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FORM 10-Q

United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(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, 2003

or

|_| 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 1-8610

SBC COMMUNICATIONS INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

175 E. Houston, San Antonio, Texas 78205
Telephone Number: (210) 821-4105

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X  No     

At October 31, 2003, common shares outstanding were 3,310,669,504.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SBC COMMUNCIATIONS INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
  Three months ended
September 30, 		  Nine months ended
September 30,
    2003   2002   2003   2002
Operating Revenues                
Voice $ 5,487 $ 6,169 $ 16,857 $ 18,805
Data   2,576   2,441   7,546   7,257
Long-distance voice   668   594   1,858   1,773
Directory advertising   1,077   868   3,233   2,640
Other   431   484   1,282   1,446
Total operating revenues   10,239   10,556   30,776   31,921
Operating Expenses                
Cost of sales (exclusive of depreciation and amortization
    shown separately below)		   4,244   4,136   12,320   12,142
Selling, general and administrative   2,433   2,243   7,274   6,964
Depreciation and amortization   1,952   2,148   5,925   6,440
Total operating expenses   8,629   8,527   25,519   25,546
Operating Income   1,610   2,029   5,257   6,375
Other Income (Expense)                
Interest expense   (280)   (356)   (972)   (1,046)
Interest income   126   137   405   427
Equity in net income of affiliates   337   729   1,173   1,616
Other income (expense) - net   22   2   1,687   227
Total other income (expense)   205   512   2,293   1,224
Income Before Income Taxes   1,815   2,541   7,550   7,599
Income taxes   599   832   2,491   2,481
Income Before Cumulative Effect
     of Accounting Changes 		  1,216   1,709   5,059   5,118
Cumulative effect of accounting changes, net of tax   -   -   2,548   (1,820)
Net Income $ 1,216 $ 1,709 $ 7,607 $ 3,298
Earnings Per Common Share:                
Income Before Cumulative Effect
     of Accounting Changes 		$ 0.37 $ 0.51 $ 1.52 $ 1.54
Net Income $ 0.37 $ 0.51 $ 2.29 $ 0.99
Earnings Per Common Share-Assuming Dilution:                
Income Before Cumulative Effect
     of Accounting Changes 		$ 0.37 $ 0.51 $ 1.52 $ 1.53
Net Income $ 0.37 $ 0.51 $ 2.28 $ 0.99
Weighted Average Number of Common
     Shares Outstanding (in millions) 		  3,331   3,336   3,333   3,353
Dividends Declared Per Common Share $ 0.3825 $ 0.27 $ 1.0975 $ 0.81
See Notes to Consolidated Financial Statements.

SBC COMMUNCIATIONS INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
    September 30,
2003 		  December 31,
2002
Assets   (Unaudited)    
Current Assets        
Cash and cash equivalents $ 4,940 $ 3,567
Accounts receivable - net of allowances for
     uncollectibles of $1,056 and $1,427		   6,140   8,540
Short-term investments   261   1
Prepaid expenses   1,002   687
Deferred income taxes   1,511   704
Other current assets   1,036   590
Total current assets   14,890   14,089
Property, plant and equipment - at cost   132,637   131,755
   Less: accumulated depreciation and amortization   80,654   83,265
Property, Plant and Equipment - Net   51,983   48,490
Goodwill - Net   1,622   1,643
Investments in Equity Affiliates   11,800   10,470
Notes Receivable from Cingular Wireless   5,885   5,885
Other Assets   15,128   14,480
Total Assets $ 101,308 $ 95,057
Liabilities and Shareowners’ Equity        
Current Liabilities        
Debt maturing within one year $ 1,900 $ 3,505
Accounts payable and accrued liabilities   9,339   9,413
Accrued taxes   3,213   870
Dividends payable   1,267   895
Total current liabilities   15,719   14,683
Long-Term Debt   16,357   18,536
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes   13,186   10,726
Postemployment benefit obligation   14,340   14,094
Unamortized investment tax credits   216   244
Other noncurrent liabilities   3,598   3,575
Total deferred credits and other noncurrent liabilities   31,340   28,639
Shareowners’ Equity        
Common shares issued ($1 par value)   3,433   3,433
Capital in excess of par value   13,015   12,999
Retained earnings   27,769   23,802
Treasury shares (at cost)   (4,596)   (4,584)
Additional minimum pension liability adjustment   (1,473)   (1,473)
Accumulated other comprehensive loss   (256)   (978)
Total shareowners’ equity   37,892   33,199
Total Liabilities and Shareowners’ Equity $ 101,308 $ 95,057
See Notes to Consolidated Financial Statements.

SBC COMMUNCIATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
  Nine months ended
September 30,
    2003   2002
Operating Activities        
Net income $ 7,607 $ 3,298
Adjustments to reconcile net income to net cash
   provided by operating activities: 		       
      Depreciation and amortization   5,925   6,440
      Undistributed earnings from investments in equity affiliates   (913)   (1,400)
      Provision for uncollectible accounts   718   1,071
      Amortization of investment tax credits   (28)   (26)
      Deferred income tax expense   1,117   829
      Gain on sales of investments   (1,678)   (316)
      Cumulative effect of accounting changes, net of tax   (2,548)   1,820
      Retirement benefit funding   (945)   -
      Changes in operating assets and liabilities:        
        Accounts receivable   35   (43)
        Other current assets   (290)   250
        Accounts payable and accrued liabilities   1,723   (1,474)
    Other - net   (640)   293
Total adjustments   2,476   7,444
Net Cash Provided by Operating Activities   10,083   10,742
Investing Activities        
Construction and capital expenditures   (3,235)   (4,998)
Investments in affiliates   -   (138)
Purchase of marketable securities   (578)   -
Maturities of marketable securities   164   -
Purchase of other investments   (436)   -
Dispositions   2,855   1,166
Acquisitions   -   (571)
Net Cash Used in Investing Activities   (1,230)   (4,541)
Financing Activities        
Net change in short-term borrowings with original
   maturities of three months or less 		  (77)   (415)
Issuance of other short-term borrowings   -   4,565
Repayment of other short-term borrowings   (1,070)   (7,357)
Issuance of long-term debt   -   1,966
Repayment of long-term debt   (2,826)   (865)
Purchase of treasury shares   (299)   (1,398)
Issuance of treasury shares   63   126
Dividends paid   (3,271)   (2,660)
Other   -   7
Net Cash Used in Financing Activities   (7,480)   (6,031)
Net increase (decrease) in cash and cash equivalents   1,373   170
Cash and cash equivalents beginning of year   3,567   703
Cash and Cash Equivalents End of Period $ 4,940 $ 873
Cash paid during the nine months ended September 30 for:        
   Interest $ 1,180 $ 1,186
   Income taxes, net of refunds $ 446 $ 1,256

See Notes to Consolidated Financial Statements.


SBC COMMUNCIATIONS INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY
Dollars and shares in millions, except per share amounts
(Unaudited)
         Nine months ended
       September 30, 2003
  Shares   Amount
Common Stock      
Balance at beginning of year 3,433 $ 3,433
Balance at end of period 3,433 $ 3,433
Capital in Excess of Par Value      
Balance at beginning of year   $ 12,999
Issuance of treasury shares     (137)
Stock option expense     146
Other     7
Balance at end of period   $ 13,015
Retained Earnings      
Balance at beginning of year   $ 23,802
Net income ($2.28 per share)     7,607
Dividends to shareowners ($1.10 per share)     (3,641)
Other     1
Balance at end of period   $ 27,769
Treasury Shares      
Balance at beginning of year (115) $ (4,584)
Purchase of shares (13)   (299)
Issuance of shares 6   287
Balance at end of period (122) $ (4,596)
Additional Minimum Pension Liability Adjustment      
Balance at beginning of year   $ (1,473)
Balance at end of period   $ (1,473)
Accumulated Other Comprehensive Income, net of tax      
Balance at beginning of year   $ (978)
Other comprehensive income (see Note 2)     722
Balance at end of period   $ (256)
See Notes to Consolidated Financial Statements.

SBC COMMUNICATIONS INC.
SEPTEMBER 30, 2003

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation – Throughout this document, SBC Communications Inc. is referred to as “we” or “SBC”. 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. We believe that these 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. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our 2002 Annual Report to Shareowners.

  Our subsidiaries and affiliates operate in the communications services industry both domestically and worldwide providing wireline and wireless telecommunications services and equipment as well as directory advertising and publishing services.

  The consolidated financial statements include the accounts of SBC and our majority-owned subsidiaries. All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships, joint ventures, including Cingular Wireless (Cingular), and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. We account for our 60% economic interest in Cingular under the equity method since we share control equally (i.e., 50/50) with our 40% economic partner in the joint venture. We have equal voting rights and representation on the board of directors that controls Cingular. Earnings from certain foreign investments accounted for using the equity method are included for periods ended within up to three months of the date of our Consolidated Statements of Income.

  In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51” (FIN 46). FIN 46 provides guidance for determining whether an entity is a variable interest entity (VIE), and which equity investor of that VIE, if any, should include the VIE in its consolidated financial statements. In October 2003, the FASB staff issued a statement delaying the effective date of FIN 46 until periods ending after December 15, 2003 for interests held by public companies in VIEs or potential VIEs created before February 1, 2003. We are currently reviewing the provisions of FIN 46 for any potential VIEs created before February 1, 2003. We have not acquired any interests in VIEs during the nine months ended September 30, 2003. We do not expect adoption of this interpretation to have a material effect on our consolidated financial statements.

  The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.

  Cash Equivalents – Cash and cash equivalents include all highly liquid investments with original maturities of three months or less, and the carrying amounts approximate fair value. In addition to cash, our cash equivalents include municipal securities, money market funds and variable-rate securities (auction rate and/or preferred securities issued by domestic or foreign corporations, municipalities or closed-end management investment companies). At September 30, 2003, we held $318 in cash, $260 in municipal securities, $3,043 in money market funds, $1,266 in variable-rate securities and $53 in other cash equivalents.

  Investment Securities – Investments in securities principally consist of held-to-maturity or available-for-sale instruments. Short-term and long-term investments in money market securities and other auction-type securities are carried as held-to-maturity securities. Available-for-sale securities consist of various debt and equity securities that are long-term in nature. Unrealized gains and losses on available-for-sale securities, net of tax, are recorded in accumulated other comprehensive income.

  Revenue Recognition – Revenues and associated expenses related to nonrefundable, up-front wireline service activation fees are deferred and recognized over the average customer life of five years. Expenses, though exceeding revenue, are only deferred to the extent of revenue.

  Certain revenues derived from local telephone and long-distance services (principally fixed fees) are billed monthly in advance and are recognized the following month when services are provided. Other revenues derived from telecommunications services, principally long-distance usage (in excess or in lieu of fixed fees) and network access, are recognized monthly as services are provided.

  Prior to 2003, we recognized revenues and expenses related to publishing directories on the “issue basis” method of accounting, which recognizes the revenues and expenses at the time the initial delivery of the related directory is completed. See the discussion of our 2003 change in directory accounting in the “Cumulative Effect of Accounting Changes” section below.

  The Emerging Issues Task Force (EITF), a task force established to assist the FASB on significant emerging accounting issues, has issued EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (EITF 00-21). EITF 00-21 addresses certain aspects of accounting for sales that involve multiple revenue-generating products and/or services sold under a single contractual agreement. For us, this rule is effective for sales agreements entered into beginning July 1, 2003 but it does not have a material effect on our consolidated financial statements.

  Goodwill – Goodwill represents the excess of consideration paid over net assets acquired in business combinations. Goodwill is not amortized, but is tested at least annually for impairment. We have completed our annual impairment testing for 2003 and determined that no impairment exists. As of September 30, 2003, the carrying amount of our goodwill decreased $21 as compared to December 31, 2002 primarily due to the third quarter 2003 sale of a division of Sterling Commerce Inc.

  Cumulative Effect of Accounting Changes

  Directory accounting
Effective January 1, 2003, we changed our method of recognizing revenues and expenses related to publishing directories from the “issue basis” method to the “amortization” method. The issue basis method recognizes revenues and expenses at the time the initial delivery of the related directory is completed. Consequently, quarterly income tends to vary with the number of directory titles published during a quarter. The amortization method recognizes revenues and expenses ratably over the life of the directory, which is typically 12 months. Consequently, quarterly income tends to be more consistent over the course of a year. We decided to change methods because the amortization method has now become the more prevalent method used among significant directory publishers. This change will allow a more meaningful comparison between our directory segment and other publishing companies (or publishing segments of larger companies).

  Our directory accounting change resulted in a noncash charge of $1,136, net of an income tax benefit of $714, recorded as a cumulative effect of accounting change on the Consolidated Statement of Income as of January 1, 2003. The effect of this change was to decrease consolidated pre-tax income and our directory segment income in the third quarter of 2003 by approximately $43 ($27 net of tax, or $0.01 per diluted share) and for the first nine months of 2003 to increase consolidated pre-tax income and our directory segment income by $594 ($364 net of tax, or $0.11 per diluted share). As the number of directory titles published in each quarter varies, with the largest number of titles published in the fourth quarter of the year, we expect the effect of this accounting change will be to lower our directory segment income in the fourth quarter of 2003 as compared with the prior method. We included the deferred revenue balance in the “Accounts payable and accrued liabilities” line item on our balance sheet.

  Depreciation accounting
  On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (FAS 143). FAS 143 sets forth how companies must account for the costs of removal of long-lived assets when those assets are no longer used in a company’s business, but only if a company is legally required to remove such assets. FAS 143 requires that companies record the fair value of the costs of removal in the period in which the obligations are incurred and capitalize that amount as part of the book value of the long-lived asset. To determine whether we have a legal obligation to remove our long-lived assets, we reviewed state and federal law and regulatory decisions applicable to our subsidiaries, primarily our wireline subsidiaries, which have long-lived assets. Based on this review, we concluded that we are not legally required to remove any of our long-lived assets, except in a few minor instances.

  However, in November 2002, we were informed that the SEC staff concluded that certain provisions of FAS 143 require that we exclude costs of removal from depreciation rates and accumulated depreciation balances in certain circumstances upon adoption, even where no legal removal obligations exist. In our case, this means that for plant accounts where our estimated costs of removal exceed the estimated salvage value, we are prohibited from accruing removal costs in those depreciation rates and accumulated depreciation balances in excess of the salvage value. For our other long-lived assets, where our estimated costs of removal are less than the estimated salvage value, we will continue to accrue the costs of removal in those depreciation rates and accumulated depreciation balances.

  Therefore, in connection with the adoption of FAS 143 on January 1, 2003, we reversed all existing accrued costs of removal for those plant accounts where our estimated costs of removal exceeded the estimated salvage value. The noncash gain resulting from this reversal was $3,684, net of deferred taxes of $2,249, recorded as a cumulative effect of accounting change on the Consolidated Statement of Income as of January 1, 2003.

  Beginning in 2003, for those plant accounts where our estimated costs of removal previously exceeded the estimated salvage value, we will now expense all costs of removal as we incur them (previously those costs had been recorded in our depreciation rates). As a result, our depreciation expense will decrease immediately and our operations and support expense will increase as these assets are removed from service. The effect of this change was to increase consolidated pre-tax income and our wireline segment income in the third quarter of 2003 by approximately $70 ($43 net of tax, or $0.01 per diluted share) and for the first nine months of 2003 by $210 ($129 net of tax, or $0.04 per diluted share). We expect the effects on the fourth quarter in 2003 to be approximately the same as the impact on the first, second and third quarters of 2003. However, over the life of the assets, total operating expenses recognized under this new accounting method will be approximately the same as under the previous method (assuming the cost of removal would be the same under both methods).

  Goodwill and other intangible assets accounting
  On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142). Adoption of FAS 142 means that we stopped amortizing goodwill, and at least annually we will test the remaining book value of goodwill for impairment. Any impairments subsequent to adoption will be recorded in operating expenses. We also stopped amortizing goodwill recorded on our equity investments. This embedded goodwill will continue to be tested for impairment under the accounting rules for equity investments, which are based on comparisons between fair value and carrying value. Our total cumulative effect of accounting change from adopting FAS 142 was a noncash charge of $1,820, net of an income tax benefit of $5, recorded as of January 1, 2002.

  Adjusted results
The amounts shown below have been adjusted assuming that we had retroactively applied the new directory and depreciation accounting methods discussed above. (FAS 142 did not allow retroactive application of the new impairment accounting method, and did not allow these adjusted results to exclude the cumulative effect of accounting change from adopting FAS 142.)

  Three months ended
September 30, 		  Nine months ended
September 30,
    2003   2002   2003   2002
Income before cumulative effect of accounting
     changes - as reported		 $ 1,216 $ 1,709 $ 5,059 $ 5,118
Directory change, net of tax   -   83   -   259
Depreciation change, net of tax   -   43   -   129
Income before cumulative effect of accounting
     changes - as adjusted 		$ 1,216 $ 1,835 $ 5,059 $ 5,506

Basic earnings per share:                
    Income before cumulative effect of accounting
         changes - as reported		 $ 0.37 $ 0.51 $ 1.52 $ 1.54
    Directory change, net of tax   -   0.03   -   0.07
    Depreciation change, net of tax   -   0.01   -   0.04
    Income before cumulative effect of accounting
        changes - as adjusted		 $ 0.37 $ 0.55 $ 1.52 $ 1.65