Good morning, ladies and gentlemen, and welcome to the AT&T first quarter earnings release 2006 conference call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mr. Rich Dietz, Senior Vice President of Investor Relations. Mr. Dietz, you may begin.

Thank you, Christine and good morning, everyone. Welcome to our first quarter conference call. I'm Rich Dietz, Head of Investor Relations for AT&T, and with me on the call today is Rick Lindner, our Chief Financial Officer. We're delighted to have you with us today. Our earnings release, investor briefing and supplementary information were all issued earlier today, and they are available on the Investor Relations page of our website. On this call, we will speak to a set of presentation slides. They are available on that same web page at www.att.com/Investor Relations. Before we get started, I need to cover our Safe Harbor statement and remind you that information set forth in these presentations contains estimates and other forward-looking statements that are subject to risks and uncertainties. The actual results may differ materially. These presentations may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on the Company's website. 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 these presentations based on new information or otherwise. I would also call to your attention on slide 4 of our presentation. This slide contains information regarding filings related to our proposed merger with BellSouth. Now turning to slide 5, let me provide you some backgrounds on our segments. As you know, this quarter marks our first quarter of combined operations following the merger of SBC and the former AT&T. In our fourth quarter's results, which were released in January, we had a partial quarter of former AT&T results. In that interim quarter to provide continuity, we presented legacy AT&T results as a separate segment. This quarter we are well underway with our integration and as a result, we have combined results into new segments that reflect how we are managing the business. We have a wireline segment which contains and combines the wireline operations of SBC and the former AT&T. We have a wireless segment which is unchanged --that is Cingular. We have a directory segment. That includes Yellow Pages, plus our electronic directory business. The fourth segment is other. It includes results from equity investments and Telmex and America Movil, Sterling Commerce, corporate operations and our equity earnings from Cingular are shown in this segment as well. To help with trending, we have made available supplemental information on the Investor Relations page of our website. This includes quarterly GAAP statements based on the new segments for the past eight quarters. You will also find pro forma statements that show 2004 and 2005 quarterly and full-year revenue results for product categories and wireline customer groups. I hope you find this information helpful, and of course, if you have any questions with material, please contact anyone in our Investor Relations team. Turning to slide 6, let me add a brief update on the BellSouth merger approval process. As you know, AT&T and BellSouth announced an agreement to merge on March 5. In the few weeks since then, we have moved ahead quickly and taken the first steps to get the various approval processes underway. We filed with the Securities and Exchange Commission on March 31, and based on our past experience, we expect a shareowner vote sometime this summer. Also, on the last day of March, we made our filings with the Department of Justice and we submitted applications to the FCC. There are six states in the BellSouth region that have an approval process. Notices are required in three additional BellSouth states. Applications are required in 12 other states and in a few foreign countries. All of these applications and filings have been made. We have made a good start in the processes and will believe it is reasonable to expect the approvals can be concluded to allow closing of this transaction by the end of this year. Now we would like to review our EPS comparisons which are on slide 7. The adjustments are straightforward and follow the format that we have previously used. In the first quarter of 2006, our adjusted EPS was $0.52. Starting at the top of the first column and working down, reported EPS was $0.37. We add back $0.06 of Cingular merger integration and intangible amortization costs. We also add back $0.09 of costs related to the AT&T merger, and the result is an adjusted EPS of $0.52. Please take note of the adjustment amounts detailed in the footnote on the slide. In the first quarter of 2006, approximately two-thirds of the adjustments are for non-cash items such as amortization of intangible at both AT&T and Cingular and accelerated depreciation at Cingular. Adjusted EPS in the first quarter a year ago was $0.34. Walking down the column on the right, reported EPS was $0.27. We had $0.07 of Cingular merger-related costs, resulting in an adjusted EPS in first quarter of '05 of $0.34. So our reported EPS in the first quarter of 2006 was $0.37. That is up 37% versus the year earlier first quarter, and our adjusted EPS was $0.52. That is up 53% versus comparable results in the year ago first quarter. With that as background, I will now turn to Rick Lindner, AT&T's Chief Financial Officer.

Thanks, Rich, and good morning, everyone. It is great to have you with us for the first full quarter of results from the new AT&T. As you have seen, we had a very good quarter. Cingular Wireless delivered outstanding progress. Churn continues to move down. Margins continue to move up. ARPU is stabilizing. Data growth was very strong, and subscriber growth was encouraging. We also delivered growth in regional consumer and small business. In the past you saw SBC deliver seven straight quarters of wireline revenue growth, and our end region results this quarter continue that trend. There are encouraging signs in enterprise. Volumes are strong, and we see positive indications of pricing stability. We are off to a strong start in terms of AT&T merger integration, and we are on track with our targets for the year. Our adjusted operating income margin in the first quarter was 17.2%, which is above the full year range we gave you in January. So strong margins, good EPS growth and solid momentum; all-in-all, a very good quarter. Slide 10 shows our earnings per share trajectory, and as Rich detailed for you, adjusting for merger-related costs in the first quarter we had EPS of $0.52. As you see on this slide, this is our fourth straight quarter of sequential and year-over-year growth in adjusted EPS. Our EPS growth drivers are straightforward. First, contributions from wireless have increased substantially, and there is a great deal of additional upside ahead. Second, we continue to execute well in wireline. Third, we have begun to realize some SBC/AT&T merger synergies. Although we have just begun to scratch the surface, the big opportunities lie ahead. And finally, the AT&T merger itself was accretive to adjusted earnings from the outset with contribution growing as synergies are realized. Wireless is a key driver of our EPS growth, and we have a quick recap of Cingular's first quarter starting with slide 11. The bottom line is merger integration is working, and Cingular is producing very positive results. Network performance is on an upward curve. Customer service has improved as well, and the result is a substantial reduction in churn. In each of the past several quarters, Cingular has led the industry with the highest gross adds. Now not only are more people choosing Cingular, more people are staying with Cingular as well. Overall churn was 1.9%, postpaid churn was 1.6%; both were Cingular's best ever. Over the past two quarters, both were down 40 basis points. These are very good trends, and we are confident there is more to come. Lower churn comes from delivering on the fundamentals -- the fewest dropped calls of any national provider, broad coverage, feature-rich attractive handsets, exclusives in both handsets and content and great customer care. Lower churn combined with continued strength in gross adds resulted in a net subscriber gain of 1.7 million with postpaid adds up more than 40% versus the previous quarter. Cingular's revenue growth was also strong, above 9% for the second straight quarter. The details are on slide 12. The drivers are strong subscriber growth and stabilizing ARPUs with impressive growth in data ARPU. Over the past year, subscribers are up more than 5 million and overall ARPU declined just 2.3%. If you went back a year ago, ARPU declines were mainly about overall pricing and primarily customer migration to new plans. At this point, the numbers reflect different factors, primarily the impact of reseller ARPU, which tends to be lower and brings down the overall average. But Cingular's ARPU, excluding impacts from the growth in reseller subs, was actually up year-over-year, and that was driven by higher data ARPU. Data ARPUs are up dramatically, as you see on this slide. In fact, we have added $0.89 of data ARPU in just the past two quarters as more customers have data capable handsets and as applications and content become more compelling. I would point out that the first quarter data ARPU of $522 is an overall average. We include in the base all 55.8 million of our subscribers. If we were to calculate the average on our postpaid base or on our 25 million or so active data users, data ARPU obviously would be much higher. In the first quarter of 2006, Cingular delivered 91 million multimedia messages and nearly 7 billion text messages. To drive further increases in data usage, Cingular is aggressively pursuing new products and services from the SLVR with iTunes to video services to new devices. We have just begun to realize the potential in wireless data, and with Cingular's Spectrum and its 3G deployment we expect to do very well. The other key area where Cingular is delivering good progress is in margins, which we show on slide 13. Cingular's adjusted margin in the first quarter was 31.9%, up 90 basis points sequentially and up 640 basis points over the past year. These numbers are more impressive when you consider the strong subscriber growth we had in the first quarter and the fact that more than 7% of the subscriber base upgraded handsets during the quarter. There is a lot of activity underway at Cingular that promises to drive down costs: network integration, streamlining systems, customer care and billing system conversion. While we have made tremendous progress in these areas, a great deal of margin upside lies ahead. Cingular continues to manage the unwind of its California/Nevada joint venture with T-Mobile and now has 71% of their customers on their own network in those markets. Cost will continue to decline as more and more of our customers fall onto our own network. Network integration activities are on schedule. Just over half of overlapping GSM cell sites have been integrated. Increased cost savings will fall into the second half of 2006 and the beginning of 2007 as Cingular largely completes GSM network integration. 97% of Cingular's minutes and 89% of its handsets are now GSM. Plus, their substantial opportunities will begin to sunset Legacy billing systems. Cingular still has a large set of cost reductions ahead, and as AT&T acquires 100% ownership of Cingular, we look forward to 1,000 basis points of margin opportunity on a $36 billion business. There is no other company in our industry with that magnitude of opportunity. Let me turn now and talk about our combined wireline business. As Rich mentioned earlier, our wireline segment now includes both the former SBC and the former AT&T wireline operations which we are integrating. Because the old organizations have been combined in some areas, what I have for you on slide 14 is a look at these revenues by customer categories as additional background to the new wireline segment. The growth rates shown here are pro forma, meaning the operations whose results are included in the categories are consistent for all periods. Pro forma results are available on our website as Rich mentioned earlier. Starting at the top, we have regional business. This includes small and medium business customers in our former SBC 13-state region. These revenues grew 7% in the first quarter. Our regional consumer revenues grew 2.1%, and together our combined regional small and medium business and our regional consumer revenues totaled $5.6 billion and had a combined first quarter growth of 3.8%. As you know, through the end of 2005, SBC had seven consecutive quarters with wireline, consumer and business revenue growth, and these results demonstrate that trend is continuing. The next customer category is enterprise, which combines former AT&T and former SBC large business operations. Revenues in this category totaled $4.5 billion in the quarter with a 6.9% decline as reported. As we mentioned last quarter, the former AT&T sold a payphone business that had been included in this category. Excluding those revenues from the year ago first quarter, enterprise revenues declined 6.1%. Next is wholesale. Again, this combines former AT&T and former SBC wholesale with revenues of $2.9 billion. Excluding a couple of positive items in the year ago quarter, wholesale revenues were essentially flat. As reported, they are down 2.2%. In the first quarter, these four revenue categories added up to $13 billion with an overall decline of 1.4%, and excluding the wholesale items and the payphone revenues, the overall decline would have been very slight, just over 0.5%. Also, shown here are the former AT&T national mass market customers. That is consumer and small business, both stand-alone, long distance and local bundled service. The first four categories shown on this slide are customers we are managing for long-term growth. In the national mass market areas, we have a different targeted strategy. In part, the strategy is to focus on cash flow. In the first quarter, our direct margins in national mass market were stable at just over 50%. For that portion of the national mass market base that is located in our local service regions, especially where we have a chance to offer our full line of broadband and bundled services, we will work to convert some of this space to regional bundles. Now let's take a deeper dive into some of these customer categories. Slide 15 shows regional small and medium business. Again, revenues were up 7%, and we had four straight quarters of mid single-digit pro forma growth in this category. Access lines increased modestly in the first quarter as they have over the past several quarters. Churn and voice revenues continue to be very stable. We had double-digit data revenue growth led by dedicated Internet access, virtual private networking and DSL. Business DSL net adds were stable and with increasing ARPUs. More than half of our DSL sales in this category were for speeds above 1.5 megabits. Transport revenues were led by strong growth in Ethernet, Metropolitan optical networks, as well as growth in DS1s, DS3s and SONET. Bottom line, continued solid performance in regional small and medium business. Slide 16 shows results from regional consumer, which are driven by broadband and bundling. We increased our total in region DSL line base by 511,000 in the quarter to more than 7.4 million. Nearly 90% of our first quarter DSL net adds, or 457,000 were consumer. As you see in this chart, our DSL penetration of consumer primary lines at the end of the quarter was 27.7%. That is up 810 basis points in one year, and in our best region, California and Nevada, consumer DSL penetration is above 33%. Higher speed products made up more than a one-third of our consumer DSL sales in the quarter, and our DSL churn is at our lowest level ever; in fact, lower than our basic voice churn. Despite cable competition, retail consumer line losses were generally consistent with recent quarters, up just slightly in primary lines. Retail consumer access lines declined by 267,000 and additional lines which reflect migration to DSL accounted for 40% of that total. The remainder were to wireless, cable and VoIP providers and CLECs. Combining DSL access lines and video, we added 223,000 retail connections in the quarter and 775,000 over the past year. Because of our success in broadband and bundling, our consumer ARPU was up 5.7%. We continue to grow revenues in our regional consumer business. We continue to have success with our strategy of bundling and broadband penetration. Now let's turn to enterprise. The highlights are on slide 17. We are seeing a continuation of the overall trends that we showed you in fourth quarter results. There are four main factors at play in this space. First, customer response to the merger has been very positive, and momentum in the marketplace is good. Second, volumes are strong in data circuits, IP-based data services and in long distance. In fact, long distance minutes were up sequentially in the quarter, the first time that has happened in the past five quarters. Data circuits volumes, DS1s and DS3s, were up nearly 7% and 23% respectively. Third, technology migration is a constant with customers moving from packet-based service to IT data. We are capturing this migration with our outstanding portfolio of services, including virtual private networks, hosting and managed Internet services. Fourth, we continue to see indications of more stability in pricing. Pressures remain obviously, but in enterprise voice and data, the gap between average price in the portfolio and price points in current sales has narrowed. In total, our enterprise revenues declined 6.9% in the first quarter. That compares with declines of 9% and 8.8% in the quarters before. If you were to exclude from first quarter 2005 the revenues from the payphone unit that AT&T sold last year, then the year-over-year decline would have been lower at 6.1%. 46% of our enterprise revenues in the first quarter came from data. Our enterprise data revenue grew slightly in the first quarter, and that compares with declines of around 4% in each of the two preceding quarters. So again, as we saw last quarter, there are encouraging signs in enterprise. No one should expect a one quarter turnaround, but with our networks, our product sets, our commitment to customers and with solid management, we will move enterprise revenue into positive territory. Slide 18 shows our results in wholesale. Wholesale revenues totaled $2.9 billion in the first quarter, and as you see in the chart on the bottom right of this slide, this revenue stream has been very steady. Nearly 40% of our wholesale business comes from data services, and data and long distance combined represent two-thirds of the total. Our first quarter wholesale LD revenues were up 13% with strong volume growth in both domestic and international. Local wholesale declined, reflecting the ramp down of UNE-P. We saw a decline in local wholesale connections of 274,000. That is the smallest decline we have seen in six quarters, roughly half the decline we saw in the fourth quarter of 2005. Wholesale data was down slightly, reflecting pricing pressures offset by volume growth, particularly in DS1s and DS3s. As I mentioned earlier, if you remove a couple of positive one-time items in the year ago quarter, wholesale revenues were essentially flat. Before moving on to merger integration and margins, let me add a few comments on revenues from a product perspective and specifically data revenues. The highlights are on slide 19. We have data revenues, as you know, in several customer categories, but primarily they reflect business, wholesale and consumer DSL. In the first quarter, data made up more than 30% of our total wireline revenues. That percentage has grown. It was about 28% a year ago on a pro forma basis. In the first quarter, our total data revenues grew 2.6%, and as you see in the chart on the upper left, that was our best growth in the past five quarters with improved growth rates every quarter. As you see in the chart on the bottom left, retail data revenues grew 4.8%, also our best in five quarters. Three-quarters of our total data revenues come from retail. Data transport revenues were up 1.6% with good volume growth. DS1 and DS3 volumes were up throughout 2005, reversing declines in 2004. Packet data declined 12.5%, reflecting migration from frame relay to EVPN and managed Internet services, which are part of our IP data category. IP data continued its double-digit growth, up 14%, partly due to this migration and also due to strong volume growth in these areas, as well as in DSL and hosting. As you see in the pie chart on this slide, 83% of our data revenues come from transport and IP, both of which have good growth. So overall a solid quarter for data revenues. First quarter has also been busy in terms of merger integration. Slide 20 provides an update. As we outlined in January, we expect expense savings from these merger synergies to be in the $600 million to $700 million range this year. While we are still very early in terms of execution, based on our progress to date, we are very much on track with the targets we laid out. Our frontline enterprise sales force consolidation is complete. We are now able to sell a number of our high-end enterprise product services down markets to our regional small and medium business customers. Detailed project planning is complete for network integration, and build out began this month. We expect to have all Legacy SBC mass market LD traffic migrated to the AT&T network by the fourth quarter of this year. We had a total force reduction in the first quarter of 3,400, and we are ahead of schedule on our merger force targets. As we said in our analyst conference at the end of January, we expect expense savings synergies to grow from the $600 million to $700 million this year to $2 billion or more in 2007. In addition to merger synergies, we have made further progress in improving our cost structure. Our productivity initiatives have contributed to the margin expansion that is shown on slide 21. Our adjusted operating income margin in the first quarter was 17.2%. That is up 200 basis points versus the year ago first quarter and up 100 basis points sequentially. It is well above our 2006 guidance of 15% to 16%. Obviously we are pleased with this result. Our margins and our operational progress in both wireless and wireline add to the confidence we had in the three-year outlook we provided for you in January. So by way of closing, let me recap that outlook. We expect to deliver double-digit adjusted EPS growth in each of the next three years. Following the BellSouth merger, we expect to return to overall revenue growth in 2007. That is versus pro forma results for 2006. We expect to generate strong and growing free cash flow after dividends: $2 billion this year even with heavy integration spending; $4 billion or more next year and more than $6 billion starting in 2008. We also expect to return substantial amounts of cash to shareowners through our strong dividend and through an expanded share repurchase. $10 billion of repurchases by the end of 2007 with at least $2 billion coming this year. Well, that concludes my remarks this morning, and at this time I believe we are ready for Q&A.

Thank you, Rick. Christine, if you would begin the Q&A session for us, please.

(Operator Instructions). Your first question is from John Hodulik, UBS.

Good morning, guys. A quick question for you, Rick, on the margins. Obviously some strong numbers here in the first quarter, but considering we expect the wireless margins to really continue to shine through the rest of the year, that 15% to 16% guidance that we have for the year would suggest that wireline margins are going to really decline from what we saw here in the first quarter. Could you talk a little bit about that, maybe if there is some upside to the margins going forward here? Secondly, along with that, update us on the Lightspeed plans and expectations for spending there? If I remember, you expected around I think it was 460 to 575 in additional spending in Lightspeed, mostly in the second half. Is that still the right number, and how do you see that progressing?

We are definitely pleased with margins in the first quarter. We are very pleased with the momentum that we have in the business on a number of cost initiatives, both related to the merger and, frankly, outside of the merger some initiatives that we have been underway with for some time. I think as we look forward in the balance of this year we will have some improvement I think from a cost standpoint obviously as we ramp up merger synergies. We will have some costs in the second half of the year primarily related to Lightspeed rollout. As we said in our meeting in January and the guidance we provided, we expect about $0.08 to $0.10 worth of additional expense pressure this year from Lightspeed, and that primarily occurs as we get into the commercial launch phase in the second half of this year. But even with that, we are very pleased with first quarter results. We are very pleased with the momentum we are seeing. We are still early in the year, so I don't think we will change our guidance at this point. But clearly I think if we continue those trends, we are poised to be at the upper end of that range or beyond it.

Our next question is from Simon Flannery, Morgan Stanley.

Thanks very much. If we could talk about the DSL for a second, obviously some strong net add numbers, but not so much data on the overall DSL revenue impact on the ARPU trends. Perhaps you could address that? Thank you. And also on the consumer long distance, we are not getting that data anymore. Where does that stand?

Thanks, Simon. DSL, as you said, we had a strong quarter in terms of net adds. We are actually seeing ARPU on the consumer side of things pretty stable in the last two or three quarters in the low $30 range. DSL ARPU, as I mentioned in my remarks on the business side, has been increasing. Business DSL ARPU is up in the mid-50s for us. We are seeing good success in several areas with respect to DSL. One is we have had all-time highs in terms of the percent of gross sales at higher speed tiers. We were in the mid-30s as a percent of sales in consumer at higher speed tiers. We were over 50% in business in higher speed tiers. But that really only tells half the story, because we are also migrating existing customers up into higher speed tier products. So, for example, if you look at a snapshot of our DSL base at the end of the first quarter compared to a snapshot of our DSL base at December 31, what you would see is that while we added 511,000 customers, we actually increased customers on our higher speed tiers by about 530,000. So the combination of the sales and the migration has been positive there.

Can you just define higher speeds? Is that 1.5 MB and up?

Yes, it would be our 1.5 MB to 3 MB product, and then of course in business, we have had a 6 MB product out there, and we are launching speeds up to 6 MB in consumer, in fact, this week. DSL revenue growth was good this quarter. I may need help well on the exact number here, Rich; I think we were up at about 17% and 2.6% or so sequentially. So again stable ARPUs and we're adding customers there. Long distance as well in the consumer business in regional consumer continues to grow. I will have Rich get you the number on the consumer long distance, but it was up, if I recall correctly, about 10% or so.

Thanks a lot.

Overall trends continue to look positive across the business similar to what you have seen in the last several quarters.

Our next question is from Mike McCormack, Bear Stearns.

Just a quick follow-up on the margin side and a clarification. The margin guidance does not include the proportion that serves Cingular, correct?

That is correct. It is guidance on a reported basis adjusted for the merger costs, predominately the intangible amortization.

Could you give us a sense for how much of the margin improvement has been seen from the legacy SBC initiatives that you guys implemented last year with headcount reduction versus some of the new things you have done this quarter with the new AT&T deal?

Well, it is tough to break the two apart, Mike, because obviously we have had a number of initiatives ongoing. We also took the opportunity last year to stop some spending and to take some costs out of the business largely through attrition in anticipation of the AT&T merger closing. So those pieces kind of come together. We are ahead of plan both in terms of our total force reduction at 3,400 in the first quarter, and we are ahead of plan in terms of merger reductions related to force in the first quarter. So I think those are both good signs. As you know, about 55% to 60% of our expense savings in the merger are force-related, so that is an important piece of it. I think the other thing in terms of the merger this year will be movement of traffic on our network. Our plans, as we mentioned earlier, will be to move essentially all of the Legacy voice traffic that is off net to move it onto the AT&T network. We will also move a substantial amount, about 40% or so, of private line circuits that are off net will move on net. We also have some circuits that are provided for frame and ATM customers that are provided by external carriers. We will move about 90% of those on net this year. We continue to show good progress, in addition, outside of the merger on the cost side in a number of areas in our basic business. For example, in DSL we have moved more of our sales to alternate channels, both retail channels, as well as Internet sales. That has helped us to take some fixed costs out of the business. On top of that, another factor helping us is that our DSL churn levels have dropped to really the lowest levels ever. As I mentioned in my remarks in the presentation, it actually dropped to below basic voice churn. So all of those are positive signs all helping us to take some costs out of the business. The other area related to the merger that is important to us is leveraging the scale of the Company in terms of everything that we buy. We have targets set for this year for procurement savings, and we have already negotiated and have in place contracts that will provide us about 40% of those savings already. So really showing good progress across the board.

Rick, just as a quick follow-up to what has happened in the enterprise marketplace, could you give us a sense if you're seeing anything different when you're selling those services in your region versus in Verizon's region with their new MCI acquisition?

Yes, I think it is pretty early to tell that. I could not tell you that there are any significant differences there at this point.

Our next question is from David Barden, Banc of America Securities.

Two questions if I could. First, on the line side. Rick, last year in first quarter we actually saw a small uptick in the primary access lines. This quarter I think they actually declined on a sequential basis from the fourth quarter, which is usually kind of soft. I'm wondering if you could speak to some of the drivers of the primary access line decline in the quarter, specifically with respect to what maybe Comcast did in the quarter with promotional changes, that sort of thing. The second question would be on the enterprise segment. You talked about the good recovery we're seeing and leveling off of the data segment. If you back into the voice side of that category, it looks like the voice was down about 12.5%. Could you talk about whether that is decelerating, accelerating? How is the other half of that revenue segment moving along?

Sure, David. In terms of consumer lines in our first 13-state territory, as you said, last year first quarter was a very good quarter for us in terms of consumer lines. If you think about the point in time we were in there, we were a quarter or so right into the change of the UNE-P rules. So we were seeing some players that had been very active in the market become less, much less active in the marketplace. We were much earlier there in terms of I think cable entry into markets. So, as we go into 2006, I think first-quarter results are pretty consistent with our expectations. We expected to see a little bit of an uptick in our retail line losses. That is simply as a result of having a fairly full cable entry in our regions, primarily both Time Warner and Comcast, offset by the fact that we have largely worked through the reductions and the transition of our wholesale base from UNE-P to commercial agreement. So we are seeing much lower declines there than we had for the past several quarters. But I would say the line trends are pretty consistent with our expectations. I think the important thing for us -- and it was just another data point in proving that out this quarter -- the important thing for us is to continue to grow revenue connections. So DSL and video will become more important to us in the consumer space as we go into the second half of the year. Those revenue connections will continue to help offset any line losses and drive growth in both ARPUs and revenues in the consumer space. Your other question was in enterprise and specifically on the voice side of enterprise. As I mentioned earlier, we had pretty good growth, a better trend in terms of volumes on the voice side, and actual some sequential growth in LD minutes in our enterprise base in the first quarter, which was very encouraging to see. We really tracked two different sets of prices in enterprise. We tracked the point of sale price. In other words, what are we seeing in the marketplace? What are new contracts being signed at, or what are contracts being renewed at? We are seeing that point of sale pricing begin to stabilize. I think, as we look forward, I think our expectation is that point of sale pricing will stabilize this year. That is the trend that it is on. Obviously as customers renew contracts, and those contracts on average tend to be probably in the three-year timeframe, there is a delta between the pricing that is embedded in our base and the point of sale pricing, and that will take some time; at least 18, 24 months certainly to work through on the voice side once the point of sale pricing has stabilized. That is what we are seeing in the trends. There is really nothing new there, but we are seeing the delta between the average price in the base and the point of sale price narrow. That is obviously important. And the other important factor certainly is that we're seeing some encouraging signs in volumes.

So if I could just quickly follow-up on that would be to say that in the enterprise category as a whole was flattening data revenue and voice at negative, say, 12.5%. The average of those being about down 6%, which has been a big improvement largely on the data side. Would you expect to see the rate of leveling off of that start to moderate a little bit over the rest of the year?

Well, it is difficult to say, David. There are three factors that go into that. One is sales activity volume growth, which right now looks encouraging. So I think that is going to help us as the year goes on. We saw a nice uptick in the first quarter in terms of new contracts signed and closed, for example, versus what we were seeing in fourth quarter and what we were seeing in earlier quarters last year. So reception in the marketplace is good. That is a positive. Then the other two factors are the trend that occurs in the point of sale price and then how quickly that migrates through the base. We would look for some continued improvement as we go forward over the next couple of years overall in the revenue trends and enterprise.

Our next question is from Frank Louthan, Raymond James.

Just a quick update following on some of these wholesale scenes. What are you seeing on the high chassis circuits? What is the growth there coming from wireless customers and then other retail? Can you give us an update on the Homezone product and how that is tracking? What are expectations are for that as you start to roll that out?

Okay, Frank. Good morning. High cap circuit volumes have been increasing, and they have been strong both in wholesale as well as in retail. I think in the wholesale side certainly there is a lot of volume growth that is being driven by wireless in that space. As more carriers roll out and expand their data offerings and build their 3G networks and as more traffic moves to wireless, we would expect that growth to continue. So strong growth there both on the retail and the wholesale side. There is some obviously some pricing pressures, and those pricing pressures have kept high cap to us this quarter, a slight negative in wholesale. Although when you look at it trend quarter to quarter, I would say overall the trend in terms of revenues there has been relatively flat. We are seeing obviously some growth in high cap revenues on the retail side where volumes have also been strong. Homezone is in trial right now, and it is going very well. We would expect to roll it commercially late this quarter. We will roll that out focusing on a lot of areas, particularly those areas that won't have access to Lightspeed in the short term.

Our next question is from Jason Armstrong, Goldman Sachs.

A couple of questions. First, on just cable Voice over IP exposure. If you take a look at some of the more mature markets where you have faced VoIP competition from the cable companies for awhile, what would porting activity indicate at this point? Are losses declining? Are they flat? Are they accelerating in those markets? Can you give us any sense as to the magnitude on sort of a more granular level? The second question relates to content. We are obviously approaching IPTV launches this summer. Where are we on content at this point? How do the rates compare to some of the larger cable companies? An answer to that would be great.

On the cable VoIP question, obviously we have had cable competition, some of it circuit switched, for a long time. So those are maybe some of our better markets, in terms of comparison. You do see it -- as you would with any product rollout --you do see it flatten out over a period of time. It is just a question of the base gets to a certain size, churn begins to catch up. Further, when you look at our base and you look at our Company overall, you have to put cable and VoIP competition in perspective. Today it is kind of amazing to me in some respects because when we talk about cable VoIP competition, we're talking primarily about consumer, regional business. That is about 16% to 17% of our total revenues today. Sometimes it feels like we spend 50% to 60% of our time talking about it, but it is about 16% to 17% of revenues. Then you back off of that base, customers where we have bundled those customers with DSL or we have bundled them already with video service through dish. Then you look at the remainder of that base and you look at the usage those customers have and whether or not they are of such a profile that they tend to be more of a target or more at risk. Pretty soon you start to get down to even a total of that risk that is no more than about a third of that total consumer base. Then obviously we are working against that base to bundle those customers and protect them going forward. So in a lot of respects I think the discussion around cable competition and impact on the business, certainly with the profile we have today, is somewhat overblown. On the content side in terms of video, we have a number of content deals done. We don't see any issues with respect to either our current controlled launch or our commercial launch later this quarter. Pricing is coming in where we have expected it from a business case standpoint, so there has not been really surprises there from a pricing standpoint. I think overall if you would compare our projections versus cable, what you would see is content as a percent of revenues for an average customer that is probably a little higher than the average cable subscriber. And because the packages we will be selling and the fact that our customers will be all digital, all IP-based, those revenues will be higher. So the gross margin dollars, if you will, per customer will be pretty consistent with what I think you see in a typical cable franchise.

Rick, if I can just follow up on the first question real quickly as it relates to small business and whether you're seeing a cable company show up there at all. They would indicate that they have had roughly two-thirds of small businesses with plants that they could eventually offer Voice over IP. You guys have had great results in sort of accelerating results on the small business side, which would kind of indicate they are not showing up at all. Any comment on that?

I think where we have seen them has been primarily in some areas around providing high-capacity circuits and providing them at fairly low prices. It has been targeted in certain areas and has not really, as you have mentioned, really has not impacted our success or our growth in that marketplace.

Christine, the next question will have to be our last question for this session.

Our last question comes from Blake Bath, Lehman Brothers.

Most of my questions have been answered. Maybe two final questions here. The free cash flow and EPS outlook that you provided, does that include any bidding and build out activity you may do in the upcoming AWS auctions? If you could sort of talk about your perspective on those auctions in terms of your involvement? The second question would be the size of the inter-company eliminations between the legacy AT&T and legacy SBC. It seemed a bit larger than our expectations. If you could talk about what the size of that was and what the primary categories were, that would be very helpful.

First of all, we are working with Cingular in terms of looking at the upcoming auctions and have not finalized a strategy. I think you should expect to see us file and be involved in the auctions. It is a significant amount of Spectrum that is coming on the marketplace, but we have not finalized a strategy there. When you look at Cingular, as you know, the Spectrum depth that we have at Cingular is very strong. It is facilitating our rollout now of 3G. As we continue to roll out UMTS with HSDPA, we pick up additional efficiencies in terms of the volume we can carry on that network, both on a voice as well as from a data standpoint. But we will follow the auctions closely and see if there are opportunities to pick up some Spectrum at values that we feel are attractive in certain areas.

I guess the question though is, is that activity likely to be significant enough to cause you to revise downward your double-digit EPS growth and the free cash flow outlooks that you have provided?

That activity certainly would not alter our EPS guidance. From a cash flow perspective, I feel very good about our projections and the trajectory of the business for both this year and next year. I would anticipate we would be able to incorporate at this point any activity in the auctions within that. I don't have specific numbers in front of me on the inter-company eliminations. Obviously we have gone through in the pro forma we filed and we have that data. It is embedded in what we filed for both 2004 and 2005 pro forma. But if I remember correctly, we were in the $2 billion or so range in terms of eliminations when we were looking at this previously. I think it would be probably best for us to follow up with you one-on-one, and we would take you through that in detail. Well, thanks, folks. At this point, I would just offer a couple of closing comments. In January we provided to you in our analyst meeting in New York fairly extensive guidance for the next three years for AT&T. I think overall reaction to that guidance was positive. But, as you would expect with I guess most things on Wall Street, there was also some skepticism. In March we followed that up with an announcement of our agreement to acquire BellSouth. Again, reaction I think overall was positive as the logic of that transaction was readily apparent. But again, some expressed concern. Some about the timing of the deal, some about valuation issues. What I would tell you, though, is our management team is confident about achieving both the guidance we provided, as well as the value of the merger with BellSouth. For us the best way to validate our belief with you is by delivering consistent results each and every quarter. So we are pleased with this first full quarter of the new AT&T as I think it provides another data point supporting our view of the business. Cingular had a strong quarter with improving network performance, customer growth, churn, data ARPU and margins. Their results confirm the significant opportunity ahead for us in wireless. Our regional consumer business operations had another quarter of growth in both revenues and margins, and our ability to deliver these results, despite competition from cable and others, demonstrates I think the ability we have both to compete and to transform the business as the market evolves. Trends in enterprise and wholesale are improving with solid volume growth and encouraging signs in market pricing. Customer response to the merger has been positive, and it gives us confidence in our ability to return these segments to positive revenue growth. Overall costs and margins in the first quarter, as we talked about today, were better than expected. The merger plans are on track, and there is good momentum on both merger and business as usual cost initiatives. Finally, BellSouth also announced a very good first quarter last week with positive revenue growth in both wireline and directory, record DSL sales and better than expected margins. I think all of these things are good signs for our business, and we look forward to building on these results going forward. Again, I want to thank you for your interest in AT&T, and thanks for joining us today.

Thank you, Rick. Christine, that will conclude our session this morning.

Thank you. This concludes the AT&T first quarter earnings release for 2006 conference call. Thank you for your participation. You may all disconnect at this time.