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Updated from 8:15 a.m. EDT


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fell short of Wall Street's earnings target for the third quarter, as the wireless division was impacted by strong performance from the


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iPhone 3G.

The U.S. 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


Earnings were impacted by the July 11 introduction of Apple's new iPhone 3G, a product for which it is the exclusive authorized U.S. service provider. The iPhone 3G initiative reduced pretax third-quarter earnings by about $900 million, or 10 cents a share, as part of the subsidy agreement AT&T has with Apple. 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% versus 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%.

"I am particularly pleased with the customer response to the iPhone 3G," said CEO Randall Stephenson. "The new customers we're winning are high-value, with attractive revenue and churn profiles."

Third-quarter 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,


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.

Shares of AT&T were down 1.7% to $25.30 in early trading. The stock is lower by 38% for the year. Telco peer


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, which reports results Monday, was losing 2.7% at $27.25.

Sprint Nextel

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was falling 2.6% to $3.72.