AT&T ( T) fell short of Wall Street's earnings target for the third quarter, due to a too-strong performance from Apple's ( AAPL) iPhone 3G and its own weak wireline results.

The Dallas phone giant said net income rose to $3.23 billion, or 55 cents a share, in the quarter, up from $3.06 billion, or 50 cents a share, in the year-ago period. Excluding noncash merger-related amortization expenses, AT&T said it had adjusted earnings of 67 cents a share. Analysts expected the company to notch a profit of 71 cents a share, according to Thomson Reuters.

The company's earnings took a hit from the July 11 introduction of Apple's new iPhone 3G, a product for which AT&T is the exclusive authorized U.S. service provider. As part of the iPhone subsidy agreement between the two companies, AT&T's profit was cut by about $900 million, or 10 cents a share.

AT&T also saw a 2-cents-a-share loss because of hurricane damage.

Third-quarter activations of the iPhone 3G totaled 2.4 million, 2.4 times results for the original iPhone through the end of the third quarter in 2007. Roughly 40% of iPhone 3G activations in the third quarter were for wireless customers who were new to AT&T.

As AT&T expects strong iPhone 3G activations to continue, its dilution associated with the iPhone 3G will run above its previous expectation. AT&T said it now expects its full-year 2008 wireless service operating income before depreciation and amortization, or OIBDA, margin to be better than 37% vs. its previous outlook of 39% to 40%. AT&T also expects its full-year adjusted consolidated operating income margin to be about 23%, compared with its previous outlook of about 24%.

Despite the impact to the company's operations, AT&T CEO Randall Stephenson is pleased with iPhone adoption. Even though the company must pay out a high subsidy to Apple, AT&T is seeing an increase in the average revenue per subscriber among wireless services and data transfer both year over year and sequentially.

AT&T Mobility head Ralph de la Vega said that the iPhone 3G drove store traffic up 15% from a year ago, and that the average revenue per subscriber, or ARPU, is 1.6 times greater for iPhone 3G users than the average subscriber in the postpaid base. Additionally, de la Vega said that iPhone 3G churn is significantly lower than the average for postpaid base.

"iPhone 3G activations have exceeded expectations and have brought a significant halo effect," said de la Vega during the company's conference call. "The iPhone 3G is attracting high-quality, high-ARPU customers, winning share at the high end."

Among AT&T's other quarter figures, revenue came in at $31.34 billion, up 4% from the year-ago quarter and in line with Wall Street's prediction of $31.31 billion.

AT&T said it had a net gain of 2 million wireless subscribers in the quarter, taking its total customer count to 74.9 million. Postpaid churn, which measures how many subscribers canceled services, came in at 1.2%, compared with 1.3% in the year-ago quarter and 1.1% in the second quarter.

As expected, AT&T saw a sharp decline in its wireline business segment. The unit saw income slip 12% sequentially and 7.5% from a year ago.

On the positive side, total broadband connections were better than a quarter ago, rising by 148,000. That figure is well above the 46,000 broadband adds in the second quarter but sank from the 499,000 additions in the third quarter of 2007.

AT&T's U-verse service also saw strong growth in the quarter. Net subscriber additions totaled 232,000, up sharply from a year ago and nearly 36% sequentially. Those customer additions pushed AT&T's total U-verse subscriber count to 781,000 at the end of the quarter.

In terms of the macroeconomic slowdown affecting enterprise and business segments, voice usage and some data transfer have declined. Those losses were offset by 15.4% growth in wireless revenue and 16.2% growth in IP data revenues, CFO Rick Linder said during the conference call.

"Our business mix is more resilient than most," Lindner said. "I believe we have the best assets in the telecom industry. These are obviously challenging times. In this environment, we feel it's prudent to be conservative." As such, Lindner said that AT&T will use available free cash flow after dividend payments to pay down debt for the remainder of the year.

Sanford Bernstein analyst Craig Moffett argued that while it is easier to focus on all of the positives on the wireless side of the business, more questions about the wireline side and the brewing economic storm should be cause for concern.

"Wireline results were a clear disappointment, and appear poised to further deteriorate as economic conditions worsen," Moffett said in an email. "Enterprise fell to -1.4% growth (versus our expectation of +1.0%), and can be expected to slow even more as IT spending winds down and GDP growth slows. Margins, too, were weak across the board."

During the conference call, AT&T also announced the launch of Research In Motion's ( RIMM) BlackBerry Bold as an AT&T exclusive beginning on Nov. 4 for $300.

Shares of AT&T were down 6.5% to $24.07. The stock is lower by nearly 40% for the year. Telco peer Verizon ( VZ), which reports results Monday, was losing 5.7% at $26.41. Sprint Nextel ( S) was falling 5% to $3.63.