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 nine months of 2008 and 2007 are summarized as follows:

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

Overview
Operating income Our operating income increased $314, or 5.9%, in the third quarter and $3,253, or 21.8%, for the first nine months of 2008, reflecting continued growth in wireless service and data revenues. Our operating income margin increased from 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 BellSouth Corporation (BellSouth) subsidiaries. In accordance with U.S. generally accepted accounting principles (GAAP), our reported results in 2007 did not include deferred 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 from BellSouth directories published during the 12-month period ending with the December 29, 2006 date we acquired BellSouth. Had our 2007 directory results included this deferred revenue and expenses, operating income would have increased $182 in the third quarter and $2,633 for the first nine months of 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 $1,210, or 4.0%, in the third quarter and $4,373, or 4.9%, for the first nine months primarily due to continuing growth in wireless subscribers. 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 discussed above, purchase accounting treatment for directories published 12 months prior to the BellSouth acquisition also increased revenues in the third quarter and for the first nine months of 2008 when compared to 2007.

Our operating revenues also reflect the continued decline in 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.

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

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 $95, or 58.6%, in the third quarter and $167, or 30.6%, for the first nine months of 2008. The increase is primarily due to improved results from our investment in América Móvil S.A. de C.V. (América Móvil), Telmex and 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 $614 for the first nine months of 2007. Results in the third quarter of 2008 primarily included expenses of $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 land and other non-strategic 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 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.

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

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

Selected Financial and Operating Data
                                               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, 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 of 781 in 2008 and 126 in 2007.
5 See our "Liquidity and Capital Resources" section for discussion. 6 See 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, (2) wireline, (3) advertising & publishing, and (4) other.

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

The wireline segment provides landline voice and data communications services, managed 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.

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

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
                                     Third Quarter                            Nine-Month Period
                                                      Percent                                    Percent
                           2008          2007          Change         2008          2007          Change
Segment operating
revenues
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          12,618        10,937           15.4        36,476        31,329           16.4
Segment operating
expenses
Cost of
services and equipment
sales                        4,989         4,079           22.3        13,261        11,690           13.4
Selling, general and
administrative               3,849         3,183           20.9        10,489         9,136           14.8
Depreciation and
amortization                 1,401         1,709          (18.0 )       4,327         5,410          (20.0 )
Total Segment
Operating Expenses          10,239         8,971           14.1        28,077        26,236            7.0
Segment Operating
Income                       2,379         1,966           21.0         8,399         5,093           64.9
Equity in Net
Income of Affiliates             -             3              -             5            12          (58.3 )
Minority Interest 1            (57 )         (43 )        (32.6 )        (186 )        (143 )        (30.1 )
Segment Income           $   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 $413, or 21.0%, in the third quarter and $3,306, or 64.9%, for the first nine 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 was 18.9% in the third quarter and 23.0% for the first nine months of 2008, which improved over margins of 18.0% in the third quarter and 16.3% for the first nine months of 2007. The higher margin in 2008 was primarily due to revenue growth of $1,681, or 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 $1,268, or 14.1%, in the third quarter and $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 September 30, 2007. This increase includes 1.7 million customers related to our acquisition of Dobson Communications Corporation (Dobson) in November 2007 and 182,000 related to our acquisition of Edge Wireless, LLC in April 2008. As of September 30, 2008, we served 74.9 million wireless customers. Contributing to our customer base increase was improvement in the postpaid customer turnover
(churn) rate. 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. 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 third quarter of 2008 and 2007. Our postpaid churn rate declined to 1.2% compared to 1.3% in the third quarter of 2007.

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

Operating Results
Service revenues are comprised of voice, data and other revenue. Service revenues increased $1,413, or 14.3%, in the third quarter and $4,377, or 15.4%, for the first nine months of 2008. The increase in service revenues primarily consisted of:
ˇ Data revenue increases of $915, or 50.5%, in the third quarter and $2,609, or 53.0%, for the first nine months primarily due to the increased number of data users and an increase in data ARPU of 31.7% 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 handsets, including the iPhone 3G, which can provide for the data services previously mentioned. Data service revenues represented 24.2% of wireless service revenues in the third quarter and 22.9% for the first nine months of 2008, up from 18.4% in the third quarter and 17.3% for the first nine months of 2007.

ˇ Voice and other revenue increases of $498, or 6.2%, in the third quarter and $1,768, or 7.5%, for the first nine months, primarily due to an increase in the average number of wireless customers of 14.4%, partially offset by a decline in voice ARPU of 7.2% in the third quarter and 6.3% for the first nine months.

Equipment revenues increased $268, or 24.9%, in the third quarter and $770, or 27.1%, for the first nine months of 2008. The increase was due to higher handset revenues reflecting increased retail customer gross additions of 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 opting for more advanced handsets than in prior periods.

Cost of services and equipment sales expenses increased $910, or 22.3%, in the third quarter and $1,571, or 13.4%, for the first nine months of 2008 with greater than 85% of the increases attributable to higher equipment sales expense. This equipment cost increase was due to the overall increase in sales as well as an increase in sales of higher-cost, advanced 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.

Cost of services increased $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 partly offset by declines in roaming, long-distance and property tax expenses of $106. Interconnect, USF, reseller and other service expenses increased $376 for the first nine months partly offset by declines in roaming, long-distance and network systems expenses of $220.

Selling, general and administrative expenses increased $666, or 20.9%, in the third quarter and $1,353, or 14.8%, for the first nine months of 2008 and included the following:
ˇ Increases in upgrade commissions and residual expenses, customer support costs and other general and administrative costs of $508 in the third quarter and $1,116 for the first nine months primarily due to increases in handset upgrade activity and related 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.

ˇ Increases in direct and indirect commissions as well as other selling expenses of $221 in the third quarter and $394 for the first nine months primarily due to increases in sales volume and commission rates, including those associated with the iPhone 3G, as well as limited workforce increases in retail locations. These increases were partially offset by lower branding advertising expenses.

Depreciation and amortization expenses decreased $308, or 18.0%, in the third quarter and $1,083, or 20.0%, for the first nine months of 2008. Amortization expense decreased $162 in the third quarter and $618 for the first nine months primarily due to lower amortization of intangibles related to our acquisition of BellSouth's 40% ownership interest in AT&T 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 $146, or 13.9%, in the third quarter and $465, or 14.5%, for the first nine 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 as well as increase in the depreciable asset base due to the acquisition of Dobson.

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

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

Operating Income and Margin Trends
Our wireline segment operating income decreased $224, or 7.6%, in the third quarter and $301 or 3.3%, for the first nine months of 2008. Our wireline segment operating income margin decreased in the third quarter from 16.5% in 2007 to 15.6% in 2008 and for the first nine 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 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 $841, or 8.1%, in the third quarter and $2,428, or 7.7%, for the first nine 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.
ˇ Local voice revenues decreased $460, or 7.5%, in the third quarter and $1,297, or 7.0%, for the first nine months of 2008. The decrease was driven primarily by a decline in access lines of approximately $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 approximately $75 in the third quarter and $365 for the first nine months of 2008. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies, the disconnection of additional lines and the slowing economy.

ˇ Long-distance revenues decreased $314, or 8.2%, in the third quarter and $854, or 7.4%, for the first nine months of 2008. The decrease was primarily due to a net decrease in demand for long-distance service, due to expected declines in the number of ATTC's mass-market customers, which decreased 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.

ˇ Local wholesale revenues decreased $67, or 15.2%, in the third quarter and $277, or 19.2%, for the first nine months of 2008. The decrease was primarily due to declining number of competitive providers using Unbundled Network Element-Platform (UNE-P) lines. However, we expect this revenue trend to stabilize since industry consolidation and UNE-P line loss has slowed.

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 $325, or 5.3%, in the third quarter and $975, or 5.4%, for the first nine months of 2008. Data revenues accounted for approximately 36% of wireline operating revenues in the third quarter and for the first nine months of 2008 and 33% of wireline operating revenues in the third quarter and for the first nine months of 2007. Data revenues include transport, IP and packet-switched data services.

IP data revenues increased $393, or 16.2%, in the third quarter and $1,176, or . . .