Form 10-Q AT&T INC. For: Sep 30

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November 3, 2016 4:48 PM EDT

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

	(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, 2016 or
	o	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

AT&T INC.

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[X]		Accelerated filer	[ ]
Non-accelerated filer	[ ]	(Do not check if a smaller reporting company)	Smaller reporting company	[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

At October 31, 2016 there were 6,141 million common shares outstanding.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015

Operating Revenues
Service	$	37,272		$	35,539		$	111,515		$	94,042
Equipment		3,618			3,552			10,430			10,640
Total operating revenues		40,890			39,091			121,945			104,682

Operating Expenses
Cost of services and sales
Equipment		4,455			4,501			13,090			13,400
Broadcast, programming and operations		4,909			4,081			14,239			6,351
Other cost of services (exclusive of depreciation and amortization shown separately below)		9,526			9,214			28,436			27,604
Selling, general and administrative		9,013			9,107			26,363			24,535
Depreciation and amortization		6,579			6,265			19,718			15,539
Total operating expenses		34,482			33,168			101,846			87,429
Operating Income		6,408			5,923			20,099			17,253
Other Income (Expense)
Interest expense		(1,224	)		(1,146	)		(3,689	)		(2,977	)
Equity in net income of affiliates		16			15			57			48
Other income (expense) – net		(7	)		(57	)		154			61
Total other income (expense)		(1,215	)		(1,188	)		(3,478	)		(2,868	)
Income Before Income Taxes		5,193			4,735			16,621			14,385
Income tax expense		1,775			1,657			5,803			4,784
Net Income		3,418			3,078			10,818			9,601
Less: Net Income Attributable to Noncontrolling Interest		(90	)		(84	)		(279	)		(262	)
Net Income Attributable to AT&T	$	3,328		$	2,994		$	10,539		$	9,339
Basic Earnings Per Share Attributable to AT&T	$	0.54		$	0.50		$	1.70		$	1.71
Diluted Earnings Per Share Attributable to AT&T	$	0.54		$	0.50		$	1.70		$	1.71
Weighted Average Number of Common Shares
Outstanding – Basic (in millions)		6,168			5,924			6,171			5,447
Weighted Average Number of Common Shares
Outstanding – with Dilution (in millions)		6,189			5,943			6,191			5,463
Dividends Declared Per Common Share	$	0.48		$	0.47		$	1.44		$	1.41
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015

Net income	$	3,418		$	3,078		$	10,818		$	9,601
Other comprehensive income (loss), net of tax:
Foreign Currency:
Foreign currency translation adjustment (includes $21, $(20), $21 and $(20) attributable to noncontrolling interest), net of taxes of $(91), $(535), $35 and $(638)		(225	)		(1,039	)		(51	)		(1,224	)
Available-for-sale securities:
Net unrealized gains (losses), net of taxes of $28, $(49), $15 and $(30)		46			(85	)		25			(51	)
Reclassification adjustment included in net income, net of taxes of $(3), $2, $(3), and $(3)		(5	)		3			(5	)		(6	)
Cash flow hedges:
Net unrealized gains (losses), net of taxes of $240, $(237), $99 and $(479)		446			(441	)		183			(890	)
Reclassification adjustment included in net income, net of taxes of $5, $6, $15 and $15		10			11			29			28
Defined benefit postretirement plans:
Amortization of net prior service credit included in net income, net of taxes of $(131), $(131), $(393) and $(393)		(215	)		(215	)		(644	)		(644	)
Other comprehensive income (loss)		57			(1,766	)		(463	)		(2,787	)
Total comprehensive income		3,475			1,312			10,355			6,814
Less: Total comprehensive income attributable to noncontrolling interest		(111	)		(64	)		(300	)		(242	)
Total Comprehensive Income Attributable to AT&T	$	3,364		$	1,248		$	10,055		$	6,572
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	September 30,			December 31,
	2016			2015
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	5,895		$	5,121
Accounts receivable - net of allowances for doubtful accounts of $650 and $704		16,855			16,532
Prepaid expenses		1,333			1,072
Other current assets		13,291			13,267
Total current assets		37,374			35,992
Property, plant and equipment		316,261			306,227
Less: accumulated depreciation and amortization		(192,339	)		(181,777	)
Property, Plant and Equipment – Net		123,922			124,450
Goodwill		105,271			104,568
Licenses		94,241			93,093
Customer Lists and Relationships – Net		15,227			18,208
Other Intangible Assets – Net		8,734			9,409
Investments in Equity Affiliates		1,679			1,606
Other Assets		16,527			15,346
Total Assets	$	402,975		$	402,672

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year	$	7,982		$	7,636
Accounts payable and accrued liabilities		28,849			30,372
Advanced billing and customer deposits		4,637			4,682
Accrued taxes		2,686			2,176
Dividends payable		2,948			2,950
Total current liabilities		47,102			47,816
Long-Term Debt		117,239			118,515
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		59,649			56,181
Postemployment benefit obligation		33,483			34,262
Other noncurrent liabilities		20,899			22,258
Total deferred credits and other noncurrent liabilities		114,031			112,701

Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2016 and
December 31, 2015: issued 6,495,231,088 at September 30, 2016 and December 31, 2015)		6,495			6,495
Additional paid-in capital		89,536			89,763
Retained earnings		35,319			33,671
Treasury stock (354,467,711 at September 30, 2016 and 350,291,239
at December 31, 2015, at cost)		(12,589	)		(12,592	)
Accumulated other comprehensive income		4,850			5,334
Noncontrolling interest		992			969
Total stockholders' equity		124,603			123,640
Total Liabilities and Stockholders' Equity	$	402,975		$	402,672
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Nine months ended
	September 30,
	2016			2015
Operating Activities
Net income	$	10,818		$	9,601
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,718			15,539
Undistributed earnings from investments in equity affiliates		(22	)		(36	)
Provision for uncollectible accounts		1,036			895
Deferred income tax expense		3,011			1,539
Net gain from sale of investments, net of impairments		(88	)		(46	)
Changes in operating assets and liabilities:
Accounts receivable		(1,108	)		737
Other current assets		1,805			546
Accounts payable and accrued liabilities		(1,173	)		1,332
Equipment installment receivables and related sales		207			(1,682	)
Deferred fulfillment costs		(1,883	)		(884	)
Retirement benefit funding		(770	)		(595	)
Other - net		(2,349	)		(251	)
Total adjustments		18,384			17,094
Net Cash Provided by Operating Activities		29,202			26,695

Investing Activities
Capital expenditures:
Purchase of property and equipment		(15,283	)		(13,356	)
Interest during construction		(669	)		(566	)
Acquisitions, net of cash acquired		(2,922	)		(30,694	)
Dispositions		184			79
Sale of securities, net		501			1,490
Net Cash Used in Investing Activities		(18,189	)		(43,047	)

Financing Activities
Net change in short-term borrowings with original maturities of three months or less		-			(1	)
Issuance of long-term debt		10,140			33,967
Repayment of long-term debt		(10,688	)		(9,962	)
Purchase of treasury stock		(444	)		-
Issuance of treasury stock		137			133
Dividends paid		(8,850	)		(7,311	)
Other		(534	)		(2,875	)
Net Cash (Used in) Provided by Financing Activities		(10,239	)		13,951
Net increase (decrease) in cash and cash equivalents		774			(2,401	)
Cash and cash equivalents beginning of year		5,121			8,603
Cash and Cash Equivalents End of Period	$	5,895		$	6,202
Cash paid during the nine months ended September 30 for:
Interest	$	4,430		$	3,462
Income taxes, net of refunds	$	3,166		$	873
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
	September 30, 2016
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Issuance of stock		-			-
Balance at end of period		6,495		$	6,495

Additional Paid-In Capital
Balance at beginning of year				$	89,763
Issuance of treasury stock					(43	)
Share-based payments					(207	)
Change related to acquisition of interests held by noncontrolling owners					23
Balance at end of period				$	89,536

Retained Earnings
Balance at beginning of year				$	33,671
Net income attributable to AT&T ($1.70 per diluted share)					10,539
Dividends to stockholders ($1.44 per share)					(8,891	)
Balance at end of period				$	35,319

Treasury Stock
Balance at beginning of year		(350	)	$	(12,592	)
Repurchase and acquisition of common stock		(14	)		(566	)
Issuance of treasury stock		10			569
Balance at end of period		(354	)	$	(12,589	)

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year				$	5,334
Other comprehensive loss attributable to AT&T					(484	)
Balance at end of period				$	4,850

Noncontrolling Interest
Balance at beginning of year				$	969
Net income attributable to noncontrolling interest					279
Distributions					(252	)
Acquisition of interest held by noncontrolling owners					(25	)
Translation adjustments attributable to noncontrolling interest, net of taxes					21
Balance at end of period				$	992

Total Stockholders' Equity at beginning of year				$	123,640
Total Stockholders' Equity at end of period				$	124,603
See Notes to Consolidated Financial Statements.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the results of DIRECTV and wireless properties in Mexico for the period from acquisition to the reporting date. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services domestically and internationally.

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including cumulative translation adjustments.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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. The consolidated statements of cash flows include revisions to present "Equipment installment receivables and related sales" and "Deferred fulfillment costs" separately from "Other – net" and previously reported changes in operating assets and liabilities.

Cash Flows In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15), which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption. The majority of the guidance in ASU 2016-15 is consistent with our current cash flow classifications. However, cash receipts on the deferred purchase price described in Note 8 will be classified as cash flows from investing activities instead of our current presentation as cash flow from operations. Under ASU 2016-15, we will continue to recognize cash receipts on owned equipment installment receivables as cash from operations. AT&T's cash flows from operating activities included cash receipts on the deferred purchase price of $534 for the nine months ended September 30, 2016, and $536 for the year ended December 31, 2015.

Leases In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding "right-of-use" assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.

Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition of lease expense appears similar to our current methodology. We are continuing to evaluate other potential impacts to our financial statements.

Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09) and has modified the standard thereafter. These standards replace existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules ("modified retrospective method"). We continue to evaluate the available adoption methods.

Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. We are still in the process of evaluating these impacts. As a result of our accounting policy change for customer set-up and installation costs made in 2015, we believe that the requirement to defer such costs under the new standard will not result in a significant change to our results. However, the requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our balance sheets. We cannot currently estimate the impact of this change upon adoption, as the industry continues to undergo changes in how devices and services are sold to customers.

Customer Fulfillment Costs During the second quarter of 2016, we updated our analysis of the economic lives of customer relationships, which included a review of satellite customer data following the DIRECTV acquisition. As of April 1, 2016, to better reflect the estimated economic lives of satellite and certain business customer relationships, we extended the amortization period to approximately 4.5 years. This change in accounting estimate decreased other cost of services and impacted net income $79, or $0.01 per diluted share, in the third quarter of 2016 and $161, or $0.03 per diluted share, for the nine months ended September 30, 2016.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015, is shown in the table below:

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Numerators
Numerator for basic earnings per share:
Net Income	$	3,418		$	3,078		$	10,818		$	9,601
Less: Net income attributable to noncontrolling interest		(90	)		(84	)		(279	)		(262	)
Net Income attributable to AT&T		3,328			2,994			10,539			9,339
Dilutive potential common shares:
Share-based payment		3			3			9			9
Numerator for diluted earnings per share	$	3,331		$	2,997		$	10,548		$	9,348
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		6,168			5,924			6,171			5,447
Dilutive potential common shares:
Share-based payment (in shares)		21			19			20			16
Denominator for diluted earnings per share		6,189			5,943			6,191			5,463
Basic earnings per share attributable to AT&T	$	0.54		$	0.50		$	1.70		$	1.71
Diluted earnings per share attributable to AT&T	$	0.54		$	0.50		$	1.70		$	1.71

NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Following our 2015 acquisitions of DIRECTV and wireless properties in Mexico, we have additional foreign operations that are exposed to fluctuations in the exchange rates used to convert operations, assets and liabilities into U.S. dollars. Since December 31, 2015, when compared to the U.S. dollar, the Brazilian real exchange rate has appreciated 17.6%, the Argentine peso exchange rate has depreciated 18.4% and the Mexican peso exchange rate has depreciated 12.7%.

	Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) on Available- for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2015	$	(1,198)		$	484		$	16		$	6,032		$	5,334
Other comprehensive income (loss) before reclassifications		(72)			25			183			-			136
Amounts reclassified from accumulated OCI		-	¹		(5)	¹		29	²		(644)	³		(620)
Net other comprehensive income (loss)		(72)			20			212			(644)			(484)
Balance as of September 30, 2016	$	(1,270)		$	504		$	228		$	5,388		$	4,850

	Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) on Available- for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2014	$	(26)		$	499		$	741		$	6,847		$	8,061
Other comprehensive income (loss) before reclassifications		(1,204)			(51)			(890)			-			(2,145)
Amounts reclassified from accumulated OCI		-	¹		(6)	¹		28	²		(644)	³		(622)
Net other comprehensive income (loss)		(1,204)			(57)			(862)			(644)			(2,767)
Balance as of September 30, 2015	$	(1,230)		$	442		$	(121)		$	6,203		$	5,294
¹ (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
² (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
³ The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our operating segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

We also evaluate segment performance based on Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate segment operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as "wired" or "wireline") to provide a complete communications solution to our business customers.

The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers and wholesale and resale wireless subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data services, including high-speed internet, video, and home monitoring services.

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates.

In reconciling items to consolidated operating income and income before income taxes, Corporate and Other includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, and (2) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest costs and expected return on plan assets for our pension and postretirement benefit plans.

Certain operating items are not allocated to our business segments, and those include:

·	Acquisition-related items which consist of (1) operations and support items associated with the merger and integration of acquired businesses and (2) the noncash amortization of intangible assets acquired in acquisitions.

Certain significant items which consist of (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) losses resulting from abandonment or impairment of assets and (4) other items for which the segments are not being evaluated.

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and, therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2016
	Revenue			Operations and Support Expenses			EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	17,767		$	10,925		$	6,842		$	2,539	$	4,303		$	-	$	4,303
Entertainment Group		12,720			9,728			2,992			1,504		1,488			-		1,488
Consumer Mobility		8,267			4,751			3,516			944		2,572			-		2,572
International		1,879			1,640			239			293		(54	)		1		(53	)
Segment Total		40,633			27,044			13,589			5,280		8,309		$	1	$	8,310
Corporate and Other		270			270			-			17		(17	)
Acquisition-related items		-			290			(290	)		1,282		(1,572	)
Certain significant items		(13	)		299			(312	)		-		(312	)
AT&T Inc.	$	40,890		$	27,903		$	12,987		$	6,579	$	6,408

For the nine months ended September 30, 2016
	Revenue			Operations and Support Expenses			EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	52,955		$	32,584		$	20,371		$	7,568	$	12,803		$	-	$	12,803
Entertainment Group		38,089			28,875			9,214			4,481		4,733			1		4,734
Consumer Mobility		24,781			14,343			10,438			2,798		7,640			-		7,640
International		5,374			4,951			423			868		(445	)		24		(421	)
Segment Total		121,199			80,753			40,446			15,715		24,731		$	25	$	24,756
Corporate and Other		759			940			(181	)		54		(235	)
Acquisition-related items		-			818			(818	)		3,949		(4,767	)
Certain significant items		(13	)		(383	)		370			-		370
AT&T Inc.	$	121,945		$	82,128		$	39,817		$	19,718	$	20,099

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2015
	Revenue			Operations and Support Expenses		EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates			Segment Contribution
Business Solutions	$	17,692		$	10,921	$	6,771		$	2,474	$	4,297		$	-		$	4,297
Entertainment Group		10,858			8,450		2,408			1,389		1,019			2			1,021
Consumer Mobility		8,784			5,065		3,719			976		2,743			-			2,743
International		1,526			1,384		142			225		(83	)		(4	)		(87	)
Segment Total		38,860			25,820		13,040			5,064		7,976		$	(2	)	$	7,974
Corporate and Other		316			315		1			3		(2	)
Acquisition-related items		(85	)		611		(696	)		1,198		(1,894	)
Certain significant items		-			157		(157	)		-		(157	)
AT&T Inc.	$	39,091		$	26,903	$	12,188		$	6,265	$	5,923

For the nine months ended September 30, 2015
	Revenue			Operations and Support Expenses		EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates			Segment Contribution
Business Solutions	$	52,913		$	32,966	$	19,947		$	7,276	$	12,671		$	-		$	12,671
Entertainment Group		22,300			18,222		4,078			3,519		559			(16	)		543
Consumer Mobility		26,317			15,808		10,509			2,912		7,597			-			7,597
International		2,253			2,131		122			346		(224	)		(4	)		(228	)
Segment Total		103,783			69,127		34,656			14,053		20,603		$	(20	)	$	20,583
Corporate and Other		984			785		199			47		152
Acquisition-related items		(85	)		1,604		(1,689	)		1,439		(3,128	)
Certain significant items		-			374		(374	)		-		(374	)
AT&T Inc.	$	104,682		$	71,890	$	32,792		$	15,539	$	17,253

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table is a reconciliation of Segment Contribution to "Income Before Income Taxes" reported on our consolidated statements of income.

	Third Quarter						Nine-Month Period
	2016			2015			2016			2015
Business Solutions	$	4,303		$	4,297		$	12,803		$	12,671
Entertainment Group		1,488			1,021			4,734			543
Consumer Mobility		2,572			2,743			7,640			7,597
International		(53	)		(87	)		(421	)		(228	)
Segment Contribution		8,310			7,974			24,756			20,583
Reconciling Items:
Corporate and Other		(17	)		(2	)		(235	)		152
Merger and integration items		(290	)		(696	)		(818	)		(1,689	)
Amortization of intangibles acquired		(1,282	)		(1,198	)		(3,949	)		(1,439	)
Employee separation charges		(260	)		(122	)		(314	)		(339	)
Gain (loss) on wireless spectrum transactions		(22	)		-			714			-
Other		(30	)		(35	)		(30	)		(35	)
Segment equity in net (income) loss of affiliates		(1	)		2			(25	)		20
AT&T Operating Income		6,408			5,923			20,099			17,253
Interest expense		1,224			1,146			3,689			2,977
Equity in net income of affiliates		16			15			57			48
Other income (expense) - net		(7	)		(57	)		154			61
Income Before Income Taxes	$	5,193		$	4,735		$	16,621		$	14,385

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,630 at September 30, 2016. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We distributed $420 to the trust during the nine months ended September 30, 2016. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We also agreed to make a cash contribution to the trust of $175 no later than the due dates of our federal income tax return for 2015 and 2016. Both such contributions, totaling $350, were made in September 2016.

We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded. Service costs and prior service credits are reported in our segment results while interest costs and expected return on plan assets are included within Corporate and Other (see Note 4).

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Pension cost:
Service cost – benefits earned during the period	$	278		$	305		$	834		$	904
Interest cost on projected benefit obligation		495			477			1,485			1,424
Expected return on assets		(778	)		(832	)		(2,336	)		(2,484	)
Amortization of prior service credit		(26	)		(25	)		(77	)		(77	)
Net pension (credit) cost	$	(31	)	$	(75	)	$	(94	)	$	(233	)

Postretirement cost:
Service cost – benefits earned during the period	$	48		$	55		$	144		$	166
Interest cost on accumulated postretirement benefit obligation		243			242			729			725
Expected return on assets		(88	)		(105	)		(266	)		(315	)
Amortization of prior service credit		(320	)		(320	)		(958	)		(959	)
Net postretirement (credit) cost	$	(117	)	$	(128	)	$	(351	)	$	(383	)

Combined net pension and postretirement (credit) cost	$	(148	)	$	(203	)	$	(445	)	$	(616	)

The decrease in the combined net pension and postretirement credit of $55 in the third quarter and $171 for the first nine months of 2016 is primarily due to a lower expected return on assets resulting from a decrease in the value in the plan assets.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the third quarter ended 2016 and 2015, net supplemental pension benefits costs not included in the table above were $23 and $22. For the first nine months of 2016 and 2015, net supplemental pension benefit costs were $70 and $63.

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2

Inputs to the valuation methodology include:

·	Quoted prices for similar assets and liabilities in active markets.

·	Quoted prices for identical or similar assets or liabilities in inactive markets.

·	Inputs other than quoted market prices that are observable for the asset or liability.

·	Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

·	Fair value is often based on developed models in which there are few, if any, external observations.

The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2015.

Long-Term Debt and Other Financial Instruments

The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:

	September 30, 2016					December 31, 2015
	Carrying		Fair			Carrying			Fair
	Amount		Value			Amount			Value
Notes and debentures¹	$	123,962		$	137,894		$	124,847		$	128,993
Bank borrowings		4			4			4			4
Investment securities		2,622			2,622			2,704			2,704
¹ Includes credit agreement borrowings.

The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.

Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2016 and December 31, 2015:

	September 30, 2016
	Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,171	$	-		$	-	$	1,171
International equities		571		-			-		571
Fixed income bonds		-		611			-		611
Asset Derivatives¹
Interest rate swaps		-		145			-		145
Cross-currency swaps		-		151			-		151
Liability Derivatives¹
Cross-currency swaps		-		(3,260	)		-		(3,260	)
¹Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

	December 31, 2015
	Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,132	$	-		$	-	$	1,132
International equities		569		-			-		569
Fixed income bonds		-		680			-		680
Asset Derivatives¹
Interest rate swaps		-		136			-		136
Cross-currency swaps		-		556			-		556
Foreign exchange contracts		-		3			-		3
Liability Derivatives¹
Cross-currency swaps		-		(3,466	)		-		(3,466	)
¹Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.

Investment Securities

Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $87 have maturities of less than one year, $277 within one to three years, $65 within three to five years and $182 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.

Derivative Financial Instruments

We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the nine months ended September 30, 2016 and September 30, 2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our Euro, British pound sterling, Canadian dollar and Swiss franc denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominations to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated rate to a fixed U.S. dollar denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the nine months ended September 30, 2016 and September 30, 2015, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the nine months ended September 30, 2016 and September 30, 2015, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2016, we had posted collateral of $2,369 (a deposit asset) and held collateral of $8 (a receipt liability). Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we would have been required to post additional collateral of $162. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P), we would owe an additional $278. At December 31, 2015, we had posted collateral of $2,343 (a deposit asset) and held collateral of $124 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

	September 30,		December 31,
	2016		2015
Interest rate swaps	$	7,050	$	7,050
Cross-currency swaps		29,642		29,642
Foreign exchange contracts		-		100
Total	$	36,692	$	36,792

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Following are the related hedged items affecting our financial position and performance:

Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships	Three months ended								Nine months ended
	September 30,								September 30,
	2016				2015				2016				2015
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps		$	(54	)		$	54			$	17			$	65
Gain (Loss) on long-term debt			54				(54	)			(17	)			(65	)

In addition, the net swap settlements that accrued and settled in the quarter ended September 30 were offset against interest expense.

	Three months ended						Nine months ended
	September 30,						September 30,
Cash Flow Hedging Relationships	2016			2015			2016			2015
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	686		$	(678	)	$	282		$	(1,008	)

Interest rate locks:
Gain (Loss) recognized in accumulated OCI		-			-			-			(361	)
Interest income (expense) reclassified from accumulated OCI into income		(15	)		(17	)		(44	)		(43	)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

DIRECTV In July 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. For accounting purposes, the transaction was valued at $47,409. Our operating results include the results of DIRECTV following the acquisition date.

The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 under the Fair Value Measurement and Disclosure framework, other than long-term debt assumed in the acquisition (see Note 6). The income approach was primarily used to value the intangible assets, consisting of acquired customer relationships, orbital slots and trade names. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used primarily for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table summarizes the fair values of the DIRECTV assets acquired and liabilities assumed and related deferred income taxes that existed as of the acquisition date.

Assets acquired
Cash	$	4,797
Accounts receivable		2,038
All other current assets		1,534
Property, plant and equipment		9,320
Intangible assets not subject to amortization
Orbital slots		11,946
Trade name		1,371
Intangible assets subject to amortization
Customer lists and relationships		19,508
Trade name		2,915
Other		445
Investments and other assets		2,375
Goodwill		34,619
Total assets acquired		90,868

Liabilities assumed
Current liabilities, excluding current portion of long-term debt		5,645
Long-term debt		20,585
Other noncurrent liabilities		16,875
Total liabilities assumed		43,105
Net assets acquired		47,763
Noncontrolling interest		(354	)
Aggregate value of consideration paid	$	47,409

Purchased goodwill is not expected to be deductible for tax purposes. The goodwill was allocated to our Entertainment Group and International segments.

Nextel Mexico In April 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, including approximately $427 of net debt and other adjustments. The subsidiaries offered service under the name Nextel Mexico.

The purchase price allocation of assets acquired was: $376 in licenses, $1,167 in property, plant and equipment, $128 in customer lists and $193 of goodwill. The goodwill was allocated to our International segment.

GSF Telecom In January 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, including net debt of approximately $700. GSF Telecom offered service under both the Iusacell and Unefon brand names in Mexico.

The purchase price allocation of assets acquired was: $735 in licenses, $658 in property, plant and equipment, $378 in customer lists, $26 in trade names and $956 of goodwill. The goodwill was allocated to our International segment.

AWS-3 Auction In January 2015, we submitted winning bids of $18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC Auction 97), a portion of which represented spectrum clearing and First Responder Network Authority funding. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of September 30, 2016 and December 31, 2015, gross equipment installment receivables of $5,015 and $5,719 were included on our consolidated balance sheets, of which $3,053 and $3,239 are notes receivable that are included in "Accounts receivable - net."

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. To date, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,496.

The following table sets forth a summary of equipment installment receivables sold during the three months and nine months ended September 30, 2016 and 2015:

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Gross receivables sold		$	1,485		$	1,601		$	5,812		$	5,964
Net receivables sold¹			1,336			1,431			5,263			5,367
Cash proceeds received			891			980			3,538			3,553
Deferred purchase price recorded			463			456			1,745			1,819
¹Receivables net of allowance, imputed interest and trade-in right guarantees.

The deferred purchase price is initially recorded at estimated fair value, which is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).

The following table shows the equipment installment receivables, previously sold to the Purchasers, that we repurchased in exchange for the associated deferred purchase price during the three months and nine months ended September 30, 2016 and 2015:

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Fair value of repurchased receivables		$	749		$	412		$	1,281		$	412
Carrying value of deferred purchase price			722			314			1,261			314
Gain on repurchases¹		$	27		$	98		$	20		$	98
¹These gains are included in "Selling, general and administrative" in the consolidated statements of income.

At September 30, 2016 and December 31, 2015, our deferred purchase price receivable was $3,022 and $2,961, respectively, of which $1,561 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.

NOTE 9. SUBSEQUENT EVENT

Pending Acquisition

On October 22, 2016, we announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at September 30, 2016, the total transaction value is approximately $108,700. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares (exchange ratio) of AT&T common stock based on the average stock price at the time of closing the Merger. If the average stock price is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash. As further discussed below, we have an 18-month commitment for an unsecured bridge term facility (Bridge Loan) for $40,000.

Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content that connects with audiences around the world, with our extensive customer relationships, world's largest pay TV subscriber base and leading scale in TV, mobile and broadband distribution.

The Merger Agreement must be adopted by Time Warner shareholders and is subject to review by the U.S. Department of Justice and if certain FCC licenses remain with Time Warner at closing, those are subject to FCC review and approval. It is also a condition to closing that necessary consents from certain public utility commissions and foreign governmental entities must be obtained. The transaction is expected to close before year end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances we would be obligated to pay Time Warner $500.

Bridge Loan

On October 22, 2016, in connection with entering into the Merger Agreement, AT&T entered into the Bridge Loan with JPMorgan Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A. and Bank of America, N.A., as lenders.

In the event advances are made under the Bridge Loan, those advances would be used solely to finance a portion of the cash consideration to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related fees and expenses. We have not drawn on this facility.

The obligations of the lenders under the Bridge Loan to provide advances will terminate on the earliest of (i) the Termination Date (as defined in the Merger Agreement), (ii) the consummation of the transactions contemplated by the Merger Agreement without the borrowing of advances under the Bridge Loan and (iii) the termination of the Merger Agreement.

AT&T INC.

SEPTEMBER 30, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Advances would bear interest, at the Company's option, either:

•

at a variable annual rate equal to: (1) the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) 0.5% per annum above the federal funds rate, and (c) the London Interbank Offered Rate (LIBOR) rate applicable to dollars for a period of one month plus 1.00%, plus (2) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Base Advances"); or

•

at a rate equal to: (i) LIBOR (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Eurodollar Rate Advances").

The Applicable Margin for Eurodollar Rate Advances will be equal to 0.750%, 1.000%, 1.125%, 1.250% or 1.500% per annum depending on the Company's unsecured long-term debt ratings. The Applicable Margin for Base Advances will be equal to the greater of (x) 0.00% and (y) the relevant Applicable Margin for Eurodollar Rate Advances minus 1.00% per annum, depending on the Company's unsecured long-term debt ratings.

The Applicable Margin for Eurodollar Rate Advances and the Applicable Margin for Base Advances are scheduled to increase by an additional 0.25% on the 90th day after the closing of the Merger and another 0.25% every 90 days thereafter.

The Company will also pay a commitment fee (Commitment Fee) of 0.070%, 0.090%, 0.100%, 0.125% or 0.175% of the commitment amount per annum, depending on the Company's unsecured long-term debt ratings.

The Company is scheduled to pay a duration fee of 0.50%, 0.75% and 1.00% on the amount of advances outstanding as of the 90th, 180th and 270th day after advances are made.

The Bridge Loan contains provisions requiring the reduction of the commitments of the lenders and the prepayment of outstanding advances by the amount of net cash proceeds resulting from the incurrence of certain indebtedness by the Company or its subsidiaries, the issuance of certain capital stock by the Company or its subsidiaries and non-ordinary course sales or dispositions of assets by the Company or its subsidiaries, in each case subject to exceptions set forth in the Bridge Loan.

Advances under the Bridge Loan are conditioned on the absence of a material adverse effect on Time Warner and certain customary events, and repayment of all advances must be made no later than 364 days after the date on which the advances are made.

The Bridge Loan contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in the Bridge Loan) financial ratio covenant that the Company will maintain, as of the last day of each fiscal quarter of not more than 3.5-to-1.

The events of default contained in the Bridge Loan are customary for an agreement of this type and such events would result in the acceleration of, or would permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.

Prior to the closing date of the Merger, only a payment or bankruptcy event of default would permit the lenders to terminate their commitments under the Bridge Loan.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share and per subscriber amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico, and the following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), our third-quarter 2015 results include 68 days of DIRECTV-related operations compared with a full quarter in 2016.You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results Our financial results in the third quarter and for the first nine months of 2016 and 2015 are summarized as follows:

	Third Quarter							Nine-Month Period
	2016		2015		Percent Change			2016		2015		Percent Change
	2016		2015		Percent Change			2016		2015		Percent Change
Operating Revenues
Service	$	37,272	$	35,539		4.9	%	$	111,515	$	94,042		18.6	%
Equipment		3,618		3,552		1.9			10,430		10,640		(2.0	)
Total Operating Revenues		40,890		39,091		4.6			121,945		104,682		16.5

Operating expenses
Cost of services and sales
Equipment		4,455		4,501		(1.0	)		13,090		13,400		(2.3	)
Broadcast, programming and operations		4,909		4,081		20.3			14,239		6,351		-
Other cost of services		9,526		9,214		3.4			28,436		27,604		3.0
Selling, general and administrative		9,013		9,107		(1.0	)		26,363		24,535		7.5
Depreciation and amortization		6,579		6,265		5.0			19,718		15,539		26.9
Total Operating Expenses		34,482		33,168		4.0			101,846		87,429		16.5
Operating Income		6,408		5,923		8.2			20,099		17,253		16.5
Income Before Income Taxes		5,193		4,735		9.7			16,621		14,385		15.5
Net Income		3,418		3,078		11.0			10,818		9,601		12.7
Net Income Attributable to AT&T	$	3,328	$	2,994		11.2	%	$	10,539	$	9,339		12.8	%

Overview

Operating revenues increased $1,799, or 4.6%, in the third quarter and $17,263, or 16.5%, for the first nine months of 2016.

Service revenues increased $1,733, or 4.9%, in the third quarter and $17,473, or 18.6%, for the first nine months of 2016. The increases were primarily due to our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic business service revenues. These were partially offset by continued declines in our legacy wireline voice and data products and lower wireless revenues resulting from more customers choosing to purchase devices through installment payment agreements, which entitle them to lower monthly service rates under our wireless Mobile Share plans.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Equipment revenues increased $66, or 1.9%, in the third quarter and decreased $210, or 2.0%, for the first nine months of 2016. The increase in the third quarter was primarily due to nonrecurring customer premises equipment contracts within our Business Solutions segment. The decline for the first nine months reflects additional promotional offers and fewer wireless handset sales during 2016, partially offset by the sale of higher priced devices and an increase in customers purchasing devices on installment.

Operating expenses increased $1,314, or 4.0%, in the third quarter and $14,417, or 16.5%, for the first nine months of 2016.

Equipment expenses decreased $46, or 1.0%, in the third quarter and $310, or 2.3%, for the first nine months of 2016. The decreases were primarily driven by lower domestic wireless sales volumes. The decrease for the first nine months was also impacted by promotional offers and vendor incentives, partially offset by increased sales volumes to our international wireless customers.

Broadcast, programming and operations expenses increased $828, or 20.3%, in the third quarter and $7,888 for the first nine months of 2016 due to our acquisition of DIRECTV and higher content costs. These increases were slightly offset by fewer AT&T U-verse^® (U-verse) subscribers.

Other cost of services expenses increased $312, or 3.4%, in the third quarter and increased $832, or 3.0%, for the first nine months of 2016. The increase in the third quarter was primarily due to our acquisition of DIRECTV, lower federal Connect America and High Cost Funds' receipts in 2016 and an increase in noncash financing-related costs associated with our pension and postretirement benefits. These increases were partially offset by prior year network rationalization charges, lower net expenses associated with our deferral and amortization of customer fulfillment costs and a decline in network and access charges.

The increase for the first nine months was primarily due to our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses were costs associated with Universal Service Fund (USF) fees and financing-related benefit costs. These increases were partially offset by prior year network rationalization charges, lower net expenses associated with fulfillment cost deferrals and a decline in network and access charges.

Selling, general and administrative expenses decreased $94, or 1.0%, in the third quarter and increased $1,828, or 7.5%, for the first nine months of 2016. The decrease in the third quarter was primarily due to lower customer support costs and bad debt reserves related to our wireless operations, partially offset by higher employee separation charges.

The increase for the first nine months was primarily due to our acquisitions in 2015 and increased advertising activity throughout 2016, partially offset by lower wireless commission expenses. The increase for the first nine months was also offset by noncash net gains of $714 on wireless spectrum transactions.

Depreciation and amortization expense increased $314, or 5.0%, in the third quarter and $4,179, or 26.9%, for the first nine months of 2016. Amortization expense increased $85, or 7.1%, in the third quarter and $2,510 for the first nine months of 2016 due to the amortization of intangibles from recent acquisitions.

Depreciation expense increased $229, or 4.5%, in the third quarter and $1,669, or 11.8%, for the first nine months of 2016. The increase was primarily due to previously mentioned acquisitions and ongoing capital spending for network upgrades and accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network.

Operating income increased $485, or 8.2%, in the third quarter and $2,846, or 16.5%, for the first nine months of 2016. Our operating income margin in the third quarter increased from 15.2% in 2015 to 15.7% in 2016, and the first nine months was flat at 16.5% in 2015 and 2016.

Interest expense increased $78, or 6.8%, in the third quarter and $712, or 23.9%, for the first nine months of 2016. The increases were primarily due to higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increase for the first nine months was slightly offset by higher capitalized interest resulting from the spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Equity in net income of affiliates increased $1, or 6.7%, in the third quarter and $9, or 18.8%, for the first nine months of 2016. Equity in net income of affiliates is primarily attributable to the results from our investments in the Game Show Network, SKY Mexico, YP Holdings LLC and Otter Media Holdings.

Other income (expense) – net We had other expense of $7 in the third quarter and other income of $154 for the first nine months of 2016, compared to other expense of $57 in the third quarter and other income of $61 for the first nine months of 2015. Results in the third quarter and for the first nine months of 2016 included net gains on the sale of non-strategic assets and investments of $3 and $88 and interest and dividend income of $24 and $91.

Other income (expense) in the third quarter and for the first nine months of 2015 included net (losses) gains on the sale of non-strategic assets and investments of $(4) and $46, interest and dividend income of $29 and $74 and foreign exchange losses of $73 and $68.

Income taxes increased $118, or 7.1%, in the third quarter and $1,019, or 21.3%, for the first nine months of 2016. Our effective tax rate was 34.2% for the third quarter and 34.9% for the first nine months of 2016, as compared to 35.0% for the third quarter and 33.3% for the first nine months of 2015. The increases in income tax expense for the third quarter and the first nine months of 2016 were primarily due to higher income before income taxes in 2016. In 2015, we recognized tax benefits related to the restructuring of a portion of our Business Solutions segment, which contributed to lower tax expense and a lower effective tax rate for the first nine months of 2015.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Selected Financial and Operating Data
	September 30,
Subscribers and connections in (000s)	2016			2015
Domestic wireless subscribers		133,338			126,406
Mexican wireless subscribers		10,698			8,091
North American wireless subscribers		144,036			134,497

North American branded subscribers		100,821			95,305
North American branded net additions		3,881			1,405

Domestic satellite video subscribers		20,777			19,570
U-verse video subscribers		4,544			5,880
Latin America satellite video subscribers¹		12,476			12,544
Total video subscribers		37,797			37,994

Total domestic broadband connections		15,618			15,832

Network access lines in service		14,603			17,352
U-verse VoIP connections		5,707			5,443

Debt ratio²		50.1	%		50.8	%
Net Debt ratio³		47.8	%		48.3	%
Ratio of earnings to fixed charges⁴		3.91			3.85
Number of AT&T employees		273,140			281,240

¹Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At June 30, 2016, SKY Mexico had 7.8 million subscribers.

²Debt ratios are calculated by dividing total debt (debt maturing within one year plus long-term debt) by total capital (total debt plus total stockholders' equity) and do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.

³Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).

⁴ See Exhibit 12.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and/or in different geographies that are managed accordingly. Our operating segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our operating segments based on Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliate for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

We also evaluate segment performance based on Segment Contribution, excluding equity in net income (loss) of affiliates and depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Our operating assets are utilized by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets to provide for the most efficient, effective and integrated service to our customers, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

We discuss capital expenditures in "Liquidity and Capital Resources."

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Business Solutions
Segment Results
	Third Quarter							Nine-Month Period
	2016		2015		Percent Change			2016		2015		Percent Change
	2016		2015		Percent Change			2016		2015		Percent Change
Segment operating revenues
Wireless service	$	8,049	$	7,732		4.1	%	$	23,867	$	23,003		3.8	%
Fixed strategic services		2,888		2,646		9.1			8,447		7,745		9.1
Legacy voice and data services		4,046		4,616		(12.3	)		12,567		14,081		(10.8	)
Other service and equipment		908		885		2.6			2,652		2,585		2.6
Wireless equipment		1,876		1,813		3.5			5,422		5,499		(1.4	)
Total Segment Operating Revenues		17,767		17,692		0.4			52,955		52,913		0.1

Segment operating expenses
Operations and support		10,925		10,921		-			32,584		32,966		(1.2	)
Depreciation and amortization		2,539		2,474		2.6			7,568		7,276		4.0
Total Segment Operating Expenses		13,464		13,395		0.5			40,152		40,242		(0.2	)
Segment Operating Income		4,303		4,297		0.1			12,803		12,671		1.0
Equity in Net Income of Affiliates		-		-		-			-		-		-
Segment Contribution	$	4,303	$	4,297		0.1	%	$	12,803	$	12,671		1.0	%

The following table highlights other key measures of performance for the Business Solutions segment:

	September 30,				Percent
(in 000s)	2016		2015		Change
Business Wireless Subscribers
Postpaid/Branded		50,014		47,414		5.5	%
Reseller		58		83		(30.1	)
Connected devices¹		29,355		24,064		22.0
Total Business Wireless Subscribers		79,427		71,561		11.0

Business IP Broadband Connections		963		891		8.1	%
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

	Third Quarter							Nine-Month Period
	2016		2015		Percent			2016			2015		Percent
(in 000s)	2016		2015		Change			2016			2015		Change

Business Wireless Net Additions^1,4
Postpaid/Branded		191		265		(27.9	)%		509			850		(40.1	)%
Reseller		1		8		(87.5	)		(34	)		14		-
Connected devices²		1,290		1,602		(19.5	)		4,067			4,104		(0.9	)
Business Wireless Net Subscriber Additions		1,482		1,875		(21.0	)		4,542			4,968		(8.6	)

Business Wireless Postpaid Churn^{1, 3, 4}		0.97%		1.05%	(8) BP				0.97%			0.95%	2 BP

Business IP Broadband Net Additions		15		20		(25.0	)%		52			70		(25.7	)%
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
² Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
⁴ Includes the impacts of the expected shutdown of our U.S. 2G network.

Operating Revenues increased $75, or 0.4%, in the third quarter and $42, or 0.1%, for the first nine months of 2016. Revenue growth was driven by wireless service revenues and increased fixed strategic services. These increases were partially offset by continued declines in our legacy voice and data services revenues.

Wireless service revenues increased $317, or 4.1%, in the third quarter and $864, or 3.8%, for the first nine months of 2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects smartphone and tablet gains.

At September 30, 2016, we served 79.4 million subscribers, an increase of 11.0% from the prior year. Postpaid subscribers increased 5.5% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased 22.0% from the prior year reflecting growth in connected cars and business customers using tracking, monitoring and other sensor-embedded devices on their equipment.

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn could be negatively impacted in the future by the loss of 2G postpaid subscribers and connected devices on our 2G network. In the third quarter, business wireless postpaid churn decreased to 0.97% in 2016 from 1.05% in 2015, including 2 basis points of pressure related to the 2G network shutdown, and for the first nine months increased to 0.97% in 2016 from 0.95% in 2015, including 3 basis points of pressure related to the 2G network shutdown.

Fixed strategic services revenues increased $242, or 9.1%, in the third quarter and $702, or 9.1%, for the first nine months of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the third quarter and for the first nine months of 2016 due to: AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet Services) of $58 and $173, Ethernet of $45 and $144, U-verse services of $42 and $132, and VPN of $32 and $88.

Legacy wired voice and data service revenues decreased $570, or 12.3%, in the third quarter and $1,514, or 10.8%, for the first nine months of 2016. Traditional data revenues in the third quarter and for the first nine months of 2016 decreased $336 and $895 and long-distance and local voice revenues decreased $224 and $600. The decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or to competitors, and the sale of certain hosting operations.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Other service and equipment revenues increased $23, or 2.6%, in the third quarter and $67, or 2.6%, for the first nine months of 2016. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and customer premises equipment.

Wireless equipment revenues increased $63, or 3.5%, in the third quarter and decreased $77, or 1.4%, for the first nine months of 2016. The increase in the third quarter was primarily due to an increase in purchases of devices on installment payment agreements rather than the device subsidy model partially offset by a decrease in handsets sold to postpaid customers. Additionally, fewer customers upgraded their handsets during the period. The decrease for the first nine months resulted from a decrease in handsets sold to postpaid customers and increased promotional offers. The nine-month decrease was partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.

Operations and support expenses increased $4 in the third quarter and decreased $382, or 1.2%, for the first nine months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

The third quarter increase was primarily due to lower Connect America and High Cost Funds' receipts in 2016, wireless handset insurance claims due to an increase in the volume and cost of replacement phones, and wireless equipment expense. Offsetting these increases were lower employee-related costs, amortization of customer fulfillment costs (see Note 1), declines in access and advertising costs, as well as the sale of certain hosting operations.

The decrease for the first nine months was primarily due to declines of $115 in wireless equipment and $223 in wireless commissions costs, primarily reflecting a decrease in sales volumes. Also contributing to the decrease were lower employee-related costs and amortization of customer fulfillment costs, as well as the sale of certain hosting operations. Partially offsetting these decreases were higher wireless handset insurance claims due to an increase in the volume and cost of replacement phones, USF fees, advertising expenses, and bad debt expense driven by a higher AT&T Next^SM (AT&T Next) subscriber base.

Depreciation expense increased $65, or 2.6%, in the third quarter and $292, or 4.0%, for the first nine months of 2016. The increases were primarily due to ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network, partially offset by fully depreciated assets.

Operating income increased $6, or 0.1%, in the third quarter and $132, or 1.0%, for the first nine months of 2016. Our Business Solutions segment operating income margin in the third quarter decreased from 24.3% in 2015 to 24.2% in 2016, and for the first nine months increased from 23.9% in 2015 to 24.2%. Our Business Solutions EBITDA margin in the third quarter increased from 38.3% in 2015 to 38.5% in 2016, and for the first nine months increased from 37.7% in 2015 to 38.5% in 2016.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Entertainment Group
Segment Results
	Third Quarter							Nine-Month Period
	2016		2015		Percent Change			2016		2015		Percent Change
	2016		2015		Percent Change			2016		2015		Percent Change
Segment operating revenues
Video entertainment	$	9,026	$	7,162		26.0	%	$	26,893	$	11,024		-	%
High-speed internet		1,892		1,685		12.3			5,562		4,861		14.4
Legacy voice and data services		1,168		1,419		(17.7	)		3,725		4,547		(18.1	)
Other service and equipment		634		592		7.1			1,909		1,868		2.2
Total Segment Operating Revenues		12,720		10,858		17.1			38,089		22,300		70.8

Segment operating expenses
Operations and support		9,728		8,450		15.1			28,875		18,222		58.5
Depreciation and amortization		1,504		1,389		8.3			4,481		3,519		27.3
Total Segment Operating Expenses		11,232		9,839		14.2			33,356		21,741		53.4
Segment Operating Income		1,488		1,019		46.0			4,733		559		-
Equity in Net Income (Loss) of Affiliates		-		2		-			1		(16)		-
Segment Contribution	$	1,488	$	1,021		45.7	%	$	4,734	$	543		-	%

The following tables highlight other key measures of performance for the Entertainment Group segment:

	September 30,				Percent
(in 000s)	2016		2015		Change
Video Connections
Satellite		20,777		19,570		6.2	%
U-verse		4,515		5,854		(22.9	)
Total Video Connections		25,292		25,424		(0.5	)

Broadband Connections
IP		12,752		12,185		4.7
DSL		1,424		2,137		(33.4	)
Total Broadband Connections		14,176		14,322		(1.0	)

Retail Consumer Switched Access Lines		6,155		7,675		(19.8	)
U-verse Consumer VoIP Connections		5,378		5,216		3.1
Total Retail Consumer Voice Connections		11,533		12,891		(10.5	)%

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

	Third Quarter								Nine-Month Period
	2016			2015		Percent Change			2016			2015		Percent Change
(in 000s)	2016			2015		Percent Change			2016			2015		Percent Change
Video Net Additions
Satellite¹		323			26		-	%		993			26		-	%
U-verse		(326	)		(92)		-			(1,099	)		(66)		-
Net Video Additions		(3	)		(66)		95.5			(106	)		(40)		-

Broadband Net Additions
IP		156			172		(9.3	)		396			802		(50.6	)
DSL		(161	)		(278)		42.1			(506	)		(922)		45.1
Net Broadband Additions		(5	)		(106)		95.3	%		(110	)		(120)		8.3	%
¹Excludes acquisition-related additions during the period.

Operating revenues increased $1,862, or 17.1%, in the third quarter and $15,789, or 70.8%, for the first nine months of 2016, largely due to our acquisition of DIRECTV in the third quarter of 2015. Also contributing to the increases was continued growth in consumer IP broadband, which offset lower revenues from legacy voice and data products.

As consumers continue to demand more mobile access to video, we have launched streaming access to our subscribers, including mobile access for existing satellite and U-verse subscribers. We also have created an option for customers to access most video programming on a mobile device while awaiting home installation of their video service ("walk out and watch"). At September 30, 2016, we had approximately 100,000 "walk out and watch" individuals and approximately 70% of such individuals complete the installation process and become subscribers. In the fourth quarter, we will launch our newest video streaming option that does not require either satellite or U-verse service (commonly called "Over the Top" service).

Video entertainment revenues increased $1,864, or 26.0%, in the third quarter and $15,869 for the first nine months of 2016, primarily related to our acquisition of DIRECTV. We are now focusing our sales efforts on satellite service as there are lower content costs for satellite subscribers. U-verse video revenue was lower in the third quarter and the first nine months of 2016, primarily due to a 22.9% decrease in U-verse video connections, when compared to 2015. At September 30, 2016, more than 80% of our video subscribers were on the DIRECTV platform.

High-speed internet revenues increased $207, or 12.3%, in the third quarter and $701, or 14.4%, for the first nine months of 2016. When compared to 2015, IP broadband subscribers increased 4.7%, to 12.8 million subscribers at September 30, 2016; however, third quarter and year-to-date net additions were lower due to fewer U-verse sales promotions in the year. The churn of video customers also contributed to lower net additions, as a portion of these video subscribers also chose to disconnect their IP broadband service.

Legacy voice and data service revenues decreased $251, or 17.7%, in the third quarter and $822, or 18.1%, for the first nine months of 2016. For the period ended September 30, 2016, legacy voice and data services represented approximately 10% of our total Entertainment Group revenue compared to 13% at September 30, 2015, and reflect decreases of $149 and $489 in local voice and long-distance, and $102 and $333 in traditional data revenues. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At September 30, 2016, approximately 10% of our broadband connections were DSL compared to nearly 15% at September 30, 2015.

Operations and support expenses increased $1,278, or 15.1%, in the third quarter and $10,653, or 58.5%, for the first nine months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content, as well as personnel charges for compensation and benefits.

Increased expenses were primarily due to our acquisition of DIRECTV, which increased our third quarter and year-to-date Entertainment Group expenses by $1,457 and $11,380. The DIRECTV related third quarter and year-to-date increases were primarily due to the recognition of additional content costs for satellite subscribers, customer support and service related charges and advertising expenses. Partially offsetting these increases were lower employee charges resulting from ongoing workforce reductions and our focus on cost initiatives.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

In the fourth quarter, margins will be pressured by a full quarter of NFL Sunday Ticket costs, annual content cost increases and start-up costs for DIRECTV NOW.

Depreciation expenses increased $115, or 8.3%, in the third quarter and $962, or 27.3%, for the first nine months of 2016. The increases were primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $469, or 46.0%, in the third quarter and $4,174 for the first nine months of 2016. Our Entertainment Group segment operating income margin in the third quarter increased from 9.4% in 2015 to 11.7% in 2016, and for the first nine months increased from 2.5% in 2015 to 12.4% in 2016. Our Entertainment Group segment EBITDA margin in the third quarter increased from 22.2% in 2015 to 23.5% in 2016, and the first nine months increased from 18.3% in 2015 to 24.2% in 2016.

Consumer Mobility
Segment Results
	Third Quarter							Nine-Month Period
	2016		2015		Percent Change			2016		2015		Percent Change
	2016		2015		Percent Change			2016		2015		Percent Change
Segment operating revenues
Service	$	6,914	$	7,363		(6.1	)%	$	20,805	$	22,019		(5.5	)%
Equipment		1,353		1,421		(4.8	)		3,976		4,298		(7.5	)
Total Segment Operating Revenues		8,267		8,784		(5.9	)		24,781		26,317		(5.8	)

Segment operating expenses
Operations and support		4,751		5,065		(6.2	)		14,343		15,808		(9.3	)
Depreciation and amortization		944		976		(3.3	)		2,798		2,912		(3.9	)
Total Segment Operating Expenses		5,695		6,041		(5.7	)		17,141		18,720		(8.4	)
Segment Operating Income		2,572		2,743		(6.2	)		7,640		7,597		0.6
Equity in Net Income of Affiliates		-		-		-			-		-		-
Segment Contribution	$	2,572	$	2,743		(6.2	)%	$	7,640	$	7,597		0.6	%

The following table highlights other key measures of performance for the Consumer Mobility segment:

	September 30,				Percent
(in 000s)	2016		2015		Change
Consumer Mobility Subscribers
Postpaid		27,374		29,257		(6.4	)%
Prepaid		13,035		10,988		18.6
Branded		40,409		40,245		0.4
Reseller		12,566		13,647		(7.9	)
Connected devices¹		936		953		(1.8	)
Total Consumer Mobility Subscribers		53,911		54,845		(1.7	)%
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

	Third Quarter								Nine-Month Period
	2016			2015		Percent Change			2016			2015		Percent Change
(in 000s)	2016			2015		Percent Change			2016			2015		Percent Change
Consumer Mobility Net Additions^{1, 4}
Postpaid		21			23		(8.7	)%		89			289		(69.2	)%
Prepaid		304			466		(34.8	)		1,169			895		30.6
Branded Net Additions		325			489		(33.5	)		1,258			1,184		6.3
Reseller		(316	)		149		-			(1,140	)		(218)		-
Connected devices²		41			-		-			14			(109)		-
Consumer Mobility Net Subscriber Additions		50			638		(92.2	)%		132			857		(84.6	)%

Total Churn^{1, 3, 4}		2.11%			1.90%	21 BP				2.06%			1.93%	13 BP
Postpaid Churn^{1, 3, 4}		1.19%			1.33%	(14) BP				1.17%			1.23%	(6) BP
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
² Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
⁴Includes the impacts of the expected shutdown of our U.S. 2G network.

Operating Revenues decreased $517, or 5.9%, in the third quarter and $1,536, or 5.8%, for the first nine months of 2016. Decreased revenues reflect declines in postpaid service revenues due to customers choosing Mobile Share plans and migrating to our Business Solutions segment, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.

Service revenue decreased $449, or 6.1%, in the third quarter and $1,214, or 5.5%, for the first nine months of 2016. The decreases were largely due to postpaid customers continuing to shift to no-device-subsidy plans that allow for discounted monthly service charges under our Mobile Share plans, and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $632, or 11.4%, in the third quarter and $1,775, or 10.6%, for the first nine months. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 6.8% and 5.7%, respectively. The decreases were partially offset by higher prepaid service revenues of $250 in the third quarter and $703 for the first nine months and include services sold under the Cricket brand.

Equipment revenue decreased $68, or 4.8%, in the third quarter and $322, or 7.5%, for the first nine months of 2016. The decreases in equipment revenues resulted from lower handset volumes and increased promotional activities, partially offset by the sale of higher priced devices and increases in devices purchased on installment payment agreements rather than the device subsidy model. We had fewer customers upgrading their handsets and more new customers bringing their own devices.

Operations and support expenses decreased $314, or 6.2%, in the third quarter and $1,465, or 9.3%, for the first nine months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Decreased operations and support expenses in the third quarter were primarily due to the following:

·	Equipment costs decreased $110 primarily due to lower handset volumes partially offset by the sale of higher priced devices.

·	Bad debt expense decreased $70 primarily due to fewer expected write-offs.

·	Marketing and advertising costs decreased $51 due to lower media and production costs.

·	Network costs decreased $29 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

Decreased operations and support expenses for the first nine months were primarily due to the following:

·	Equipment costs decreased $453 primarily due to lower handset volumes partially offset by the sale of higher priced devices.

·	Selling and commission expenses decreased $299 primarily due to lower sales volumes and lower average commission rates, including those paid under the AT&T Next program, combined with fewer upgrade transactions.

·	Network costs decreased $225 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

·	Customer service costs decreased $107 primarily due to reduced salaries and benefits and lower vendor and professional services from reduced call volumes.

·	Bad debt expense decreased $101 primarily due to fewer expected write-offs.

Depreciation expense decreased $32, or 3.3%, in the third quarter and $114, or 3.9% for the first nine months of 2016. The decrease was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion and accelerating depreciation related to the expected year-end 2016 shutdown of our U.S. 2G network.

Operating income decreased $171, or 6.2%, in the third quarter and increased $43, or 0.6%, for the first nine months of 2016. Our Consumer Mobility segment operating income margin in the third quarter decreased from 31.2% in 2015 to 31.1% in 2016, and for the first nine months increased from 28.9% in 2015 to 30.8% in 2016. Our Consumer Mobility EBITDA margin in the third quarter increased from 42.3% in 2015 to 42.5% in 2016, and for the first nine months increased from 39.9% in 2015 to 42.1% in 2016.

International
Segment Results
	Third Quarter								Nine-Month Period
	2016			2015		Percent Change			2016			2015		Percent Change
Segment operating revenues
Video entertainment	$	1,297		$	945		37.2	%	$	3,649		$	945		-	%
Wireless		484			494		(2.0	)		1,428			1,153		23.9
Equipment		98			87		12.6			297			155		91.6
Total Segment Operating Revenues	$	1,879		$	1,526		23.1		$	5,374		$	2,253		-

Segment operating expenses
Operations and support	$	1,640		$	1,384		18.5		$	4,951		$	2,131		-
Depreciation and amortization		293			225		30.2			868			346		-
Total Segment Operating Expenses		1,933			1,609		20.1			5,819			2,477		-
Segment Operating Income (Loss)		(54	)		(83)		34.9			(445	)		(224)		(98.7	)
Equity in Net Income (Loss) of Affiliates		1			(4)		-			24			(4)		-
Segment Contribution	$	(53	)	$	(87)		39.1	%	$	(421	)	$	(228)		(84.6	)%

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

The following tables highlight other key measures of performance for the International segment:

	September 30,				Percent
(in 000s)	2016		2015		Change
Mexican Wireless Subscribers
Postpaid		4,733		4,159		13.8	%
Prepaid		5,665		3,487		62.5
Branded		10,398		7,646		36.0
Reseller		300		445		(32.6	)
Total Mexican Wireless Subscribers		10,698		8,091		32.2

Latin America Satellite Subscribers
PanAmericana		7,139		7,006		1.9
SKY Brazil		5,337		5,538		(3.6	)
Total Latin America Satellite Subscribers¹		12,476		12,544		(0.5	)%
¹Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At June 30, 2016, SKY Mexico had 7.8 million subscribers.

	Third Quarter								Nine-Month Period
(in 000s)	2016			2015		Percent Change			2016			2015		Percent Change
Mexican Wireless Net Additions
Postpaid		163			15		-	%		444			47		-	%
Prepaid		606			(210)		-			1,670			(677)		-
Branded Net Additions		769			(195)		-			2,114			(630)		-
Reseller		(26	)		(36)		27.8			(100	)		(59)		(69.5	)
Mexican Wireless Net Subscriber Additions		743			(231)		-			2,014			(689)		-

Latin America Satellite Net Additions
PanAmericana		(36	)		16		-			73			16		-
SKY Brazil		(12	)		(129)		90.7			(107	)		(129)		17.1
Latin America Satellite Net Subscriber Additions¹		(48	)		(113)		57.5	%		(34	)		(113)		69.9	%
¹Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At June 30, 2016, SKY Mexico had 7.8 million subscribers and net subscriber additions of 121,000 in the second quarter of 2016.

Operating Results

Our International segment consists of the Latin American operations acquired in our July 2015 acquisition of DIRECTV as well as the Mexican wireless operations acquired earlier in 2015 (see Note 7). Video entertainment services are provided to primarily residential customers using satellite technology. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations.

Operating revenues increased $353, or 23.1%, in the third quarter and $3,121 for the first nine months of 2016. The increase in the third quarter and for the first nine months includes $352, or 37.2%, and $2,704 from video services in Latin America. Mexico wireless revenues increased $1, or 0.2%, in the third quarter and $417, or 31.9%, for the first nine months of 2016, primarily due to an increase in our subscriber base offset by lower ARPU (average revenue per average wireless subscriber).

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Operations and support expenses increased $256, or 18.5%, in the third quarter and $2,820 for the first nine months of 2016. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits. The increase in our third-quarter 2016 expenses is partially offset by approximately $70 in settlements and reserve adjustments for interconnect, and operating and payroll taxes from our Mexico wireless operations.

Depreciation expense increased $68, or 30.2%, in the third quarter and $522 for the first nine months of 2016. The increase was primarily due to the acquisition of DIRECTV.

Operating income increased $29, or 34.9%, in the third quarter and decreased $221, or 98.7%, for the first nine months of 2016. Our International segment operating income margin in the third quarter increased from (5.4)% in 2015 to (2.9)% in 2016, and for the first nine months increased from (9.9)% in 2015 to (8.3)% in 2016. Our International EBITDA margin in the third quarter increased from 9.3% in 2015 to 12.7% in 2016 and the first nine months increased from 5.4% in 2015 to 7.9% in 2016.

Supplemental Operating Information

As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility).

AT&T Mobility Results
	Third Quarter							Nine-Month Period
	2016		2015		Percent Change			2016		2015		Percent Change
	2016		2015		Percent Change			2016		2015		Percent Change
Operating revenues
Service	$	14,963	$	15,095		(0.9	)%	$	44,673	$	45,022		(0.8	)%
Equipment		3,229		3,234		(0.2	)		9,398		9,797		(4.1	)
Total Operating Revenues		18,192		18,329		(0.7	)		54,071		54,819		(1.4	)

Operating expenses
Operations and support		10,696		10,865		(1.6	)		31,822		33,310		(4.5	)
EBITDA		7,496		7,464		0.4			22,249		21,509		3.4
Depreciation and amortization		2,107		2,046		3.0			6,244		6,082		2.7
Total Operating Expenses		12,803		12,911		(0.8	)		38,066		39,392		(3.4	)
Operating Income		5,389		5,418		(0.5	)		16,005		15,427		3.7
Equity in Net Income of Affiliates		-		-		-			-		-		-
Operating Contribution	$	5,389	$	5,418		(0.5	)%	$	16,005	$	15,427		3.7	%

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

The following tables highlight other key measures of performance for AT&T Mobility:

										September 30,					Percent Change
(in 000s)										2016			2015		Percent Change
Wireless Subscribers¹
Postpaid smartphones											58,688			57,733		1.7	%
Postpaid feature phones and data-centric devices											18,700			18,938		(1.3	)
Postpaid											77,388			76,671		0.9
Prepaid											13,035			10,988		18.6
Branded											90,423			87,659		3.2
Reseller											12,624			13,729		(8.0	)
Connected devices²											30,291			25,018		21.1
Total Wireless Subscribers											133,338			126,406		5.5

Branded Smartphones											69,752			66,233		5.3
Mobile Share connections											57,142			59,592		(4.1	)
Smartphones under our installment programs at end of period											29,382			23,487		25.1	%
¹ Represents 100% of AT&T Mobility wireless subscribers.
² Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

	Third Quarter									Nine-Month Period
		2016			2015		Percent Change				2016			2015	Percent Change
(in 000s)		2016			2015		Percent Change				2016			2015	Percent Change
Wireless Net Additions^{1, 4}
Postpaid			212			289		(26.6	)%		598			1,140		(47.5	)%
Prepaid			304			466		(34.8	)		1,169			895		30.6
Branded Net Additions			516			755		(31.7	)		1,767			2,035		(13.2	)
Reseller			(315	)		156		-			(1,174	)		(205)		-
Connected devices²			1,331			1,602		(16.9	)		4,081			3,995		2.2
Wireless Net Subscriber Additions			1,532			2,513		(39.0	)		4,674			5,825		(19.8	)

Smartphones sold under our installment programs during period			4,283			4,074		5.1	%		12,378			11,998		3.2	%

Total Churn^{3, 4}			1.45%			1.33%	12 BP				1.41%			1.35%	6 BP
Branded Churn^{3, 4}			1.63%			1.68%	(5) BP				1.57%			1.60%	(3) BP
Postpaid Churn^{3, 4}			1.05%			1.16%	(11) BP				1.04%			1.06%	(2) BP
¹ Excludes acquisition-related additions during the period.
² Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
⁴ Includes the impacts of the expected shutdown of our U.S. 2G network.

Operating income decreased $29, or 0.5%, in the third quarter and increased $578, or 3.7%, for the first nine months of 2016. The operating income margin of AT&T Mobility in the third quarter was 29.6% in both 2015 and 2016, and increased for the first nine months from 28.1% in 2015 to 29.6% in 2016. AT&T Mobility's EBITDA margin in the third quarter increased from 40.7% in 2015 to 41.2% in 2016, and increased for the first nine months from 39.2% in 2015 to 41.1% in 2016. AT&T Mobility's EBITDA service margin in the third quarter increased from 49.4% in 2015 to 50.1% in 2016, and increased for the first nine months from 47.8% in 2015 to 49.8% in 2016 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues).

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Subscriber Relationships

As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including Mobile Share and AT&T Next. Additionally, beginning in the first quarter of 2016, we introduced an integrated offer that allows for unlimited wireless data when combined with our video services, ending the third quarter with more than 6.7 million subscribers on these packages.

The expected year-end 2016 shutdown of our U.S. 2G network is beginning to contribute to higher disconnections and churn of subscribers. We expect that fourth-quarter 2016 churn and net additions could be negatively impacted by the shutdown of this network if these subscribers do not choose to migrate to another device. Our 2G subscribers and connections at September 30 are as follows:

	September 30,				Percent
(in 000s)	2016		2015		Change
Postpaid (primarily phones)		335		1,077		(68.9	)%
Prepaid		210		442		(52.5	)
Reseller¹		673		3,317		(79.7	)
Connected devices ²		2,794		6,575		(57.5	)
Total 2G Subscribers and Connections		4,012		11,411		(64.8	)%
¹ Primarily included in our Consumer Mobility segment.
²Primarily included in our Business Solutions segment.

ARPU

Postpaid phone-only ARPU was $59.64 for the third quarter and $59.66 for the first nine months of 2016, compared to $60.81 and $60.68 in 2015. Postpaid phone-only ARPU plus AT&T Next subscriber installment billings increased 1.7% compared to the third quarter of 2015 and 3.1% compared to the first nine months of 2015 due to the continuing growth of the AT&T Next program.

Churn

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was higher for the third quarter and first nine months of 2016 and could be negatively impacted in the fourth quarter by the loss of 2G reseller subscribers and connected devices on our 2G network. Loss of 2G subscribers contributed more than 20 basis points of pressure to total churn and 2 basis points to postpaid churn during the quarter. Postpaid churn was lower for the third quarter and first nine months of 2016.

Branded Subscribers

Branded subscribers increased 0.6% when compared to June 30, 2016 and 3.2% when compared to September 30, 2015. These increases included a 3.2% and 18.6% increase in prepaid subscribers and a 0.1% and 0.9% increase in postpaid subscribers, respectively. At September 30, 2016, 90% of our postpaid phone subscriber base used smartphones, compared to 87% at September 30, 2015. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Device connections on our Mobile Share plans now represent 74% of our postpaid customer base. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and minimize subscriber churn.

During the first quarter of 2016, we discontinued offering subsidized smartphones to most of our customers. Under this no-subsidy model, subscribers must purchase a device on installments under an equipment installment program or choose to bring their own device, with no annual service contract. At September 30, 2016, about 50% of the postpaid smartphone base is on an installment program compared to nearly 41% at September 30, 2015. Of the postpaid smartphone gross adds and upgrades during the third quarter and first nine months of 2016, 94% and 93% were either equipment installment plans or BYOD, compared to 80% and 75% in 2015. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins. During the third quarter and first nine months of 2016, we added approximately 595,000 and 1,628,000 BYOD customers, compared to 510,000 and 1,157,000 in 2015.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Our equipment installment purchase programs, including AT&T Next, allow for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers.

Connected Devices

Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 4.6% during the third quarter when compared to June 30, 2016 and 21.1% when compared to September 30, 2015. During the third quarter and first nine months of 2016, we added approximately 1.1 million and 3.5 million "connected" cars through agreements with various carmakers. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

OTHER BUSINESS MATTERS

Time Warner Inc. Acquisition On October 22, 2016, we announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at September 30, 2016, the total transaction value is approximately $108,700. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares (exchange ratio) of AT&T common stock based on the average stock price at the time of closing the Merger. If the average stock price is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash. We have an 18-month commitment for an unsecured bridge term facility (Bridge Loan) for $40,000.

Litigation Challenging DIRECTV's NFL Sunday Ticket More than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL Sunday Ticket. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL Sunday Ticket package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. On June 24, 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted. On August 8, 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. A hearing on both motions is currently scheduled for December 12, 2016.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

SportsNet LA Litigation On November 2, 2016, the U.S. Department of Justice filed a civil antitrust complaint in federal court (Central District of California) against DIRECTV Group Holdings, LLC and AT&T Inc., as successor in interest to DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection with negotiations with SportsNet LA about carrying Los Angeles Dodgers games. The complaint alleges that DIRECTV's conduct violated Section 1 of the Sherman Act. The complaint seeks a declaration that DIRECTV's conduct unlawfully restrained trade and seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&T to monitor relevant communications between their executives and competitors and to periodically report to the Department of Justice, and (3) requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded its litigation costs. We vigorously dispute these allegations.

Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We are disputing these allegations vigorously.

Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and on August 29, 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court of Appeals to reconsider the decision. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.

In June 2015, the Federal Communications Commission (FCC) issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers described above. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. In July 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

San Diego County Inquiry Involving Cricket Communications, Inc. In February 2014, the San Diego County Air Pollution Control District began inquiring into alleged violations of California regulations governing removal, handling and disposal of asbestos containing materials arising from an independent dealer's demolition and construction activity in preparation to install upgraded point of purchase and fixtures in accordance with Cricket dealer guidelines. While the independent dealer was in sole control of contractors performing the work at issue, the County has focused on Cricket Communications dealer agreement terms and interactions with the independent dealer as a basis for asserting direct liability against Cricket Communications, Inc. After discussions, in November 2015, the County issued a penalty demand in excess of one hundred thousand dollars. In October 2016, we reached a monetary settlement with the County of this matter for an immaterial amount.

Labor Contracts A contract covering nearly 16,000 traditional wireline employees in our West region expired in April 2016 and employees are working under the terms of the prior contract, including benefits, while negotiations continue. After expiration of the current agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

On August 30, 2016, our U.S. mobility employees ratified a separate national contract that primarily covers medical benefits for approximately 40,000 employees.

COMPETITIVE AND REGULATORY ENVIRONMENT

Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.

In February 2015, the FCC released an order reclassifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly expands the FCC's existing authority to regulate the provision of fixed and mobile broadband internet access services. AT&T and other providers of broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. On June 14, 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. On July 29, 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court. Those petitions remain pending.

The FCC is expected to release an order adopting new rules that restrict our use of customer information in marketing and advertising. The FCC also is considering proposals that could adversely affect our provision of video services and that would increase regulation and lower prices of certain data services used by businesses, beginning July 2017. We expect to appeal any new requirements that we believe unlawfully restrain our business.

We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide U-verse service through a single statewide or state-approved franchise (as opposed to the need to acquire hundreds or even thousands of municipal-approved franchises) to offer a competitive video product. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

We provide wireless services in robustly competitive markets, but are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the "AWS-3 Auction") and also authorized the FCC to conduct an "incentive auction," to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction"). We participated in the AWS-3 Auction. The 600 MHz Auction (Auction 1000) began on March 29, 2016, and the multiple phases of Auction 1000 are expected to progress over the next several months.

We have also submitted a bid to provide a nationwide mobile broadband network for first responders (FirstNet). Should our bid be accepted, the actual reach of the network will depend on participation by the individual States.

In May 2014, in a separate proceeding, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the new spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs, but because AT&T uses more "low band" spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T's ability to expand capacity in these bands (low band spectrum has better propagation characteristics than "high band" spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.

As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to face spectrum and capacity constraints on our wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make additional spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.

LIQUIDITY AND CAPITAL RESOURCES

We had $5,895 in cash and cash equivalents available at September 30, 2016. Cash and cash equivalents included cash of $2,460 and money market funds and other cash equivalents of $3,435. Approximately $813 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation. Cash and cash equivalents increased $774 since December 31, 2015. In the first nine months of 2016, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties, and long-term debt issuances. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses; funding capital expenditures; debt repayments; dividends to stockholders; and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Cash Provided by or Used in Operating Activities

During the first nine months of 2016, cash provided by operating activities was $29,202, compared to $26,695 for the first nine months of 2015. Higher operating cash flows in 2016 were primarily due to our acquisition of DIRECTV offset by the timing of working capital payments.

Cash Used in or Provided by Investing Activities

For the first nine months of 2016, cash used in investing activities totaled $18,189 and consisted primarily of $15,283 for capital expenditures, excluding interest during construction, and $2,922 for the acquisition of wireless spectrum, Quickplay Media, Inc. and other operations. These expenditures were partially offset by net cash receipts of $501 from the sale of securities.

The majority of our capital expenditures are spent on our wireless and wireline networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased $1,927 in the first nine months. The increase was primarily due to DIRECTV operations, our wireless network expansion in Mexico, and continued fiber buildout. In connection with capital improvements to our wireless network in Mexico, we also negotiated favorable payment terms (referred to as vendor financing). For the first nine months of 2016, we excluded $225 of vendor financing related to capital investments. We do not report capital expenditures at the segment level.

We continue to expect our 2016 capital investment, which includes our capital expenditures plus vendor financing payments related to our Mexico network, for our existing businesses to be in the $22,000 range, and we expect our capital investment to be in the 15 percent range of service revenues or lower for each of the years 2016 through 2018. The amount of capital investment is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring merger commitments are met.

Cash Provided by or Used in Financing Activities

For the first nine months of 2016, cash used in financing activities totaled $10,239 and included net proceeds of $10,140 primarily from the following long-term debt issuances:

·	February issuance of $1,250 of 2.800% global notes due 2021.

·	February issuance of $1,500 of 3.600% global notes due 2023.

·	February issuance of $1,750 of 4.125% global notes due 2026.

·	February issuance of $1,500 of 5.650% global notes due 2047.

·	May issuance of $750 of 2.300% global notes due 2019.

·	May issuance of $750 of 2.800% global notes due 2021.

·	May issuance of $1,100 of 3.600% global notes due 2023.

·	May issuance of $900 of 4.125% global notes due 2026.

·	May issuance of $500 of 4.800% global notes due 2044.

During the first nine months of 2016, we redeemed $10,688 of debt, primarily consisting of the following:

·	February redemption of $1,250 of AT&T Floating Rate Notes due 2016.

·	March prepayment of the remaining $1,000 outstanding under a $2,000 18-month credit agreement by and between AT&T and Mizuho.

·	May redemption of $1,750 of 2.950% global notes due 2016.

·	June prepayment of $5,000 of outstanding advances under our $9,155 Syndicated Credit Agreement (See "Credit Facilities" below).

·	August redemption of $1,500 of 2.400% global notes due 2016.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

In March 2016, we completed a debt exchange in which $16,049 of DIRECTV notes with stated rates of 1.750% to 6.375% were tendered and accepted in exchange for $16,049 of new AT&T Inc. global notes with stated rates of 1.750% to 6.375% plus a $16 cash payment.

On September 7, 2016, we completed a debt exchange in which $5,615 of notes of AT&T or one or more of its subsidiaries with stated rates of 5.350% to 8.250% were tendered and accepted in exchange for $4,500 of new AT&T Inc. global notes with a stated rate of 4.500% and $2,500 of new AT&T Inc. global notes with a stated rate of 4.550%.

In July 2016, we made a refundable deposit with the FCC for Auction 1000.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.2% as of September 30, 2016, compared to 4.2% as of June 30, 2016, and 4.0% as of December 31, 2015. We had $123,963 of total notes and debentures outstanding at September 30, 2016, which included Euro, British pound sterling, Swiss franc, Brazilian real and Canadian dollar denominated debt of approximately $25,789.

As of September 30, 2016, we had approximately 396 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first nine months of 2016, we repurchased approximately 11 million shares for $444. In 2016, we intend to use free cash flow (operating cash flows less construction and capital expenditures) after dividends primarily to pay down debt.

We paid dividends of $8,850 during the first nine months of 2016, compared with $7,311 for the first nine months of 2015, primarily reflecting the increase in shares outstanding resulting from our acquisition of DIRECTV. Dividends declared by our Board of Directors totaled $0.48 per share in the third quarter and $1.44 per share for the first nine months of 2016 and $0.47 per share in the third quarter and $1.41 per share for the first nine months of 2015. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors. On October 22, 2016, our Board of Directors approved a 2.1% increase in the quarterly dividend from $0.48 to $0.49 per share.

At September 30, 2016, we had $7,982 of debt maturing within one year, $7,468 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

·	$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021.

·	An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.

Credit Facilities

On December 11, 2015, we entered into a five-year, $12,000 credit agreement (the "Revolving Credit Agreement") with Citibank, N.A. (Citibank), as administrative agent.

In January 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent. In March 2015, AT&T borrowed all amounts available under the Tranche A Facility and the Tranche B Facility. Amounts borrowed under the Tranche A Facility will be due on March 2, 2018. Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with 25 percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due on March 2, 2020. In June 2016, we repaid $4,000 of the outstanding debt under the Tranche A Facility and $1,000 of the outstanding debt under the Tranche B Facility. After repayment, the amortization in the Tranche B Facility has been satisfied. As of September 30, 2016, we have $2,286 outstanding under the Tranche A Facility and $1,869 outstanding under the Tranche B Facility and we have complied with all covenants.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

On October 22, 2016, in connection with entering into Merger Agreement, AT&T entered into the $40,000 Bridge Loan with JPMorgan Chase Bank, N.A., as agent, and JPMorgan Chase Bank, N.A. and Bank of America, N.A., as lenders. No amounts will be drawn under the Bridge Loan prior to the consummation of the Merger. In the event advances are made under the Bridge Loan, those advances would be used solely to finance a portion of the cash consideration to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related fees and expenses.

Revolving Credit Agreement

In the event advances are made under the Revolving Credit Agreement, those advances would be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under the agreement. We can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. We also may request that the total amount of the lender's commitments be increased by an integral multiple of $25 effective on a date that is at least 90 days prior to the scheduled termination date then in effect, provided that no event of default has occurred and in no event shall the total amount of the lender's commitments at any time exceed $14,000. At September 30, 2016, we had no advances outstanding under the Revolving Credit Agreement and we have complied with all covenants.

The obligations of the lenders to provide advances will terminate on December 11, 2020, unless prior to that date either: (i) AT&T reduces to $0 the commitments of the lenders, or (ii) certain events of default occur. We and lenders representing more than 50% of the facility amount may agree to extend their commitments for two one-year periods beyond the December 11, 2020 termination date, under certain circumstances.

Advances under the Revolving Credit Agreement would bear interest, at AT&T's option, either:

at a variable annual rate equal to (i) the highest of: (a) the base rate of the bank affiliate of Citibank, N.A. which is serving as administrative agent under the Agreement, (b) 0.50% per annum above the Federal Funds Rate, and (c) the London Interbank Offered Rate (LIBOR) applicable to U.S. dollars for a period of one month plus 1.00% per annum, plus (ii) an applicable margin, as set forth in the Revolving Credit Agreement ("Applicable Margin for Base Advances"); or

·	at a rate equal to: (i) LIBOR for a period of one, two, three or six months, as applicable, plus (ii) the Applicable Margin ("Applicable Margin for Eurocurrency Rate Advances").

The Applicable Margin for Eurocurrency Rate Advances will equal 0.680%, 0.910%, 1.025% or 1.125% per annum, depending on AT&T's credit rating. The Applicable Margin for Base Rate Advances will be equal to the greater of 0.00% and the relevant Applicable Margin for Eurocurrency Rate Advances minus 1.00% per annum depending on AT&T's credit rating.

We will pay a facility fee of 0.070%, 0.090%, 0.100% or 0.125% per annum, depending on AT&T's credit rating, of the amount of lender commitments.

The Revolving Credit Agreement contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in the Revolving Credit Agreement) financial ratio covenant that AT&T will maintain, as of the last day of each fiscal quarter of not more than 3.5-to-1.

The events of default contained in the Revolving Credit Agreement are customary for an agreement of this type and such events would result in the acceleration of, or would permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.

The Syndicated Credit Agreement

Advances bear interest at a rate equal to: (i) the LIBOR for deposits in dollars (adjusted upwards to reflect any bank reserve costs) for a period of three or six months, as applicable, plus (ii) the Applicable Margin (each such Advance, a Eurodollar Rate Advance). The Applicable Margin under the Tranche A Facility will equal 1.000%, 1.125% or 1.250% per annum depending on AT&T's credit rating. The Applicable Margin under the Tranche B Facility will equal 1.125%, 1.250% or 1.375% per annum, depending on AT&T's credit rating.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

The Syndicated Credit Agreement contains covenants that are customary for an issuer with an investment grade senior debt credit rating, as well as a net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization, and other modifications described in the Syndicated Credit Agreement) financial ratio covenant that AT&T will maintain, as of the last day of each fiscal quarter of not more than 3.5-to-1.

The events of default contained in the Syndicated Credit Agreement are customary for an agreement of this type and such events would result in the acceleration of, or would permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.

Bridge Loan

Advances would bear interest, at the Company's option, either:

at a variable annual rate equal to: (1) the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) 0.5% per annum above the federal funds rate, and (c) the LIBOR rate applicable to dollars for a period of one month plus 1.00%, plus (2) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Base Advances"); or

·	at a rate equal to: (i) LIBOR (adjusted upwards to reflect any bank reserve costs) for a period of one, two, three or six months, as applicable, plus (ii) an applicable margin, as set forth in the Bridge Loan (the "Applicable Margin for Eurodollar Rate Advances").

The Company is scheduled to pay a duration fee of 0.50%, 0.75% and 1.00% on the amount of advances outstanding as of the 90th, 180th and 270th day after advances are made.

AT&T INC.

SEPTEMBER 30, 2016

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Prior to the closing date of the Merger, only a payment or bankruptcy event of default would permit the lenders to terminate their commitments under the Bridge Loan.

Collateral Arrangements

During the first nine months of 2016, we posted $141 of additional cash collateral, on a net basis, to banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At September 30, 2016, our debt ratio was 50.1%, compared to 50.8% at September 30, 2015, and 50.5% at December 31, 2015. Our net debt ratio was 47.8% at September 30, 2016, compared to 48.3% at September 30, 2015, and 48.5% at December 31, 2015. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

During the first nine months of 2016, we received $3,757 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of $8,630 as of September 30, 2016, and $8,714 as of December 31, 2015, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. We distributed $420 to the trust during the first nine months of 2016. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares. At the time of the contribution of the preferred equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal income tax return for each of 2015 and 2016. Both such contributions, totaling $350, were made in the third quarter of 2016.

AT&T INC.

SEPTEMBER 30, 2016

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At September 30, 2016, we had interest rate swaps with a notional value of $7,050 and a fair value of $145.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(3,109) at September 30, 2016.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of September 30, 2016. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of September 30, 2016.

AT&T INC.

SEPTEMBER 30, 2016

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

·	Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.

·	Changes in available technology and the effects of such changes, including product substitutions and deployment costs.

Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends, and unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.

The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limitation, special access and business data services, intercarrier compensation; interconnection obligations; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure including the withdrawal of legacy TDM-based services; universal service; broadband deployment; E911 services; competition policy; net neutrality; including the FCC's order reclassifying broadband as Title II services subject to much more fulsome regulation; unbundled network elements and other wholesale obligations; multi-channel video programming distributor services and equipment; availability of new spectrum, on fair and balanced terms, and wireless and satellite license awards and renewals.

·	The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation of IP-based services, relief from Carrier of Last Resort obligations and elimination of state commission review of the withdrawal of services.

Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.

·	Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and Over The Top Video service) and our ability to maintain capital expenditures.

·	The extent of competition including from governmental networks and other providers and the resulting pressure on customer and access line totals and segment operating margins.

·	Our ability to develop attractive and profitable product/service offerings to offset increasing competition.

The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).

The continued development and delivery of attractive and profitable video offerings through satellite and U-verse; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

·	Our continued ability to maintain margins, attract and offer a diverse portfolio of wireless service and devices and device financing plans.

·	The availability and cost of additional wireless spectrum and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.

·	Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.

·	The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.

The impact from major equipment failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks.

·	The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

·	Our ability to integrate our acquisition of DIRECTV.

·	Our pending acquisition of Time Warner Inc.

·	Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.

·	Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations as well as regulatory and political uncertainty in Latin America.

·	Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.

·	The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

AT&T INC.

SEPTEMBER 30, 2016

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. The additional Risk Factor below reflects our pending acquisition of Time Warner (See "Other Business Matters").

The impact of our pending acquisition of Time Warner, including our ability to obtain governmental approvals on favorable terms including any required divestitures; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of Time Warner's existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third party relationships and revenues.

As discussed in Other Business Matters, on October 22, 2016, we agreed to acquire Time Warner for a total transaction value of approximately $108,700 (including Time Warner's net debt). We believe that the acquisition will give us the scale, resources and ability to deploy video content more efficiently to more customers than otherwise possible and to provide very attractive integrated offerings of video, broadband and wireless services. Providing more flexible and integrated services to customers will enable us to compete more effectively against other video providers as well as other technology, media and communications companies. In addition, we believe that the acquisition will result in cost savings, especially in the area of video content costs, and other potential synergies enabling us to expand and enhance our broadband and video options across multiple mobile and fixed devices.

Achieving these results will depend upon obtaining governmental approvals on favorable terms within the time limits contemplated by the parties. Delays in closing, including as a result of delays in obtaining regulatory approval, could divert attention from ongoing operations on the part of management and employees, adversely affecting customers and suppliers and therefore revenues. If such approvals are obtained and the transaction is consummated, then we must integrate a large number of operational and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, delays in the process could have a material adverse effect on our revenues, expenses, operating results and financial condition. This acquisition also will increase the amount of debt on our balance sheet (both Time Warner's debt and the indebtedness which may be needed to pay a portion of the purchase price) leading to additional interest expense and, due to additional shares being issued, will result in additional cash being required for any dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and declare future dividends. In addition, events outside of our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition.

AT&T INC.

SEPTEMBER 30, 2016

PART II – OTHER INFORMATION - CONTINUED

Dollars in millions except per share amounts

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) A summary of our repurchases of common stock during the third quarter of 2016 is as follows:

Period	(a) Total Number of Shares (or Units) Purchased ^{1, 2, 3}		(b) Average Price Paid Per Share (or Unit)			(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs¹		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs

July 1, 2016 - July 31, 2016		3,143		$	-		-		401,550,000
August 1, 2016 - August 31, 2016		6,000,384			41.15		6,000,000		395,550,000
September 1, 2016 - September 30, 2016		624,640			-		-		395,550,000
Total		6,628,167		$	41.15		6,000,000
¹ In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date.
² Of the shares repurchased, 3,721 shares were acquired through the withholding of taxes on the vesting of restricted stock or on the exercise price of options.
³ Of the shares repurchased, 624,446 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.

AT&T INC.

SEPTEMBER 30, 2016

Item 6. Exhibits

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.


10-a	AT&T Health Plan
10-b	Agreement between James Cicconi and AT&T Inc.
12	Computation of Ratios of Earnings to Fixed Charges
31	Rule 13a-14(a)/15d-14(a) Certifications 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer
32	Section 1350 Certifications
101	XBRL Instance Document

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

November 3, 2016

AT&T Inc.

/s/ John J. Stephens

John J. Stephens

Senior Executive Vice President

and Chief Financial Officer

AT&T HEALTH PLAN

Effective: January 1, 1987

Previously Amended and Restated: January 1, 2016

Amended and Restated Effective: January 1, 2017 (unless otherwise provided herein)

AT&T HEALTH PLAN

TABLE OF CONTENTS

ARTICLE 1

ARTICLE 2

ARTICLE 3

ARTICLE 4

ARTICLE 5

ARTICLE 6

ARTICLE 7

ARTICLE 8

ARTICLE 9

ARTICLE 10

ARTICLE 11

ARTICLE 12

PURPOSE......................................................................................................

DEFINITIONS..............................................................................................

ELIGIBILITY.................................................................................................

BENEFITS.....................................................................................................

TERMINATION OF PARTICIPATION....................................................

DISABILITY.................................................................................................

COSTS...........................................................................................................

LOYALTY CONDITIONS..........................................................................

MISCELLANEOUS.....................................................................................

COBRA.........................................................................................................

PRIVACY OF MEDICAL INFORMATION.............................................

CLAIM AND APPEAL PROCESS ............................................................

AT&T HEALTH PLAN

ARTICLE 1 PURPOSE

The AT&T Health Plan (“Plan”) provides Participants with supplemental medical, dental, and vision benefits. Effective March 23, 2010, the Plan shall be frozen to new Participants, as further described in Section 2.16. The Company intends this Plan to be a “grandfathered health plan” under the Patient Protection and Affordable Care Act (the “Affordable Care Act”). Appendix C hereto contains the required Participant disclosure regarding the Plan’s grandfathered status under the Affordable Care Act.

ARTICLE 2 DEFINITIONS

For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise:

2.1	Active Participant. “Active Participant” shall mean an Active Employee Participant and his Dependents.

2.2	Active Employee Participant. “Active Employee Participant” shall mean an Eligible Employee electing to participate in the Plan while in active service, on a Leave of Absence or while receiving short term disability benefits under the Officer Disability Plan.

2.3

Annual Deductible. “Annual Deductible” shall mean the amount the Active Participant must pay for Covered Health Services in a Plan Year before the Plan will begin paying for Covered Benefits in that calendar year. The Annual Deductible applies to all Covered Health Services. The Annual Deductible does not apply to Preventive Care, Dental Services and Vision Services. Solely for purposes of this Plan, the Annual Deductible will operate on a combined basis with the Annual Deductible (both the “Network/ONA” and “Non-Network Benefit” annual deductibles) applicable in the AT&T Medical Plan. Once the Participant meets his applicable Annual Deductible, the Plan will begin to pay Covered Benefits, subject to any required Coinsurance, in accordance with and as governed by Section 4.1. The applicable Annual Deductible is set forth in Appendix A to this Plan.

2.4

Annual Out-of-Pocket Maximum. “Annual Out-of-Pocket Maximum” shall mean the maximum amount of Covered Health Services an Active Participant must pay out-of-pocket every calendar year, including the Participant’s Annual Deductible. Solely for purposes of this Plan, the Annual Out-of-Pocket Maximum will operate on a combined basis with the Annual Out-of-Pocket Maximum (both the “Network/ONA” and “Non-Network Benefit annual out-of-pocket maximums) applicable in the AT&T Medical Plan (or the Annual Out-of-Pocket Maximum in the AT&T International Health Plan for Officers serving in expatriate positions with the Company). Once the Participant reaches the applicable Annual Out-of-Pocket Maximum, Covered Benefits for those Covered Health Services that apply to the Annual Out-of-Pocket Maximum are payable in accordance with and as governed by Section 4.1 during the rest of that Plan Year. The following costs shall never apply toward the Annual Out-of-Pocket Maximum: (a) any applicable Monthly Contributions and (b) any charges for Non-Covered Health Services. Even when the Annual Out-of-Pocket Maximum has been reached, Covered Benefits will not be provided for the following: (a) any applicable Monthly Contributions and (b) any charges for Non-Covered Health Services. The applicable Annual Out-of-Pocket Maximum is set forth in Appendix A to this Plan.

2.5	AT&T. “AT&T” shall mean AT&T Inc. References to “Company” shall mean AT&T.

2.6

Basic Plan(s). “Basic Plan(s)” shall mean AT&T’s group medical (known as the “Silver Option” in the “AT&T Medical Plan” (or the “AT&T International Health Plan” for Officers serving in expatriate positions with the Company)), dental (non-DHMO option), and vision care plans (including the AT&T Retiree Vision Care Program). For a Participant who Retired on or before August 31, 1992, Basic Plans shall mean the AT&T Medical and Group Life Insurance Plan–CustomCare (“CustomCare”) and dental (non-DHMO option) plans. For this purpose, the Plan Administrator maintains governing records setting forth the names of those Participants who Retired on or before August 31, 1992.

2.7	CEO. “CEO” shall mean the Chief Executive Officer of AT&T Inc.

2.8	COBRA. “COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

2.9

Coinsurance. “Coinsurance” shall mean the amount an Active Participant must pay each time he receives Covered Health Services, after he meets the applicable Annual Deductible. Coinsurance payments are calculated as a percentage of Covered Health Services, rather than a set dollar amount. Coinsurance does not apply to Preventive Care, Dental Services and Vision Services (or Medical Services for Retired Participants as provided in Section 4.1(c)). The applicable Coinsurance percentage is set forth in Appendix A to this Plan.

2.10	Committee. “Committee” shall mean the Human Resources Committee of the Board of Directors of AT&T Inc.

2.11	Covered Benefits. “Covered Benefits” shall mean the benefits provided by the Plan, as provided for and governed by Section 4.1 of the Plan.

2.12

Covered Health Services. “Covered Health Services” means all Medical Services or Preventive Care that would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not. Dental Services and Vision Services are not included in the definition of Covered Health Services.

2.13	Dental Services. “Dental Services” shall mean services for dental and orthodontic care. The Plan Administrator, in its sole discretion, shall determine whether a particular service is classified as Preventive Care or a Dental, Medical or Vision Service.

2.14

Dependent(s). “Dependent(s)” shall mean those individuals who would qualify as a Participant’s dependent(s) under the terms of the group medical Basic Plan in which the Participant participates (or last previously participated with respect to Medicare Eligible Retired Participants (the “Prior Basic Plan”), or, if applicable, Substitute Basic Coverage.

2.15	Disability. “Disability” shall mean qualification for long term disability benefits under Section 3.1 of the Officer Disability Plan.

2.16

Eligible Employee. “Eligible Employee” shall mean an Officer. Notwithstanding the foregoing, the CEO may, from time to time, exclude any Officer or group of Officers from being an “Eligible Employee” under this Plan. Employees of a company acquired by AT&T shall not be considered an Eligible Employee unless designated as such by the CEO. Notwithstanding the foregoing, only the Committee shall have the authority to exclude from participation or take any action with respect to Executive Officers.

Notwithstanding the foregoing provisions, individuals hired, rehired or promoted to an Officer level position on or after March 23, 2010 shall be excluded from the term Eligible Employee, and such individuals (and their Dependents) shall not be eligible to participate in this Plan.

2.17	Employer. “Employer” shall mean AT&T Inc. or any of its Subsidiaries.

2.18	Executive Officer. “Executive Officer” shall mean any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934.

2.19	Leave of Absence. “Leave of Absence” shall mean a Company-approved leave of absence.

2.20

Medical Services. “Medical Services” shall mean medical/surgical, mental health/substance abuse and prescription pharmacy services. The Plan Administrator, in its sole discretion, shall determine whether a particular service is classified as Preventive Care or a Medical, Dental or Vision Service. Medical Services do not include Dental Services and Vision Services.

2.21	Monthly Contributions. “Monthly Contributions” shall mean the monthly premiums or contributions required for participation in this Plan as further governed by Article 7 of the Plan. The applicable Monthly Contributions are set forth in Exhibit A to this Plan.

2.22	Non-Covered Health Services. “Non-Covered Health Services” shall mean any Medical Services or Preventive Care which do not meet the definition of Covered Health Services.

2.23	Officer. “Officer” shall mean an individual who is designated as an officer level employee for compensation purposes on the records of AT&T.

2.24	Participant. “Participant” shall mean an Active Participant or Retired Participant or both, as the context indicates.

2.25	Plan Administrator. “Plan Administrator” shall mean the SEVP-HR, or any other person or persons whom the Committee may appoint to administer the Plan; provided that the Committee may act as the Plan Administrator at any time.

2.26	Plan Year. “Plan Year” shall mean the calendar year.

2.27

Preventive Care. “Preventive Care” shall have the same meaning as such term has in the AT&T Medical Plan. The plan administrator for the AT&T Medical Plan shall determine whether a particular service constitutes Preventive Care and the Plan Administrator for this Plan shall rely upon such determination.

2.28	Qualified Dependent. “Qualified Dependent” shall mean a Dependent who loses coverage under a COBRA eligible program due to a Qualifying Event.

2.29	Qualifying Event. “Qualifying Event” shall mean any of the following events if, but for COBRA continuation coverage, they would result in a Participant’s loss of coverage under this Plan:

(1)

(2)

death of a covered Eligible Employee;

termination (other than by reason of such Eligible Employee’s gross misconduct) of an Employee’s employment;

(3)

reduction in hours of an Eligible Employee;

(4)

divorce or legal separation of an Eligible Employee or dissolution of an Eligible Employee’s registered domestic partnership;

(5)

an Eligible Employee’s entitlement to Medicare benefits; or

(6)

a Dependent child ceasing to qualify as a Dependent under the group medical Basic Plan,(or, if applicable, Substitute Basic Coverage) or with respect to a Dependent child who is a Medicare Eligible Retired Participant, the child’s ceasing to otherwise qualify under the Prior Basic Plan.

2.30

Retire, Retired or Retirement. “Retire,” “Retired” or “Retirement” shall mean the termination of an Active Employee Participant’s employment with AT&T or any of its Subsidiaries, for reasons other than death, on or after the earlier of the following dates: (1) the date such Active Employee Participant has attained age 55, and, for an Active Employee Participant on or after January 1, 2002, has five (5) years of service, or (2) the date the Active Employee Participant has attained one of the following combinations of age and service at termination of employment on or after April 1, 1997:

Net Credited Service Age

25 years or more 50 or older

30 years or more Any age

2.31	Retired Participant. “Retired Participant” shall mean a Retired Employee Participant and his Dependents.

2.32	Retired Employee Participant. “Retired Employee Participant” shall mean a former Active Employee Participant who has Retired within the meaning of Section 2.30 and who meets the additional requirements of Section 3.2 to be eligible for coverage in Retirement.

2.33	SEVP-HR. "SEVP-HR" shall mean AT&T's highest ranking Officer, specifically responsible for human resources matters.

2.34

Subsidiary. "Subsidiary" shall mean any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest. The Committee may, at its sole discretion, designate any other corporation, partnership, venture or other entity a Subsidiary for the purpose of participating in this Plan. Notwithstanding anything herein to the contrary, unless designated a "Subsidiary" pursuant to the immediately preceding sentence, Cingular Wireless LLC, Sterling Commerce, Inc., and their respective subsidiaries shall not be considered a Subsidiary under this Plan.

2.35	Vision Services. "Vision Services" shall mean services for vision care. The Plan Administrator, in its sole discretion, shall determine whether a particular service is classified as Preventive Care or a Vision, Medical or Dental Service.

2.36	Medicare Eligible Retired Participant. "Medicare Eligible Retired Participant" shall mean a Retired Participant who is eligible for Medicare due to reaching the eligible age for Medicare.

ARTICLE 3 ELIGIBILITY

3.1	Active Participants. Each Eligible Employee shall be eligible to participate in this Plan along with his/her Dependent(s) beginning on the effective date of the employee becoming an Eligible Employee.

Upon becoming an Eligible Employee, he/she shall have 90 days to elect to participate in this Plan. In order to continue participation, the Active Participant must pay all applicable Monthly Contributions. If an Active Employee Participant terminates participation in this Plan at any time for any reason, that Participant and his/her Dependent(s) shall be ineligible to participate in the Plan at any time in the future.

3.2

Retired Participants. Provisions of this Plan will continue in effect during Retirement for each Retired Employee Participant and his/her Dependent(s) with respect to any Eligible Employee who became a Participant before January 1, 1999. Neither an Eligible Employee who became a Participant after December 31, 1998 nor his/her Dependent(s) shall be eligible for participation hereunder on or after such Participant's Retirement. Coverage for Retired Participants shall be subject to the payment of all applicable Monthly Contributions, as governed by Article 7. The provisions of this Plan related to Retired Participants, including the level of Covered Benefits and the applicable Monthly Premiums, shall begin to apply on the first day of the month following the month in which the Active Employee Participant Retires. If a Retired Employee Participant terminates participation at any time for any reason, participation of that Retired Employee participant and his/her Dependent(s) may not be reinstated for any reason.

3.3

Requirement to Enroll and Participate in Basic Plans and Medicare. Notwithstanding any provision in this plan to the contrary, as a condition to participation in the Plan, each Participant must be enrolled in, paying for, and participating in (i) the Basic Plans if such Participant is eligible for coverage under the terms of the Basic Plans, or, if applicable, Substitute Basic Coverage, and (ii) all parts of Medicare for which such Participant is eligible and for which Medicare would be primary if enrolled therein, except for Medicare Part D relating to prescription drug coverage.

Notwithstanding any other provision of the Plan to the contrary, an individual who first becomes an Eligible Employee in the middle of a Plan Year and who is enrolled in AT&T sponsored group health plans other than the Basic Plans, will be allowed to participate in the Plan for the remainder of the Plan Year along with his/her Dependent(s) who are enrolled in such other AT&T sponsored health plans, as if they were participating in the Basic Plans. At the next group enrollment opportunity for the Basic Plans, the Active Employee Participant and his/her Dependent(s) must enroll in the Basic Plans to continue participation in this Plan.

ARTICLE 4 BENEFITS

4.1

Covered Benefits. Subject to the limitations in this Plan (including but not limited to the loyalty conditions set forth in Article 8 below), this Plan provides the benefits described below. Monthly Contributions for participation in this Plan, the Basic Plans, Medicare, or any other health plan are not considered "services", and are therefore are not Covered Benefits under this Plan.

(a)	Active Participants (Medical Services and Preventive Care) -

Medical Services - After the Annual Deductible has been met, 100% payment of Covered Health Services not paid under the AT&T Medical Plan (or AT&T International Health Plan with respect to Officers serving in expatriate positions with the Company) or Medicare minus the amount of Coinsurance, until the Active Participant reaches the Annual Out-of-Pocket Maximum, at which time coverage is 100% of Covered Health Services not paid under the AT&T Medical Plan (or AT&T International Health Plan with respect to Officers serving in expatriate positions with the Company) .

Preventive Care - Preventive Care, whether received as a "Network/ONA" service or "Non-Network" service, as defined in the AT&T Medical Plan, is covered at 100%, not subject to the Annual Deductible or Coinsurance.

(b)	Active Participants (Dental Services and Vision Services) -

100% payment, through reimbursement or otherwise, of all Dental Services and Vision Services not paid under the Active Participant's (i) Basic Plans or (ii) Medicare, provided expenses for such services would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not.

(c)	Retired Participants –

100% payment, through reimbursement or otherwise, of all Medical, Dental, Vision and Preventive services not paid under the Retired Participant's (i) Basic Plans or Substitute Basic Coverage, if either is applicable or (ii) Medicare, provided expenses for such services would qualify as deductible medical expenses for federal income tax purposes, whether deducted or not.

4.2	Covered Benefit Limits. RESERVED

4.3	Priority of Paying Covered Claims. Claims for benefits will be applied against the various health plans, as applicable, and coordinated with Medicare in the following order:

(1)

Medicare, to the extent the Participant is eligible therefore and such claim is actually paid by Medicare,

(2)

Basic Plans, if applicable,

(3)

CarePlus, if elected,

(4)

Long Term Care Plan, if elected,

(5)

this Plan.

4.4

Substitute Basic Coverage. Notwithstanding any other provision of this Plan to the contrary, if a Retired Employee Participant, other than a Medicare Eligible Retired Participant, is eligible for participation under this Plan during Retirement, but not eligible to participate under the Basic Plans, the Plan shall provide medical, dental, and vision benefits for the Retired Employee Participant and his/her Dependent(s) substantially equivalent to the benefits under the Basic Plans through an insured product (hereinafter, "Substitute Basic Coverage"). Eligibility for Substitute Basic Coverage is conditioned upon the Retired Participant's payment of contributions in the same amount that a similarly situated retired Basic Plan participant is required to pay under the Basic Plans. Such Substitute Basic Coverage shall constitute such Retired Participant's Basic Plans for all purposes under this Plan. The costs of Substitute Basic Coverage (except for the required monthly contributions referenced in this paragraph) shall be borne by AT&T, and the costs of Substitute Basic Coverage shall not be included in the determination of any Retired Participant's annual Plan contribution amount as provided in Article 7. In addition, certain other Retired Employee Participants participate in the "Separation Medical Plan" rather than the Basic Plans. References to Substitute Basic Coverage throughout this Plan shall be deemed to include the Separation Medical Plan. The Plan Administrator maintains records governing the names of those Retired Employee Participants who have Substitute Basic Coverage or Separation Medical Plan coverage.

ARTICLE 5 TERMINATION OF PARTICIPATION

5.1	Termination of Participation. Participation will cease on the last day of the month in which one of the following conditions occurs:

(1)	The Participant, other than a Medicare Eligible Retired Participant, is no longer a participant in the Basic Plans or Substitute Basic Coverage, in which case participation ceases for such Participant;

(2)	A Participant ceases to meet the definition of a Dependent (as set forth in Section 2.14 of this Plan) for any reason, in which case participation ceases for such Participant;

(3)

A Participant eligible to enroll in Medicare is no longer a participant in all parts of Medicare for which such Participant is eligible to enroll and for which Medicare would be primary if enrolled therein, except for Medicare Part D relating to prescription drug coverage, in which case participation ceases for such Participant;

(4)

The Active Employee Participant's termination of employment for reasons other than Death, Disability, or Retirement by an individual who meets the applicable requirements of Section 3.2 in order to qualify for Plan benefits in Retirement, in which case participation ceases for the Participant and his/her Dependent(s);

(5)	The demotion or designation of an Active Employee Participant so as to no longer be eligible to participate in the Plan, in which case participation ceases for the Participant and his/her Dependent(s);

(6)

The Active Employee Participant (or Retired Employee Participant) participates in an activity that constitutes engaging in competitive activity with AT&T or engaging in conduct disloyal to AT&T under Article 8, in which case participation ceases for the Active Employee Participant (or Retired Employee Participant) and his/her Dependent(s); or

(7)	Discontinuance of the Plan by AT&T, or, with respect to a Subsidiary's Active Employee Participants (or Retired Employee Participants), such Subsidiary's failure to make the benefits hereunder available to Active Employee Participants employed by it (or its Retired Employee Participants).

5.2	Dependents Failure to Participate in Basic Plans. If a Dependent, other than a Medicare Eligible Retired Participant, ceases participation under a Basic Plan or, if applicable, Substitute Basic Coverage, such Dependent's participation under this Plan will cease with the same effective date.

5.3	Death. In the event of the Active Employee Participant's (or Retired Employee's Participant's) death, his Dependents may continue participation in this Plan as follows:

(1)

In the event of the death of a Retired Employee Participant such Retired Employee Participant's Dependents may continue participation in this Plan, eligible for the Covered Benefits described in Section 4.1(c) of the Plan, for so long as such Dependents are participating in the Basic Plans (or, if applicable, Substitute Basic Coverage) or with respect to a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible for participation under the terms of the Prior Basic Plan and are paying any applicable contributions for this Plan as provided in Article 7. If a surviving spouse of such deceased Active Employee Participant otherwise eligible for participation in the Plan remarries, his/her participation and the participation of any otherwise eligible Dependents will cease with the effective date of his/ her marriage.

(2)

In the event of an in-service death of an Active Employee Participant eligible to participate in the Plan in Retirement as provided under Article 3.2, who was Retirement eligible, within the meaning of Section 2.30, at the time of death, such Active Employee Participant's surviving Dependents may continue participation in this Plan, eligible for the Covered Benefits described in Section 4.1(a) and (b), for so long as such Dependents are participating in the Basic Plans (or, if applicable Substitute Basic Coverage) or with respect to a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible for participation under the terms of the Prior Basic Plan and are paying any applicable contributions for this Plan as provided in Article 7. If a surviving spouse of such deceased Active Employee Participant otherwise eligible for participation in the Plan remarries, his/her participation and the participation of any otherwise eligible Dependents will cease with the effective date of his/ her marriage.

(3)

In the event of (i) an in-service death of an Active Employee Participant not eligible to participate in the Plan in Retirement as provided in Article 3.2 or (ii) an in-service death of an Active Employee Participant eligible to participate in the Plan in Retirement as provided in Article 3.2 but the

individual was not Retirement eligible, within the meaning of Section 2.30, at the time of death, such Active Employee Participant's Dependent(s) may continue participation in this Plan, eligible for the Covered Benefits described in Sections 4.1(a) and (b), for a 36-month period commencing the month following the month in which such Active Employee Participant dies as long as such Dependent(s) are participating in the Basic Plans (or with respect to a Dependent who is a Medicare Eligible Retired Participant, for so long as such Dependent would have otherwise been eligible for participation under the terms of the Prior Basic Plan) and subject to the payment of Active Participant Contributions for the first 12 months and payment of Active COBRA Contributions for the remaining 24 months, as provided by Articles 7 and 10.1. If the Active Employee Participant's Dependent(s) are eligible for COBRA, they will automatically be enrolled in COBRA so that there is no lapse in coverage, and this 36-month coverage will be integrated and run concurrently with COBRA coverage.

ARTICLE 6 DISABILITY

6.1	Disability. With respect to any Active Employee Participant who commences receipt of short term or long term disability benefits under the Officer Disability Plan, participation under this Plan will be as follows:

(1)

The Participant will continue to participate in this Plan, eligible for the Covered Benefits described in Section 4.1(a) and (b), for as long as he/she receives short term disability benefits under the Officer Disability Plan and pays the applicable contributions for this Plan as provided by Article 7.

(2)

An Active Employee Participant not eligible to participate in the Plan in Retirement as provided in Article 3.2 who commences long term disability benefits under the Officer Disability Plan or an Active Employee Participant eligible to participate in the Plan in Retirement as provided in Article 3.2 but who is not Retirement eligible, within the meaning of Section 2.30, at the time long term disability benefits under the Officer Disability Plan commence, will cease participation in this Plan (along with his/her Dependents) effective as of the last day of the calendar month in which such long term disability benefits commence, unless such benefits commence on the first day of a calendar month, in which case participation in this Plan shall cease effective as of the last day of the prior month.

(3)

An Active Employee Participant eligible to participate in the Plan in Retirement as provided in Article 3.2 ,who is Retirement eligible, within the meaning of Section 2.30, at the time long term disability benefits under the Officer Disability Plan commence, will be eligible to continue participation in this Plan on the same terms and conditions that participation would be available to such Participant in Retirement, subject to the payment of applicable contributions for this Plan as provided by Article 7, regardless of his/her continued receipt of long term disability benefits under the Officer Disability Plan.

ARTICLE 7 COSTS

7.1	Provision of Benefits under the Plan. Except as provided below in this Article 7 with respect to required Monthly Contributions or with respect to any required Coinsurance, the benefits available to Participants under this Plan shall be provided through an insurance policy maintained by AT&T.

7.2

Active Participant Contributions. An Active Participant electing to participate in the Plan will pay Monthly Contributions to participate in the Plan while in active service, while on Leave of Absence or while receiving short term disability benefits under the Officer Disability Plan. The Monthly Contribution for participation may change annually, effective at the beginning of each Plan Year. Contributions to be made by Active Participants electing to participate in the Plan shall be set annually by the SEVP-HR, determined in the SEVP-HR's sole and absolute discretion. The SEVP-HR may adopt tiered rates for similarly situated groups of Participants based on factors such as the number of Dependents covered or Medicare eligibility. Notwithstanding the foregoing, required Monthly Contributions for Executive Officers shall be approved by the Committee.

7.3

Retired Participant Contributions. Retired Participants who elect to participate will pay Monthly Contributions to participate in the Plan. The Monthly Contribution for participation may change annually, effective at the beginning of each Plan Year. Contributions to be made by Retired Participants who elect to participate shall be set annually by the SEVP-HR (in his/her sole and absolute discretion), to the extent their contributions have not previously been provided for in a separate agreement.

7.4

Survivor Contributions. Upon the death of a Participant, the Participant's Dependents shall be required to pay Monthly Contributions to participate in the Plan. The Monthly Contributions shall be set annually by the SEVP-HR, in the SEVP-HR's sole and absolute discretion. Any changes to the Monthly Contributions shall be effective at the beginning of each Plan Year.

7.5

Contributions for Participants on Disability. Participants continuing benefits while on Disability shall be required to pay Monthly Contributions to participate in the Plan. The Monthly Contributions shall be set annually by the SEVP-HR, determined in the SEVP-HR's sole and absolute discretion. Any changes to the Monthly Contributions shall be effective at the beginning of each Plan Year.

ARTICLE 8 LOYALTY CONDITIONS

8.1

Participants acknowledge that no coverage and benefits would be provided under this Plan on and after January 1, 2010 but for the loyalty conditions and covenants set forth in this Article, and that the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan coverage and benefits for the Participants on or after January 1, 2010. Accordingly, as a condition of receiving coverage and any Plan benefits on or after January 1, 2010, each Participant is deemed to agree that he shall not, without obtaining the written consent of the Plan Administrator in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in this Section. Further and notwithstanding any other provision of this Plan, all coverage and

benefits under this Plan on and after January 1, 2010 with respect to a Participant and his or her Dependents shall be subject in their entirety to the enforcement provisions of this Section if the Participant, without the Plan Administrator's consent, participates in an activity that constitutes engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as defined below. The provisions of this Article 8 as in effect immediately before such date shall be applicable to Participants who retire before January 1, 2010.

8.2	Definitions. For purposes of this Article and of the Plan generally

(1)	an "Employer Business" shall mean AT&T, any Subsidiary, or any business in which AT&T or a Subsidiary or an affiliated company of AT&T has a substantial ownership or joint venture interest;

(2)

"engaging in competition with AT&T" shall mean, while employed by an Employer Business or within two (2) years after the Participant's termination of employment, engaging by the Participant in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business. "Engaging in competition with AT&T" shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer Business. "Engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee or director of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.

(3)

"engaging in conduct disloyal to AT&T" means, while employed by an Employer Business or within two (2) years after the Participant's termination of employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by AT&T or its affiliates during the one (1) year prior to the termination of the Participant's employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T and its affiliates; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Participant had business contact on behalf of any Employer Business during the two (2) years prior to the termination of the Participant's employment, for any reason to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or its affiliate; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom Participant had business contact, whether in person or by other media, on behalf of any Employer Business during the two (2) years prior to the termination of Participant's employment for any reason ("Customer"), to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business. "Engaging in conduct disloyal to AT&T" also means, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.

Confidential Information to the Employer Business following termination of employment.

(4)

"Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to the Participant, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure. Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by the Participant. For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business. Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by the Participant from a third party; (iii) was known to the Participant prior to receipt from the Employer Business; or (iv) was independently developed by the Participant or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by the Participant or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.

8.3

Forfeiture of Benefits. Subject to the provisions of Section 1001(5) of the Affordable Care Act, coverage and benefits shall be forfeited and shall not be provided under this Plan for any period as to which the Plan Administrator determines that, within the time period and without the written consent specified, Participant has been either engaging in competition with AT&T or engaging in conduct disloyal to AT&T.

8.4

Equitable Relief. The parties recognize that any Participant's breach of any of the covenants in this Article 8 will cause irreparable injury to AT&T, will represent a failure of the consideration under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to provide the Participant with the opportunity to receive Plan coverage and benefits, and that monetary damages would not provide AT&T with an adequate or complete remedy that would warrant AT&T's continued sponsorship of the Plan and payment of Plan benefits for all Participants. Accordingly, in the event of a Participant's actual or threatened breach of the covenants in this Article, the Plan Administrator, in addition to all other rights and acting as a fiduciary under ERISA on behalf of all Participants, shall have a fiduciary duty (in order to assure that AT&T receives fair and promised consideration for its continued Plan sponsorship and funding) to seek an injunction restraining the Participant from breaching the covenants in this Article 8. In addition, AT&T shall pay for any Plan expenses that the Plan Administrator incurs hereunder, and shall be entitled to recover from the Participant its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies. To enforce its repayment rights with respect to a Participant, the Plan shall have a first priority, equitable lien on all Plan benefits provided to or for the Participant and his or her Dependents. In the event the Plan Administrator succeeds in enforcing the terms of this Article through a written settlement with the Participant or a court order granting an injunction hereunder, the Participant shall be entitled to collect Plan benefits collect Plan benefits prospectively, if the Participant is otherwise entitled to such benefits, net of any fees and costs assessed pursuant hereto (which fees and costs shall be paid to AT&T as a repayment on behalf of the Participant), provided that the Participant complies with said settlement or injunction.

8.5

Uniform Enforcement. In recognition of AT&T's need for nationally uniform standards for the Plan administration, it is an absolute condition in consideration of any Participant's accrual or receipt of benefits under the Plan after January 1, 2010 that each and all of the following conditions apply to all Participants and to any benefits that are paid or are payable under the Plan:

(1)	ERISA shall control all issues and controversies hereunder, and the Committee shall serve for purposes hereof as a "fiduciary" of the Plan, and as its "named fiduciary" within the meaning of ERISA.

(2)

All litigation between the parties relating to this Article shall occur in federal court, which shall have exclusive jurisdiction, any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA.

(3)

If the Plan Administrator determines in its sole discretion either (I) that AT&T or its affiliate that employed the Participant terminated the Participant's employment for cause, or (II) that equitable relief enforcing the Participant's covenants under this Article 8 is either not reasonably available, not ordered by a court of competent jurisdiction, or circumvented because the Participant has sued in state court, or has otherwise sought remedies not available under ERISA, then in any and all of such instances the Participant shall not be entitled to collect any Plan benefits, and if any Plan benefits have been paid to the, the Participant shall immediately repay all Plan benefits to the Plan (with such repayments being used within such year for increased benefits for other Participants in any manner determined in the Plan Administrator's discretion) upon written demand from the Plan Administrator. Furthermore, the Participant shall hold AT&T and its affiliates harmless from any loss, expense, or damage that may arise from any of the conduct described in clauses (I) and (II) hereof.

ARTICLE 9 MISCELLANEOUS

9.1

Administration. The Plan Administrator is the named fiduciary of the Plan and has the power and duty to do all things necessary to carry out the terms of the Plan. The Plan Administrator has the sole and absolute discretion to interpret the provisions of the Plan, to make findings of fact, to determine the rights and status of Participants and other under the Plan, to determine which expenses and benefits qualify as Covered Health Services or Covered Benefits, to make all benefit determinations under the Plan, to decide disputes under the Plan and to delegate all or a part of this discretion to third parties and insurers. To the fullest extent permitted by law, such interpretations, findings, determinations and decisions shall be final, binding and conclusive on all persons for all purposes of the Plan. The Plan Administrator may delegate any or all of its authority and responsibility under the Plan to other individuals, committees, third party administrators, claims administrators or insurers for any purpose, including, but not limited to the processing of benefits and claims related thereto. In carrying out these functions, these individuals or entities have been delegated responsibility and discretion for interpreting the provisions of the Plan, making findings of fact, determining the rights and status of Participants and others under the Plan, and deciding disputes under the Plan and such interpretations, findings, determinations and decisions shall be final, binding and conclusive on all persons for all purposes of the Plan.

9.2	Amendments and Termination. This Plan may be modified or terminated at any time in accordance with the provisions of AT&T's Schedule of Authorizations.

9.3

Newborns' and Mothers' Health Protection Act of 1996. To the extent this Plan provides benefits for hospital lengths of stay in connection with childbirth, the Plan will cover the minimum length of stay required for deliveries (i.e., a 48-hour hospital stay after a vaginal delivery or a 96-hour stay following a delivery by Cesarean section.) The mother's or newborn's attending physician, after consulting with the mother, may discharge the mother or her newborn earlier than the minimum length of stay otherwise required by law. Such coverage shall be subject to all other provisions of this Plan.

9.4

Women's Health and Cancer Rights Act of 1998. To the extent this Plan provides benefits for mastectomies, it will provide, for an individual who is receiving benefits in connection with a mastectomy and who elects breast reconstruction in connection with such mastectomy, coverage for reconstruction on the breast on which the mastectomy was performed, surgery and reconstruction on the other breast to give a symmetrical appearance, and prosthesis and coverage for physical complications of all stages of the mastectomy, including lymphedemas. Such coverage shall be subject to all other provisions of this Plan.

9.5

Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008. To the extent this Plan provides mental health benefits or substance use disorder benefits it will not place annual or lifetime maximums for such benefits that are lower than the annual and lifetime maximums for physical health benefits. In addition, the financial requirements (e.g., deductibles and co-payments) and treatment limitations (e.g., number of visits or days of coverage) that apply to mental health benefits or substance use disorder benefits will not be more restrictive than the predominant financial requirements or treatment limitations that apply to substantially all medical/surgical benefits; mental health benefits and substance use disorder benefits will not be subject to any separate cost sharing requirements or treatment limitations that only apply to such benefits; if the Plan provides for out of network medical/surgical or substance use disorder benefits, it will provide for out of network mental health and substance use disorder benefits and standards for medical necessity determinations and reasons for any denial of benefits relating to mental health benefits and substance use disorder benefits will be made available upon request to plan participants. Such coverage shall be subject to all other provisions of this Plan.

9.6

Continuation of Coverage During Family or Medical Leave. During any period which an Active Employee Participant is on a family or medical leave as defined in the Family or Medical Leave Act, any benefit elections in force for such Participant shall remain in effect. While the Participant is on paid leave, contributions shall continue. If the Participant is on an unpaid leave, the Participant may elect to prepay required contributions on a pre-tax basis before the commencement of such unpaid leave. Alternatively, the Participant may elect to make such payments on an after-tax basis monthly in accordance with an arrangement that the Plan Administrator shall provide. If coverage is not continued during the entire period of the family or medical leave because the Participant declines to pay the premium, the coverage must be reinstated upon reemployment with no exclusions or waiting periods, notwithstanding any other provision of this Plan to the contrary. If the Participant does not return to work upon completion of the leave, the Participant must pay the full cost of any health care coverage that was continued on his/her behalf during the leave. These rules apply to the COBRA eligible programs.

9.7

Rights While on Military Leave. Pursuant to the provisions of the Uniformed Services Employment and Reemployment Rights Act of 1994, an Active Employee Participant on military leave will be considered to be on a Leave of Absence and will be entitled during the leave to the health and welfare benefits that would be made available to other similarly situated employees if they were on a Leave of Absence. This entitlement will end if the individual provides written notice of intent not to return to work following the completion of the military leave. The individual shall have the right to continue his/her coverage, including any Dependent coverage, for the lesser of the length of the leave or 18 months. If the military leave is for a period of 31 days or more, the individual may be required to pay 102 percent of the total premium (determined in the same manner as a COBRA continuation coverage premium). If coverage is not continued during the entire period of the military leave because the individual declines to pay the premium or the leave extends beyond 18 months, the coverage must be reinstated upon reemployment with no pre-existing condition exclusions (other than for service-related illnesses or injuries) or waiting periods (other than those applicable to all Eligible Employees).

9.8

Qualified Medical Child Support Orders. The Plan will comply with any Qualified Medical Child Support Order issued by a court of competent jurisdiction or administrative body that requires the Plan to provide medical coverage to a Dependent child of an Active Employee or Retired Employee Participant. The Plan Administrator will establish reasonable procedures for determining whether a court order or administrative decree requiring medical coverage for a Dependent child meets the requirements for a Qualified Medical Child Support Order. The cost of coverage or any additional cost of such coverage, if any, shall be borne by the Participant.

9.9

Right of Recovery. If the Plan has made an erroneous or excess payment to any Participant, the Plan Administrator shall be entitled to recover such excess from the individual or entity to whom such payments were made. The recovery of such overpayment may be made by offsetting the amount of any other benefit or amount payable by the amount of the overpayment under the Plan.

ARTICLE 10 COBRA

10.1	Continuation of Coverage Under COBRA. Participants shall have all COBRA continuation rights required by federal law and all conversion rights. COBRA continuation coverage shall be continued as provided in this Article 10.

10.2

COBRA Continuation Coverage for Terminated Participants. A covered Active Employee Participant may elect COBRA continuation coverage, at his/her own expense, if his participation under this Plan would terminate as a result of one of the following Qualifying Events: an Employee's termination of employment or reduction of hours with an Employer.

10.3	COBRA Continuation Coverage for Dependents. A Qualified Dependent may elect COBRA continuation coverage, at his/her own expense, if his/her participation under this Plan would terminate as a result of a Qualifying Event.

10.4

Period of Continuation Coverage for Covered Participants. A covered Active Employee Participant who qualifies for COBRA continuation coverage as a result of a Participant's termination of employment or reduction in hours of employment described in Subsection 10.2 may elect COBRA continuation coverage for up to 18 months measured from the date of the Qualifying Event.

Coverage under this Subsection 10.4 may not continue beyond the:

(1)	date on which the Active Employee Participant's Employer ceases to maintain this Plan;

(2)	last day of the month for which premium payments have been made with respect to this Plan, if the individual fails to make premium payments on time, in accordance with Subsection 10.6;

(3)	date the covered Active Employee Participant becomes entitled to Medicare; or

(4)	date the covered Participant is no longer subject to a pre-existing condition exclusion under the Participant's other coverage or new employer plan for the type of coverage available under the COBRA eligible program for which the COBRA election was made.

10.5

Period of COBRA Continuation Coverage for Dependents. If a Qualified Dependent elects COBRA continuation coverage under a COBRA eligible program as a result of the an Active Employee Participant's termination of employment as described in Subsection 10.2, continuation coverage may be continued for up to 18 months measured from the date of the Qualifying Event. COBRA continuation coverage for all other Qualifying Events may continue for up to 36 months.

Continuation coverage under this Subsection 10.5 with respect to a COBRA eligible program may not continue beyond the date:

(1)	on which premium payments have not been made, in accordance with Subsection 10.6 below;

(2)	the Qualified Dependent becomes entitled to Medicare;

(3)	on which the Employer ceases to maintain this Plan; or

(4)	the Qualified Dependent is no longer subject to a pre-existing condition exclusion under the Participant's other coverage or new employer plan for the type of coverage available under this Plan.

10.6

Contribution Requirements for COBRA Continuation Coverage. Covered Participants and Qualified Dependents who elect COBRA continuation coverage as a result of a Qualifying Event will be required to pay continuation coverage payments. Continuation coverage payments are the payments required for COBRA continuation coverage that is an amount equal to a reasonable estimate of the cost to this Plan of providing coverage for all covered Participants at the time of the Qualifying Event plus a 2% administrative expense. In the case of a disabled individual who receives an additional 11-month extended coverage under COBRA, the Employer may assess up to 150% of the cost for this extended coverage period. Such cost shall be determined on an actuarial basis and take into account such factors as the Secretary of the Treasury may prescribe in regulations.

Covered Participants and Qualified Dependents must make the continuation coverage payment prior to the first day of the month in which such coverage will take effect. However, a covered Participant or Qualified Dependent has 45 days from the date of an affirmative election to pay the continuation coverage payment for the first month's payment and the cost for the period between the date medical coverage would otherwise have terminated due to the Qualifying Event and the date the covered Participant and/or Qualified Dependent actually elects COBRA continuation coverage.

The covered Participant and/or Qualified Dependent shall have a 30-day grace period to make the continuation coverage payments due thereafter. Continuation coverage payments must be postmarked on or before the completion of the 30-day grace period. If continuation coverage payments are not made on a timely basis, COBRA continuation coverage will terminate as of the last day of the month for which timely premiums were made. The 30-day grace period shall not apply to the 45-day period for the first month's payment of COBRA premiums as set out in the section above.

If payment is received that is significantly less than the required continuation coverage payment, then continuation coverage will terminate as of the last day of the month for which premiums were paid. A payment is considered significantly less than the amount due if it is greater than the lesser of $50 or 10% of the required continuation coverage payment. Upon receipt of a continuation coverage payment that is insignificantly less than the required amount, the Plan Administrator must notify the covered Participant or Qualified Dependent of the amount of the shortfall and provide them with an additional 30-day grace period from the date of the notice for this payment only.

10.7	Limitation on Participant's Rights to COBRA Continuation Coverage.

(1)

If a Qualified Dependent loses, or will lose medical coverage under this Plan as a result of divorce, legal separation, entitlement to Medicare, or ceasing to be a Dependent, such Qualified Dependent is responsible for notifying the Plan Administrator in writing within 60 days of the Qualifying Event. Failure to make timely notification will terminate the Qualified Dependent's rights to COBRA continuation coverage under this Article.

(2)

A Participant must complete and return the required enrollment materials within 60 days from the later of (a) the date of loss of coverage, or (b) the date the Plan Administrator sends notice of eligibility for COBRA continuation coverage. Failure to enroll for COBRA continuation coverage during this 60-day period will terminate all rights to COBRA continuation coverage under this Article. An affirmative election of COBRA continuation coverage by a Participant or his/her spouse shall be deemed to be an election for that Participant's Dependent(s) who would otherwise lose coverage under the Plan.

10.8

Subsequent Qualifying Event. If a second Qualifying Event occurs during an 18-month extension explained above, coverage may be continued for a maximum of 36 months from the date of the first Qualifying Event. In the event the Dependent loses coverage due to a Qualifying Event and after such date the Participant becomes entitled to Medicare, the Dependent shall have available up to 36 months of coverage measured from the date of the Qualifying Event that causes the loss of coverage. If the Participant was entitled to Medicare prior to the Qualifying Event, the Dependent shall have up to 36 months of coverage measured from the date of entitlement to Medicare.

10.9

Extension of COBRA Continuation Period for Disabled Individuals. The period of continuation shall be extended to 29 months in total (measured from the date of the Qualifying Event) in the event the individual is disabled as determined by the Social Security laws within 60 days of the Qualifying Event. The individual must provide evidence to the Plan Administrator of such Social Security determination prior to the earlier of 60 days after the date of the Social Security determination, or the expiration of the initial 18 months of COBRA continuation coverage. In such event, the Employer may charge the individual up to 150% of the COBRA cost of the coverage.

ARTICLE 11 PRIVACY OF MEDICAL INFORMATION

11.1	Definitions. For purposes of this Article 11, the following defined terms shall have the meaning assigned to such terms in this subsection:

(1) "Business Associate" shall have the meaning assigned to such phrase at 45 C.F.R. § 160.103;

(2) "Health Care Operations" shall have the meaning assigned to such phrase at 45 C.F.R. § 164.501;

(3) "HIPAA" shall mean Parts 160 ("General Administrative Requirements") and 164 ("Security and Privacy") of Title 45 of the Code of Federal Regulations as such parts are amended from time to time;

(4) "Payment" shall have the meaning assigned to such phrase at 45 C.F.R § 160.103;

(5) "Protected Health Information" or "PHI" shall have the meaning assigned to such phrase at 45 C.F.R. § 160.103; and

(6) "Treatment" shall have the meaning assigned to such phrase at 45 C.F.R. § 164.501.

11.2

Privacy Provisions Relating to Protected Health Information ("PHI"). The Plan and its Business Associates shall use and disclose PHI to the extent permitted by, and in accordance with, HIPAA, for purposes of providing benefits under the Plan and for purposes of administering the plan, including, by way of illustration and not by way of limitation, for purposes of Treatment, Payment, and Health Care Operations.

11.3

Disclosure of De-Identified or Summary Health Information. The HIPAA Plan, or, with respect to the HIPAA Plan, a health insurance issuer, may disclose summary health information (as that phrase is defined at 45 C.F.R. § 160.5049a)) to the Plan Sponsor of the HIPAA Plan (and its affiliates) if such entity requests such information for the purpose of:

(1)	Obtaining premium bids from health plans for providing health insurance coverage under the HIPAA Plan;

(2)	Modifying, amending or terminating the group health benefits under the HIPAA Plan.

In addition, the HIPAA Plan or a health insurance insurer with respect to the HIPAA Plan may disclose to the Plan Sponsor of the HIPAA Plan (or its affiliates) information on whether an individual is participating in the group health benefits provided by the HIPAA Plan or is enrolled in, or has ceased enrollment with health insurance offered by the HIPAA Plan.

11.4	The HIPAA Plan Will Use and Disclose PHI as Required by Law or as Permitted by the Authorization of the Participant or Beneficiary.

Upon submission of an authorization signed by a Participant, beneficiary, subscriber or personal representative that meets HIPAA requirements, the HIPAA Plan will disclose PHI.

In addition, PHI will be disclosed to the extent permitted or required by law, without the submission of an authorization form.

11.5	Disclosure of PHI to the Plan Sponsor. The HIPAA Plan will disclose information to the Plan Sponsor only upon certification from the Plan Sponsor that the HIPAA Plan documents have been amended to incorporate the assurances provided below.

The Plan Sponsor agrees to:

(1)

not use or further disclose PHI other than as permitted or required by the HIPAA Plan document or as required by law;

(2)

ensure that any affiliates or agents, including a subcontractor, to whom the Plan Sponsor provides PHI received from the HIPAA Plan, agrees to the same restrictions and conditions that apply to the Plan Sponsor with respect to such PHI;

(3)

not use or disclose PHI for employment-related actions and decisions unless authorized by the individual to whom the PHI relates;

(4)

not use or disclose PHI in connection with any other benefits or employee benefit plan of the Plan Sponsor or its affiliates unless permitted by the Plan or authorized by an individual to whom the PHI relates;

(5)

report to the Plan any PHI use or disclosure that is inconsistent with the uses or disclosures provided for of which it becomes aware;

(6)

make PHI available to an individual in accordance with HIPAA's access rules;

(7)

make PHI available for amendment and incorporate any amendments to PHI in accordance with HIPAA;

(8)

make available the information required to provide an accounting of disclosures;

(9)

make internal practices, books and records relating to the use and disclosure of PHI received from the HIPAA Plan available to the Secretary of the United States Department of Health and Human Resources for purposes of determining the Plan's compliance with HIPAA; and

(10)

if feasible, return or destroy all PHI received from the HIPAA Plan that the Plan Sponsor still maintains in any form, and retain no copies of such PHI when no longer needed for the purpose for which disclosure was made (or if return or destruction is not feasible, limit further uses and disclosures to those purposes that make the return or destruction infeasible).

11.6	Separation Between the Plan Sponsor and the HIPAA Plan. In accordance with HIPAA, only the following employees and Business Associate personnel shall be given access to PHI:

(1)

employees of the AT&T Benefits and/or AT&T Executive Compensation organizations responsible for administering group health plan benefits under the HIPAA Plan, including those employees whose functions in the regular course of business include Payment, Health Care Operations or other matters pertaining to the health care programs under a HIPAA Plan;

(2)

employees who supervise the work of the employees described in (1), above;

(3)

support personnel, including other employees outside of the AT&T Benefits or AT&T Executive Compensation organizations whose duties require them to rule on health plan-related appeals or perform functions concerning the HIPAA Plan;

(4)

investigatory personnel to the limited extent that such PHI is necessary to conduct investigations of possible fraud;

(5)

outside and in-house legal counsel providing counsel to the HIPAA Plan;

(6)

consultants providing advice concerning the administration of the HIPAA Plan; and

(7)

the employees of Business Associates charged with providing services to the HIPAA Plan.

The persons identified above shall have access to and use PHI to the extent that such access and use is necessary for the administration of group health benefits under a HIPAA Plan. If these persons do not comply with this Plan document, the Plan Sponsor shall provide a mechanism for resolving issues of noncompliance, including disciplinary sanctions.

11.7	Enforcement. Enforcement of this Article 11 shall be as provided for by HIPAA. In particular, participants and beneficiaries are not authorized to sue with regard to purported breaches of this Article 11 except as explicitly permitted by HIPAA.

ARTICLE 12 CLAIM AND APPEAL PROCESS

12.1	Claims for Benefits under the Plan. – See Appendix B.

12.2	Claims Related to Basic Eligibility for Coverage under the Plan and Claims Related to the Article 8 Loyalty Conditions.

(a)

Claims. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as a "Claimant") based on a claim for basic eligibility for coverage under the Plan or a claim related to the Article 8 Loyalty Conditions may file a written request for such benefit with the Executive Compensation Administration Department, setting forth his or her claim. The request must be addressed to the AT&T Executive Compensation Administration Department at its then principal place of business.

(b)

Claim Decision. Upon receipt of a claim, the AT&T Executive Compensation Administration Department shall review the claim and provide the Claimant with a written notice of its decision within a reasonable period of time, not to exceed ninety (90) days, after the claim is received. If the AT&T Executive Compensation Administration Department determines that special circumstances require an extension of time beyond the initial ninety (90)- day claim review period, the AT&T Executive Compensation Administration Department shall notify the Claimant in writing within the initial ninety (90)-day period and explain the special circumstances that require the extension and state the date by which the AT&T Executive Compensation Administration Department expects to render its decision on the claim. If this notice is provided, the AT&T Executive Compensation Administration Department may take up to an additional ninety (90) days (for a total of one hundred eighty (180) days after receipt of the claim) to render its decision on the claim.

If the claim is denied by the AT&T Executive Compensation Administration Department, in whole or in part, the AT&T Executive Compensation Administration Department shall provide a written decision using language calculated to be understood by the Claimant and setting forth: (i) the specific reason or reasons for such denial; (ii) specific references to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) a description of the Plan's procedures for review of denied claims and the steps to be taken if the Claimant wishes to submit the claim for review; (v) the time limits for requesting a review of a denied claim under this section and for conducting the review under this section ; and (vi) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review under this section.

(c)

Request for Review. Within sixty (60) days after the receipt by the Claimant of the written decision on the claim provided for in this section, the Claimant may request in writing that the Plan Administrator review the determination of the AT&T Executive Compensation Administration Department. Such request must be addressed to the Plan Administrator at the address provided in the written decision regarding the claim. To assist the Claimant in deciding whether to request a review of a denied claim or in preparing a request for review of a denied claim, a Claimant shall be provided, upon written request to the Plan Administrator and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim. The Claimant or his or her duly authorized representative may, but need not, submit a statement of the issues and comments in writing, as well as other documents, records or other information relating to the claim for consideration by the Committee. If the Claimant does not request a review by the Plan Administrator of the AT&T Executive Compensation Administration Department’s decision within such sixty (60)-day period, the Claimant shall be barred and estopped from challenging the determination of the AT&T Executive Compensation Administration Department.

(d)

Review of Decision. Within sixty (60) days after the Plan Administrator's receipt of a request for review, the Plan Administrator will review the decision of the AT&T Executive Compensation Administration Department. If the Plan Administrator determines that special circumstances require an extension of time beyond the initial sixty (60)-day review period, the Plan Administrator shall notify the Claimant in writing within the initial sixty (60)-day period and explain the special circumstances that require the extension and state the date by which the Plan Administrator expects to render its decision on the review of the claim. If this notice is provided, the Plan Administrator may take up to an additional sixty (60) days (for a total of one hundred twenty (120) days after receipt of the request for review) to render its decision on the review of the claim

During its review of the claim, the Plan Administrator shall:

(1)	Take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial review of the claim conducted pursuant to this section;

(2)	Follow reasonable procedures to verify that its benefit determination is made in accordance with the applicable Plan documents; and

(3)	Follow reasonable procedures to ensure that the applicable Plan provisions are applied to the Participant to whom the claim relates in a manner consistent with how such provisions have been applied to other similarly-situated Participants.

After considering all materials presented by the Claimant, the Plan Administrator will render a decision, written in a manner designed to be understood by the Claimant. If the Plan Administrator denies the claim on review, the written decision will include (i) the specific reasons for the decision; (ii) specific references to the pertinent provisions of this Plan on which the decision is based; (iii) a statement that the Claimant is entitled to receive, upon request to the Plan Administrator and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA.

In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.

Appendix A

AT&T Health Plan

2017 Monthly Contributions, Annual Deductible, Coinsurance Percentages and

Annual Out-of-Pocket Maximum

Active Participants

Monthly Contributions	Individual - $74 Individual + Spouse - $91 Individual + 1 or More Children - $74 Individual + Spouse + 1 or More Children - $178
Annual Deductible (combined with group medical plan annual deductible)	Individual - $1,500 Individual + 1 or More - $3,000
Coinsurance Percentage (Note 1)	10% after the Annual Deductible is met. Coinsurance applies until the Annual Out-of-Pocket Maximum is reached.
Annual Out-of-Pocket Maximum	Individual - $5,000 Individual + 1 or More - $10,000 (individual amount of $5,000)

Note 1: For prescription pharmacy services, the Coinsurance shall equal the lesser of (i) the Coinsurance Percentage multiplied by the amount of the Covered Health Services or (ii) the amount payable by the Participant for such services under the Basic Plan.

Retired Participants – Monthly Contributions

Retired Prior to August 31, 1992 and Surviving Spouses	Individual - $200 Individual + Spouse - $200 Individual + 2 or More - $200
Retired on or after September 1, 1992 and Surviving Spouses Note: The Plan Administrator shall maintain records governing whether a Retired Participant is in Class A, B, C or D.	Class A	Individual - $507 Individual + Spouse - $825 Individual + 1 or More Children - $507 Individual + Spouse + 1 or More Children - $782
	Class B	Individual - $620 Individual + Spouse - $1,009 Individual + 1 or More Children - $620 Individual + Spouse + 1 or More Children - $958
	Class C	Individual - $783 Individual + Spouse - $1,261 Individual + 1 or More Children - $783 Individual + Spouse + 1 or More Children - $1,209
	Class D	Individual - $954 Individual + Spouse - $1,944 Individual + 1 or More Children - $954 Individual + Spouse + 1 or More Children - $1,920

COBRA Continuation Coverage – Monthly Contributions

Active COBRA	Individual - $873 Individual + Spouse - $1,788 Individual + 1 or More Children - $1,411 Individual + Spouse + 1 or More Children - $2,558
Retired Prior to August 31, 1992 and Surviving Spouses COBRA	Individual - $1,412 Individual + 1 - $2,879 Individual + 2 or More - $3,944
Retired on or after September 1, 1992 and Surviving Spouses COBRA	Individual - $1,412 Individual + Spouse - $2,879 Individual + 1 or More Children - $3,832 Individual + Spouse + 1 or More Children - $4,112

Appendix B

Claims Procedure Applicable to Claims for Benefits under the Plan

Claim for Benefits Procedures

You, your covered dependents or a duly authorized person has the right under ERISA and the Plan to file a written claim for benefits under the Plan. The following describes the procedures used by the Plan to process claims for benefits, along with your rights and responsibilities. These procedures were designed to comply with the rules of the Department of Labor (DOL) concerning claims for Benefits. It is important that you follow these procedures to make sure that you receive full benefits under the Plan.

The Plan is an ERISA plan, and you may file suit in federal court if you are denied benefits you believe are due you under the Plan. However, you must complete the full claims and appeal process offered under the Plan before filing a lawsuit.

Filing a Claim for Benefits

When filing a claim for benefits, you should file the claim with the Claims Administrator. The Claims Administrator is the third party to whom claims and appeal responsibility has been delegated as permitted under Section 9.1 of the Plan.

The following are not considered claims for benefits under the Plan:

·	A claim related to basic eligibility for coverage under the Plan (See Section 12.2 of the Plan).

·	A claim related to the Loyalty Conditions contained in Article 8 of the Plan (See Section 12.2 of the Plan).

Claim Filing Limits

A request for payment of benefits must be submitted within one year after the date of service or the date the prescription was provided.

Required Information

When you request payment of benefits from the Plan, you must provide certain information as requested by the Claims Administrator.

Benefit Determinations

Post-Service Claims

Post-service claims are those claims that are filed for payment of benefits after medical care has been received. If your post-service claim is denied, you will receive a written notice from the Claims Administrator within 30 days of receipt of the claim, as long as all needed information identified above and any other information that the Claims Administrator may request in connection with services rendered to you was provided with the claim. The Claims Administrator will notify you within this 30-day period if additional information is needed to process the Claim and may request a one-time extension not longer than 15 days and pend your Claim until all information is received.

Once notified of the extension, you then have 45 days to provide this information. If all of the needed information is received within the 45-day time frame and the claim is denied, the claims Administrator will notify you of the denial within 15 days after the information is received. If you don't provide the needed information within the 45-day period, your claim will be denied.

A denial notice will explain the reason for denial, refer to the part of the Plan on which the denial is based, and provide the claim appeal procedures.

Pre-Service Claims

Pre-service claims are those claims that require notification or approval prior to receiving medical care or require notification within a specified time period after service begins as required under the Plan provisions. If your claim is a pre-service claim and is submitted properly with all needed information, you will receive written notice of the claim decision from the Claims Administrator within 15 days of receipt of the claim. If you file a pre-service claim improperly, the Claims Administrator will notify you of the improper filing and how to correct it within five days after the pre-service claim is received. If additional information is needed to process the

pre-service claim, the Claims Administrator will notify you of the information needed within 15 days after the claim was received and may request a one-time extension not longer than 15 days and pend your claim until all information is received. Once notified of the extension, you then have 45 days to provide this information. If all of the needed information is received within the 45-day time frame, the Claims Administrator will notify you of the determination within 15 days after the information is received. If you don't provide the needed information within the 45-day period, your claim will be denied. A denial notice will explain the reason for denial, refer to the part of the Plan on which the denial is based, and provide the claim appeal procedures.

Urgent Care Claims That Require Immediate Action

Urgent care claims are those claims that require notification or approval prior to receiving medical care in which a delay in treatment could seriously jeopardize your life or health or the ability to regain maximum function or, in the opinion of a physician with knowledge of your medical condition, could cause severe pain. In these situations:

·	You will receive notice of the benefit determination in writing or electronically within 72 hours after the Claims Administrator receives all necessary information, taking into account the seriousness of your condition.

·	Notice of denial may be oral with a written or electronic confirmation to follow within three days.

If you filed an urgent claim improperly, the Claims Administrator will notify you of the improper filing and how to correct it within 24 hours after the urgent claim was received. If additional information is needed to process the claim, the Claims Administrator will notify you of the information needed within 24 hours after the claim was received. You then have 48 hours to provide the requested information.

You will be notified of a determination no later than 48 hours after either:

·	The Claims Administrator's receipt of the requested information.

·	The end of the 48-hour period within which you were to provide the additional information, if the information is not received within that time.

A denial notice will explain the reason for denial, refer to the part of the Plan on which the denial is based, and provide the claim appeal procedures.

Concurrent Care Claims

If an ongoing course of treatment was previously approved for a specific period of time or number of treatments, and your request to extend the treatment is an urgent care claim as defined above, your request will be decided within 24 hours, provided your request is made at least 24 hours prior to the end of the approved treatment. The Claims Administrator will make a determination on your request for the extended treatment within 24 hours from receipt of your request.

If your request for extended treatment is not made at least 24 hours prior to the end of the approved treatment, the request will be treated as an urgent care claim and decided according to the time frames described above. If an ongoing course of treatment was previously approved for a specific period of time or number of treatments, and you request to extend treatment in a non-urgent circumstance, your request will be considered a new claim and decided according to post-service or pre-service timeframes, whichever applies.

How to Appeal a Claim Decision

If you disagree with a pre-service or post-service claim determination after following the above steps, you can contact the applicable Claims Administrator in writing to formally request an appeal. Your first appeal request must be submitted to the Claims Administrator within 180 days after you receive the Claim denial.

Appeal Process

A qualified individual who was not involved in the decision being appealed will be appointed to decide the appeal. The Claims Administrator may consult with, or seek the participation of, medical experts as part of the appeal resolution process. You must consent to this referral and the sharing of pertinent medical claim information. Upon written request and free of charge you have the right to reasonable access to and copies of all documents, records and other information relevant to your claim for benefits.

Appeals Determinations

Pre-Service and Post-Service Claim Appeals

You will be provided written or electronic notification of the decision on your appeal as follows:

For appeals of pre-service claims, the first-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 15 days from receipt of a request for appeal of a denied Claim. The second-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 15 days from receipt of a request for review of the first-level appeal decision.

For appeals of post-service claims, the first-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 30 days from receipt of a request for appeal of a denied claim. The second-level appeal will be conducted and you will be notified by the Claims Administrator of the decision within 30 days from receipt of a request for review of the first-level appeal decision.

·	For procedures associated with urgent Claims, refer to the following "Urgent Claim Appeals That Require Immediate Action" section.

If you are not satisfied with the first-level appeal decision of the Claims Administrator, you have the right to request a second-level appeal from the Claims Administrator. Your second level appeal request must be submitted to the Claims Administrator in writing within 60 days from receipt of the first-level appeal decision.

·	For pre-service and post-service claim appeals, the Plan Administrator has delegated to the Claims Administrator the exclusive right to interpret and administer the provisions of the Plan. The Claims Administrator's decisions are conclusive and binding.

Please note that the Claims Administrator's decision is based only on whether or not benefits are available under the Plan for the proposed treatment or procedure. The determination as to whether the pending health service is necessary or appropriate is between you and your physician.

Urgent Claim Appeals That Require Immediate Action

Your appeal may require immediate action if a delay in treatment could significantly increase the risk to your health or the ability to regain maximum function or cause severe pain.

In these urgent situations, the appeal does not need to be submitted in writing. You or your physician should call the Claims Administrator as soon as possible. The Claims Administrator will provide you with a written or electronic determination within 72 hours following receipt by the Claims Administrator of your request for review of the determination taking into account the seriousness of your condition.

For urgent claim appeals, the Plan Administrator has delegated to the applicable Claims Administrator the exclusive right to interpret and administer the provisions of the Plan. The Claims Administrator's decisions are conclusive and binding.

In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue and exhaust all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.

APPENDIX C

DISCLOSURE OF GRANDFATHERED STATUS

MODEL NOTICE

AT&T, as plan sponsor, believes this Plan is a "grandfathered health plan" under the Patient Protection and Affordable Care Act (the "Affordable Care Act"). As permitted by the Affordable Care Act, a grandfathered health plan can preserve certain basic health coverage that was already in effect when that law was enacted. Being a grandfathered health plan means that the plan may not include certain consumer protections of the Affordable Care Act that apply to other plans, for example, the requirement for the provision of preventive health services without any cost sharing. However, grandfathered health plans must comply with certain other consumer protections of the Affordable Care Act, for example, the elimination of lifetime limits on benefits.

Questions regarding which protections apply and which protections do not apply to a grandfathered health plan and what might cause a plan to change from grandfathered health plan status can be directed to the plan administrator at P.O. Box 30558, Salt Lake City, Utah 84130-0558. You may also contact the Employee Benefits Security Administration, U.S. Department of labor at 1-866-444-3272 or www.dol.gov/ebsa/healthreform. This website has a table summarizing which protections do and do not apply to grandfathered health plans.

AGREEMENT AND RELEASE AND WAIVER OF CLAIMS

This Agreement and the Release and Waiver contained herein are made and entered into in Dallas, Texas, by and between AT&T Services, Inc. (hereinafter "Company") and Mr. James Cicconi (hereinafter "Mr. Cicconi") for and in consideration of the mutual promises and agreements set forth below and are conditional on performance of such promises and agreements.

WHEREAS, Mr. Cicconi will retire from Company on September 30, 2016; and as a consequence, Mr. Cicconi will be entitled to receive appropriate, usual and customary benefits and certain other benefits described herein; and

WHEREAS, both parties agree that in connection with Mr. Cicconi's retirement on September 30, 2016, in addition to the before referenced appropriate, usual and customary benefits, Mr. Cicconi should receive additional benefits and consideration as set forth herein, and that Mr. Cicconi, among other things, should release and forever discharge Company, AT&T Inc. ("AT&T"), any and all other subsidiaries (which term when used throughout this document shall include entities, corporate or otherwise, in which the company referred to owns, directly or indirectly, fifty percent or more of the outstanding equity interests) of Company and of AT&T, their officers, directors, agents, employees, successors and assigns and any and all employee benefit plans maintained by AT&T or any subsidiary thereof and/or any and all fiduciaries of any such plan, from any and all common law and/or statutory claims, causes of action or suits of any kind whatsoever, arising from or in connection with Mr. Cicconi's employment by Company or any affiliate of AT&T and/or Mr. Cicconi's separation from Company, all as set forth in more detail in the Release and Waiver contained herein.

WHEREAS, Mr. Cicconi has been employed by Company and/or AT&T's subsidiaries for eighteen (18) years and worked in significant positions and assignments that required access to and involvement with confidential and proprietary information, trade secrets and matters of strategic importance to Company, AT&T and/or AT&T's subsidiaries that will continue beyond Mr. Cicconi's employment with Company. During the term of his longstanding with Company, or an AT&T subsidiary, Mr. Cicconi has acquired knowledge of all aspects of its business, on a national and regional level, including but not limited to operations, sales, marketing, advertising, technology, networks, network technology, network development and strategy, distribution and distribution channels, operations, strategic planning initiatives, new product and services development, strategic planning, rate information and growth strategies and initiatives. Mr. Cicconi has acquired and possesses unique skills as a result of employment with Company and/or AT&T subsidiaries. The trade secrets with which Mr. Cicconi has been involved are critical to Company's, AT&T's, and AT&T's subsidiaries' success. Disclosure of this information in the performance of services for a subsequent employer engaged in similar businesses would be inevitable and inherent as part of Mr. Cicconi's performance of services for such an employer. For all of these reasons and due to the confidential and proprietary information and trade secrets Mr. Cicconi learned in his employment with Company, or an AT&T subsidiary, Mr. Cicconi acknowledges that it is reasonable for Company to seek the restrictions contained in the subsequent provisions of this Agreement and that more limited restrictions are neither feasible nor appropriate. Mr. Cicconi understands and agrees that the consideration provided herein requires Mr. Cicconi to comply strictly with all terms of this Agreement including, but not limited to, confidentiality, non-compete, non-solicitation of employees and non-solicitation of customers as set forth below.

NOW, therefore, the parties further agree as follows:

1. Mr. Cicconi will retire from Company effective at the close of business on September 30, 2016, and Mr. Cicconi herewith resigns all officer and director positions that he may hold in AT&T and in any subsidiary of AT&T effective at the close of business on September 30, 2016.

2. Company shall propose to the Human Resources Committee of the AT&T Board of Directors or its authorized delegate (the "Committee") that the AT&T 2011 Incentive Plan provisions requiring (A) the automatic proration of Mr. Cicconi' 2014, 2015, and 2016 Performance Share Grants shall not apply and Mr. Cicconi shall be eligible for full distribution of such grants after the applicable three (3) year performance period, subject to adjustment based on achievement of the applicable performance goals, approval of the Committee and all other terms and conditions of the grant, (B) the automatic forfeiture of Mr. Cicconi's 2013, 2014, 2015, and 2016 Restricted Stock Units shall not apply and Mr. Cicconi shall be eligible for full distribution of such Restricted Stock Units, which shall be paid subject to all other terms and conditions of the Restricted Stock Unit grants, including with respect to timing, and (C) the automatic forfeiture of Mr. Cicconi's 2014 Restricted Stock Award shall not apply and Mr. Cicconi shall be fully vested and such Restricted Stock Award shall be distributed upon his termination of employment. Notwithstanding the foregoing, none of the consideration described in this Section 2 shall be made available to Mr. Cicconi (or shall be subject to rescission) should he not timely sign, or should he revoke, the Release and Wavier contained herein.

3. The consideration described herein shall be in lieu of, and Mr. Cicconi hereby specifically waives any right to any and all other termination pay allowance resulting from his retirement.

4. This Agreement and the Release and Waiver contained herein do not abrogate any of the usual entitlements that Mr. Cicconi has or will have, first, while a regular employee and subsequently, upon his retirement, under any AT&T or AT&T subsidiary sponsored employee benefit plan, program or policy, all of which will be subject to and provided in accordance with the terms and conditions of the respective benefit plan, program, or policy as applicable to Mr. Cicconi. Further, AT&T and its subsidiaries have reserved the right to end or amend any or all of the plans, programs, and policies that it sponsors. Each participating subsidiary, which includes Company, has reserved the right to end its participation in these plans, programs, and policies and to discontinue providing any and all such benefits. This means, for example, that Mr. Cicconi will not acquire a lifetime right to any health care plan benefit or to the continuation of any health care plan merely by reason of the fact that such benefit, plan, program, or policy is in existence at the time of Mr. Cicconi' retirement or because of this Agreement and the Release and Waiver contained herein. Thus, except as specifically provided in this Agreement, Mr. Cicconi's rights/entitlements to any benefit under any of the plans, programs, or policies are no different as a result of entering into this Agreement and the Release and Waiver contained herein than they would have been in the absence of this Agreement and the Release and Waiver contained herein.

5. At Company's request at any time during the eighteen (18) months immediately following his retirement, Mr. Cicconi will cooperate with Company, AT&T or any of their respective subsidiaries in any future claims or lawsuits involving any of them where Mr. Cicconi has knowledge of the underlying facts; provided, however, Mr. Cicconi shall not be required to and shall not provide such services for more than twenty percent (20%) of the average amount of time he provided bona fide services over the thirty-six (36) month period immediately preceding September 30, 2016. For the time Mr. Cicconi spends working on any claims or lawsuits at such request, Mr. Cicconi shall be reimbursed at the equivalent per hour base salary rate at which Mr. Cicconi was being compensated by Company immediately prior to his retirement; provided, however, that if Mr. Cicconi is a named party in any claim or lawsuit and Company, in its discretion, determines that Mr. Cicconi's interests are adverse to Company, AT&T or any of their respective subsidiaries, he will not be entitled to such compensation. Mr. Cicconi agrees not to voluntarily aid, assist, or cooperate with any claimants or plaintiffs or their attorneys or agents, whether individually or as part of a class, in any claims or lawsuits commenced in the future against Company, AT&T or any AT&T subsidiary; provided, however, that nothing in this Agreement shall prohibit Mr. Cicconi from exercising his right to file a charge of discrimination with, or that would limit his right to testify, assist, or participate in an investigation, hearing, or proceeding conducted by the Equal Employment Opportunity Commission ("EEOC"), a comparable state or local agency, or any other governmental agency charged with enforcing anti-discrimination laws; provided, further, however, nothing in this Agreement will be construed to prevent Mr. Cicconi from testifying at an administrative hearing, a deposition, or in court in response to a lawful subpoena in any litigation or proceedings involving Company, AT&T or any of their respective subsidiaries. Notwithstanding the foregoing, Mr. Cicconi acknowledges and agrees that the Release and Waiver contained herein includes a waiver of his right, if any, to monetary recovery should any party, entity, administrative agency, or governmental agency (such as the EEOC, the National Labor Relations Board, or any state or local agencies) pursue any claims on Mr. Cicconi's behalf against the persons or entities covered by the Agreement and the Release and Waiver contained herein.

Company agrees to indemnify Mr. Cicconi if he is a defendant or is threatened to be made a defendant to any action, suit or proceeding, whether civil, criminal, administrative or investigative that is brought by a third party by reason of the fact that he was a director, officer, employee or agent of Company, or was serving at the request of Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, but in each case only if and to the extent permitted under applicable state or federal law.

6. Mr. Cicconi acknowledges that, as a result of his employment with Company and/or any AT&T subsidiaries, he has and had access to certain Trade Secrets and Confidential Information (as these terms are defined below) and the Company will continue to provide Mr. Cicconi access to such Trade Secrets and Confidential Information through his termination of employment so that he may continue performing his job responsibilities. Mr. Cicconi acknowledges that AT&T and its subsidiaries must protect its Trade Secrets and Confidential Information from disclosure or misappropriation, and Mr. Cicconi further acknowledges that the Trade Secrets and Confidential Information are unique and confidential and are the proprietary property of AT&T and its subsidiaries. Mr. Cicconi acknowledges that the Trade Secrets and Confidential Information derive independent, actual and potential commercial value from not being generally known, or readily ascertainable through independent development. Mr. Cicconi agrees to hold Trade Secrets or Confidential Information in trust and confidence and to not directly or indirectly disclose or transmit Trade Secrets or Confidential Information to any third party without prior written consent of AT&T; provided however, nothing in this Agreement shall prohibit Mr. Cicconi from reporting possible violations of federal law or regulation to any governmental agency or entity or making other disclosures that are protected under the whistleblower provisions of federal or state law or regulation. Mr. Cicconi further agrees not to use any such Trade Secrets or Confidential Information for his personal benefit or for the benefit of any third party. This restriction shall apply indefinitely as long as the document or information exists as a Trade Secret or Confidential Information.

On or before his retirement, Mr. Cicconi shall return to AT&T or an AT&T subsidiary all of AT&T's (and its subsidiaries') documents (and all copies thereof), and other property of AT&T and its subsidiaries that are in Mr. Cicconi's possession, including, but not limited to, AT&T's (and its subsidiaries') files, notes, drawings, records, business plans and forecasts, financial information, specifications, all product specifications, customer identity information, product development information, source code information, object code information, tangible property (including, but not limited to, computers), intellectual property, credit cards, entry cards, and keys; and, any materials of any kind which contain or embody Trade Secrets or Confidential Information (and all reproductions thereof), including, without limitation, any such documents and other property in electronic form, or any computer or data storage device. Mr. Cicconi shall not retain or provide to anyone else any copies, summaries, abstracts, descriptions, compilation, or other representations of such information or things or their contents.

"Trade Secret" means information proprietary to AT&T or any AT&T subsidiary including, but not limited to, technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, marketing plans, pricing plans, advertising and sponsorship plans, product development analyses or plans, any plans involving the combination of AT&T's or its subsidiaries' products or services, or pricing of such products or services, offered or to be offered by or in conjunction with AT&T or any subsidiary of AT&T, or lists of actual or potential customers or suppliers which: (1) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

"Confidential Information" means this Agreement and the Release and Waiver contained herein and any data or information, other than Trade Secrets, that is competitively sensitive to AT&T or an AT&T subsidiary and not generally known by the public. To the extent consistent with the foregoing definition, Confidential Information includes, without limitation: (1) the sales records, profit and performance records, pricing manuals, sales manuals, training manuals, selling and pricing procedures, and financing methods of AT&T or any AT&T subsidiary, (2) customer lists, the special demands of particular customers, and the current and anticipated requirements of customers for the products and services of AT&T or any AT&T subsidiary, (3) the specifications of any new products or services under development by AT&T or any AT&T subsidiary, (4) the sources of supply for integrated components and materials used for production, assembly, and packaging by AT&T or any AT&T subsidiary, and the quality, prices, and usage of those components and materials, and (5) the business plans, marketing strategies, promotional and advertising strategies, branding strategies, and internal financial statements and projections of AT&T or any AT&T subsidiary.

Notwithstanding the definitions of Trade Secrets and Confidential Information set forth above, Trade Secrets and Confidential Information shall not include any information: (1) that is or becomes generally known to the public, (2) that is developed by Mr. Cicconi after his retirement through his entirely independent efforts without use of any Trade Secret or Confidential Information, (3) that Mr. Cicconi obtains from an independent source having a bona fide right to use and disclose such information, (4) that is required to be disclosed by subpoena, law, or similar legislative, judicial, or administrative requirement; provided, however, Mr. Cicconi will notify Company upon receipt of any such subpoena or similar request and give Company a reasonable opportunity to contest or otherwise oppose the subpoena or similar request, or (5) that AT&T approves for unrestricted release by express authorization of a duly authorized officer.

It is hereby agreed that Mr. Cicconi may represent himself as a former employee or retiree of Company or AT&T; but otherwise he agrees that he will not make, nor cause to be made any public statements, disclosures or publications which relate in any way, directly or indirectly to his cessation of employment with Company without prior written approval by Company. Mr. Cicconi also agrees that he will not make, nor cause to be made any public statements, disclosures or publications which portray unfavorably, reflect adversely on, or are derogatory or inimical to the best interests of AT&T, its subsidiaries, or their respective directors, officers, employees or agents, past, present or future.

7. Mr. Cicconi agrees that he shall not, during the twenty-four (24) months immediately following his retirement, without obtaining the written consent of Company in advance, participate in activities that constitute Engaging in Competition with AT&T or Engaging in Conduct Disloyal to AT&T, as those terms are defined below.

"Engaging in Competition with AT&T" means engaging in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business. "Engaging in Competition with AT&T" shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer Business. "Engaging in Competition with AT&T" shall include representing or providing consulting services to, or being an employee or director of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.

"Engaging in Conduct Disloyal to AT&T" means (i) soliciting for employment or hire, whether as an employee or as an independent contractor, any person employed by AT&T or its subsidiaries during the one (1) year prior to Mr. Cicconi's retirement, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T or its subsidiaries; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Mr. Cicconi had business contact on behalf of any Employer Business during the two (2) years prior to Mr. Cicconi's retirement, to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or any AT&T subsidiary; or (iii) soliciting, encouraging, or inducing any AT&T or AT&T subsidiary customer or active prospective customer, in each case, with respect to whom Mr. Cicconi had business contact, whether in person or by other media ("Customer"), on behalf of any Employer Business during the two (2) years prior to Mr. Cicconi's retirement, to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business.

c.	"Employer Business" shall mean AT&T, any subsidiary of AT&T, or any business in which AT&T or an AT&T subsidiary has a substantial ownership or joint venture interest.

Mr. Cicconi acknowledges that the business of AT&T and its subsidiaries is global in scope and that the geographic and temporal limitations set forth in this Section are therefore reasonable.

Mr. Cicconi may submit a description of any proposed activity in writing to Company (attn: Vice President – Executive Compensation), and Company shall advise Mr. Cicconi, in writing, within (15) fifteen business days whether such proposed activity would constitute a breach of the provisions of this Section.

8. Mr. Cicconi acknowledges and agrees that Company would be unwilling to provide the consideration provided pursuant to this Agreement and the Release and Waiver contained herein but for the confidentiality, non-solicitation, and non-compete conditions and covenants set forth in Sections 6 and 7, and that these conditions and covenants are a material inducement to AT&T's willingness to enter into this Agreement. Accordingly, Mr. Cicconi shall return to Company any consideration received pursuant to this Agreement and the Release and Waiver contained herein, for any breach by Mr. Cicconi of the provisions of Section 6 or 7 hereof, or of the Release and Waiver contained herein. Further, Mr. Cicconi recognizes that any breach by him of the provisions in Sections 6 or 7 would cause irreparable injury to Company such that monetary damages would not provide an adequate or complete remedy. Accordingly, in the event of Mr. Cicconi's actual or threatened breach of the provisions of Section 6 or 7, Company, in addition to all other rights under law or this Agreement, shall be entitled to an injunction restraining Mr. Cicconi from breaching these provisions and to recover from Mr. Cicconi its reasonable attorneys' fees and costs incurred in obtaining such remedies.

9. It is hereby specifically agreed that Mr. Cicconi shall maintain the confidentiality of the terms of this Agreement and the Release and Waiver contained herein and that he shall not, except as necessary for performance of the terms hereof or as specifically required by law, disclose the existence of this Agreement and the Release and Waiver contained herein or any of its terms to third persons without the express consent of Company; provided, however, Mr. Cicconi may disclose the existence of this Agreement and the Release and Waiver contained herein or any of its terms to any member of his immediate family, his financial advisor, and/or his attorney, but only after making such individuals aware of the non-disclosure requirements with respect to such information. Mr. Cicconi hereby specifically agrees to secure from those persons to whom he makes such disclosure, their agreement to maintain the confidentiality of such disclosed information.

10. Mr. Cicconi declares that his decision to execute this Agreement and the Release and Waiver contained herein has not been influenced by any declarations or representations by Company, AT&T, or any AT&T subsidiary, other than the contractual agreements and consideration expressly stated herein.

Company has expressly advised Mr. Cicconi to seek personal legal advice prior to executing this Agreement and the Release and Waiver contained herein, and Mr. Cicconi, by his signature below, hereby expressly acknowledges that he was given at least twenty one (21) days in which to seek such advice and decide whether or not to enter into and execute the Release and Waiver contained herein. The parties agree that any changes to this Agreement or to the Release and Waiver contained herein made after the initial draft of this Agreement and Release and Waiver of Claims is presented to Mr. Cicconi, whether material or immaterial, do not restart the running of said twenty-one (21) day period.

Mr. Cicconi may revoke this Agreement and the Release and Waiver contained herein within seven (7) days of his execution of the Release and Waiver contained herein by giving notice, in writing, by certified mail, return receipt requested to Company at the address specified below. Proof of such mailing within said seven (7) day period shall suffice to establish revocation pursuant to this Section. In the event of any such revocation, this entire Agreement and the Release and Waiver contained herein shall be null and void, and unenforceable by either party.

11. Any notice required hereunder to be given by either party must be in writing and will be deemed effectively given upon personal delivery to the party to be notified, or five (5) days after deposit with the United States Post Office by certified mail, postage prepaid, to the other party at the addresses noted in the signature block of this Agreement.

12. The parties agree that any conflicts relating to this Agreement and the Release and Waiver contained herein, including choice of law and venue with respect to any such conflict, shall be determined as provided in that certain Management Arbitration Agreement to the extent agreed to by and between Mr. Cicconi and Company (the "Management Arbitration Agreement"). If the Management Arbitration Agreement is inapplicable, the validity, interpretation, construction and performance of this Agreement and the Release and Waiver contained herein shall be governed by the laws of the State of Texas excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement and the Release and Waiver contained herein to the substantive law of another jurisdiction, and to achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Agreement, which the parties agree is a material condition of entering into this Agreement, the parties agree and acknowledge that (a) the sole and exclusive venue for any such action shall be an appropriate federal or state court in Dallas County, Texas, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Dallas County, Texas court, and no other, (c) such Dallas County, Texas court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto, and (d) that the parties waive any and all objections and defenses to bringing any such action before such Dallas County, Texas court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens.

13. The terms and conditions contained in this Agreement that by their sense and context are intended to survive the termination or completion of performance of obligations by either or both parties under this Agreement shall so survive.

14. This Agreement and the Release and Waiver contained herein shall not be modified or amended except pursuant to an instrument in writing executed and delivered on behalf of each of the parties hereto.

15. This Agreement and the Release and Waiver contained herein, and, to the extent agreed by Mr. Cicconi and Company, the Management Arbitration Agreement, constitute the entire agreement and supersede all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, except that neither this Agreement nor the Management Arbitration Agreement (to the extent applicable) shall be deemed to supersede or cancel any obligations applicable to Mr. Cicconi under any AT&T or AT&T subsidiary sponsored deferred compensation plan, equity award plan, fringe benefit program, or any other AT&T or AT&T subsidiary sponsored benefit plan as to which Mr. Cicconi is a participant immediately preceding his retirement.

16. In the event any provision of this Agreement or the Release and Waiver contained herein is held invalid, void, or unenforceable, the same shall not affect in any respect whatsoever the validity of any other provision of this Agreement or said Release and Waiver, except that should said Release and Waiver be held to be invalid as applicable to and as asserted by Mr. Cicconi with regard to any claim or dispute covered thereunder, or should any part of the provisions of Sections 6, 7, or 8 of this Agreement be held invalid, void, or unenforceable as applicable to and as asserted by Mr. Cicconi, this Agreement and the Release and Waiver contained herein, at Company's option, may be declared by Company null and void. If this Agreement and the Release and Waiver contained herein are declared null and void by Company pursuant to the provisions of this Section, Mr. Cicconi shall return to Company all consideration previously received pursuant to this Agreement and the Release and Waiver contained herein.

17. This Agreement and the Release and Waiver contained herein shall inure to the benefit of and be binding upon, Company, its successors and assigns, and Mr. Cicconi and his beneficiaries, whether under the various employee benefit programs or otherwise.

(The remainder of this page is intentionally left blank)

18. This Agreement and the Release and Waiver contained herein shall be and hereby are declared to be null and void in the event that Mr. Cicconi does not retire from Company on or before the close of business on September 30, 2016. All payments and other consideration to be provided to Mr. Cicconi by Company are contingent upon Mr. Cicconi's retirement actually becoming effective on or before the close of business on September 30, 2016, and are further contingent upon Mr. Cicconi's execution of this Agreement no later than September 30, 2016 and the Release and Waiver contained herein on September 30, 2016, and not revoking either this Agreement or the Release and Waiver contained herein.

AT&T Services, Inc.

208 South Akard Street

Room 412

Dallas, TX 75202

By: William A. Blase, Jr.

Title: Senior Executive Vice President-

Human Resources

Date:

James Cicconi

891 Alvermar Ridge Dr.

McLean, VA 22102

James Cicconi

Date:

RELEASE AND WAIVER

I, James Cicconi, hereby fully waive and forever release and discharge Company, AT&T, any and all other subsidiaries of Company and of AT&T, their officers, directors, agents, servants, employees, successors and assigns and any and all employee benefit plans maintained by AT&T or any subsidiary thereof and/or any and all fiduciaries of any such plan from any and all common law and/or statutory claims, causes of action or suits of any kind whatsoever arising from or in connection with my past employment by Company (and any AT&T subsidiary to the extent applicable) and/or my separation therefrom, including but not limited to claims, actions, causes of action or suits of any kind allegedly arising under the Employee Retirement Income Security Act (ERISA), as amended, 29 USC §§ 1001 et seq.; the Rehabilitation Act of 1973, as amended, 29 USC §§ 701 et seq.; the Civil Rights Acts of 1866 and 1870, as amended, 42 USC §§ 1981, 1982 and 1988; the Civil Rights Act of 1871, as amended, 42 USC §§ 1983 and 1985; the Civil Rights Act of 1964, as amended, 42 USC § 2000d et seq.; the Americans With Disabilities Act, as amended, 42 USC §§ 12101 et seq., and the Age Discrimination in Employment Act of 1967 (ADEA), as amended, 29 USC §§ 621 et seq., the Family and Medical Leave Act; the Fair Credit Reporting Act, known and unknown. Notwithstanding the foregoing, nothing herein is intended to release claims that cannot be released as a matter of law, including, by way of example, filing a charge of discrimination with the EEOC or testifying, assisting, or participating in an investigation, hearing, or proceeding conducted by the EEOC. In addition, I, Mr. Cicconi, agree not to file any lawsuit or other claim seeking monetary damage or other relief in any state or federal court or with any administrative agency (except as provided in the Agreement delivered by Company contemporaneously with this Release and Waiver (the "Agreement")) against any of the aforementioned parties in connection with or relating to any of the aforementioned matters. Provided, however, by executing this Release and Waiver, I, James Cicconi, do not waive rights or claims that may arise after the date of execution; provided further, however, this Release and Waiver shall not affect my right to receive or enforce through litigation, any indemnification rights to which I am entitled as a result of my past employment by Company and, if applicable, any subsidiary of AT&T, or contract rights pursuant to the Agreement and Release and Waiver of Claims entered into substantially contemporaneously herewith; and, provided further, this Release and Waiver shall not affect the ordinary distribution of benefits/entitlements, if any, to which I am entitled upon termination from Company; it being understood by me that said benefits/entitlements, if any, will be subject to and provided in accordance with the terms and conditions of their respective governing plan and the Agreement.

James Cicconi

Dated: September 30, 2016

																			EXHIBIT 12
AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions

	Nine Months Ended
	September 30,						Year Ended December 31,
	(Unaudited)						Year Ended December 31,
	2016			2015			2015			2014			2013			2012			2011
Earnings:
Income from continuing operations before income taxes	$	16,621		$	14,385		$	20,692		$	10,355		$	28,050		$	10,496		$	6,998
Equity in net income of affiliates included above		(57	)		(48	)		(79	)		(175	)		(642	)		(752	)		(784	)
Fixed charges		5,465			4,834			6,592			5,295			5,452			4,876			4,835
Distributed income of equity affiliates		35			12			30			148			318			137			161
Interest capitalized		(669	)		(566	)		(797	)		(234	)		(284	)		(263	)		(162	)

Earnings, as adjusted	$	21,395		$	18,617		$	26,438		$	15,389		$	32,894		$	14,494		$	11,048

Fixed Charges:
Interest expense	$	3,689		$	2,977		$	4,120		$	3,613		$	3,940		$	3,444		$	3,535
Interest capitalized		669			566			797			234			284			263			162
Portion of rental expense representative of interest factor		1,107			1,291			1,675			1,448			1,228			1,169			1,138

Fixed Charges	$	5,465		$	4,834		$	6,592		$	5,295		$	5,452		$	4,876		$	4,835

Ratio of Earnings to Fixed Charges		3.91			3.85			4.01			2.91			6.03			2.97			2.29

CERTIFICATION

I, Randall Stephenson, certify that:

1.	I have reviewed this report on Form 10-Q of AT&T Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 3, 2016

/s/ Randall Stephenson

Randall Stephenson
Chairman of the Board,

Chief Executive Officer and President

CERTIFICATION

I, John J. Stephens, certify that:

1.	I have reviewed this report on Form 10-Q of AT&T Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 3, 2016

/s/ John J. Stephens..

John J. Stephens
Senior Executive Vice President

and Chief Financial Officer

Certification of Periodic Financial Reports

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2016 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 3, 2016

By: /s/ Randall Stephenson

Randall Stephenson

Chairman of the Board, Chief Executive Officer

and President

By: /s/ John J. Stephens

John J. Stephens

Senior Executive Vice President

and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Exchange Act") or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AT&T Inc. and will be retained by AT&T Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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