Top U.S. phone company AT&T posted a 41.5 percent rise in quarterly net profit on Tuesday, as Apple’s iPhone helped boost wireless subscriber growth above market expectations.

AT&T, the exclusive U.S. service provider for the iPhone, said its third-quarter net profit was $3.1 billion, compared with $2.2 billion in the year-earlier quarter before it bought BellSouth. Earnings per share fell to 50 cents from 56 cents due to a larger number of shares following the acquisition.

Excluding costs from the deal and other items, profit rose to 71 cents per share from 63 cents. That was in line with Wall Street's average forecast, according to Reuters Estimates.

AT&T's wireless subscriber growth, however, beat analysts' expectations. The company added a net 2 million wireless subscribers in the quarter, taking the total to 65.7 million. That exceeded the average forecast of around 1.5 million net additions from six analysts contacted by Reuters. Estimates ranged from 1.2 million to 1.8 million.

"It was a remarkable quarter for wireless," said Kevin Roe, an analyst at Roe Equity Research who had forecast 1.2 million net additions. "The iPhone materially helped third-quarter results. It absolutely was a draw for subscribers."

AT&T shares were up 1.1 percent, or 44 cents, to $41.61 in afternoon trade on the New York Stock Exchange. Few analysts predicted substantial gains in the shares, saying growth has been priced in.

Christopher King, an analyst at Stifel Nicolaus, said he believes the stock was fully valued at current levels of around 6.6 times his 2008 estimates.

Apple said on Monday it shipped 1.12 million iPhone units in the quarter, near the high end of analysts' forecasts.

AT&T Chief Financial Officer Rick Lindner told analysts on a conference call that more than 40 percent of those iPhone buyers were new customers for AT&T.

Wireless revenue in the quarter totaled $10.9 billion, up 14.4 percent from the year-earlier quarter.

Wireless margin rose to 39.1 percent from 35.6 percent, and Lindner forecast it to rise to "a full-year average in the lower 40 percent range" next year, with room for further improvement beyond 2008.

Overall third-quarter revenue nearly doubled, to $30.1 billion from $15.6 billion. But combining sales from the former BellSouth as well as their wireless joint venture, revenue rose 3.2 percent. AT&T closed the acquisition of BellSouth late last year, and Cingular Wireless has been renamed AT&T.

AT&T has gone through a series of mergers in the past several years including SBC Communications Inc.'s acquisition of AT&T Corp. Lindner said the company achieved cost savings of $2.8 billion in the first three quarters as a result of mergers.

In addition to merger-related savings, growth in wireless and Internet services have helped AT&T keep posting profit gains despite a decline in landline subscribers.

AT&T said high-speed Internet subscribers rose 18.6 percent from a year earlier to 13.8 million.

Analysts noted strong growth in the company's high-speed Internet and video service called U-verse, aimed at competing with cable providers' all-in-one packages of video, phone, and Internet. AT&T said it ended the quarter with 126,000 U-verse video subscribers, up from 51,000 three months earlier.

But the service has not been without problems. The company said U-verse suffered an outage on Sunday after loading new software. Analysts have also said U-verse may not be enough to stem customer defections to cable.

The market has recently speculated that AT&T may buy a satellite company such as EchoStar Communications, with which it has a partnership. Lindner declined to comment when asked about the possibility of such a deal.

AT&T repurchased 50.5 million shares in the third quarter for $2 billion. It also paid $2.2 billion in dividends.

The company raised its free cash flow forecast for the year to $6 billion to $7 billion from $5 billion to $6 billion. Lindner forecast double-digit growth in adjusted earnings per share through this year and next, and said the company will raise dividends.

"You should expect to see substantial cash that will be available to shareowners both in terms of dividends and dividend growth as well as share repurchases as we go through next year," he said.