth acquisition, selling, general and administrative expenses in 2007 increased ~~$164 in the third quarter and $800 for the first nine months of 2006 primarily~~ due to ~~advertising costs related to promotion of~~ the AT&T brand name. In addition, other advertising expenses increased $13 in the third quarter and $70 for the first nine months of 2006. Salary and wage merit increases and other employee related expenses increased $42 in the third quarter and $56 for the first nine months of 2006. Nonemployee related expenses, such as contract services, agent commissions and materials and supplies costs,

following:

·	Higher expenses of $185 in the third quarter and for the first nine months related to legal proceedings.

·	Higher expenses of $70 in the third quarter and for the first nine months due to a change in our policy regarding the timing for earning vacation days made in the third quarter of 2006, which reduced expense in 2006.

·	Higher provision for uncollectible accounts of $18 in the third quarter and $43 for the first nine months.

·	Salary and wage merit increases and other bonus accrual adjustments of $13 in the third quarter and $84 for the first nine months.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

increased $26 in the third quarter and $14 for the first nine months of 2006. Benefit expenses, consisting primarily of our combined net pension and postretirement cost, increased $23 in the third quarter and $47 for the first nine months of 2006. In addition, expenses increased $57 in the third quarter and $73 for the first nine months of 2006 related to changes in 2005 to phone concessions for out-of region retirees which reduced expenses in 2005.

Partially offsetting these increases, ~~were lower employee levels, which~~selling, general and administrative expenses in 2007 decreased expenses, primarily salary and wages, $67 in the third quarter and $201 for the first nine months of 2006. Our provision for uncollectible accounts decreased slightly in the third quarter and $55 for the first nine months of 2006 as we experienced fewer losses from our retail customers and a decrease in bankruptcy filings by our wholesale customers. Expenses in the third quarter and for the first nine months of 2006 were $70 lower than prior periods due to a change in our policy regarding the timing for earning vacation days. Expenses also decreased $236 for the first nine months of 2006 due to a charge we incurred in the second quarter of 2005 to terminate existing agreements with WilTel Communications, which will continue to provide transitional and out-of-market long distance services under an agreement that commenced in November 2005 as a result of our acquisition of ATTC.

to:

·	Lower employee levels decreased expenses (primarily salary and wages) by $40 in the third quarter and $203 for the first nine months.

·	Lower nonemployee-related expenses, such as contract services, agent commissions and materials and supplies costs, of $55 for the first nine months.

·	Lower advertising expense of $13 for the first nine months.

Depreciation and amortization expenses increased ~~$629,~~$946, or ~~36.0%~~39.6%, in the third quarter and ~~1,956,~~$2,807, or ~~37.1%~~38.6%, for the first nine months of ~~2006~~2007 primarily due to higher depreciable and amortizable asset bases as a result of the ~~ATTC merger.~~purchase of BellSouth and the inclusion of the associated depreciation for the purchased assets.

Supplemental Information

Because our acquisition of BellSouth has a significant effect on comparative financial information, we have included the following 2007 sequential quarterly results for comparative purposes.

Three-Month Period Ended

September 30,
2007

June 30,
2007

March 31,
2007

Segment operating revenues
Voice $
10,356
$ 10,586 $ 10,677
Data
6,076
5,980 5,862
Other
1,508
1,427 1,447
Total Segment Operating Revenues
17,940
17,993 17,986
Segment operating expenses
Cost of sales
7,620
7,623 7,558
Selling, general and administrative
4,105
3,959 4,093
Depreciation and amortization
3,333
3,300 3,440
Total Segment Operating Expenses
15,058
14,882 15,091
Segment Income $
2,882
$ 3,111 $ 2,895

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~Supplemental Information~~

Access Line, Broadband Connections and Video Connections Summary

Our in-region switched access lines at September 30, ~~2006~~2007 and ~~2005~~2006 are shown below and access line trends are addressed throughout this segment ~~discussion:~~

In-Region¹

Switched Access Lines
September 30,

% Increase
(in 000’s)
2006
2005
(Decrease)

Retail Consumer

Primary
22,068
22,922
(3.7)%
Additional
3,571
3,989
(10.5)
Retail Consumer Subtotal
25,639
26,911
(4.7)

Retail Business
17,212
17,511
(1.7)
Retail Subtotal
42,851
44,422
(3.5)
Percent of total switched access lines
91.0%
88.5%

Sold to ATTC
1,216
1,790
(32.1)
Sold to other CLECs²
2,756
3,633
(24.1)
Wholesale Subtotal
3,972
5,423
(26.8)
Percent of total switched access lines
8.4%
10.8%

Payphone (Retail and Wholesale)
264
372
(29.0)
Percent of total switched access lines
0.6%
0.7%

Total Switched Access Lines
47,087
50,217
(6.2)%

Broadband Connections³
8,155
6,496
25.5%

discussion. Because our acquisition of BellSouth has a significant effect on comparative information, we have included first- and second-quarter 2007 information as well as pro forma amounts below as of September 30, 2006 for comparative purposes, as if the companies had been combined.

In-Region ¹
	Actual			Actual			Actual			Actual			Pro forma
	September 30,			June 30,			March 31,			September 30,			September 30,
(in 000’s)	2007			2007			2007			2006			2006
Switched Access Lines
Retail Consumer ²		35,811			36,399			36,706			25,641			37,588
Retail Business ²		22,942			23,051			23,160			16,689			23,271
Retail Subtotal²		58,753			59,450			59,866			42,330			60,859
Percent of total switched access lines		93.5	%		92.8	%		91.5	%		89.9	%		90.1	%

Sold to ATTC		327			567			1,105			1,216			1,487
Sold to other CLECs ^2,3		3,522			3,766			4,144			3,277			4,836
Wholesale Subtotal²		3,849			4,333			5,249			4,493			6,323
Percent of total switched access lines		6.1	%		6.8	%		8.0	%		9.5	%		9.4	%

Payphone (Retail and Wholesale) ⁴		269			295			314			264			347
Percent of total switched access lines		0.4	%		0.4	%		0.5	%		0.6	%		0.5	%

Total Switched Access Lines		62,871			64,078			65,429			47,087			67,529

Total Broadband Connections ⁵		13,760			13,261			12,861			8,155			11,604

Satellite service ⁶		1,986			1,846			1,684			640			1,396
U-verse video		126			51			13			3			3
Video Connections		2,112			1,897			1,697			643			1,399

¹ In-region represents access lines served by AT&T’s ILECs.

²Prior period amounts have been restated to conform to current period reporting methodology.

³Competitive local exchange carriers ~~(CLECs)~~(CLECS)

³⁴Payphone lines are presented above as previously reported. Revenue from these lines is reported in the Other segment.

⁵Broadband connections include DSL, ~~lines of 8,148 in 2006 and 6,496 in 2005,~~ U-verse high-speed ~~internet~~Internet access and satellite broadband.

⁶Satellite service includes connections under our agency and resale agreements with EchoStar and DIRECTV.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~Cingular~~Wireless

Segment Results

Third Quarter

Nine-Month Period

Percent

Percent

2006

2005

Change

2006

2005

Change
Segment operating revenues

Service revenues
$
8,661
$
7,721

12.2%

$
24,961
$
22,859

9.2%
Equipment revenues

892

1,025

(13.0)

2,790

2,725

2.4
Total Segment Operating Revenues

9,553

8,746

9.2

27,751

25,584

8.5
Segment operating expenses

Cost of services and equipment sales

3,725

3,667

1.6

11,218

10,629

5.5
Selling, general and administrative

2,836

2,881

(1.6)

8,439

8,835

(4.5)
Depreciation and amortization

1,576

1,541

2.3

4,854

4,845

0.2
Total Segment Operating Expenses

8,137

8,089

0.6

24,511

24,309

0.8
Segment Operating Income

1,416

657

-

3,240

1,275

-
Interest Expense

306

304

0.7

901

968

(6.9)
Equity in Net Income of Affiliates

-

1

-

-

4

-
Other – net

(38)

(28)

(35.7)

(107)

(32)

-
Segment Income
$
1,072
$
326

-

$
2,232
$
279

-

Third Quarter Nine-Month Period
Percent Percent

2007
2006 Change
2007
2006 Change
Segment operating revenues
Service revenues $
9,860
$ 8,670 13.7 % $
28,492
$ 24,985 14.0 %
Equipment revenues
1,077
891 20.9
2,837
2,789 1.7
Total Segment Operating Revenues
10,937
9,561 14.4
31,329
27,774 12.8
Segment operating expenses
Cost of services and equipment sales
4,079
3,725 9.5
11,690
11,218 4.2
Selling, general and administrative
3,183
2,836 12.2
9,136
8,439 8.3
Depreciation and amortization
1,709
1,582 8.0
5,410
4,874 11.0
Total Segment Operating Expenses
8,971
8,143 10.2
26,236
24,531 7.0
Segment Operating Income
1,966
1,418 38.6
5,093
3,243 57.0
Minority Interest and Equity in Net
Income (Loss) of Affiliates*
(40 ) (36 ) (11.1 ) (131 ) (99 ) (32.3 )
Segment Income $
1,926
$ 1,382 39.4 % $
4,962
$ 3,144 57.8 %

* Includes minority interest recorded as Other Income (Expense) – Net on the Consolidated Statements of Income

Accounting for ~~Cingular~~AT&T Mobility

~~We account~~

Prior to the BellSouth acquisition (see Note 2), we accounted for our 60% economic interest in ~~our Cingular joint venture~~AT&T Mobility under the equity method ~~of accounting in our consolidated financial statements.~~since we shared control equally with BellSouth. This means that our consolidated results include Cingular’s results in the “Equity in net income of affiliates” line. However, when analyzing our segment results, we evaluate Cingular’s results on a stand-alone basis using information provided by Cingular during the year. Including 100% of Cingular’s results in our segment operations (rather than 60% in equity in net income of affiliates) affects the presentation of this segment’s revenues, expenses, operating income, nonoperating items and segment income but does not affect our consolidated net income. We discuss Cingular’s liquidity and capital expenditures under the heading “Cingular” within “Liquidity and Capital Resources.”

~~Cingular’s Customer and Operating Trends~~

~~As of September 30, 2006, Cingular served 58.7 million cellular/PCS (wireless) customers compared to 52.3 million at September 30, 2005. Cingular’s increase in customer gross additions~~ in the third quarter and for the first nine months of 2006 included our 60% share of AT&T Mobility’s results in “Equity in net income of affiliates” on our Consolidated Statements of Income. Following the BellSouth acquisition, AT&T Mobility became a wholly-owned subsidiary and AT&T Mobility’s results are included as operating revenues and expenses in our Consolidated Statements of Income. However, for all the periods presented, the wireless segment reflects 100% of the results reported by AT&T Mobility based on the management of the business.

Wireless Customer and Operating Trends

As of September 30, 2007, we served 65.7 million wireless customers compared to ~~2005 was primarily driven by an increase in reseller~~61.0 million at December 31, 2006 and ~~prepaid~~58.7 million at September 30, 2006. Approximately 70% of our wireless customer growth, combined with its larger distribution network, broad range of service offerings and advertising over the past year. This growth was partially offset by a decline in postpaid customer growth due to the streamlining of operations, such as the reduction of retail stores and agents, and higher wireless market penetration. Cingular’s net ~~subscriber~~ additions ~~increased 56.6%~~ in the third quarter and ~~42.3% for the~~ first nine months were retail customer additions, and 85% of ~~2006.~~

~~Competition~~these additions were postpaid customer additions. Contributing to our net additions was improvement in customer turnover (customer churn) levels due to our strong network performance and attractive products and services offerings, including the Apple iPhone (iPhone), which were partially offset by a slowing growth rate of new wireless users asreflecting a maturing wireless industry. Since the ~~wireless market matures will continue to impact Cingular’s gross additions, revenue growth, expenses and put pressure on margins. Cingular expects~~June 29, 2007 launch of the iPhone, we have activated nearly 1.0 million iPhone customers through September 30, 2007, of which more than 40% were new customers.

We expect that future revenue growth will become increasingly dependent on minimizing customer ~~turnover (customer churn)~~churn and increasing average service ~~average~~ revenue per user/customer (ARPU).

~~Cingular’s~~, as the wireless industry continues to mature. Wireless service ARPU ~~has weakened over~~increased 2.0% compared to the ~~past several years as it has offered a broader array~~third quarter of ~~plans~~2006 and 0.4% compared to ~~expand its customer base and responded~~the second quarter of 2007 primarily due to ~~increasing competition, resulting in pricing reductions. However, in the past quarter Cingular’s ARPU improved slightly reflecting~~ increased ~~use of~~ data services and postpaid ARPU growth. In the third quarter, data ARPU grew 47.8% year over year and 6.5% compared to the second quarter of 2007. The growth in data ARPU was partially offset by ~~customers. Cingular expects~~a decline in voice service ARPU of 4.6% year over year and 0.9% compared to the second quarter of 2007. We expect continued pressure on voice service ARPU ~~notwithstanding~~despite our increasing revenue from data services.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

ARPU increased 0.2% in the third quarter and declined 1.8% for the first nine months of 2006. The slight increase in ARPU in the third quarter was primarily due to an increase of 46.0% in average data revenue per customer, which was almost entirely offset by decreases in local service, net roaming revenue and other revenue per customer. The decline in ARPU for the first nine months was due to a decrease in local service, net roaming revenue and other revenue per customer partially offset by an increase in average data revenue per customer, which increased 42.0% for the first nine months, and long-distance revenue per customer. Local service revenue per customer declined primarily due to an increase in reseller customers which provide significantly lower ARPU than non-reseller customers, customer shifts to all-inclusive rate plans that offer lower monthly charges, Cingular’s free mobile-to-mobile plans that allow Cingular customers to call other Cingular customers at no charge and to a lesser extent “rollover” minutes.

The effective management of wireless customer churn is critical to ~~Cingular’s~~our ability to maximize revenue growth and to maintain and improve margins. ~~Cingular’s wireless~~Wireless customer churn ~~rate~~ is calculated by dividing the aggregate number of wireless customers ~~(prepaid and postpaid)~~ who cancel service during each month in a period by the total number of wireless customers at the beginning of each month in that period. ~~Cingular’s~~Our wireless churn rate was 1.7% in the third quarter and for the first nine months of 2007, down from 1.8% in the third quarter and for the first nine months of ~~2006, down from 2.3%~~2006. The churn rate for postpaid customers was 1.3% in the third quarter and ~~2.2%~~ for the first nine months of ~~2005. The churn rate for Cingular’s postpaid customers was~~2007, down from 1.5% in the third quarter and for the first nine months of ~~2006, down from 2.0% in the third quarter and 1.9% for the first nine months of 2005.~~2006. The decline in overall and postpaid churn reflects ~~benefits from the acquisition of AT&T Wireless Service Inc. (AT&T Wireless), including more affordable rate plans,~~our broader network coverage, higher network quality, broad array of products and services, exclusive devices and free mobile-to-mobile calling among ~~Cingular~~wireless customers.

~~Cingular’s customer churn of 1.8% in the~~ Sequentially, third quarter ~~increased 10 basis points sequentially~~churn levels were up slightly reflecting seasonality and mild pressure from ~~the second quarter~~our ongoing transition of ~~2006. The sequential increase resulted~~customers from ~~normal seasonality patterns, the phasing out of AT&T Wireless prepaid plans and from certain actions Cingular made to recover increased costs associated with serving the diminishing base of its~~our Time Division Multiple Access (TDMA) ~~customers and migration of these customers~~platform to ~~the Cingular~~our Global System for Mobile Communication (GSM) network. While Cingular anticipates continued improvements to its network and customer care and more compelling customer products and services, they continue to expect higher disconnects from the continued phase out of the AT&T

Wireless ~~prepaid platform and from Cingular’s analog and TDMA service which is planned to discontinue in early 2008.~~
Cingular expects its cost of services to continue increasing due to higher network system usage, which includes the costs Cingular is now paying T-Mobile USA (T-Mobile) for the use of its network in California and Nevada, higher costs associated with integrating the AT&T Wireless network and operations, and, to a lesser extent, increased expenses related to operating, maintaining and decommissioning TDMA networks that duplicated GSM networks while integrating the networks acquired from AT&T Wireless. Cingular’s remaining purchase commitment to T-Mobile was $243 at September 30, 2006. Operating costs will substantially increase in the event that Cingular’s network expansion in California and Nevada is not completed prior to fulfilling the purchase commitment with T-Mobile. However, this network expansion is proceeding on schedule, and as of September 30, 2006, more than 85% of Cingular’s customers in California and Nevada were on the Cingular network.
In June 2006, the Federal Communications Commission (FCC) increased the safe harbor for contributions to the Universal Service Fund (USF) by wireless carriers, which establishes a presumption that a specific percentage of a wireless carrier’s revenues are derived from providing interstate telecommunications services, and thus are subject to USF contributions. Cingular previously has contributed to the fund based on the wireless safe harbor, but likely will begin to contribute based on its actual interstate revenues in light of the increase in the wireless safe harbor.

~~Cingular’s~~ Operating Results

Our ~~Cingular~~wireless segment operating income margin was 18.0% in the third quarter and 16.3% for the first nine months of 2007, which improved over margins of 14.8% in the third quarter and 11.7% for the first nine months of ~~2006, which improved over margins of 7.5% in the third quarter and 5.0% for the first nine months of 2005.~~2006. The higher ~~margin~~margins in ~~2006 was~~2007 were primarily due to revenue

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued~~

~~Dollars in millions except per share amounts~~

growth of $807 in the third quarter and $2,167 for the first nine months. Cingular’s revenue growth reflects the impact of service credits to customers affected by Hurricane Katrina of $31 in the third quarter of 2005.

~~Service~~~~revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $940,~~$1,376, or ~~12.2%~~14.4%, in the third quarter and ~~$2,102,~~$3,555, or ~~9.2%~~12.8%, ~~for the first nine months of 2006 and consisted of:~~

Local voice revenues increased $449, or 7.1%, in the third quarter and $1,083, or 5.8%, for the first nine months, primarily due to an increase in Cingular’s average number of wireless customers of 12.1% in the third quarter and 11.3% for the first nine months, partially offset by ~~a decline in local service ARPU~~increased operating expenses of ~~4.4% in the third quarter and 5.0% for the first nine months.~~

~~Data service revenues increased $417,~~$828, or ~~60.5%~~10.2%, in the third quarter and ~~$1,055,~~$1,705, or ~~55.1%~~7.0%, for the first nine ~~months, due to an~~months. The increase reflects growth in ~~average~~ data ~~revenue per~~revenues, reduced customer churn and progress on merger integration efforts, especially in improving our network cost structure.

Service revenues are comprised of 46.0% in the third quarter and 42.0% for the first nine months, which was related to increased use of text messaging and internet access services. Data service revenues represented 12.8% of Cingular’s service revenues in the third quarter and 11.9% for the first nine months.

~~Roaming revenues from Cingular customers~~voice, data and other ~~wireless carriers for use of Cingular’s network~~revenue. Service revenues increased ~~$57,~~$1,190, or ~~10.8%~~13.7%, in the third quarter and ~~decreased $45,~~$3,507, or ~~2.9%,~~14.0% for the first nine ~~months.~~

months of 2007 and primarily consisted of:

~~Long-distance and other~~
· Data revenue increases of $707 in the third quarter and $1,952 for the first nine months due to the increased number of data users and an increase in data ARPU of 47.8% in the third quarter and 50.1% for the first nine months, which primarily resulted from increased use of text messaging, email, data access and media bundling services. Our significant data growth also reflects an increased number of subscribers using our 3G (third generation) network. At September 30, 2007, we had nearly 7 million customers using 3G devices, nearly triple the amount of subscribers at March 31, 2007. Data service revenues represented 17.3% of wireless service revenues in 2007 compared to 11.9% in 2006.

Voice revenue increases of $473 in the third quarter and $1,518 for the first nine months of 2007, primarily due to an increase in the number of wireless customers of approximately 11.9%, partially offset by a decline in voice ARPU of 4.6% in the third quarter and 4.0% for the first nine months. Included in voice revenues were increases in long-distance and net roaming revenue due to increased international usage.

Equipment revenues increased ~~$17,~~$186, or ~~8.9%~~20.9%, in the third quarter and ~~$9,~~$48, or ~~1.6%, for the first nine months primarily as a result of increased international long-distance usage partially offset by a decline in other revenue attributed to property management fees.~~

~~Equipment~~~~revenues decreased $133, or 13.0%, in the third quarter and increased $65, or 2.4%~~1.7%, for the first nine months of ~~2006. The decline~~2007. This increase in the third quarter was ~~primarily~~ due to higher handset revenues as a result of an 8.8% increase in ~~rebate activity~~retail gross customer additions, customers purchasing higher-priced handsets (including the iPhone) and ~~reduced~~increased handset ~~pricing, partially offset by increased accessory pricing and upgrade volume.~~upgrades. The increase for the first nine months was due to ~~increased~~higher handset revenues ~~as a result of increased handset sales~~ related to ~~the higher~~increased gross customer additions, ~~and higher prices on handset upgrades and accessories,~~ partially offset by increased equipment discounts, rebate ~~activity.~~activity and higher prepaid additions as a percentage of retail gross additions during the first half of 2007.

Cost of services and equipment sales expenses increased ~~$58,~~$354, or ~~1.6%~~9.5%, in the third quarter and ~~$589,~~$472, or ~~5.5%~~4.2%, for the first nine months of ~~2006~~2007. The third-quarter and nine-month increases were primarily due to ~~increases in network usage and associated network system expansion.~~

~~Cost~~increased equipment sales expense of ~~services increased $63, or 2.6%,~~$455 in the third quarter and ~~$443, or 6.4%,~~$675 for the first nine months of ~~2006 primarily~~2007, due to ~~the following:~~

~~Increases in network usage with~~ an increase in ~~minutes~~sales of ~~use~~higher cost 3G devices, the introduction of ~~21.3%~~the iPhone handset and an increase in the ~~third quarter and 21.0% for the first nine months.~~

~~Higher roaming and long-distance costs were partially offset by a decline in reseller expenses. The reseller decrease resulted from a decrease in minutes~~number of ~~use on the T-Mobile network of 60.1% in the third quarter and 50.1% for the first nine months.~~

Cost of services includes integration costs, primarily for network integration, of $65 in the third quarter and $150 for the first nine months of 2006 compared to $101 in the third quarter and $123 in the first nine months of 2005. Cost of services in the third quarter of 2005 also includes $78 in hurricane costs.

Equipment sales expense decreased $5, or 0.4%, in the third quarter and increased $146, or 3.9%, for the first nine months of 2006. The decrease in the third quarter was primarily due to a decline in the average cost per handset sold. The increase for the first nine months was due to increased handset unit sales (including upgrades) associated with the higher gross additions, partially offset by the decline in the average cost per handset sold.accessory sales. Total equipment costs continue to be higher than equipment revenues due to ~~Cingular’s~~the sale of handsets below cost, through direct sales sources, to customers who committed to one-year or two-year contracts or in connection with other promotions.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

Equipment sales expense was partially offset by declines in cost of services of $101 in the third quarter and $203 for the first nine months of 2007. These decreases were due to lower interconnect, incollect and long-distance expenses related to network and systems integration and cost reduction initiatives, as well as cost reductions from the continued migration of network usage from the T-Mobile USA (T-Mobile) network in California and Nevada. Our remaining purchase commitment to T-Mobile was $58 at September 30, 2007. Our wireless network expansion is proceeding on schedule with more than 98% of our wireless customers in California and Nevada now transitioned onto our network. The third quarter and first nine months decreases were partially offset by higher network usage, with increases in total system minutes of use of 11.9% in the third quarter and 14.0% for the first nine months, and associated network system expansion and increased equipment costs.

Selling, general and administrativeexpenses ~~decreased $45,~~increased $347, or ~~1.6%~~12.2%, in the third quarter and ~~$396,~~$697, or ~~4.5%~~8.3%, for the first nine months of ~~2006. The decline in the third quarter was due to decreases in general~~2007 and administrative expenses of $85, partially offset by increased selling expenses of $40. The decline for the nine months was due to decreases in general and administrative expenses of $347 and selling expenses of $49.

~~Selling, general and administrative expenses~~ included the following:

~~Billing~~
· Selling expenses increased $189 in the third quarter and $355 for the first nine months due to increases in sales and advertising expenses and iPhone launch preparation costs, partially offset by a decrease in net commission expense, which was consistent with the increase in prepaid plan sales as a percentage of total retail sales.

·	Customer service and other expense increased $90 in the third quarter and $195 for the first nine months primarily due to increased bad debt expenses and other costs, partially offset by a decline in billing expenses, lower information technology and customer service expenses.

·	Upgrade commission and residual expense increased $68 in the third quarter and $147 for the first nine months due to increased prepaid plan costs and higher handset upgrade activity.

Depreciation and ~~bad debt expense decreased $131~~amortization expenses increased $127, or 8.0%, in the third quarter and ~~$283~~$536, or 11.0%, for the first nine months of 2007. Amortization expense increased $344 in the third quarter and $1,193 for the first nine months of 2007 primarily due to amortization of identifiable intangible assets related to our acquisition of BellSouth’s 40% ownership interest of AT&T Mobility, partially offset by declining amortization of identifiable AT&T Wireless, Inc. intangible assets acquired by AT&T Mobility in 2004, which are principally amortized using the sum-of-the-months-digits method of amortization.

Depreciation expense decreased $217 in the third quarter and $657 for the first nine months primarily due to ~~fewer account write-offs~~certain network assets becoming fully depreciated and ~~cost savings~~purchase accounting adjustments on certain network assets related to ~~transitioning~~acquiring BellSouth’s 40% ownership interest, partially offset by increased expense related to ~~one billing system.~~

accelerated depreciation on TDMA assets and ongoing capital spending for network upgrades and expansion.

~~Other administrative~~

AT&T INC.

SEPTEMBER 30, 2007

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued

Dollars in millions except per share amounts

Advertising & Publishing

Segment Results

	Third Quarter								Nine-Month Period
						Percent								Percent
	2007		2006			Change			2007		2006			Change
Total Segment Operating Revenues	$	1,457	$	913			59.6	%	$	4,378	$	2,746			59.4	%
Segment operating expenses
Cost of sales		440		277			58.8			1,281		853			50.2
Selling, general and administrative		315		154			-			1,000		445			-
Depreciation and amortization		238		1			-			743		2			-
Total Segment Operating Expenses		993		432			-			3,024		1,300			-
Segment Operating Income		464		481			(3.5	)		1,354		1,446			(6.4	)
Equity in Net Income (Loss) of Affiliates		-		(2	)		-			-		(13	)		-
Segment Income	$	464	$	479			(3.1	)%	$	1,354	$	1,433			(5.5	)%

Accounting Impacts from the BellSouth Acquisition

Prior to the BellSouth acquisition (see Note 2), we accounted for our 66% economic interest in YPC under the equity method since we shared control equally with BellSouth. Following the BellSouth acquisition, YPC became a wholly-owned subsidiary of AT&T and results are reflected in operating revenues and expenses ~~decreased $60~~on our Consolidated Statements of Income.

For segment disclosure purposes, we have carried forward deferred revenue and deferred cost balances for BellSouth in order to reflect how the segment is managed. This is different for consolidated reporting purposes as under Statement of Financial Accounting Standards No. 141, “Business Combinations”, BellSouth deferred revenue and expenses from directories published during the twelve-month period ending with the December 29, 2006 acquisition date are not recognized and therefore were not included in the opening balance sheet (see Note 5). For management reporting purposes, we continue to amortize these balances over the life of the directory. Thus, our advertising & publishing segment results include revenue of $196 and expenses of $64 in the third quarter of 2007 and ~~$140~~revenue of $911 and expenses of $291 for the first nine months of 2007 related to directories published in the Southeast region during 2006, prior to our acquisition of BellSouth.

Operating Results

Our advertising & publishing operating income margin was 31.8% in the third quarter of 2007, compared to 52.7% in the third quarter of 2006 and 30.9% in the first nine months of 2007 compared to 52.7% for the first nine months of 2006. The decrease in the ~~third quarter was~~segment operating income margin is primarily due to the addition of BellSouth’s operating results including the amortization of BellSouth’s customer lists acquired as a ~~decline in spending related~~part of the acquisition and an opening balance sheet adjustment to ~~IT and other professional services and a benefit related to a settlement~~allowance for uncollectibles associated with unbilled receivables established at the time of a dispute. The decrease for the first nine months was due to a decline in litigation related expenses, lower employee costs and employee-related benefits due to a decrease in headcount, lower IT and other professional services expense and a federal excise tax refund accrual.

acquisition.

Customer service expenses decreased $3 in the third quarter and $90 for the first nine months of due to a decline in the number of call center outsourced professional services and lower billing expenses.

~~Other expenses~~Operating revenues increased ~~$109 in the third quarter and $166 for the first nine months due to increased prepaid card replenishment costs and higher migration and upgrade transaction costs.~~

Selling expenses increased $40 in the third quarter and decreased $49 for the first nine months of 2006. The increase in the third quarter was due to increased direct commissions related to changes to the sales compensation plan. The decrease for the first nine months was due to lower indirect commissions and advertising expenses, partially offset the increased direct commissions expense mentioned previously. The decline in indirect commissions was due to reductions in average activation and agent branding expense.

~~Depreciation and amortization~~ ~~expenses increased $35,~~$544, or ~~2.3%~~59.6%, in the third quarter and ~~$9,~~$1,632, or ~~0.2%~~59.4%, for the first nine months of ~~2006. Depreciation expense~~2007 primarily due to the addition of BellSouth’s operating results, which increased ~~$129, or 11.4%,~~operating revenues approximately $550 in the third quarter and ~~$364, or 10.5%,~~$1,650 for the first nine months of ~~2006, primarily due to depreciation associated with the property, plant~~2007. The increase is largely driven by publishing and ~~equipment related to Cingular’s ongoing capital spending associated with its GSM network.~~Internet advertising revenue.

~~Amortization expense decreased $94, or 22.9%,~~

Operating Expenses increased $561 in the third quarter and ~~$355, or 25.8%,~~$1,724 for the first nine months of ~~2006~~2007 primarily due to ~~declining amortization~~the addition of BellSouth’s operating results, which increased total operating expenses by approximately $520 in the ~~AT&T Wireless customer contracts~~third quarter and ~~other intangible assets acquired, which are amortized using~~$1,625 for the ~~sum~~first nine months of ~~the months digits method of amortization.~~

2007.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~Directory~~

~~Segment Results~~

Third Quarter

Nine-Month Period

Percent

Percent

2006

2005

Change

2006

2005

Change
Total Segment Operating Revenues
$
921
$
932

(1.2)%

$
2,769
$
2,786

(0.6)%
Segment operating expenses

Cost of sales

277

271

2.2

853

827

3.1
Selling, general and administrative

162

154

5.2

468

474

(1.3)
Depreciation and amortization

1

1

-

2

4

(50.0)
Total Segment Operating Expenses

440

426

3.3

1,323

1,305

1.4
Segment Operating Income

481

506

(4.9)

1,446

1,481

(2.4)
Equity in Net Income (Loss) of Affiliates

(2)

-

-

(13)

(1)

-
Segment Income
$
479
$
506

(5.3)%

$
1,433
$
1,480

(3.2)%

~~Our directory operating income margin was 52.2% in the third quarter~~Cost of ~~2006, compared to 54.3% in the third quarter of 2005 and 52.2% for the first nine months of 2006 compared to 53.2% for the first nine months of 2005.~~

~~Operating revenues~~ ~~decreased $11,~~sales increased $163, or ~~1.2%~~58.8%, in the third quarter and ~~decreased $17,~~$428, or ~~0.6%~~50.2%, for the first nine months of ~~2006. Decreases in print advertising revenues~~2007 primarily due to the addition of ~~$34~~BellSouth’s operating results, which increased cost of sales by approximately $125 in the third quarter and ~~$63 for the first nine months were partially offset by internet advertising revenues of $20 in the third quarter and $52~~$405 for the first nine months of ~~2006, which do not include~~2007. Publishing, commissions, paper and printing costs represent the ~~revenues~~majority of ~~YPC. These results in the third quarter and for the first nine months reflect the impact~~cost of ~~competition from other publishers, other advertising media and continuing economic pressures on advertising customers.~~

~~Cost of~~ salesincreased $6, or 2.2%, in the third quarter of 2006 and increased $26, or 3.1%, for the first nine months of 2006. The increase was primarily driven by higher costs for internet traffic and commissions.

~~Selling, general and administrative~~ expenses increased $8, or 5.2%, in the third quarter of 2006 and decreased $6, or 1.3%, for the first nine months of 2006. The increase in the third quarter was primarily due to increased other directory segment costs, including benefits, partially offset by lower bad debt expense. The decline for the first nine months was primarily due to lower bad debt expense, partially offset by other directory segment costs, including benefits.

~~Other~~

~~Segment Results~~

Third Quarter

Nine-Month Period

Percent

Percent

2006

2005

Change

2006

2005

Change
Total Segment Operating Revenues
$
204
$
182

12.1%

$
604
$
529

14.2%
Total Segment Operating Expenses

221

222

(0.5)

678

632

7.3
Segment Operating Income (Loss)

(17)

(40)

57.5

(74)

(103)

28.2
Equity in Net Income of Affiliates

651

219

-

1,451

343

-
Segment Income
$
634
$
179

-

$
1,377
$
240

-

~~Our other segment operating results~~ in the third quarter and for the first nine months of ~~2006~~2007.

Selling, general and ~~2005~~administrative expenses increased $161 in the third quarter and $555 for the first nine months of 2007 primarily due to the addition of BellSouth’s operating results, which increased selling, general and administrative expenses by approximately $160 in the third quarter and $485 for the first nine months of 2007. Employee, uncollectible and advertising related expenses represent the majority of selling, general and administrative expenses in the third quarter and for the first nine months of 2007.

Depreciation and amortization expenses increased $237 in the third quarter and $741 for the first nine months of 2007 resulting from the amortization of customer lists acquired as a part of the BellSouth acquisition, which increased expenses by $236 in the third quarter and $737 for the first nine months of 2007.

Other

Segment Results

	Third Quarter							Nine-Month Period
					Percent							Percent
	2007		2006		Change			2007		2006		Change
Total Segment Operating Revenues	$	562	$	469		19.8	%	$	1,664	$	1,390		19.7	%
Total Segment Operating Expenses		440		391		12.5			1,468		1,137		29.1
Segment Operating Income (Loss)		122		78		56.4			196		253		(22.5	)
Equity in Net Income of Affiliates		159		644		(75.3	)		533		1,421		(62.5	)
Segment Income	$	281	$	722		(61.1	)%	$	729	$	1,674		(56.5	)%

Our other segment operating results consist primarily of Sterling, customer information services, corporate and other operations. Sterling provides ~~business integration~~business-integration software and services.

Segment operating revenues increased $93, or 19.8%, in the third quarter and $274, or 19.7%, for the first nine months of 2007 primarily due to the addition of BellSouth’s other operations and increased operating revenue at Sterling.

Segment operating expenses increased $49, or 12.5%, in the third quarter and $331, or 29.1%, for the first nine months of 2007 primarily due to the addition of BellSouth’s other operations and increased operating expenses at Sterling.

Prior to the December 29, 2006 close of the BellSouth acquisition, our other segment included our 60% proportionate share of AT&T Mobility results as equity in net income of affiliates. As a result of the BellSouth acquisition, we own 100% of AT&T Mobility and its results are no longer included in equity in net income of affiliates in this segment or on our Consolidated Statements of Income.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~Operating revenues~~ increased $22, or 12.1%, in the third quarter and $75, or 14.2%, for the first nine months of 2006 primarily due to increased intercompany revenue from our captive insurance company (shown as intersegment revenue in Note 5) and improved operating revenue at Sterling, partially offset by revenue earned by our paging subsidiary in 2005. Our paging subsidiary was sold in November of 2005.

~~Operating expenses~~ were flat in the third quarter and increased $46, or 7.3%, for the first nine months of 2006 primarily due to increased expense from our captive insurance company and increased operating expenses at Sterling, partially offset by management fees paid in 2005 that did not recur in 2006.

~~Our other segment includes our 60% proportionate share of Cingular’s results as equity in net income of affiliates.~~

Our other segment also includes our equity investments in international companies, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies. Our foreign investments are recorded under GAAP, which include adjustments for the purchase method of accounting and exclude certain adjustments required for local reporting in specific countries. Our equity in net income of affiliates by major investment is listed below:

Third Quarter

Nine-Month Period

2006

2005

2006

2005
Cingular
$
508
$
133
$
1,045
$
77
América Móvil

79

27

200

104
Telmex

54

59

167

157
Other

10

-

39

5
Other Segment Equity in Net
Income of Affiliates
$
651
$
219
$
1,451
$
343

Third Quarter Nine-Month Period

2007
2006
2007
2006
América Móvil $
91
$ 79 $
311
$ 200
Telmex
60
54
200
167
AT&T Mobility
-
508
-
1,045
Other
8
3
22
9
Other Segment Equity in Net
Income of Affiliates
$
159
$ 644 $
533
$ 1,421

Equity in net income of affiliates ~~increased $432~~ decreased $485 in the third quarter and ~~$1,108~~$888 for the first nine months of ~~2006.~~2007. The ~~increase~~decrease was ~~primarily~~ due to a change in accounting for AT&T Mobility, the results of which are no longer included in equity in net income of affiliates in 2007 due to the acquisition of BellSouth. This decrease was partially offset by an increase of ~~$375~~$18 in the third quarter and ~~$968~~$144 for the first nine months ~~in our proportionate share of Cingular’s results. Also contributing to the increase for the first nine months was an increase in equity income of $106~~ from América Móvil ~~S.A. de C.V.~~ and ~~Teléfonos de México, S.A. de C.V. reflecting~~Telmex primarily due to improved operating ~~results at both companies.~~results.

COMPETITIVE AND REGULATORY ENVIRONMENT

OverviewAT&T subsidiaries operating within the U.S. are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the U.S. are subject to the jurisdiction of national and supranational regulatory authorities in the ~~market~~markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of enterprise (i.e., large business) services.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a ~~pro-competitive, deregulatory~~ national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating burdensome regulation. Since the Telecom Act was passed, the ~~FCC~~Federal Communications Commission (FCC) and some state regulatory commissions have maintained many of the extensive regulatory requirements applicable to our traditional wireline subsidiaries. We are actively pursuing additional legislative and regulatory measures to reduce or eliminate regulatory requirements that inhibit our ability to provide the full range of services ~~increasingly~~ demanded by our customers. For example, we are supporting regulatory and legislative efforts ~~at both the state and federal levels, as well as proposed rules at the FCC,~~ that would offer a streamlined process for new video service providers to compete with traditional cable television providers. ~~Several~~In March 2007, the FCC released an order adopting rules that prohibit municipalities from making unnecessary and unreasonable demands on competitive video service providers, and which require prompt action by such localities on cable franchise applications by new entrants. In addition, states representing a majority of our local service access lines have ~~passed~~adopted legislation that enables new video entrants to acquire a ~~state-wide~~statewide franchise to offer video services. ~~In addition, we~~We also are supporting efforts to update regulatory treatment for retail services. ~~Several bills~~Passage of legislation is uncertain and depends on many factors.

Our wireless operations are ~~also pending before Congress~~likewise subject to substantial governmental regulation. Wireless communications providers must be licensed by the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the rules and policies governing the use of the spectrum as adopted by the FCC. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, an increasing number of states are attempting to regulate or legislate various aspects of wireless services, such as in the area of consumer protection. Additionally, we have noted our opposition to proposals to impose “net neutrality” access regulation to wireless providers. We believe that ~~would both reform~~ the ~~Telecom Act~~wireless industry is characterized by innovation, differentiation and ~~promote~~competition among handset manufacturers, carriers and applications; and that additional ~~video competition. Passage~~

broadband regulation and new wholesale requirements are unnecessary given the state of competition and may be appropriate only in the case of market failure.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

Special Access In January 2005, the FCC commenced a broad examination of ~~legislation is uncertain and depends on many factors, but we believe~~the regulatory framework applicable to interstate special access services provided by price cap local exchange carriers, including whether the special access pricing flexibility rules that ~~the increasing pace of technological change and competition in our industry will encourage lawmakers to remove artificial barriers to competition.~~

~~Triennial Review Remand Order~~~~In December 2004,~~ the FCC adopted in 1999 have worked as intended. In a notice dated July 9, 2007, the FCC invited interested parties to update the record in that proceeding in light of industry developments since 2005. If the FCC were to modify its ~~fourth set of~~special access pricing flexibility regime (such as by mandating further reductions in special access rates), it might negatively impact our operating results.

Broadband Forbearance Order In October 2007, the FCC adopted an order eliminating Title II dominant carrier regulations and certain “Computer Inquiry” rules ~~concerning~~previously applicable to optical and packet-switched broadband transmission services provided by our operating companies. Consequently, our operating companies will no longer be subject to, among other things, the FCC’s tariff filing requirements or price cap rules for Frame Relay, ATM, Ethernet, Remote Network Access, SONET, Optical Network or Wave-based broadband services. This order gives us substantial flexibility to offer individually tailored contractual arrangements that better meet our customers’ needs while enabling us to reduce costs and operate more efficiently.

Long Distance Non-Dominance Order In August 2007, the FCC adopted an ~~ILEC’s obligation~~order granting regulatory relief to ~~make elements of its network available to other~~AT&T, Verizon Communications Inc. and Qwest Communications International Inc. and their independent incumbent local ~~service providers.Each of its previous three sets of rules had been overturned by the federal courts. These new rules, known as the Triennial Review Remand Order (TRRO)~~exchange carrier affiliates (e.g., ~~became effective on March 11, 2005. The TRRO provided significant~~AT&T Connecticut). This relief ~~from unbundling by eliminating our remaining obligation~~allows us to provide ~~local switching~~interstate long-distance services free from both structural separation requirements and ~~hence the UNE-P, for mass-market customers,~~dominant carrier regulation (e.g., tariffing and price cap requirements), subject to certain limited conditions. As a ~~12-month transition period, which ended on March 11, 2006. At the same time, the TRRO largely retained unbundling requirements for many~~result of ~~our high-capacity loop and transport facilities.~~

We and other parties filed appeals with the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) challenging various portions of the TRRO. In June 2006, the D.C. Circuit issued a decision upholding the FCC’s order, ~~in all respects. The D.C. Circuit’s decision became final and non-appealable in September 2006.~~

~~Video Legislation~~ During the third quarter, California passed video franchise reform legislation that ends disputes over the need for municipal video franchises. While the California Public Utility Commission (CPUC) is the state franchising authority, the law specifically clarified that the CPUC has no authority over rates, terms and conditions of video service. Additionally, as part of this law, thereour business units will be able to integrate functions across organizations and jointly plan business operations more efficiently than previously possible. We anticipate that this relief will lower our administrative costs and improve our responsiveness to customers. In addition, the FCC eliminated the equal access scripting requirement, which had required AT&T’s customer service representatives to inform new local telephone service customers of the availability of long-distance service from other carriers and to read a freeze on rates for basic telephone services, generally capping residential primary line basic service until January 1, 2009. The new law provides for certain nondiscrimination obligations as well as build-out obligations, the latterlist of ~~which generally requires AT&T and other large telephone companies providing video service using a technology other than fiber~~such carriers to the ~~premises to make video service available to 35% of California households in their telephone service areas within three years and to 50% within five years of obtaining a new state video franchise.~~customer upon request.

~~OTHER BUSINESS MATTERS~~

~~Acquisition of BellSouth~~~~On March 4, 2006, we agreed to acquire BellSouth Corporation (BellSouth) in a transaction in which each share of BellSouth common stock will be exchanged for 1.325 shares of AT&T common stock. Based~~FCC Order on ~~the average closing price of AT&T shares for the two days prior to, including, and two days subsequent to the public announcement~~Recommendations of the acquisition (March 5, 2006) of $27.32, the total transaction is valued, for purchase accounting purposes, at approximately $66,000. The transaction has been approved by the Board of Directors and the stockholders of each company, and various other regulatory authorities. Hurricane Katrina Panel In October ~~2006, the U.S. Department of Justice completed its review of the transaction without imposing any conditions. The acquisition remains subject to approval by the FCC.~~

~~On October 13, 2006, the Chairman of~~2007, the FCC issued an order revising its previously adopted rule that was designed to improve the reliability, interoperability and recovery of telecommunications in future disasters. The original order required carriers to maintain back-up power, for a ~~letter addressing~~specified number of hours, at certain points in the ~~concerns posed by two members of~~network, such as cell sites and remote terminals. The FCC revised the ~~FCC in reviewing this transaction. In response~~back-up power rule due to ~~those concerns, the Chairman has allowed 10 days for further review and evaluation of the proposals submitted by AT&T to address those concerns and any additional~~numerous concerns raised by providers about feasibility of compliance with the ~~two members regarding this transaction.~~original rule. Although compliance with the new rule will still require substantial effort by AT&T, it gives us additional flexibility to meet our back-up power obligations by gauging compliance with reference to the original design parameters of assets, exempting assets from the back-up power requirements where compliance is infeasible and permitting us to satisfy our obligations by creating a disaster recovery plan that relies on portable generators and other back-up power sources.

Wireless Universal Service Our wireless subsidiary, AT&T Mobility, is currently an Eligible Telecommunications Carrier (ETC) for purposes of receiving federal universal service support in certain states. To maintain these designations, the state must certify that the carrier should receive the funds for the subsequent calendar year. We are certified for each state for 2008, and if there are no changes to the federal ETC support mechanism, we will receive approximately $150. In May 2007, the Federal-State Joint Board on Universal Service recommended applying a funding cap to the amount of universal service support received by competitive ETCs. The FCC ~~has scheduled~~could act on the Joint Board’s recommendation this year. If the FCC approves the funding cap, it will decrease the amount of support received by AT&T Mobility and other competitive ETCs.

FCC Video Program Access Order In October 2007, the FCC released an ~~open meeting~~order and Further Notice of Proposed Rule Making addressing video programming issues. The order extends for ~~November 3, 2006 where they intend~~five years the exclusive contract prohibition of the Communications Act, which bans exclusive contracts for satellite cable programming and satellite broadcast programming between vertically integrated programming vendors and cable operators. The order also improves the FCC’s program access complaint procedures by strengthening the discovery rules and requiring production information necessary to ~~consider the application.~~

~~Acquisition of USi~~On October 20, 2006, we acquired an independent application service provider, USinternetworking, Inc. (USi) for approximately $300 in cash and assumed debt. The transaction is designed to enhance our enterprise service offerings.

~~U-verse Services (Project Lightspeed)~~~~In June 2004, we announced key advances in developing~~adjudicate a network capable of delivering a new generation of integrated digital television, high-speed broadband and VoIP services to our residential and small-business customers. We have been building out this network in numerous locations and began providing AT&T U-verse services, including U-verse TV (IPTV) video, in one market (San Antonio) in a limited manner, in late 2005. During this controlled market entry we implemented our new operatingcomplaint.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

Video Service Legislation A number of states in which we operate have adopted legislation that will make it easier for telecommunications companies to offer television (i.e., video) service. Recently, the attorney general for the State of Mississippi issued an opinion that provided clarity on our authority to use the right-of-way to provide video service.

FCC E911 Order On September 11, 2007, the FCC adopted an order, the text of which has not yet been released, that would require wireless carriers to achieve E911 location accuracy measured in each of the local areas served by the approximately 6,000 Public Safety Answering Points (PSAPs) across the country. Carriers would have five years to achieve PSAP-level accuracy. Under FCC rules, carriers are required to attempt to deliver location data to PSAPs when callers dial 911. We use a network-based location solution that employs triangulation to estimate the location of the caller. Location data for this network-based solution must be accurate within 300 meters on 95 percent of all calls, and ~~back-office systems~~within 100 meters on 67 percent of all calls. The former rules required accuracy measured network-wide. This order, when released, is likely to be appealed by us and ~~gained marketing experience.~~the industry, as the record indicates that PSAP-level accuracy is not completely attainable using currently available technology. Depending on technological developments, the text and the interpretation of the final order and the resolutions of any appeals, we could be required to make significant capital expenditures to implement this order.

California High Cost Fund In June 2006, the California Public Utilities Commission (CPUC) opened a rulemaking to review the California High Cost Fund B (CHCF-B). The CHCF-B program was established in 1996 and was designed to support universal service goals by ensuring that basic telephone service remains affordable in high-cost areas within the service territories of the state’s major incumbent local exchange carriers, such as our AT&T subsidiaries. In September 2007, the CPUC adopted a decision that implemented reforms to the CHCF-B, which we ~~began marketing~~estimate will reduce our payments from the CHCF-B by approximately $160 in 2008 and $260 in 2009.

OTHER BUSINESS MATTERS

Spectrum Licenses In October 2007, we agreed to ~~additional~~purchase spectrum licenses covering 196 million people in the 700 MHz frequency band from Aloha Partners, L.P. for $ 2,500. The spectrum covers many major metropolitan areas, including 72 of ~~San Antonio while continuing~~the top 100 and all of the top 10 markets in the U.S. We expect to ~~monitor~~receive all required government approvals and to close the transaction within approximately nine months. Additionally, we intend to participate in the wireless spectrum auctions scheduled to be held in January 2008 by the FCC.

Interwise In November 2007, we purchased Interwise®, a leading global provider of voice, web and video conferencing services to businesses for $121.

IBM In October 2007, we announced that we have entered into a business arrangement with International Business Machines Corp. (IBM). IBM will utilize our ~~systems~~global telecommunications and ~~market reaction. Subject~~network management services internally and externally to ~~successful implementation~~customers. As provisions of ~~our additional IP video services and deployment schedule,~~this arrangement are enacted, we expect to ~~offer U-verse services in a total~~incur charges of approximately 15$80 over the next 12 months.

In October, we also announced that we entered into a second arrangement with IBM in which we will increase and expand the information technology services we currently purchase from IBM. We incurred charges of approximately $48 in 2007.

While providing additional revenue, these agreements are not expected to have a material impact on our financial results.

Dobson In July 2007, we agreed to acquire Dobson Communications Corporation (Dobson) for approximately $2,800 in cash and to consolidate debt of approximately $2,300, net of cash. Dobson markets ~~(defined as metropolitan statistical areas) within~~wireless services under the Cellular One brand and has provided roaming services to AT&T subsidiaries since 1990. Dobson has 1.7 million subscribers across 17 states, mostly in rural and suburban areas with a population covered of more than 12.6 million people. Following the acquisition, Dobson will be incorporated into our ~~traditional 13-state wireline area~~wireless operations. The transaction received clearance by the Department of Justice on October 30, 2007, pending divestiture of certain assets and remains subject to FCC approval. Our goal is to obtain approval by the end of ~~2006, with~~2007.

AT&T INC.

SEPTEMBER 30, 2007

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued

Dollars in millions except per share amounts

U-verse Services We are continuing to expand our deployment of U-verse high-speed broadband and TV services. As of September 30, 2007, we have passed approximately 5.5 million living units (constructed housing units as well as platted housing lots) and are marketing the ~~additional markets beyond San Antonio~~services to ~~be launched late in the fourth quarter. We expect~~approximately 40 percent of those units. Our deployment strategy is to ~~follow the plan used in San Antonio, namely, to initially~~ enter ~~only~~each market on a limited ~~area~~basis in order to ensure that all operating and back-office systems are functioning successfully and then expand within each market ~~and then expand~~as we continue to ~~additional areas within each market. During our launch into~~monitor these ~~additional markets,~~systems. In these market expansions, we expect to ~~add additional features~~continue to use contracted outside labor in addition to our ~~IP video service offering. We expect~~employees as installers; our rate of expansion will be slowed if we cannot hire and train an adequate number of qualified contractors and technicians to have the capability to offer service to approximately 19 million living units by the end of 2008, as part of our initial deployment, and expect to spend approximately $4,600 in network-related deployment costs and capital expenditures beginning in 2006 through 2008, as well as additionalkeep pace with customer ~~activation capital expenditures. These expenditures may increase slightly if the programming and features of the video offering expand~~demand or if ~~additional network conditioning is required.~~

~~With respect to our IP video service,~~ we cannot obtain all required local building permits in a timely fashion. We also continue to work with our vendors ~~to develop,~~on improving, in a timely manner, the requisite hardware and software technology. Our deployment plans could be delayed if we do not receive required equipment and software on schedule. ~~We have completed most negotiations, and within~~See our programming profitability assumptions, with programming owners (e.g., movie studios and cable networks) to offer existing television programs and movies and, if applicable, other new interactive services that we could offer in the future using advances in the IP technology. Also, as discussed in the “Competitive and Regulatory Environment” section, we are supporting legislation at both the federal and state levels that would streamline the regulatory process“Liquidity” discussion for ~~new video competitors to enter the market.~~

an update on our U-verse capital spending.

We believe that ~~IPTV~~our U-Verse TV service is subject to federal oversight as a “video service” under the Federal Communications ~~Act.~~Act (see our “Competitive and Regulatory” section). However, some cable providers and municipalities have claimed that certain IP services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation, which could include the requirement to pay fees to obtain local franchises for our ~~IP video~~U-verse TV service. Certain municipalities ~~also~~ have refused us permission to use our existing right-of-ways to deploy or activate our U-verse-related services and products, resulting in litigation. Pending negotiations and current or threatened litigation involving municipalities could delay our deployment plans in those areas for ~~2006~~2007 and future years. If the courts were to decide that federal, state and local cable regulation were applicable to our U-verse services, it could have a material adverse effect on the cost, timing and extent of our deployment plans.

~~Antitrust Litigation~~

In ~~2002, two consumer class-action antitrust cases were filed in~~June 2006, the Connecticut Department of Public Utility Control (DPUC) ruled that AT&T’s planned IPTV service was not a “cable service” and would not be subject to existing state franchise regulation. The Connecticut Office of Consumer Counsel and the cable industry appealed the DPUC’s order to federal court. On October 9, 2007, the United States District Court for the ~~Southern~~ District of ~~New York (District~~Connecticut (Connecticut District Court) ~~against SBC, Verizon Communications Inc., BellSouth~~ruled that AT&T “constitutes a ‘cable operator’ providing a ‘cable service’ over a ‘cable system,’ as those terms are defined in the Cable Act” and ~~Qwest Communications International Inc. alleging~~ that ~~they~~AT&T’s service is subject to cable franchise. The Connecticut District Court’s ruling is only binding in Connecticut. While we disagree with the Connecticut District Court’s conclusions, we believe that state legislation enacted on October 1, 2007 rendered this court proceeding moot and have ~~violated federal and state antitrust laws by agreeing not to compete~~filed a motion with ~~one another and acting together to impede competition for local telephone services (Twombly v. Bell Atlantic Corp., et al.). In October 2003,~~ the Connecticut District Court ~~granted~~to request a ruling to that effect. Pursuant to the ~~joint defendants’ motion~~new state law, on October 1, 2007 we applied for a video franchise authority. On October 15, 2007, our application was rejected by the DPUC on the basis that we are not eligible to ~~dismiss~~apply even under the new law. The decision also prohibits us from marketing or selling U-verse in Connecticut and from deploying video-only equipment. The decision does not affect our existing U-verse customers, but requires us to obtain a legacy cable franchise by December 31, 2007. We filed for Declaratory Relief in State Superior Court (State Court) and the ~~plaintiffs appealed. In~~State Court held a hearing on October ~~2005,~~26, 2007. On October 31, 2007, the ~~United States~~State Court ~~of Appeals~~ruled in our favor, holding that we do not need to obtain a statewide cable franchise for our U-verse service and that we can apply for a franchise under the ~~Second Circuit Court (Second Circuit) reversed~~new state law. On November 1, 2007, the ~~District Court, thereby allowing~~DPUC granted us a video franchise under the ~~cases~~new law, which will enable us to proceed. The Second Circuit noted in its decision that its ruling was procedural in nature and did not address the merits of the cases. In March 2006, we filed a petition for certiorari requesting the Supreme Court of the United States (Supreme Court) to review the Second Circuit’s decision. In June 2006, the Supreme Court announced its decision to review the case. The District Court has stayed further proceedings pending a decision by the Supreme Court. The case is set for argument on November 27, 2006. We continue to ~~believe that an adverse outcome having a material effect on~~offer our ~~financial statements in these cases is unlikely but will continue~~U-verse service to ~~evaluate the potential impact of these suits on our financial results as they progress.~~

customers.

~~Retiree Phone Concession Litigation~~~~In May 2005, we were served with a purported class action in U.S. District Court, Western District of Texas (Stoffels v. SBC Communications Inc.~~), in which the plaintiffs, who are retirees of Pacific Bell Telephone Company, Southwestern Bell, and Ameritech, contend that the telephone concession provided by the company is, in essence, a “defined benefit plan” within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA). On October 3, 2006, the Court certified two classes. On October 18, 2006, we filed a Petition for Permission to Appeal the class certification with the U.S. Court of Appeals for the Fifth District. On October 24, 2006,

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued~~

~~Dollars in millions except per share amounts~~

the U.S. District Court, Western District of Texas stayed the case pending the resolution of the appeal. We believe that an adverse outcome having a material effect on our financial statements in this case is unlikely, but will continue to evaluate the potential impact of this suit on our financial results as it progresses.

NSA LitigationThere are 2124 pending lawsuits that allege that ~~AT&T~~we and other telecommunications carriers unlawfully provided assistance to the National Security Agency (NSA) in connection with intelligence activities that were initiated following the events of September 11, 2001. In the first filed case,Hepting et al v. AT&T Corp., AT&T Inc. and Does 1-20, ~~plaintiffs filed this~~a purported class action filed in U.S. District Court in the Northern District of California, on behalf of “all individuals in the United States that are current residential subscribers or customers of defendants’ telephone services or internet services, or that were residential telephone or internet subscribers or customers at any time after September 2001.” Theyplaintiffs allege that the defendants have disclosed and are currently disclosing to the U.S. Government content and call records concerning communications to which Plaintiffs ~~and class members~~ were a ~~party, including providing access to stored telephone and Internet records databases and permitting interception of telephone and Internet communications.~~party. Plaintiffs seek damages, a declaratory judgment, and injunctive relief for violations of the First and Fourth Amendments to the United States Constitution, the Foreign Intelligence Surveillance Act, the Electronic Communications Privacy Act, and other federal and California statutes. ~~In April 2006, we~~We filed a motion to dismiss the complaint. ~~In May, the~~The United States ~~requested leave to intervene in this litigation,~~ asserted the “state secrets privilege” and related statutory privileges and also filed a motion asking the court to either dismiss the complaint or issue a summary judgment in favor of the ~~defendants on the grounds that adjudication of the claims may put at risk the disclosure of privileged national security information. On July 20, 2006, the~~defendants. The Court denied the Motions to Dismiss of both parties. Specifically, the Court ruled that the state secrets privilege does not prevent AT&T from asserting any statutory defense it may have, as appropriate, regarding allegations that it assisted the government in monitoring communication content. However, with regard to the calling records allegations, the Court noted that it would not require AT&T to disclose what relationship, if any, it has with the government. ~~Both AT&T~~We and the U.S. government filed interlocutory appeals onin July ~~31,~~ 2006. The case was argued before a panel of the U.S. Court of Appeals for the Ninth Circuit ~~has not yet accepted these appeals.~~

~~Since~~on August 15, 2007. We expect a decision by the ~~filing~~end of this complaint, 20 additional class action lawsuits have been filed in various jurisdictions that allege substantially the same claims. All 21 pending lawsuits have been consolidated under the jurisdiction of a single court, namely the U.S. District Court in the Northern District of California, before the judge presiding over the~~Hepting~~ ~~case. To date, a small number of plaintiffs have objected to this consolidation and their objections are pending before the joint panel on multidistrict litigation.~~

~~In one of these 21 cases,Terkel v. AT&T Corp. and Illinois Bell~~ (filed with the U.S. District Court in the Northern District of Illinois), a purported class action filed on behalf of defendants’ Illinois customers, the Court, on July 25, 2006, dismissed the case, acknowledging that the U.S. government’s state secrets privilege prohibited the plaintiffs’ case from proceeding. The~~Terkel~~ case involved allegations that the defendants supplied the U.S. government with calling records data in violation of the Electronic Communications Privacy Act but did not allege interception of communications.

year. Management believes these actions are without merit and intends to vigorously defend these matters.

~~AT&T Wireless Litigation~~ Several class-action lawsuits have been filed in the District Court against ATTC asserting claims under the federal securities laws in connection with the offering of AT&T Wireless tracking stock in April 2000 (~~In re AT&T Corp. Securities Litigation~~). The plaintiffs had demanded damages in excess of $2,100 related to the offering of AT&T Wireless tracking stock. In April 2006, the parties agreed to settle the litigation for $150. The Court gave final approval of the settlement in October 2006.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~ACCOUNTING POLICIES AND STANDARDS~~

~~FAS 158~~InPrepaid Calling Card Patent Litigation On September ~~2006,~~14, 2007, a jury in Texas found that ATTC willfully infringed two patents owned by TGIP Inc. (TGIP) relating to point-of-sale prepaid cards sold by ATTC and awarded TGIP $156 in damages. (TGIP Inc. v. AT&T Corp. et al., U.S. District Court for the ~~FASB issued Statement~~Eastern District of ~~Financial Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit Pension~~Texas). The jury’s finding of willfulness also entitles TGIP to ask the judge to award additional damages up to treble the jury verdict. On September 28, 2007, AT&T filed a motion requesting that the Court overturn the jury’s verdict as a matter of law. On October 29, 2007, the Court overturned the jury’s finding of infringement, the jury’s $156 award of damages and ~~Other Postretirement Plans” (FAS 158), an amendment~~the jury’s finding of ~~Statement~~willfulness. Once the judgment is entered, TGIP will have 30 days in which to file a notice of ~~Financial Accounting Standard No. 87 “Employers’ Accounting for Pensions,” Statement~~appeal.

Broadcom Patent Dispute While there has been no resolution yet, we are continuing to take steps to mitigate the effects on us of ~~Financial Accounting Standard No. 88 “Employers’ Accounting for Settlements~~the dispute at the U.S. International Trade Commission (ITC) between Broadcom Corporation and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” Statement of Financial Accounting Standard No. 106 “Employers’ Account for Postretirement Benefits Other Than Pensions” and Statement of Financial Accounting Standard No. 132(R) “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” FAS 158Qualcomm Incorporated (Qualcomm). Currently, the U.S. ITC’s exclusion order applicable to certain Qualcomm technology is stayed pending a decision by the appeals court. We anticipate a decision will require us to recognize the funded status of defined benefit pension and postretirement plans as an asset or liability in our statement of financial position and to recognize changes in that funded statusnot occur before late in the year in which the changes occur through comprehensive income, it will have no effect on our expense or benefit recognition. FAS 158 requires prospective application for fiscal years ending after December 15, 2006. Had FAS 158 been in effect at December 31, 2005, we would have reduced our pension assets approximately $8,700 and increased our postretirement benefit obligation approximately $7,300. The after tax reduction to our stockholders’ equity would have been approximately $10,000. We will adopt FAS 158 in the fourthsecond quarter of ~~2006.~~2008.

LIQUIDITY AND CAPITAL RESOURCES

We had ~~$1,251~~$2,714 in cash and cash equivalents available at September 30, ~~2006.~~2007. Cash and cash equivalents included cash of ~~$744~~$983 and money market funds and other cash equivalents of ~~$507.~~$1,731. Cash and cash equivalents increased $296 since December 31, 2006. In the first nine months of 2007, cash inflow was primarily provided by cash receipts from operations, the issuance of long-term debt, net cash received from dispositions of non-strategic real estate, the sale of marketable securities and other assets. These inflows were offset by cash used to meet the needs of the business including, but not limited to, payment of operating expenses, funding capital expenditures, ~~payment~~repurchase of common shares, the repayment of debt, dividends to stockholders ~~debt repayments, tax-related payments, share repurchases~~ and ~~funding~~payment of ~~Cingular’s capital and operating requirements in accordance with the terms of our agreement with Cingular and BellSouth.~~interest on debt. We discuss many of these factors in detail below. ~~Once the acquisition of BellSouth is complete, our liquidity will reflect the results of BellSouth, Cingular and YPC as consolidated subsidiaries.~~

Cash Provided by or Used in Operating Activities

During the first nine months of ~~2006, our primary source of funds was~~2007, cash ~~from~~provided by operating activities ~~of $10,593~~was $24,220 compared to ~~$8,383~~$10,593 for the first nine months of ~~2005.~~2006. Operating cash flows increased primarily due to an increase in ~~net~~operating income ~~of more than $2,200 and~~reflecting additional cash provided by the ~~ATTC~~BellSouth acquisition and our success in achieving merger synergies and operational efficiencies, partially offset by increased ~~tax~~interest payments of ~~$714~~$1,015.

Cash Used in 2006. Tax payments were higher primarily due to increased income before income taxes. Tax payments in 2006 include a refund from the completion of the ATTC federal income tax audit covering 1997 – 2001. The 2005 and 2006 tax payments include amounts related to prior year accrued liabilities. The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. We also made advance tax payments in 2005, which we consider a refundable deposit, to a certain state jurisdiction. These payments were made in order to avoid potentially onerous interest and penalties. The issues involved are in dispute and we intend to pursue all procedural options available to us in order to obtain refunds of the amounts deposited. We do not anticipate 2006 cash payments for income taxes to exceed reported income tax expense.

~~Cash~~or Provided by ~~or Used in~~ Investing Activities

For the first nine months of ~~2006,~~2007, cash used ~~for~~in investing activities consisted ~~of:~~

~~$6,158~~primarily of $12,124 for capital expenditures, $301 for investments in ~~construction~~securities and ~~capital expenditures.~~

$233 for acquisitions. Included in acquisitions was a payment of $145 to satisfy an obligation to Alaska Native Wireless, LLC to acquire wireless spectrum.

~~$624~~

In October 2007, we agreed to purchase spectrum licenses in the 700 MHz frequency band from Aloha Partners, L.P. for approximately $2,500 in cash and expect the transaction to close within six to nine months. Additionally, we agreed to purchase Interwise, a leading global provider of ~~funding~~voice, Web and video conferencing services, for ~~Cingular’s capital~~approximately $121 in cash. This transaction is expected to be completed in the fourth quarter of 2007.

Net cash provided by investing activities for the nine months was $1,906 and ~~operating requirements in accordance with~~consisted primarily of net proceeds of $885 from the ~~terms~~sale of ~~our agreement with Cingular~~marketable and ~~BellSouth. See our “Cingular” section below for details.~~

equity securities and $993 from dispositions of non-strategic assets and other activities. Proceeds from dispositions included the following:

~~$62 related to an investment in 2Wire Inc., a privately held company that provides services related to Project Lightspeed.~~

·	$536 from the sale of properties and other assets.

·	$301 from the completion of the sale of Education Broadband Service and Broadband Radio Service spectrum to Clearwire Corporation, which includes interest.

·	$68 from the sale of cost investments.

·	$44 from the sale of wireless towers.

·	$44 related to T-Mobile’s exercise of its option to purchase an additional 10 MHz of spectrum in the San Diego market.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~$50 related to the acquisition of Nistevo Corporation, which provides internet-based services related to services offered by our subsidiary Sterling.~~

~~During the first nine months of 2006, cash from dispositions of $72 related to the sale of securities and other assets.~~

To provide high-quality communications services to our customers, we must make significant investments in property, plant and equipment. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations. ~~Our capital expenditures totaled $6,158 for the first nine months of 2006 and $3,743 for the first nine months of 2005.~~ Capital expenditures in the wireline segment, which represented ~~substantially all~~approximately 81% of our capital expenditures, increased ~~65.5%~~62% for the first nine months of ~~2006 compared to~~2007, reflecting the ~~first nine months~~acquisition of ~~2005.~~BellSouth. Our capital expenditures are primarily for our wireline subsidiaries’ networks, ~~(including ATTC), Project Lightspeed,~~our U-verse services, merger-integration projects and support systems for our long-distance service.

Because of opportunities made available by the continued changing regulatory environment and our ~~acquisition~~acquisitions of ATTC and BellSouth, we expect that our capital expenditures ~~in 2006,~~for 2007 and 2008, which include ~~Project Lightspeed~~wireless network expansion and ~~exclude Cingular,~~U-verse services, will be ~~at or slightly above~~in the ~~high end~~midteens as a percentage of ~~our target range of $8,000 to $8,500.~~consolidated revenue. We expect to ~~spend approximately $4,600~~fund 2007 capital expenditures for our wireline and wireless segments, including international operations, using cash from operations and incremental borrowings depending on interest rate levels and overall market conditions.

During the first nine months of 2007, we spent $2,179 in the wireless segment primarily for GSM/EDGE (Enhanced Data Rates for Global Evolution) network capacity expansion and upgrades, Universal Mobile Telecommunications System/High Speed Packet Access (UMTS/HSPA) network expansion, IT and other support systems for our wireless service. The network capacity requirements and expansion of our UMTS/HSPA wireless networks will continue to require substantial amounts of capital over the remainder of 2007 and through 2008.

We expect spending to be between $4,500 to $5,000 on our ~~Project Lightspeed initiative~~U-verse services for ~~network related~~network-related deployment costs and capital expenditures ~~beginning~~from January 2007 through the end of 2008, and we will be shifting some of that capital to start-up costs to expand into the initial markets in ~~2006 through~~the Southeast region. Since these start-up activities are in preparation for, but do not immediately result in, passing living units, there is a corresponding change in living units we expect to pass by the end of 2008 ~~as well as additional~~to approximately 17 million. Additional customer activation capital ~~expenditures.~~expenditures are not included in this capital spending forecast. We expect that the business opportunities made available, specifically in the data/broadband area, will allow us to expand our products and services (see
~~“U-verse Services (Project Lightspeed)”~~ “U-verse Services” discussed in “Other Business Matters”).

We expect to fund 2006 capital expenditures for our wireline segment, which includes international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions.

The other segment capital expenditures were ~~less than 2.0%~~1.3% of total capital expenditures for the first nine months of ~~2006.~~2007. Included in the other segment are equity investments, which should be self-funding as they are not direct AT&T ~~operations,~~operations; as well as corporate, diversified business and Sterling operations, which we expect to fund using cash from operations. We expect to fund any ~~directory~~advertising & publishing segment capital expenditures using cash from operations. ~~We discuss our Cingular segment below.~~

Cash Used in or Provided by ~~or Used in~~ Financing Activities

We plan to fund our ~~2006~~2007 financing activities ~~primarily~~ through a combination of debt issuances and cash from operations. ~~We will continue to examine opportunities to fund our~~Our financing activities ~~by issuing debt at favorable rates in order to refinance some~~include funding share repurchases and the repayment of ~~our debt maturities and with cash from the disposition of certain other non-strategic investments.~~

We paid dividends of $3,873 for the first nine months of 2006 compared to $3,196 for the first nine months of 2005, reflecting the issuance of additional shares for the ATTC acquisition and a dividend increase. Dividends declared by our Board of Directors totaled $0.3325 per share in the third quarter of 2006 and $0.3225 per share in the third quarter of 2005. Our dividend policy considers both the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors the opportunity to continue our historical approach to dividend growth. All dividends remain subject to approval by our Board of Directors.

debt.

Our Board of Directors has authorized the repurchase of up to 400 million shares of AT&T common stock; this authorization expires at the end of 2008. ~~During~~In July 2007, we completed our $10,000 buyback of common shares that was announced in March 2006. We repurchased 50.5 million shares in the ~~first nine months of 2006, we repurchased 45 million shares~~third quarter at a cost of ~~$1,359.~~$2,008. Total share repurchases under this authorization through the third quarter totaled approximately 314 million shares. We expect to ~~repurchase between $2,000 and $3,000 in shares~~continue repurchases during ~~2006, with a total buyback of $10,000 through~~ the ~~end~~fourth quarter of 2007. We have repurchased, and intend to continue to repurchase, a portion of the shares pursuant to plans that comply with the requirements of Rule 10b5-1(c) under the Securities Exchange Act of 1934. We will fund our additional share repurchases through a combination of cash from operations, borrowings dependent upon market conditions, and cash from the disposition of certain non-strategic investments.

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~Item 2. Management’s Discussion and Analysis~~ See our “Issuer Equity Repurchases” table for information on share repurchases during the third quarter of ~~Financial Condition and Results of Operations - Continued~~

~~Dollars in millions except per share amounts~~

2007.

At September 30, ~~2006,~~2007, we had ~~$4,713~~$6,026 of debt maturing within one year, which included ~~$1,952~~$4,961 of long-term debt maturities, ~~$2,636~~$1,005 of commercial paper borrowings and ~~$125~~$60 of bank borrowings relating to foreign subsidiaries of ATTC. Included in our long-term debt maturities was the fair value debt adjustment (required under purchase accounting rules) applicable to the acquisition of ATTC.other borrowings. All of our commercial paper borrowings are due within 90 days. The availability of bank borrowings is contingent on the level of cash held by some of our foreign subsidiaries. We continue to examine our mix of short- and long-term debt in light of interest rate trends.

AT&T INC.

SEPTEMBER 30, 2007

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued

Dollars in millions except per share amounts

During the first nine months of ~~2006, debt repayments totaled $2,885 and consisted of:~~

~~$2,858 related to debt repayments with interest rates ranging from 5.75% to 9.50%.~~

~~$27 related to scheduled principal payments on other debt and short-term borrowings.~~

~~In May 2006,~~2007, we received net proceeds of ~~$1,491~~$7,898 from the issuance of ~~$1,500~~$7,999 in long-term debt. Parts of ~~long-term~~the proceeds were used for repurchases of our common stock. Long-term debt ~~consisting~~issuances consisted of:

·	$2,000 of 6.5% notes due in 2037.

·	€1.25 billion of 4.375% notes due in 2013 (equivalent to U.S. $1,641 when issued).

·	$1,500 of floating-rate notes due in 2010.

·	$1,200 of 6.375% notes due in 2056.

·	£600 million of 5.5% notes due in 2027 (equivalent to U.S. $1,158 when issued).

·	$500 of 5.625% notes due in 2016.

We entered into fixed to fixed cross-currency swaps on our two foreign-currency-denominated debt instruments to hedge our exposure to changes in foreign currency exchange rates. These hedges also include interest rate swaps of ~~$900~~a fixed foreign-denominated rate to a fixed U.S.-denominated interest rate, which results in a U.S.-denominated rate of ~~two-year floating rate~~5.31% on our Euro-denominated notes and ~~$600 of 6.80%, 30-year bonds maturing in 2036.~~

~~At September 30, 2006,~~5.97% on our ~~debt ratio was 36.3% compared to our debt ratio of 36.6% at September 30, 2005. The decrease was primarily due to an increase in stockholders’ equity by more than $15,200 compared to~~Pound Sterling-denominated notes.

During the first nine months of ~~2005~~2007, debt repayments totaled $7,287 and ~~includes~~consisted of:

·	$4,279 related to repayments of commercial paper and other short-term bank borrowings.

·	$2,984 related to debt repayments with a weighted average interest rate of 6.2%, which included the early redemption of debt related to a put exercise on $1,000 of our 4.2% Puttable Reset Securities and called debt of $500 with an interest rate of 7.0%.

·	$24 related to scheduled principal payments on other debt and repayments of other borrowings.

At September 30, 2007, our ~~acquisition of ATTC~~debt ratio was 35.3% compared to 36.3% at September 30, 2006. Our debt ratio at September 30, 2007 reflects the following:

·	Increased debt due to the BellSouth and AT&T Mobility debt we now reflect on our balance sheet following the acquisition, as well as debt issuances during the first nine months of 2007.

·	An increase in stockholders’ equity due to our acquisition of BellSouth in the fourth quarter of 2006.

·	A decline in stockholders’ equity related to share repurchases and dividend payments totaling nearly $15,500.

A decrease in stockholders’ equity of approximately $5,000 due to the December 2006 adoption of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (FAS 158).

Our debt ratio at December 31, 2006 was 34.1%. The increase in the ~~fourth quarter of 2005,~~debt ratio from year-end is due to a net increase in long-term debt and ~~debt repayments, partially offset by ATTC debt we now reflect on our balance sheet following the acquisition.~~

~~In July 2006, we replaced our three-year $6,000 credit agreement with~~a decline in stockholders’ equity due to share repurchases and dividend payments.

We have a five-year ~~$6,000~~$10,000 credit agreement with a syndicate of investment and commercial banks. The current agreement will expire in July 2011. The available credit under this agreement will increase by an additional $4,000 in the event AT&T completes its pending acquisition of BellSouth before March 6, 2007. This incremental available credit is intended to replace BellSouth’s existing credit facility,banks, which ~~would terminate upon completion of the acquisition. We~~we have the right to ~~request the lenders to further~~ increase ~~their commitments (i.e., raise the available credit)~~ up to an additional $2,000, provided no event of default under the credit agreement has occurred. The current agreement will expire in July 2011. We also have the right to terminate, in whole or in part, amounts committed by the lenders under this agreement in excess of any outstanding advances; however, any such terminated commitments may not be reinstated. Advances under this agreement may be used for general corporate purposes, including support of commercial paper borrowings and other short-term borrowings. There is no material adverse change provision governing the drawdown of advances under this credit agreement. This agreement contains a negative pledge covenant, which requires that, if at any time we or a subsidiary pledge assets or otherwise permits a lien on its properties, advances under this agreement will be ratably secured, subject to specified exceptions. We must maintain a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. We ~~are in compliance~~comply with all covenants under the agreement. ~~As of November 1, 2006,~~At September 30, 2007, we had no borrowings outstanding under this agreement.

~~Cingular~~

~~The upgrade, integration and expansion~~

We paid dividends of $6,584 in the ~~Cingular and AT&T Wireless networks and~~first nine months of 2007, increasing from $3,873 in the ~~networks acquired in a transaction with Triton PCS Holdings, Inc. will continue to require substantial amounts~~first nine months of ~~capital over~~2006, reflecting the ~~next several years. As~~issuance of September 30, 2006, Cingular has spent $4,851 primarily for GSM/GPRS/EDGE network upgrades with cash from operations, dispositions and, as needed, advances under the revolving credit agreement mentioned below. Cingular expects to fund its capital requirements in 2006 from existing cash balances, cash generated from operations and, if necessary, drawing under the revolving credit agreement. In 2006, Cingular expects to spend within a target range of between $7,000 and $7,500 primarilyadditional shares for the ~~upgrade, integration~~BellSouth acquisition and ~~expansion~~a dividend increase. In December 2006, our Board of ~~its networks, the installation of UMTS/HSDPA technology in~~Directors approved a number of markets and the construction and upgrade of network facilities in California and Nevada following the sale of duplicate facilities to T-Mobile upon the termination of Cingular’s GSM Facilities, LLC (GSMF) network infrastructure joint venture. Cingular participated6.8% increase in the ~~recent FCC spectrum auction~~quarterly dividend to $0.355 per share. Dividends declared by our Board of Directors totaled $0.355 per share in the third quarter of 2007 and ~~made successful bids totaling approximately $1,300.~~

$0.3325 per share in the third quarter of 2006. Our dividend policy considers both the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in 2008. All dividends remain subject to approval by our Board of Directors.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation - Continued

Dollars in millions except per share amounts

~~We and BellSouth agreed to finance Cingular’s capital and operating cash requirements through a revolving credit agreement,~~

During the first nine months, proceeds of $1,736 from the issuance of treasury shares were related to the ~~extent Cingular requires funding above the level provided by operations. We describe the terms~~exercise of ~~this agreement in Note 6.~~ stock-based compensation.

During the first nine months of ~~2006,~~2007, we ~~made net advances~~paid $134 to ~~Cingular~~minority interest holders and $47 to terminate interest rate swaps with notional amounts totaling $1,800 acquired as a result of ~~$624 under~~our acquisition of BellSouth.

Commitments and Contingencies

We adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. FIN 48 clarifies the ~~revolving credit agreement. These amounts increased~~accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a threshold for the ~~outstanding amount~~financial statement recognition and measurement of ~~advances made~~a tax position taken or expected to ~~Cingular~~be taken within an income tax return. Due to ~~a total~~the adoption of ~~$931~~FIN 48, at September 30, 2007, we now have unrecognized tax benefits, including interest and penalties, of $5,791, of which $1,655 is expected to be paid within one year. We cannot reasonably estimate the timing or amounts of additional cash payments, if any, at this time.

During 2004, we agreed to new five-year labor agreements for nonmanagement employees. The agreements provided that, prior to expiration of the agreement, we would contribute $2,000 to a VEBA trust to partially fund current and future retiree health care, $1,000 of which was contributed during 2004. Prior to the date of this report, a determination was made that contributions by the company, which were used to pay retiree claims, were payments towards satisfying this obligation. Qualifying claims paid included $285 in 2004, $412 in 2005 and $338 through September 30, 2006, ~~from $307~~exceeding the $1,000 retirement benefit obligation reported at December 31, ~~2005 and are reflected in “Investments in and Advances to Cingular Wireless” on our Consolidated Balance Sheets.~~

2006, therefore, satisfying all remaining obligations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 30, ~~2006,~~2007, we had interest rate swaps with a notional value of $3,250 ~~and~~with a fair value ~~liability~~ of ~~$35. We had $1,000 of swaps mature in 2006 related to our repayment of the underlying security.~~ $3.

In ~~May 2006,~~March 2007, we entered into fixed to fixed cross-currency swaps on foreign-currency-denominated debt instruments with a United States Dollar notional value of $2,799 to hedge our exposure to changes in foreign currency exchange rates. These hedges include initial and final exchanges of principal from fixed foreign denominations to fixed U.S.-denominated amounts, to be exchanged at a specified rate, which was determined by the market spot rate upon issuance. They also include an interest rate ~~forward contract~~swap of a fixed foreign-denominated rate to a fixed U.S.-denominated interest rate. These derivatives have been designated at inception and qualify as cash flow hedges with a ~~notional amount~~net fair value of ~~$750 to partially hedge interest expense related to our debt issuance in 2006. We utilized a notional amount of $600 of this forward contract and incurred settlement gains of $4.~~

$134 at September 30, 2007.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of September 30, ~~2006.~~2007. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of September 30, ~~2006.~~

2007.

AT&T INC.

SEPTEMBER 30, 2007

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of ~~the~~these factors ~~listed here~~ are discussed in more detail in the “Risk Factors” section inof our ~~Annual Report on~~ Form ~~10-K and updated in the “Risk Factors” section below.~~10-K. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

~~Adverse economic changes in the markets served by us or in countries in which we have significant investments.~~

~~Changes in available technology and the effects of such changes including product substitutions and deployment costs.~~

·	Adverse economic changes in the markets served by us or in countries in which we have significant investments.

Increases in our benefit plans’ costs including increases due to adverse changes in the U.S. securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends.

·	Changes in available technology and the effects of such changes including product substitutions and deployment costs.

The final outcome of Federal Communications Commission proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment and unbundled loop and transport elements.

·	Increases in our benefit plans’ costs including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends.

The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings, and judicial review, if any, of such proceedings, including proceedings relating to interconnection terms, access charges, universal service, UNE-Ps and resale and wholesale rates, broadband deployment including Project Lightspeed, performance measurement plans, service standards and traffic compensation.

·	The final outcome of Federal Communications Commission proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment, unbundled loop and transport elements and wireless services.

~~Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments.~~

The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings, and judicial review, if any, of such proceedings, including proceedings relating to interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates, broadband deployment including our U-verse services, performance measurement plans, service standards and traffic compensation.

Our ability to absorb revenue losses caused by increasing competition, including offerings using alternative technologies (e.g., cable, wireless and VoIP), and our ability to maintain capital expenditures.

~~AT&T INC.~~

~~SEPTEMBER 30, 2006~~

~~The extent of competition and the resulting pressure on access line totals and wireline and wireless operating margins.~~

·	Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments.

~~Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireline and wireless markets.~~

·	Our ability to absorb revenue losses caused by increasing competition, including offerings using alternative technologies (e.g., cable, wireless and VoIP), and our ability to maintain capital expenditures.

The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to UNE-Ps and nonregulation of comparable alternative technologies (e.g., VoIP).

·	The extent of competition and the resulting pressure on access line totals and wireline and wireless operating margins.

The timing, extent and cost of deployment of our Project Lightspeed initiative; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative, and; the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

·	Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireline and wireless markets.

~~The outcome of pending or threatened litigation including patent claims against third parties doing business with us or Cingular.~~

The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).

~~The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.~~

The timing, extent and cost of deployment of our U-verse services (our Lightspeed initiative); the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations; and the resolution of disputes with any taxing jurisdictions.

·	The outcome of pending or threatened litigation including patent claims against third parties doing business with us.

The impact of the wireless joint venture with BellSouth, known as Cingular, including: marketing and product-development efforts; customer acquisition and retention costs; access to additional spectrum; network upgrades; technological advancements; industry consolidation, including the acquisition of AT&T Wireless; and availability and cost of capital.

·	The impact on our networks and business of major equipment failures, severe weather conditions, natural disasters or terrorist attacks.

~~Cingular’s failure to achieve, in the amounts and within the time frame expected, the capital and expense synergies and other benefits expected from its acquisition of AT&T Wireless.~~

·	The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

The impact of our pending acquisition of BellSouth, including our ability to obtain FCC approval of the acquisition on the proposed terms and schedule; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may take longer to realize than expected or may not be fully realized; and the disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers.

The impact of our acquisition of ATTC, including the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; disruption from the integration process making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.

·	Our ability to adequately fund our wireless operations, including access to additional spectrum; network upgrades and technological advancements.

~~Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, to respond to competition and regulatory, legislative and technological developments.~~

The impact of our acquisition of BellSouth, including the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may take longer to realize than expected or may not be fully realized; and the disruption from the acquisition may make it more difficult to maintain relationships with customers, employees or suppliers.

·	Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, to respond to competition and regulatory, legislative and technological developments.

Readers are cautioned that other factors discussed in this report, although not ~~listed~~enumerated here, also could materially affect our future earnings.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

PART II - OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. ~~We updated this discussion in our Form 10-Q for~~For the third quarter ended June 30, 2006 to discuss our pending acquisition of BellSouth. On October 13, 2006, the Chairman of the FCC issued a letter addressing the concerns posed by two members of the FCC in reviewing this transaction. In response to those concerns, the Chairman has allowed 10 days for further review and evaluation of the proposals submitted by AT&T to address those concerns and any additional concerns raised by the two members regarding this transaction. The FCC has scheduled an open meeting for November 3, 2006 where they intend to consider the application.

2007, there were no such material developments.

Item 2. Unregistered Sales of Securities and Use of Proceeds

(a)

~~(a)~~

During the third quarter of ~~2006,~~2007, non-employee directors acquired from AT&T shares of common stock pursuant to AT&T’s Non-Employee Director Stock and Deferral Plan. Under the plan, a director may make an annual election to receive all or part of his or her: (1) annual retainer in the form of AT&T shares or deferred stock units (DSUs) and (2) fees in the form of DSUs. DSUs are convertible into AT&T shares. ~~Also under~~Under the plan, each Director will receive an annual grant of DSUs during the ~~third~~second quarter. In the third quarter an aggregate of ~~12,942~~11,940 AT&T shares and DSUs were acquired by non-employee directors at prices ranging from ~~$29.99~~$39.16 to ~~$32.56,~~$42.31, in each case the fair market value of the shares on the date of acquisition. The issuances of shares and DSUs were exempt from registration pursuant to Section 4(2) of the Securities Act.

(c)

~~(c)~~

~~Issuer Equity Repurchases –~~ On March 4, 2006, our Board of Directors authorized the repurchase of up to 400 million shares of AT&T common stock; this authorization expires at the end of 2008. ~~During~~In July 2007, we completed our $10,000 buy back of common shares that was announced in March 2006. We repurchased 50.5 million shares in the third quarter ~~of 2006, we repurchased 39.3 million shares~~ at a cost of ~~$1,211. Under~~$2,008. Total share repurchases under this ~~purchase~~ plan through the third quarter totaled approximately 314 million shares. At September 30, 2007, we had 86.2 million shares remaining under our current repurchase authorization, and expect to ~~repurchase between $2,000 and $3,000 in shares~~continue repurchases during ~~2006, with a total buyback of $10,000 through~~ the ~~end~~fourth quarter of 2007. We have repurchased, and intend to continue to repurchase, a portion of the shares pursuant to plans that comply with the requirements of Rule 10b5-1(c) under the Securities Exchange Act of 1934. We will fund our share repurchases through a combination of cash from operations, borrowings dependent upon market conditions, and cash from the disposition of certain non-strategic investments.

Purchase Period
Total Number of Shares Purchased
Average Price Paid per Share¹
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 31, 2006
1,700,000
$   29.34
1,700,000
392,580,000
August 1, 2006 –
August 31, 2006
23,300,000
$   30.34
23,300,000
369,280,000
September 1, 2006 –
September 29, 2006
14,250,000
$   31.80
14,250,000
355,030,000
Total
39,250,000
$   30.83
39,250,000
355,030,000

¹~~Average Price Paid per Share excludes transaction costs.~~

Purchase Period	Total Number of Shares Purchased	Average Price Paid per Share¹	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 2, 2007 – July 16, 2007	11,030,000	$ 40.61	11,030,000	125,708,783
August 2, 2007 – August 31, 2007	24,000,000	$ 39.06	24,000,000	101,708,783
September 4, 2007 – September 28, 2007	15,500,000	$ 40.14	15,500,000	86,208,783
Total	50,530,000	$ 39.73	50,530,000	86,208,783

¹Average Price Paid per Share excludes transaction costs.

Between October 1, 2007 and October 31, 2007, we repurchased ~~10.6~~11.5 million shares with a total cost of $482 and at an average per share price of ~~$32.77~~$41.94 under our share repurchase ~~program between October 2, 2006 and October 25, 2006. We have 344,430,000 remaining shares authorized to be repurchased under our repurchase~~ program.

AT&T INC.

SEPTEMBER 30, ~~2006~~2007

~~Item 4. Submission of Matters to a Vote of Security Holders~~
~~Special Meeting of Shareowners (shares in millions)~~
~~(a)~~
A special meeting of stockholders of AT&T was held on July 21, 2006, in San Antonio, Texas. Shareowners representing 2,792, or 71.8%, of the common shares outstanding as of the June 1, 2006 record date were present in person or were represented at the meeting by proxy.
~~(b)~~
~~Holders of common shares voted at this meeting on the following matter, which was set forth in our proxy statement and prospectus dated June 2, 2006.~~

For
% For
Against
% Against
Abstain
Non-Vote
Issuance of AT&T common shares

required pursuant to the
Agreement and Plan of Merger
dated March 4, 2006¹
2,720
98.7%
37
1.3%
35
-
¹ ~~Percentages are based on the total common shares voted. Approval of this proposal required a majority vote.~~

Item 6. Exhibits

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.

3	~~Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on July 28, 2006~~Bylaws amended June 29, 2007 (Exhibit 3 to Form ~~10-Q for June 30, 2006)~~ 8-K dated July 2, 2007.)
~~10-ff~~ 10-a	~~2005 Supplemental Employee Retirement~~BellSouth Corporation Directors’ Compensation Deferral Plan, as amended and restated effective as of January 1, 2005.
~~10-ii~~ 10-b	~~AT&T Corp. Senior Management Incentive Award Deferral~~Amendment to Cingular Wireless Long-Term Compensation Plan (Exhibit 10.1 to Form 8-K dated October 19, 2007.)
12	Computation of Ratios of Earnings to Fixed Charges
31	Rule 13a-14(a)/15d-14(a) Certifications 31.1Certification of Principal Executive Officer 31.2Certification of Principal Financial Officer
32	Section 1350 Certifications

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~AT&T Inc.~~

~~November 2, 2006~~	~~/s/ Richard G. Lindner~~
	~~Richard G. Lindner~~
	~~Senior Executive Vice President~~
		~~and Chief Financial Officer~~

AT&T Inc.

November 5, 2007 /s/ Richard G. Lindner

Richard G. Lindner

Senior Executive Vice President

and Chief Financial Officer

		Purchase Price Allocation
		As of				As of
		12/31/05		Adjustments		9/30/06
Assets acquired
Current assets	$	6,295	$	16	$	6,311
Property, plant and equipment		10,921		(662)		10,259
Intangible assets not subject to amortization:
Trade name		4,900		-		4,900
Licenses		40		-		40
Intangible assets subject to amortization:
Customer lists and relationships		3,050		-		3,050
Patents		150		-		150
Brand licensing agreements		70		-		70
Investments in unconsolidated subsidiaries		160		(90)		70
Other assets		4,247		165		4,412
Goodwill		12,343		(691)		11,652
Total assets acquired		42,176		(1,262)		40,914

Liabilities assumed
Current liabilities, excluding current portion of long-term debt		6,740		63		6,803
Long-term debt		8,293		-		8,293
Deferred income taxes		531		(720)		(189)
Postemployment benefit obligation		8,807		(468)		8,339
Other noncurrent liabilities		2,288		(137)		2,151
Total liabilities assumed		26,659		(1,262)		25,397
Net assets acquired	$	15,517	$	-	$	15,517

	Balance at 12/31/05		CashPayments for the Quarter Ended									Balance at
	Balance at 12/31/05		3/31/06		6/30/06		9/30/06		Adjustments				9/30/06
Paid out of:
Company funds	$	870	$	(46)	$	(59)	$	(86)	$	(97)	$		582
Pension and Postemployment benefit plans		673		(5)		(27)		(18)		(380)			243
Total	$	1,543	$	(51)	$	(86)	$	(104)	$	(477)	$		825

		For the Quarter Ended								For the Year Ended
		3/31/05		6/30/05		9/30/05		12/31/05		2005
Revenues	$	16,619	$	16,554	$	16,414	$	16,202	$	65,789
Net Income		1,319		1,257		1,729		1,862		6,167

	12/31/06		Cash			Additional					9/30/07
	Balance		Payments			Accruals		Adj.			Balance
Severance accruals paid from:
Company funds	$	986	$	(348	)	$	16	$	(72	)	$	582
Pension and postemployment benefit plans		183		(39	)		-		-			144
Lease terminations		146		(72	)		220		24			318
Equipment removal and other related costs		117		(110	)		152		(28	)		131
Total	$	1,432	$	(569	)	$	388	$	(76	)	$	1,175

For the three months ended September 30, 2005

		Wireline		Cingular		Directory		Other		Consolidation and Elimination		Cingular Elimination		Consolidated Results
Revenues from external customers	$	9,222	$	8,746	$	917	$	165	$	-	$	(8,746)	$	10,304
Intersegment revenues		7		-		15		17		(39)		-		-
Total segment operating revenues		9,229		8,746		932		182		(39)		(8,746)		10,304
Operations and support expenses		5,987		6,548		425		168		(41)		(6,548)		6,539
Depreciation and amortization expenses		1,747		1,541		1		54		1		(1,541)		1,803
Total segment operating expenses		7,734		8,089		426		222		(40)		(8,089)		8,342
Segment operating income		1,495		657		506		(40)		1		(657)		1,962
Interest expense		-		304		-		-		349		(304)		349
Interest income		-		8		-		-		82		(8)		82
Equity in net income (loss) of affiliates		-		1		-		219		-		(1)		219
Other income (expense) – net		-		(36)		-		-		(70)		36		(70)
Segment income before income taxes	$	1,495	$	326	$	506	$	179	$	(336)	$	(326)	$	1,844

For the three months ended September 30, 2006
											Consolidation
	Wireline		Wireless			Advertising & Publishing			Other		and Elimination			Wireless Elimination			Consolidated Results
Revenues from external customers	$	14,305	$	9,561		$	907		$	418	$	-		$	(9,553	)	$	15,638
Intersegment revenues		1		-			6			51		(58	)		-			-
Total segment operating revenues		14,306		9,561			913			469		(58	)		(9,553	)		15,638
Operations and support expenses		9,563		6,561			431			349		(59	)		(6,561	)		10,284
Depreciation and amortization expenses		2,387		1,582			1			42		2			(1,577	)		2,437
Total segment operating expenses		11,950		8,143			432			391		(57	)		(8,138	)		12,721
Segment operating income		2,356		1,418			481			78		(1	)		(1,415	)		2,917
Interest expense		-		-			-			-		442			-			442
Equity in net income (loss) of affiliates ¹		-		(36	)		(2	)		644		1			42			649
Other income (expense) – net		-		-			-			-		109			-			109
Segment income before income taxes	$	2,356	$	1,382		$	479		$	722	$	(333	)	$	(1,373	)	$	3,233


Operating revenues	$15,638	$10,304	51	.8%	$47,164	$30,855	52	.9%
Operating expenses	12,721	8,342	52	.5	39,452	25,819	52	.8
Operating income	2,917	1,962	48	.7	7,712	5,036	53	.1
Income before income taxes	3,233	1,844	75	.3	8,087	4,629	74	.7
Net Income	2,165	1,246	73	.8	5,418	3,131	73	.0

	September 30,
	2006	2005
Debt ratio¹	36.3%	36.6%
In-region network access lines in service (000)²	47,087	50,217
In-region wholesale lines (000)²	3,972	5,423
In-region broadband connections (000)^{2, 3}	8,155	6,496
Number of AT&T employees⁴	179,420	154,500
Cingular Wireless customers (000)⁵	58,666	52,292

	Three-Month Period Ended
	September 30, 2007		June 30, 2007		March 31, 2007
Segment operating revenues
Voice	$	10,356	$	10,586	$	10,677
Data		6,076		5,980		5,862
Other		1,508		1,427		1,447
Total Segment Operating Revenues		17,940		17,993		17,986
Segment operating expenses
Cost of sales		7,620		7,623		7,558
Selling, general and administrative		4,105		3,959		4,093
Depreciation and amortization		3,333		3,300		3,440
Total Segment Operating Expenses		15,058		14,882		15,091
Segment Income	$	2,882	$	3,111	$	2,895

In-Region¹
Switched Access Lines	September 30,
			% Increase
(in 000’s)	2006	2005	(Decrease)

Retail Consumer
Primary	22,068	22,922	(3.7)%
Additional	3,571	3,989	(10.5)
Retail Consumer Subtotal	25,639	26,911	(4.7)

Retail Business	17,212	17,511	(1.7)
Retail Subtotal	42,851	44,422	(3.5)
Percent of total switched access lines	91.0%	88.5%

Sold to ATTC	1,216	1,790	(32.1)
Sold to other CLECs²	2,756	3,633	(24.1)
Wholesale Subtotal	3,972	5,423	(26.8)
Percent of total switched access lines	8.4%	10.8%

Payphone (Retail and Wholesale)	264	372	(29.0)
Percent of total switched access lines	0.6%	0.7%

Total Switched Access Lines	47,087	50,217	(6.2)%

Broadband Connections³	8,155	6,496	25.5%

Purchase Period	Total Number of Shares Purchased	Average Price Paid per Share¹	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 31, 2006	1,700,000	$ 29.34	1,700,000	392,580,000
August 1, 2006 – August 31, 2006	23,300,000	$ 30.34	23,300,000	369,280,000
September 1, 2006 – September 29, 2006	14,250,000	$ 31.80	14,250,000	355,030,000
Total	39,250,000	$ 30.83	39,250,000	355,030,000

	For	% For	Against	% Against	Abstain	Non-Vote
Issuance of AT&T common shares
required pursuant to the Agreement and Plan of Merger dated March 4, 2006¹	2,720	98.7%	37	1.3%	35	-