8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of report (Date of earliest event reported) November 17, 2006

AT&T INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	1-8610	43-1301883
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

175 E. Houston, San Antonio, Texas	78205
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code (210) 821-4105

__________________________________

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[  ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240-14d-2(b))

[  ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item8.01 Other Events.

Throughout this document, the Registrant, AT&T Inc., is referred to as “we” or “AT&T.”

AT&T is filing this Current Report on Form 8-K in order to incorporate by reference into its registration statements, including Registration Statement on Form S-3 (File No. 333-118476), information about its pending acquisition of BellSouth Corporation (“BellSouth”). Unaudited Pro Forma Condensed Combined Financial Information as of and for the period ended September 30, 2006, derived from the historical consolidated financial statements of AT&T, BellSouth and Cingular Wireless L.L.C. (“Cingular”) and adjusted to give effect to AT&T’s acquisition of BellSouth, is attached hereto as Exhibit 99.1 and incorporated herein by reference. The BellSouth Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 is attached hereto as Exhibits 99.2 and is incorporated herein by reference. The Consolidated Financial Statements included in Cingular’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 is attached hereto as Exhibit 99.3 and is incorporated herein by reference.

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this filing contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially. A discussion of factors that may affect future results is contained in AT&T’s filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update or revise statements contained in this filing based on new information or otherwise.

Item 9.01 Financial Statements and Exhibits

(b) Pro Forma Financial Information

RATIO OF EARNINGS TO FIXED CHARGES

AT&T’s pro forma ratio of earnings to fixed charges for the nine-month period ended

September 30, 2006 was 3.74. At September 30, 2006 no preferred stock was outstanding.

The pro forma calculation of ratio of earnings to fixed charges for the nine-month period ended September 30, 2006 is derived from the historical consolidated financial statements of AT&T, BellSouth and Cingular using the purchase method of accounting. AT&T is treated as the acquirer and assumes the acquisition of BellSouth had been completed on January 1, 2005. For purposes of calculating this ratio, the undistributed earnings from equity investments held by the above mentioned companies are included.

The historical ratios of earnings to fixed charges for each of the five years ended December 31, 2005 and for the nine months ended September 30, 2005 and 2006 are set forth in AT&T’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, which is incorporated by reference herein.

(d) Exhibits

12	Computation of Ratios of Earnings to Fixed Charges
99.1	Unaudited Pro Forma Condensed Financial Statements.
99.2	BellSouth Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. The material set forth in the exhibits to the Form 10-Q is not attached hereto or included as an exhibit and is not being incorporated herein by reference.
99.3	Consolidated Financial Statements of Cingular Wireless L.L.C. (Excerpt from Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).

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 hereunto duly authorized.

	AT&T INC.
Date: November 17, 2006	By: /s/ John J. Stephens John J. Stephens Senior Vice President and Controller

EX-12

AT&T Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - PRO FORMA
For the Nine Months Ended September 30, 2006
($ in millions)
				Adjustments		Combined
		Historical	Historical	Consolidation		Pro Forma
		AT&T Inc.	BellSouth	of Cingular	Other	AT&T Inc.
Earnings:
	Income from continuing operations before income taxes	$       8,087	$          4,042	$                491	$     (2,428)	$        10,192
	Equity in net income of affiliates included above	(1,438)	(694)	1,741		(391)
	Fixed Charges	1,647	949	1,323	(346)	3,573
	Distributed income of equity affiliates	79	-			79
	Interest capitalized	(52)	(8)	(32)	-	(92)
	Earnings, as adjusted	$       8,323	$         4,289	$           3,523	$       (2,774)	$        13,361
Fixed Charges:
	Interest expense	$       1,378	$             860	$               901	$          (346)	$          2,793
	Interest capitalized	52	8	32		92
	Dividends on preferred securities	2	-	-		2
	Portion of rental expense representative of interest factor	215	81	390		686
	Fixed Charges	$      1,647	$              949	$            1,323	$         (346)	$          3,573
	Ratio of Earnings to Fixed Charges	5.05	4.52	2.66		3.74

EX-99

AT&T INC.

Unaudited Pro Forma Condensed Combined Financial Information

September 30, 2006

Dollars in millions except per share amounts

The Unaudited Pro Forma Condensed Combined Financial Statements presented below are derived from the historical consolidated financial statements of AT&T Inc. (AT&T), BellSouth Corporation (BellSouth) and Cingular Wireless LLC (Cingular). The Unaudited Pro Forma Condensed Combined Financial Statements do not give effect to the consolidation of YellowPages.com, which we refer to as YPC, a joint venture between AT&T and BellSouth, for which AT&T’s and BellSouth’s total investment was approximately $100 at September 30, 2006. The Unaudited Pro Forma Condensed Combined Financial Statements are prepared using the purchase method of accounting, with AT&T treated as the acquirer and as if the acquisition of BellSouth had been completed on January 1, 2005 for statement of income purposes and September 30, 2006 for balance sheet purposes. For a summary of the business combination, see “The Merger” included in the AT&T Form S-4 filed with the Securities and Exchange Commission (SEC) on March 31, 2006 (File No. 333-132904) including all amendments and supplements to it.

The pro forma amounts have been developed from (a) the unaudited condensed consolidated financial statements of AT&T contained in its Quarterly Report on Form 10-Q for the nine-month period ended September 30, 2006, (b) the unaudited condensed consolidated financial statements of BellSouth contained in its Quarterly Report on Form 10-Q for the nine-month period ended September 30, 2006, and (c) the unaudited condensed consolidated financial statements of Cingular contained in its Quarterly Report on Form 10-Q for the nine-month period ended September 30, 2006.

As of the date of this document, the detailed valuation studies necessary to arrive at the required estimates of the fair market value of the BellSouth assets to be acquired and the liabilities to be assumed (which will include the fair value adjustments for BellSouth’s 40 percent interest in Cingular) and the related allocations of purchase price are in process, and AT&T has not identified the adjustments necessary, if any, to conform BellSouth and Cingular data to AT&T’s accounting policies (see Note 1). For this document, AT&T has made certain adjustments to the historical book values of the assets and liabilities of BellSouth and Cingular to reflect certain preliminary estimates of fair values, with the excess of the purchase price over the historical net assets of BellSouth, as adjusted to reflect estimated fair values, recorded as goodwill (see Note 2). Actual results may differ from these Unaudited Pro Forma Condensed Combined Financial Statements once AT&T has determined the final purchase price for BellSouth and has completed the valuation studies necessary to finalize the required purchase price allocations and identified any necessary conforming accounting changes for BellSouth and Cingular. There can be no assurance that such finalization will not result in material changes.

Additionally, as of September 30, 2006, AT&T has not completed and included the final valuations for the AT&T Corp. (ATTC) acquisition in the AT&T consolidated balance sheet. The values of certain assets and liabilities assumed in the acquisition of ATTC are based on preliminary valuations and are subject to adjustment as additional information is obtained. As of September 30, 2006, AT&T had obtained additional information on many of the outstanding issues relating to the preliminary valuation, resulting in the adjustment of certain assets and liabilities, offset by a change to goodwill. AT&T has 12 months from the closing of the acquisition to finalize the valuations; any remaining adjustments will be reflected in the fourth quarter of 2006.

The Unaudited Pro Forma Condensed Combined Financial Statements are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of AT&T would have been had the BellSouth acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position.

The Unaudited Pro Forma Condensed Combined Financial Statements do not include the realization of future cost savings from operating efficiencies, revenue synergies or other restructuring costs expected to result from the BellSouth acquisition.

The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the separate historical consolidated financial statements and accompanying notes of AT&T, BellSouth and Cingular.

AT&T INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

		Historic				Adjustments
		AT&T		BellSouth		Consolidation of Cingular			Other			Combined
Total Operating Revenues	$	47,164	$	15,595	$	27,751		$	(1,795)	(c1)	$	87,627
									(588)	(d1)
									(500)	(d2)
Operating Expenses
Cost of sales (exclusive of depreciation and amortization shown separately below)		20,641		5,974		11,218			(1,795)	(c1)		34,790
									-	(c2)
									(588)	(d1)
									(160)	(d3)
									(500)	(d2)
Selling, general and administrative		11,396		2,868		8,439			(1)	(c2)		22,641
									(61)	(d3)
Depreciation and amortization		7,415		2,685		4,854			(408)	(c4)		17,734
									1,147	(a5)
									2,041	(b3)
Asset impairment and net restructuring and other charges		-		72		-			-			72
Total Operating Expenses		39,452		11,599		24,511			(325)			75,237
Operating Income		7,712		3,996		3,240			(2,558)			12,390
Interest expense		1,378		860		901	(a3)		(358)	(c1)		2,793
									13	(c3)
									(1)	(d4)
Other income (expense) – net		1,753		906		(107)	(a3)		(358)	(c1)		453
						(1,741)	(a3)
Income Before Income Taxes		8,087		4,042		491			(2,570)			10,050
Provision for income taxes		2,669		1,312		491	(a3)		(910)	(f)		3,562
Net Income	$	5,418	$	2,730	$	-		$	(1,660)		$	6,488
Basic Earnings Per Share:
Net Income	$	1.40	$	1.51							$	1.03	(e1)
Weighted Average Common Shares Outstanding (000,000)		3,880		1,806								6,294
Diluted Earnings Per Share:
Net Income	$	1.39	$	1.51							$	1.03	(e2)
Weighted Average Common Shares Outstanding with Dilution (000,000)		3,900		1,813								6,323

The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.

AT&T INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2006
			Historical				Pro Forma
							Adjustments
			AT&T	BellSouth			Consolidation of Cingular			Other			Combined
	Assets
	Current Assets
	Cash and cash equivalents	$	1,251	$	731	$	491	(a1)	$	-		$	2,473
	Accounts receivable – net		8,668		2,562		3,921	(a1)		-			15,151
	Other current assets		3,593		2,638		2,414	(a1)		-			8,645
	Total current assets		13,512		5,931		6,826			-			26,269
	Property, Plant and Equipment – Net		57,651		21,820		22,696	(a1)		1,540	(b2)		103,707
	Goodwill		13,385		-		22,004	(a1)		(8,802)	(a4)		64,611
							472	(a2)		37,552	(b)
	Other Intangibles – Net		7,728		1,540		27,397	(a1)		10,200	(b3)		52,166
										5,300	(a5)
										12,500	(a5)
										(10,959)	(a4)
										(1,540)	(b2)
	Investments in Equity Affiliates		2,222		31		1	(a1)		-			2,254
	Investments in and Advances to Cingular Wireless		33,029		22,357		(33,029)	(a2)		-			-
							(22,357)	(a2)
	Other Assets		16,365		8,694		1,368	(a1)		(14)	(b4)		25,286
										(1,127)	(b2)
	Total Assets	$	143,892	$	60,373	$	25,378		$	44,650		$	274,293
	Liabilities and Stockholders’ Equity
	Current Liabilities
	Debt maturing within one year	$	4,713	$	3,926	$	2,829	(a1)	$	-		$	9,916
							(1,552)	(a2)		-
	Other current liabilities		19,192		4,956		6,714	(a1)		-			30,862
	Total current liabilities		23,905		8,882		7,991			-			40,778
	Long-Term Debt		26,799		14,278		18,593	(a1)		(96)	(a7)		52,920
							(6,717)	(a2)		63	(b5)
	Other Noncurrent liabilities		37,787		11,777		5,511	(a1)		5,273	(b4)		59,235
										(1,127)	(b2)
										14	(a6)
	Total Noncurrent liabilities		64,586		26,055		17,387			4,127			112,155
	Stockholders’ Equity
	Common shares issued		4,065		2,020		-			(2,020)	(b6)		6,479
										2,414	(b1)
	Capital in excess of par value		27,116		8,130		-			(8,130)	(b6)		90,661
										63,545	(b1)
	Members’ capital		-		-		46,655	(a1)					-
							(46,655)	(a2)
	Retained earnings (deficit)		30,653		21,525		-			(21,525)	(b6)		30,653
	Treasury shares (at cost)		(5,867)		(6,274)		-			6,274	(b6)		(5,867)
	Accumulated other comprehensive						(10)	(a1)		(35)	(b6)		(566)
	income		(566)		35		10	(a2)
	Total stockholders’ equity		55,401		25,436		-			40,523			121,360
	Total Liabilities and Stockholders’ Equity	$	143,892	$	60,373	$	25,378		$	44,650		$	274,293

The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.

AT&T INC.

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

Dollars in millions except per share amounts

Note 1. Basis of Presentation

The accompanying Unaudited Pro Forma Condensed Combined Financial Statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of AT&T, BellSouth and Cingular, after giving effect to the BellSouth merger and adjustments described in these footnotes, and are intended to reflect the impact of the pending BellSouth acquisition on AT&T. The Unaudited Pro Forma Condensed Combined Financial Statements do not give effect to the consolidation of the YPC joint venture between AT&T and BellSouth, for which AT&T’s and BellSouth’s aggregate total investment was approximately $100 at September 30, 2006. On March 5, 2006, AT&T and BellSouth jointly announced the execution of the merger agreement, pursuant to which AT&T would acquire BellSouth in a transaction in which each BellSouth common share would be converted into and exchanged for 1.325 AT&T common shares. Based on the average closing price of the AT&T common shares for the two days prior to, including, and two days subsequent to the public announcement of the merger (March 5, 2006) of $27.32, the purchase price would be $65,959.

AT&T and BellSouth jointly own Cingular, with AT&T holding a 60 percent economic interest and BellSouth holding a 40 percent economic interest. Control of Cingular is shared equally by AT&T and BellSouth. AT&T and BellSouth historically each have accounted for Cingular under the equity method of accounting, recording the proportional share of Cingular’s income as equity in net income of affiliates on the respective consolidated statements of income and reporting the ownership percentage of Cingular’s net assets as “Investments in and Advances to Cingular Wireless.” After the merger, BellSouth and Cingular will be wholly-owned subsidiaries of AT&T.

Upon consolidation, the asset and liabilities of BellSouth and Cingular will be appraised, based on third-party valuations, for inclusion on the opening balance sheet, adjusting 100% of BellSouth’s and 40% of Cingular’s values. Long-lived assets such as property, plant and equipment will reflect a value of replacing the assets, which takes into account changes in technology, usage, and relative obsolescence and depreciation of the assets, sometimes referred to as a Greenfield approach. In an industry that relies heavily on technology, such as telecommunications, this approach often results in differences, sometimes material, from recorded book values even if, absent the acquisition, the assets would be not be impaired. As such, we expect that there may be material decreases in the property, plant and equipment when recorded at fair value using the Greenfield approach (see Note 2, b3). Additionally, assets and liabilities that would not normally be recorded in ordinary operations will be recorded at their acquisition values (e.g., customer relationships that were developed by the acquired company). Debt instruments and investments are valued in relation to current market conditions and other assets and liabilities are valued based on the acquiring company’s estimates. After all identifiable assets and liabilities are valued, the remainder of the purchase price is recorded as goodwill.

The accompanying Unaudited Pro Forma Condensed Combined Financial Statements are presented for illustrative purposes only and do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of AT&T’s, BellSouth’s and Cingular’s operations.

Additionally, the Unaudited Pro Forma Condensed Combined Financial Statements do not include any transaction costs relating to the merger that will be included by AT&T as part of the purchase price (as those amounts are anticipated to be immaterial to the total purchase price). The Unaudited Pro Forma Combined Condensed Statement of Income reflects the BellSouth acquisition as if it had been completed on January 1, 2005.

The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the merger as if it was completed on September 30, 2006 and includes AT&T’s preliminary valuations of property, plant and equipment, intangible assets, employee benefit plans, debt and certain other assets and liabilities acquired in the ATTC acquisition. As of September 30, 2006, we have obtained additional information on many of the outstanding issues relating to the preliminary valuation, resulting in the adjustment of certain assets and liabilities, offset by a change to goodwill. We have 12 months from the closing of the acquisition to finalize our valuations; any remaining adjustments will be reflected in the fourth quarter of 2006.

For more information on estimated cost savings, and revenue synergies, see “The Merger – AT&T’s Reasons for the Merger” and “The Merger – BellSouth’s Reasons for the Merger” included in the AT&T Form S-4 filed with the SEC on March 31, 2006 (File No. 333-132904) including all amendments and supplements to it.

AT&T INC.

Dollars in millions except per share amounts

Note 2. Pro Forma Adjustments

(a) The Unaudited Pro Forma Condensed Combined Balance Sheet includes adjustments to reflect the consolidation of Cingular as a wholly-owned subsidiary of AT&T.

(a1) AT&T and BellSouth historically each have accounted for Cingular under the equity method of accounting, reporting the ownership percentage of Cingular’s net assets as “Investments in and Advances to Cingular Wireless” on their respective consolidated balance sheets.

At September 30, 2006, AT&T’s total investment in Cingular was $33,029. The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to remove AT&T’s “Investment in and Advances to Cingular Wireless” and to record, by category, AT&T’s 60 percent ownership of Cingular’s assets and liabilities as reported in Cingular’s consolidated balance sheet included in their Quarterly Report on Form 10-Q. AT&T’s 60 percent ownership of Cingular’s assets and liabilities remains at the existing historical book values after the merger.

At September 30, 2006, BellSouth’s total investment in Cingular was $22,357. The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to remove BellSouth’s “Investment in and Advances to Cingular Wireless” and to record, by category, BellSouth’s 40 percent ownership of the fair value of Cingular’s assets and liabilities as reported in Cingular’s consolidated balance sheet included in their Quarterly Report on Form 10-Q, with fair values approximating historical book values as of September 30, 2006, unless otherwise noted in a4 through a7.

(a2) The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to eliminate Cingular’s September 30, 2006 “Members’ Capital,” other equity amounts, amounts due to AT&T and BellSouth under the Cingular revolving credit agreement and long-term debt due to AT&T and BellSouth as follows:

Investments in and Advances to Cingular Wireless
AT&T	$	33,029
BellSouth		22,357
Combined investment in Cingular	$	55,386
Member investment reflected as goodwill	$	472
Cingular revolving credit agreement with parents		1,552
Cingular long-term debt due to parents		6,717
Cingular’s unrecognized losses		(10)
Cingular’s members capital		46,655
	$	55,386

(a3) AT&T and BellSouth historically each have accounted for Cingular under the equity method of accounting, recording the proportional share of Cingular’s income as equity in net income of affiliates on the respective consolidated statements of income. The Unaudited Pro Forma Combined Statement of Income has been adjusted to remove equity in net income of affiliates recorded by AT&T and BellSouth and to record, by category, Cingular’s results as reported in Cingular’s consolidated statement of income included in their Quarterly Report on Form 10-Q.

AT&T INC.

Dollars in millions except per share amounts

(a4) The acquisition of BellSouth’s portion of Cingular will be accounted for as a step acquisition. In accordance with purchase accounting rules, BellSouth’s investment in Cingular will be adjusted to its fair value through purchase accounting adjustments. Accordingly, the Unaudited Pro Forma Condensed Combined Balance Sheet includes adjustments of $8,802 to eliminate BellSouth’s 40% ownership interest in Cingular’s historical goodwill and $10,959 to eliminate BellSouth’s interest in Cingular’s intangible assets.

(a5) Of the total amount allocated to “Other Intangibles — Net,” approximately $12,500 represents BellSouth’s portion of the fair value of wireless licenses held by Cingular. These licenses are intangible assets with indefinite lives and, as such, are not subject to amortization. Additionally, AT&T has tentatively assigned approximately $5,300 to BellSouth’s portion of the fair value of Cingular’s customers acquired with an average asset life of 5 years. The final purchase price allocations, which will be based on third party appraisals, may result in different allocations for tangible and intangible assets than presented in these Unaudited Pro Forma Condensed Combined Financial Statements, and those differences could be material.

Amortization of these intangibles is reflected in the Unaudited Pro Forma Condensed Combined Statement of Income using the sum-of-the-months-digits method of amortization. The sum-of-the-months-digits method is a process of allocation, not of valuation and reflects the belief that more revenues will be generated from the assets during the earlier years of their lives. Using the sum-of-the-months-digits method of amortization records a larger portion of the amortization expense earlier in the life of the assets.

(a6) The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to reflect BellSouth’s portion of Cingular’s pension and postretirement benefit plans at fair value. The total adjustment represents 40 percent of the unrecognized net losses and the unrecognized prior services cost (benefit) for Cingular’s pension and postretirement plans as of September 30, 2006. Such amounts were reflected in the balance sheet based on the plans the adjustments relate to and whether such plans were in a net asset or net liability position.

(a7) The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to report BellSouth’s portion of Cingular’s long-term debt due to external parties at fair value. BellSouth’s portion of the estimated fair value of Cingular’s long-term debt (including current maturities of long-term debt) was $5,165 at September 30, 2006, calculated using quotes or rates available for debt with similar terms and maturities, based on Cingular’s debt ratings at that time. BellSouth’s portion of the carrying value of Cingular’s long-term debt (including current maturities of long-term debt) is calculated based on the principal amount of the notes, net of premiums and/or unamortized discounts and was $5,261 at September 30, 2006, resulting in a proportional decrease to debt of $96. The carrying value of debt with an original maturity of less than one year approximates market value. None of this fair market value adjustment was attributed to current maturities of long-term debt.

AT&T INC.

Dollars in millions except per share amounts

(b) This entry reflects the preliminary allocation of the purchase price to identifiable net assets acquired and liabilities assumed and the excess purchase price to Goodwill as follows:

		Common Stock		Additional Capital		Total
Total consideration: Issuance of AT&T common stock to BellSouth shareholders	$	2,414	$	63,545	$	65,959	(b1)
Book value of net asset acquired
BellSouth’s equity					$	25,436
Elimination of BellSouth’s ownership percentage of Cingular’s goodwill and intangibles						(19,761)	(a4)
Fair value of BellSouth’s customer lists						10,200	(b3)
BellSouth’s portion of the fair value of Cingular’s customer lists						5,300	(a5)
BellSouth’s portion of the fair value of Cingular’s wireless licenses						12,500	(a5)
Preliminary fair value adjustments
BellSouth deferred activation and installation revenue						1,127	(b2)
BellSouth deferred activation and installation revenue						(1,127)	(b2)
BellSouth long-term debt						(63)	(b5)
BellSouth’s ownership percentage of Cingular’s long-term debt						96	(a7)
BellSouth’s pension and postretirement plans						(5,287)	(b4)
BellSouth’s ownership percentage of Cingular’s pension and postretirement plans						(14)	(a6)
Preliminary estimate of fair value of identifiable net assets (liabilities) acquired					$	28,407
Goodwill					$	37,552	(b2)

(b1) The purchase price allocation included within these Unaudited Pro Forma Condensed Combined Financial Statements is based upon a purchase price of $65,959 calculated as follows:

BellSouth shares outstanding at September 30, 2006		1,822,000,000
Exchange ratio		1.325
AT&T common shares to be issued		2,414,150,000
Price per share 1	$	27.32
Aggregate value of AT&T shares issued	$	65,959
Value attributed to par at $1 par value	$	2,401
Balance to capital in excess of par value	$	63,545

¹ Price per share is based on the average closing price of the AT&T common shares for the two days prior to, including and two days subsequent to the first trading day following public announcement of the merger on March 5, 2006.

It is assumed that all stock will be new issuances. However, AT&T may issue treasury shares for a portion of the required AT&T common shares. The actual number of newly issued shares of AT&T common stock or treasury shares to be delivered in connection with the merger will be based upon the number of BellSouth common shares issued and outstanding when the merger closes.

AT&T INC.

Dollars in millions except per share amounts

(b2) The Unaudited Pro Forma Condensed Combined Financial Statements reflect a preliminary allocation of the purchase price to tangible assets and liabilities and unless otherwise noted in b3 through b5, fair values approximate historical book values as of September 30, 2006, including for property, plant and equipment. The remaining unallocated purchase price was allocated to Goodwill. The final purchase price allocations, which are based on third party appraisals, may result in different allocations for tangible and intangible assets than presented in these Unaudited Pro Forma Condensed Combined Financial Statements, and those differences could be material.

The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the reclassification of BellSouth’s capitalized software, which was recorded as an intangible asset and to eliminate deferred activation-related revenue and expense (see note d2).

(b3) Of the total amount allocated to “Other Intangibles — Net,” AT&T has tentatively identified approximately $10,200 for customers acquired from BellSouth with an average asset life of 6 years. Amortization of these intangibles is reflected in the Unaudited Pro Forma Condensed Combined Statement of Income using the sum-of-the-months-digits method of amortization. The sum-of-the-months-digits method is a process of allocation, not of valuation and reflects the belief that more revenues will be generated from the assets during the earlier years of their lives, recording a larger portion of the amortization expense earlier in the life of the assets.

The following table is presented for illustrative purposes and provides the estimated annual impact on pro forma net income for every incremental $1,000 assigned to amortizable intangible assets of either BellSouth or BellSouth’s 40 percent ownership of Cingular in the final purchase price allocation (since it is an illustration, the table below should not be substituted for the quarterly pro forma results shown in these pro forma financial statements). Amortization of these assets is utilizing the sum-of-the-months digits method over the lives shown and the first year of amortization is displayed. Expense for each year thereafter will decrease.

Lives in years	Estimated Amortization Expense	Net income impact	Per share impact
3	$550	$340	$0.05
5	357	221	0.04
9	209	129	0.02

The following table is presented for illustrative purposes and provides the estimated annual impact on pro forma net income for every decremental or incremental $1,000 assigned to property, plant and equipment of either BellSouth or BellSouth’s 40 percent ownership of Cingular in the final purchase price allocation. Depreciation of these assets is calculated utilizing the straight-line method over the lives shown.

Lives in years	Estimated Depreciation Expense	Net income impact	Per share impact
3	$333	$206	$0.03
10	100	62	0.01
20	50	31	0.00

(b4) The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to reflect BellSouth’s pension and postretirement benefit plans at fair value. The total adjustment represents unrecognized net loss, unrecognized prior services cost (benefit) and unrecognized net obligation for BellSouth’s pension and postretirement plans as of September 30, 2006. Such amounts were reflected in the balance sheet based on adjustments to the individual plans and whether such plans were in a net asset or net liability position.

AT&T INC.

Dollars in millions except per share amounts

(b5) The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to report BellSouth’s long-term debt at fair value. The estimated fair value of BellSouth’s long-term debt (including current maturities of long-term debt) was $18,267 at September 30, 2006, calculated using quotes or rates available for debt with similar terms and maturities, based on BellSouth’s debt ratings at that time. The carrying value of BellSouth’s long-term debt (including current maturities of long-term debt) is calculated based on the principal amount of the notes, net of premiums and/or unamortized discounts and was $18,204 at September 30, 2006, resulting in a total increase to debt of $63. The carrying value of debt with an original maturity of less than one year approximates market value. None of this fair market value adjustment was attributed to current maturities of long-term debt.

(b6) The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to eliminate the historical shareholders’ equity accounts of BellSouth.

(c) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect Cingular as a wholly-owned subsidiary of AT&T rather than as a joint venture, thereby eliminating amounts recorded as equity in net income of affiliates by AT&T and BellSouth from Cingular and to eliminate the following items:

(c1) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to eliminate intercompany operating revenues and cost of sales expenses between Cingular and AT&T and BellSouth. Operating revenues and expenses consist primarily of access and long-distance services and commission revenue. Other revenues and expense adjustments of $358 consist primarily of interest on shareholder loans and advances to Cingular.

(c2) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect lower amortization of prior service cost and unrealized losses due to BellSouth’s portion of the adjustment of Cingular’s pension and postretirement plans to fair value (see note a6). The adjustment reflects BellSouth’s portion of the elimination of amounts recorded by Cingular in the first nine months of 2006 for amortization of unrecognized prior service benefit and amortization of losses for pension and postretirement benefits and are reflected on the Unaudited Pro Forma Condensed Combined Statement of Income in the cost categories in which the expenses would have been charged, based on the expected allocation to our labor force.

(c3) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect increased interest expense due to BellSouth’s portion of the adjustment of Cingular’s long-term debt to fair value (see note a7). The difference between the fair value and the face amount of each borrowing is amortized using the effective interest method.

(c4) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect the elimination of BellSouth’s portion of Cingular’s historical intangible asset amortization (see note a4).

(d) The Unaudited Pro Forma Condensed Combined Statement of Income includes the results of BellSouth’s operations and has been adjusted to eliminate the following items:

(d1) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to eliminate certain intercompany revenues and expenses between AT&T and BellSouth, consisting primarily of switched access, Unbundled Network Element-Platform (UNE-P) and high-capacity transport services, which include DS1s and DS3s (types of dedicated high-capacity lines), and SONET (a dedicated high-speed solution for multisite businesses). Other intercompany transactions and ending intercompany balances are immaterial.

(d2) BellSouth defers revenue from activation-related activities and recognizes the revenue over the life of the customer relationship. Associated expenses are also deferred but only to the extent of revenues and are recognized over the same period as the revenue. The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to eliminate the amortization of this revenue and expense in accordance with fair value accounting.

AT&T INC.

Dollars in millions except per share amounts

(d3) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect lower amortization of prior service cost and unrealized losses due to the adjustment of BellSouth’s pension and postretirement plans to fair value (see note b4). The adjustment reflects the elimination of amounts recorded by BellSouth for amortization of net unrecognized prior service cost, transition obligation and net amortization of losses for pension and postretirement benefits and are reflected on the Unaudited Pro Forma Condensed Combined Statement of Income in the cost categories in which the expenses would have been charged, based on the expected allocation to our labor force.

(d4) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect lower interest expense due to the adjustment of BellSouth’s long-term debt to fair value (see note b5). The difference between the fair value and the face amount of each borrowing is amortized on a straight-line basis as an increase to interest expense over the remaining term of the borrowing, based on the maturity dates ranging from one to 91 years.

(e) Pro forma combined earnings per common share are based on the historical AT&T weighted average shares outstanding, adjusted to assume that shares issued by AT&T (see Note b1) for the BellSouth merger were outstanding for the entire period presented. Additionally, for dilutive purposes, pro forma combined earnings per common share are adjusted to assume that additional shares were issued for the BellSouth weighted average common stock equivalents and that those shares were outstanding for the entire period presented. Pro forma combined earnings per common share are calculated using net income.

(e1) Pro forma combined basic earnings per common share are calculated as follows (shares in millions):

For the Nine Months Ended September 30, 2006
AT&T weighted average shares outstanding at September 30, 2006	3,880
AT&T shares to be issued for BellSouth acquisition	2,414	(b1)
Pro Forma Combined weighted average shares outstanding at September 30, 2006	6,294

(e2) Pro forma combined diluted earnings per common share are calculated as follows (shares in millions):

For the Nine Months Ended September 30, 2006
AT&T weighted average shares outstanding with dilution at September 30, 2006	3,900
AT&T shares to be issued for BellSouth acquisition	2,414	(b1)
Additional shares assumed issued for dilutive impact of BellSouth options outstanding at September 30, 2006 (7 shares converted at 1.325)	9
Pro Forma Combined weighted average shares outstanding with dilution at September 30, 2006	6,323

(f) The Unaudited Pro Forma Condensed Combined Statement of Income has been adjusted to reflect the aggregate pro forma income tax effect of notes (c) through (d) and the amortization impact of items (a5) and (b3) of $(910). The aggregate pre-tax effect of these adjustments is reflected as “Income Before Income Taxes” on the Unaudited Pro Forma Condensed Combined Statement of Income, which was taxed at the AT&T, BellSouth and Cingular combined tax rate of 35.4%.

Note 3. Federal Income Tax Consequences of the Merger

The Unaudited Pro Forma Condensed Combined Financial Statements assume that the merger qualifies as a tax-free reorganization for federal income tax purposes.

EX-99

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 September 30, 2006

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 1-8607

BELLSOUTH CORPORATION

(Exact name of registrant as specified in its charter)

Georgia 58-1533433

(State of Incorporation) (I.R.S. Employer

Identification Number)

1155 Peachtree Street, N. E., 30309-3610

Atlanta, Georgia (Zip Code)

(Address of principal executive offices)

Registrant's telephone number 404-249-2000

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer X Accelerated filer___ Non-accelerated filer___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes___ No __X_

At October 30, 2006, 1,824,067,817 common shares were outstanding.

	Table of Contents
Item		Page
	Part I
1.	Financial Statements
	Consolidated Statements of Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Cash Flows	5
	Consolidated Statements of Shareholders’ Equity and Comprehensive Income	6
	Notes to Consolidated Financial Statements	7
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
3.	Qualitative and Quantitative Disclosures about Market Risk	34
4.	Controls and Procedures	34
	Part II
1.	Legal Proceedings	35
1A.	Risk Factors	35
2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
4.	Submission of Matters to a Vote of Security Holders	36
6.	Exhibits	36

PART I – FINANCIAL INFORMATION

BELLSOUTH CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(Unaudited)

	For the Three Months		For the Nine Months
	Ended September 30,		Ended September 30,
	2005	2006	2005	2006
Operating revenues:
Communications Group	$ 4,558	$ 4,669	$ 13,749	$13,969
Advertising & Publishing Group	506	535	1,521	1,581
All other	8	14	35	45
Total operating revenues	5,072	5,218	15,305	15,595
Operating expenses:
Cost of services and products (excludes depreciation
and amortization shown separately below)	2,017	1,905	5,862	5,974
Selling, general, and administrative expenses	996	967	2,833	2,868
Depreciation and amortization	922	894	2,756	2,685
Provisions for restructuring and asset impairments	166	7	181	72
Total operating expenses	4,101	3,773	11,632	11,599
Operating income	971	1,445	3,673	3,996
Interest expense	274	302	850	860
Net earnings (losses) of equity affiliates	97	342	85	694
Gain on sale of operations	351	—	351	—
Other income (expense), net	64	90	176	212
Income from continuing operations before income taxes	1,209	1,575	3,435	4,042
Provision for income taxes	392	516	1,140	1,312
Income from continuing operations	817	1,059	2,295	2,730
Income from discontinued operations, net of tax	—	—	381	—
Net income	$ 817	$1,059	$ 2,676	$2,730
Weighted-average common shares outstanding:
Basic	1,831	1,814	1,831	1,806
Diluted	1,836	1,822	1,835	1,813
Dividends declared per common share	$ 0.29	$ 0.29	$ 0.85	$ 0.87
Basic earnings per share:
Income from continuing operations	$ 0.45	$ 0.58	$ 1.25	$ 1.51
Discontinued operations, net of tax	—	—	0.21	—
Net income	$ 0.45	$ 0.58	$ 1.46	$ 1.51
Diluted earnings per share:
Income from continuing operations	$ 0. 44	$ 0.58	$ 1.25	$ 1.51
Discontinued operations, net of tax	—	—	0.21	—
Net income	$ 0.44	$ 0.58	$ 1.46	$ 1.51

The accompanying notes are an integral part of these consolidated financial statements.

BELLSOUTH CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

	December 31,		September 30,
	2005		2006
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	427	$	731
Short-term investments		—		1,327
Accounts receivable, net of allowance for uncollectibles of $289 and $244		2,555		2,562
Material and supplies		385		383
Other current assets		842		928
Total current assets		4,209		5,931
Investments in and advances to Cingular Wireless		21,274		22,357
Property, plant and equipment, net		21,723		21,820
Other assets		7,814		8,725
Intangible assets, net		1,533		1,540
Total assets	$	56,553	$	60,373
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Debt maturing within one year	$	4,109	$	3,926
Accounts payable		1,040		909
Other current liabilities		3,505		4,047
Total current liabilities		8,654		8,882
Long-term debt		13,079		14,278
Noncurrent liabilities:
Deferred income taxes		6,607		6,818
Other noncurrent liabilities		4,679		4,959
Total noncurrent liabilities		11,286		11,777
Shareholders’ equity:
Common stock, $1 par value (8,650 shares authorized; 1,798 and 1,822 shares outstanding)		2,020		2,020
Paid-in capital		7,960		8,130
Retained earnings		20,383		21,525
Accumulated other comprehensive income (loss)		(14)		35
Shares held in trust and treasury		(6,815)		(6,274)
Total shareholders’ equity		23,534		25,436
Total liabilities and shareholders’ equity	$	56,553	$	60,373

The accompanying notes are an integral part of these consolidated financial statements.

BELLSOUTH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

(Unaudited)

	For the Nine Months Ended September 30,
		2005		2006
Cash Flows from Operating Activities:
Net income	$	2,676	$	2,730
Less income from discontinued operations, net of tax		(381)		—
Income from continuing operations	$	2,295	$	2,730
Adjustments to reconcile income to cash provided by operating activities from continuing operations:
Depreciation and amortization		2,756		2,685
Provision for uncollectibles		258		230
Net earnings of equity affiliates		(85)		(694)
Deferred income taxes		51		165
Pension income		(399)		(391)
Stock-based compensation expense		70		45
Loss on extinguishment of debt		42		—
Gain on sale of operations		(351)		—
Asset impairments		166		—
Net change in:
Accounts receivable and other current assets		(174)		(275)
Accounts payable and other current liabilities		1,009		447
Deferred charges and other assets		(79)		(49)
Other liabilities and deferred credits		337		332
Other reconciling items, net		38		43
Net cash provided by operating activities from continuing operations		5,934		5,268
Cash Flows from Investing Activities:
Capital expenditures		(2,465)		(2,761)
Investment in short-term instruments		(88)		(5,227)
Proceeds from sale of short-term instruments		104		3,901
Proceeds from sale of operations		1,555		—
Investments in debt and equity securities		(156)		(819)
Proceeds from sale of debt and equity securities		45		289
Net repayments from (advances to) Cingular Wireless		1,736		(416)
Other investing activities, net		(37)		(32)
Net cash provided by (used for) investing activities from continuing operations		694		(5,065)
Cash Flows from Financing Activities:
Net borrowings (repayments) of short-term debt		(2,110)		234
Proceeds from issuance of long-term debt		—		1,200
Repayments of long-term debt		(1,500)		(433)
Dividends paid		(1,520)		(1,572)
Purchase of treasury shares		(137)		(52)
Proceeds from issuing common stock		60		654
Other financing activities, net		44		70
Net cash (used in) provided by financing activities from continuing operations		(5,163)		101
Net increase in cash and cash equivalents from continuing operations		1,465		304
Cash flows from discontinued operations:
Net cash provided by operating activities		10		—
Net cash used for investing activities		(125)		—
Net cash provided by financing activities		—		—
Net decrease in cash and cash equivalents from discontinued operations		(115)		—
Net increase in cash and cash equivalents		1,350		304
Cash and cash equivalents at beginning of period		680		427
Cash and cash equivalents at end of period	$	2,030	$	731

The accompanying notes are an integral part of these consolidated financial statements.

BELLSOUTH CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(IN MILLIONS)

(Unaudited)

	Number of Shares		Amount
	Common Stock	(a) Shares Held in Trust and Treasury	Common Stock	Paid-in Capital	Retained Earnings	Accum. Other Comprehensive Income (Loss)	(a) Shares Held in Trust and Treasury	Total
Balance at December 31, 2004	2,020	(189)	$ 2,020	$ 7,840	$ 19,267	$ (157)	$ (5,904)	$ 23,066
Net income					2,676			2,676
Other comprehensive income, net of tax						129		129
Total comprehensive income								2,805
Dividends declared					(1,556)			(1,556)
Purchase of treasury stock		(5)					(137)	(137)
Share issuances for employee benefit plans		5		(54)	(61)		176	61
Stock-based compensation				70				70
Tax benefit related to stock options				5				5
Balance at September 30, 2005	2,020	(189)	$ 2,020	$ 7,861	$ 20,326	$ (28)	$ (5,865)	$ 24,314
Balance at December 31, 2005	2,020	(222)	$ 2,020	$ 7,960	$ 20,383	$ (14)	$ (6,815)	$ 23,534
Net income					2,730			2,730
Other comprehensive income, net of tax						49		49
Total comprehensive income								2,779
Dividends declared					(1,571)			(1,571)
Purchase of treasury stock		(2)					(52)	(52)
Share issuances for employee benefit plans		26		(144)	(17)		838	677
Purchases and sales of treasury stock with grantor trusts				245			(245)	—
Stock-based compensation				45				45
Tax benefit related to stock options				24				24
Balance at September 30, 2006	2,020	(198)	$ 2,020	$ 8,130	$ 21,525	$ 35	$ (6,274)	$ 25,436

(a) Trust and treasury shares are not considered to be outstanding for financial reporting purposes.

	As of September 30,
	2005	2006
Shares held in trust	26	8
Shares held in treasury	163	190
Total	189	198

The accompanying notes are an integral part of these consolidated financial statements.

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE A - PREPARATION OF INTERIM FINANCIAL STATEMENTS

In this report, BellSouth Corporation and its subsidiaries are referred to as “we”, “the Company”, or “BellSouth.”

The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of our significant accounting policies and other information, you should read this report in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2005.

Certain amounts within the prior year’s information have been reclassified to conform to the current year’s presentation.

NOTE B – RECENTLY ISSSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 158, "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans" (SFAS No. 158). SFAS No. 158 amends FASB Statements No. 87, 88, 106, and 132(R) by requiring recognition of the over-funded or under-funded status of our defined benefit postretirement plans as assets or liabilities in our statement of financial position and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. SFAS No. 158 is effective for BellSouth on a prospective basis beginning December 31, 2006. We are currently evaluating the impact SFAS No. 158 will have on our financial statements. If the standard had been applied based on balances as of December 31, 2005, net liabilities would have increased $2.9 billion with a corresponding decline in equity.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This Interpretation prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. This Interpretation is effective for BellSouth beginning January 1, 2007. We are currently evaluating the impact FIN 48 will have on our financial statements.

NOTE C - EARNINGS PER SHARE

Basic earnings per share are computed based on the weighted-average number of common shares outstanding during each year. Nonvested restricted stock carries dividend and voting rights and, in accordance with Generally Accepted Accounting Principles (GAAP), is not included in the weighted-average number of common shares outstanding used to compute basic earnings per share. Diluted earnings per share are based on the weighted-average number of common shares outstanding plus net incremental shares arising out of employee stock compensation and benefit plans. The earnings amounts used for per-share calculations are the same for both the basic and diluted methods. The following is a reconciliation of the weighted-average share amounts (in millions) used in calculating earnings per share:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Basic common shares outstanding	1,831	1,814	1,831	1,806
Incremental shares from stock-based compensation and benefit plans	5	8	4	7
Diluted common shares outstanding	1,836	1,822	1,835	1,813
Common stock equivalents excluded from the computation	77	44	77	57

Options with an exercise price greater than the average market price of the common stock or that have an anti-dilutive effect on the computation are excluded from the calculation of diluted earnings per share. Restricted stock or restricted stock units that have an anti-dilutive effect on the computation are also excluded from the calculation of diluted earnings per share.

NOTE D – DISCONTINUED OPERATIONS

In March 2004, we signed an agreement with Telefónica Móviles, S.A., the wireless affiliate of Telefónica, S.A., to sell all of our interests in Latin America. During 2004, we closed on the sale of 8 of the 10 properties. During January 2005, we closed on the sale of the operations in the remaining two Latin American countries for gross proceeds of $1,077 and a gain of $390, net of tax. The gain includes the recognition of cumulative foreign currency translation losses of $68.

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE D – DISCONTINUED OPERATIONS (Continued)

Summarized results of operations for the discontinued operations for the nine months ended September 30, 2005 are as follows:

	2005
Revenue	$ 66
Operating loss	(5)
Gain on sale of operations	629
Income before income taxes	616
Income tax expense	235
Income from discontinued operations	$ 381

NOTE E - MERGER OF BELLSOUTH AND AT&T

On March 4, 2006, we agreed to merge with a subsidiary of AT&T Inc. (AT&T) in a transaction in which each share of BellSouth common stock will be exchanged for 1.325 shares of AT&T common stock. The stock consideration in the transaction is expected to be tax-free to our shareholders. On July 21, 2006, AT&T and BellSouth received approval from their stockholders for AT&T to acquire BellSouth. The acquisition is subject to approval by regulatory authorities and to other customary closing conditions. The US Department of Justice cleared the merger on October 11, 2006. The Federal Communications Commission has scheduled a meeting to vote on the merger on November 3, 2006. The acquisition is currently expected to close in the fall of 2006. However, it is possible that factors outside of our control could require us to complete the merger at a later time or not to complete it at all. The terms of certain of our agreements, including contracts, employee benefit arrangements and debt instruments, have provisions which could result in changes to the terms of these agreements upon a change in control of BellSouth.

NOTE F - INVESTMENTS IN AND ADVANCES TO CINGULAR WIRELESS

Investment

We own a 40 percent economic interest in Cingular Wireless, a joint venture with AT&T. Because we exercise influence over the financial and operating policies of Cingular Wireless, we use the equity method of accounting for this investment. Under the equity method of accounting, we record our proportionate share of Cingular Wireless' earnings in our consolidated statements of income. These earnings are included in the caption "Net earnings (losses) of equity affiliates."

The following table displays the summary financial information of Cingular Wireless. These amounts are shown on a 100 percent basis.

	December 31, 2005	September 30, 2006
Balance Sheet Information:
Current assets	$ 6,049	$ 6,826
Noncurrent assets	$ 73,270	$ 73,466
Current liabilities	$ 10,008	$ 9,543
Noncurrent liabilities	$ 23,790	$ 23,486
Minority interest	$ 543	$ 618
Members’ capital	$ 44,978	$ 46,645

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Income Statement Information:
Revenues	$ 8,746	$ 9,553	$ 25,584	$ 27,751
Operating income	$ 657	$ 1,416	$ 1,275	$ 3,240
Net income (loss)	$ 222	$ 847	$ 129	$ 1,741

As of September 30, 2006, our book investment exceeded our proportionate share of the net assets of Cingular Wireless by $456.

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE F - INVESTMENTS IN AND ADVANCES TO CINGULAR WIRELESS (Continued)

Advance

We have an advance to Cingular Wireless that, with interest, totaled $2,622 at December 31, 2005 and September 30, 2006. This advance earns an interest rate of 6.0 percent per annum and matures on June 30, 2008.

Revolving Line of Credit

BellSouth and AT&T provide unsubordinated short-term financing on a pro rata basis for Cingular Wireless’ ordinary course of business cash requirements. Under the terms of the line of credit, Cingular Wireless’ available cash (as defined), if any, is applied first to repay amounts loaned to Cingular Wireless under the line of credit. Remaining available cash is applied to the repayment of the advance described above. Borrowings bear interest at 1-Month LIBOR plus 0.05 percent payable monthly. The line of credit terminates on July 31, 2007. Borrowings from BellSouth under the revolving credit line, including interest, were $204 at December 31, 2005 and $621 at September 30, 2006.

Provision of Services

We also generate revenues from Cingular Wireless in the ordinary course of business for the provision of local interconnection services, long distance services, sales agency fees and customer billing and collection fees.

Interest and Revenue Earned from Cingular Wireless:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Revenues	$ 193	$ 214	$ 527	$ 607
Interest income on advances	$ 47	$ 49	$ 163	$ 140
Interest expense on line of credit	$ 2	$ —	$ 2	$ —

Interest income on advances and interest expense on the line of credit are offset by a like amount of interest expense and interest income recorded by Cingular Wireless and reported in our financial statements in the caption “Net earnings (losses) of equity affiliates.”

Receivables and payables incurred in the ordinary course of business are recorded on our balance sheets as follows:

	December 31, 2005	September 30, 2006
Receivable from Cingular	$ 51	$ 73
Payable to Cingular	$ 54	$ 60

NOTE G - DEBT

Issuances & Maturities

On August 2, 2006, we sold $1,200 of 2-year, floating rate notes due August 15, 2008. In addition, we incurred debt issuance costs of $2 related to this transaction.

The proceeds were used in part to fund $1,000 of maturing 5-year, 5.0 percent notes on October 16, 2006.

Early Redemptions

On January 18, 2005, we redeemed $400 of 40-year, 6.75 percent debentures, due October 15, 2033. The redemption price was 103.33 percent of the principal amount, and resulted in recognition of a loss of $22, or $14 net of tax, which includes $9 associated with fully expensing remaining discount and deferred debt issuance costs.

On May 18, 2005 we redeemed $300 of 40-year, 7.625 percent debentures, due May 15, 2035. The redemption price was 103.66 percent of the principal amount, and resulted in recognition of a loss of $20, or $12 net of tax, which includes $9 associated with fully expensing remaining discount and deferred debt issuance costs.

NOTE H - WORKFORCE REDUCTION AND RESTRUCTURING

Based on competitive activity in the telecommunications industry, realignment of our business and productivity improvements, we have periodically initiated workforce reductions and recorded charges for early termination benefits.

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE H - WORKFORCE REDUCTION AND RESTRUCTURING (Continued)

In December 2005, we announced that we would reduce our management workforce by approximately 1,500 employees. The plan included a voluntary program offering a special termination benefit followed by an involuntary program to the extent necessary to achieve the targeted reductions. As a result of the pending merger of BellSouth and AT&T, we modified the terms of the fourth quarter 2005 announced workforce reduction by eliminating the involuntary component that was scheduled to follow the voluntary offer. Accordingly, in the first quarter of 2006 we reversed the minimum liability accrued (except with respect to the 60 employees who had already accepted under that program). Based on the acceptances of the voluntary offer, we accrued $73 for the second quarter of 2006 and $127 for the first half of 2006. Under the modified plan, we reduced our management workforce by approximately 1,350 employees. This reduction program was substantially complete at the end of June 2006.

In addition, we recorded restructuring charges totaling $7 for non-management surpluses announced in the third quarter of 2006 and $31 for the nine months ended September 30, 2006.

The following table summarizes activity associated with the workforce reduction and restructuring liability for the nine months ended September 30, 2006:

Balance at December 31, 2005	$ 100
Accruals	158
Cash Payments	(151)
Adjustments	(86)
Balance at September 30, 2006	$ 21

Adjustments to the employee separations accrual are due to the reversal noted above for $77 as well as estimated demographics being different than actual demographics of employees that separated from the Company.

NOTE I - EMPLOYEE BENEFITS PLANS

Substantially all of our employees are covered by noncontributory defined benefit pension plans. We provide certain medical, dental and life insurance benefits to substantially all retired employees under various plans and accrue actuarially-determined postretirement benefit costs as active employees earn these benefits. Management employees hired after January 1, 2001 are provided access to medical benefits at retirement but are required to pay 100 percent of the cost.

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. Approximately 10 percent of these costs are capitalized to property, plant and equipment with labor related to network construction. During the quarter, lump sum distributions from our management pension plan exceeded the settlement threshold equal to the sum of the service cost and interest cost components of net periodic pension cost; therefore, we recognized a settlement gain in addition to our normal periodic cost. Components of net periodic benefit costs were as follows:

	Pension Benefits		Other Benefits
	For the Three Months Ended September 30,		For the Three Months Ended September 30,
	2005	2006	2005	2006
Service cost	$ 52	$ 49	$ 31	$ 31
Interest cost	147	150	145	146
Expected return on plan assets	(322)	(319)	(84)	(86)
Amortizations:
Unrecognized net obligation	—	—	19	12
Unrecognized prior service cost	(10)	(10)	56	45
Unrecognized (gain) loss	—	—	26	29
Net periodic benefit cost (income)	$ (133)	$ (130)	$ 193	$ 177
Settlements	—	(8)	—	—
Net periodic benefit cost (income), adjusted	$ (133)	$ (138)	$ 193	$ 177

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE I - EMPLOYEE BENEFITS PLANS (Continued)

	Pension Benefits		Other Benefits
	For the Nine Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Service cost	$ 155	$ 147	$ 92	$ 94
Interest cost	441	449	437	438
Expected return on plan assets	(964)	(956)	(252)	(260)
Amortizations:
Unrecognized net obligation	—	—	55	38
Unrecognized prior service cost	(31)	(31)	169	135
Unrecognized (gain) loss	—	—	77	86
Net periodic benefit cost (income)	$ (399)	$ (391)	$ 578	$ 531
Settlements	—	(8)	—	—
Net periodic benefit cost (income), adjusted	$ (399)	$ (399)	$ 578	$ 531

Employer Contributions

Due to the funded status of our pension plans, we do not expect to make contributions to these plans in 2006. Consistent with prior years, we expect to contribute cash to the Voluntary Employee Beneficiary Association trusts to fund other benefit payments. During the nine months ended September 30, 2006, we contributed $268 to fund these other benefits and expect to contribute approximately $80 to $130 during the remainder of 2006.

Cash Balance Pension Plans

In July 2003, a Federal district court in Illinois ruled that the benefit formula used in International Business Machines Corporation's (IBM) cash balance pension plan violated the age discrimination provisions of the Age Discrimination in Employment Act (ADEA) and certain provisions of the Employee Retirement Income Security Act (ERISA). Subsequent opinions of several other courts have conflicted with that court's view, while others have agreed. Recently, the Seventh Circuit Court of Appeals overturned the district court's opinion in the IBM case and determined that cash balance pension plan formulas are not inherently age discriminatory. Further, recent legislation, the Pension Protection Act of 2006, specifically validated prospectively the legal status of certain cash balance designs, including the types of cash balance formulas specified under our tax-qualified cash balance pension plans. At this time, it is unclear what effect, if any, the remaining negative decisions regarding cash balance formulas may have on our tax-qualified cash balance pension plans or our financial condition.

NOTE J - STOCK COMPENSATION PLANS

We have granted stock-based compensation awards to key employees under several plans. One share of BellSouth common stock is the underlying security for any award under these plans. Under the stock plan approved by shareholders in 2004, the maximum number of shares available for future grants is limited to 80 million reduced by awards granted and increased by shares tendered in option exercises. In 2003, we used the retroactive restatement method provided by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” to adopt the expense recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS No. 123) by restating all periods beginning on or after January 1, 1995 (the effective date of SFAS No. 123). Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), “Share-Based Payment,” (SFAS No. 123R) using the modified prospective application of its provisions; therefore, our financial statements for prior periods will not be restated. The cumulative effect of adopting SFAS No. 123R was immaterial. Because we previously adopted the expense recognition provisions of SFAS No. 123, the impact of adopting SFAS No. 123R resulted in essentially three changes: (1) use of an estimated forfeiture rate versus recognition of actual forfeitures as incurred, (2) use of fair value to measure expense for awards classified as liabilities, and (3) use of the alternative transition method to calculate the pool of excess tax benefits available to absorb tax deficiencies in future years, which increased the pool by $130. Effective with the adoption of SFAS No. 123R, we instituted a policy of recognizing expense for awards with graded vesting provisions using the straight-line method of expense attribution.

Given trends in long-term compensation awards and market conditions, over the last few years we have moved toward granting a mix of restricted stock (or restricted stock units) and performance share units in lieu of stock options. The table below summarizes the total compensation cost for each type of award and the related total tax benefit included in our results of operations:

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE J - STOCK COMPENSATION PLANS (Continued)

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
Compensation cost:	2005	2006	2005	2006
Stock options	$ 9	$ 2	$ 32	$ 9
Restricted stock and restricted stock units	13	12	39	36
Performance share units	19	57	49	133
Total compensation cost	41	71	120	178
Income tax benefit	(15)	(27)	(44)	(69)
Compensation cost net of income tax benefit	$ 26	$ 44	$ 76	$ 109

Stock Option Awards

Stock options granted under the plans entitle recipients to purchase shares of BellSouth common stock within prescribed periods at a price either equal to, or in excess of, the fair market value on the date of grant. Options generally become exercisable at the end of three to five years, have a term of ten years, and provide for accelerated vesting if there is a change in control (as defined in the plans). The grant date fair value of each option granted, which is estimated using the Black-Scholes option-pricing formula, is expensed over the vesting period. A summary of option activity under the plans is presented below:

	Number of options	Weighted- average option prices per common share	Weighted- average remaining contractual term in years	Aggregate intrinsic value
Outstanding at December 31, 2005	96,802,789	$36.12
Granted	—	—
Exercised	(26,430,051)	$25.97
Forfeited or expired	(2,443,580)	$38.58
Outstanding at September 30, 2006	67,929,158	$39.97	3.98	$252
Exercisable at September 30, 2006	65,928,420	$40.33	3.91	$223

As of September 30, 2006, total compensation cost related to unvested stock options of $1 is expected to be amortized by the end of 2006. Information related to stock option exercises is provided below:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Total value received by employees for options exercised	$ 6	$ 109	$ 23	$ 246
Tax benefit realized for options exercised	$ 2	$ 40	$ 8	$ 91
Cash received for options exercised	$ 22	$ 274	$ 60	$ 654

Restricted Stock and Restricted Stock Unit Awards

Restricted stock and restricted stock unit awards granted to key employees under the plans are settled by issuing shares of common stock at the vesting date. Generally, the restrictions lapse in full on the third anniversary of the grant date, or on a pro rata basis on each of the first three anniversaries of the grant date. The vesting of restricted stock and restricted stock units accelerates if there is a change in control (as defined in the plans) and the employee is terminated or resigns for good reason within two years of the change in control. The grant date fair value of the restricted stock and restricted stock units, which is the stock price on the grant date, is expensed over the period during which the restrictions lapse. The shares represented by restricted stock awards (but not restricted stock unit awards) are considered outstanding at the grant date, as the recipients are entitled to dividends and voting rights. A summary of restricted stock and restricted stock unit activity under the plans is presented below:

	Number of shares & units	Weighted-average grant date fair value
Unvested at December 31, 2005	4,270,080	$27.02
Granted	1,604,386	$31.88
Vested	(848,920)	$27.52
Forfeited	(190,625)	$28.55
Unvested at September 30, 2006	4,834,921	$28.48

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE J - STOCK COMPENSATION PLANS (Continued)

The weighted-average grant date fair value of restricted stock and restricted stock units granted during the three months ended September 30, 2005 and 2006 was $26.90 and $38.79, respectively. The weighted-average grant date fair value of restricted stock and restricted stock units granted during the nine months ended September 30, 2005 and 2006 was $26.06 and $31.88, respectively. As of September 30, 2006, the total unrecognized compensation cost for unvested restricted stock and restricted stock units of $65 is expected to be amortized over a weighted-average period of approximately 14 months. Information related to shares vested is provided below:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Total value received by employees for shares vested	$ 1	$ 1	$ 16	$ 27
Tax benefit realized for shares vested	$ –	$ –	$ 4	$ 9

Performance Share Unit Awards

Performance share units granted to key employees are settled in cash based on an average stock price at the end of the three-year performance period multiplied by the number of units earned. The number of performance share units actually earned by recipients is based on the achievement of certain performance goals as defined by the terms of the awards, and can range from 0% to 150% of the number of units granted. At the end of the performance period, recipients also receive a cash payment equal to the dividends paid on a share of BellSouth stock during the performance period for each performance share unit earned. Vesting accelerates and the performance period is modified if there is a change in control (as defined in the plans). For awards granted prior to 2006, performance share unit expense is generally recognized over the performance period; for awards granted in 2006, performance share unit expense is recognized over the vesting period, which approximates the performance period. Since performance share units are settled in cash, our obligations related to these awards are classified as liabilities. A summary of performance share unit activity under the plans is presented below:

	Number of units
Unvested at December 31, 2005	5,857,605
Granted	2,259,675
Vested	–
Forfeited	(101,070)
Unvested at September 30, 2006	8,016,210

Effective with the adoption of the provisions of SFAS No. 123R on January 1, 2006, the amount of expense recognized for all unvested performance share units is based on the fair value of the performance shares at each reporting date and, as applicable, the expected outcome of performance conditions. The fair value of each performance share unit is determined at the grant date and at each reporting date using a Monte Carlo simulation model. The simulation model includes ranges of assumptions for stock price volatility, risk-free interest rates, and expected dividends. Expected volatilities for the three unvested awards are estimated based on a blend of historical volatility of our stock and implied volatilities from traded options on our stock and are currently estimated at 19% to 20%. The risk-free interest rate for periods within each performance period is based on the US Treasury yield curve in effect at the valuation date and currently ranges from 4.72% to 5.01%. Expected dividends are estimated based on historical patterns of increases.

The weighted-average fair value of unvested performance share units as of September 30, 2006 was $47.83, and the total unrecognized compensation cost of $181, based on this value, is expected to be amortized over a weighted-average period of approximately 15 months. Information related to performance share units vested and paid is provided below:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Total value received by employees for units vested and paid	$ 5	$ 14	$ 12	$ 35
Tax benefit realized for units vested and paid	$ 2	$ 6	$ 4	$ 14

NOTE K - SEGMENT INFORMATION

We have three reportable operating segments: (1) Communications Group; (2) Wireless; and (3) Advertising & Publishing Group. We own a 40 percent economic interest in Cingular Wireless, and share joint control of the venture with AT&T. We account for the investment under the equity method. For management purposes we evaluate our Wireless segment

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE K - SEGMENT INFORMATION (Continued)

based on our proportionate share of Cingular Wireless’ results. Accordingly, results for our Wireless segment reflect the proportional consolidation of 40 percent of Cingular Wireless’ results.

The Company’s chief decision makers evaluate the performance of each business unit based on segment net income, exclusive of internal charges for use of intellectual property and adjustments for unusual items that may arise. Unusual items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their nonrecurring or nonoperational nature.

The following table provides information for each operating segment:

		For the Three Months				For the Nine Months
		Ended September 30,				Ended September 30,
		2005		2006		2005		2006
Communications Group
External revenues	$	4,558	$	4,669	$	13,749	$	13,969
Intersegment revenues		30		27		82		79
Total segment revenues		4,588		4,696		13,831		14,048
Segmentoperating income		1,021		1,205		3,228		3,474
Segment net income	$	611	$	720	$	1,935	$	2,072
Wireless
Total segment revenues	$	3,499	$	3,821	$	10,234	$	11,100
Segmentoperating income		555		748		1,301		1,914
Segment net income	$	242	$	360	$	477	$	879
Advertising & Publishing Group
External revenues	$	506	$	535	$	1,521	$	1,581
Intersegment revenues		3		2		10		9
Total segment revenues		509		537		1,531		1,590
Segmentoperating income		233		245		709		723
Segment net income	$	146	$	154	$	441	$	450

RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION

			For the Three Months								For the Nine Months
			Ended September 30,								Ended September 30,
			2005				2006				2005			2006
Operating revenues
Total reportable segments	$		8,596		$		9,054		$		25,596		$	26,738
Cingular proportional consolidation			(3,499)				(3,821)				(10,234)			(11,100)
Corporate, eliminations and other			(25)				(15)				(57)			(43)
Total consolidated	$		5,072		$		5,218		$		15,305		$	15,595
Operating income
Total reportable segments		$		1,809		$		2,198		$		5,238	$	6,111
Cingular proportional consolidation				(555)				(748)				(1,301)		(1,914)
Hurricane Katrina-related expenses, net				(124)				–				(124)		(119)
Asset impairment				(166)				–				(166)		–
AT&T merger costs				–				(17)				–		(44)
Severance charges				–				–				–		(73)
Corporate, eliminations and other				7				12				26		35
Total consolidated		$		971		$		1,445		$		3,673	$	3,996

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE K - SEGMENT INFORMATION (Continued)

RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION (Continued)

		For the Three Months				For the Nine Months
		Ended September 30,				Ended September 30,
		2005		2006		2005		2006
Net Income
Total reportable segments	$	999	$	1,234	$	2,853	$	3,401
Wireless merger intangible amortization		(93)		(75)		(284)		(240)
Wireless merger integration costs		(56)		(33)		(119)		(127)
Hurricane Katrina-related expenses, net		(98)		–		(98)		(73)
Asset impairment		(102)		–		(102)		–
AT&T merger costs		–		(13)		–		(30)
Severance charges		–		–		–		(45)
Early extinguishment of debt		–		–		(26)		–
Gain on sale of operations		228		–		228		–
Discontinued operations		–		–		381		–
Corporate, eliminations and other		(61)		(54)		(157)		(156)
Total consolidated	$	817	$	1,059	$	2,676	$	2,730

NOTE L - OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income (loss) is comprised of the following components:

	December 31, 2005	September 30, 2006
Cumulative foreign currency translation adjustments	$ (2)	$ (2)
Minimum pension liability adjustment	(133)	(125)
Net unrealized gains on derivatives	5	5
Net unrealized gains on securities	116	157
	$ (14)	$ 35

Total comprehensive income details are presented in the table below:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2005	2006	2005	2006
Net Income	$ 817	$ 1,059	$ 2,676	$ 2,730
Other comprehensive income, net of tax:
Foreign currency translation:
Adjustments	(11)	—	(1)	—
Sale of foreign entities	10	—	78	—
	(1)	—	77	—
Minimum pension liability adjustment, net of tax	—	3	—	8
Deferred gains on derivatives:
Deferred gains	5	—	16	—
Reclassification adjustment for (gains) losses included in net income	(1)	—	(1)	—
	4	—	15	—
Unrealized gains (losses) on securities:
Unrealized holdings gains (losses)	35	22	34	48
Reclassification adjustment for (gains) losses included in net income	4	(9)	3	(7)
	39	13	37	41
Other comprehensive income	42	16	129	49
Total comprehensive income	$ 859	$ 1,075	$ 2,805	$ 2,779

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE M - CONTINGENCIES

GUARANTEES

In most of our sale and divestiture transactions, we indemnify the purchaser for various items including labor and general litigation as well as certain tax matters. Generally, the terms last one to five years for general and specific indemnities and for the statutory review periods for tax matters. The events or circumstances that would require us to perform under the indemnity are transaction and circumstance specific. We regularly evaluate the probability of having to incur costs associated with these indemnifications and have accrued for expected losses that are probable. In addition, in the normal course of business, we indemnify counterparties in certain agreements. The nature and terms of these indemnities vary by transaction. Historically, we have not incurred significant costs related to performance under these types of indemnities.

LEGAL PROCEEDINGS

Regulatory-related claims

In May 2005, we sued AT&T in the U.S. District Court for the Northern District of Georgia for unpaid access charges associated with AT&T’s prepaid calling cards and its “IP in the middle” services that use Internet Protocol technology for internal call processing but use the public switched network to originate and terminate calls. The lawsuit follows two separate rulings by the Federal Communications Commission (FCC), one in April 2004 concerning “IP in the middle’’ services and one in February 2005 concerning prepaid card services, that each service was a telecommunications service subject to access charges. AT&T estimated in securities filings that it had “saved’’ $340 in access charges on its prepaid card services and $250 in access charges on its “IP in the middle’’ services. We believe that some of the improperly avoided access charges should have been paid to us for the use of our network. AT&T appealed the FCC’s decision relating to the prepaid card services to the Court of Appeals for the D.C. Circuit, which denied the appeal in July 2006. If the U.S. District Court lawsuit in Georgia progresses, we expect to obtain information from AT&T and other sources that will determine the amount of BellSouth access charges AT&T avoided. In addition, AT&T has asserted certain defenses against BellSouth and has filed the New York lawsuit described below in an effort to reduce any amount it may owe to BellSouth. In April 2006, BellSouth and AT&T agreed to stay the U.S. District Court lawsuit in Georgia until the earlier of 12 months or the consummation or termination of the Merger Agreement between BellSouth and AT&T. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of the amount of gain, if any, be made. Accordingly, no revenue has been recognized with respect to this matter in our consolidated financial statements.

On November 4, 2005, AT&T sued BellSouth Long Distance, Inc. (BSLD) and Qwest Communications Corporation (Qwest) in the U.S. District Court for the Southern District of New York. AT&T has asserted claims of breach of contract, fraudulent misrepresentation and unjust enrichment against BSLD and related claims against Qwest. AT&T’s claims arise from a contract with BSLD pursuant to which BSLD purchased wholesale long distance minutes that it resold to Qwest. The complaint does not specify the amount of damages sought by AT&T. The parties have agreed to stay the New York lawsuit pending the arbitration of the dispute between AT&T and BSLD. To date, no arbitration has been initiated by AT&T. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made.

In June 2004, the U.S. Court of Appeals for the 11th Circuit affirmed the District Court’s dismissal of most of the antitrust and state law claims brought by a plaintiff competitive local exchange carrier (CLEC) in a case captioned Covad Communications Company, et al v. BellSouth Corporation, et al. The appellate court, however, permitted a price squeeze claim and certain state tort claims to proceed. In November 2005, Covad dismissed with prejudice the civil action and then contemporaneously filed complaints with the public service commissions of Florida and Georgia and filed an informal complaint with the FCC. The commission complaints allege breaches of our interconnection contracts approved by the state commissions, including failure to provide collocation, mishandling of orders, ineffective support systems, and failure to provide unbundled loops. The complaints also allege improper solicitation of Covad customers. These claims are similar to the claims raised in the civil action dismissed by Covad. The complaints seek credits and equitable relief. Covad has asked the state commissions to stay proceedings on its complaints pending resolution of its FCC complaint. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made.

Employment claim

On April 29, 2002, five African-American employees filed a putative class action lawsuit, captioned Gladys Jenkins et al. v. BellSouth Corporation, against the Company in the U.S. District Court for the Northern District of Alabama. The complaint alleges that BellSouth discriminated against current and former African-American employees with respect to compensation and promotions in violation of Title VII of the Civil Rights Act of 1964 and 42 USC Section 1981. Plaintiffs purport to bring the claims on behalf of two classes: a class of all African-American hourly workers employed by BellSouth

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE M - CONTINGENCIES (Continued)

Telecommunications at any time since April 29, 1998, and a class of all African-American salaried workers employed by BellSouth Telecommunications at any time since April 29, 1998 in management positions at or below Job Grade 59/Level C. The plaintiffs are seeking unspecified amounts of back pay, benefits, punitive damages and attorneys’ fees and costs, as well as injunctive relief. The District Court denied plaintiffs’ motion for class certification on September 19, 2006. The plaintiffs have filed a motion for reconsideration of the class certification ruling.

Securities and ERISA claims

From August through October 2002, several individual shareholders filed substantially identical class action lawsuits against BellSouth and three of its senior officers alleging violations of the federal securities laws. The parties have reached a settlement agreement, subject to court approval, pursuant to which the class will receive $35 (all of which will be funded by insurance except for a $2.5 deductible).

In February 2003, a similar complaint was filed in the Superior Court of Fulton County, Georgia on behalf of participants in BellSouth’s Direct Investment Plan alleging violations of Section 11 of the Securities Act. We believe the settlement in the securities case described above will also resolve the claims brought in this litigation.

In September and October 2002, three substantially identical class action lawsuits were filed in the U.S. District Court for the Northern District of Georgia against BellSouth, its directors, three of its senior officers, and other individuals, alleging violations of the Employee Retirement Income Security Act (ERISA). Subject to approval of the court, the parties reached a settlement of the ERISA lawsuits. The settlement is on behalf of the Plans and certain participants who brought claims individually and on behalf of the Plans pursuant to ERISA section 502(a)(2). BellSouth does not expect the settlement to have a material effect on the Company. The principal terms of the settlement increase the minimum levels below which the Company matching contributions may not fall for a three-year period. The settlement does not require any other unreimbursed cash payments by the Company.

Antitrust claims

In December 2002, a consumer class action alleging antitrust violations of Section 1 of the Sherman Antitrust Act was filed against BellSouth, Verizon, AT&T (formerly known as SBC) and Qwest, captioned William Twombly, et al v. Bell Atlantic Corp., et al, in U.S. District Court for the Southern District of New York. The complaint alleged that defendants conspired to restrain competition by agreeing not to compete with one another and to impede competition with others. The plaintiffs are seeking an unspecified amount of treble damages and injunctive relief, as well as attorneys’ fees and expenses. In October 2003, the district court dismissed the complaint for failure to state a claim. In October 2005, the Second Circuit Court of Appeals reversed the District Court’s decision and remanded the case to the District Court. In June 2006, the U.S. Supreme Court granted the defendants’ petition for writ of certiorari. At this time, the likely outcome of the case cannot be predicted, nor can a reasonable estimate of the amount of loss, if any, be made.

Other claims

We are subject to claims arising in the ordinary course of business involving allegations of personal injury, breach of contract, anti-competitive conduct, employment law issues, regulatory matters and other actions. BellSouth Telecommunications, Inc. is also subject to claims attributable to pre-divestiture events, including environmental liabilities, rates and contracts. Certain contingent liabilities for pre-divestiture events are shared with AT&T. While complete assurance cannot be given as to the outcome of these claims, we believe that any financial impact would not be material to our results of operations, financial position or cash flows.

NOTE N - SUBSIDIARY FINANCIAL INFORMATION

We have fully and unconditionally guaranteed all of the outstanding debt securities of BellSouth Telecommunications, Inc. (BST), which is a 100 percent owned subsidiary of BellSouth. In accordance with SEC rules, we are providing the following condensed consolidating financial information. BST is listed separately because it has debt securities, registered with the SEC, that we have guaranteed. The Other column represents all other wholly owned subsidiaries excluding BST and BST subsidiaries. The Adjustments column includes the necessary amounts to eliminate the intercompany balances and transactions between BST, Other and Parent and to consolidate wholly-owned subsidiaries to reconcile to our consolidated financial information.

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE N - SUBSIDIARY FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statements of Income

	For the Three Months Ended September 30, 2005
	BST		Other		Parent		Adjustments		Total
Total operating revenues	$	4,165	$	1,810	$	—	$	(903)	$	5,072
Total operating expenses		4,065		1,366		(6)		(1,324)		4,101
Operating income (loss)		100		444		6		421		971
Interest expense		129		7		222		(84)		274
Net earnings (losses) of equity affiliates		292		96		819		(1,110)		97
Other income (expense), net		6		400		52		(43)		415
Income (loss) from continuing operations before income taxes		269		933		655		(648)		1,209
Provision (benefit) for income taxes		(28)		411		(162)		171		392
Income (loss) from continuing operations		297		522		817		(819)		817
Income (loss) from discontinued operations, net of tax		—		—		—		—		—
Net income (loss)	$	297	$	522	$	817	$	(819)	$	817

	For the Three Months Ended September 30, 2006
	BST		Other		Parent		Adjustments		Total
Total operating revenues	$	4,230	$	1,757	$	—	$	(769)	$	5,218
Total operating expenses		3,677		1,214		20		(1,138)		3,773
Operating income (loss)		553		543		(20)		369		1,445
Interest expense		152		9		251		(110)		302
Net earnings (losses) of equity affiliates		257		352		1,154		(1,421)		342
Other income (expense), net		14		45		99		(68)		90
Income (loss) from continuing operations before income taxes		672		931		982		(1,010)		1,575
Provision (benefit) for income taxes		139		299		(77)		155		516
Income (loss) from continuing operations		533		632		1,059		(1,165)		1,059
Income (loss) from discontinued operations, net of tax		—		—		—		—		—
Net income (loss)	$	533	$	632	$	1,059	$	(1,165)	$	1,059

	For the Nine Months Ended September 30, 2005
	BST		Other		Parent		Adjustments		Total
Total operating revenues	$	12,567	$	5,329	$	—	$	(2,591)	$	15,305
Total operating expenses		11,543		3,927		3		(3,841)		11,632
Operating income (loss)		1,024		1,402		(3)		1,250		3,673
Interest expense		375		14		668		(207)		850
Net earnings (losses) of equity affiliates		855		86		2,494		(3,350)		85
Other income (expense), net		(24)		505		161		(115)		527
Income (loss) from continuing operations before income taxes		1,480		1,979		1,984		(2,008)		3,435
Provision (benefit) for income taxes		184		771		(311)		496		1,140
Income (loss) from continuing operations		1,296		1,208		2,295		(2,504)		2,295
Income (loss) from discontinued operations, net of tax		—		381		381		(381)		381
Net income (loss)	$	1,296	$	1,589	$	2,676	$	(2,885)	$	2,676

	For the Nine Months Ended September 30, 2006
	BST		Other		Parent		Adjustments		Total
Total operating revenues	$	12,652	$	5,503	$	—	$	(2,560)	$	15,595
Total operating expenses		11,409		3,913		(16)		(3,707)		11,599
Operating income (loss)		1,243		1,590		16		1,147		3,996
Interest expense		455		24		715		(334)		860
Net earnings (losses) of equity affiliates		807		704		2,974		(3,791)		694
Other income (expense), net		24		141		253		(206)		212
Income (loss) from continuing operations before income taxes		1,619		2,411		2,528		(2,516)		4,042
Provision (benefit) for income taxes		252		787		(202)		475		1,312
Income (loss) from continuing operations		1,367		1,624		2,730		(2,991)		2,730
Income (loss) from discontinued operations, net of tax		—		—		—		—		—
Net income (loss)	$	1,367	$	1,624	$	2,730	$	(2,991)	$	2,730

BELLSOUTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)

(Unaudited)

NOTE N - SUBSIDIARY FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheets

	December 31, 2005					September 30, 2006
	BST	Other	Parent	Adjust- ments	Total	BST	Other	Parent	Adjust- ments	Total
ASSETS
Current assets:
Cash and cash equivalents	$         98	$       141	$       138	$          50	$       427	$ 4	$ 108	$ 576	$ 43	$ 731
Short-term investments	—	—	—	—	—	—	—	1,327	—	1,327
Accounts receivable, net	25	2,058	4,510	(4,038)	2,555	58	1,029	4,194	(2,719)	2,562
Other current assets	537	531	39	120	1,227	507	519	84	201	1,311
Total current assets	660	2,730	4,687	(3,868)	4,209	569	1,656	6,181	(2,475)	5,931
Investments in and advances to Cingular Wireless	—	21,069	205	—	21,274	—	21,736	621	—	22,357
Property, plant and equipment, net	21,045	644	3	31	21,723	21,176	590	2	52	21,820
Deferred charges and other assets	9,117	611	34,322	(36,236)	7,814	9,529	548	35,671	(37,023)	8,725
Intangible assets, net	1,040	400	3	90	1,533	1,095	367	2	76	1,540
Total assets	$ 31,862	$   25,454	$   39,220	$    (39,983)	$   56,553	$ 32,369	$ 24,897	$ 42,477	$ (39,370)	$ 60,373
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Debt maturing within one year	$ 5,003	$       270	$     3,985	$     (5,149)	$     4,109	$ 3,744	$ 176	$ 3,857	$ (3,851)	$ 3,926
Other current liabilities	3,307	1,437	1,113	(1,312)	4,545	3,868	1,104	1,115	(1,131)	4,956
Total current liabilities	8,310	1,707	5,098	(6,461)	8,654	7,612	1,280	4,972	(4,982)	8,882
Long-term debt	2,931	99	10,571	(522)	13,079	2,894	94	11,772	(482)	14,278
Noncurrent liabilities:
Deferred income taxes	5,032	1,927	(574)	222	6,607	4,972	1,991	(298)	153	6,818
Other noncurrent liabilities	3,185	757	591	146	4,679	3,268	847	595	249	4,959
Total noncurrent liabilities	8,217	2,684	17	368	11,286	8,240	2,838	297	402	11,777
Shareholders’ equity	12,404	20,964	23,534	(33,368)	23,534	13,623	20,685	25,436	(34,308)	25,436
Total liabilities and shareholders’ equity	$   31,862	$   25,454	$   39,220	$    (39,983)	$   56,553	$ 32,369	$ 24,897	$ 42,477	$ (39,370)	$ 60,373

Condensed Consolidating Cash Flow Statements

	For the Nine Months Ended September 30, 2005
	BST		Other		Parent		Adjustments		Total
Cash flows from continuing operations:
Cash flows from operating activities	$	5,254	$	1,257	$	6,473	$	(7,050)	$	5,934
Cash flows from investing activities		(2,344)		4,709		1,975		(3,646)		694
Cash flows from financing activities		(2,905)		(6,053)		(6,935)		10,730		(5,163)
Cash flows from discontinued operations		—		(115)		—		—		(115)
Net (decrease) increase in cash	$	5	$	(202)	$	1,513	$	34	$	1,350

	For the Nine Months Ended September 30, 2006
	BST		Other		Parent		Adjustments		Total
Cash flows from continuing operations:
Cash flows from operating activities	$	4,225	$	1,821	$	2,011	$	(2,789)	$	5,268
Cash flows from investing activities		(2,754)		26		(2,081)		(256)		(5,065)
Cash flows from financing activities		(1,565)		(1,880)		508		3,038		101
Cash flows from discontinued operations		—		—		—		—		—
Net (decrease) increase in cash	$	(94)	$	(33)	$	438	$	(7)	$	304

Supplemental Data

	For the Nine Months Ended September 30, 2005
	BST			Other			Parent			Adjustments			Total
Depreciation and amortization expense	$	2,535	$		183	$		2	$		36	$		2,756
Capital expenditures	$	2,336	$		115	$		2	$		12	$		2,465

	For the Nine Months Ended September 30, 2006
	BST			Other			Parent			Adjustments			Total
Depreciation and amortization expense	$	2,462	$		189	$		2	$		32	$		2,685
Capital expenditures	$	2,613	$		126	$		-	$		22	$		2,761

BELLSOUTH CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our annual report on Form 10-K for the year ended December 31, 2005 and our other filings with the SEC.

Overview

We are a Fortune 500 company with annual revenues of over $20 billion. Our core businesses are wireline and wireless communications and our largest customer segment is the retail consumer. We have interests in wireless communications through our ownership of 40 percent of Cingular Wireless, the nation’s largest wireless company based on number of customers and revenue. We also operate one of the largest directory advertising businesses in the United States. The majority of our revenues are generated based on monthly recurring services.

We operate much of our wireline business in one of the country’s strongest regional economies, where the population is increasing, real income growth is outpacing the national average and a diverse mix of businesses require advanced information and communication technology solutions. The Southeast is a positive net migration region, with net migration averaging almost 500,000 annually. The region’s real income growth is expected to exceed the national average over the next five years.

INDUSTRY DYNAMICS

Demand in the traditional voice business has been negatively impacted by the proliferation of wireless services led by one-rate pricing plans that include a large bucket of minutes and free roaming and long-distance, the popularity of e-mail and instant messaging, and technological advances such as broadband. After a period of significant growth in the 1990s, access lines, a key driver of our business, have declined steadily since 2001.

While the last mile connectivity to the customer remains essential, the communications industry is transitioning from a network-centric circuit-based infrastructure to an applications-centric Internet Protocol (IP) infrastructure, which could create uncertainty around traditional business models. Further, industry consolidation, such as the recent combinations of SBC and AT&T, Verizon and MCI, and Sprint and Nextel, and the pending merger of BellSouth and AT&T, are creating large enterprises with global reach and economies of scale.

Based on comparisons to penetration rates in other parts of the world, there is still significant growth potential in the wireless market in the United States. There are currently four national wireless companies engaging in aggressive competition in a growing market. The intense competition has driven down pricing, increased costs due to customer churn and increased wireless usage as companies attempt to differentiate their service plans. Meanwhile, significant capital is being invested in networks to meet increasing demand and to upgrade capabilities in anticipation of the development of new data applications.

REGULATION AND COMPETITION

Our core businesses are subject to regulation, and all of our businesses are subject to vigorous competition.

Changes to federal law in the early 1990s generally preempted states from regulating the market entry or rates of a wireless carrier, while allowing states to regulate other terms and conditions of wireless service. Wireless carriers are also subject to regulation by the Federal Communications Commission (FCC), which allocates the spectrum used by wireless carriers, and adopts and enforces other policies relating to wireless services.

Our wireline business is subject to dual state and federal regulation. The FCC has historically engaged in heavy regulation of our interstate services. In recent years, it has granted increasing pricing flexibility for our interstate telecommunications services because of the additional competition to which those services are subject, though nearly all of the services remain subject to tariffing requirements. Separately, in response to the Telecommunications Act of 1996, the FCC initially required us to share our network extensively with local service competitors, and prescribed a pricing policy (TELRIC) that has not permitted fair cost recovery. These sharing (unbundling) rules were invalidated by the courts on three separate occasions, but not before the invalid policies had been generally implemented in our contracts with competitors. In February 2005, the FCC issued rules that cut back significantly on some of the anticompetitive sharing requirements. The new rules essentially eliminated the unbundled network platform, or UNE-P, a combination of unbundled elements that replicate local service at unfairly low prices.

During 2005 and early 2006, we transitioned most former UNE-P customers to a similar platform service at commercially negotiated terms and prices. Our completion of the FCC-ordered phase out is being litigated before certain state commissions.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

The FCC provided additional relief when it released new broadband rules effective in November 2005 that responded to a U.S. Supreme Court decision. The new rules are designed to provide our high speed Internet access services with regulation equivalent to that of our competition, particularly cable modem providers. The new rules were fully phased in during the third quarter of 2006.

The states in our region continue to exert economic regulation over much of the revenue generated by our traditional narrowband wireline telecommunications services, though that regulation has been lessening. During the past two years, state legislatures and state regulatory commissions have taken action that moved regulation toward equivalence with our telecommunications competitors by prohibiting state regulation of broadband services, rebalancing rates, and reducing regulation of service bundles and services under contract.

Despite these successes, our wireline business remains more regulated than competing businesses that use cable, wireless or non-facilities based technologies. While we welcome the reforms, the transition of our wireline business regulation from the comprehensive, utility-like regulation of previous years to standard business regulation is not complete, and adjusting to each individual change requires significant management attention. We will accordingly continue to encourage regulatory reform in every appropriate forum.

Competition in the yellow pages industry continues to intensify. Major markets are seeing multiple competitors, with many different media competing for advertising revenue. We continue to respond to the increasing competition and the dynamic media environment with investments in product enhancements, multiple delivery options, local promotions, customer value plans, increased advertising and sales execution.

MERGERS, ACQUISITIONS AND DISPOSITIONS

On March 4, 2006, we agreed to merge with a subsidiary of AT&T. In the merger, shareholders of BellSouth will receive 1.325 shares of AT&T common stock for each share of BellSouth common stock. The transaction has been approved by the Board of Directors and shareholders of each company, as well as the US Department of Justice (DOJ) and all necessary state and foreign regulatory authorities. The FCC has scheduled a meeting to vote on the merger on November 3, 2006. We currently expect the transaction to close in the fall of 2006. We expect the combined company to be a more effective and efficient provider in the wireless, broadband, video, voice and data markets. The merger will also put control of Cingular Wireless in one company.

We have completed the exit of our international operations and increased our investment in the wireless market through Cingular Wireless’ acquisition of AT&T Wireless. The addition of AT&T Wireless filled in Cingular Wireless’ national coverage footprint, added depth to its licensed spectrum position, and added size and scale to compete more effectively. Cingular Wireless’ improvements in customer service and network coverage combined with new advertising campaigns are driving customer loyalty and growth. Customer churn has reduced appreciably, integration efforts are well underway and cost synergies are contributing to margin expansion. This acquisition substantially increases BellSouth’s participation in the wireless industry, bringing wireless to over 40 percent of our proportional revenues including Cingular Wireless. As Cingular completes its integration of AT&T Wireless and executes its strategy, we expect its contribution to BellSouth’s earnings to increase.

HIGHLIGHTS AND OUTLOOK

Consolidated revenues, which do not include our share of Cingular, increased 2.9 percent in the third quarter of 2006 and 1.9 percent year-to-date compared to the same periods of 2005, attributable to growth in both the Communications Group and Advertising & Publishing Group. The year-over-year growth in consolidated revenues was positively impacted by $51 in one-time credits issued during the third quarter of 2005 to customers affected by Hurricane Katrina. Revenue growth was driven by digital subscriber lines (DSL), long distance, wholesale wireless transport and emerging data services, as well as by electronic media and print services. This growth was partially offset by revenue declines from retail residence and wholesale voice access line losses. We added 176,000 net DSL customers and 118,000 long distance customers during the third quarter of 2006. We served more than 3.4 million total DSL customers and approximately 7.6 million long distance customers at September 30, 2006. At September 30, 2006 we had more than 5.1 million residential packages, an increase of 5.7 percent compared to the same period in 2005. Nearly 44 percent of packages included multiple products.

Total access lines were down 301,000 from June 30, 2006 driven by technology substitution and competition from cable telephony providers. Total retail access lines were down 127,000, which included 135,000 of line losses in consumer and positive retail small business line growth of 20,000 offset by a 13,000 decline in retail large business. The wholesale line base, of which the majority is UNE-P, declined 174,000 compared to June 30, 2006.

Our cost structure is heavily weighted towards labor and fixed asset related costs. We have adjusted our workforce due to shifts in market share of access lines. Since the beginning of 2001, we have reduced our domestic workforce by nearly 21,000 employees, or 26 percent. These workforce reductions along with reduced overtime and project spending contributed to improved year-over-year wireline operating margins. Sustaining our margins will require continued

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

market penetration of new services and improvements in productivity to manage our costs as competition and technology substitution intensifies.

Operating cash flow from continuing operations of $5,268 for the first nine months of 2006 was $666 lower than the same period in 2005 primarily due to a $566 federal income tax payment in the third quarter of 2006. Capital expenditures were $2,761 for the first nine months of 2006 and $2,465 for the first nine months of 2005. The increase in capital expenditures compared to the prior period relates primarily to expenditures of approximately $265 for Hurricane Katrina restoration efforts in 2006 compared to $22 in the third quarter of 2005, and increased spending for broadband investments in infrastructure and systems.

Cingular Wireless

Cingular Wireless added approximately 1.4 million net customers in the third quarter of 2006, bringing its nationwide customer base to 58.7 million customers. Customer churn of 1.8 percent in the third quarter of 2006 decreased 50 basis points compared to the same period in the prior year. Year-over-year revenue growth exceeded 9 percent driven by subscriber growth and higher data average revenue per user (ARPU). Operating margin has been improving due to revenue growth and ARPU stabilization coupled with operational and merger-related synergies.

Consolidated Results of Operations

Key financial and operating data for BellSouth Corporation for the three and nine months ended September 30, 2005 and 2006 are set forth below. All references to earnings per share are on a diluted basis. The discussion of consolidated results should be read in conjunction with the discussion of results by segment directly following this section.

Following Generally Accepted Accounting Principles (GAAP), we use the equity method of accounting for our investment in Cingular Wireless. We record and present our proportionate share of Cingular Wireless’ earnings as net earnings of equity affiliates in our consolidated income statements. Additionally, our financial statements reflect results for our former Latin American operations and other associated activities as Discontinued Operations.

	For the Three Months Ended September 30,		Percent	For the Nine Months Ended September 30,		Percent
	2005	2006	Change	2005	2006	Change
Operating revenues	$ 5,072	$ 5,218	2.9%	$ 15,305	$ 15,595	1.9%
Operating expenses
Cost of services and products	2,017	1,905	(5.6%)	5,862	5,974	1.9%
Selling, general, and administrative expenses	996	967	(2.9%)	2,833	2,868	1.2%
Depreciation and amortization	922	894	(3.0%)	2,756	2,685	(2.6%)
Provisions for restructuring and asset impairments	166	7	*	181	72	(60.2%)
Total operating expenses	4,101	3,773	(8.0%)	11,632	11,599	(0.3%)
Operating income	971	1,445	48.8%	3,673	3,996	8.8%
Interest expense	274	302	10.2%	850	860	1.2%
Net earnings (losses) of equity affiliates	97	342	252.6%	85	694	*
Gain on sale of operations	351	–	*	351	–	*
Other income (expense), net	64	90	40.6%	176	212	20.5%
Income from continuing operations before income taxes	1,209	1,575	30.3%	3,435	4,042	17.7%
Provision for income taxes	392	516	31.6%	1,140	1,312	15.1%
Income from continuing operations	817	1,059	29.6%	2,295	2,730	19.0%
Income from discontinued operations, net of tax	–	–	–	381	–	*
Net income	$ 817	$ 1,059	29.6%	$ 2,676	$2,730	2.0%

* Not meaningful.

Operating revenues

Consolidated operating revenues increased $146 in the third quarter of 2006 and $290 year-to-date compared to the same periods in 2005 reflecting growth in DSL, long distance, wholesale wireless transport and emerging data services as well as electronic media and print services. These increases were partially offset by the impact of revenue declines associated with retail residence and wholesale voice access line losses due to competition and technology substitution. The year-over-year increase in the third quarter of 2006 also reflects the impact of $51 in credits issued to customers affected by Hurricane Katrina in the third quarter of 2005. Combined revenues from DSL and long distance increased $154 in the third quarter of 2006 and $482 year-to-date compared to the same periods last year. Other data revenues increased $44 in the third quarter of 2006 and $52 year-to-date compared to the same periods in 2005. Other voice and access line-related revenues declined $134 in the third quarter of 2006 and $362 year-to-date compared to the same periods in 2005.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

Electronic media and print revenues grew $28 in the third quarter of 2006 and $59 year-to-date compared to the same periods last year.

Revenue trends are discussed in more detail in the Communications Group and Advertising & Publishing Group segment results sections.

Operating expenses

Total operating expenses decreased $328 in the third quarter of 2006 compared to the same period of the prior year. The major driver of this decrease was $290 incurred during the third quarter of 2005 for Hurricane Katrina-related asset impairments, service restoration and network repair costs. Other year-over-year decreases during the third quarter of 2006 included $48 at the Communications Group which consisted primarily of lower information technology platform spending, fees and labor costs (from force reductions and lower overtime primarily offset by increases in stock-based compensation). Also, depreciation and amortization was lower by $28 due to reduced rates. These declines were slightly offset by $24 of costs directly associated with the pending merger with AT&T and incremental severance-related costs associated with voluntary management workforce reductions. Additionally, the Advertising & Publishing Group experienced $15 of higher growth-related expenses and uncollectibles expense.

Year-to-date, total operating expenses decreased $33 compared to the same period of 2005. Expenses in 2006 continued to be impacted by service restoration and network repair activities carrying over from damage caused by Hurricanes Katrina and Wilma in late 2005. These costs, net of $50 in insurance recoveries, were less than the weather-related spending of the corresponding period of the prior year, resulting in an overall decrease in weather-related expenses of $104 year-to-date. Lower depreciation and amortization of $72 as well as $24 of year-to-date expense declines at the Communications Group also contributed to the year-over-year decrease. This year-to-date expense decline was partially offset by $57 of incremental severance-related costs associated with voluntary management workforce reductions, $44 of costs directly associated with the pending merger with AT&T and $43 of year-over-year increases at the Advertising & Publishing Group.

Operating expense trends are discussed in more detail in the Communications Group and Advertising & Publishing Group segment results sections.

Interest expense

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2005	2006	Change	2005	2006	Change
Interest expense – debt	$     248	$ 271	$ 23	$ 771	$ 781	$ 10
Interest expense – other	26	31	5	79	79	–
Total interest	$     274	$ 302	$ 28	$ 850	$ 860	$ 10
Average debt balances	$17,292	$17,908	$616	$18,468	$17,615	$(853)
Effective rate	5.7%	6.0%	30 bps	5.6%	5.9%	30 bps

Interest expense associated with interest-bearing debt was higher in the third quarter and year-to-date periods of 2006 compared to the same periods of the prior year. This was primarily the result of higher interest rates on variable rate debt. The increase in interest expense in the third quarter of 2006 compared to prior year was also impacted by higher average debt balances due to borrowings.

Net earnings (losses) of equity affiliates

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2005	2006	Change	2005	2006	Change
Cingular	$ 89	$ 339	$ 250	$ 53	$ 696	$ 643
Other equity investees	8	3	(5)	32	(2)	(34)
Total	$ 97	$ 342	$ 245	$ 85	$ 694	$ 609

The increase in earnings from Cingular Wireless in 2006 was attributable to growth in the customer base and merger synergies associated with its increased scale and integration of the former AT&T Wireless operations. See the Wireless segment results section for a further discussion of operational drivers. The decline in earnings from other equity investees is due to the sale of our interest in Cellcom in the third quarter of 2005.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

Other income (expense), net

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2005	2006	Change	2005	2006	Change
Interest income	$ 8	$ 21	$ 13	$ 18	$ 36	$ 18
Interest on advances to Cingular	47	49	2	163	140	(23)
Loss on early extinguishment of debt	–	–	–	(42)	–	42
Other, net	9	20	11	37	36	(1)
Total other income (expense), net	$ 64	$ 90	$ 26	$ 176	$ 212	$ 36

Interest income for the three and nine months ended September 30, 2006 increased over the same periods of the prior year due to increased average invested cash and higher interest rates. Interest on advances to Cingular for the three months ended September 30, 2006 was higher than the same period of the prior year due to principal borrowings and rate increases. The decline in interest on advances to Cingular in the year-to-date period is due to principal repayments, partially offset by rate increases. Interest income on advances to Cingular is offset by a like amount of interest expense recorded by Cingular and reported in our financial statements in the caption “Net earnings (losses) of equity affiliates.”

Provision for income taxes

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2005	2006	Change	2005	2006	Change
Provision for income taxes	$ 392	$ 516	$ 124	$ 1,140	$ 1,312	$ 172
Effective tax rate	32.4%	32.8%	40 bps	33.2%	32.5%	(70 bps)

The effective rates in both periods of 2006 are favorably impacted by year-over-year increases in tax benefits associated with the dividends received deduction for our investment in Cingular, the release of valuation allowance against state net operating losses, the Medicare Part D subsidy, and a tax benefit for production activities conducted within the US. Current year increases in these benefits are offset by tax impacts of certain non-deductible merger-related costs incurred in 2006, and higher state tax expense primarily due to enacted state law changes.

Income from discontinued operations, net of tax

In the first quarter of 2005, we sold the final two of the ten Latin American properties, which resulted in a $390 gain, net of tax.

Results by Segment

Our reportable segments reflect strategic business units that offer similar products and services and/or serve similar customers. We have three reportable operating segments:

• Communications Group;

• Wireless; and

• Advertising & Publishing Group.

The Company’s chief decision makers evaluate the performance of each business unit based on net income, exclusive of internal charges for use of intellectual property and adjustments for unusual items that may arise. Unusual items are transactions or events that are included in reported consolidated results but are excluded from segment results due to their nonrecurring or nonoperational nature. Such items are listed in the table of summary results for each segment. In addition, when changes in our business affect the comparability of current versus historical results, we adjust historical operating information to reflect the current business structure. See Note K to our consolidated financial statements for a reconciliation of segment results to the consolidated financial information.

The following discussion highlights our performance in the context of these segments. For a more complete understanding of our industry, the drivers of our business, and our current period results, you should read this discussion in conjunction with our consolidated financial statements, including the related notes.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

Communications Group

The Communications Group is our core domestic business and it includes all domestic wireline voice, data, broadband, long distance, Internet services and advanced voice features. The Communications Group provides these services to an array of customers, including residential, business and wholesale.

BellSouth continues to focus its marketing on long distance and BellSouth® FastAccess® DSL, encouraging customers to purchase packages containing multiple telecommunications services. We also continue to experience access line market share loss due to competition and technology substitution, and we expect these overall trends to continue throughout 2006.

	For the Three Months Ended September 30,		Percent	For the Nine Months Ended September 30,		Percent
	2005	2006	Change	2005	2006	Change
Segment operating revenues:
Voice	$ 3,136	$ 3,058	(2.5%)	$ 9,445	$ 9,289	(1.7%)
Data	1,166	1,315	12.8%	3,491	3,861	10.6%
Other	286	323	12.9%	895	898	0.3%
Total segment operating revenues	4,588	4,696	2.4%	13,831	14,048	1.6%
Segment operating expenses:
Cost of services and products	1,860	1,833	(1.5%)	5,563	5,627	1.2%
Selling, general, and administrative expenses	793	772	(2.6%)	2,306	2,285	(0.9%)
Depreciation and amortization	914	886	(3.1%)	2,734	2,662	(2.6%)
Total segment operating expenses	3,567	3,491	(2.1%)	10,603	10,574	(0.3%)
Segment operating income	1,021	1,205	18.0%	3,228	3,474	7.6%
Segment net income	$ 611	$ 720	17.8%	$ 1,935	$ 2,072	7.1%
Unusual items excluded from segment net income:
Hurricane Katrina-related expenses	(172)	–	*	(172)	(74)	*
Severance charges	–	–	*	–	(45)	*
AT&T merger costs	–	(13)	*	–	(30)	*
Early extinguishment of debt costs	–	–	*	(26)	–	*
Segment net income including unusual items	$ 439	$ 707	61.0%	$ 1,737	$ 1,923	10.7%

Key Indicators (000s except where noted)
Switched access lines (1):
Residence retail:
Primary				11,465	10,932	(4.6%)
Additional				1,206	1,044	(13.4%)
Total retail residence				12,671	11,976	(5.5%)
Residential wholesale voice lines				1,674	1,121	(33.0%)
Total residence				14,345	13,097	(8.7%)
Business retail				5,294	5,305	0.2%
Business wholesale voice lines				712	553	(22.3%)
Total business				6,006	5,858	(2.5%)
Other retail/wholesale lines (primarily payphones)				95	83	(12.6%)
Total Switched access lines				20,446	19,038	(6.9%)
DSL customers (retail and wholesale)				2,678	3,449	28.8%
Retail long distance customers				6,993	7,596	8.6%
Switched access and local minutes of use (millions)	15,511	14,810	(4.5%)	47,279	45,088	(4.6%)
Retail long distance minutes of use (millions)	6,660	6,703	0.6%	18,972	19,877	4.8%
Total access minutes of use (millions)	22,171	21,513	(3.0%)	66,251	64,965	(1.9%)
Capital expenditures	$ 878	$ 725	(17.4%)	$ 2,446	$ 2,743	12.1%

* Not meaningful.

(1) Prior period operating data are often revised at later dates to reflect updated information. The above information reflects the latest data available for the periods indicated.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

Segment operating revenues

Revenue grew 2.4 percent in the third quarter of 2006 compared to the same period in 2005. Adjusting for $44 of one-time Hurricane Katrina credits in the third quarter of 2005, the year-over-year increase would have been 1.4 percent. Revenue growth in mass-market broadband and long distance services and growth in emerging data services offset revenue declines from traditional access line services.

Growth in consumer long distance and DSL revenue was partially offset by retail residential access line losses, resulting in a 2.8 percent year-over-year increase in consumer revenue. Revenue for our small business unit increased 10.6 percent in the third quarter of 2006 when compared to the same period in 2005. We continue to reacquire and retain customers with competitively priced term agreements while also increasing customer ARPU with FastAccess DSL and long distance packages. Revenue for our large business segment increased 2.3 percent in the third quarter of 2006 compared to the same period last year. Revenue growth in emerging data products and long distance offset declines in legacy services coupled with pricing stability. Wholesale revenue decreased 1.8 percent in the third quarter of 2006 compared to the same period in the prior year as declines in local wholesale revenue, which includes UNE-P and Internet Service Provider (ISP) dial-up contracts, were offset by wireless transport growth and Georgia regulatory rate adjustments.

Voice

Voice revenues decreased $78 in the third quarter of 2006 and $156 year-to-date when compared to the same periods in 2005. Access line-related revenues declined $82 in the third quarter of 2006 and $254 year-to-date when compared to the same periods in 2005 due to total switched access line losses of 1,408,000, or 6.9 percent. The access line decline was the result of continued share loss, wireless and broadband technology substitution and, to a lesser extent, losses to Voice over Internet Protocol providers. Wholesale lines totaled over 1.7 million at September 30, 2006, down 722,000 year-over-year. Wholesale lines consist primarily of both the grandfathered service provided under invalidated FCC rules (UNE-P) and successor service provided under commercial contracts at negotiated rates. Commercial contracts covered predominately all of the wholesale lines at September 30, 2006.

In efforts to combat share loss, we continue to further penetrate our customer base with package services. At the end of the third quarter of 2006, we had more than 5.1 million residential packages, representing a 47 percent penetration of our retail primary line residence base. As of September 30, 2006, 86 percent of our package customers had long distance in their package and 49 percent had either FastAccess DSL or BellSouth dial-up Internet.

Long distance voice revenue increased $56 in the third quarter of 2006 and $206 year-to-date when compared to the same periods in 2005, driven primarily by growth in interLATA retail revenues and wholesale long distance services sold to Cingular. InterLATA retail revenues increased $46 in the third quarter and $156 year-to-date reflecting an increase in the proportion of customers on BellSouth Unlimited Long Distance Plans and continued market share gains both driven by marketing efforts. At September 30, 2006, we had nearly 7.6 million retail long distance customers and a mass-market penetration rate of almost 63 percent of our retail customer base.

Switched access revenues decreased $23 in the third quarter of 2006 and $53 year-to-date when compared to the same periods in 2005. Our entry into interLATA long distance shifted switched access minutes from other carriers to our service, resulting in a transfer from wholesale switched access revenues to retail long distance revenue. Excluding our retail long distance traffic, switched access and local minutes of use decreased 4.5 percent in the third quarter when compared to the same period in 2005. The decrease is due to access line losses and alternative communications services, primarily wireless and e-mail.

Data

Data revenues increased $149 in the third quarter of 2006 and $370 year-to-date when compared to the same periods in 2005. Data revenues were driven primarily by strong growth from the sale of BellSouth® FastAccess® DSL service. Combined wholesale and retail DSL revenues of $405 in the quarter and $1,187 year-to-date were up $100 and $302, respectively, when compared to the same periods in 2005 due primarily to a larger customer base. As of September 30, 2006, we had more than 3.4 million DSL customers, an increase of 771,000 customers compared to September 30, 2005. DSL net subscriber additions were 176,000 in the third quarter of 2006. More than 30 percent of BellSouth’s broadband customers subscribe to the Company’s premium service offerings -- FastAccess DSL Xtreme and FastAccess DSL Xtreme 6.0.

Revenue from other retail data products increased $34 in the third quarter of 2006 and $61 year-to-date when compared to the same periods in 2005. This growth was driven by our long distance offerings in complex business and emerging data services, particularly BellSouth Metro Ethernet Service and BellSouth Virtual Private Network, coupled with pricing stability. These growth areas more than offset declines in legacy services.

Revenue from the sale of wholesale data transport services, including long distance companies, wireless service providers and competitive local exchange carriers (CLEC), increased $15 in the third quarter of 2006 and $7 year-to-date when compared to the same periods in 2005. Data transport sold to inter-exchange carriers declined as they continue to reduce their network costs in response to declining volumes. In addition, dial-up ISP traffic revenue declined as volumes

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

declined. These declines were offset by revenue growth in transport sold to wireless carriers as wireless subscribers and volumes continue to expand. The third quarter of 2005 also included $12 of negative billing adjustments.

Other

Other revenues increased $37 in the third quarter of 2006 and were essentially flat year-to-date when compared to the same periods in 2005 reflecting incremental revenue of $12 associated with Georgia regulatory rate adjustments and higher equipment revenues.

Segment operating expenses

Cost of services and products

Cost of services and products decreased $27 in the third quarter of 2006 and increased $64 year-to-date when compared to the same periods in 2005. The third quarter decrease includes $33 decrease in fees for contributions to the Universal Service Fund (USF) and access fees based on volumes, along with decreases of $22 in labor costs primarily associated with headcount reductions and $15 in deferred activation expense recognition. These decreases were offset by increases of $19 in materials and supplies related to fuel and utility costs, $11 in contract services primarily for network-related costs as a result of weather and $10 in cost of goods sold related to higher volumes in long distance service.

The year-to-date increase reflects a $117 increase in contract services primarily related to network repairs associated with damage caused by Hurricane Wilma, $45 in materials and supplies related to increased fuel costs and DSL modems, and $29 in cost of goods sold driven by higher volumes in long distance service. These increases were partially offset by a $79 reduction in penalties associated with CLEC parity requirements, USF contributions and access fees, $17 in deferred activation expense recognition and a $21 reduction in labor costs due to lower benefit valuations and increased capitalization. Savings due to headcount reductions were offset by rate increases.

Selling, general, and administrative expenses

Selling, general, and administrative expenses decreased $21 in the third quarter of 2006 and year-to-date when compared to the same periods in 2005. The third quarter decrease reflects a $59 decrease in contract services for technology platform initiatives, partially offset by increases of $15 in labor costs due to the increased stock price’s impact on stock-based compensation partially offset by headcount reductions, $15 in uncollectibles driven by a third quarter 2005 reserve adjustment and $13 in outside sales commissions related to higher vendor sales volumes.

The year-to-date decrease reflects a $37 decrease in contract services for technology platform initiatives, $11 in fees, $10 in labor costs due to headcount, overtime, bonus awards offset by stock-based compensation and $6 in material and supplies. These decreases were partially offset by increases of $33 in outside sales commissions related to higher vendor sales volumes and $12 in advertising due to campaign timings.

Depreciation and amortization

Depreciation and amortization expense decreased $28 during the third quarter of 2006 and $72 year-to-date when compared to the same periods in 2005 reflecting reduced depreciation rates under the group life method of depreciation partially offset by depreciation expense on new capital expenditures in the previous 12 months.

Wireless

We own a 40 percent economic interest in Cingular Wireless, a joint venture with AT&T. Because we exercise influence over the financial and operating policies of Cingular Wireless, we use the equity method of accounting for this investment. Under the equity method of accounting, we record our proportionate share of Cingular Wireless' earnings in our consolidated statements of income. These earnings are included in the caption "Net earnings (losses) of equity affiliates." For management purposes, we evaluate our Wireless segment based on our proportionate share of Cingular Wireless’ results. Accordingly, results for our Wireless segment reflect the proportional consolidation of 40 percent of Cingular Wireless’ financial results.

The wireless industry continued its strong growth trajectory seen in 2005 through the first nine months of 2006. Despite industry consolidation, competition continues to be intense among the current four national competitors, their affiliates and the smaller regional carriers. Cingular Wireless’ year-to-date third quarter ARPU decreased 1.8 percent year-over-year, driven primarily by lower voice ARPU partially offset by increased data ARPU. However, third quarter ARPU increased slightly year-over-year from data revenue growth. Data revenue continues to play an increasingly important role in revenue composition, rising from 8.7 percent of ARPU during the third quarter of 2005 to 12.7 percent of ARPU in the third quarter of 2006.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

	For the Three Months Ended September 30,		Percent	For the Nine Months Ended September 30,		Percent
	2005	2006	Change	2005	2006	Change
Segment operating revenues:
Service revenues	$ 3,089	$ 3,464	12.1%	$ 9,144	$ 9,984	9.2%
Equipment revenues	410	357	(12.9%)	1,090	1,116	2.4%
Total segment operating revenues	3,499	3,821	9.2%	10,234	11,100	8.5%
Segment operating expenses:
Cost of services and products	1,395	1,464	4.9%	4,171	4,427	6.1%
Selling, general, and administrative expenses	1,128	1,125	(0.3%)	3,438	3,341	(2.8%)
Depreciation and amortization	421	484	15.0%	1,324	1,418	7.1%
Total segment operating expenses	2,944	3,073	4.4%	8,933	9,186	2.8%
Segment operating income	555	748	34.8%	1,301	1,914	47.1%
Segment net income	$ 242	$ 360	48.8%	$ 477	$ 879	84.3%
Unusual items excluded from segment net income:
Merger integration costs	(56)	(33)	*	(119)	(127)	*
Wireless merger intangible amortization	(93)	(75)	*	(284)	(240)	*
Hurricane Katrina-related expenses	(23)	–	*	(23)	–	*
Segment net income including unusual items	$ 70	$ 252	*	$ 51	$ 512	*

Key Indicators (100% Cingular):
Cellular/PCS Customers (000s)				52,292	58,666	12.2%
Wireless service average monthly revenue per customer – Cellular/PCS	$ 49.65	$ 49.76	0.2%	$ 49.92	$ 49.04	(1.8%)
Capital Expenditures	$ 1,346	$ 1,828	35.8%	$ 4,505	$ 4,851	7.7%

* Not meaningful

Segment operating revenues

Cingular Wireless had net additions of 1.4 million during the third quarter of 2006, up from 867,000 during the third quarter of 2005 and 4.5 million net additions year-to-date up from 3.2 million in the corresponding prior year period. This resulted in 58.7 million cellular/PCS customers on September 30, 2006. Gross customer additions during the third quarter of 2006 totaled 4.6 million and totaled 13.7 million year-to-date, up from 4.4 million and 13.4 million from the same periods a year ago. The slight increase in gross customer additions for both periods was primarily driven by new prepaid offerings launched in the second half of 2005. Additionally, strong reseller gross additions attributed to the year-to-date increase. These additions were partially offset by decreased postpaid additions due to planned distribution rationalization such as the reduction of retail stores and agents, higher wireless market penetration in general and lower churn among major wireless carriers.

The cellular/PCS churn rate was 1.8 percent for both the third quarter of 2006 and year-to-date, down from 2.3 percent and 2.2 percent in the corresponding prior year periods. Postpaid churn for both the third quarter of 2006 and year-to-date was 1.5 percent, down from 2.0 percent and 1.9 percent in the corresponding prior year periods. The decline in cellular/PCS churn was driven by a 9.1 percent reduction in disconnects in the third quarter of 2006 and a 9.7 percent reduction in disconnects year-to-date in comparison to the same periods of 2005, which Cingular believes is attributable primarily to better network quality and coverage, and improvements in the overall customer experience.

Cellular/PCS ARPU slightly increased to $49.76 in the third quarter of 2006 from $49.65 in the third quarter of 2005. Year-to-date ARPU declined 1.8 percent to $49.04, down from $49.92 in the corresponding prior year period. The third quarter increase was driven by continued increased incremental data revenues resulting from Cingular’s competitive data products, such as ringtones and messaging. Data revenue increases also partially offset the year-to-date ARPU decline. The third quarter increase also reflected an approximate $0.20 impact for service credits to customers affected by Hurricane Katrina in the third quarter of 2005. Driving the year-to-date decline and partially offsetting the third quarter increase were the addition of a disproportionately higher percentage of lower-ARPU prepaid and reseller customers than postpaid customers over the past four quarters, an increase in the number of customers on plans allowing free mobile-to-mobile calling, roaming, and long distance, and a higher percentage of customers on lower access revenue FAMILYTALK® plans.

Segment operating revenues, consisting of service revenue and equipment sales, increased $322 in the third quarter of 2006 and $866 year-to-date when compared with the same periods of 2005. The growth in service revenue of $375 during the third quarter of 2006 and $840 year-to-date was primarily due to the increases in local service voice and data revenues. The year-to-date increase was partially offset by decreases in roamer and other revenues. Cingular Wireless’ revenue growth in both periods also reflects the impact of $12 of service credits to customers affected by Hurricane Katrina in third quarter of 2005. The local service voice component of total service revenues includes recurring monthly

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

access charges, airtime usage, including prepaid service, and charges for optional features and services, such as voice mail, mobile-to-mobile calling, roadside assistance, caller ID and handset insurance. It also includes billings to Cingular Wireless’ customers for the USF and other regulatory fees and taxes. The key driver of the $180 increase in local service voice revenues in the third quarter of 2006, $433 year-to-date, was an increase of 12.1 percent for the third quarter of 2006 and 11.3 percent year-to-date in the average number of cellular/PCS subscribers. This volume-based increase was partially offset by the incremental impact of a disproportionate amount of lower-ARPU prepaid and reseller customers added to the base.

Increases in data revenues also favorably impacted total service revenues. Data revenues increased $167 in the third quarter of 2006 and $422 year-to-date over the same prior year periods driven by greater data service penetration and usage of short message service (SMS) messaging, email, and other data services by Cingular Wireless’ cellular/PCS customers.

Incollect roamer revenues in the third quarter of 2006 increased $14 when compared with the third quarter of 2005 because of current quarter rate increases, which were partially offset by decreased volume. Year-to-date incollect roamer revenues decreased $28 when compared with amounts from the corresponding prior year period due to the continued impact of bundling “free” roaming minutes with all-inclusive regional and national rate plans.

Long distance revenues increased $8 in the third quarter of 2006 and $22 year-to-date from the corresponding prior year periods due to increases in international long distance revenues resulting from the successful marketing of international calling plan initiatives.

Outcollect revenues increased $9 in the third quarter of 2006 and $10 year-to-date when compared with the corresponding prior year periods primarily from increased minutes of use. The year-to-date increase is partially offset by decreases in the average rate.

Equipment sales, comprised of product, accessory and upgrade sales, decreased $53 during the third quarter of 2006 and increased $26 year-to-date from the corresponding prior year periods. The third quarter decrease is primarily attributable to increased rebate activity and reduced handset pricing partially offset by increased accessory pricing and increased upgrade volume. The year-to-date increase was primarily driven by a higher volume of new customer handsets, increased volume and price of upgrades by existing customers to devices with more advanced features than those in the past, and accessory price increases, partially offset by increased rebate activity.

Segment operating expenses

Cost of services and products

Cost of services and products increased $69 in the third quarter of 2006 and $256 year-to-date when compared to the same periods of 2005 primarily driven by increased minutes of use. In addition, higher handset volumes contributed to the year-to-date increase.

The local systems component increased $54 in the third quarter of 2006 and $121 year-to-date when compared to the corresponding prior year periods. Both increases resulted primarily from higher interconnection fees of $34 associated with a 21.3 percent growth in system minutes in the third quarter of 2006 and $101 associated with a 21.0 percent growth in system minutes year-to-date over the prior year corresponding periods; USF and gross receipts tax increases of $16 in the third quarter of 2006 and $19 year-to-date; and an increase in local network system costs of $15 in the third quarter of 2006 and $39 year-to-date primarily related to increased maintenance expense. These increases were partially offset by a decrease in reseller services expense of $12 in the third quarter of 2006 and $38 year-to-date in comparison to the corresponding prior year periods. The decrease in reseller services expense was driven by decreases in minutes of use on the T-Mobile network of 60.1 percent in the third quarter of 2006 and 50.1 percent year-to-date partially offset by higher handset insurance claims and third party license expenses in both periods when compared to the same periods of the prior year.

Third-party network system costs increased $17 for the third quarter of 2006 resulting from a $7 increase in roaming expense and $10 increase in long distance expense over the corresponding prior year period. Third-party network system costs increased $76 year-to-date when compared to the same period of the prior year resulting from increases of $32 in roaming expense and $44 of long distance expense compared to the prior year period. Roaming costs increased primarily due to increased usage minutes over the comparable prior periods. Increases in long distance costs were driven by higher minutes of use resulting from the increased number of average subscribers, partially offset by minor rate decreases.

Equipment sales expenses declined $2 in the third quarter 2006 and grew $58 year-to-date when compared to the same periods of the prior year. The third quarter decrease is related to lower average per unit costs of handsets and insurance program adjustments partially offset by higher volumes. The year-to-date increase is driven by higher volume of product and upgrade handsets and a higher average cost per upgrade unit sold partially offset by decreases in the average cost per unit sold of product handsets.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

Selling, general, and administrative expenses

Selling, general, and administrative expenses were flat in the third quarter of 2006 and decreased $97 year-to-date when compared to the same periods of 2005. Selling expenses increased $18 in the third quarter of 2006 and $11 year-to-date compared to the prior year corresponding periods driven by increases in sales expenses related to the long-term incentive plan and direct commissions from sales compensation plan changes; the year-to-date increase was partially offset by lower indirect commissions and lower advertising in the year-to-date period. Costs for maintaining and supporting Cingular Wireless’ customer base decreased $5 in the third quarter of 2006 and $70 year-to-date when compared to the same periods of 2005 principally due to a decrease in bad debt primarily from improved collections and improved involuntary churn which contributed to lower net write-offs, a decrease in customer service costs due to reduced outsourced professional services at call centers and reduced billing expenses resulting from continued migration to the combined billing system. These decreases were partially offset by prepaid card replenishment costs and increased migration and upgrade transactions in both periods. Additionally, administrative expenses decreased $14 in the third quarter of 2006 and $37 year-to-date in comparison to the corresponding periods of the prior year driven by lower litigation related expenses partially offset by higher third-party transaction processing fees in both periods. The year-to-date decrease was also driven by lower rent expense from combining AT&T Wireless and legacy Cingular office space and a federal excise tax refund accrual.

Depreciation and amortization

Depreciation expense increased $68 in the third quarter of 2006 and $107 year-to-date when compared to the same periods in 2005 primarily due to Cingular Wireless’ increased network investment and reductions to depreciation expense recorded in 2005 from the revaluation of acquired AT&T Wireless assets pursuant to the network rationalization plans offset by the impact of assets being fully depreciated in 2006. Amortization expense decreased $5 for the third quarter of 2006 and $13 year-to-date primarily due to amortization associated with intangible assets that became fully amortized during 2005 and year-to-date 2006.

Advertising & Publishing Group

Our Advertising & Publishing Group is comprised of companies in the US that publish, print, and sell advertising in and perform related services concerning alphabetical and classified telephone directories and electronic media offerings.

In the third quarter of 2006, our Advertising & Publishing Group continued to see the favorable impact from strategic initiatives implemented in prior years, partially offset by continued competitive pressures.

	For the Three Months Ended September 30,		Percent Change	For the Nine Months Ended September 30,		Percent Change
	2005	2006		2005	2006
Segment operating revenues	$ 509	$ 537	5.5%	$ 1,531	$ 1,590	3.9%
Segment operating expenses:
Cost of services and products	94	96	2.1%	283	286	1.1%
Selling, general, and administrative expenses	175	188	7.4%	518	558	7.7%
Depreciation and amortization	7	8	14.3%	21	23	9.5%
Total segment operating expenses	276	292	5.8%	822	867	5.5%
Segment operating income	233	245	5.2%	709	723	2.0%
Segment net income	$ 146	$ 154	5.5%	$ 441	$ 450	2.0%
Unusual items excluded from segment net income:
Hurricane Katrina-related credits (charges)	(6)	–	*	(6)	1	*
Segment net income including unusual items	$ 140	$ 154	10.0%	$ 435	$ 451	3.7%
Capital Expenditures	$ 7	$ 5	(28.6%)	$ 19	$ 18	(5.3%)

* Not meaningful

Segment operating revenues

Segment operating revenues increased $28 in the third quarter of 2006 and $59 year-to-date compared to the same periods of 2005. These increases include an improvement in print revenues as a result of core print growth and new products and growing electronic media revenues. The year-over-year comparison is impacted by $7 in credits issued to customers affected by Hurricane Katrina in the third quarter of 2005.

Segment operating expenses

Cost of services and products increased $2 in the third quarter of 2006, $3 year-to-date, and selling, general, and administrative expenses increased $13 in the third quarter of 2006, $40 year-to-date, compared to the same periods of

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

2005. These increases were primarily from sales commissions on higher revenues, traffic costs related to growth initiatives for electronic media products and weather-related delivery costs, as well as higher bad debt.

Liquidity and Financial Condition

BellSouth’s cash generation and financial position enable it to reinvest in its business while distributing substantial cash to its shareholders. BellSouth’s priorities for the use of cash are to fund investment opportunities, maintain a capital structure that balances a low weighted-average cost of capital against an appropriate level of financial flexibility, and distribute cash to shareholders in the form of dividends and share repurchases.

Sources and uses of cash

Our primary source of cash flow is dividends from our consolidated operating subsidiaries. Our subsidiaries generate sufficient cash flow to fund their capital expenditures. Generally, we do not permit these subsidiaries to accumulate cash, but require them to distribute cash to us in the form of dividends. Our subsidiaries no longer issue external debt, and they redeem existing debt as it matures. Any subsidiary financing needs are provided by BellSouth, either through available cash or through external financing. In addition, after funding capital expenditures and redeeming maturing debt, Cingular Wireless distributes 40 percent of its remaining cash, reflecting our ownership percentage, to BellSouth.

Our sources of funds — primarily from operations and, to the extent necessary, from readily available external financing arrangements — are sufficient to meet all current obligations on a timely basis. We believe that these sources of funds will be sufficient to meet the operating needs of our business for at least the next twelve months. Information about the Company’s cash flows, by category, is presented in the consolidated statement of cash flows.

Net cash provided by (used for):

		For the Nine Months Ended September 30,
		2005		2006		Change
Continuing Operations
Operating activities	$	5,934	$	5,268	$	(666)	(11.2%)
Investing activities	$	694	$	(5,065)	$	(5,759)	*
Financing activities	$	(5,163)	$	101	$	5,264	*
Discontinued Operations	$	(115)	$	—	$	115	*

*Not meaningful

Cash generated by operations declined $666 in the first nine months of 2006 compared to the same period in the prior year due primarily to a $566 federal income tax payment in 2006, higher incremental cash expenses associated with network restoration from hurricane damage sustained in late 2005, and severance payments under the 2006 workforce reduction. Partially offsetting this negative impact was higher operating income (absent hurricane-related expense) and positive changes in working capital.

CAPITAL EXPENDITURES

Capital expenditures consist primarily of (a) gross additions to property, plant and equipment having an estimated service life of one year or more, plus incidental costs of preparing the asset for its intended use, and (b) gross additions to capitalized software. Our capital expenditures of $2,761 during the first nine months of 2006 and of $2,465 during the first nine months of 2005 were incurred to support our wireline network, to promote the introduction of new products and services and to increase operating efficiency and productivity. The increase in capital expenditures compared to the prior period relates primarily to expenditures of approximately $265 for Hurricane Katrina restoration efforts in 2006, as compared to $22 in the third quarter of 2005, and increased spending for broadband investments in infrastructure and systems.

WIRELESS

In general, Cingular Wireless funds its capital and operating cash requirements from operations. To the extent additional funding is required, BellSouth and AT&T provide unsubordinated short-term financing on a pro rata basis. As of September 30, 2006, BellSouth had outstanding advances under the line of credit of $621. During the remainder of 2006, we expect Cingular Wireless to utilize its operating cash flow after capital expenditures primarily to pay its obligation relating to the recent FCC auction of 90 MHz of spectrum and maturing third-party debt.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

DISTRIBUTIONS TO SHAREHOLDERS

Dividends

Our Board of Directors considers the cash dividend on a quarterly basis. BellSouth has paid a dividend each quarter since it began operations in 1984. Over the last four years, BellSouth increased its quarterly dividend 45 percent from 20 cents per common share to 29 cents per common share. Under the merger agreement with AT&T, without AT&T’s prior written consent, BellSouth is not permitted to pay a quarterly dividend in excess of 29 cents per share.

Share repurchases

BellSouth uses share repurchases to help manage cash distributions to shareholders. In October 2005, BellSouth’s Board of Directors authorized the repurchase of up to $2 billion of BellSouth’s common shares through 2007. Under this plan, we repurchased nearly $1 billion through December 31, 2005 and approximately $42 during 2006. Under the merger agreement with AT&T, without AT&T’s prior written consent, BellSouth is not permitted to repurchase shares other than those necessary to offset shares issued in connection with employee benefit plans or the direct investment plan. Further, share repurchases may not exceed $500 per fiscal quarter.

EXTERNAL FINANCING

Credit ratings

At September 30, 2006, our long-term credit ratings were A2 from Moody’s Investors Service and A from Standard and Poor’s, and our short-term credit ratings were P-1 from Moody’s and A-1 from Standard and Poor’s. On July 27, 2006, Moody’s confirmed the A2 long-term and P-1 short-term credit ratings of BellSouth.

Standard and Poor’s placed the credit ratings of BellSouth on CreditWatch with negative implications on January 13, 2006, which reflected Standard and Poor’s concern that the local wireline businesses of investment-grade communications carriers faced more uncertain business prospects. On September 15, 2006, Standard and Poor’s stated that it expects to affirm both the A long-term and A-1 short-term credit ratings of BellSouth if the merger of AT&T and BellSouth is consummated under the contemplated terms. Pending the closing of the merger, however, Standard and Poor’s credit ratings of BellSouth remain on CreditWatch with negative implications.

Financing arrangements

As of September 30, 2006, our authorized commercial paper program was $10.5 billion, with $1.6 billion outstanding. We believe that we have ready access to the commercial paper market in the event we need funding in excess of our operating cash flows. We also have an effective registration statement on file with the Securities and Exchange Commission under which we could issue $1.9 billion of long-term debt securities. The merger agreement with AT&T provides that we cannot incur additional indebtedness in excess of $1.5 billion in the aggregate without AT&T’s prior written consent.

BellSouth and BellSouth Telecommunications currently have debt outstanding under various indentures that we have entered into over the past thirteen years. None of these indentures contain any financial covenants. They do contain limitations that restrict the Company’s (or the affiliate of the company that is a party to the indenture) ability to create liens on their properties or assets (but not the properties or assets of their subsidiaries) except in specified circumstances. None of these indentures contains any provisions that are tied to the ratings assigned to the Company or its affiliates by an external debt rating agency. Further, none of these indentures contains cross-default provisions.

Effective April 29, 2005, we entered into a syndicated line of credit in the amount of $3.0 billion. This line of credit serves as a backup facility for our commercial paper program and will expire on April 29, 2008. We do not have any balances outstanding under the line of credit.

Except as described in this paragraph, the line of credit contains no financial covenants or requirements for compensating balances. Further, the line of credit does not contain any provisions that are tied to the ratings assigned to us or our affiliates by an external debt rating agency. The line of credit limits the debt of the Company and its consolidated subsidiaries to 300 percent of consolidated earnings before interest, taxes, depreciation and amortization for the preceding four quarters. During the first nine months of 2006, this debt to earnings ratio was approximately 210 percent. In addition, the line of credit prohibits the Company and its significant subsidiaries from permitting liens to be placed on their properties or assets except in specified circumstances. If BellSouth or any of our subsidiaries defaults on any outstanding debt in excess of $200, an event of default will occur under the line of credit.

(Dollars in Millions, Except Per Share Amounts and as Otherwise Indicated)

Market Risk

For a complete discussion of our market risks, you should refer to the caption “Quantitative and Qualitative Disclosure About Market Risk” in our annual report on Form 10-K for the year ended December 31, 2005. Our primary exposure to market risks relates to unfavorable movements in interest rates and changes in equity investment prices. Since December 31, 2005, we have invested approximately $530 in debt and equity securities subject to market risk. We do not anticipate any significant changes in our objectives and strategies with respect to managing such exposures.

In order to limit our risk from fluctuations in interest rates, we enter into interest rate swap agreements to exchange fixed and variable rate interest payment obligations without the exchange of the underlying principal amounts.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Other than repayments of debt as discussed in the Liquidity and Financial Condition Section, there are no material changes with respect to off-balance sheet arrangements and aggregate contractual obligations as presented in our annual report on Form 10-K for the year ended December 31, 2005.

In most of our sale and divestiture transactions we indemnify the purchaser for various items including labor and general litigation as well as certain tax matters. Generally, the terms last one to five years for general and specific indemnities and for the statutory review periods for tax matters. The events or circumstances that would require us to perform under the indemnity are transaction and circumstance specific. We regularly evaluate the probability of having to incur costs associated with these indemnifications and have accrued for expected losses that are probable. In addition, in the normal course of business, we indemnify counter parties in certain agreements. The nature and terms of these indemnities vary by transaction. Historically, we have not incurred significant costs related to performance under these types of indemnities.

We do not have transactions, arrangements or relationships with “special purpose” entities, and we do not have any off-balance sheet debt.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

See the caption labeled "Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. We also have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective at providing reasonable assurance that all material information relating to BellSouth (including consolidated subsidiaries) required to be included in our Exchange Act reports is reported in a timely manner. In addition, based on such evaluation we have identified no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Cautionary Language Concerning Forward-Looking Statements

In addition to historical information, this document contains forward-looking statements regarding business prospects, financial trends and accounting policies that may affect our future operating results, financial position and cash flows. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, they include statements relating to future actions, prospective products and services, future performance or results of current and anticipated products and services, sales efforts, capital expenditures, expenses, interest rates, the outcome of contingencies, such as legal proceedings, and financial results.

These statements are based on our assumptions and estimates and are subject to risks and uncertainties. For these statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

There are possible developments that could cause our actual results to differ materially from those forecast or implied in the forward-looking statements. You are cautioned not to place undue reliance on these forward- looking statements, which are current only as of the date of this filing. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

While the below list of cautionary statements is not exhaustive, some factors, in addition to those contained throughout this document, that could affect future operating results, financial position and cash flows and could cause actual results to differ materially from those expressed in the forward-looking statements are:

• the impact and the success of Cingular Wireless, our wireless joint venture with AT&T, including marketing and product development efforts, technological changes and financial capacity;

• changes in laws or regulations, or in their interpretations, which could result in the loss, or reduction in value, of our licenses, concessions or markets, or in an increase in competition, compliance costs or capital expenditures;

• continued pressures on the telecommunications industry from a financial, competitive and regulatory perspective;

• the intensity of competitive activity and its resulting impact on pricing strategies and new product offerings;

• changes in the federal and state regulations governing the terms on which we offer retail and wholesale services;

• the impact on our business of consolidation in the wireline and wireless industries in which we operate;

• the impact on our network and our business of adverse weather conditions;

• the issuance by the Financial Accounting Standards Board or other accounting bodies of new accounting standards or changes to existing standards;

• changes in available technology that increase the likelihood of our customers choosing alternate technology to our products (technology substitution);

• higher than anticipated start-up costs or significant up-front investments associated with new business initiatives;

• the outcome of pending litigation; and

• unanticipated higher capital spending from, or delays in, the deployment of new technologies.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

For a description of material developments relating to certain pending legal proceedings, see Note M to the consolidated financial statements.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005 and the factor set forth below, all of which could materially affect our business, financial condition or future results. These described risks are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The pending merger with AT&T may create uncertainty for our customers, employees and suppliers.

On March 5, 2006, we announced that we had entered into a merger agreement with AT&T. Completion of the merger requires certain regulatory approvals. The US Department of Justice cleared the merger on October 11, 2006. The Federal Communications Commission has scheduled a meeting to vote on the merger on November 3, 2006. Current employees may experience uncertainty about their post-merger roles with AT&T. This may materially adversely affect the ability of BellSouth to attract and retain key management, sales, marketing, technical and other personnel. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with AT&T following the merger. Accordingly, no assurance can be given that we will be able to attract or retain key employees to the same extent as we have in the past. Further, diversion of attention from ongoing operations on the part of management and employees could adversely affect our customers, suppliers and other parties with whom we have relationships. While the merger is pending, customers and strategic partners may delay or defer decisions to use BellSouth services, which could adversely affect our revenues and earnings, as well as the market price of our common shares.

In addition, customers may experience uncertainty about their BellSouth services, including network integration, pricing, and customer service, after the closing of the merger. This may materially adversely affect the ability of BellSouth to gain new customers and retain existing customers.

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

The following table contains information about our purchases of our equity securities during the third quarter of 2006.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased(1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of a Publicly Announced Plan	Approximate Dollar Value that May Yet Be Purchased Under the Plan (2)
July 1 – 31, 2006	2,892	$ 37.18	—	$ 1,012,540,000
August 1 - 31, 2006	1,703	$ 40.08	—	$ 1,012,540,000
September 1 - 30, 2006	1,239	$ 42.18	—	$ 1,012,540,000
Total	5,834	$ 39.09	—	$ 1,012,540,000

(1) Represents shares purchased from employees to pay taxes related to the vesting of restricted shares, at an average price of $39.09. Excludes shares purchased from employees to pay taxes related to the exercise of stock options.

(2) On October 25, 2005, we announced that the Board of Directors authorized the repurchase of up to $2 billion of common stock through the end of 2007.Under the merger agreement with AT&T, share repurchases may not exceed $500 million per fiscal quarter. Furthermore, BellSouth may not repurchase shares other than as necessary to offset shares issued in connection with employee benefit plans or the direct investment plan.

Item 4. Submission of Matters to a Vote of Security Holders

A special meeting of shareholders was held on July 21, 2006. The voting results were as follows:

Number of Shares Outstanding as of Record Date: 1,825,692,542

Number of Shares Present: 1,265,955,733

Percent of Shares Present: 69.34%

Proposal to Approve the Agreement and Plan of Merger dated March 4, 2006, among BellSouth, AT&T and a wholly-owned subsidiary of AT&T

For____________ Against______ Abstain_____

1,228,061,127 25,504,276 12,390,330

Item6. Exhibits

Exhibit
Number
	4a	No instrument which defines the rights of holders of our long- and intermediate-term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy of any such instrument to the SEC upon request.
	10k-1	BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective January 1, 2005.
	10l-3	BellSouth Corporation Supplemental Executive Retirement Plan as amended and restated effective as of January 1, 2005.
	10y-6	BellSouth Corporation Trust Under Executive Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	10z-6	BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	10aa-5	BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	10bb-5	BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	11	Computation of Earnings Per Common Share.
	12	Computation of Ratio of Earnings to Fixed Charges.
	31a	Section 302 certification of F. Duane Ackerman.
	31b	Section 302 certification of W. Patrick Shannon.
	32	Statement Required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

BELLSOUTH CORPORATION

By /s/ Raymond E. Winborne, Jr.

RAYMOND E. WINBORNE, JR.

Controller

(Principal Accounting Officer)

November 1, 2006

EXHIBIT INDEX

Exhibit
Number
	4a	No instrument which defines the rights of holders of our long- and intermediate-term debt is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, we agree to furnish a copy of any such instrument to the SEC upon request.
	10k-1	BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective January 1, 2005.
	10l-3	BellSouth Corporation Supplemental Executive Retirement Plan as amended and restated effective as of January 1, 2005.
	10y-6	BellSouth Corporation Trust Under Executive Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	10z-6	BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	10aa-5	BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	10bb-5	BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended and restated effective as of October 11, 2006.
	11	Computation of Earnings Per Common Share.
	12	Computation of Ratio of Earnings to Fixed Charges.
	31a	Section 302 certification of F. Duane Ackerman.
	31b	Section 302 certification of W. Patrick Shannon.
	32	Statement Required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-99

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

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
	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 001-31673

Cingular Wireless LLC

Formed under the laws of the State of Delaware
I.R.S. Employer Identification Number 74-2955068

5565 Glenridge Connector, Atlanta, Georgia 30342
Telephone Number: (404) 236-6000

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 þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filers” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o     Accelerated filer  o     Non-accelerated filer  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults upon Senior Securities	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
Signature		29
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS

							Nine Months
	Three Months Ended						Ended
	September 30,						September 30,
	2005			2006			2005			2006
Operating revenues:
Service revenues	$	7,721		$	8,661		$	22,859		$	24,961
Equipment sales		1,025			892			2,725			2,790
Total operating revenues		8,746			9,553			25,584			27,751
Operating expenses:
Cost of services (excluding depreciation, included below, of $779 and $1,089, and $2,938 and $3,323, respectively)		2,464			2,527			6,901			7,344
Cost of equipment sales		1,203			1,198			3,728			3,874
Selling, general and administrative		2,881			2,836			8,835			8,439
Depreciation and amortization		1,541			1,576			4,845			4,854
Total operating expenses		8,089			8,137			24,309			24,511
Operating income		657			1,416			1,275			3,240
Other income (expenses):
Interest expense		(304	)		(306	)		(968	)		(901	)
Minority interest in earnings of consolidated entities		(38	)		(43	)		(95	)		(127	)
Equity in net income of affiliates		1			—			4			—
Other, net		10			5			63			20
Total other income (expenses)		(331	)		(344	)		(996	)		(1,008	)
Income before provision for income taxes		326			1,072			279			2,232
Provision for income taxes		104			225			150			491
Net income	$	222		$	847		$	129		$	1,741

See accompanying notes.

1

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions) — (Continued)

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

	December 31,			September 30,
	2005			2006
	(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	472		$	491
Accounts receivable, net of allowance for doubtful accounts of $286 and $193		3,622			3,921
Inventories		536			583
Prepaid assets		320			418
Current deferred tax assets		767			987
Other current assets		332			426
Total current assets		6,049			6,826
Property, plant and equipment, net		21,745			22,696
Licenses, net		25,242			25,245
Goodwill		22,359			22,004
Customer relationship intangibles, net		2,998			2,000
Other intangible assets, net		174			152
Other assets		752			1,369
Total assets	$	79,319		$	80,292
LIABILITIES AND MEMBERS’ CAPITAL
Current liabilities:
Debt maturing within one year	$	2,036		$	2,829
Accounts payable		1,920			1,212
Due to affiliates, net		54			89
Advanced billing and customer deposits		946			1,088
Accrued liabilities		5,052			4,325
Total current liabilities		10,008			9,543
Long-term debt:
Debt due to members		6,717			6,717
Other long-term debt, net of premium		12,623			11,876
Total long-term debt		19,340			18,593
Deferred tax liabilities, net		3,086			3,375
Other noncurrent liabilities		1,364			1,518
Total liabilities		33,798			33,029
Commitments and contingencies
Minority interests in consolidated entities		543			618
Members’ capital:
Members’ capital		44,988			46,655
Accumulated other comprehensive loss, net of taxes		(10	)		(10	)
Total members’ capital		44,978			46,645
Total liabilities and members’ capital	$	79,319		$	80,292

See accompanying notes.

2

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions) — (Continued)

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOW

	Nine Months
	Ended
	September 30,
	2005			2006
Operating activities
Net income	$	129		$	1,741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,845			4,854
Provision for doubtful accounts		412			187
Loss on disposal of fixed assets		130			31
Minority interest in earnings of consolidated entities		95			127
Equity in net income of affiliates		(4	)		—
Amortization of debt discount (premium), net		(175	)		(141	)
Deferred income taxes		74			415
Changes in operating assets and liabilities:
Accounts receivable		(439	)		(482	)
Inventories		163			(47	)
Other current assets		105			(231	)
Accounts payable and other current liabilities		108			(1,362	)
Pensions and benefits		69			167
Other, net		25			87
Net cash provided by operating activities		5,537			5,346
Investing activities
Construction and capital expenditures		(4,505	)		(4,851	)
Receipts from (investments in) equity affiliates, net		(199	)		6
Proceeds from dispositions of assets		3,845			108
Acquisitions of businesses and licenses, net of cash received		(5	)		(3	)
Deposits for license purchase		(143	)		(500	)
Redemption of held-to-maturity investments		219			—
Other		50			—
Net cash used in investing activities		(738	)		(5,240	)
Financing activities
Net (repayments) borrowings under revolving credit agreement		(1,667	)		1,041
Repayment of long-term debt and capital lease obligations		(478	)		(1,017	)
Repayment of long-term debt due to members		(2,675	)		—
Distributions paid to members		—			(56	)
Net distributions to minority interests		(43	)		(55	)
Net cash used in financing activities		(4,863	)		(87	)
Net (decrease) increase in cash and cash equivalents		(64	)		19
Cash and cash equivalents at beginning of period		352			472
Cash and cash equivalents at end of period	$	288		$	491

See accompanying notes.

3

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions) — (Continued)

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL &
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

Nine Months Ended September 30, 2005:
Balance at December 31, 2004	$	44,536
Net income		129
Contribution of properties		117
Other, net		(4	)
Balance at September 30, 2005	$	44,778
Nine Months Ended September 30, 2006:
Balance at December 31, 2005	$	44,978
Net income		1,741
Distributions to members		(74	)
Balance at September 30, 2006	$	46,645

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
Comprehensive Income:	2005			2006		2005			2006
Net income	$	222		$	847	$	129		$	1,741
Other comprehensive loss:
Net foreign currency translation adjustment		(6	)		—		(6	)		—
Total comprehensive income	$	216		$	847	$	123		$	1,741

See accompanying notes.

4

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Summary of Significant Accounting Policies

Basis of Presentation

Cingular Wireless LLC (the Company) is a Delaware limited liability company formed in 2000 by SBC Communications Inc. (SBC)* and BellSouth Corporation (BellSouth) as the operating company for their U.S. wireless joint venture. AT&T and BellSouth, through their wholly-owned subsidiaries, respectively, own approximate 60% and 40% economic interests in the Company. Cingular Wireless Corporation (the Manager), which is directed equally by AT&T and BellSouth, acts as the Company’s manager and controls the Company’s management and operations. The Company provides wireless voice and data communications services, including local, long-distance and roaming services using both cellular and personal communications services (PCS) frequencies licensed by the Federal Communications Commission (FCC), and equipment to customers in 46 states, including service to all 100 of the largest U.S. metropolitan areas. All of the Company’s operations, which primarily serve customers in the U.S., are conducted through subsidiaries or joint ventures. Through roaming arrangements with other carriers, the Company provides its customers service in regions where it does not have network coverage and is thus able to serve customers in virtually the entire U.S. and over 180 foreign countries.

In October 2004, the Company acquired AT&T Wireless Services, Inc. (AT&T Wireless) for aggregate consideration of approximately $41,000 in cash. AT&T Wireless, which has been renamed New Cingular Wireless Services, Inc. (NCWS), will continue to be referred to herein as AT&T Wireless and is now a direct wholly-owned subsidiary of the Company. The operations of AT&T Wireless are integrated with those of the Company, and the business is conducted under the “Cingular” brand name.

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) that permit reduced disclosure for interim periods. Management believes the 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. These interim financial statements should be read in conjunction with the consolidated financial statements of the Company and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006.

Income Taxes

The Company is not a taxable entity for federal income tax purposes. Rather, federal taxable income or loss is included in the Company’s respective members’ federal income tax returns. However, the Company’s provision for income taxes includes federal and state income taxes for certain of its corporate subsidiaries, as well as for certain states that impose income taxes upon non-corporate legal entities. After the acquisition, AT&T Wireless, now known as NCWS, contributed the majority of its assets and liabilities to Cingular Wireless II, LLC (CW II),

*  On November 18, 2005, SBC acquired AT&T Corp. and changed the name of the surviving entity to AT&T Inc. When used herein, “AT&T” will refer to the surviving entity. AT&T Corp. refers to that entity prior to November 18, 2005. In March 2006, AT&T and BellSouth agreed to merge. The transaction has been approved by the Board of Directors and shareholders of each company and reviewed by the U.S. Department of Justice. It is subject to approval by the FCC and satisfaction of normal closing conditions.

5

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

which it owns jointly with the Company. In exchange for the assets and liabilities contributed to CW II, NCWS received a 43% ownership interest in CW II, from which any income (loss) is allocated and which is subject to federal and state income taxes. The remaining income (loss) from CW II is allocated to the Company and flows through to the members who are taxed at their respective levels pursuant to federal and state income tax laws.

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, applying enacted statutory rates. The Company provides valuation allowances for deferred tax assets for which it does not consider realization to be more likely than not.

The Company’s effective tax rates vary from the expected federal statutory rate of 35% primarily from the exclusion from the Company’s income tax provision of operating results that are wholly allocated to its respective members’ federal income tax returns; these excluded results primarily consist of 57% of the CW II earnings and interest expense on our long-term member loans. The Company’s effective income tax rates for the three and nine months ended September 30, 2005 were 32.0% and 53.6%, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2006 were 20.9% and 22.0%, respectively. The effective tax rate for the nine months ended September 30, 2005 also reflects state income tax law changes and the reversal of previously established valuation allowances.

New Accounting Standards

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

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS 157 does not require any new fair value measurements and we do not expect the application of this standard to change our current practices. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

In September 2006, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No. 06-1, Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Specialized Equipment Necessary for an End-Customer to Receive Service from the Service Provider, (EITF 06-1). The scope of EITF 06-1 addresses whether the guidance in EITF Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), should be applied when service providers give consideration to manufacturers or resellers who are not an end-customer. In order to apply EITF 01-9 in these circumstances, there must be a direct link between the consideration given by the service provider to the manufacturer or reseller and the benefit received by the end-customer of the service provider. This Issue requires a service provider to characterize the consideration it gives to a manufacturer or reseller as cash or non-cash, consistent with the basic guidance provided in EITF 01-9, based on the form of consideration it directs the manufacturer or reseller to provide to the service provider’s end-customer. Non-

6

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cash consideration would be characterized as an expense. Cash consideration would be accounted for as a reduction of revenue. The consensus on EITF 06-1 will be effective for the first annual reporting period beginning after June 15, 2007. The Company does not expect the adoption of EITF 06-1 to have a material impact on its consolidated results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132R (SFAS 158). This new standard requires an employer to: (i) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (ii) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. For the Company, the requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after June 15, 2007. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the adoption of SFAS 158 to have a material impact on its consolidated results of operations and financial condition.

In September 2006, the SEC Staff issued Staff Accounting Bulletin (SAB) Topic 1N, Financial Statements — Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108). The adoption of SAB 108 will not have a material impact on the Company’s consolidated results of operations and financial condition.

Reclassifications

Certain amounts have been reclassified in the 2005 consolidated financial statements to conform to the current year presentation.

2.   Intangible Assets

Summarized below are the carrying values for the major classes of intangible assets:

			(Audited)
			December 31, 2005					September 30, 2006
			Gross					Gross
	Useful		Carrying		Accumulated			Carrying		Accumulated
	Lives		Amount		Amortization			Amount		Amortization
Intangible assets subject to amortization:
Customer relationship intangibles		5 years	$	5,316	$	(2,318	)	$	4,974	$	(2,974	)
Other intangibles		1-18 years		306		(134	)		300		(150	)
Total			$	5,622	$	(2,452	)	$	5,274	$	(3,124	)
Intangible assets not subject to amortization:
FCC (U.S.) licenses			$	25,242	$	—		$	25,245	$	—
Goodwill			$	22,359	$	—		$	22,004	$	—

7

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The $355 change in the carrying value of goodwill for the nine months ended September 30, 2006 is primarily attributable to deferred income tax adjustments in the second quarter of 2006 with respect to the AT&T Wireless transaction.

The following table presents current and estimated amortization expense for each of the following periods:

Aggregate amortization expense:
For the nine months ended September 30, 2006	$	1,020
Estimated amortization expense:
For the remainder of 2006	$	295
For the years ending December 31,
2007		955
2008		603
2009		237
2010 and thereafter		60
	$	2,150

For the nine months ended September 30, 2005, amortization expense was $1,376.

In addition to the intangible assets noted above, the Company had $2 of intangible assets at December 31, 2005 and September 30, 2006 in connection with the recognition of an additional minimum liability for its bargained pension plan and/or other unqualified benefit plans as required by SFAS No. 87, Employers’ Accounting for Pensions.

3.   Salmon PCS LLC

In November 2000, the Company and Crowley Digital Wireless, LLC (Crowley Digital) entered into an agreement, pursuant to which Salmon PCS LLC (Salmon) was formed to bid as a “very small business” for certain 1900 megahertz (MHz) band PCS licenses auctioned by the FCC. The Company granted Crowley Digital the right to put its approximate 20% economic interest in Salmon to the Company at a cash price equal to Crowley Digital’s initial investment plus a specified rate of return. The Company consolidates Salmon in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. In April 2006, Crowley Digital exercised its put right pursuant to which the Company paid $187 in October 2006 upon FCC approval.

4.   Termination of GSMF Network Infrastructure Joint Venture

In May 2004, the Company and T-Mobile entered into a comprehensive agreement to dissolve the GSM Facilities, LLC (GSMF) joint venture, sell to T-Mobile certain spectrum licenses and other assets and exchange certain other spectrum licenses.

Pursuant to the agreement, the joint venture was dissolved in January 2005 and the Company sold its ownership of the California/Nevada Major Trading Area network assets to T-Mobile for approximately $2,500. The Company retained the right to utilize the California/ Nevada and New York T-Mobile networks during a four-year transition period and has committed to purchase a minimum number of minutes over this term with

8

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

a purchase commitment value of $1,200 (see Note 8). Additionally, in January 2005, the Company sold 10 MHz of spectrum to T-Mobile in each of the San Francisco, Sacramento and Las Vegas Basic Trading Areas for $180 as part of the agreement.

In connection with the dissolution, the Company and T-Mobile are contractually required to exchange certain spectrum licenses. The Company expects the spectrum licenses to be exchanged on January 1, 2007. Upon the completion of the spectrum exchange, the Company expects to recognize a significant gain in connection with the consummation of these transactions, based upon the fair market value of the assets exchanged, net of $88 in deferred losses which are reflected in “Other Assets” on the consolidated balance sheets and relate to components of the transaction that have closed.

5.   Debt

Revolving Credit Agreement

Under a revolving credit agreement, AT&T and BellSouth provide the Company unsubordinated short-term financing on a pro rata basis at an interest rate of LIBOR plus 0.05% for the Company’s ordinary course operations. The revolving credit agreement provides in the event that the Company has available cash (as defined) on any business day, such amount shall first be applied to the repayment of the revolving loans, and any remaining excess shall then be applied to the repayment of the subordinated member loans from AT&T and BellSouth at month end if the Company does not then require a cash advance under the agreement. As of December 31, 2005 and September 30, 2006, the Company had an outstanding balance of $511 and $1,552, respectively, under the revolving credit agreement. The weighted average interest rate under this agreement was 2.7% and 5.2% for the nine months ended September 30, 2005 and 2006, respectively.

Debt Repayment

The Company repaid $1,000 of 7.35% AT&T Wireless Services, Inc. unsecured, unsubordinated Senior Notes when they matured on March 1, 2006.

6.   Related Party Transactions

These consolidated financial statements include charges from AT&T and BellSouth for certain expenses pursuant to various agreements.

In addition to the affiliate transactions described elsewhere in these consolidated financial statements, other significant transactions with the Company’s members are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Type of Services(1)	2005		2006		2005		2006
Agent commissions and compensation	$	18	$	20	$	54	$	49
Interconnect and long distance		333		467		925		1,395
Telecommunications and other services		52		88		167		283

9

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1) See Note 11 to the Company’s audited consolidated financial statements included in Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for a further description of services.

The Company had receivables from affiliates of $156 and $198 and payables to affiliates of $210 and $287 at December 31, 2005 and September 30, 2006, respectively.

7.   Acquisition-Related and Integration Costs

In 2005, management of the Company approved plans affecting the integration of retail stores, administrative space and network acquired in the merger with AT&T Wireless in October 2004 with those of legacy Cingular. These plans resulted in adjustments in 2005 to the original purchase price allocation for the acquired assets and assumed liabilities of AT&T Wireless and the need to shorten the useful lives of certain network and other property, plant and equipment.

The incremental depreciation expense related to the shortened useful lives was $86 and $226 for the three and nine months ended September 30, 2005, respectively, and $42 and $175 for the three and nine months ended September 30, 2006, respectively.

The following table displays the current period activity and balances recorded under EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, which are reflected in “Accrued liabilities” in the consolidated balance sheets. Due to ongoing monitoring of the integration plan, in the current period, the Company recorded additional accruals for extended lease notification periods and accrual reductions related to the ongoing contract termination progress. In the table below, accrual increases of $23 for the nine months ended September 30, 2006 are reflected as expense in the current period consolidated statements of operations. Accrual decreases of $40 are reflected as reductions to goodwill in the consolidated balance sheets.

	December 31,										September 30,
EITF 95-3 Summary	2005		Accruals		Payments			Adjustments			2006
Lease terminations	$	262	$	23	$	(45	)	$	(28	)	$	212
Severance		15		—		(7	)		—			8
Equipment removal costs		185		—		(42	)		(12	)		131
Other		3		—		(2	)		—			1
Total	$	465	$	23	$	(96	)	$	(40	)	$	352

A summary of total expected costs to be incurred under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) for the integration plans, and the amounts incurred through and for the nine months ended September 30, 2006, are presented in the table below. These costs are primarily included in “Cost of services” in the consolidated statements of operations.

10

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Estimate of		Cumulative Expenses				Cumulative Expenses
	Expenses Expected		Incurred through				Incurred through
	to be		December 31,		Expenses Incurred		September 30,
Summary of SFAS 146 Costs	Incurred		2005		During 2006		2006
Contract termination costs:
Lease terminations	$	124	$	36	$	42	$	78
Agent terminations		9		—		3		3
Other contract terminations		6		—		—		—
Equipment removal costs		126		15		27		42
Other		7		3		4		7
Total	$	272	$	54	$	76	$	130

The following table displays the SFAS 146 activity and balances of the restructuring liabilities associated with the integration plans which are reflected in “Accrued liabilities” on the consolidated balance sheets. Activity under SFAS No. 112, Employers’ Accounting for Postemployment Benefits for the nine months ended September 30, 2006 was immaterial.

	SFAS 146
Balance at December 31, 2005	$	37
Additions		76
Payments		(39	)
Balance at September 30, 2006	$	74

8.   Commitments and Contingencies

Commitments

The Company has unconditional purchase commitments for advertising and marketing, computer equipment and services, roaming, long distance services, network equipment and related maintenance and software development and related maintenance. These commitments totaled approximately $1,455 at September 30, 2006. Included in this amount are commitments aggregating $121 to AT&T, BellSouth and their affiliates for telecommunications and other services.

In connection with the termination of the Company’s GSMF network infrastructure joint venture with T-Mobile, the Company made a $1,200 commitment to purchase a minimum number of minutes from T-Mobile over a four-year transition period. This commitment became effective in January 2005, and approximately $243 of the purchase commitment remained outstanding as of September 30, 2006. The Company believes the rates reflected in this purchase commitment are indicative of market rates based upon the volume of the commitment and the length of the transition period.

See Note 15 to the Company’s audited consolidated financial statements included in Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for a further description of these commitments.

11

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

Item 1.   Financial Statements (Unaudited)

CINGULAR WIRELESS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Contingencies

The Company is subject to claims arising in the ordinary course of business involving allegations of personal injury, breach of contract, anti-competitive conduct, employment law issues, regulatory matters and other actions. To the extent management believes a loss arising from litigation or regulatory proceedings is probable and can reasonably be estimated, an amount is accrued on the financial statements for the estimated loss. As additional information becomes available, the potential liability related to the matter is reassessed and the accruals are revised, if necessary. While complete assurance cannot be given as to the outcome of any legal claims, the Company believes any financial impact would not be material to its business, financial position or cash flows.

12

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

The following should be read in conjunction with the December 31, 2005 Cingular Wireless LLC audited consolidated financial statements and accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2005 and the unaudited consolidated financial statements and accompanying notes, related information and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Reports on Form 10-Q for the three and six months ended March 31, 2006 and June 30, 2006, respectively.

Overview of Business

We earn revenues and generate cash primarily by offering a comprehensive variety of high-quality wireless voice and data communications services and products. Our services are available in a variety of postpaid pricing plans and prepaid service arrangements. Our voice and data offerings are tailored to meet the communications needs of targeted customer segments, including youth, family, active professionals, ethnic, local and regional businesses and national corporate accounts.

At September 30, 2006, we served 58.7 million voice and data subscribers over our cellular and PCS networks and were the largest provider of wireless voice and data communications services in the U.S., based on the number of wireless subscribers. We had access to FCC licenses to provide cellular or PCS wireless communications services covering 296 million POPs, or approximately 99% of the U.S. population, including all of the 100 largest U.S. metropolitan markets.

Industry and Operating Trends

We compete for customers based principally on our reputation, network quality, customer service, price and service offerings. We face substantial and increasing competition in all aspects of our business. Our competitors are principally three national (Verizon Wireless, Sprint Nextel and T-Mobile) and a large number of regional providers of cellular, PCS and other wireless communications services, as well as resellers. In addition, we may experience significant competition from companies that provide similar services using other current or future communications technologies and services. Competition and the high rate of wireless service penetration may continue to adversely impact gross additions, revenue growth, expenses and margins.

Our management focuses on key wireless industry drivers — subscriber penetration, average revenue per user (ARPU), operating income, OIBDA (defined as operating income before depreciation and amortization) and reputation within the wireless industry — to evaluate our performance.

•  Subscriber Penetration — The wireless telecommunications industry is continuing to grow. A high degree of competition exists among the current four national carriers, their affiliates and the smaller regional carriers. This competition and other factors will continue to put pressure on pricing, margins and subscriber churn as the carriers compete for customers. Future carrier revenue growth is highly dependent upon the number of net subscriber additions a carrier can achieve and the revenue derived from its subscribers. For the three and nine months ended September 30, 2006, net subscriber additions increased 56.6% and 42.3%, respectively, from the comparative prior year period. These increases have driven our overall market penetration to approximately 20.8% as of September 30, 2006, an increase of approximately 250 basis points from September 30, 2005.

•  ARPU — Quarterly ARPU of $49.76 for the three months ended September 30, 2006 increased slightly on a year-over-year basis. We experienced continued increased data revenues driven by our competitive data products, such as ringtones and messaging, which we expect to grow as we continue expanding our UMTS/HSDPA (Universal Mobile Telephone System/High Speed Downlink Packet Access) third-generation (3G) service. The increase in data revenues was partially offset by the addition of a disproportionately higher

13

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

percentage of lower-ARPU prepaid and reseller subscribers than postpaid subscribers over the past four quarters. Reseller subscribers have increased approximately 2.2 million over the prior year comparable period and comprise 9.8% of our subscriber base as of September 30, 2006, compared to 6.8% at September 30, 2005. Other contributing factors include competitive plan offerings that:

•  add incremental revenue but at a lower rate through such offerings as FAMILYTALK^®;

•  allow customers to carry over unused minutes to succeeding months (ROLLOVER^® plans), which reduces overage revenues;

•  include no roaming or long distance charges; and

•  allow our customers to call each other for free.

These plans effectively position Cingular to compete for customers and add incremental revenue, including future data revenues, though they may negatively affect ARPU. Additionally, our ARPU is adversely affected by the general competitive environment and increasing wireless penetration, which puts pressure on the prices we can charge. Our ARPU growth in the third quarter of 2006 also reflects the impact of $31 of service credits, or approximately $0.20 ARPU impact, provided in the third quarter of 2005 to customers affected by Hurricane Katrina.

•  Operating Income — Our operating results for the three and nine months ended September 30, 2006 were significantly higher than the respective comparable periods in 2005 as our operating expenses remained essentially flat while our revenues rose 9.2% and 8.5%, respectively, on a year-over-year basis. For the comparable three month periods, lower selling, general and administrative expenses and slightly lower cost of equipment sales were offset by increases in cost of service and depreciation. For the comparable nine month periods, lower selling, general and administrative expenses were more than offset by increases in cost of service, cost of equipment sales and depreciation. We expect cost of services to continue to increase due to higher network system usage and continued integration of AT&T Wireless’ network and operations, as described below. We will continue to incur redundant expenses related to operating multiple networks until our subscriber base transitions from our Time Division Multiple Access (TDMA) and analog networks to our Global System for Mobile Communications (GSM) network and 3G network. If we are successful in increasing the rate of gross subscriber additions, our subscriber acquisition costs may also increase because of sales commissions and handset subsidies. We also expect increased costs to maintain and support our growing subscriber base and for customer care initiatives to improve our level of service to our subscriber base and to retain existing subscribers. We expect to incur higher depreciation costs as a result of the enhancement of the network coverage in our footprint and installation of high-speed 3G technology in our network infrastructure, together with the accelerated depreciation of our TDMA network.

•  OIBDA — Our OIBDA margin continued to strengthen as our integration initiatives progressed and was higher in the three and nine months ended September 30, 2006 than in the respective corresponding prior year periods by 600 basis points and 560 basis points, respectively. For more information on the calculation of OIBDA and OIBDA margins, see “OIBDA Discussion” below.

•  Reputation — We continue to strive to be the most highly regarded wireless company in the industry with a driving focus on best of class sales and service. We primarily use subscriber churn to evaluate our reputation within the wireless industry. Over the eight calendar quarters since we acquired AT&T Wireless, our overall customer churn has declined from 2.8% to 1.8%, as customers have positively responded to improved network quality, new products and services, more attractive service plans and initiatives in customer care intended to improve the total customer experience. Our subscriber churn of 1.8% for the three months ended September 30, 2006 represents an improvement of 50 basis points from the prior year corresponding period and a sequential increase of 10 basis points from the three months ended June 30, 2006. The sequential

14

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

increase resulted from normal seasonality patterns, the phasing out of AT&T Wireless prepaid plans, and from certain actions we took to recover increased costs associated with serving the diminishing base of our TDMA customers and encourage migration of these customers to our GSM network. While we anticipate continued improvements to our network and customer care and more compelling customer products and services, we continue to expect higher disconnects from the continued phase out of our TDMA prepaid platform and from our analog and TDMA service, which we plan to discontinue in early 2008.

Integration of AT&T Wireless

We acquired AT&T Wireless in October 2004 and have made substantial progress in integrating its assets and operations. We expect to continue to incur costs associated with integration activities through the remainder of 2006, and to a lesser degree, into 2007. The remaining integration costs expected to be incurred primarily relate to lease termination and equipment removal costs. As a result of our integration efforts, we are realizing cost savings and improved operating performance. We expect these to contribute further to operating margins going forward.

For the three and nine months ended September 30, 2006, our operating income was negatively impacted by $139 and $536, respectively, of integration costs, which were reflected in our consolidated statements of operations within “Depreciation and amortization,” “Cost of services” and “Selling, general and administrative” expenses. Integration costs impacting “Depreciation and amortization” expenses primarily included accelerated depreciation of $52 and $299 for the three and nine months ended September 30, 2006, respectively. In addition, for the three and nine months ended September 30, 2006, integration costs impacting “Cost of services” of $65 and $150, respectively, and “Selling, general and administrative” of $22 and $87 respectively, were primarily comprised of network system costs and IT development. Also, for the three and nine months ended September 30, 2006, our operating income was negatively impacted by approximately $314 and $1,009, respectively, of non-cash amortization expenses related to amortizable intangible assets that were recorded with the acquisition.

Selected Financial and Operating Data

							Nine Months
	Three Months Ended						Ended
	September 30,						September 30,
	2005			2006			2005			2006
Construction and capital expenditures	$	1,346		$	1,828		$	4,505		$	4,851
Licensed cellular / PCS POPs (in millions) (end of period)(1)		294			296			294			296
Total cellular / PCS subscribers (in millions) (end of period)(2)		52.3			58.7			52.3			58.7
Net additions, cellular / PCS subscribers (in millions)		0.9			1.4			3.2			4.5
Cellular / PCS subscriber churn(3)		2.3	%		1.8	%		2.2	%		1.8	%
Average cellular / PCS revenue per user (ARPU) (4) (Actual dollars)	$	49.65		$	49.76		$	49.92		$	49.04
OIBDA(5)	$	2,198		$	2,992		$	6,120		$	8,094
OIBDA margin(6)		28.5	%		34.5	%		26.8	%		32.4	%

(1)	Licensed POPs refers to the number of people residing in areas where we have licenses to provide cellular or PCS service.
(2)	Cellular/PCS subscribers include customers of other companies served through reseller agreements.

15

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

(3)	Cellular/PCS subscriber churn is calculated by dividing the aggregate number of cellular/PCS subscribers who cancel service during each month in a period by the total number of cellular/PCS subscribers at the beginning of each month in that period.
(4)	ARPU is defined as cellular/PCS service revenues during the period divided by average number of cellular/PCS subscribers during the period. For discussion of ARPU and a reconciliation to its most comparable measure under U.S. generally accepted accounting principles (GAAP), see “ARPU Discussion” below.
(5)	OIBDA is defined as operating income before depreciation and amortization. For discussion of OIBDA, including reasons we believe its presentation is useful and a reconciliation to its most comparable measure under GAAP, see “OIBDA Discussion” below.
(6)	OIBDA margin is defined as OIBDA divided by service revenues.

OIBDA Discussion.  OIBDA is defined as operating income before depreciation and amortization. OIBDA margin is calculated as OIBDA divided by service revenues. These are non-GAAP financial measures. They differ from operating income and operating margin, as calculated in accordance with GAAP, in that they exclude depreciation and amortization. They differ from net income, as calculated in accordance with GAAP, in that they exclude, as presented in our consolidated statements of operations: (i) depreciation and amortization, (ii) interest expense, (iii) minority interest in earnings of consolidated entities, (iv) equity in net income of affiliates, (v) other, net, and (vi) provision for income taxes. We believe these measures are relevant and useful information to our investors as they are an integral part of our internal management reporting and planning processes and are important metrics that our management uses to evaluate the operating performance of our consolidated operations. They are used by management as a measurement of our success in acquiring, retaining and servicing subscribers because we believe these measures reflect our ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing our performance with that of many of our competitors. The components of OIBDA include the key revenue and expense items for which our operating managers are responsible and upon which we evaluate their performance. Lastly, we use this measure for planning purposes and in presentations to our board of directors, and we use multiples of this current or projected measure in our discounted cash flow models to determine the value of our licensing costs and our overall enterprise valuation.

OIBDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. OIBDA excludes other, net, minority interest in earnings of consolidated entities and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base and our national footprint that we utilize to obtain and service our customers. Equity in net income (loss) of affiliates represents our proportionate share of the net income (loss) of affiliates in which we exercise significant influence, but do not control. As we do not control these entities, our management excludes these results when evaluating the performance of our primary operations. OIBDA also excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with our capitalization and tax structures. Finally, OIBDA excludes depreciation and amortization, in order to eliminate the impact of capital investments.

We believe OIBDA as a percentage of service revenues to be a more relevant measure of our operating margin than OIBDA as a percentage of total revenue. We generally subsidize a portion of our handset sales, all of which are recognized in the period in which we sell the handset. This results in a disproportionate impact on our margin in that period. Management views this equipment subsidy as a cost to acquire or retain a subscriber, which is recovered through the ongoing service revenue that is generated by the subscriber. We also use service revenues to calculate margin to facilitate comparison, both internally and externally with our competitors, as they calculate their margins using services revenue as well.

16

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

There are material limitations to using these non-GAAP financial measures. OIBDA and OIBDA margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates that directly affect our net income. Management compensates for these limitations by carefully analyzing how our competitors present performance measures that are similar in nature to OIBDA as we present it, and considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income as calculated in accordance with GAAP. OIBDA and OIBDA margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

The following is a reconciliation of net income to OIBDA.

							Nine Months
	Three Months Ended						Ended
	September 30,						September 30,
	2005			2006			2005			2006
Net income	$	222		$	847		$	129		$	1,741
Plus: Interest expense		304			306			968			901
Plus: Minority interest in earnings of consolidated entities		38			43			95			127
Plus: Equity in net income of affiliates		(1	)		—			(4	)		—
Plus: Other, net		(10	)		(5	)		(63	)		(20	)
Plus: Provision for income taxes		104			225			150			491
Operating income		657			1,416			1,275			3,240
Plus: Depreciation and amortization		1,541			1,576			4,845			4,854
OIBDA	$	2,198		$	2,992		$	6,120		$	8,094

ARPU Discussion.  ARPU is defined as cellular/PCS service revenues during the period divided by average cellular/PCS subscribers during the period. This metric is used to compare the recurring revenue amounts generated on our cellular/PCS network to prior periods and internal targets. Our ARPU calculation excludes data revenues from customers retained in the sale of our Mobitex business in late 2004 and thereby makes our metric more comparable with other wireless carriers, which we believe makes it more useful to investors.

The following is a reconciliation of service revenues to service revenues used to calculate ARPU.

					Nine Months
	Three Months Ended				Ended
	September 30,				September 30,
	2005		2006		2005		2006
Service revenues	$	7,721	$	8,661	$	22,859	$	24,961
Less: Mobitex data revenues		18		7		56		32
Service revenues used to calculate ARPU	$	7,703	$	8,654	$	22,803	$	24,929

17

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

Consolidated Results of Operations

Three and Nine Months Ended September 30, 2005 Compared with the Three and Nine Months Ended September 30, 2006

Subscriber Base

	Three Months Ended											Nine Months Ended
	September 30,					Change						September 30,						Change
	2005			2006		Fav(Unfav)			%			2005			2006			Fav(Unfav)			%
				(In thousands)											(In thousands)
Beginning of Period		51,442			57,308		5,866			11.4	%		49,132			54,144			5,012			10.2	%
Net Additions (Losses)
Postpaid		664			928		264			39.8	%		2,680			2,869			189			7.1	%
Prepaid		(25	)		256		281			NM			(317	)		480			797			NM
Reseller		228			174		(54	)		(23.7	)%		823			1,186			363			44.1	%
Total Net Additions		867			1,358		491			56.6	%		3,186			4,535			1,349			42.3	%
Other Adjustments		(17	)		—		17			NM			(26	)		(13	)		13			NM
End of Period		52,292			58,666		6,374			12.2	%		52,292			58,666			6,374			12.2	%
Gross Additions
Postpaid		3,336			3,174		(162	)		(4.9	)%		10,239			9,422			(817	)		(8.0	)%
Prepaid		787			1,136		349			44.3	%		2,173			2,958			785			36.1	%
Reseller		263			248		(15	)		(5.7	)%		938			1,329			391			41.7	%
Total Gross Additions		4,386			4,558		172			3.9	%		13,350			13,709			359			2.7	%

NM — Not Meaningful

We had 58.7 million cellular/PCS subscribers at September 30, 2006. We added approximately 1.4 million and 4.5 million subscribers, net of disconnections, to our subscriber base during the three and nine months ended September 30, 2006, respectively, up from 0.9 million and 3.2 million additions in the respective corresponding prior year periods. Gross subscriber additions for the three and nine months ended September 30, 2006 totaled approximately 4.6 million and 13.7 million, respectively. The slight increase in total gross subscriber additions during the three and nine month periods was primarily driven by new prepaid offerings launched in the second half of 2005 and strong reseller additions particularly in the first six months of 2006. These additions were partially offset by decreased postpaid additions due to planned distribution rationalization such as the reduction of retail stores and agents, higher wireless market penetration in general and lower churn among major wireless carriers.

For both the three and nine months ended September 30, 2006, our monthly cellular/PCS churn rate was 1.8%, down from 2.3% and 2.2% in the corresponding prior year periods, respectively. Postpaid churn for both the three and nine months ended September 30, 2006 was 1.5%, down from 2.0% and 1.9% in the corresponding prior year periods, respectively. The decline in our cellular/PCS churn was driven by a 9.1% and 9.7% reduction in disconnections for the three and nine months ended September 30, 2006, respectively, which we believe is attributed primarily to better network quality and coverage, and improvements in the overall customer experience.

18

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

Historical Consolidated Data — For the three and nine months ended September 30, 2005 and 2006

													Nine Months
	Three Months Ended												Ended
	September 30,						Change						September 30,						Change
	2005			2006			$			%			2005			2006			$			%
Operating revenues
Local service revenue — voice	$	6,313		$	6,762		$	449			7.1	%	$	18,809		$	19,892		$	1,083			5.8	%
Data revenue		689			1,106			417			60.5			1,913			2,968			1,055			55.1
Total local service revenue		7,002			7,868			866			12.4			20,722			22,860			2,138			10.3
Incollect roamer revenue		349			384			35			10.0			1,038			967			(71	)		(6.8	)
Long distance		125			146			21			16.8			352			408			56			15.9
Subscriber revenue		7,476			8,398			922			12.3			22,112			24,235			2,123			9.6
Outcollect revenue		178			200			22			12.4			523			549			26			5.0
Other revenue		67			63			(4	)		(6.0	)		224			177			(47	)		(21.0	)
Other service revenue		245			263			18			7.3			747			726			(21	)		(2.8	)
Service revenue		7,721			8,661			940			12.2			22,859			24,961			2,102			9.2
Equipment sales		1,025			892			(133	)		(13.0	)		2,725			2,790			65			2.4
Total operating revenues		8,746			9,553			807			9.2			25,584			27,751			2,167			8.5
Operating expenses
Cost of services (excluding depreciation)		2,464			2,527			63			2.6			6,901			7,344			443			6.4
Cost of equipment sales		1,203			1,198			(5	)		(0.4	)		3,728			3,874			146			3.9
Selling, general and administrative		2,881			2,836			(45	)		(1.6	)		8,835			8,439			(396	)		(4.5	)
Depreciation and amortization		1,541			1,576			35			2.3			4,845			4,854			9			0.2
Total operating expenses		8,089			8,137			48			0.6			24,309			24,511			202			0.8
Operating income		657			1,416			759			115.5			1,275			3,240			1,965			154.1
Other income (expenses):
Interest expense		(304	)		(306	)		(2	)		0.7			(968	)		(901	)		67			(6.9	)
Minority interest in earnings of consolidated entities		(38	)		(43	)		(5	)		13.2			(95	)		(127	)		(32	)		33.7
Equity in net income of affiliates		1			—			(1	)		(100.0	)		4			—			(4	)		(100.0	)
Other, net		10			5			(5	)		(50.0	)		63			20			(43	)		(68.3	)
Total other income (expenses)		(331	)		(344	)		(13	)		3.9			(996	)		(1,008	)		(12	)		1.2
Income before provision for income taxes		326			1,072			746			228.8			279			2,232			1,953			700.0
Provision for income taxes		104			225			121			116.3			150			491			341			227.3
Net income	$	222		$	847		$	625			281.5	%	$	129		$	1,741		$	1,612			1,249.6	%

Operating Revenues

Service revenue.  Service revenue increased $940 and $2,102 for the three and nine months ended September 30, 2006, respectively, when compared with the corresponding prior year periods, primarily due to the increases in local service — voice and data revenues. The nine-month period increase was partially offset by decreases to roamer and other revenues. Our revenue growth in the three and nine months periods also reflects the impact of $31 of service credits provided in the third quarter of 2005 to customers affected by

19

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

Hurricane Katrina. The local service revenue — voice component of total service revenues includes recurring monthly access charges, airtime usage, including prepaid service, and charges for optional features and services, such as voice mail, mobile-to-mobile calling, roadside assistance, caller ID and handset insurance. Local service revenue -voice revenues also include billings to our customers for the USF and other regulatory fees and taxes.

The key driver of the increase in local service revenue-voice for the three and nine months ended September 30, 2006 was an increase of 12.1% and 11.3% in the monthly average number of cellular/PCS subscribers for the three and nine months, respectively, over the corresponding prior year periods. Data revenues increased $417, or 60.5%, and $1,055, or 55.1%, for the three and nine months ended September 30, 2006, respectively, when compared with the corresponding prior year periods. These increases were driven by greater data service penetration and usage of SMS messaging, email and other data services by our cellular/PCS subscribers.

Incollect roaming revenues increased by $35 when compared with the three-month corresponding prior year period. The increase is attributable to current quarter rate increases, which were partly offset by decreased volume. Incollect roaming revenues decreased $71 when compared with the amounts for the nine-month period from the corresponding prior year period due to the continued impact of bundling “free” roaming minutes with all-inclusive regional and national rate plans.

Long distance revenues for the three and nine months ended September 30, 2006 increased from the corresponding prior year periods $21 and $56, respectively, due to increases in international long distance revenues resulting from the successful marketing of international calling plan initiatives.

Outcollect revenues increased $22 and $26 for the three and nine months ended September 30, 2006, respectively, compared to the corresponding prior year period, primarily the result of increased minutes of use. The nine month comparative period increase in minutes of use was partly offset by decreases in average rates over the period compared to the corresponding prior year period.

Equipment sales.  These sales are comprised of product, accessory and upgrade revenues. Equipment sales decreased $133 and increased $65 for the three and nine months ended September 30, 2006, respectively, from the corresponding prior year periods. The three-month period decrease of $133 is primarily attributable to increased rebate activity and reduced handset pricing partly offset by increased accessory pricing and increased upgrade volume. The nine-month period increase of $65 is primarily attributable to higher volume of new customer handsets, increased volume and price of upgrades by existing customers to devices with more advanced features than those in the past, and accessory price increases. These nine-month period increases were partly offset by increased rebate activity.

Operating Expenses

Cost of services (excluding depreciation).  Total cost of services, excluding depreciation, increased $63 and $443 for the three and nine months ended September 30, 2006, respectively, when compared with the corresponding prior year periods. The increase resulted from increases in local systems cost of $21 and $251 and third-party network system costs of $42 and $192 for the three and nine months ended September 30, 2006, respectively. For the three months ended September 30, 2005 and 2006, cost of services included integration costs of $101 and $65, respectively, and for the nine months ended September 30, 2005 and 2006, cost of services included integration costs of $123 and $150, respectively. For both periods, the integration costs primarily related to network integration.

The increase in the local systems costs component of cost of services resulted primarily from increases in interconnection fees of $84 and $254 for the three and nine months ended September 30, 2006 associated with

20

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

21.3% and 21.0% respective growth in system minutes of use, USF and gross receipts tax increases of $41 and $47 for the three and nine months ended September 30, 2006, respectively. Offsetting the local system costs increases were decreases of $30 and $94 related to reseller services expenses for the three and nine months ended September 30, 2006, respectively. The reseller services expense decreases primarily resulted from the 60.1% and 50.1% respective decreases in minutes of use for the three and nine months ended September 30, 2006, related to the T-Mobile purchase commitment, which were partially offset by higher handset insurance claims and third-party content expenses for both comparable prior year periods. Network systems costs for the three months ended September 30, 2006, decreased by $76 from the comparable period in the prior year, largely due to the recognition in 2005 of $78 in hurricane costs and lower network integration costs in the current period, offset by increased maintenance expenses. However, for the nine months ended September 30, 2006, network system costs increased by $44 compared to the nine months ended September 30, 2005, due to higher lease termination buyouts and network integration costs which exceeded the hurricane costs recorded in the comparable period for the prior year.

The third-party network system costs component of cost of services includes incollect roaming and long distance costs. Roaming costs increased $17 and $82 for the three and nine months ended September 30, 2006, respectively, compared with the corresponding prior year periods, and long distance costs increased $25 and $110 for the three and nine months ended September 30, 2006, respectively. Roaming costs increased primarily due to increased usage minutes over the comparable prior periods. Increases in long distance costs were driven by higher minutes of use resulting from the increased number of average subscribers, offset by minor rate decreases.

Cost of equipment sales.  For the three and nine months ended September 30, 2006, cost of equipment sales decreased $5 and increased $146 when compared to the respective prior year periods. The three-month period decrease is primarily the result of lower average per unit costs and insurance program adjustments, partly offset by higher volumes. The nine-month period increase is the net result of product and upgrade device volume increases and increases in the average per unit cost for upgrade devices, partly offset by decreases in the average unit cost for products.

Selling, general and administrative expenses.  Selling, general and administrative expenses (SG&A) for the three and nine months ended September 30, 2006 decreased $45 and $396, respectively, when compared with the corresponding prior year periods. For the three months ended September 30, 2005 and 2006, SG&A included integration costs of $48 and $22, respectively, and for the nine months ended September 30, 2005 and 2006, SG&A included integration costs of $226 and $87, respectively. For the 2005 periods, the integration costs primarily related to employee termination benefits for former Cingular employees, systems integration costs and sales distribution rationalization. For the 2006 periods, the integration costs primarily related to network integration and billing system conversion costs.

Selling expenses, which include sales, marketing, advertising and commission expenses, for the three and nine months ended September 30, 2006 increased $40 and decreased $49, respectively, when compared with the corresponding prior year periods. For the three months ended September 30, 2006, the $40 increase over the corresponding prior year period is primarily attributed to net increases in direct commissions resulting from changes in the sales compensation plan and net increases in sales expenses related to the long-term incentive plan. For the nine months ended September 30, 2006, the $49 decrease over the corresponding prior year period is primarily attributed to decreases in indirect commissions of which $73 are largely attributable to reductions in average cost per activation and reduced agent branding expenses. The decrease in indirect commissions was partly offset by direct commissions increases of $46 primarily due to changes in the compensation plan. In addition, advertising and promotions expense decreases were partly offset by increased internet and television advertising.

21

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

Costs for maintaining and supporting our subscriber base for the three and nine months ended September 30, 2006 decreased $25 and $207, respectively, when compared with the corresponding prior year periods. The decreases were primarily due to reductions in bad debt expense of $108 and $225, respectively, resulting from improved collections and improved involuntary churn which contributed to lower net account write-offs. Other factors contributing to the decreases included decreases to customer service costs of $3 and $90, for the respective periods, due to reduced outsourced professional services at certain call centers. In addition, billing expenses decreased $23 and $58 for the respective periods, resulting from the continued migration to the combined billing systems. These decreases were primarily offset by increased prepaid card replenishment costs and increased migration and upgrade transactions in the three and nine months ended September 30, 2006.

Other administrative costs for the three and nine months ended September 30, 2006 decreased $60 and $140, respectively, when compared with the corresponding prior year periods. The decrease in the three-month period primarily resulted from lower IT and other professional services of $48 and lower litigation related expenses of $46. These decreases were partly offset primarily by higher third-party transaction processing fees of $15. The decrease in the nine-month period primarily resulted from headcount reductions of $20, lower IT and other professional services of $20, lower litigation related expenses of $61, lower rents realized by combining AT&T Wireless and legacy Cingular office space of $18, and a federal excise tax refund accrual. These decreases were partly offset primarily by higher third-party transaction processing fees of $26.

Depreciation and amortization.  Total depreciation and amortization expense for the three and nine months ended September 30, 2006 was essentially flat with the corresponding prior year periods. Increases in depreciation of $129 and $364 for the three and nine months ended September 30, 2006, respectively, compared with the corresponding prior year periods are largely attributable to increased network investment and reductions to depreciation expense recorded in 2005 associated with the revaluation of acquired AT&T Wireless assets pursuant to the network integration plans, partly offset by the impact of assets being fully depreciated in 2006. Intangibles amortization expense for the three and nine months ended September 30, 2006 were $317 and $1,021, respectively, representing decreases of $94 and $355, respectively, when compared with the corresponding prior year periods, primarily due to declining amortization of the customer relationship intangible assets recorded with the AT&T Wireless acquisition. The decreases also resulted from other intangible assets that became fully amortized in 2005 and 2006.

Other Income (Expenses)

Interest Expense.  For the three and nine months ended September 30, 2006, interest expense totaled $306 and $901, respectively, and represented an increase of $2 and a decrease of $67, respectively, when compared with the corresponding prior year periods. The slight increase for the three-month period reflects a higher outstanding balance under our revolving credit agreement, offset by reductions in the balance of our member loans and the repayment of $1,000 of 7.35% AT&T Wireless Services, Inc. unsecured and unsubordinated Senior Notes that matured on March 1, 2006. The decrease in member loans is the result of $2,911 of repayments made during 2005. For the nine months ended September 30, 2006, the $67 decrease in interest expense reflects the lower average balance of our member loans and Senior Notes, partially offset by higher balances and rates on the revolving credit agreement and reduced debt premium amortization.

Minority interest in earnings of consolidated entities.  For the three and nine months ended September 30, 2006, minority interest in earnings of consolidated entities totaled $43 and $127, respectively, and represented increases of $5 and $32, respectively, over the corresponding prior year periods. The increases primarily resulted from increased partnership net income in the three and nine months ended September 30, 2006.

Other, net.  For the three and nine months ended September 30, 2006, other, net totaled $5 and $20, respectively, and represented decreases of $5 and $43, respectively, over the corresponding prior year periods.

22

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

The decreases resulted from higher interest income earned in the three and nine months ended September 30, 2005, primarily attributable to cash proceeds received from the sale of certain network assets to T-Mobile in January 2005. Additionally, a gain on the sale of certain assets of $13 was recognized in the 2005 period where minimal comparable activity occurred in 2006.

Provision for Income Taxes

Provision for income taxes.  For the three and nine months ended September 30, 2006, the provision for income taxes was $225 and $491, representing increases of $121 and $341, respectively, as compared with the corresponding prior year periods. The higher provision for income taxes resulted from higher taxable income versus the prior year periods.

Our effective tax rate for the three and nine months ended September 30, 2006 was 20.9% and 22.0%, respectively. These rates vary from the expected federal statutory rate of 35% primarily as a result of the exclusion from our income tax provision of operating results that are wholly allocated to our respective members’ federal income tax returns. The income tax provisions for the three and nine months ended September 30, 2006 also include provisions for income taxes in certain state and local jurisdictions.

Liquidity and Capital Resources

Cash Flow Analysis

Cash Flows for the Nine Month Ended September 30, 2005 Compared with the Nine Months Ended September 30, 2006

	Nine Months Ended
	September 30,						Change
	2005			2006			$			%
Net cash provided by operating activities	$	5,537		$	5,346		$	(191	)		(3.4	)%
Net cash used in investing activities		(738	)		(5,240	)		(4,502	)		610.0	%
Net cash used in financing activities		(4,863	)		(87	)		4,776			(98.2	)%
Net increase (decrease) in cash and cash equivalents		(64	)		19			83			(129.7	)%
Cash and cash equivalents at beginning of period		352			472			120			34.1	%
Cash and cash equivalents at end of period	$	288		$	491		$	203			70.5	%

Net cash provided by operating activities.  For the nine months ended September 30, 2006, cash provided by operating activities was $5,346, a decrease of $191 from the nine months ended September 30, 2005. Although we experienced a $1,974 increase in operating income, excluding depreciation and amortization, this was offset by decreases of cash generated from working capital. This working capital decrease, as compared with prior year activity for the comparable period, was primarily attributable to the following increases in uses of cash associated with accounts payable and other current liabilities, $1,470; other current assets, $336; and inventories, $210. The decrease in accounts payable and other current liabilities for the nine months ended September 30, 2006 primarily resulted from the payment of capital expenditure obligations generated at the end of 2005.

Net cash used in investing activities.  For the nine months ended September 30, 2006, net cash used in investing activities was $5,240, an increase of $4,502 from the corresponding prior year period. The increase was primarily the result of decreased cash receipts from dispositions. Additionally, the 2005 nine-month period included proceeds from certain one-time transactions that were not present in the comparable 2006 period. These one-time transactions included $2,482 of proceeds from the sale of our California and Nevada network

23

CINGULAR WIRELESS LLC

PART I — FINANCIAL INFORMATION (Dollars in Millions)

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

assets to T-Mobile in January 2005; $432 of proceeds from the sale of wireless properties, including those that we were required to divest; $300 of proceeds from the sale of IDEA Cellular Ltd., $349 of proceeds from the Atlantic West B.V. distribution, $180 from the sale of spectrum to T-Mobile, and $36 from the partial sale of former AT&T Wireless operations and telecommunications licenses in Bermuda and certain Caribbean markets to Digicel. Increases in the use of cash included an increase in capital expenditures of $346, an increase in deposits for license purchases of $357 and the impact of the 2005 redemption of $219 of held to maturity investments. The primary offset was a $200 capital restoral deficit payment made to GSMF upon its dissolution in January 2005

Net cash used in financing activities.  For the nine months ended September 30, 2006, cash used by financing activities was $87, a decrease of $4,776 from the corresponding prior year period. For the nine months ended September 30, 2006, we made net draws of $1,041 under our revolving credit agreement. This increase in cash was offset by our $1,000 repayment of the 7.35% AT&T Wireless Services, Inc. unsecured and unsubordinated Senior Notes. For the nine months ended September 30, 2005, the primary use of cash was the $1,667 of repayments to our members under our revolving credit agreement, $2,675 of repayments to our members under our Subordinated Notes, $250 in repayments of AT&T Wireless Senior Notes and $211 for the redemption of the Telecorp Notes.

Sources of Liquidity

Under a revolving credit agreement, AT&T and BellSouth provide unsubordinated short-term financing on a pro rata basis at an interest rate of LIBOR plus 0.05% for our ordinary course operations. The revolving credit agreement provides that in the event that we have available cash (as defined) on any business day, such amount shall first be applied to the repayment of the revolving loans, and any remaining excess then shall be applied to the repayment of the subordinated member loans from AT&T and BellSouth at month end if we do not then require a cash advance under the agreement. For nine months ended September 30, 2006, we made net draws of $1,041. For the three months ended September 30, 2006, we made net repayments of $151. At September 30, 2006, we had $1,552 outstanding under the revolving credit agreement.

As of September 30, 2006, we had cash and cash equivalents totaling $491. We expect to fund our remaining capital requirements for at least the next 12 months by using existing cash balances, cash generated from operations and, if necessary, draws under our revolving credit agreement with AT&T and BellSouth.

Cash Requirements

Our operating cash requirements during the remainder of 2006 will continue to be driven primarily by capital expenditures associated with our network enhancement and integration activities, interest payments and costs associated with acquiring and retaining new and existing subscribers.

Network Upgrades, Integration and Expansion.  The expansion of our GSM/GPRS/EDGE networks, the continued installation of UMTS/ HSDPA technology in a number of markets and the construction and upgrade of network facilities in California and Nevada following the sale of facilities to T-Mobile upon the termination of our GSMF network infrastructure joint venture will drive capital requirements through the remainder of the year. For the three and nine months ended September 30, 2006, respectively, we spent $1,828 and $4,851 for network and non-network capital expenditures. We expect our total capital expenditures in 2006 to be in the low end of the $7,000 to $7,500 range.

Spectrum Auction.  We made a $500 deposit to the FCC in July 2006 in connection with qualifying for the auction of 90 MHz of spectrum in the 1700 and 2100 MHz frequency bands that began in August 2006. Upon completion of the auction in which we were the highest bidder for 48 licenses, we made an additional payment for $835 in October 2006.

24

Integration of AT&T Wireless.  For the three and nine months ended September 30, 2006, respectively, aside from integration activities impacting depreciation and amortization, we incurred $87 and $237 of integration costs, which are included in “Selling, general and administrative” expenses and “Cost of services” expenses in our consolidated income statements. Although the integration is substantially complete, we expect to continue to incur costs associated with integration activities through 2006, and to a lesser degree, into 2007. The remaining integration costs expected to be incurred primarily relate to lease termination and equipment removal costs.

Contractual Obligations.  Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2005 and Note 8 within Item 1. Financial Statements of this Quarterly Report for a description of our contractual obligations.

Debt Service.  As of September 30, 2006, we had $19,844 of consolidated indebtedness and capitalized lease obligations, excluding unamortized premiums/discounts and interest rate swap fair value adjustments. This debt includes: $2,000 in unsecured Senior Notes of Cingular Wireless LLC; $8,250 in unsecured senior and senior subordinated notes of AT&T Wireless; $6,717 in unsecured, subordinated member loans from AT&T and BellSouth; $1,552 in outstanding borrowings under the revolving credit agreement; $1,206 in capital lease obligations (excluding executory costs and imputed interest); and $119 in other debt. During the first quarter of 2006, we repaid $1,000 of 7.35% AT&T Wireless Services, Inc. unsecured and unsubordinated Senior Notes. Additional capital lease obligations for the three and nine months ending September 30, 2006, respectively, were $26 and $63. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2005 for our debt service requirements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions. There have not been any material changes in Critical Accounting Policies and Estimates from those reported in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2005.

Related Party Transactions

See Related Party Transactions in Note 6 to our consolidated financial statements included in Item 1, “Financial Statements”.

Off-Balance Sheet Arrangements

As of September 30, 2006, we had no material off-balance sheet arrangements.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

The majority of our financial instruments are medium- and long-term fixed rate notes and member loans. Fluctuations in market interest rates can lead to significant fluctuations in the fair values of these fixed rate instruments. In addition, we are exposed to market risks, primarily from changes in interest rates. To manage exposure to these fluctuations, manage capital costs, control financial risks and maintain financial flexibility over the long term, we engage from time to time in hedging transactions that have been authorized by the board of directors of our manager. We do not anticipate any significant changes in our objectives and strategies with respect to managing such exposures. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.

25

Item 3.  Quantitative and Qualitative Disclosures About Market Risk — (Continued)

As of September 30, 2006, we had outstanding an aggregate of $6,717 in unsecured, subordinated member loans from AT&T and BellSouth with a fixed interest rate of 6.0% and a stated maturity of June 30, 2008. In addition, as of September 30, 2006, we had outstanding $10,250 of unsecured senior notes with fixed interest rates ranging from 5.625% to 8.75% with maturity dates between 2006 and 2031. As of September 30, 2006, we had $250 of fixed-to-floating interest rate swaps related to our five-year unsecured senior notes. A change in interest rates of 100 basis points would change our interest expense as a result of the swaps as of September 30, 2006 by approximately $3 per annum. We also have capital leases outstanding of $1,206 with fixed interest rates ranging from 5.72% to 9.6%.

As of September 30, 2006, we had $1,567 of floating rate borrowings. These borrowings primarily include amounts outstanding under our revolving credit agreement with AT&T and BellSouth, which carry an interest rate of LIBOR plus 0.05%. A change in interest rates of 100 basis points would change our interest expense on floating rate debt balances as of September 30, 2006 by approximately $16 per annum.

The risk management discussion above, related to our market risks, contains forward-looking statements and represents, among other things, an estimate of possible changes in fair value that would occur assuming changes in interest rates. Future impacts of market risk would be based on actual developments in the financial markets. See Cautionary Language Concerning Forward-Looking Statements immediately following Part II, Item 6 of this Quarterly Report.

Item 4.   Controls and Procedures

(a) We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

As of September 30, 2006, management, including our President and Chief Executive Officer and our Chief Financial Officer, completed its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer and our Chief Financial Officer concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. We also have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily more limited than those we maintain with respect to our consolidated subsidiaries.

(b) During the evaluation referred to in Item 4 (a) above, we have identified no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

26

CINGULAR WIRELESS LLC

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

In a jury trial, Freedom Wireless, Inc. (Freedom) was awarded damages jointly against us and Boston Communications Group, Inc. (BCGI) in the aggregate amount, including prejudgment interest, of approximately $165 million for alleged past infringement of two patents for technology allegedly owned by Freedom and used by BCGI to provide to us and other carriers a prepaid wireless telephone service technology platform. This litigation has been settled, in connection with which we have paid $20 million.

Several class-action lawsuits were filed against AT&T Corp. asserting claims under the federal securities laws in connection with the split-off of AT&T Wireless from AT&T Corp. in respect of which we were alleged to be liable for 70% under a Separation Agreement between AT&T Wireless and AT&T Corp. This litigation has been settled, in connection with which we have paid $105 million.

Except as noted above, there are no material changes in the status of our legal proceedings from those described in our Annual Report on Form 10-K for the year ended December 31, 2005 and in our Quarterly Reports on Form 10-Q for the three months ended March 31, 2006 and June 30, 2006, respectively.

Item 1A.  Risk Factors

See “Risk Factors” in Part I — Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2005 for information on risk factors. There are no material changes in the status of our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2005.

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

None.

Item 3.   Defaults upon Senior Securities

None.

Item 4.   Submission of Matters to a Vote of Security Holders

None.

Item 5.   Other Information

None.

Item 6.   Exhibits

(a) Exhibits

Number			Title
	31	.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1 *	Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
	32	.2 *	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

* This exhibit is hereby furnished to the SEC as an accompanying document and is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.

27

CINGULAR WIRELESS LLC

PART II — OTHER INFORMATION

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

In addition to historical information, this document contains forward-looking statements regarding events, financial trends, critical accounting policies, contractual obligations and estimates that may affect our future operating results, financial position and cash flows. These statements are based on assumptions and estimates and are subject to risks and uncertainties.

There are possible developments that could cause our actual results to differ materially from those forecasted or implied by our forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which are current only as of the date of this filing. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

While the below list of cautionary statements is not exhaustive, some factors, in addition to those contained throughout this document, that could affect future operating results, financial position and cash flows and could cause actual results to differ materially from those expressed or implied in the forward-looking statements are:

•  the pervasive and intensifying competition in all markets where we operate;

•  delays or inability of vendors to deliver hardware, software, handsets or network equipment, including failure to deliver such equipment free of claims, including patent claims, of other parties;

•  problems associated with the transition of our network to higher-speed technologies;

•  slowing growth of our data services due to lack of popular applications, terminal equipment, advanced technology and other factors;

•  adverse economic, employment or interest rate trends;

•  the final outcome of FCC proceedings, including rulemakings, and judicial review, if any, of such proceedings;

•  enactment of additional state and federal laws, regulations and requirements pertaining to our operations; and

•  the outcome of pending or threatened complaints and litigation.

28

CINGULAR WIRELESS LLC

PART II — OTHER INFORMATION

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.

Cingular Wireless LLC

By:	CINGULAR WIRELESS CORPORATION, as Manager
By:	/s/  Peter A. Ritcher

Peter A. Ritcher

Chief Financial Officer

(Principal Financial Officer)

Date: November 1, 2006

29

CINGULAR WIRELESS LLC

PART II — OTHER INFORMATION

Exhibit Index
(Exhibits Physically Filed Herewith)

Number			Title
	31	.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1	Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
	32	.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.