RESULTS OF OPERATIONS

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

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

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

Overview
Operating income Our operating income increased $2,387 in the third quarter and $7,200 for the first nine months, reflecting the addition of BellSouth's and AT&T Mobility's operating results as noted above. Our operating income margin decreased in the third quarter from 18.7% in 2006 to 17.6% in 2007 and increased for the first nine months from 16.4% in 2006 to 16.8% in 2007. The third quarter of 2006 reflected expense reductions due to a change in our vacation policy. Results for the quarter and nine months ended reflected merger-related charges and the additional amortization expense on intangibles identified and recorded in connection with the BellSouth and AT&T Corp. (ATTC) acquisitions, non-merger severance and non-recurring adjustments, partially offset by operational improvements, merger synergies and the addition of the higher-margined wireline operations at BellSouth. As we amortize several merger-related intangible assets using the sum-of-the-months-digits method of amortization, amortization expense decreases as the amount of time we hold the assets increases.

The positive impact of the BellSouth acquisition was slightly offset by the continued decline of our 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. While we lose the voice revenues, we have the opportunity to increase wireless service revenue should customers choose AT&T Mobility as their alternative provider.

Operating revenues Our operating revenues increased $14,494, or 92.7%, in the third quarter and $41,415, or 87.8%, for the first nine months primarily due to our acquisition of BellSouth and the resulting inclusion of BellSouth and wireless revenues in our operating revenues. Also contributing to the operating revenue increase was continuing growth in data, primarily related to Internet Protocol (IP) data, partially offset by the continued decline in voice revenues. Wireless data growth has also been strong and is expected to continue.

AT&T INC.
SEPTEMBER 30, 2007

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

Operating expenses Our operating expenses increased $12,107, or 95.2%, in the third quarter and $34,215, or 86.7%, for the first nine months of 2007 primarily due to the above-mentioned acquisition of BellSouth. Operating expenses included merger integration costs of $326 in the third quarter and $891 for the first nine months, and amortization expense on intangible assets identified at the time of either the BellSouth or the ATTC acquisitions of $1,365 in the third quarter and $4,607 for the first nine months. We are amortizing these intangibles using the sum-of-the-months-digits method, which means that we will record higher expenses in earlier periods. Partially offsetting these increases were merger synergies of approximately $670 in the third quarter and $2,000 for the first nine months, reflecting progress with the integration of BellSouth, AT&T Mobility and ATTC, workforce reductions and other cost-reduction initiatives.

Interest expense increased $445 in the third quarter and $1,261, or 91.5%, for the first nine months of 2007. The increase was primarily due to higher average debt balances resulting from the inclusion of BellSouth and AT&T Mobility outstanding debt on our consolidated balance sheet.

Equity in net income of affiliates decreased $487, or 75.0%, in the third quarter and $893, or 62.1%, for the first nine months of 2007. The decrease is a result of the change in accounting for AT&T Mobility to a wholly-owned subsidiary. Prior to the BellSouth acquisition (see Note 2), we accounted for our 60% economic interest in AT&T Mobility under the equity method since we shared control equally with our joint-venture partner, BellSouth. As a result of the BellSouth acquisition, AT&T Mobility became a wholly-owned subsidiary of AT&T and is reported in our wireless segment and our Consolidated Statements of Income. This decrease was slightly offset by improved results from our investments in América Móvil S.A. de C.V. (América Móvil) and Teléfonos de México, S.A. de C.V. (Telmex).

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

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

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

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

AT&T INC.
SEPTEMBER 30, 2007

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

Selected Financial and Operating Data
(September 30, 2006 amounts do not include BellSouth)
                                                        September 30,
                                                     2007          2006
Wireless customers (000)1                             65,666        58,666
In-region consumer revenue connections (000)2,7       49,639        33,197
In-region network access lines in service (000)3      62,871        47,087
In-region wholesale lines (000)3,7                     3,849         4,493
In-region broadband connections (000)3,4,7            13,760         8,155
In-region video connections (000)3,5,7                 2,112           643
Debt ratio6                                             35.3 %        36.3 %
Number of AT&T employees                             303,670       179,420

1 Amounts represent 100% of the wireless customers of AT&T Mobility. 2 Consumer revenue connections include retail access lines, broadband and video.
3 In-region represents access lines served by AT&T's incumbent local exchange companies (ILECs).
4 Broadband connections include DSL, U-verse high speed Internet access and satellite broadband.
5 Video connections include customers that have satellite service under our agency and resale agreements
with EchoStar and DIRECTV and U-verse video connections. 6 See our "Liquidity and Capital Resources" section for discussion. 7 Prior year amounts restated to conform to current year methodology.

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

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

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

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

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

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

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

Pro forma other revenues are higher in the third quarter reflecting improved wireless handset sales, and lower for the first nine months in 2007 due to a decline in demand for integration services and customer premises equipment.

Segment Results
Our segments represent strategic business units that offer different products and services and are managed accordingly. Our operating segment results presented in Note 5 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. Interest expense, interest income and other income (expense) - net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. As a result of our acquisition of BellSouth, we have revised our segment reporting to represent how we now manage our business, restating prior periods to conform to the current segments. We have four reportable segments: (1) wireline; (2) wireless; (3) advertising & publishing; and (4) other.

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

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

The advertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and Internet-based advertising. This segment also includes the results of YELLOWPAGES.COM (YPC), which was a joint venture with BellSouth prior to the December 29, 2006 acquisition and is now a wholly-owned subsidiary of AT&T. In 2006, our portion of the results from YPC were recorded in this segment as equity in net income of affiliates. Our advertising & publishing segment results include revenue of $196 in the third quarter and $911 for the first nine months and expenses of $64 in the third quarter and $291 for the first nine months of 2007, related to directories published in the Southeast region during 2006, prior to our acquisition of BellSouth (see Note 5).

The other segment includes results from Sterling Commerce Inc. (Sterling), customer information services and all corporate and other operations. The other segment includes our portion of the results from our international equity investments. In 2006, this segment also included our results from AT&T Mobility as equity in net income of affiliates, as discussed above.

AT&T INC.
SEPTEMBER 30, 2007

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

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


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

Operating Income and Margin Trends
Our wireline segment operating income increased $526 in the third quarter and $2,879 for the first nine months reflecting the addition of BellSouth's operating results in 2007. Our wireline segment operating income margin decreased in the third quarter from 16.5% in 2006 to 16.1% in 2007 and increased for the first nine months from 13.9% in 2006 to 16.5% in 2007. Our third-quarter expenses reflect charges related to legal proceedings, contract termination and severance charges. Results for the third quarter and nine months ended reflect lower expenses as a result of merger synergies and the addition of higher-margined operations of BellSouth, partially offset by merger-related charges and additional amortization expense on those intangibles identified at the time of our acquisitions of BellSouth and ATTC. Our operating income continued to be pressured by access line declines due to increased competition, as customers disconnected both primary and additional lines and switched to alternative technologies, such as wireless, VoIP and cable for voice and data. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, video and voice. For example, we have the opportunity to increase wireless segment revenues if customers choose AT&T Mobility as an alternative provider.

Wireline Operating Results
All changes other than those specifically stated as being due to the BellSouth acquisition are related to pre-acquisition wireline operations.

Voice revenues increased $1,956, or 23.3%, in the third quarter of 2007 and $6,095, or 23.9%, for the first nine months of 2007 primarily due to the acquisition of BellSouth. 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 increased $1,661, or 37.4%, in the third quarter and $5,230, or 39.1%, for the first nine months of 2007 due to the acquisition of BellSouth, which increased local voice revenues approximately $1,990 in the third quarter and $6,070 for the first nine months of 2007. Local voice revenues also increased in the third quarter due to pricing increases for regional telephone service, custom calling features and inside wire maintenance agreements. These increases were partially offset by expected declines in revenues from ATTC's mass-market customers to which no proactive marketing occurs. Local voice revenues were also negatively impacted by continued declines in customer demand for sales of calling features and inside wire agreements. We expect our local voice revenue to continue to be negatively affected by increased competition, including customers shifting to competitors' alternative technology and the disconnection of additional lines for DSL service and other reasons.

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

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

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

Data revenues increased $1,478, or 32.1%, in the third quarter and $4,285, or 31.4%, for the first nine months of 2007. Data revenues accounted for approximately 33% of our wireline operating revenues in the third quarter and for the first nine months of 2007 and over 31% of wireline operating revenues in the third quarter and for the first nine months of 2006. Data revenues include transport, IP and packet switched data services.

IP data revenues increased $779, or 47.4%, in the third quarter and $2,213, or 46.3%, for the first nine months of 2007, primarily due to the acquisition of BellSouth, which increased IP data approximately $565 and $1,640, respectively. Included in IP data revenues are DSL, dedicated Internet access, VPN and other hosting services. VPN and dedicated Internet access services contributed to IP data growth in 2007 due to continued growth in the customer base and migration from other traditional circuit-based products.

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

Our packet switched services, which include frame relay, ATM and managed packet services, increased $20, or 2.7%, in the third quarter and $41, or 1.8%, for the first nine months of 2007 primarily due to the acquisition of BellSouth, which increased packet switched services revenue approximately $80 in the third quarter and $205 for the first nine months of 2007. This increase was almost entirely offset by both competitive pricing and lower demand as customers continue to shift to IP-based technology. We expect these services to continue to decline as a percentage of our overall data revenues.

Other operating revenues increased $200, or 15.3%, in the third quarter and $376, or 9.4%, for the first nine months of 2007, due to our acquisition of BellSouth, which increased other operating revenue approximately $220 in the third quarter and $680 for the first nine months. Major items included in other operating revenues are integration services and customer premises equipment, government-related services, state and municipal fees, outsourcing and international data bundles, which account for over 76% of total other operating revenue for all periods. Equipment sales and related network integration and management services decreased $29 in the third quarter and $205 for the first nine months primarily due to less emphasis on the sale of lower-margin equipment. Revenue also decreased by $70 for the first nine months of 2007 due to the recognition of intellectual property license fees in 2006.

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

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

. . .