UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
 

 (Mark One)  

 x
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
    
  For the quarterly period ended March 31,September 30, 2008 
    
  or 
    
 o
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
    
For the transition period from       to     
 
Commission File Number 1-8610

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,
208 S. Akard St., Dallas, Texas 7820575202
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.  Yes [X]   No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer[X] Accelerated filer[   ]
Non-accelerated filer[   ](Do not check if a smaller reporting company)Smaller reporting company[   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]   No [X]
 
At April 30,October 31, 2008, there were 5,9415,893 million common shares outstanding.
outstanding

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
 March 31,
  2008  2007 
Operating Revenues      
Wireless service $10,605  $9,070 
Voice  9,693   10,455 
Data  5,972   5,655 
Directory  1,398   1,022 
Other  3,076   2,767 
Total operating revenues  30,744   28,969 
Operating Expenses        
Cost of sales (exclusive of depreciation and amortization        
   shown separately below)  11,775   11,252 
Selling, general and administrative  8,086   7,437 
Depreciation and amortization  4,903   5,616 
Total operating expenses  24,764   24,305 
Operating Income  5,980   4,664 
Other Income (Expense)        
Interest expense  (865)  (873)
Equity in net income of affiliates  243   173 
Other income (expense) – net  33   504 
Total other income (expense)  (589)  (196)
Income Before Income Taxes  5,391   4,468 
Income taxes  1,930   1,620 
Net Income $3,461  $2,848 
         
Basic Earnings Per Share $0.58  $0.46 
Diluted Earnings Per Share $0.57  $0.45 
Weighted Average Number of Common        
Shares Outstanding – Basic (in millions)
  5,997   6,224 
Dividends Declared Per Common Share $0.400  $0.355 
See Notes to Consolidated Financial Statements.
Financial Data           
            
AT&T Inc.           
                 
Consolidated Statements of Income               
Dollars in millions except per share amounts               
Unaudited 
  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2008  2007  2008  2007 
Operating Revenues               
   Wireless service$11,227  $9,834  $32,726  $28,417 
   Voice 9,313   10,164   28,525   30,997 
   Data 6,144   5,880   18,170   17,281 
   Directory 1,333   1,240   4,114   3,417 
   Other 3,325   3,014   9,417   8,467 
      Total Operating Revenues 31,342   30,132   92,952   88,579 
                 
Operating Expenses               
   Cost of services and sales (exclusive of               
      depreciation and amortization shown separately below) 13,070   11,736   36,972   34,816 
   Selling, general and administrative 7,676   7,770   22,976   22,497 
   Depreciation and amortization 4,978   5,322   14,839   16,354 
      Total Operating Expenses 25,724   24,828   74,787   73,667 
Operating Income 5,618   5,304   18,165   14,912 
Interest Expense 858   887   2,577   2,639 
Equity in Net Income of Affiliates 257   162   712   545 
Other Income (Expense) - Net (81)  (17)  (91)  614 
Income Before Income Taxes 4,936   4,562   16,209   13,432 
Income Taxes 1,706   1,499   5,746   4,617 
Net Income$3,230  $3,063  $10,463  $8,815 
                 
                 
Basic Earnings Per Share$0.55  $0.50  $1.76  $1.43 
Diluted Earnings Per Share
$0.55  $0.50  $1.75  $ 1.42 
Weighted Average Number of Common               
      Shares Outstanding - Basic (in millions) 5,893   6,088   5,938   6,152 
Dividends Declared Per Common Share
$ 0.400   $0.355   $1.200   $1.065 
See Notes to Consolidated Financial Statements.                 

2

AT&T INC. 
CONSOLIDATED BALANCE SHEETS 
Dollars in millions except per share amounts      
  March 31,  December 31, 
  2008  2007 
Assets (Unaudited)    
Current Assets      
Cash and cash equivalents $1,963  $1,970 
Accounts receivable – net of allowances for        
uncollectibles of $1,361 and $1,364
  
15,697
   16,185 
Prepaid expenses  
1,610
   1,524 
Deferred income taxes  
1,934
   2,044 
Other current assets  
2,742
   2,963 
Total current assets  
23,946
   24,686 
Property, plant and equipment  
209,920
   210,518 
Less: accumulated depreciation and amortization
  
113,682
   114,628 
Property, Plant and Equipment – Net  
96,238
   95,890 
Goodwill  
70,815
   70,713 
Licenses  
40,711
   37,985 
Customer Lists and Relationships - Net  
13,692
   14,505 
Other Intangible Assets - Net  
5,877
   5,912 
Investments in Equity Affiliates  
2,578
   2,270 
Postemployment Benefit  
17,645
   17,291 
Other Assets  
6,697
   6,392 
Total Assets $278,199  $275,644 
         
Liabilities and Stockholders’ Equity        
Current Liabilities        
Debt maturing within one year $13,301  $6,860 
Accounts payable and accrued liabilities  
18,590
   21,399 
Advanced billing and customer deposits  
3,677
   3,571 
Accrued taxes  
4,186
   5,027 
Dividends payable  
2,375
   2,417 
Total current liabilities  
42,129
   39,274 
Long-Term Debt  
60,189
   57,255 
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes  
25,203
   24,939 
Postemployment benefit obligation  
24,510
   24,011 
Other noncurrent liabilities  
13,910
   14,798 
Total deferred credits and other noncurrent liabilities  
63,623
   63,748 
         
Stockholders’ Equity        
Common shares issued ($1 par value)  
6,495
   6,495 
Capital in excess of par value  
91,598
   91,638 
Retained earnings  
34,311
   33,297 
Treasury shares (at cost)  (19,590)  (15,683)
Accumulated other comprehensive income (loss)  (556)  (380)
Total stockholders’ equity  
112,258
   115,367 
Total Liabilities and Stockholders’ Equity $278,199  $275,644 
Financial Data     
      
AT&T Inc.     
Consolidated Balance Sheets       
Dollars in millions except per share amounts       
  
September 30,
2008
  
December 31,
2007
 
  (Unaudited)     
Assets
       
Current Assets       
Cash and cash equivalents$1,594  $1,970 
Accounts receivable - net of allowances for       
     uncollectibles of $1,328 and $1,364 16,395   16,185 
Prepaid expenses 1,657   1,524 
Deferred income taxes 1,560   2,044 
Other current assets 2,239   2,963 
Total current assets 23,445   24,686 
Property, Plant and Equipment 215,420     210,518 
    Less: accumulated depreciation and amortization 117,649    114,648 
Property, Plant and Equipmant - Net 97,771    95,890 
Goodwill 71,537   70,713 
Licenses 46,931   37,985 
Customer Lists and Relationships - Net 11,495   14,505 
Other Intangible Assets - Net 5,816   5,912 
Investments in Equity Affiliates 2,839   2,270 
Postemployment Benefit 18,164   17,291 
Other Assets 6,530   6,392 
   Total Assets$284,528  $275,644 
         
Liabilities and Stockholders' Equity       
Current Liabilities       
Debt maturing within one year$17,419  $6,860 
Accounts payable and accrued liabilities 18,690   21,399 
Advanced billing and customer deposits 3,896   3,571 
Accrued taxes 2,976   5,027 
Dividends payable 2,357   2,417 
Total current liabilities 45,338   39,274 
Long-Term Debt 59,355   57,255 
Deferred Credits and Other Noncurrent Liabilities       
Deferred income taxes 27,776   24,939 
Postemployment benefit obligation 25,493   24,011 
Other noncurrent liabilities 14,048   14,798 
Total deferred credits and other noncurrent liabilities 67,317   63,748 
         
Stockholders' Equity       
Common shares issued ($1 par value) 6,495   6,495 
Capital in excess of par value 91,684   91,638 
Retained earnings 36,613   33,297 
Treasury shares (at cost) (21,412)  (15,683)
Accumulated other comprehensive income(loss) (862)  (380)
Total stockholders' equity 112,518   115,367 
Total Liabilities and Stockholders' Equity$284,528  $275,644 
See Notes to Consolidated Financial Statements.

3

AT&T INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
Dollars in millions, increase (decrease) in cash and cash equivalents 
(Unaudited) 
 Three months ended
 March 31,
  2008  2007 
Operating Activities      
Net income $3,461  $2,848 
Adjustments to reconcile net income to net cash        
provided by operating activities:
        
Depreciation and amortization
  4,903   5,616 
Undistributed earnings from investments in equity affiliates
  (225)  (156)
Provision for uncollectible accounts
  480   376 
Deferred income tax expense
  569   65 
Net gain on sales of investments
  (46)  - 
 Gain on license exchange  -   (409)
 Changes in operating assets and liabilities:        
Accounts receivable  (150)  237 
Other current assets  159   (748)
Accounts payable, accrued and other liabilities  (4,654)  (3,232)
Stock-based compensation tax benefit  (7)  (47)
Other - net
  467   98 
Total adjustments  1,496   1,800 
Net Cash Provided by Operating Activities  4,957   4,648 
         
Investing Activities        
Construction and capital expenditures        
Capital expenditures  (4,178)  (3,338)
Interest during construction
  (70)  (35)
Acquisitions, net of cash acquired  (3,662)  (198)
Dispositions  47   209 
Proceeds from sale of securities, net of investments  131   518 
Other  33   7 
Net Cash Used in Investing Activities  (7,699)  (2,837)
         
Financing Activities        
Net change in short-term borrowings with original        
maturities of three months or less
  5,786   (2,989)
Issuance of long-term debt  3,972   5,924 
Repayment of long-term debt  (613)  (227)
Purchase of treasury shares  (4,071)  (3,005)
Issuance of treasury shares  103   687 
Dividends paid  (2,422)  (2,218)
Stock-based compensation tax benefit  7   47 
Other  (27)  (84)
Net Cash Provided by (Used in) Financing Activities  2,735   (1,865)
Net decrease in cash and cash equivalents  (7)  (54)
Cash and cash equivalents beginning of year  1,970   2,418 
Cash and Cash Equivalents End of Period $1,963  $2,364 
         
Cash paid during the three months ended March 31 for:        
Interest
 $1,130  $904 
Income taxes, net of refunds
 $2,763  $1,177 
See Notes to Consolidated Financial Statements.

Financial Data
     
      
AT&T Inc.     
Consolidated Statements of Cash Flows       
Dollars in millions increase (decrease) in cash and cash equivalents       
Unaudited
Nine Months Ended
September 30,
   2008   2007 
Operating Activities       
Net income$10,463  $8,815 
Adjustments to reconcile net income to       
    net cash provided by operating activities:       
  Depreciation and amortization 14,839   16,354 
  Undistributed earnings from investments in equity affiliates (572)  (434)
  Provision for uncollectible accounts 1,297   1,142 
  Deferred income tax expense 4,063   486 
  Net gain on sales of investments (2)  (29)
  Gain on license exchange -   (409)
  Changes in operating assets and liabilities:       
      Accounts receivable (1,597)  (1,253)
      Other current assets 616   (661)
      Accounts payable and accrued liabilities (5,958)  (46)
      Stock-based compensation tax benefit (15)  (149)
  Other - net (361)  529 
  Total adjustments 12,310   15,530 
  Net Cash Provided by Operating Activities 22,773   24,345 
         
Investing Activities       
Construction and capital expenditures       
    Capital expenditures (14,388)  (12,124)
    Interest during construction (455)  (125)
Acquisitions, net of cash acquired (10,086)  (233)
Dispositions 1,444   993 
Proceeds from sale of securities, net of investments (103)  584 
Sale of other investments 436   - 
Other 33   28 
Net Cash Used in Investing Activities (23,119)  (10,877)
         
Financing Activities       
Net change in short-term borrowings with       
  original maturities of three months or less 5,188   (4,279)
Issuance of long-term debt 10,924   7,898 
Repayment of long-term debt (3,143)  (3,008)
Purchase of treasury shares (6,077)  (8,912)
Issuance of treasury shares 317   1,736 
Dividends paid (7,150)  (6,584)
Stock-based compensation tax benefit 15   149 
Other (104)  (172)
Net Cash Used in Financing Activities (30)  (13,172)
Net increase (decrease) in cash and cash equivalents (376)  296 
Cash and cash equivalents beginning of year 1,970   2,418 
Cash and Cash Equivalents End of Period$1,594  $2,714 
        
Cash paid during the nine months ended September 30 for: $  3,068  $ 2,518 
Interest       
Income taxes, net of refunds$  5,217  $ 2,028 
See Notes to Consolidated Financial Statements.       
4

AT&T INC.
   
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY   
Dollars and shares in millions, except per share amounts   
(Unaudited)   
  Three months ended 
  March 31, 2008 
  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     $91,638 
Issuance of shares      21 
Stock based compensation      (61)
Balance at end of period     $91,598 
         
Retained Earnings        
Balance at beginning of year     $33,297 
Net income ($0.57 per diluted share)      3,461 
Dividends to stockholders ($0.40 per share)      (2,380)
Other      (67)
Balance at end of period     $34,311 
         
Treasury Shares        
Balance at beginning of year  (451) $(15,683)
Purchase of shares  (112)  (4,071)
Issuance of shares  7   164 
Balance at end of period  (556) $(19,590)
         
Accumulated Other Comprehensive Income, net of tax        
Balance at beginning of year     $(380)
Other comprehensive income (loss) (see Note 2)      (176)
Balance at end of period     $(556)
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, 2008 
  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     $91,638 
Issuance of shares      87 
Stock based compensation      (41)
Balance at end of period     $91,684 
         
Retained Earnings        
Balance at beginning of year     $33,297 
Net income ($1.75 per diluted share)      10,463 
Dividends to stockholders ($1.20 per share)      (7,090)
Other      (57)
Balance at end of period     $36,613 
         
Treasury Shares        
Balance at beginning of year  (451) $(15,683)
Purchase of shares  (164)  (6,077)
Issuance of shares  13   348 
Balance at end of period  (602) $(21,412)
         
Accumulated Other Comprehensive Income (Loss), net of tax        
Balance at beginning of year     $(380)
Other comprehensive income (loss) (see Note 2)      (482)
Balance at end of period     $(862)
See Notes to Consolidated Financial Statements. 
 
5
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL 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 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, 2007.

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 communications services and equipment, managed networking, wholesale services and directory advertising and publishing services.

All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. Earnings from certain foreign equity investments accounted for using the equity method are included for periods ended within up to one month of our year end.

Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157) requires disclosures for financial assets and liabilities that are remeasured at fair value at least annually. FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Substantially all of our available-for-sale securities are valued using quoted market prices (referred to as Level 1). Adjustments to fair value are recorded in other comprehensive income until the investment is sold (see Note 2). The fair market value of these securities was $2,364$2,196 at March 31,September 30, 2008.

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.

Valuation and Other Adjustments In accordance with Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” (FAS 112) we establish obligations for 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 March 31,September 30, 2008, we had severance accruals under FAS 112 of $472,$220, of which $71$23 were established as merger-related severance accruals. At December 31, 2007, we had severance accruals of $127.

Included in the current liabilities reported on our consolidated balance sheet are accruals established under Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (EITF 95-3). The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation (BellSouth) and Dobson Communications Corporation. Following is a summary of the accruals recorded under EITF 95-3 at December 31, 2007, cash payments made during 2008 and the adjustments thereto.

  12/31/07  Cash     3/31/08 
  Balance  Payments  Adjustments  Balance 
Severance accruals paid from:            
Company funds $540  $(68) $5  $477 
Pension and postemployment
benefit plans
  129   (16)  -   113 
Lease terminations  425   (27)  2   400 
Equipment removal and other related costs  161   (6)  (5)  150 
Total $1,255  $(117) $2  $1,140 


6
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued 
Dollars in millions except per share amounts


  12/31/07  Cash     9/30/08 
  Balance  Payments  Adjustments  Balance 
Severance accruals paid from:            
Company funds $540  $(201) $8  $347 
Pension and postemployment
benefit plans
  129   (24)  -   105 
Lease terminations  425   (78)  96   443 
Equipment removal and other related costs  161   (52)  4   113 
Total $1,255  $(355) $108  $1,008 

New Accounting Standards
Split Dollar Life Insurance In 2007, the EITF ratified the consensus on EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4) and EITF 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). EITF 06-4 and EITF 06-10 cover split-dollar life insurance arrangements (where the company owns and controls the policy) and provides that an employer should recognize a liability for future benefits in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (FAS 106). These are effective for fiscal years beginning after December 15, 2007. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, recording additional postretirement liabilities of $101 and a decrease to retained earnings of $63.

FAS 161FSP 157-3  InOn October 10, 2008, the FASB issued StatementFASB Staff Position 157-3, “Determining the Fair Value of a Financial Accounting Standards No. 161, “Disclosures about Derivative InstrumentsAsset When the Market of that Asset is not Active” (FSP 157-3). FSP 157-3 provides an example that clarifies and Hedging Activities, an amendmentreiterates certain provisions of FASB Statement No. 133” (FAS 161). FAS 161 requires enhanced disclosures about an entity’s derivativethe existing fair value standard, including basing fair value on orderly transactions and hedging activitiesusage of management and broker inputs. FSP 157-3 is effective immediately but is not expected to improve the transparency of financial reporting. FAS 161 will not have ana material impact on our financial position andor results of operations.


7 
AT&T INC.
SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 2. COMPREHENSIVE INCOME

The components of our comprehensive income for the three and nine months ended March 31,September 30, 2008 and 2007 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustment, net unrealized gain (loss) on available-for-sale securities, net unrealized gain (loss) on cash flow 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 Three months endedNine months ended 
          March 31, September 30,  September 30, 
 2008  2007  2008  2007  2008  2007 
Net income $3,461  $2,848  $3,230  $3,063  $10,463  $8,815 
Other comprehensive income, net of tax:                        
Foreign currency translation adjustment  66   (26) (142) (14) (37) 4 
Net unrealized gains (losses) on securities:                        
Unrealized gains (losses)
  (90)  81  (220) (15) (284) 134 
Less reclassification adjustment realized in net income
  (50)  -  (12) 3  (28) (37)
Net unrealized gains (losses) on cash flow hedges:                        
Unrealized gains (losses)  (78)  (23) 44  (15) (55) (51)
Reclassification adjustment for losses on cash flow hedges
included in net income
  4   4  4  5  13  13 
Defined benefit postretirement plans:
Amortization of net actuarial (gain) loss and prior service benefit
included in net income
  (28)  48 
Defined benefit postretirement plans:                
Amortization of net actuarial (gain) loss and prior service
benefit included in net income
 (31) 52  (90) 156 
Other
  -   (2)  (1)  -   (1)  (1)
Other comprehensive income (loss)  (176)  82   (358)  16   (482)  218 
Total Comprehensive Income  $3,285  $2,930  $2,872  $3,079  $9,981  $9,033 


7
8 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 3. EARNINGS PER SHARE

A reconciliationReconciliations of the numerators and denominators of basic and diluted earnings per share for net income for the three and nine months ended March 31,September 30, 2008 and 2007 isare shown in the table below:

   Three months ended Three months ended  Nine months ended 
       March 31, September 30,  September 30, 
 
2008
  2007  2008  2007  2008  2007 
Numerators                  
Numerator for basic earnings per share:                  
Net income
 $3,461  $2,848  $3,230  $3,063  $10,463  $8,815 
Dilutive potential common shares:
                        
Other stock-based compensation  
2
  2  2  2  7  6 
Numerator for diluted earnings per share $3,463  $2,850  $3,232  $3,065  $10,470  $8,821 
Denominators (000,000)                        
Denominator for basic earnings per share:                        
Weighted-average number of common
                        
shares outstanding  
5,997
  6,224  5,893  6,088  5,938  6,152 
Dilutive potential common shares:
                        
Stock options
  
14
  22  6  26  12  25 
Other stock-based compensation
  
22
  20   22   15   21   19 
Denominator for diluted earnings per share  
6,033
  6,266   5,921   6,129   5,971   6,196 
Basic earnings per share
 $0.58  $0.46  $0.55  $0.50  $1.76  $1.43 
Diluted earnings per share
 $0.57  $0.45  $0.55  $0.50  $1.75  $1.42 

At March 31,September 30, 2008, and 2007, we had issued and outstanding options to purchase approximately 223 and 281206 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 116173 million shares in the third quarter and 132131 million sharesfor the first nine months exceeded the average market price of AT&T stock for the three months ended March 31, 2008 and 2007.stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods.period. At March 31,September 30, 2008, the exercise price of 10834 million share options was below market price.

At September 30, 2007, we had issued and outstanding options to purchase 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 period.


8
 9
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes. Interest expense 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. We have four reportable segments: (1) wireless, (2) wireline, (3) advertising & publishing and (4) other.

The wireless segment provides wireless voice data and otheradvanced data communications services.

The wireline segment provides landline communications services, including localvoice and long-distance voice, switched access, Internet protocol and Internet access data messagingcommunications services, managed networking to business customers, AT&T U-verseSM TV, servicehigh-speed broadband and voice services (U-verse) and satellite television services through our agency arrangements.

The advertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and Internet-based advertising. Results for this segment are shown under the amortization method, which means that revenues and direct expenses are recognized ratably over the life of the directory title, typically 12 months. However, consolidated results for 2007 directory operations acquired in our BellSouth acquisition are treated differently in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141).

Under FAS 141, BellSouth deferred revenue and expenses from directories published during the twelve-month period ending with the December 29, 2006 acquisition date were not recognized in 2007 consolidated results. Accordingly, our consolidated revenue and expenses in 2007 related to directory operations were lower. Because management assesses the performance of the segment including the revenue and expenses associated with those directories, for segment reporting purposes, our 2007 advertising & publishing segment results include revenue of $409$196 in the third quarter and $911 for the first nine months of 2007 and expenses of $108$64 in the third quarter and $291 for the first quarternine months of 2007. These amounts are eliminated in the consolidationsconsolidation and eliminationselimination 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 includes our portion of the results from our international equity investments. Also included in the other segment are impacts of corporate widemanagement decisions affecting the entire company for which management does not evaluate the individual operating segments are not being evaluated.segments.

In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP. The Wireless, Wireline, Advertising & Publishing and Other columns represent the segment results of each such operating segment. The Consolidation and Elimination column adds in those line items that we manage on a consolidated basis only: interest expense and other income (expense) – net. This column also eliminates any intercompany transactions included in each segment’s results as well as the advertising & publishing revenue and expenses in the third quarter and for the first quarternine months of 2007 as noted above.

Segment assets for the nine months ended September 30, 2008 are materially unchanged from the year ended December 31, 2007 with the exception of the wireless and other segment assets. Our wireless segment assets totaled $126,563, which increased $20,610, or 19.5%, primarily due to the acquisition of wireless spectrum. Our other segment assets totaled $219,043, which increased $35,968, or 19.7%, primarily due to an increase in value of our investments in our subsidiaries.

9
10 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

At March 31, 2008 or for the three months ended                
        Advertising &     Consolidation  Consolidated 
  Wireless  Wireline  Publishing  Other  and Elimination  Results 
Revenues from external customers $11,785  $17,087  $1,398  $474  $-  $30,744 
Intersegment revenues  40   537   19   70   (666)  - 
Total segment operating revenues  11,825   17,624   1,417   544   (666)  30,744 
Operations and support expenses  7,389   11,621   787   730   (666)  19,861 
Depreciation and amortization expenses  1,480   3,170   212   40   1   4,903 
Total segment operating expenses  8,869   14,791   999   770   (665)  24,764 
Segment operating income (loss)  2,956   2,833   418   (226)  (1)  5,980 
Interest expense  -   -   -   -   865   865 
Equity in net income of affiliates  2   -   -   241   -   243 
Minority interest  (60)  -   -   -   60   - 
Other income (expense) – net  -   -   -   -   33   33 
Segment income before income taxes $2,898  $2,833  $418  $15  $(773) $5,391 
                         
Segment Assets $118,743  $172,103  $14,212  $202,373  $(229,232) $278,199 

For the three months ended March 31, 2007                
For the three months ended September 30, 2008For the three months ended September 30, 2008                
       Advertising &     Consolidation  Consolidated        Advertising &     Consolidation and  Consolidated 
 Wireless  Wireline  Publishing  Other  and Elimination  Results  Wireless  Wireline  Publishing      Other  Elimination  Results 
Revenues from external customers $9,975  $17,476  $1,431  $496  $(409) $28,969  $12,571  $17,003  $1,333  $435  $-  $31,342 
Intersegment revenues 22  510  12  48  (592) -  47  547  17   66  (677)  - 
Total segment operating revenues 9,997  17,986  1,443  544  (1,001) 28,969   12,618   17,550   1,350   501   (677)  31,342 
Operations and support expenses 6,583  11,651  734  421  (700) 18,689  8,838  11,482  735   369  (678)  20,746 
Depreciation and amortization expenses 1,891  3,440  242  43  -  5,616  1,401  3,331  194   51  1   4,978 
Total segment operating expenses 8,474  15,091  976  464  (700) 24,305   10,239   14,813   929   420   (677)  25,724 
Segment operating income 1,523  2,895  467  80  (301) 4,664 
Segment operating income (loss) 2,379  2,737  421   81  -   5,618 
Interest expense -  -  -  -  873  873  -  -  -   -  858   858 
Equity in net income of affiliates 7  -  -  172  (6) 173  -  -  -   257  -   257 
Minority interest (48) -  -  -  48  -  (57) -  -   -  57   - 
Other income (expense) – net -  -  -  -  504  504   -   -   -   -   (81)  (81)
Segment income before income taxes $1,482  $2,895  $467  $252  $(628) $4,468  $2,322  $2,737  $421  $338  $(882) $4,936 

For the nine months ended September 30, 2008                
        Advertising &     
Consolidation
and
  Consolidated 
  Wireless  Wireline  Publishing  Other  Elimination  Results 
Revenues from externa l customers $36,333  $51,149  $4,114  $1,356  $-  $92,952 
Intersegment revenues  143   1,633   60   201   (2,037)  - 
Total segment operating revenues  36,476   52,782   4,174   1,557   (2,037)  92,952 
Operations and support expenses  23,750   34,213   2,293   1,729   (2,037)  59,948 
Depreciation and amortization expenses  4,327   9,770   609   133   -   14,839 
Total segment operating expenses  28,077   43,983   2,902   1,862   (2,037)  74,787 
Segment operating income (loss)  8,399   8,799   1,272   (305)  -   18,165 
Interest expense  -   -   -   -   2,577   2,577 
Equity in net income of affiliates  5   -   -   707   -   712 
Minority interest  (186)  -   -   -   186   - 
Other income (expense) – net  -   -   -   -   (91)  (91)
Segment income before income taxes $8,218  $8,799  $1,272  $402  $(2,482) $16,209 

10
11 
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts


For the three months ended September 30, 2007                
        Advertising &     Consolidation and  Consolidated 
  Wireless  Wireline  Publishing  Other  Elimination  Results 
Revenues from external customers $10,911  $17,472  $1,436  $509  $(196) $30,132 
Intersegment revenues  26   469   21   53   (569)  - 
Total segment operating revenues  10,937   17,941   1,457   562   (765)  30,132 
Operations and support expenses  7,262   11,646   755   478   (635)  19,506 
Depreciation and amortization expenses  1,709   3,334   238   40   1   5,322 
Total segment operating expenses  8,971   14,980   993   518   (634)  24,828 
Segment operating income (loss)  1,966   2,961   464   44   (131)  5,304 
Interest expense  -   -   -   -   887   887 
Equity in net income of affiliates  3   -   -   159   -   162 
Minority interest  (43)  -   -   -   43   - 
Other income (expense) – net  -   -   -   -   (17)  (17)
Segment income before income taxes $1,926  $2,961  $464  $203  $(992) $4,562 

For the nine months ended September 30, 2007                
        Advertising &     Consolidation and  Consolidated 
  Wireless  Wireline  Publishing  Other  Elimination  Results 
Revenues from external customers $31,254  $52,432  $4,328  $1,476  $(911) $88,579 
Intersegment revenues  75   1,494   50   182   (1,801)  - 
Total segment operating revenues  31,329   53,926   4,378   1,658   (2,712)  88,579 
Operations and support expenses  20,826   34,750   2,281   1,548   (2,092)  57,313 
Depreciation and amortization expenses  5,410   10,076   743   125   -   16,354 
Total segment operating expenses  26,236   44,826   3,024   1,673   (2,092)  73,667 
Segment operating income (loss)  5,093   9,100   1,354   (15)  (620)  14,912 
Interest expense  -   -   -   -   2,639   2,639 
Equity in net income of affiliates  12   -   -   533   -   545 
Minority interest  (143)  -   -   -   143   - 
Other income (expense) – net  -   -   -   -   614   614 
Segment income before income taxes $4,962  $9,100  $1,354  $518  $(2,502) $13,432 

12 
AT&T INC.
SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 5. 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 retirees under various plans and accrue actuarially determined postretirement benefit costs as employees earn these benefits. Our objective in funding these plans, in combination with the standards of 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 2008.

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 Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and FAS 106. In the following table, gains are denoted with parentheses and losses are not.

     Three months ended Three months ended  Nine months ended 
       March 31, September 30,  September 30, 
 2008  2007  2008  2007  2008  2007 
Pension (benefit) cost:                  
Service cost – benefits earned during the period
 $293  $316  $294  $314  $880  $943 
Interest cost on projected benefit obligation
  830   801  830  803  2,489  2,411 
Expected return on assets
  (1,400)  (1,367) (1,400) (1,367) (4,201) (4,101)
Amortization of prior service cost  33   32  34  36  100  107 
Recognized actuarial loss  2   60   1   61   7   181 
Net pension (benefit) cost $(242) $(158)
Net pension benefit
 $(241) $(153) $(725) $(459)
                        
Postretirement benefits cost:        
Postretirement benefit cost:                
Service cost – benefits earned during the period $107  $127  $108  $127  $322  $381 
Interest cost on accumulated postretirement                        
benefit obligation  636   643  637  644  1,912  1,931 
Expected return on assets  (332)  (337) (331) (336) (995) (1,010)
Amortization of prior service benefit and transition obligation  (90)  (89)
Amortization of prior service benefit
 (92) (90) (271) (270)
Recognized actuarial loss  -   74  -  72  -  220 
Postretirement benefits cost $321  $418 
Postretirement benefit cost
 $322  $417  $968  $1,252 
                        
Combined net pension and postretirement cost $79  $260  $81  $264  $243  $793 

Our combined net pension and postretirement cost decreased $181$183 in the third quarter and $550 for the first quarternine months of 2008. This decreasedecline was primarily due to the decrease in amortization of the unrecognized actuarial losses recorded under Statement of Financial Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” in Other Comprehensive Income. As allowed under GAAP, we amortize gains and losses only when the net gains or losses exceed 10 percent of the greater of the projected benefit obligation or the market-related value of assets.

We have varying types of pension programs providing benefits for certain non-U.S. operations. In addition to the pension and postretirement costs above, we recorded net pension cost for non-U.S. plans of $4 in the third quarter and $11 for the first quarternine months of 2008 and $3 in the third quarter and $11 for the first nine months of 2007.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above was $45 in the third quarter and $136 for the first quarternine months of 2008, of which $35 and $47$106 was interest cost, respectively. Net supplemental retirement pension benefits cost was $50 in the third quarter and $146 for the first quarternine months of 2007, of which $35$37 and $36$109 was interest cost, respectively.


1113
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

Item 2. 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 in both the United States and internationally providing telecommunications services and equipment as well as 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, 2007. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Consolidated Results  Our financial results in the third quarter and for the first quarternine months of 2008 and 2007 are summarized as follows:

 First Quarter  Third Quarter  Nine-Month Period 
       Percent        Percent        Percent 
 2008  2007  Change  2008  2007  Change  2008  2007  Change 
Operating revenues $30,744  $28,969  6.1% $31,342  $30,132  4.0% $92,952  $88,579  4.9%
Operating expenses  24,764  24,305  1.9  25,724  24,828  3.6  74,787  73,667  1.5 
Operating income  5,980  4,664  28.2  5,618  5,304  5.9  18,165  14,912  21.8 
Income before income taxes  5,391  4,468  20.7  4,936  4,562  8.2  16,209  13,432  20.7 
Net Income  3,461  2,848  21.5%  3,230   3,063   5.5   10,463   8,815   18.7 

Overview
Operating incomeOur operating income increased $1,316,$314, or 28.2%5.9%, in the third quarter and $3,253, or 21.8%, for the first quarternine months of 2008, reflecting increasedcontinued growth in wireless service revenues and continued growth in data revenues. Our operating income margin increased from 16.1%17.6% to 17.9% in the third quarter and from 16.8% to 19.5%. for the first nine months. Reported results in 2008 include directory revenue and expenses from directories published by subsidiaries acquired in our 2006 acquisition of BellSouth Corporation (BellSouth). subsidiaries. In accordance with U.S. generally accepted accounting principles (GAAP), our reported results in the first quarter of 2007 did not include deferred revenue of $409$196 in the third quarter and $911 for the first nine months and expenses of $108$64 in the third quarter and $291 for the first nine months from theseBellSouth directories published during the 12-month period ending with the December 29, 2006 acquisition date.date we acquired BellSouth. Had our first-quarter 2007 directory results included this deferred revenue and expenses, operating income would have increased $1,015$182 in the third quarter and $2,633 for the first quarternine months of 2008.2008, as compared to 2007. See our “Advertising & Publishing Segment Results” section for discussion of this purchase accounting treatment.

Operating revenues  Our operating revenues increased $1,775,$1,210, or 6.1%4.0%, in the third quarter and $4,373, or 4.9%, for the first quarternine months primarily due to continuing growth in wireless subscriber revenuessubscribers. Revenues in the third quarter and for the first nine months also reflect an increase in data revenues, primarily related to Internet Protocol (IP) data, partially offset by the continued decline in voice revenues. As previously discussed above, purchase accounting treatment for directories published 12 months prior to the BellSouth acquisition also contributed to the increased revenues in the third quarter and for the first quarternine months of 2008 when compared to 2007.

Our operating revenues also reflect the continued decline ofin our retail access lines due to increased competition, as customers disconnected both primary and additional lines and switched to competitors’ wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data. The slower national economy also adversely affected the ability of our consumer wireline customers to purchase our services. While we lose the voice revenues, we have the opportunity to increase wireless service revenues should the customer choose us as their wireless provider.

Operating expenses  Our operating expenses increased $459, or 1.9%, in the first quarter primarily due to increased wireless equipment sales, a $374 charge taken in the first quarter of 2008 for workforce reductions and our accounting for the deferred directory expenses noted above. Partially offsetting these increases were approximately $200 of merger integration costs recognized in 2007 and not in 2008, and lower amortization expense on intangible assets in 2008. We are primarily amortizing these intangibles using an accelerated method, which means that we record lower expenses as the remaining useful life of the asset decreases.

Interest expense decreased $8, or 0.9%, in the first quarter of 2008. Interest expense remained relatively unchanged due to a decrease in our weighted average interest rate and changes in interest charged during construction offset by an increase in our average debt balances. Future interest expense will reflect interest during construction due to our spectrum purchases (see “Wireless Spectrum Auction” discussed in “Other Business Matters”).

1214
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

Operating expenses  Our operating expenses increased $896, or 3.6%, in the third quarter and increased $1,120, or 1.5%, for the first nine months. The increase in the third quarter was primarily due to an increase of $782 in equipment costs related to the successful launch of the iPhone 3G and increased sales of PDA devices. Also increasing expenses were higher commissions and residuals from the growth in wireless, as well as hurricane-related expenses affecting both the Wireless and Wireline segments. Partially offsetting these increases were merger integration costs recognized in 2007 and not in 2008, and lower amortization expense on intangible assets in 2008.
The increase for the first nine months was primarily due to increased wireless equipment sales, a $374 charge taken in the first quarter of 2008 for workforce reductions and the purchase accounting treatment of the BellSouth deferred directory expenses discussed above. Partially offsetting these increases were merger integration costs recognized in 2007 and not in 2008, and lower amortization expense on intangible assets in 2008.

Interest expense decreased $29, or 3.3%, in the third quarter and $62, or 2.3%, for the first nine months of 2008. Interest expense remained relatively unchanged with a decrease in our weighted average interest rate and changes in interest charged during construction offset by an increase in our average debt balances. Future interest expense will continue to reflect increased interest during construction related to preparing spectrum purchases for service.

Equity in net income of affiliates increased $70,$95, or 40.5%58.6%, in the third quarter and $167, or 30.6%, for the first quarternine months of 20082008. The increase is primarily due to improved results from our investment atin América Móvil S.A. de C.V. (América Móvil), Telmex and other accounting related adjustments at Teléfonos de México, S.A. de C.V. (Telmex).Telmex Internacional.

Other income (expense) – net  We had other expense of $81 in the third quarter and $91 for the first nine months of 2008, as compared to other expense of $17 in the third quarter and other income of $33 in$614 for the first quarter of 2008 and $504 in the first quarternine months of 2007. Results in the firstthird quarter of 2008 consistedprimarily included expenses of a net gain$59 related to minority interest expenses, $46 for the sale of administrative buildings and other non-strategic assets and $44 related to asset impairments, partially offset by $54 of interest and dividend income. 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 for the first nine months of 2008 primarily included expenses of $188 related to minority interest expenses, $89 loss on the sale of cost investments, interest income, minority interestland and other non-strategic investment activity.assets and $75 related to asset impairments, partially offset by $177 of interest, dividend and leveraged lease income and $79 gain on sale of investments. Results infor the first quarternine months of 2007 primarily consisted ofincluded gains of $409 related to a wireless spectrum license exchange, $127 for the sale of administrative buildings and $85other non-strategic assets, $118 of interest income and $29 for land dispositions and leveraged lease sales, whichthe sale of cost investments. These gains were partially offset by $41$143 in minority interest expenses.

Income taxes increased $310,$207, or 19.1%13.8%, in the third quarter and $1,129, or 24.5%, for the first quarternine months of 2008. The increase in income taxes in the third quarter and for the first nine months was primarily the result ofdue to higher income before income taxes in 2008.taxes. Our effective tax rate was 35.8%rates were 34.6% in the firstthird quarter of 2008 compared to 32.9% in the third quarter of 2007, and 36.3%35.4% for the same period infirst nine months of 2008 compared to 34.4% for the first nine months of 2007. The decreaseincrease in our effective tax raterates in 2008 was primarily due to an increase in income before income taxes. The effective tax rate for the recognitionthird quarter of state2007 reflects a benefit related to adjustments to our unrecognized tax benefits partially offset by the impact of a state law change.

15
AT&T INC.
SEPTEMBER 30, 2008

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

Selected Financial and Operating Data
              March 31, 
  2008  2007 
    Wireless customers (000)  71,367��  62,217 
    Consumer revenue connections (000) 1,2
  49,340   49,265 
    Network access lines in service (000) 2
  60,415   65,429 
    Broadband connections (000) 2,3
  14,647   12,861 
    Video connections (000) 2,4
  2,611   1,697 
    Debt ratio 5
  39.6%  35.4%
    Ratio of earnings to fixed charges  5.5   5.4 
    Number of AT&T employees
  310,070   301,760 
  September 30, 
  2008  2007 
Wireless customers (000)  74,871   65,666 
Consumer revenue connections (000) 1,2
  47,548   49,598 
Network access lines in service (000) 2
  57,191   62,871 
Broadband connections (000) 2,3
  14,841   13,760 
Video connections (000) 4
  2,963   2,112 
Debt ratio 5
  40.6%  35.3%
Ratio of earnings to fixed charges 6
  5.15   5.34 
Number of AT&T employees  303,530   303,670 
1
Consumer revenue connections includes retail access lines, VoIP customers,U-verse voice over IP connections, broadband and video.
2
Represents services by AT&T’s local exchange companies (ILECs) and affiliates.
3
Broadband connections include DSL, U-verse high-speed Internet access and satellite broadband.
4
Video connections include customers that have satellite service under our agency arrangements and U-verse video connections.
connections of 781 in 2008 and 126 in 2007.
5
See our “Liquidity and Capital Resources” section for discussion.
6See Exhibit 12.

 
Segment Results

Our segments represent strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. Interest expense and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have four reportable segments: (1) wireless;wireless, (2) wireline;wireline, (3) advertising & publishing;publishing, and (4) other.

The wireless segment provides wireless voice data and otheradvanced data communications services.

The wireline segment provides landline voice and data communications services, including local and long-distance voice, switched access, IP and Internet access data, managed network services,networking to business customers, AT&T U-verseSM TV, high-speed broadband and voice services (U-verse) and satellite television services through our agency arrangements.

The advertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and Internet-based advertising. See Note 4 for a discussion of FAS 141.

The other segment includes results from Sterling Commerce Inc. (Sterling), customer information services and all corporate and other operations. The other segment includes our portion of the results from our international equity investments. Also included in the other segment are impacts of management decisions affecting the entire company for which management does not evaluate the individual operating segments.

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AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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


The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

Wireless
Segment Results
 First Quarter  Third Quarter  Nine-Month Period 
       Percent        Percent        Percent 
 2008  2007  Change  2008  2007  Change  2008  2007  Change 
Segment operating revenues                           
Service $10,645  $9,092  17.1%
Equipment  1,180  905  30.4 
Service revenues $11,273  $9,860  14.3% $32,869  $28,492  15.4%
Equipment revenues 1,345  1,077   24.9  3,607  2,837   27.1 
Total Segment Operating Revenues  11,825  9,997  18.3  12,618  10,937   15.4  36,476  31,329   16.4 
Segment operating expenses                                    
Cost of services and equipment sales  4,110  3,670  12.0  4,989  4,079  22.3  13,261  11,690  13.4 
Selling, general and administrative  3,279  2,913  12.6  3,849  3,183  20.9  10,489  9,136  14.8 
Depreciation and amortization  1,480  1,891  (21.7) 1,401  1,709   (18.0) 4,327  5,410   (20.0)
Total Segment Operating Expenses  8,869  8,474  4.7  10,239  8,971   14.1  28,077  26,236   7.0 
Segment Operating Income  2,956  1,523  94.1  2,379  1,966  21.0  8,399  5,093  64.9 
Equity in Net Income of Affiliates  2  7  (71.4) -  3  -  5  12  (58.3)
Minority Interest 1
  (60) (48) (25.0) (57) (43)  (32.6) (186) (143)  (30.1)
Segment Income $2,898  $1,482  95.5% $2,322  $1,926   20.6% $8,218  $4,962   65.6%
1
Minority interest is reported as “Other Income (Expense) – Net” in the consolidated statements of income.

Operating Income and Margin Trends
Our wireless segment operating income increased $1,433,$413, or 94.1%21.0%, in the third quarter and $3,306, or 64.9%, for the first quarternine months of 2008, reflecting an increase in our customer base and a decline in merger-related expenses as our wireless operations now have been largely integrated. Our wireless segment operating income margin increased from 15.2%was 18.9% in the third quarter and 23.0% for the first quarternine months of 2007 to 25.0%2008, which improved over margins of 18.0% in the third quarter and 16.3% for the first quarternine months of 2008.2007. The higher margin in 2008 was primarily due to revenue growth of $1,828,$1,681, or 18.3%15.4%, in the third quarter and $5,147, or 16.4%, for the first nine months of 2008, partially offset by increased operating expenses of $395,$1,268, or 4.7%14.1%, reflecting networkin the third quarter and operational improvements.$1,841, or 7.0%, for the first nine months. The majority of the improvement in our results was due to the increase in our customer base of 9.2 million since March 31,September 30, 2007. This increase includes 1.7 million customers related to our acquisition of Dobson Communications Corporation (Dobson), which was acquired in November 2007.2007 and 182,000 related to our acquisition of Edge Wireless, LLC in April 2008. As of March 31,September 30, 2008, we served 71.474.9 million wireless customers, compared to 62.2 million at March 31, 2007.customers. Contributing to our net additionscustomer base increase was improvement in the postpaid customer turnover (churn) rate due to our strong network performance and attractive products and services offerings. First quarter customerrate. Customer net additions for the first nine months of 2008 were adversely affected by approximately 330,000 disconnections related to the shut down of our Time Division Multiple Access (TDMA) wireless network operations, which was completed in February 2008. Additionally, gross customer additions increased to 5.0 million in the first quarter of 2008, compared to 4.3 million in the first quarter of 2007.

Also contributing to our improved results were higher average service revenue per user/customer (ARPU) and effective churn management, as well as success in achieving merger synergies and operational efficiencies. ARPU increased 2.0% in the first quarter of 2008, primarily related to data services ARPU growth of 37.1%. We expect continued growth from data services as more customers purchase advanced and integrated handsets and as our third-generation network continues to expand. The growth in data ARPU was partially offset by a decline in voice service ARPU of 4.7% in the first quarter of 2008, reflecting a higher percentage of prepaid and reseller customers, which provide lower ARPU than postpaid customers. We expect continued pressure on voice service ARPU. Results also benefited from merger integration costs recognized in 2007 and not reoccurring in 2008 and from lower amortization expense on intangible assets in 2008. Wireless operating margins were also pressured by higher costs of equipment, selling, general and administrative expenses due in part to strong sales of advanced handsets including the iPhone 3G.

Average service revenue per user/customer (ARPU) in the third quarter of 2008 remained consistent with the third quarter of 2007. Data services ARPU grew 31.7% in the third quarter of 2008, offset by a decline in voice service ARPU of 7.2%. We expect continued growth from data services as more customers purchase advanced handsets, such as the iPhone 3G, and laptop cards and as our third-generation network continues to expand. The decline in voice service ARPU is the result of a decrease in postpaid voice overage charges, increases in our Family Talk, prepaid and reseller customers, which have lower ARPU than traditional postpaid customers, lower roaming revenues due to acquisitions and rate negotiations as part of roaming cost savings initiatives, slowing international growth and lower regulatory cost recovery charges. We expect continued pressure on voice service ARPU.

Our total churn rate remained stable and was 1.7% in the firstthird quarter of 2008 and 2007. Our postpaid churn rate declined to 1.2% compared to 1.3% in the firstthird quarter of 2007. We expect the increasing mix of prepaid customers in our customer base will continue to pressure overall churn rates.


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AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

Operating Results
Service revenues are comprised of voice, data and other revenue. Service revenues increased $1,553,$1,413, or 17.1%14.3%, in the third quarter and $4,377, or 15.4%, for the first quarternine months of 2008 and2008. The increase in service revenues primarily consisted of:
·  Data revenue increases of $835,$915, or 57.3%50.5%, in the third quarter and $2,609, or 53.0%, for the first quarternine months primarily due to the increased number of data users and an increase in data ARPU of 37.1%, which31.7% in the third quarter and 33.5% for the first nine months. Data revenue growth was primarily driven by strong increases in wireless internet access, messaging, e-mail and data access revenues. This primarily resulted from increased use of more advanced and integrated handsets, including the iPhone 3G, which can provide for text messaging, Internet access, e-mail, otherthe data services and media bundling services.previously mentioned. Data service revenues represented 21.5%24.2% of wireless service revenues in the third quarter and 22.9% for the first quarternine months of 2008, and 16.0%up from 18.4% in the third quarter and 17.3% for the first quarternine months of 2007.
·  Voice and other revenue increases of $718,$498, or 9.4%6.2%, in the third quarter and $1,768, or 7.5%, for the first quarternine months, primarily due to an increase in the average number of wireless customers of 14.8%14.4%, partially offset by a decline in voice ARPU of 4.7%. Included7.2% in voice revenues were increases in long-distancethe third quarter and net roaming revenue due to increased international usage and a positive impact from6.3% for the acquisition of Dobson.first nine months.

Equipment revenues increased $275,$268, or 30.4%24.9%, in the third quarter and $770, or 27.1%, for the first quarternine months of 2008. The increase was due to higher handset revenues reflecting increased retail customer gross additions of 14.7%14.3% in the third quarter and 12.6% for the first nine months with a greater proportion of those gross additions and customer upgrades toopting for more advanced integrated handsets.handsets than in prior periods.

Cost of services and equipment sales expenses increased $440,$910, or 12.0%22.3%, in the third quarter and $1,571, or 13.4%, for the first quarternine months of 2008 primarily duewith greater than 85% of the increases attributable to increasedhigher equipment sales expense of $425expense. This equipment cost increase was due to the overall increase in sales as well as an increase in sales of higher-cost, advanced and integrated handsets, including the iPhone 3G, and accessories. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers who committed to one-year or two-year contracts or in connection with other promotions.customers.

Cost of services increased $15$128 in the third quarter and $156 for the first nine months. Interconnect, USF, reseller and network systems expenses increased $234 in the third quarter due to increased Universal Service Fund,partly offset by declines in roaming, long-distance and property tax expenses of $106. Interconnect, USF, reseller services and other expense of $111, partiallyservice expenses increased $376 for the first nine months partly offset by a declinedeclines in roaming, long-distance and network systems expenses of $96 primarily related to lower network costs, interconnect, roaming and long-distance expenses related to cost savings initiatives, including vendor maintenance agreements, and benefits from the Dobson acquisition. The lower cost of services also reflects our continued migration off the T-Mobile USA network in California. These declines in network expenses were partially offset by higher network usage, with increases in total system minutes of use of 15.3% and associated network system expansion and maintenance costs.$220.

Selling, general and administrative expenses increased $366,$666, or 12.6%20.9%, in the third quarter and $1,353, or 14.8%, for the first quarternine months of 2008 and included the following:
·  Increases in upgrade commissions and residual expenses, customer servicesupport costs and other expensesgeneral and administrative costs of $212$508 in the third quarter and $1,116 for the first nine months primarily due to increased support costsincreases in handset upgrade activity and bad-debtrelated commission rates (including those related to the iPhone 3G) and prepaid plan gross addition costs. These increases were partially offset by a decline in billing expenses as a result of cost savings initiatives and to a lesser degree for the quarter, lower bad debt expense.
·  Increases in selling, upgradedirect and indirect commissions and residualas well as other selling expenses of $154$221 in the third quarter and $394 for the first nine months primarily due to increases in sales prepaid plan gross addition costsvolume and handset upgrade activity, which was consistentcommission rates, including those associated with our increasethe iPhone 3G, as well as limited workforce increases in customer gross and net additions. This increase wasretail locations. These increases were partially offset by a decline inlower branding advertising expenses.

Depreciation and amortization expenses decreased $411,$308, or 21.7%18.0%, in the third quarter and $1,083, or 20.0%, for the first quarternine months of 2008. Amortization expense decreased $246$162 in the third quarter and $618 for the first quarternine months primarily due to using an acceleratedlower amortization method for customer lists, trade names and other intangible assetsof intangibles related to our acquisition of BellSouth’s 40% ownership interest in AT&T Mobility.Mobility due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases. These decreases in amortization were slightly offset by the amortization of intangibles related to our acquisition of Dobson.

Depreciation expense decreased $165$146, or 13.9%, in the third quarter and $465, or 14.5%, for the first quarternine months primarily due to certain network assets becoming fully depreciated (including TDMA assets), partially offset by increased expense related to ongoing capital spending for network upgrades and expansion.expansion as well as increase in the depreciable asset base due to the acquisition of Dobson.


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AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

Wireline
Segment Results
 First Quarter  Third Quarter  Nine-Month Period 
       Percent        Percent        Percent 
 2008  2007  Change  2008  2007  Change  2008  2007  Change 
Segment operating revenues                           
Voice $9,919  $10,677  (7.1)% $9,515  $10,356  (8.1)% $29,191  $31,619  (7.7)%
Data  6,205  5,862  5.9  6,401  6,076  5.3  18,893  17,918  5.4 
Other  1,500  1,447  3.7  1,634  1,509   8.3  4,698  4,389   7.0 
Total Segment Operating Revenues  17,624  17,986  (2.0) 17,550  17,941   (2.2) 52,782  53,926   (2.1)
Segment operating expenses                                    
Cost of sales  7,616  7,558  0.8  8,128  7,778  4.5  23,908  23,396  2.2 
Selling, general and administrative  4,005  4,093  (2.2) 3,354  3,868  (13.3) 10,305  11,354  (9.2)
Depreciation and amortization  3,170  3,440  (7.8) 3,331  3,334   (0.1) 9,770  10,076   (3.0)
Total Segment Operating Expenses  14,791  15,091  (2.0) 14,813  14,980   (1.1) 43,983  44,826   (1.9)
Segment Income $2,833  $2,895  (2.1)% $2,737  $2,961   (7.6)% $8,799  $9,100   (3.3)%

Operating Income and Margin Trends
Our wireline segment operating income decreased $62,$224, or 2.1%7.6%, in the third quarter and $301 or 3.3%, for the first quarternine months of 2008 and our2008. Our wireline segment operating income margin was 16.1%decreased in boththe third quarter from 16.5% in 2007 to 15.6% in 2008 and for the first quarter of 2008 and 2007. Our operatingnine months decreased from 16.9% in 2007 to 16.7% in 2008. Operating income continued to be pressured by access line declines due to increased competition, customers switching to alternative technologies such as wireless and alternative technologies.VoIP, and the slowing national economy. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, including VoIP and video. Additionally, we have the opportunity to increase wireless segment revenues if customers choose AT&T Mobility as an alternative provider. The decline in segment voice revenue was partially offset by continued growth in data revenue and lower amortization of intangibles related to the AT&T Corp. (ATTC) and BellSouth acquisitions due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases. Operating margins were also pressured by hurricane-related costs of approximately $90 in the third quarter of 2008.

Operating Results
Voice revenues decreased $758,$841, or 7.1%8.1%, in the third quarter and $2,428, or 7.7%, for the first quarternine months of 2008 primarily due to declining demand for traditional voice services. Included in voice revenues are revenues from local voice, long-distance and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.
·  Local voice revenues decreased $410,$460, or 6.5%7.5%, in the third quarter and $1,297, or 7.0%, for the first quarter.nine months of 2008. The decrease was driven primarily by declinesa decline in customer demand for access lines of $278approximately $340 in the third quarter and $840 for the first nine months of 2008 and by expected declines in revenues from ATTC’s mass-market customers of $164. The decreaseapproximately $75 in local voice revenues was partially offset by pricing increasesthe third quarter and $365 for telephone service, custom calling features and inside wire maintenance agreements.the first nine months of 2008. We expect our local voice revenue to continue to be negatively affected by increased competition including customers shifting to competitors’from alternative technologies, and the disconnection of additional lines for DSL service and other reasons.the slowing economy.
·  Long-distance revenues decreased $238,$314, or 6.1%8.2%, in the third quarter and $854, or 7.4%, for the first quarter.nine months of 2008. The decrease was primarily due to a net decrease in demand for long-distance service, mostly due to expected declines in the number of ATTC’s mass-market customers, which decreased $186.approximately $175 in the third quarter and $535 for the first nine months and decreased demand from global and consumer customer revenues of approximately $155 in the third quarter and $340 for the first nine months of 2008.
·  Local wholesale revenues decreased $110,$67, or 21.4%15.2%, in the third quarter and $277, or 19.2%, for the first quarter.nine months of 2008. The decrease was primarily due to industry consolidation as certain customers moved more traffic to their own networks and the declining number of competitive providers using Unbundled Network Element-Platform wholesale lines(UNE-P) lines. However, we expect this revenue trend to stabilize since industry wide.consolidation and UNE-P line loss has slowed.
19
AT&T INC.
SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued
Dollars in millions except per share amounts
Data revenues increased $343,$325, or 5.9%5.3%, in the third quarter and $975, or 5.4%, for the first quarter.nine months of 2008. Data revenues accounted for approximately 35%36% of our wireline operating revenues in the third quarter and for the first quarternine months of 2008 and 33% of wireline operating revenues in the third quarter and for the first quarternine months of 2007. Data revenues include transport, IP and packet-switched data services.

IP data revenues increased $405,$393, or 18.2%16.2%, in the third quarter and $1,176, or 16.8%, for the first quarternine months of 2008 primarily due to growth in consumer and business broadband, virtual private networks (VPN) and managed Internet services. DSL and U-verseBroadband high-speed Internet access increased IP data revenues approximately $165, VPN contributed approximately $140$105 in the third quarter and $400 for the first nine months of 2008. The increase in broadband revenues was partially offset by the decline in shared revenue due to the increaserenegotiation of our Yahoo! agreement. VPN increased approximately $130 in the third quarter and $385 for the first nine months of 2008, and various other IP data services such as U-verse video and dedicated Internet access services contributed approximately $105$140 to the increase.  These were partially offset by a decreaseincrease in revenue due to pricing pressures.the third quarter and $375 for the first nine months of 2008. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based products.

16
services.

AT&T INC.
MARCH 31, 2008
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    

Our transport services, which include DS1s and DS3s (types of dedicated high-capacity lines) and SONET (a dedicated high-speed solution for multisite businesses), increased $20,$47, or 0.7%1.6%, in the third quarter and $98, or 1.1%, for the first quarternine months of 2008. Transport services revenues increased primarily due to continuing high-speed volume growth in Ethernet (types of high capacity switched lines), AT&T Ultravailable® Network (custom Dense Wave Division Multiplexing-based solutions for interconnecting data sites)ISDN and other transport data services.international private lines. These increases were almost entirelypartially offset by pricing pressures and merger pricing conditions for DS1s and DS3s.pressure from usage-based transport services used by our largest business customers.

Our packet-switchedtraditional circuit-based services which include frame relay, asynchronous transfer mode and managed packet services, and decreased $82,$115, or 10.7%15.1%, in the third quarter and $299, or 13.1%, for the first quarternine months of 2008. This decrease is primarily due to lower demand as customers continue to shift to IP-based technology such as VPN, DSL and managed Internet services and DSL.services. We expect packet-switchedthese traditional services to continue to decline as a percentage of our overall data revenues.

Other operating revenues increased $53,$125, or 3.7%8.3%, in the third quarter and $309, or 7.0%, for the first quarter. Major items included in other operating revenues are integrationnine months of 2008. Integration services and customer premises equipment, government-related services and outsourcing, whichmanaged services account for more than 58%60% of total other revenue for bothall periods. Managed services, which includeincludes wholesale revenue from agreements we announced last year, increased $87$129 in the third quarter and $323 for the first quarter.nine months. Government professional services revenue increased $28,$25 in the third quarter and $80 for the first nine months driven by growth across various contracts. Partially offsetting these increases, revenue from equipment sales and related network integration decreased $54by $33 in the third quarter and $90 for the first nine months primarily due to less emphasis on the sale of lower-margin equipment.

Cost of sales expenses increased $58,$350, or 0.8%4.5%, in the third quarter and $512, or 2.2%, for the first quarter. Costnine months of sales consists of costs we incur in order to provide our products and services, including costs of operating and maintaining our networks and personnel costs. Costs in this category include our repair technicians and repair services, certain network planning and engineering expenses, information technology and property taxes related to elements of our network. Pension and postretirement costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees.2008.

Cost of sales increased due to the following:
·  Higher nonemployee-related expenses, such as contract services, materials and supplies costs, of $129.$402 in the third quarter and $690 for the first nine months.
·  Salary and wageHigher employee compensation related to annual merit increases and other bonus accrual adjustmentsbonuses of $61.$127 in the third quarter and $149 for the first nine months.
·  Higher cost of equipment sales and related network integration services of $37 in the third quarter and $26 for the first nine months primarily due to increased U-verse customers partially offset by reductions due to less emphasis on sales of lower-margin equipment.
·  Higher employee levels increased expenses (primarily salary and wages) by $38.$36 in the third quarter and $148 for the first nine months.
·  Higher other wireline support charges of $32 in the third quarter.
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AT&T INC.
SEPTEMBER 30, 2008

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

Offsetting these increases, cost of sales decreased due to:
·  Lower net pension and postretirement cost, which reduced expense $94, reflecting the decrease in amortization of unrecognized actuarial losses.
·  Lower traffic compensation expenses (for access to another carrier’s network) of $41,$188 in the third quarter and $351 for the first nine months primarily due to reduced portal fees from renegotiation of our agreement with Yahoo!, continued migration of long-distance calls onto our network and a lower volume of calls from ATTC’s declining national mass-market customer base.
·  Lower other wireline support chargesnet pension and postretirement cost, which reduced expense $97 in the third quarter and $290 for the first nine months, reflecting the decrease in amortization of $32.unrecognized actuarial losses.

Selling, general and administrative expenses decreased $88,$514, or 2.2%13.3%, in the third quarter and $1,049, or 9.2%, for the first quarter. Selling, general and administrative expenses consistnine months of our provision for uncollectible accounts; advertising costs; sales and marketing functions, including customer service centers; 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 those employees.2008.

Selling, general and administrative expenses decreased due to:
·  Lower other wireline support costs of $66,$199 in the third quarter and $436 for the first nine months primarily due to higher advertising costs incurred in 2007 for brand advertising and re-branding related to the BellSouth acquisition.
·  Lower legal expenses of $185 in the third quarter and for the first nine months.
·  Lower net pension and postretirement cost, which reduced expense $56,$58 in the third quarter and $173 for the first nine months, reflecting the decrease in amortization of unrecognized actuarial losses.

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AT&T INC.
MARCH 31, 2008
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    

·  Lower employee levels decreased expenses (primarily salary and wages) by $40.
·  Lower nonemployee-related expenses, such as contract services, materials and supplies costs, of $27.$73 in the third quarter and $22 for the first nine months.
·  Lower employee levels decreased expenses (primarily salary and wages) by $69 in the third quarter and $154 for the first nine months.

Partially offsetting these decreases, selling, general and administrative expenses increased due to salaryhigher provision for uncollectible accounts, primarily related to our business and wage merit increases and other bonus accrual adjustmentswholesale customers, of $81.$32 in the third quarter.

Depreciation and amortization expenses decreased $270, or 7.8%,$3 in the third quarter and $306, or 3%, for the first quarter.nine months of 2008. The decrease was primarily due to lower amortization of intangibles, which decreased $207.$76 in the third quarter and $430 for the first nine months of 2008. Intangibles related to the 2006 acquisition of BellSouth and the 2005 acquisition of ATTC primarily are amortized using an accelerated method, which means that we record lower expenses as the remaining useful life of the asset decreases. The decrease was slightly offset by amortization of the customer lists acquired from Yahoo!, which began in the second quarter of 2008.

Depreciation expense for property, plant, and equipment decreased $63increased $73 in the third quarter and $124 for the first quarter. Certain assets, although still in use, have been fully depreciated resulting in a larger decline in depreciation expensenine months of 2008 due to more plant being added to service than the incremental depreciation associated with new asset additions.offsetting reduction due to the attrition of the existing plant base.

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AT&T INC.
SEPTEMBER 30, 2008

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

Supplemental Information

Telephone, Broadband and Video Connections Summary
Our switched access lines and other services provided by our local exchange telephone subsidiaries at March 31,September 30, 2008 and 2007 are shown below and access line trends are addressed throughout this segment discussion.

(in 000s)
                  
   Actual  Actual            
   March 31,  March 31,   % Increase  September 30,  September 30,  % Increase 
  2008 2007   (Decrease)  2008  2007  (Decrease) 
Switched Access Lines 1
                  
Retail Consumer  34,178  36,660  (6.8)% 31,751  35,770  (11.2)%
Retail Business 2
  22,647  23,318  (2.9) 22,159  23,004   (3.7)
Retail Subtotal 2
  56,825  59,978  (5.3) 53,910  58,774   (8.3)
Percent of total switched access lines  94.1% 91.7%     94.3% 93.5%    
                        
Sold to ATTC  164  1,091  (85.0) 146  320  (54.4)
Sold to other CLECs 2,3
  3,243  4,045  (19.8) 2,996  3,507   (14.6)
Wholesale Subtotal 2
  3,407  5,136  (33.7) 3,142  3,827   (17.9)
Percent of total switched access lines  5.6% 7.8%     5.5% 6.1%    
                        
Payphone (Retail and Wholesale) 4
  183  315  (41.9)% 139  270   (48.5)
Percent of total switched access lines  0.3% 0.5%     0.2% 0.4%    
                        
Total Switched Access Lines  60,415  65,429  (7.7)%  57,191   62,871   (9.0)%
                        
Total Broadband Connections 5
  14,647  12,861  13.9%
Total Broadband Connections 2,5
  14,841   13,760   7.9%
                        
Satellite service 6
  2,232  1,684  32.5%
Satellite service 2,6
 2,182  1,986  9.9%
U-verse video  379  13  -   781   126   - 
Total Video Connections  2,611  1,697  53.9%  2,963   2,112   40.3%
1 Represents access lines served by AT&T’s ILECs and affiliates.
2 Prior period amounts restated to conform to current period reporting methodology.
1
Represents access lines served by AT&T’s ILECs and affiliates.3 Competitive local exchange carriers (CLECs).
2
Prior period amounts restated to conform to current period reporting methodology.
4 Revenue from retail payphone lines is reported in the Other segment.
5 Broadband connections include DSL, U-verse high-speed Internet access and satellite broadband.
3
Competitive local exchange carriers (CLECs).6 Satellite service includes connections under our agency and resale agreements.
4
Payphone lines are presented above as previously reported. Revenue from these lines is reported in the Other segment.

5
Broadband connections include DSL, U-verse high-speed Internet and satellite broadband.
6
Satellite service includes connections under our agency and resale arrangements.
22
18
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

Advertising & Publishing
Segment Results
 First Quarter  Third Quarter  Nine-Month Period 
       Percent        Percent        Percent 
 2008  2007  Change  2008  2007  Change  2008  2007  Change 
Total Segment Operating Revenues $1,417  $1,443  (1.8)% $1,350  $1,457   (7.3)% $4,174  $4,378   (4.7)%
Segment operating expenses                                    
Cost of sales  444  455  (2.4) 461  417  10.6  1,321  1,214  8.8 
Selling, general and administrative  343  279  22.9  274  338  (18.9) 972  1,067  (8.9)
Depreciation and amortization  212  242  (12.4) 194  238   (18.5) 609  743   (18.0)
Total Segment Operating Expenses  999  976  2.4  929  993   (6.4) 2,902  3,024   (4.0)
Segment Income $418  $467  (10.5)% $421  $464  (9.3)% $1,272  $1,354  (6.1)%

Accounting Impacts from the BellSouth Acquisition
Statement of Financial Accounting Standards No.FAS 141 “Business Combinations” (FAS 141) requiredrequires that BellSouth deferred revenue and expenses from directories published during the 12-month period ending with the December 29, 2006 acquisition date not be included in our consolidated results. However, for management reporting purposes we continued to amortize these balances over the life of the directory (typically 12 months). Thus, for segment disclosure purposes, our advertising & publishing segment results included revenue of $196 and expenses of $64 in the firstthird quarter of 2007, includedand revenue of $409$911 and expenses of $108 related to directories published in$291 for the Southeast region during 2006.first nine months of 2007. See Note 4 for a discussion of FAS 141.

Operating Results
Our advertising & publishing operating income decreased $49, or 10.5%,margin was 31.2% in the firstthird quarter of 2008, and our operating margin decreased from 32.4%compared to 31.8% in the firstthird quarter of 2007 to 29.5% inand 30.5% for the first quarternine months of 2008. The decrease in segment operating income margin was primarily due2008 compared to lower print revenue, increased Internet related costs and bad debt expense.30.9% for the first nine months of 2007.

Operating revenues decreased $26,$107, or 1.8%7.3%, in the third quarter and $204, or 4.7%, for the first quarternine months of 2008 largely driven by lowercontinuing declines in print revenue of $86$119 in the third quarter and $307 for the first nine months and lower sales agency revenue of approximately $33 in the third quarter and $70 for the first nine months due to the sale of a sales agency business. This decrease was partially offset by increased Internet revenue of $51$44 in the third quarter and other revenue of $9.$148 for the first nine months.

Cost of salesOperating expenses decreased $11,$64, or 2.4%6.4%, in the firstthird quarter primarily due to net decreases across multiple costs categories partially offset by increased Internet traffic.

Selling, general and administrative expenses increased $64,$122, or 22.9%4.0%, infor the first quarternine months of 2008 largely driven by higher salaries, uncollectibles,decreased depreciation and advertising for YELLOWPAGES.COM expansion.

Depreciation and amortization expenses decreased $30, or 12.4%, of $44 in the third quarter and $134 for the first quarternine months, resulting from theuse of an accelerated method of amortization for the customer list acquired as a part of the BellSouth acquisition.acquisition, and employee, professional and contract related expenses. These expense decreases were partially offset by increased YELLOWPAGES.COM expansion costs.


19
AT&T INC.
MARCH 31, 2008
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    

Other
Segment Results
 First Quarter  Third Quarter  Nine-Month Period 
        Percent        Percent        Percent 
 2008   2007   Change  2008  2007  Change  2008  2007  Change 
Total Segment Operating Revenues $544  $544  -  $501  $562   (10.9)% $1,557  $1,658   (6.1)%
Total Segment Operating Expenses  770  464  65.9  420  518   (18.9) 1,862  1,673   11.3 
Segment Operating Income  (226) 80  - 
Segment Operating Income (Loss) 81  44   84.1  (305) (15)  - 
Equity in Net Income of Affiliates  241  172  40.1  257  159   61.6  707  533   32.6 
Segment Income $15  $252  (94.0)% $338  $203   66.5% $402  $518   (22.4)%

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

23
AT&T INC.
SEPTEMBER 30, 2008

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

Segment operating revenues remained unchangeddecreased $61, or 10.9%, in the third quarter and $101, or 6.1%, for the first quarternine months of 2008.2008 primarily due to reduced revenues from our operator services and our retail payphone operations.

Segment operating expenses increased $306,decreased $98, or 65.9%18.9%, in the third quarter and increased $189, or 11.3%, for the first nine months of 2008. The decrease in the third quarter was primarily due to the reduction of 2008employee related accruals and reduced operating expenses from our operator services and retail payphone operations. The increase for the first nine months was primarily due to a charge in the first quarter of $374 associated with our announced workforce reduction, of approximately 1.5%, primarily management employees in non-customer facing areas of the business. Thebusiness as a result of the restructure of our operations from a collection of regional companies to a single national approach allows us to streamline staff functions.approach. This was partially offset by a reduction in reserves held at our captive insurance company and by decreased operating expenses from our operator services and retail payphone operations, and receipt of international receivables.operations.

Our other segment also includes our equity investments in América Móvil, Telmex and minor investments in other 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.

Equity in net income of affiliates increased $69$98, or 61.6%, in the third quarter and $174, or 32.6%, for the first nine months of 2008. Equity investments in foreign countries include adjustments not only for initial purchase price accounting, but also ongoing differences in treatment of certain items between US GAAP and local GAAP.  For our investments in Mexico, these ongoing differences include depreciation, minority interest and tax accounting.  Our investment in América Móvil increased $45 in the third quarter and $96 for the first nine months primarily due to improved operating results at América Móvil of $36 and acquisitiontax treatment. Our investments in Telmex and other accounting adjustment activity of $33 at Telmex.Telmex Internacional increased $53 in the third quarter and $83 for the first nine months, reflecting lower depreciation and minority interest partially offset by lower operating results.

COMPETITIVE AND REGULATORY ENVIRONMENTOTHER BUSINESS MATTERS

Overview Market ConditionsAT&T subsidiaries operating within  During 2008, the securities markets and the banking system in general have experienced significant declines in value and liquidity. The U.S. Congress, the U.S. Treasury Department, the Federal Reserve system and various other regulators have worked together to adopt plans to restore liquidity and stability to the securities markets and to the banking system. Among other actions, the U.S. government will provide capital to financial institutions and will ensure access to short-term borrowings for companies with high credit ratings, such as AT&T. We are not yet able to determine the outcome of these plans.

Included on our consolidated balance sheets are assets held by benefit plans for the payment of future benefits. The losses associated with the securities markets declines during 2008 are not expected to have an impact on the ability of our benefit plans to pay benefits. However, because our pension plans are subject to federal and state regulatory authorities. AT&T subsidiaries operating outsidefunding requirements of the U.S. are subject to the jurisdictionEmployee Retirement Income Security Act of national and supranational regulatory authorities1974, as amended (ERISA), a continued weakness in the markets where service is provided,could require us to make contributions to the pension plans in order to maintain minimum funding requirements as established by ERISA. In addition, losses on investments in the pension and regulation is generally limitedother postretirement plans would be reflected in future earnings, potentially to operational licensing authoritya material amount. To the extent that market volatility also increases interest rates, we will also experience an increase in our discount rate for measuring our retirement liabilities which would decrease future expense. The extent of the provisionimpact on future earnings cannot be known until the end of services to enterprise customers.the year when annual returns and rates are measured.

InThe growing weaknesses in the Telecommunications Actsecurities and credit markets are also affecting portions of 1996 (Telecom Act), Congress established a national policy framework intendedour customer base although, at this time, we are unable to bringquantify the benefits of competition and investment ineffect. We are seeing lower demand for our services from traditional residential wireline customers although business revenues remained relatively stable this past quarter. Our wireless business continues to grow, reflecting both an increased demand for advanced telecommunications facilities and services, to all Americansas evidenced by opening all telecommunications markets to competition and reducing or eliminating burdensome regulation. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained manyour successful launch of the extensive regulatory requirements applicable toiPhone 3G and increased sales of other advanced handsets, as well as a shift in demand from our traditional wireline subsidiaries. We are actively pursuing additional legislativeservices. Should the economy continue to weaken, we may experience pressure on pricing and regulatory measures to reduce or eliminate regulatory requirements that inhibit our ability to provide the full range of services demanded by our customers. For example, we are supporting regulatory and legislative efforts that would offer a streamlined process for new video service providers to compete with traditional cable television providers. The FCC has adopted 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. States representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a statewide or state-approved (as opposed to municipal-approved) franchise to offer video services. We also are supporting efforts to update regulatory treatment for retail services. Passage of legislation is uncertain and depends on many factors.

20
AT&T INC.
MARCH 31, 2008
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    

Our wireless operations are 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 on wireless providers. We believe that the wireless industry is characterized by innovation, differentiation and competition among handset manufacturers, carriers and applications and that additional broadband regulation and new wholesale requirements are unnecessary given the state of competition and may be appropriate only in the case of market failure.

E911 Order  In September 2007, the FCC adopted an order (the E911 Order) that would substantially increase accuracy requirements in connection with providing the location of a wireless caller to dispatchers of 911 emergency services. Compliance with interim accuracy benchmarks is required in March 2009.

Under FCC rules, carriers are required to attempt to deliver location data to Public Safety Answering Points (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 within 100 meters on 67 percent of all calls. The current rules permit these percentages to be calculated based on all calls, network-wide, for purposes of measuring location accuracy. The E911 Order would require wireless carriers to achieve E911 location accuracy measured in each of the local areas served by the approximately 6,000 PSAPs across the country. Carriers would have until September 2012 to achieve PSAP-level accuracy, and would have to demonstrate compliance with certain incremental location accuracy benchmarks in 2009 and 2010. The PSAP-level accuracy requirement in the E911 Order is not attainable throughout our wireless network using currently available commercial technology.

On March 28, 2008, the United States Court of Appeals for the DC Circuit (Court of Appeals) granted motions filed by AT&T and other carriers seeking a stay of the E911 Order pending a ruling on the merits of the appeals of that order. The E911 Order will not go into effect while the Court of Appeals is considering the appeals. Depending on technological developments, the interpretation of the final order and the resolution of appeals, we could be required to make significant capital expenditures to implement and maintain compliance with this Order.

Order on Recommendations of the Hurricane Katrina Panel In October 2007, the FCC issued an order designed to improve the reliability, interoperability and recovery of telecommunications in future disasters. The order requires carriers to maintain backup power at certain points in the network, such as cell sites and remote terminals. In February 2008, the D.C. Circuit granted a stay of the effective date of the Katrina Order's back-up power rules, pending review of a filed appeal.

OTHER BUSINESS MATTERS

Wireless Spectrum Auction On March 20, 2008, the FCC announced that we were the winning bidder of 227 B Block 700 MHz Band wireless spectrum licenses in an auction conducted by the FCC. Accordingly, in April 2008, we paid the FCC $6,136, which was in addition to the $500 deposit that we provided to the FCC at the start of the auction. This purchase was funded using cash from operations and debt. In April 2008, we submitted our license application with the FCC, requesting that the FCC grant the wireless licenses on which we were the high bidder. We will use this spectrummargins as we buildout our networkcompete for next generationboth wireline and wireless services.

DispositionIn April 2008, we sold a unit of one of our publishing subsidiaries to Local Insight Regatta Holdings, Inc. for $235.customers who will have less discretionary income.

U-verse Services We are continuing to expand our deployment of U-verse TV, high-speed broadband and voice services. As of March 31,September 30, 2008, we have passed approximately 914 million living units. As we expand our deployment, we expect to continue to use contracted outside labor in addition to our 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 keep pace with customer demand or if we cannot obtain all required local building permits in a timely fashion. Our deployment plans also could be delayed if we do not receive required equipment and software on schedule.

21
24
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

We believe that our U-verse TV service is subject to federal oversight as a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP video services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Certain municipalities 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. In July 2008, the U.S. District Court for Connecticut affirmed its October 2007 ruling that AT&T’s U-verse TV service is a cable service in Connecticut. We have appealed that decision on the basis that state legislation rendered the case moot. If the courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or 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.

NSA Litigation  There are 24 pending lawsuits that allege that 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, a purported class action filed in U.S. District Court in the Northern District of California, plaintiffs allege that the defendants have disclosed and are currently disclosing to the U.S. Government content and call records concerning communications to which Plaintiffs were a 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. We filed a motion to dismiss the complaint. The United States asserted the “state secrets privilege” and related statutory privileges and also filed a motion asking the court to dismiss the complaint. The Court denied the Motions to Dismiss of both parties.

We and the U.S. governmentGovernment filed interlocutory appeals. The case was argued before a panel of the U.S. Court of Appeals for the Ninth Circuit in August 2007. On August 21, 2008, the court remanded the case to the district court without deciding the issue in light of the passage of the FISA Amendments Act discussed below.

In July 2008, the President signed into law, the FISA (Foreign Intelligence Surveillance Act) Amendments Act of 2008 (the Act), a provision of which addresses the allegations in these pending lawsuits (immunity provision). The immunity provision requires the pending lawsuits to be dismissed if the Attorney General certifies to the court either that the alleged assistance was undertaken by court order, certification, directive, or written request or that the telecom entity did not provide the alleged assistance. On September 19, 2008, the Attorney General filed his certification and asked the court to dismiss all of the lawsuits pending against the telecommunications companies. On October 16, 2008, the plaintiffs filed an opposition to the certification and motion to dismiss arguing that the Act is unconstitutional and, alternatively, that the government failed to meet its burden of justifying dismissal. We are awaitingbelieve that the immunity provision is constitutional, that the government has met its burden of proof, and that the lawsuits pending against us will eventually be dismissed.

In addition, a decision. lawsuit seeking to enjoin the immunity provision’s application on grounds that it is unconstitutional was filed the day after the Act was signed by the President. That case has been referred to the Joint Panel on Multidistrict Litigation, which has conditionally transferred the case to the Northern District of California, the court referred to above that is considering the Attorney General’s certification and motion to dismiss.

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

Prepaid Calling CardBroadcom Patent LitigationDispute  In September 2007,A number of our handsets, as well as those provided by other wireless carriers, have been subject to 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 ATTCpatent dispute at the U.S. International Trade Commission (ITC) between Broadcom Corporation and awarded TGIP $156 in damages. (TGIP Inc. v. AT&T Corp. et alQualcomm Incorporated (Qualcomm)., U.S. District On October 14, 2008, the Court of Appeals for the Eastern District of Texas).Federal Circuit vacated and remanded the ITC's finding that Qualcomm had infringed a Broadcom patent and vacated the ITC’s limited exclusion order applicable to certain handsets containing Qualcomm technology. The Court held that the ITC did not have authority to issue a limited exclusion order affecting handset suppliers and retailers, such as AT&T, filed a motion requesting thatunless those parties were also named in the Court overturnlawsuit. While this ruling would allow us to continue to sell to our customers handsets using the jury’s verdict as a matter of law. In October 2007, the Court overturned the jury’s finding of infringement, the jury’s $156 award of damages and the jury’s finding of willfulness. TGIP appealed the Court's decision. In April 2008, the parties settled the litigation resulting in no additional expense accrual.disputed Qualcomm chips, we do not currently offer any such handsets.

ACCOUNTING POLICIES AND STANDARDS

Split-Dollar Life Insurance In 2007, the Emerging Issues Task Force (EITF) ratified the consensus on EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4) and EITF 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). EITF 06-4 and EITF 06-10 cover split-dollar life insurance arrangements (where the company owns and controls the policy) and provides that an employer should recognize a liability for future benefits in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” These are effective for fiscal years beginning after December 15, 2007. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, recording additional postretirement liabilities of $101 and a decrease to retained earnings of $63.

FAS 161 In 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (FAS 161). FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities to improve the transparency of financial reporting. FAS 161 will not have an impact on our financial position and results of operations.


2225
AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

DIRECTV Agreement  On September 26, 2008, we announced an agreement to market and sell DIRECTV's service as a co-branded satellite television service after Jan. 31, 2009. We will offer, market and sell co-branded AT&T | DISH Network services through Jan. 31, 2009. After that date, existing AT&T | DISH Network customers will continue to receive service.

COMPETITIVE AND REGULATORY ENVIRONMENT

AT&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 markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a 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 regulation. Since the Telecom Act was passed, however, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained regulatory requirements applicable to our traditional wireline subsidiaries. Where appropriate, we are pursuing additional legislative and regulatory measures to reduce regulatory requirements that inhibit our ability to compete effectively in providing services to our customers. For example, we are supporting regulatory and legislative efforts that would offer a streamlined process for new video service providers to compete with traditional cable television providers. In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a statewide or state-approved (as opposed to municipal-approved) franchise to offer video services. We also are supporting efforts to update regulatory treatment for retail services. Passage of legislation is uncertain and depends on many factors.

Our wireless operations are likewise subject to certain 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. We believe that the wireless industry is characterized by innovation, differentiation and competition among handset manufacturers, carriers and applications and that additional regulation is unnecessary given the state of competition and may be appropriate only in the case of market failure.

ACCOUNTING POLICIES AND STANDARDS

FSP 157-3  On October 10, 2008, the FASB issued FASB Staff Position 157-3, “Determining the Fair Value of a Financial Asset When the Market of that Asset is not Active” (FSP 157-3). FSP 157-3 provides an example that clarifies and reiterates certain provisions of the existing fair value standard, including basing fair value on orderly transactions and usage of management and broker inputs. FSP 157-3 is effective immediately but is not expected to have a material impact on our financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

We had $1,963$1,594 in cash and cash equivalents available at March 31,September 30, 2008. Cash and cash equivalents included cash of $923$915 and money market funds and other cash equivalents of $1,040.$679. In the first quarter,nine months, cash inflow was primarily provided by cash receipts from operations, short-term borrowings and the issuance of long-term debt.debt, short-term borrowings and dispositions. These inflows were offset by cash used to meet the needs of the business including, but not limited to, payment of operating expenses, acquisition of wireless spectrum licenses and other assets, funding capital expenditures, repurchase of common shares, acquisitions, dividends to stockholders, tax payments, the repayment of debt and the payment of interest on debt. We discuss many of these factors in detail below.

26
AT&T INC.
SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued
Dollars in millions except per share amounts
Cash Provided by or Used in Operating Activities
In the first quarternine months of 2008, cash provided by operating activities was $4,957$22,773 compared to $4,648$24,345 in the first quarternine months of 2007. Our operating cash flow reflects our increased operating income including our success in achieving merger synergies and operational efficiencies. Our operating cash flows also reflect(including the effects of lower amortization expense), more than offset by declines in our operational liabilities and our accelerated amortization of intangible assets. Partially offsetting these efficiencies were increased tax and interest payments of $1,812.approximately $3,200.

Within the next nine12 months, we expect the IRSInternal Revenue Service (IRS) will complete its examination of our 2003 through 2005 federal income tax returns and that we will make a deposit in the range of $800 to $1,200 to reduce the accrual of interest while we continue to work with the IRS to resolve any contested issues. As a result, during the first quarter we reclassified approximately $1,000 of our unrecognized tax benefits from “Other noncurrent liabilities” to “Accrued taxes” on our consolidated balance sheet.

Cash Used in or Provided by Investing Activities
In the first quarternine months of 2008, cash used in investing activities consisted primarily of $4,178$10,086 for the acquisition of wireless spectrum and business acquisitions, $14,388 for capital expenditures, $3,662 for acquisitions and $70$455 for interest during construction.construction and $103 related to other investing activities. Cash provided by investing activities of $211 wasincluded $436 from EchoStar for an investment made in 2003 and $1,477 primarily related to the sale of cost investments and the disposition of non-strategic assets.

Our acquisitions activity included the following:
·  $9,325 for the purchase of spectrum licenses related to the 700 MHz Band wireless spectrum auction and the acquisition of licenses from Aloha Partners, L.P.
·  $350 related to a customer list acquisition.
·  $342 related to wireless related acquisitions.
·  $69 related to other acquisitions.

Our capital expenditures are primarily for our wireless and wireline subsidiaries’ networks, our U-verse services, and support systems for our communications services. Capital spending excluding interest during construction in our wireless segment increased 57%66.2% in the first quarter,nine months, primarily for network capacity expansion, integration and upgrades to our Universal Mobile Telecommunications System/High-Speed Packet Access network, as well as for IT and other support systems for our wireless service. Capital expenditures in the wireline segment, which represented 80%73.3% of our capital expenditures, increased 20%7.9% in the first quarter,nine months, primarily due to the continued deployment of our U-verse services.

We continue to expect that our 2008 capital expenditures, which include wireless network expansion and U-verse services, will be in the midteens as a percentage of consolidated revenue. We continue to expect to fund 2008 capital expenditures for our wireless and wireline segments, including international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations.

Included in acquisitions wereIn the following:
·  Approximately $2,688 for the purchase of spectrum licenses, primarily for the acquisition of licenses from Aloha Partners, L.P.
·  $500 deposit with the FCC related to the 700 MHz Band wireless spectrum auction.
·  $350 related to a customer list acquisition.
·  $124 related to other acquisitions.
first nine months, proceeds from dispositions included $1,130 from the sale of buildings and other equipment, $230 from the sale of a unit of one of our publishing subsidiaries and $84 from the sale of other non-strategic assets.

On March 20, 2008, the FCC announced that we were the winning bidder of 227 B Block 700 MHz Band wireless spectrum licenses in an auction conducted by the FCC. In April 2008, we paid the FCC $6,136, which was in addition to the $500 deposit that we provided to the FCC at the start of the auction, mentioned previously.


23
AT&T INC.
MARCH 31, 2008
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    

Cash Used in or Provided by Financing Activities
We plancontinue to fund our 2008 financing activities through a combination of short- and long-term borrowings and cash from operations. Our financing activities include the repayment of debt and funding repurchases of our common stock and the repayment of debt.stock.

At March 31,September 30, 2008, we had $13,301$17,419 of debt maturing within one year, which included $7,691$7,196 of commercial paper borrowings, $5,593$10,189 of long-term debt maturities, and $17$23 of other borrowings. AllThe majority of our commercial paper borrowings are due within 90 days. We continue to examine our mix of short- and long-term debt in light of interest rate trends.
27
AT&T INC.
SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - Continued
Dollars in millions except per share amounts
In the first quarternine months of 2008, we received net proceeds of $5,786$10,924 from the issuance of long-term debt and $5,188 from the issuance of commercial paper and $3,972 from the issuance of $4,000 inpaper. Our long-term debt which consisted of the following:issuances were as follows:
·  $2,500 of 5.5% global notes due in 2018.
·  $7502,000 of floating rate notes due 2010 in a private offering, which can be redeemed by the holder early (which is classified as debt maturing in one year).
·  
€1,250 of 6.125% global notes due 2015 (equivalent to approximately $1,975 when issued).
·  $1,500 of 4.95% global notes due in 2013.
·  $1,250 of 6.40% global notes due 2038.
·  $1,000 of 5.60% global notes due 2018.
·  $750 of 6.3% global notes due in 2038.

In the first quarter,nine months, we repaid $613$3,143 of debt, which primarily consisted of repayments on long-term debt and scheduled principal payments on other debt and borrowings.

On December 10, 2007, 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 2009. In the first quarternine months of 2008, we repurchased 111.6164.2 million shares at a cost of $4,071. See our “Issuer Equity Repurchases” table for information on$6,077. Although we will evaluate additional share repurchases during the first quarterremainder of 2008.2008 should the economic environment improve, we currently intend to focus on reducing debt.

We paid dividends of $2,422$7,150 in the first quarternine months of 2008 and $2,218$6,584 in the first quarternine months of 2007, primarily reflecting an increase in the quarterly dividend approved by our Board of Directors in December 2007, which was partially offset by a decline in common shares outstanding of approximately 4.0%4% due to our share repurchases over the past year. Dividends declared by our Board of Directors totaled $0.40 per share in the firstthird quarter of 2008 and $0.355 per share in the firstthird quarter of 2007. Our dividend policy considers 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 future periods. All dividends remain subject to declaration by our Board of Directors.

At March 31,September 30, 2008, our debt ratio was 39.6%40.6% compared to 35.4%35.3% at March 31,September 30, 2007 and 35.7% at December 31, 2007. The increased debt ratio at March 31,September 30, 2008 reflects an increase in debt of nearly $11,000$16,200 since March 31,September 30, 2007 and $9,400nearly $12,700 since December 31, 2007. The increase was primarily due to the issuance of new debt to pay for the acquisition of wireless spectrum licenses in April 2008 (see “Cash Used in or Provided by Investing Activities”). The increased debt ratio also reflects the impact of our share repurchases and increased dividend payments in 2007 and the first quarter of 2008. Equity in 2008 reflects our increased income and adjustments to other comprehensive income required under Statement of Financial Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

In April 2008, we received proceeds of $3,965 from the issuance of $2,000 of floating rate notes due 2010 in a private offering and €1,250 of 6.125% global notes due 2015 (equivalent to approximately $1,975 when issued).

We have a five-year $10,000 credit agreement with a syndicate of investment and commercial banks, which we have the right to increase up to an additional $2,000 provided no event of default under the credit agreement has occurred. One of the participating banks is Lehman Brothers Bank, Inc., which recently declared bankruptcy. We are unable to determine the status of their stated commitment of $595 at this time. 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. 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 comply with all covenants under the agreement. At March 31,September 30, 2008, we had no borrowings outstanding under this agreement.


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AT&T INC.
MARCH 31, 2008
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts      

In April 2008, we entered into a $3,000 revolving credit agreement with certain banks. This agreement will expire inbanks with a scheduled expiration date of December 2008. We have theIn August 2008, we exercised our 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. This agreement will not affect our existing $10,000, five-year revolving credit agreement, mentioned previously. These advances would be used for general corporate purposes, which could include repayment of maturing commercial paper. We must maintain a debt-to-EBITDA (with 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. 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.agreement.

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AT&T INC.
SEPTEMBER 30, 2008

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At March 31,September 30, 2008, we had interest rate swaps with a notional value of $3,250$5,750 and a fair value of $180.$76. In the third quarter we terminated a swap with Lehman Brothers Special Financing Inc. with a notional value of $250.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $2,799$4,774 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $142$(363) at March 31,September 30, 2008.

In April 2008, we entered into fixed-to-fixed cross-currency swaps on our Euro-denominated global notes with a U.S. dollar notional value of $1,975 to hedge our exposure to changes in foreign currency exchange rates. This hedge also includes interest rate swaps of a fixed foreign-denominated rate to a fixed U.S.-denominated interest rate, which results in a U.S.-denominated semi-annual rate of 5.78% on our Euro-denominated notes.

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 March 31,September 30, 2008. 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 March 31,September 30, 2008.



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AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

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

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 these factors are discussed in more detail in the “Risk Factors” section of our Form 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.investments including the impact on customer demand and our ability to access financial markets.
·  Changes in available technology and the effects of such changes including product substitutions and deployment costs.
·  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 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.
·  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.
·  Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments.
·  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 extentimpact of competition on customer totals and customer acquisition and retention costs and the resulting pressurepressures on access line totals and wireline and wireless operating margins.
·  Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.
·  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 timing, extent and cost of deployment of our U-verse services; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to these services; and the availability, cost and/or reliability of the various technologies and/or content required to provide such services.
·  The outcome of pending or threatened litigation including patent infringement claims by or against third parties.
·  The impact on our networks and business of major equipment failures, severe weather conditions, natural disasters or terrorist attacks.
·  The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
·  The issuance by the Internal Revenue Service and/or other tax authorities of new tax regulations or changes to existing standards; actions by tax agencies and judicial authorities with respect to applying applicable tax laws and regulations; and the resolution of disputes with any taxing jurisdictions.
·  Our ability to adequately fund our wireless operations, including access to additional spectrum, network upgrades and technological advancements.
·  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.
·  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 enumerated here, also could materially affect our future earnings.

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AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    
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. For the firstthird quarter 2008, there were no such material developments.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)During the firstthird quarter of 2008, non-employee directors acquired shares of common stock pursuant to the 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 annual retainer or fees in the form of shares or deferred stock units (DSUs) that are convertible into cash or shares. Each director also receives an annual grant of DSUs. The plan provides that DSUs (and dividends earned thereon) acquired during 2007 and thereafter would be convertible in the form of cash only. During the firstthird quarter of 2008, an aggregate of 5,8267,301 shares and DSUs (from pre-2007 accruals) were acquired by non-employee directors at prices ranging from $34.83 to $38.49, in each case$30.81, 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)  On December 10, 2007, 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 2009. In the first quarter of 2008, we repurchased 111.6 million shares at a cost of $4,071. We have repurchased, and intend to continue to repurchase, 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 PeriodTotal 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
January 30, 2008 –
January 31, 2008
10,000,000
    $     35.70
 10,000,000 390,000,000
February 1, 2008 –
February 29, 2008
77,133,333
    $     36.78
 77,133,333 312,866,667
March 3, 2008 –
March 31, 2008
24,500,000
    $     35.77
 24,500,000 288,366,667
Total111,633,333
    $     36.46
 111,633,333 288,366,667
1Average Price Paid per Share excludes transaction costs.



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AT&T INC.
MARCH 31,SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued  
Dollars in millions except per share amounts    6. Exhibits

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.

10-aAT&T Inc. 2005 Supplemental Employee Retirement Plan amended and restated effective as of June 26, 2008
10-bBellSouth Corporation Supplemental Executive Retirement Plan, amended and restated effective as of January 1, 2008
12Computation of Ratios of Earnings to Fixed Charges
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32Section 1350 Certifications

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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.




May 7,November 5, 2008                                                                               /s/ Richard G. LindnerLindner.
Richard G. Lindner
Senior Executive Vice President
   and Chief Financial OfficerOffice
 
 
 
 
 
 
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