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 March 31, ~~2015~~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 April 30, ~~2015~~2016, there were ~~5,193~~6,156 million common shares outstanding.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AT&T INC.	AT&T INC.							AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME	CONSOLIDATED STATEMENTS OF INCOME							CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts	Dollars in millions except per share amounts							Dollars in millions except per share amounts
(Unaudited)	(Unaudited)							(Unaudited)
									Three Months Ended
		Three months ended							March 31,
		March 31,							2016			2015
		2015			2014
Operating Revenues
Service		$	28,962		$	29,776			$	37,101		$	28,962
Equipment			3,614			2,700				3,434			3,614
Total operating revenues			32,576			32,476				40,535			32,576

Operating Expenses
Cost of services and sales (exclusive of depreciation
Cost of services and sales
Equipment										4,375			4,546
Broadcast, programming and operations										4,629			1,122
Other cost of services (exclusive of depreciation
and amortization shown separately below)			14,581			13,321				9,396			8,812
Selling, general and administrative			7,961			8,260				8,441			7,961
Depreciation and amortization			4,578			4,617				6,563			4,578
Total operating expenses			27,120			26,198				33,404			27,019
Operating Income			5,456			6,278				7,131			5,557
Other Income (Expense)
Interest expense			(899	)		(860	)			(1,207	)		(899	)
Equity in net income of affiliates			-			88				13			-
Other income (expense) – net			70			145				70			70
Total other income (expense)			(829	)		(627	)			(1,124	)		(829	)
Income Before Income Taxes			4,627			5,651				6,007			4,728
Income tax expense			1,351			1,917				2,122			1,389
Net Income			3,276			3,734				3,885			3,339
Less: Net Income Attributable to Noncontrolling Interest			(76	)		(82	)			(82	)		(76	)
Net Income Attributable to AT&T		$	3,200		$	3,652			$	3,803		$	3,263
Basic Earnings Per Share Attributable to AT&T		$	0.61		$	0.70			$	0.62		$	0.63
Diluted Earnings Per Share Attributable to AT&T		$	0.61		$	0.70			$	0.61		$	0.63
Weighted Average Number of Common Shares Outstanding – Basic (in millions)			5,203			5,222				6,172			5,203
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)			5,219			5,238				6,190			5,219
Dividends Declared Per Common Share		$	0.47		$	0.46			$	0.48		$	0.47
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
   Three months ended
March 31,
2015 2014
Net income $ 3,276 $ 3,734
Other comprehensive income, net of tax:
   Foreign currency:
        Foreign currency translation adjustment (includes $0 and $0 attributable to
             noncontrolling interest), net of taxes of $(104) and $(9)
(186 ) (20 )
        Reclassification adjustment included in net income, net of taxes of $0 and $14 - 25
   Available-for-sale securities:
        Net unrealized gains, net of taxes of $19 and $10 34 16
        Reclassification adjustment included in net income, net of taxes of $(3) and $(7) (5 ) (11 )
   Cash flow hedges:
        Net unrealized (losses) gains, net of taxes of $(190) and $3 (354 ) 6
        Reclassification adjustment included in net income, net of taxes of $4 and $4 7 7
   Defined benefit postretirement plans:
        Amortization of net prior service credit included in net income, net of taxes of $(131)
             and $(147)
(215 ) (240 )
        Reclassification adjustment included in net income, net of taxes of $0 and $2 - 3
Other comprehensive income (loss) (719 ) (214 )
Total comprehensive income 2,557 3,520
Less: Total comprehensive income attributable to noncontrolling interest (76 ) (82 )
Total Comprehensive Income Attributable to AT&T $ 2,481 $ 3,438
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
	Three months ended
	March 31,
	2016			2015
Net income	$	3,885		$	3,339
Other comprehensive income, net of tax:
Foreign currency:
Foreign currency translation adjustment, net of taxes of $(10) and $(104)		(44	)		(186	)
Available-for-sale securities:
Net unrealized gains (losses), net of taxes of $(15) and $19		(26	)		33
Reclassification adjustment included in net income, net of taxes of $(2) and $(3)		(3	)		(5	)
Cash flow hedges:
Net unrealized gains (losses), net of taxes of $67 and $(190)		124			(354	)
Reclassification adjustment included in net income, net of taxes of $5 and $4		10			7
Defined benefit postretirement plans:
Amortization of net prior service credit included in net income, net of taxes of $(131) and $(131)		(215	)		(215	)
Other comprehensive income (loss)		(154	)		(720	)
Total comprehensive income		3,731			2,619
Less: Total comprehensive income attributable to noncontrolling interest		(82	)		(76	)
Total Comprehensive Income Attributable to AT&T	$	3,649		$	2,543
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
March 31, December 31,
2015 2014
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 4,444 $ 8,603
Accounts receivable - net of allowances for doubtful accounts of $488 and $454 13,592 14,527
Prepaid expenses 930 831
Deferred income taxes 1,538 1,142
Other current assets 6,906 6,925
Total current assets 27,410 32,028
Property, plant and equipment 285,133 282,295
   Less: accumulated depreciation and amortization (171,935 ) (169,397 )
Property, Plant and Equipment – Net 113,198 112,898
Goodwill 70,341 69,692
Licenses 80,560 60,824
Other Intangible Assets – Net 6,423 6,139
Investments in Equity Affiliates 266 250
Other Assets 9,830 10,998
Total Assets $ 308,028 $ 292,829

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 8,181 $ 6,056
Accounts payable and accrued liabilities 20,418 23,592
Advanced billing and customer deposits 4,221 4,105
Accrued taxes 2,390 1,091
Dividends payable 2,441 2,438
Total current liabilities 37,651 37,282
Long-Term Debt 88,272 76,011
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 38,019 37,544
Postemployment benefit obligation 37,074 37,079
Other noncurrent liabilities 19,908 17,989
Total deferred credits and other noncurrent liabilities 95,001 92,612

Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2015 and
   December 31, 2014: issued 6,495,231,088 at March 31, 2015 and December 31, 2014) 6,495 6,495
Additional paid-in capital 90,977 91,108
Retained earnings 28,490 27,736
Treasury stock (1,302,176,826 at March 31, 2015 and 1,308,318,131
   at December 31, 2014, at cost) (46,804 ) (47,029 )
Accumulated other comprehensive income 7,341 8,060
Noncontrolling interest 605 554
Total stockholders' equity 87,104 86,924
Total Liabilities and Stockholders' Equity $ 308,028 $ 292,829
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	March 31,			December 31,
	2016			2015
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	10,008		$	5,121
Accounts receivable - net of allowances for doubtful accounts of $697 and $704		16,070			16,532
Prepaid expenses		1,378			1,072
Other current assets		10,545			13,267
Total current assets		38,001			35,992
Property, plant and equipment		309,380			306,227
Less: accumulated depreciation and amortization		(185,926	)		(181,777	)
Property, Plant and Equipment – Net		123,454			124,450
Goodwill		104,651			104,568
Licenses		94,130			93,093
Customer Lists and Relationships - Net		17,197			18,208
Other Intangible Assets – Net		9,108			9,409
Investments in Equity Affiliates		1,594			1,606
Other Assets		15,503			15,346
Total Assets	$	403,638		$	402,672

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year	$	8,399		$	7,636
Accounts payable and accrued liabilities		26,169			30,372
Advanced billing and customer deposits		4,550			4,682
Accrued taxes		2,455			2,176
Dividends payable		2,955			2,950
Total current liabilities		44,528			47,816
Long-Term Debt		122,104			118,515
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		57,489			56,181
Postemployment benefit obligation		34,114			34,262
Other noncurrent liabilities		20,998			22,258
Total deferred credits and other noncurrent liabilities		112,601			112,701

Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2016 and
December 31, 2015: issued 6,495,231,088 at March 31, 2016 and December 31, 2015)		6,495			6,495
Additional paid-in capital		89,414			89,763
Retained earnings		34,506			33,671
Treasury stock (339,006,986 at March 31, 2016 and 350,291,239
at December 31, 2015, at cost)		(12,163	)		(12,592	)
Accumulated other comprehensive income		5,180			5,334
Noncontrolling interest		973			969
Total stockholders' equity		124,405			123,640
Total Liabilities and Stockholders' Equity	$	403,638		$	402,672
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Three months ended
March 31,
2015 2014
Operating Activities
Net income $ 3,276 $ 3,734
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization 4,578 4,617
   Undistributed earnings from investments in equity affiliates - 17
   Provision for uncollectible accounts 285 241
   Deferred income tax expense 214 578
   Net (gain) loss from sale of investments, net of impairments (33 ) (122 )
   Changes in operating assets and liabilities:
      Accounts receivable 739 (498 )
      Other current assets 13 (340 )
      Accounts payable and accrued liabilities (1,817 ) 1,025
   Retirement benefit funding (140 ) (140 )
   Other - net
(377 ) (313 )
Total adjustments 3,462 5,065
Net Cash Provided by Operating Activities 6,738 8,799

Investing Activities
Construction and capital expenditures:
   Capital expenditures (3,848 ) (5,716 )
   Interest during construction (123 ) (55 )
Acquisitions, net of cash acquired (19,514 ) (662 )
Dispositions 8 351
Sale of securities 1,890 -
Net Cash Used in Investing Activities (21,587 ) (6,082 )

Financing Activities
Net change in short-term borrowings with original maturities of three months or less - (17 )
Issuance of long-term debt 16,572 2,987
Repayment of long-term debt (596 ) (1,867 )
Purchase of treasury stock - (1,237 )
Issuance of treasury stock 8 13
Dividends paid (2,434 ) (2,398 )
Other (2,860 ) 74
Net Cash Provided by (Used in) Financing Activities 10,690 (2,445 )
Net (decrease) increase in cash and cash equivalents (4,159 ) 272
Cash and cash equivalents beginning of year 8,603 3,339
Cash and Cash Equivalents End of Period $ 4,444 $ 3,611

Cash paid (received) during the three months ended March 31 for:
   Interest $ 1,021 $ 976
   Income taxes, net of refunds $ (247 ) $ (40 )
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Three months ended
	March 31,
	2016			2015
Operating Activities
Net income	$	3,885		$	3,339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,563			4,578
Undistributed earnings from investments in equity affiliates		(13	)		-
Provision for uncollectible accounts		374			285
Deferred income tax expense		1,346			252
Net gain from sale of investments, net of impairments		(44	)		(33	)
Changes in operating assets and liabilities:
Accounts receivable		627			739
Other current assets		612			408
Accounts payable and accrued liabilities		(4,006	)		(1,817	)
Retirement benefit funding		(140	)		(140	)
Other - net		(1,304	)		(873	)
Total adjustments		4,015			3,399
Net Cash Provided by Operating Activities		7,900			6,738

Investing Activities
Construction and capital expenditures:
Capital expenditures		(4,451	)		(3,848	)
Interest during construction		(218	)		(123	)
Acquisitions, net of cash acquired		(165	)		(19,514	)
Dispositions		81			8
Sale of securities, net		445			1,890
Net Cash Used in Investing Activities		(4,308	)		(21,587	)

Financing Activities
Issuance of long-term debt		5,978			16,572
Repayment of long-term debt		(2,296	)		(596	)
Issuance of treasury stock		89			8
Dividends paid		(2,947	)		(2,434	)
Other		471			(2,860	)
Net Cash Provided by Financing Activities		1,295			10,690
Net increase (decrease) in cash and cash equivalents		4,887			(4,159	)
Cash and cash equivalents beginning of year		5,121			8,603
Cash and Cash Equivalents End of Period	$	10,008		$	4,444

Cash paid (received) during the three months ended March 31 for:
Interest	$	1,459		$	1,021
Income taxes, net of refunds	$	477		$	(247	)
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)
March 31, 2015
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 $ 91,108
Issuance of treasury stock 3
Share-based payments (123 )
Change related to acquisition of interests held by noncontrolling owners (11 )
Balance at end of period $ 90,977

Retained Earnings
Balance at beginning of year $ 27,736
Net income attributable to AT&T ($0.61 per diluted share) 3,200
Dividends to stockholders ($0.47 per share) (2,446 )
Balance at end of period $ 28,490

Treasury Stock
Balance at beginning of year (1,308 ) $ (47,029 )
Issuance of treasury stock 6 225
Balance at end of period (1,302 ) $ (46,804 )

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year $ 8,060
Other comprehensive loss attributable to AT&T (719 )
Balance at end of period $ 7,341

Noncontrolling Interest
Balance at beginning of year $ 554
Net income attributable to noncontrolling interest 76
Distributions (54 )
Acquisition of noncontrolling interests 29
Balance at end of period $ 605

Total Stockholders' Equity at beginning of year $ 86,924
Total Stockholders' Equity at end of period $ 87,104
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)
	March 31, 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					(41	)
Share-based payments					(308	)
Balance at end of period				$	89,414

Retained Earnings
Balance at beginning of year				$	33,671
Net income attributable to AT&T ($0.61 per diluted share)					3,803
Dividends to stockholders ($0.48 per share)					(2,968	)
Balance at end of period				$	34,506

Treasury Stock
Balance at beginning of year		(350	)	$	(12,592	)
Issuance of treasury stock		11			429
Balance at end of period		(339	)	$	(12,163	)

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					(154	)
Balance at end of period				$	5,180

Noncontrolling Interest
Balance at beginning of year				$	969
Net income attributable to noncontrolling interest					82
Distributions					(78	)
Balance at end of period				$	973

Total Stockholders' Equity at beginning of year				$	123,640
Total Stockholders' Equity at end of period				$	124,405
See Notes to Consolidated Financial Statements.

AT&T INC.

MARCH 31, ~~2015~~2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of PresentationThroughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." ~~We believe that these~~These consolidated financial statements include all adjustments ~~consisting only of normal recurring accruals,~~ that are necessary to present fairly the results for the presented interim ~~periods.~~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, ~~2014.~~2015.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and ~~affiliates.~~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, ~~both~~providing services and equipment that deliver voice, video and broadband services domestically and internationally, providing wireless communications services, traditional wireline voice services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale services.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 ~~month~~quarter of our period end. We also ~~recorded~~record our proportionate share of our equity method investees' other comprehensive income (OCI) items, including ~~actuarial gains and losses on pension and other postretirement benefit obligations.~~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. Certain amounts have been conformed to the current period's presentation, including our change in accounting to capitalize customer set-up and installations costs and amortize them over the expected economic life of the customer relationship. The consolidated statements of income also include revisions to present "Equipment" and "Broadcast, programming and operations" costs separately from "Other cost of services."

New Accounting Standards

Leases In February 2016, the Financial Accounting Standards Board (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. 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 appears similar to our current methodology.

ASU 2016-02 becomes effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. We have just begun our evaluation of the impact on our financial statements, as well as available adoption methods, but we believe our implementation of the revenue recognition standard discussed below could influence the timing of our adoption of ASU 2016-02.

Revenue Recognition In May 2014, the ~~Financial Accounting Standards Board (FASB)~~FASB issued ~~Accounting Standards Update~~ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09) and has since modified the standard with ASU 2015-14, "Deferral of the Effective Date," ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ~~which replaces~~" and ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." 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, ~~2016. In April 2015,~~2017, at which point we plan to adopt the ~~FASB issued an exposure draft to delay the effective date of ASU 2014-09 by one year. We continue to evaluate the impact of the new standard and available adoption methods.~~standard.

~~Long-Term Debt and Debt Issuance Costs~~ In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which will result in the reclassification of debt issuance costs from "Other Assets" to inclusion as a reduction of our reportable "Long-term Debt" balance on our consolidated balance sheets. ASU 2015-03 becomes effective January 1, 2016, subject to early adoption, and will require full retrospective application. We do not expect this new standard to have a material impact on our consolidated balance sheets.7

AT&T INC.

MARCH 31, ~~2015~~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 impact of the new standard and 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 in 2015, we believe under the new standard that the requirement to defer such costs 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.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for the three months ended March 31, ~~2015~~2016 and ~~2014,~~2015, is shown in the table below:

	Three months ended						Three months ended
	March 31,						March 31,
	2015			2014			2016			2015
Numerators
Numerator for basic earnings per share:
Net income	$	3,276		$	3,734		$	3,885		$	3,339
Less: Net income attributable to noncontrolling interest		(76	)		(82	)		(82	)		(76	)
Net income attributable to AT&T		3,200			3,652			3,803			3,263
Dilutive potential common shares:
Share-based payment		4			4			4			4
Numerator for diluted earnings per share	$	3,204		$	3,656		$	3,807		$	3,267
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common shares outstanding		5,203			5,222			6,172			5,203
Dilutive potential common shares:
Share-based payment (in shares)		16			16			18			16
Denominator for diluted earnings per share		5,219			5,238			6,190			5,219
Basic earnings per share attributable to AT&T	$	0.61		$	0.70		$	0.62		$	0.63
Diluted earnings per share attributable to AT&T	$	0.61		$	0.70		$	0.61		$	0.63

~~AT&T INC.~~

~~MARCH 31, 2015~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~ - ~~Continued~~

~~Dollars in millions except per share amounts~~

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 March 31, 2015 and for the period ended:

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) $ 498 $ 741 $ 6,847 $ 8,060
Other comprehensive income
   (loss) before reclassifications
(186) 34 (354) -    (506)
Amounts reclassified
   from accumulated OCI
-
¹
(5)
²
7
³
(215)
⁴
(213)
Net other comprehensive
   income (loss)
(186) 29 (347) (215) (719)
Balance as of March 31, 2015 $ (212) $ 527 $ 394 $ 6,632 $ 7,341

At March 31, 2014 and for the period ended:

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, 2013 $ (367) $ 450 $ 445 $ 7,352 $ 7,880
Other comprehensive income
   (loss) before reclassifications
(20) 16 6 -    2
Amounts reclassified
   from accumulated OCI
25
¹
(11)
²
7
³
(237)
⁴
(216)
Net other comprehensive
   income (loss)
5 5 13 (237) (214)
Balance as of March 31, 2014 $ (362) $ 455 $ 458 $ 7,115 $ 7,666
¹Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
²(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
³(Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
⁴The 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).
   Actuarial loss reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.

9Following our 2015 acquisitions of DIRECTV and wireless businesses 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 9.3%, the Argentine peso exchange rate has depreciated 13.7% and the Mexican peso exchange rate has depreciated 0.4%.

AT&T INC.

MARCH 31, ~~2015~~2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

At March 31, 2016, and for the period ended:
		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			(44)			(26)			124			-			54
Amounts reclassified from accumulated OCI			-	¹		(3)	²		10	³		(215)	⁴		(208)
Net other comprehensive income (loss)			(44)			(29)			134			(215)			(154)
Balance as of March 31, 2016		$	(1,242)		$	455		$	150		$	5,817		$	5,180

At March 31, 2015, and for the period ended:
		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			(186)			33			(354)			-			(507)
Amounts reclassified from accumulated OCI			-	¹		(5)	²		7	³		(215)	⁴		(213)
Net other comprehensive income (loss)			(186)			28			(347)			(215)			(720)
Balance as of March 31, 2015		$	(212)		$	527		$	394		$	6,632		$	7,341
¹	Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
²	(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
³	(Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
⁴	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 ~~different~~ products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. Due to recent organizational changes and our July 24, 2015, acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we revised our operating segments to align with our new management structure and organizational responsibilities. We analyze our operating segments based on segment contribution, which consists of operating income, before income taxes. We make our capital allocation decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and to provide emerging services to our customers. Actuarial gains and losses from pensionexcluding acquisition-related costs and other ~~postretirement benefits, interest expense~~significant items (as discussed below), and ~~other~~equity in net income ~~(expense) – net, are~~of affiliates for investments managed ~~only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in~~within each ~~segment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States.~~operating segment. We have ~~three~~four reportable segments: (1) ~~Wireless,~~Business Solutions, (2) ~~Wireline~~Entertainment Group, (3) Consumer Mobility and ~~(3)~~(4) International.

AT&T INC.

MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

We also evaluate segment performance based on segment operating income before 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.

The ~~Wireless~~Business Solutions segment ~~uses our nationwide network~~provides services to business, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide ~~consumer~~advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as strategic business ~~customers with wireless~~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 ~~services. This segment included~~solution to our ~~portion of the results from our equity investment in the Softcard~~^TM~~mobile wallet joint venture.~~business customers.

The ~~Wireline~~Entertainment Group segment ~~uses~~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 ~~regional, national~~copper and ~~global~~IP-based wired network and/or our satellite technology.

The Consumer Mobility segment provides nationwide wireless service to consumers and wireless wholesale and resale subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide ~~consumer~~voice and ~~business customers with~~ data ~~and voice communications~~ services, ~~AT&T U-verse® high speed~~including high-speed Internet, video, and ~~VoIP services and managed networking to business customers.~~home monitoring services.

The International segment ~~uses the Iusacell~~provides entertainment services in Latin America and ~~Unefon~~wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication ~~services~~services. Our international subsidiaries conduct business in ~~Mexico. Beginning April 30, 2015, the International segment also utilizes the regional~~their local currency and ~~national networks of Nextel Mexico~~operating results are converted to ~~provide similar services.~~U.S. dollars using official exchange rates.

~~The~~ In reconciling items to consolidated operating income and income before income taxes, Corporate and Other ~~column includes unallocated corporate expenses,~~ includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which ~~includes costs to support corporate-driven activities~~we no longer actively market, and ~~operations, 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~~plans.

Certain operating items are not allocated to our business segments:

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

Certain significant items include (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. Therefore, these items are also not included in each segment's reportable 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 ~~actuarial gains~~assets to provide for the most efficient, effective and ~~losses on~~integrated service to our ~~pension~~customers, not by operating segment, and ~~postretirement plan valuations. Results from equity method investments in América Móvil S.A. de C.V. (prior to the June 2014 disposal of our investment), YP Holdings LLC,~~therefore asset information and ~~Otter Media (our joint venture with The Chernin Group), are also excluded from our~~capital expenditures by segment ~~results as those results~~ are not ~~considered in our assessment of segment performance. We have revised our prior-period presentation to conform to our current reporting.~~presented. Depreciation is allocated based on network usage or asset utilization by segment.

AT&T INC.

MARCH 31, ~~2015~~2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended March 31, 2016
		Revenue		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	17,609	$	10,802	$	6,807	$	2,508	$	4,299	$	-	$	4,299
Entertainment Group		12,658		9,578		3,080		1,488		1,592		3		1,595
Consumer Mobility		8,328		4,912		3,416		922		2,494		-		2,494
International		1,667		1,588		79		277		(198)		14		(184)
Segment Total		40,262		26,880		13,382		5,195		8,187	$	17	$	8,204
Corporate and Other		273		377		(104)		17		(121)
Acquisition-related items		-		295		(295)		1,351		(1,646)
Certain significant items		-		(711)		711		-		711
AT&T Inc.	$	40,535	$	26,841	$	13,694	$	6,563	$	7,131

For the three months ended March 31, 2015
		Revenue		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	17,557	$	11,073	$	6,484	$	2,342	$	4,142	$	-	$	4,142
Entertainment Group		5,660		4,859		801		1,065		(264)		(6)		(270)
Consumer Mobility		8,778		5,541		3,237		1,002		2,235		-		2,235
International		236		218		18		28		(10)		-		(10)
Segment Total		32,231		21,691		10,540		4,437		6,103	$	(6)	$	6,097
Corporate and Other		345		234		111		20		91
Acquisition-related items		-		299		(299)		121		(420)
Certain significant items		-		217		(217)		-		(217)
AT&T Inc.	$	32,576	$	22,441	$	10,135	$	4,578	$	5,557

AT&T INC.

MARCH 31, ~~2015~~2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

	Three months ended
	March 31,
	2016			2015
Pension cost:
Service cost – benefits earned during the period	$	278		$	299
Interest cost on projected benefit obligation		495			474
Expected return on assets		(778	)		(826	)
Amortization of prior service credit		(26	)		(26	)
Net pension (credit) cost	$	(31	)	$	(79	)

Postretirement cost:
Service cost – benefits earned during the period	$	48		$	55
Interest cost on accumulated postretirement benefit obligation		243			242
Expected return on assets		(89	)		(105	)
Amortization of prior service credit		(319	)		(320	)
Net postretirement (credit) cost	$	(117	)	$	(128	)

Combined net pension and postretirement (credit) cost	$	(148	)	$	(207	)

The increase of $59 in the first quarter 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 first quarter ended 2016 and 2015, net supplemental retirement pension benefits costs not included in the table above, were $23 and $20, respectively.

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. ~~Valuation~~Our valuation techniques ~~used should~~ maximize the use of observable inputs and minimize the use of unobservable inputs.

AT&T INC.

MARCH 31, 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, ~~2014.~~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:

	March 31, 2015					December 31, 2014						March 31, 2016					December 31, 2015
	Carrying		Fair			Carrying			Fair			Carrying		Fair			Carrying			Fair
	Amount		Value			Amount			Value			Amount		Value			Amount			Value
Notes and debentures	$	96,026		$	105,084		$	81,632		$	90,367
Notes and debentures¹												$	129,229		$	137,865		$	124,847		$	128,993
Bank borrowings		5			5			5			5		4			4			4			4
Investment securities		2,740			2,740			2,735			2,735		2,592			2,592			2,704			2,704
¹Includes credit agreement borrowings.

The carrying value 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. The carrying and fair values included above reflect our March 2016 debt exchange of $16,049 of DIRECTV notes for AT&T global notes with matching terms.

13Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2016, and December 31, 2015:

	March 31, 2016
	Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,111	$	-		$	-	$	1,111
International equities		541		-			-		541
Fixed income bonds		-		676			-		676
Asset Derivatives¹
Interest rate swaps		-		197			-		197
Cross-currency swaps		-		519			-		519
Liability Derivatives¹
Cross-currency swaps		-		(2,582	)		-		(2,582	)
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.

MARCH 31, ~~2015~~2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

~~Following is the fair value leveling for available-for-sale securities and derivatives as of March 31, 2015 and December 31, 2014:~~

	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.

March 31, 2015
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
   Domestic equities $ 1,176 $ - $ - $ 1,176
   International equities 592 - - 592
   Fixed income bonds - 793 - 793
Asset Derivatives¹

   Interest rate swaps - 194 - 194
   Cross-currency swaps - 706 - 706
Liability Derivatives¹

   Cross-currency swaps - (3,528 ) - (3,528 )
   Interest rate locks - (444 ) - (444 )

December 31, 2014
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
   Domestic equities $ 1,160 $ - $ - $ 1,160
   International equities 553 - - 553
   Fixed income bonds - 836 - 836
Asset Derivatives¹

   Interest rate swaps - 157 - 157
   Cross-currency swaps - 1,243 - 1,243
   Interest rate locks - 5 - 5
Liability Derivatives¹

   Cross-currency swaps - (1,506 ) - (1,506 )
   Interest rate locks - (133 ) - (133 )
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.~~

~~MARCH 31, 2015~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~ - ~~Continued~~

~~Dollars in millions except per share amounts~~

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 ~~$91~~$99 have maturities of less than one year, ~~$409~~$308 within one to three years, ~~$66~~$65 within three to five years, and ~~$227~~$204 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and 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 ~~employ derivatives~~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.

The majority of our derivatives are designated either as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

Fair Value HedgingWe designate our ~~fixed-to-floating~~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 three months ended March 31, ~~2015~~2016, and March 31, ~~2014,~~2015, no ineffectiveness was measured on interest rate swaps designated as fair value hedges.

AT&T INC.

MARCH 31, 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~~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 ~~which was~~that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating ~~foreign-denominated~~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, both for the period they are outstanding.~~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 three months ended March 31, ~~2015~~2016, and March 31, ~~2014,~~2015, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

~~AT&T INC.~~

~~MARCH 31, 2015~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~ - ~~Continued~~

~~Dollars in millions except per share amounts~~

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 ~~$35~~$59 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks. ~~Our unutilized interest rate locks carry mandatory early terminations, the latest occurring in the first half of 2015.~~

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. ~~Some of these instruments are designated as cash flow hedges while others remain nondesignated, largely based on size and duration.~~ 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"~~– net" in the consolidated statements of income. In the three months ended March 31, ~~2015~~2016, and March 31, ~~2014,~~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 March 31, ~~2015,~~2016, we had posted collateral of ~~$2,566~~$1,743 (a deposit asset) and held collateral of ~~$62~~$111 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of ~~$147.~~$130. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) and below Baa3 (Moody's), we would owe an additional $195. At December 31, ~~2014,~~2015, we had posted collateral of ~~$530~~$2,343 (a deposit asset) and held collateral of ~~$599~~$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 is the notional amount of our outstanding derivative positions:

	March 31,		December 31,		March 31,		December 31,
	2015		2014		2016		2015
Interest rate swaps	$	6,550	$	6,550	$	7,050	$	7,050
Cross-currency swaps		29,350		26,505		29,642		29,642
Interest rate locks		7,000		6,750
Foreign exchange contracts						3		100
Total	$	42,900	$	39,805	$	36,695	$	36,792

Following is 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
March 31, March 31,
2015    2014
Interest rate swaps (Interest expense):
   Gain (Loss) on interest rate swaps $ 41 $ (11 )
   Gain (Loss) on long-term debt (41 ) 11

AT&T INC.

MARCH 31, ~~2015~~

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
	March 31,			March 31,
	2016			2015
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps	$	66			$	41
Gain (Loss) on long-term debt		(66	)			(41	)

In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest expense.

	Three months ended						Three months ended
	March 31,			March 31,			March 31,			March 31,
Cash Flow Hedging Relationships	2015			2014			2016			2015
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	(228	)	$	11		$	191		$	(228	)
Interest rate locks:
Gain (Loss) recognized in accumulated OCI		(316	)		-			-			(316	)
Interest income (expense) reclassified from accumulated OCI into income		(11	)		(11	)		(15	)		(11	)
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI		-			(2	)

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 preliminarily 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.

The fair value estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectable. We have not identified any material unrecorded pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is 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 acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill.

AT&T INC.

MARCH 31, 2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table summarizes the preliminary estimated 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		2,026
All other current assets		1,535
Property, plant and equipment		9,331
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		457
Investments and other assets		2,388
Goodwill		34,449
Total assets acquired		90,723

Liabilities assumed
Current liabilities, excluding current portion of long-term debt		5,733
Long-term debt		20,585
Other noncurrent liabilities		16,642
Total liabilities assumed		42,960
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 AuctionIn January 2015, we submitted winning bids ~~for 251~~of $18,189 in the Advanced Wireless Service (AWS) ~~spectrum licenses in the AWS-3~~-3 Auction (FCC Auction 97) ~~for $18,189.~~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. ~~The interest associated with this acquisition will be excluded from interest expense and capitalized until this spectrum is ready for its intended use.~~

~~GSF Telecom~~ On January 16, 2015, we acquired Mexican wireless company GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) for $2,500, less net debt of approximately $700. GSF Telecom offers service under both the Iusacell and Unefon brand names in Mexico.

~~The preliminary values of assets acquired were: $1,078 in licenses, $943 in property, plant and equipment, $365 in customer lists, $51 in trade names and $690 of goodwill.~~

~~Subsequent and Pending Acquisitions~~

~~Nextel Mexico~~ On April 30, 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, less approximately $427 of net debt and other adjustments. The subsidiaries offer service under the name Nextel Mexico.

~~DIRECTV~~ In May 2014, we announced a merger agreement to acquire DIRECTV in a stock-and-cash transaction for $95.00 per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of March 31, 2015, DIRECTV had approximately $15,129 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our average stock price is below $34.90 per share at closing and 1.724 AT&T shares if our average stock price is above $38.58 at closing. If our average stock price (calculated in accordance with the merger agreement with DIRECTV) is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.

The merger agreement was adopted by DIRECTV's stockholders on September 25, 2014 and the transaction remains subject to review by the FCC and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by certain foreign governmental entities have been obtained and are in full force and effect. The transaction is still expected to close in the second quarter of 2015. The merger agreement provides certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the merger is not consummated by May 18 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and nonappealable. In October 2014, DIRECTV and the National Football League renewed their agreement for the "NFL Sunday Ticket" service substantially on the terms discussed between AT&T and DIRECTV, satisfying one of the conditions to closing the merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or following a termination of the agreement.

AT&T INC.

MARCH 31, ~~2015~~2016

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

~~Subsequent Debt Issuance~~

~~In May 2015, we issued $17,500 in debt to be used for general corporate purposes, including funding previously announced acquisitions.~~

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, with 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 March 31, ~~2015~~2016, and December 31, ~~2014,~~2015, gross equipment installment receivables of ~~$3,786~~$5,079 and ~~$4,265~~$5,719 were included on our consolidated balance sheets, of which ~~$2,240~~$3,007 and ~~$2,514~~$3,239 are notes receivable that are included in "Accounts receivable - net."

~~On June 27,~~In 2014, we entered into the first of a series of uncommitted agreements pertaining to the sale of equipment installment receivables and related security with Citibank ~~N.A.~~ and various other relationship banks as purchasers (collectively, the Purchasers). Under these agreements, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the ~~receivables.~~receivables, referred to as the deferred purchase price. Under the terms of the arrangements, we continue to bill and collect on behalf of our customers for the receivables sold. ~~To date, we have collected and remitted approximately $1,298 (net of fees), of which $130 was returned as deferred purchase price.~~

The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2016 and 2015:

	Three months ended		Three months ended
	March 31,		March 31,
	2015		2016			2015
Gross receivables sold				$	2,482		$	2,635
Net receivables sold¹	$	2,381			2,256			2,381
Cash proceeds received		1,524			1,521			1,524
Deferred purchase price recorded		858			719			858
¹Gross receivables sold were $2,635, before deducting the allowance, imputed interest and trade-in right guarantees.
¹Receivables net of allowance, imputed interest and trade-in right guarantees.			¹Receivables net of allowance, imputed interest and trade-in right guarantees.

The deferred purchase price ~~was~~is initially recorded at estimated fair value, which ~~was~~is based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and is 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).

During the first quarter of 2016, we repurchased installment receivables previously sold to the Purchasers, with a fair value of $532. These transactions reduced our current deferred purchase price receivable by $539, resulting in a loss of $7 during the quarter. This loss is included in "Selling, general and administrative" in the consolidated statements of income.

At March 31, 2016, and December 31, 2015, our deferred purchase price receivable was ~~$2,410,~~$2,975 and $2,961, respectively, of which ~~$1,148~~$1,469 and $1,772 is included in "Other current assets" on our consolidated balance sheets, with the remainder ~~in "Other Assets." At December 31, 2014, our deferred purchase price receivable was $1,606, which is included~~ 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.

The sales of equipment installment receivables did not have a material impact inon 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.

1819

AT&T INC.

MARCH 31, ~~2015~~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 both in the United States~~industry. Our subsidiaries and ~~internationally, providing wireless and wireline telecommunications~~affiliates provide services and ~~equipment.~~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), operating results from acquired businesses prior to acquisition are excluded. You should read this discussion in conjunction with the consolidated financial statements and accompanying ~~notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.~~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 first quarter of ~~2015~~2016 and ~~2014~~2015 are summarized as follows:

	First Quarter							First Quarter
	2015		2014		Percent Change			2016		2015		Percent Change
	2015		2014		Percent Change			2016		2015		Percent Change
Operating Revenues
Service	$	28,962	$	29,776		(2.7	) %	$	37,101	$	28,962		28.1	%
Equipment		3,614		2,700		33.9			3,434		3,614		(5.0	)
Total Operating Revenues		32,576		32,476		0.3			40,535		32,576		24.4
Operating expenses
Cost of services and sales		14,581		13,321		9.5
Equipment									4,375		4,546		(3.8	)
Broadcast, programming and operations									4,629		1,122		-
Other cost of services									9,396		8,812		6.6
Selling, general and administrative		7,961		8,260		(3.6	)		8,441		7,961		6.0
Depreciation and amortization		4,578		4,617		(0.8	)		6,563		4,578		43.4
Total Operating Expenses		27,120		26,198		3.5			33,404		27,019		23.6
Operating Income		5,456		6,278		(13.1	)		7,131		5,557		28.3
Income Before Income Taxes		4,627		5,651		(18.1	)		6,007		4,728		27.1
Net Income		3,276		3,734		(12.3	)		3,885		3,339		16.4
Net Income Attributable to AT&T	$	3,200	$	3,652		(12.4	) %	$	3,803	$	3,263		16.5	%

Overview

Operating revenues increased ~~$100,~~$7,959, or ~~0.3%~~24.4%, in the first quarter of ~~2015.~~2016.

Service revenues ~~decreased $814,~~increased $8,139, or ~~2.7%~~28.1%, in the first quarter of ~~2015.~~2016. The ~~decrease~~increase was primarily due to ~~increased adoption~~our 2015 acquisitions of ~~our~~DIRECTV and wireless ~~Mobile Share Value plans,~~operations in Mexico and gains in IP broadband and fixed strategic business services. These were partially offset by continued declines in our legacy wireline voice and data products ~~and the October 2014 sale of~~as well as from customers choosing to purchase devices through installment payment agreements, which entitle them to a lower monthly service rate under our ~~Connecticut wireline operations, partially offset by strong revenues from AT&T U-verse® (U-verse), strategic business services and revenues from our prepaid~~ wireless ~~offering, Cricket®.~~Mobile Share plans.

Equipment revenues ~~increased $914,~~decreased $180, or ~~33.9%~~5.0%, in the first quarter of ~~2015. Growth in~~2016. This decline reflects fewer wireless handset sales, additional promotional activities during 2016 and lower revenue related to customer premises equipment ~~revenues reflected~~. Revenue declines were partially offset by the continuing trend byof our ~~postpaid~~ wireless ~~subscribers~~customers to ~~choose~~purchase higher priced devices ~~on installment purchase rather than the device subsidy model. Revenues also increased as subscribers are purchasing higher-priced smartphones.~~

~~Operating expenses~~ ~~increased $922, or 3.5%, in the first quarter of 2015.~~

~~Cost of services and sales~~ expenses increased $1,260, or 9.5%, in the first quarter of 2015. The increase was primarily due to higher wireless equipment costs resulting from customers choosing higher-priced devices, increased wireless network costs, higher expenses attributable to U-verse subscriber growth, voluntary employee separation charges and an increase in noncash benefit expenses in our Wireline segment. These increases were slightly offset by lower noncash financing-related costs associated with our pension and postretirement benefits and lower traffic compensation costs.customers choosing to purchase devices on installment when compared to the prior year.

1920

AT&T INC.

MARCH 31, ~~2015~~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

Operating expenses increased $6,385, or 23.6%, in the first quarter of 2016.

Equipment expenses decreased $171, or 3.8%, in the first quarter of 2016. The decrease was primarily due to the decline in devices sold to postpaid subscribers, who tend to buy more expensive devices. The decrease was partially offset by increased sales volumes to our prepaid subscribers.

Broadcast, programming and operations expenses increased $3,507 in the first quarter of 2016. Broadcast costs increased due to our acquisition of DIRECTV, slightly offset by fewer AT&T U-verse® (U-verse) subscribers.

Other cost of services expenses increased $584, or 6.6%, in the first quarter of 2016. The increase was primarily due to our acquisitions of DIRECTV and Mexican wireless properties. Also contributing to higher expenses was an increase in noncash financing-related costs associated with our pension and postretirement benefits. These increases were partially offset by lower network and access charges.

Selling, general and administrative expenses ~~decreased $299,~~increased $480, or ~~3.6%~~6.0%, in the first quarter of ~~2015.~~2016. The ~~decrease~~increase was primarily due to ~~lower~~our acquisitions in 2015 and increased advertising ~~employee related and wireless commissions costs, which~~activity in 2016. The increases were ~~partially~~largely offset by ~~increases in our sales~~a $736 noncash gain on wireless spectrum transactions, lower wireless commission expenses ~~resulting from increased competition.~~and lower employee separation charges.

Depreciation and amortization expense ~~decreased $39,~~increased $1,985, or ~~0.8%~~43.4%, in the first quarter of ~~2015. The decrease is~~2016. Amortization expense increased $1,228 due to the amortization of intangibles from recent acquisitions. Depreciation expense increased $757 primarily due to ~~extending~~ the ~~estimated useful life of software~~previously mentioned acquisitions and ~~abandonment of certain network assets, both in 2014. These decreases were partially offset by increases due to~~ ongoing capital spending for network ~~upgrades and additional expenses associated with the assets acquired from Leap Wireless International, Inc. (Leap) and GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom).~~upgrades.

Operating income ~~decreased $822,~~increased $1,574, or ~~13.1%~~28.3%, in the first quarter of ~~2015.~~2016. Our operating income margin in the first quarter ~~decreased~~increased from ~~19.3%~~17.1% in ~~2014~~2015 to ~~16.7%~~17.6% in ~~2015.~~2016.

Interest expenseincreased ~~$39,~~$308, or ~~4.5%~~34.3%, in the first quarter of ~~2015.~~2016. The increase was primarily due to higher average debt ~~balances.~~balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV. The ~~increase was~~increases were partially offset by ~~lower average interest rates and an increase in~~higher capitalized interest resulting from spectrum acquired in the ~~AWS-3~~Advanced Wireless Service (AWS)-3 Auction (see Note 7).

Equity in net income of affiliates ~~decreased $88~~increased $13 in the first quarter of ~~2015.~~2016. This ~~decrease~~increase primarily resulted from earnings from investments acquired in our purchase of DIRECTV in the ~~sale~~third quarter of ~~América Móvil, S.A. de C.V. (América Móvil) in June 2014 and~~2015, partially offset by lower earnings from Otter Media Holdings and YP Holdings LLC.

Other income (expense) – net We had other income of $70 in the first quarter of ~~2015, compared to other income of $145~~both 2016 and 2015. Results in the first quarter of ~~2014. Results for first quarter~~2016 and 2015 included a net gain on the sale of investments of $44 and $33 and interest and dividend income of ~~$19. Results for first quarter 2014 included a net gain on the sale of América Móvil shares~~$29 and ~~other investments of $122 and interest and dividend income of $13.~~

$19, respectively.

Income taxes ~~decreased $566,~~increased $733, or ~~29.5%~~52.8%, in the first quarter of ~~2015.~~2016. Our effective tax rate was ~~29.2% for the first quarter 2015, compared to 33.9% for first quarter 2014. The decrease in effective tax rate~~35.3% for the first quarter of ~~2015~~2016, compared to 29.4% for first quarter of 2015. The increase in income tax expense for the first quarter of 2016 was primarily due to ~~recognition of~~higher income before income taxes in 2016. In 2015, we recognized tax benefits related to the restructuring of a portion of our ~~enterprise business.~~Business Solutions segment, which contributed to lower income tax expense and the effective tax rate in the first quarter of 2015.

AT&T INC.

MARCH 31, 2016

Selected Financial and Operating Data
March 31,
Subscribers and connections in (000s) 2015 2014
Domestic wireless subscribers 121,772 116,014
Network access lines in service 18,949 23,582
U-verse VoIP connections 5,200 4,134
Total wireline broadband connections 16,097 16,503
Debt ratio¹
52.5 % 46.6 %
Net debt ratio²
50.1 % 44.5 %
Ratio of earnings to fixed charges³
4.22 5.50
Number of AT&T employees⁴
250,790 246,730

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
	March 31,
Subscribers and connections in (000s)	2016			2015
Domestic wireless subscribers		130,445			121,772
Mexican wireless subscribers		9,213			5,728
North American wireless subscribers		139,658			127,500

North American branded subscribers		98,158			91,448
North American branded net additions		1,195			539

Domestic satellite video subscribers		20,112			-
U-verse video subscribers		5,260			5,993
Latin America satellite video subscribers¹		12,436			-
Total video subscribers		37,808			5,993

Total domestic broadband connections		15,764			16,097

Network access lines in service		15,975			18,949
U-Verse VoIP connections		5,484			5,200

Debt ratio²		51.2	%		51.5	%
Net Debt Ratio³		47.3	%		49.1	%
Ratio of earnings to fixed charges⁴		4.22			4.30
Number of AT&T employees		280,870			250,790

¹Excludes subscribers of our International segment equity investments in SKY Mexico.

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.

²³Net debt ratios are calculated by ~~dividing~~deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).

^{3 4}See Exhibit 12.

⁴ ~~Reflects recent acquisition activity.~~

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

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, before income taxes. We make our capital allocation decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and to provide emerging services to our customers. Actuarial gains and losses from pensionexcluding acquisition-related costs and other ~~postretirement benefits, interest expense~~significant items, and ~~other~~equity in net income ~~(expense) – net, are~~of affiliate for investments managed ~~only on a total company basis and are, accordingly, reflected only in consolidated results. Therefore, these items are not included in~~within each ~~segment's reportable results. The customers and long-lived assets of our reportable segments are predominantly in the United States.~~operating segment. We have ~~three~~four reportable segments: (1) ~~Wireless,~~Business Solutions, (2) ~~Wireline~~Entertainment Group, (3) Consumer Mobility and ~~(3)~~(4) International.

We also evaluate segment performance based on segment operating income before 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 operating income before depreciation and amortization, divided by total revenues.

The ~~Wireless~~Business Solutions segment ~~uses our nationwide network~~ provides services to business, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide ~~consumer~~advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as strategic business ~~customers with wireless~~services; as well as traditional data and voice ~~communications services. This segment included~~products. We utilize our ~~portion of the results from our equity investment in Softcard.~~

~~The Wireline segment uses our regional, national~~wireless and ~~global network~~wired networks (referred to as "wired" or "wireline") to provide ~~consumer and business customers with data and voice~~a complete communications ~~services, U-verse high speed Internet, video and VoIP services and managed networking~~solution to our business customers.

The International segment uses the Iusacell and Unefon regional and national networks to provide consumer and business customers with wireless data and voice communication services in Mexico. Beginning April 30, 2015, the International segment also utilizes the regional and national networks of Nextel Mexico to provide similar services.22

~~We discuss capital expenditures for each segment in "Liquidity and Capital Resources."~~

Wireless
Segment Results
First Quarter
2015 2014
Percent
Change

Segment operating revenues
      Service $ 14,812 $ 15,387 (3.7 ) %
      Equipment 3,374 2,479 36.1
Total Segment Operating Revenues 18,186 17,866 1.8

Segment operating expenses
      Operations and support 11,681 10,882 7.3
      Depreciation and amortization 2,058 1,931 6.6
Total Segment Operating Expenses 13,739 12,813 7.2
Segment Operating Income 4,447 5,053 (12.0 )
Equity in Net Income (Loss) of Affiliates (4 ) (20 ) 80.0
Segment Income $ 4,443 $ 5,033 (11.7 ) %

AT&T INC.

MARCH 31, ~~2015~~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 table highlights other key measures of performance for the Wireless segment:

First Quarter
2015 2014
Percent
Change

(in 000s)
Wireless Subscribers ¹
121,772 116,014 5.0 %
   Postpaid smartphones 57,157 53,020 7.8
   Postpaid feature phones and data-centric devices 19,018 20,271 (6.2 )
Postpaid 76,175 73,291 3.9
Prepaid 10,037 10,411 (3.6 )
Reseller 13,595 13,886 (2.1 )
Connected devices ²
21,965 18,426 19.2
Total Wireless Subscribers 121,772 116,014 5.0

Net Additions ³

   Postpaid 441 625 (29.4 )
   Prepaid 98 88 11.4
   Reseller (266 ) (206 ) (29.1 )
   Connected devices²
945 555 70.3
Net Subscriber Additions 1,218 1,062 14.7

Mobile Share connections 55,581 32,585 70.6
Smartphones under our installment program at end of period 18,540 4,132 -
Smartphones sold under our installment program during period 4,065 2,868 41.7 %

Total Churn⁴
1.40 % 1.39 % 1 BP
Postpaid Churn⁴
1.02 % 1.07 % (5) BP
¹Represents 100% of AT&T Mobility wireless subscribers.

²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

³Excludes merger and acquisition-related additions during the period.

⁴Calculated 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.

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 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 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. Our International segment is subject to foreign currency fluctuations.

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."

Business Solutions
Segment Results
	First Quarter
	2016		2015		Percent Change
	2016		2015		Percent Change
Segment operating revenues
Wireless service	$	7,855	$	7,515		4.5	%
Fixed strategic services		2,786		2,549		9.3
Legacy voice and data services		4,338		4,754		(8.8	)
Other service and equipment		859		846		1.5
Wireless equipment		1,771		1,893		(6.4	)
Total Segment Operating Revenues		17,609		17,557		0.3

Segment operating expenses
Operations and support		10,802		11,073		(2.4	)
Depreciation and amortization		2,508		2,342		7.1
Total Segment Operating Expenses		13,310		13,415		(0.8	)
Segment Operating Income		4,299		4,142		3.8
Equity in Net Income (Loss) of Affiliates		-		-		-
Segment Contribution	$	4,299	$	4,142		3.8	%

AT&T INC.

MARCH 31, 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 table highlights other key measures of performance for the Business Solutions segment:

	First Quarter
	2016			2015		Percent Change
(in 000s)	2016			2015		Percent Change
Business Wireless Subscribers
Postpaid		48,844			45,959		6.3	%
Reseller		64			14		-
Connected devices¹		26,863			20,972		28.1
Total Business Wireless Subscribers		75,771			66,945		13.2

Business Wireless Net Additions²
Postpaid		133			297		(55.2	)
Reseller		(22	)		3		-
Connected devices ¹		1,578			1,024		54.1
Business Wireless Net Subscriber Additions		1,689			1,324		27.6

Business Wireless Postpaid Churn^{2, 3}		1.02%			0.90%	12 BP

Business IP Broadband Connections		928			849		9.3
Business IP Broadband Net Additions		17			27		(37.0	) %
¹ Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
² Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
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.

Operating revenues increased $52, or 0.3%, in the first quarter of 2016. Revenue growth was driven by wireless service revenues and increased fixed strategic business services. Revenue increases were partially offset by continued declines in our legacy voice and data products, lower equipment revenue and foreign exchange pressures.

Wireless service revenues increased $340, or 4.5%, in the first quarter of 2016. The revenue increase is primarily due to customer migrations from our Consumer Mobility segment and reflects smartphone and tablet gains.

At March 31, 2016, we served 75.8 million subscribers, an increase of 13.2% from the prior year. Postpaid subscribers increased 6.3% 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 28.1% from the prior year reflecting growth in 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. In the first quarter, business wireless postpaid churn increased to 1.02% in 2016 from 0.90% in 2015.

Fixed strategic services revenues increased $237, or 9.3%, in the first quarter of 2016. Our revenues, which were negatively impacted by foreign exchange rates, increased in the first quarter of 2016 due to increases in: Ethernet of $65, AT&T Dedicated Internet (formally known as Ethernet access to Managed Internet Services) of $54, U-verse services of $50, and VPN of $26.

AT&T INC.

MARCH 31, 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

Legacy wired voice and data service revenues decreased $416, or 8.8%, in the first quarter of 2016. Traditional data revenues in the first quarter of 2016 decreased $229 and long-distance and local voice revenues decreased $183. The decreases were primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.

Other service and equipment revenues increased $13, or 1.5%, in the first quarter 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 decreased $122, or 6.4%, in the first quarter of 2016. The decrease in equipment revenues resulted from a decrease in handsets sold to postpaid customers and increased promotional activities during the quarter. The decreases were partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.

Operations and support expenses decreased $271, or 2.4%, in the first quarter 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 first quarter decrease was primarily due to declines of $170 in wireless equipment and $161 in wireless commissions costs, reflecting a decrease in sale volumes and upgrade transactions, as well as lower average commission rates. Access costs also declined $59, resulting from lower interconnect and roaming costs. Partially offsetting these decreases were higher advertising expenses, wireless handset insurance claims and bad debt expense driven by a higher AT&T Next^SM (AT&T Next) subscriber base.

Depreciation expense increased $166, or 7.1%, in first quarter of 2016. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $157, or 3.8%, in the first quarter of 2016. Our Business Solutions segment operating income margin in the first quarter increased from 23.6% in 2015 to 24.4% in 2016. Our Business Solutions EBITDA margin in the first quarter increased from 36.9% in 2015 to 38.7% in 2016.

Entertainment Group
Segment Results
	First Quarter
	2016		2015		Percent Change
	2016		2015		Percent Change
Segment operating revenues
Video entertainment	$	8,904	$	1,871		-
High-speed Internet		1,803		1,553		16.1
Legacy voice and data services		1,313		1,612		(18.5	)
Other service and equipment		638		624		2.2
Total Segment Operating Revenues		12,658		5,660		-

Segment operating expenses
Operations and support		9,578		4,859		97.1
Depreciation and amortization		1,488		1,065		39.7
Total Segment Operating Expenses		11,066		5,924		86.8
Segment Operating Income (Loss)		1,592		(264)		-
Equity in Net Income (Loss) of Affiliates		3		(6)		-
Segment Contribution	$	1,595	$	(270)		-

AT&T INC.

MARCH 31, 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 table highlights other key measures of performance for the Entertainment Group segment:

	First Quarter
	2016			2015			Percent Change
(in 000s)	2016			2015			Percent Change
Video Connections
Satellite		20,112			-			-
U-verse		5,232			5,969			(12.3	)
Total Video Connections		25,344			5,969			-

Video Net Additions
Satellite		328			-			-
U-verse		(382	)		49			-
Net Video Additions		(54	)		49			-

Broadband Connections
IP		12,542			11,796			6.3
DSL		1,749			2,741			(36.2	)
Total Broadband Connections		14,291			14,537			(1.7	)

Broadband Net Additions
IP		186			413			(55.0	)
DSL		(181	)		(320	)		43.4
Net Broadband Additions		5			93			(94.6	)

Retail Consumer Switched Access Lines		6,888			8,660			(20.5	)
U-verse Consumer VoIP Connections		5,225			5,009			4.3
Total Retail Consumer Voice Connections		12,113			13,669			(11.4	) %

Operating revenues increased $6,998 in the first quarter of 2016, largely due to our acquisition of DIRECTV in the third quarter of 2015. Also contributing to the increase was continued strong growth in consumer IP broadband, which more than offset lower revenues from legacy voice and data products.

Video entertainment revenues increased $7,033 in the first quarter of 2016. The first quarter increase was 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 flat in the first quarter of 2016, primarily due to a 12.3% decrease in U-verse video connections, when compared to 2015.

High-speed Internet revenues increased $250, or 16.1%, in the first quarter of 2016. When compared to 2015, IP broadband connections increased 6.3%, to 12.5 million connections at March 31, 2016; however, first quarter 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 those video subscribers also choose to disconnect their IP broadband service.

Legacy voice and data service revenues decreased $299, or 18.5%, in the first quarter of 2016. At March 31, 2016, legacy voice and data services represented approximately 10% of our total Entertainment Group revenue, and reflect a decrease of $179 in long-distance and local voice revenues, and $120 in traditional data revenues. The decreases reflect our continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31, 2016, approximately 12% of our broadband connections were DSL compared to nearly 19% at March 31, 2015.

AT&T INC.

MARCH 31, 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 $4,719, or 97.1%, in the first quarter 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.

The first quarter increase was primarily due to our acquisition of DIRECTV in the third quarter of 2015, which increased our first quarter Entertainment Group expenses by $4,823. The DIRECTV related 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 the increased expenses were lower employee charges resulting from ongoing workforce reductions and our focus on cost initiatives.

Depreciation expense increased $423, or 39.7%, in the first quarter of 2016. The increase was 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 $1,856 in the first quarter of 2016. Our Entertainment Group segment operating income margin increased from (4.7)% in 2015 to 12.6% in 2016. Our Entertainment Group segment EBITDA margin in the first quarter increased from 14.2% in 2015 to 24.3% in 2016.

Consumer Mobility
Segment Results
	First Quarter
	2016		2015		Percent Change
	2016		2015		Percent Change
Segment operating revenues
Service	$	6,943	$	7,297		(4.9	) %
Equipment		1,385		1,481		(6.5	)
Total Segment Operating Revenues		8,328		8,778		(5.1	)

Segment operating expenses
Operations and support		4,912		5,541		(11.4	)
Depreciation and amortization		922		1,002		(8.0	)
Total Segment Operating Expenses		5,834		6,543		(10.8	)
Segment Operating Income		2,494		2,235		11.6
Equity in Net Income (Loss) of Affiliates		-		-		-
Segment Contribution	$	2,494	$	2,235		11.6	%

AT&T INC.

MARCH 31, 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 table highlights other key measures of performance for the Consumer Mobility segment:

	First Quarter
	2016		2015		Percent Change
(in 000s)	2016		2015		Percent Change
Consumer Mobility Subscribers
Postpaid		28,294		30,216		(6.4	) %
Prepaid		12,171		10,037		21.3
Branded		40,465		40,253		0.5
Reseller		13,313		13,581		(2.0	)
Connected devices ¹		896		993		(9.8	)
Total Consumer Mobility Subscribers		54,674		54,827		(0.3	)

Consumer Mobility Net Additions ²
Postpaid		(4)		144		-
Prepaid		500		98		-
Branded Net Additions		496		242		-
Reseller		(378)		(269)		(40.5	)
Connected devices ¹		(26)		(79)		67.1
Consumer Mobility Net Subscriber Additions		92		(106)		-

Total Churn ^{2, 3}		2.11%		2.04%	7 BP
Postpaid Churn ^{2, 3}		1.24%		1.20%	4 BP
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
²Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
³Calculated 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.

Operating Revenues decreased $450, or 5.1%, in the first quarter 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 $354, or 4.9%, in the first quarter of 2016. The decrease was largely due to a $516 decline from postpaid customers continuing to shift to no-device-subsidy plans, which allow for discounted monthly service charges under our Mobile Share plans and the migration of subscribers to Business Solutions. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 4.2%. The decrease was partially offset by a $204 increase in prepaid service revenues, which includes services sold under the Cricket brand.

Equipment revenue decreased $96, or 6.5%, in the first quarter of 2016. The decrease in equipment revenues resulted from a decrease in handsets sold to postpaid customers and increased promotional activities, partially offset by an increase in handsets sold to prepaid customers and devices purchased on installment payment agreements rather than the device subsidy model.

Operations and support expenses decreased $629, or 11.4%, in the first quarter 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.

MARCH 31, 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 first quarter were primarily due to the following:

·	Selling and commission expenses decreased $205 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.

·	Equipment costs decreased $120 primarily due to a decrease in postpaid handset volumes partially offset by the sale of more devices to prepaid subscribers.

·	Network costs decreased $115 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

·	Other administrative expenses decreased $73 primarily due to lower technology and development costs.

Depreciation expense decreased $80, or 8.0%, in the first quarter of 2016. The decrease was primarily due to fully depreciated assets, partially offset by the ongoing capital spending for network upgrades and expansion.

Operating income increased $259, or 11.6%, in the first quarter of 2016. Our Consumer Mobility segment operating income margin increased from 25.5% in 2015 to 29.9% in 2016. Our Consumer Mobility EBITDA margin increased from 36.9% in 2015 to 41.0% in 2016.

International
Segment Results
	First Quarter
	2016		2015		Percent Change
Segment operating revenues
Video entertainment	$	1,130	$	-		-
Wireless		455		215		-
Equipment		82		21		-
Total Segment Operating Revenues		1,667		236		-

Segment operating expenses
Operations and support		1,588		218		-
Depreciation and amortization		277		28		-
Total Segment Operating Expenses		1,865		246		-
Segment Operating Income (Loss)		(198)		(10)		-
Equity in Net Income of Affiliates		14		-		-
Segment Contribution	$	(184)	$	(10)		-

AT&T INC.

MARCH 31, 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 table highlights other key measures of performance for the International segment:

	First Quarter
						Percent
(in 000s)	2016			2015		Change
Mexican Wireless Subscribers
Postpaid		4,405			1,646		-
Prepaid		4,445			3,590		23.8
Branded		8,850			5,236		69.0
Reseller		363			492		(26.2	)
Total Mexican Wireless Subscribers		9,213			5,728		60.8
Mexican Wireless Net Additions
Postpaid		116			-		-
Prepaid		450			-		-
Branded Net Additions		566			-		-
Reseller		(37	)		-		-
Mexican Wireless Net Subscriber Additions		529			-		-

Latin America Satellite Subscribers
PanAmericana		7,094			-		-
SKY Brazil		5,342			-		-
Total Latin America Satellite Subscribers		12,436			-		-
Latin America Satellite Net Additions
PanAmericana		28			-		-
SKY Brazil		(101	)		-		-
Latin America Satellite Net Subscriber Additions		(73	)		-		-

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 $1,431, with $1,130 in video services in Latin America and $301 attributable to additional wireless revenues in Mexico.

Operations and support expenses increased $1,370 and 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 expenses, such as compensation and benefits.

Depreciation expense increased $249 in 2016. The increase was primarily due to the acquisition of DIRECTV and the Nextel Mexico wireless property.

Operating income decreased $188. Our International segment operating income margin in the first quarter was (11.9)% for 2016, compared to (4.2)% for 2015. Our International EBITDA margin in the first quarter was 4.7% for 2016 and 7.6% for 2015.

AT&T INC.

MARCH 31, 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

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
	First Quarter
	2016		2015		Percent Change
	2016		2015		Percent Change
Operating revenues
Service	$	14,798	$	14,812		(0.1	) %
Equipment		3,156		3,374		(6.5	)
Total Operating Revenues		17,954		18,186		(1.3	)

Operating expenses
Operations and support		10,624		11,472		(7.4	)
EBITDA		7,330		6,714		9.2
Depreciation and amortization		2,056		2,005		2.5
Total Operating Expenses		12,680		13,477		(5.9	)
Operating Income	$	5,274	$	4,709		12.0	%

AT&T INC.

MARCH 31, 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 table highlights other key measures of performance for AT&T Mobility:

	First Quarter
	2016		2015		Percent Change
(in 000s)	2016		2015		Percent Change
Wireless Subscribers ¹
Postpaid smartphones		58,258		57,157		1.9	%
Postpaid feature phones and data-centric devices		18,880		19,018		(0.7	)
Postpaid		77,138		76,175		1.3
Prepaid		12,171		10,037		21.3
Branded		89,309		86,212		3.6
Reseller		13,378		13,595		(1.6	)
Connected devices ²		27,758		21,965		26.4
Total Wireless Subscribers		130,445		121,772		7.1

Net Additions ³
Postpaid		129		441		(70.7	)
Prepaid		500		98		-
Branded Net Additions		629		539		16.7
Reseller		(400)		(266)		(50.4	)
Connected devices ²		1,552		945		64.2
Net Subscriber Additions		1,781		1,218		46.2
Branded Smartphones		68,271		64,047		6.6
Mobile Share connections		59,372		55,581		6.8
Smartphones under our installment program at end of period		28,548		18,540		54.0
Smartphones sold under our installment program during period		4,135		4,065		1.7	%

Total Churn ⁴		1.42%		1.40%	2 BP
Branded Churn ⁴		1.63%		1.59%	4 BP
Postpaid Churn ⁴		1.10%		1.02%	8 BP
¹Represents 100% of AT&T Mobility wireless subscribers.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³Excludes acquisition-related additions during the period.
⁴Calculated 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.

Operating income increased $565, or 12.0%, in the first quarter of 2016. The operating income margin of AT&T Mobility increased from 25.9% in 2015 to 29.4% in 2016. AT&T Mobility's EBITDA margin increased from 36.9% in 2015 to 40.8% in 2016. AT&T Mobility's EBITDA service margin increased from 45.3% in 2015 to 49.5% in 2016. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)

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 ~~Mobile Share Value (collectively referred to as Mobile Share) and~~ AT&T ~~Next~~^SM ~~(AT&T Next).~~

At March 31, 2015, we served 121.8 million subscribers, an increase of 5.0% from the prior year. Our subscriber base consists primarily of postpaid accounts and connected devices. Our prepaid services, which include results from services sold under the Cricket brand, are monthly prepaid services.

~~ARPU~~

~~Postpaid phone-only ARPU (average revenue per average wireless subscriber) decreased 9.6% compared to~~Next. Additionally, in the first quarter of 2014 reflecting subscribers' continued adoption of AT&T Next and Mobile Share Value plans. Postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) decreased 1.9% compared to2016, we introduced an integrated offer that allows for unlimited wireless data when combined with our video services, ending the ~~first~~ quarter ~~of 2014 and increased 0.4% sequentially. As AT&T Next continues to grow, postpaid phone-only ARPU plus AT&T Next is expected to increase.~~with more than 3.0 million subscribers on these packages.

AT&T INC.

MARCH 31, ~~2015~~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

ARPU

Postpaid phone-only ARPU (average revenue per average wireless subscriber) was $59.53 at March 31, 2016 and $59.98 at March 31, 2015. Postpaid phone-only ARPU plus AT&T Next subscriber installment billings increased 5.1% in the first quarter of 2016 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 slightly higher in the first quarter of ~~2015, compared to~~2016. Postpaid churn was also higher reflecting continuing competitive pressure in the industry.

Branded Subscribers

Branded subscribers increased 3.6% in the first quarter of ~~2014. Postpaid churn, however, was lower for the first quarter of 2015. A significant portion of our~~2016, which included a 21.3% increase in prepaid subscribers and a 1.3% increase in postpaid ~~subscribers are on plans that historically have experienced lower churn.~~

~~Postpaid~~

~~Postpaid subscribers increased 3.9% compared to March 31, 2014.~~subscribers. At March 31, ~~2015, 84%~~2016, 88% of our postpaid phone subscriber base used smartphones, compared to ~~78%~~84% at March 31, ~~2014. About 97%~~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. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with approximately 49.0 million subscribers on these plans as compared to 42.7 million subscribers in the prior year. About half of our Mobile Share accounts have chosen data plans with 10 gigabytes or higher and 38% have chosen plans with 15 gigabytes or higher. Device connections on our Mobile Share plans now represent ~~over 70%~~77% 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.

AsDuring the first quarter of ~~March 31, 2015, approximately 92%~~2016, we discontinued offering subsidized smartphones to most of our ~~postpaid smartphone~~customers. Under this no-subsidy model, subscribers ~~use a 4G-capable device (i.e.,~~must purchase a device ~~that would operate~~ on ~~our LTE~~installments under the AT&T Next program or ~~HSPA+ network), and about 80% of our postpaid smartphone subscribers use an LTE device.~~

Historically, our postpaid customers have signed two-year service contracts when they purchase subsidized handsets. However, through our Mobile Share plans, we offer postpaid services at lower prices for those customers who eitherchoose to bring their own ~~devices (BYOD) or participate in our AT&T Next program. Approximately 65%~~device, with no annual service contract. Over 90% of ~~all~~ postpaid smartphone gross adds and upgrades during the first quarter of ~~2015 chose~~2016 were either AT&T ~~Next. We also experienced an 18% increase in the number of BYOD gross adds year over year.~~Next or BYOD. While BYOD customers do not generate equipment revenue or ~~incur additional expenses for device subsidy,~~expense, the service revenue helps improve our margins.

Our AT&T Next program allows for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, they 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 ~~customers that elect these trade-in~~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 on the AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers.

~~Prepaid~~Connected Devices

~~Beginning with the first quarter of 2015, we have updated our definition of prepaid subscribers to exclude~~Connected Devices includes data-centric devices such as session-based tablets, ~~which are now included with connected devices. Prepaid~~monitoring devices and automobile systems. Connected device subscribers ~~now consist primarily of phone users. On this revised basis, prepaid subscribers decreased 3.6% when compared to the first quarter of 2014.~~

~~Operating Results~~

~~Service~~ ~~revenues decreased $575, or 3.7%,~~increased 26.4% in the first quarter of 2015. This decrease was largely due to customers continuing to shift to no-device-subsidy plans, which allow for discounted monthly service charges under our Mobile Share plans. While we expect monthly service revenues to continue to be pressured as customers move to Mobile Share plans, we expect equipment revenues to increase for those subscribers who elect the AT&T Next program. The decline in service revenue was partially offset by increased revenues from Cricket and higher handset insurance revenue.

~~Equipment~~~~revenues increased $895, or 36.1%, in~~2016. During the first quarter of ~~2015.~~2016, we added approximately 1.2 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

Litigation Challenging DIRECTV's NFL Sunday Ticket More than two dozen putative class actions have been 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 ~~increase was primarily related~~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 ~~increase~~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 ~~devices sold under our AT&T Next program~~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. We vigorously dispute the ~~increase in sales of higher-priced smartphones, including those to Cricket customers.~~allegations the complaints have asserted.

AT&T INC.

MARCH 31, ~~2015~~2016

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

Dollars in millions except per share ~~amounts~~

~~Operations~~ and ~~supportexpenses increased $799, or 7.3%, in the first quarter of 2015. The first quarter increase was primarily due to the following:~~

·	Equipment costs increased $690, reflecting the sales of more expensive smartphones. Equipment costs also include subscriber integration charges. We expect Cricket integration charges will continue during 2015 as we complete the migration of those subscribers to our network.

·	~~Handset insurance cost increased $111 due to an increase in the cost and volume of replacement phones.~~

Network costs, which include incremental costs associated with the acquisition of Leap, increased $100 due to increased lease fees, higher maintenance and energy costs resulting from the increase in the number of cell sites and expenses related to our network enhancement efforts. These increases were partially offset by lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.

~~Partially offsetting these increases were the following:~~

·	Selling (other than commissions) and administrative expenses decreased $75, primarily due to: decreases of $113 in advertising and promotions and $50 in information technology and development, partially offset by increases of $55 in sales and marketing and $41 in bad debt expense.

·	Commission expenses decreased $53, primarily due to lower average commission rates paid under the AT&T Next program as well as decreases due to national equipment activation credits. These decreases are partially offset by an increase due to Cricket sales, postpaid gross activations and upgrades.

~~Depreciation and amortization~~ expense increased $127, or 6.6%, in the first quarter of 2015. The expense increase was primarily due to ongoing capital spending for network upgrades and expansion and additional expenses associated with the assets acquired from Leap, partially offset by fully depreciated assets.

~~Operating income~~ ~~decreased $606, or 12.0%, in the first quarter of 2015. Our Wireless segment operating income margin in the first quarter decreased from 28.3% in 2014 to 24.5% in 2015.~~

Wireline
Segment Results
First Quarter
2015 2014
Percent
Change

Segment operating revenues
   Service $ 13,935 $ 14,389 (3.2 ) %
   Equipment 213 212 0.5
Total Segment Operating Revenues 14,148 14,601 (3.1 )
Segment operating expenses
   Operations and support 10,263 10,457 (1.9 )
   Depreciation and amortization 2,476 2,684 (7.7 )
Total Segment Operating Expenses 12,739 13,141 (3.1 )
Segment Operating Income 1,409 1,460 (3.5 )
Equity in Net Income (Loss) of Affiliates (7 ) 1 -
Segment Income $ 1,402 $ 1,461 (4.0 ) %

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except~~ per ~~share~~subscriber amounts

Our broadband, switched access lines and other services provided by our local exchange telephone subsidiaries at March 31, 2015 and 2014 are shown below and trends are addressed throughout this segment discussion.

March 31, March 31, Percent
(in 000s)

2015¹

2014¹
Change
U-verse high speed Internet 12,644 11,009 14.9 %
DSL and Other Broadband Connections 3,453 5,494 (37.1 )
Total Wireline Broadband Connections²
16,097 16,503 (2.5 )

Total U-verse Video Connections 5,993 5,661 5.9

Retail consumer Switched Access Lines 8,660 11,655 (25.7 )
U-verse consumer VoIP connections 5,009 4,120 21.6
Total Retail Consumer Voice Connections 13,669 15,775 (13.4 )

Switched Access Lines
Retail consumer 8,660 11,655 (25.7 )
Retail business 8,610 10,084 (14.6 )
Retail Subtotal 17,270 21,739 (20.6 )

Wholesale 1,490 1,611 (7.5 )

Total Switched Access Lines³
18,949 23,582 (19.6 ) %

¹~~Connections reflect the sale of our Connecticut wireline operation in 2014.~~

²~~Total wireline broadband connections include DSL, U-verse high speed Internet and satellite broadband.~~

³~~Total switched access lines include access lines provided to national mass markets and private payphone service providers of 189 at March 31, 2015 and 232 at March 31, 2014.~~

~~Operating Results~~

~~Service~~ revenues decreased $454, or 3.2%, in the first quarter of 2015, reflecting the sale of our Connecticut wireline operations in 2014. The decline was also driven by lower service revenues from business customers (which include integration, government-related and outsourcing services), and the continued decline in revenues from our legacy services that we no longer actively market.

~~Business~~

Service revenues from business customers decreased $387, or 4.6%, in the first quarter of 2015 and were negatively impacted by the sale of our Connecticut operations in 2014, our exit from low-margin wholesale businesses and foreign exchange rates. The revenue decrease was also due to a $317 decrease in long-distance and local voice revenues and a $270 decrease in traditional data revenues, which include circuit-based and packet-switched data services. These decreases were primarily due to lower demand as customers continue to shift to our most advanced IP-based offerings, including VPNs, Ethernet, and U-verse services (Strategic business services). Strategic business services grew $339, or 14.8%, in the first quarter. Revenue from Ethernet increased $101, VPN increased $62, U-verse services increased $57 and EaMIS increased $46.

~~Consumer~~

Service revenues from residential customers decreased $50, or 0.9%, in the first quarter of 2015 and reflects the sale of our Connecticut operations in the fourth quarter of 2014. The decrease was also driven by a $377 decrease in traditional voice revenues and a decrease of $180 in DSL revenue as customers continue to shift to our strategic high-speed Internet access offerings or choose competitors' offerings. These decreases were partially offset by higher IP data revenue reflecting increased U-verse penetration, customer additions, and migration from our legacy voice and DSL services. In the first quarter, U-verse revenue from consumers increased $229 for high-speed Internet access, $209 for video and $71 for voice.

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

~~Equipment~~ ~~revenues increased $1, or 0.5%, in the first quarter of 2015. Our equipment revenues are mainly attributable to our business customers.~~

~~Operations and support~~ expenses decreased $194, or 1.9%, in the first quarter of 2015. 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 decrease in the first quarter reflects the sale of our Connecticut operations in 2014. Lower expenses were also due to lower net traffic compensation costs of $123; lower contract services costs of $60; lower advertising costs of $47; and lower materials and energy costs of $16. These decreases were partially offset by increased cost of sales of $98, related to U-verse related content fees, and higher employee-related expenses driven by an increase in noncash benefit expenses.

~~Depreciation and amortization~~ expense decreased $208, or 7.7%, for the first quarter of 2015. Depreciation decreased $176, or 6.8%, primarily due to extending the estimated useful life of software and abandonment of certain network assets, both in 2014. These decreases were partially offset by increases due to ongoing capital spending for network upgrades and expansion. Amortization decreased $32, or 37.6%, primarily due to lower amortization of intangibles for the customer lists associated with acquisitions.

~~Operating income~~ decreased $51, or 3.5%, in the first quarter of 2015. Our Wireline segment operating income margin in the first quarter was 10.0% for 2015 and 2014. We expect margin improvement in the remaining quarters of 2015 due in part to additional cost savings, including the impact of our voluntary retirement plan offer.

International
Segment Results
First Quarter
2015 2014
Percent
Change

Total Segment Operating Revenues $ 236 $ - - %
Segment operating expenses
Operations and support 219 - -
Depreciation and amortization 44 - -
Total Segment Operating Expenses 263 - -
Segment Income (Loss) $ (27 ) $ - - %

~~Operating Results~~

On January 16, 2015, we acquired GSF Telecom which offers service under both the Iusacell and Unefon brand names in Mexico (see Note 7). Our International segment operating income margin was (11.4)% in the first quarter of 2015.

We are a wireless provider in Mexico, with approximately 6 million subscribers at March 31, 2015. Our subscriber base predominantly consists of prepaid customers. Operating revenues were $236 and operating expenses were $263 in the first quarter of 2015.

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

~~Supplemental Operating Information~~

As a supplemental discussion of our operating results, we are providing a view of our AT&T Business Solutions (ABS) business revenues which includes both wireless and wireline. This combined view of ABS presents a complete revenue profile of the entire business customer relationship, and underscores the growing importance of mobile solutions to serving our business customers.

AT&T Business Solutions
Operating Revenues
First Quarter
2015 2014
Percent
Change

ABS operating revenues
Wireless $ 9,445 $ 9,032 4.6 %
Wireline 8,288 8,670 (4.4 )
Total ABS Operating Revenues $ 17,733 $ 17,702 0.2 %

~~ABS Operating Revenues~~

~~Our ABS operating revenues increased $31, or 0.2%, in the first quarter of 2015. At March 31, 2015, mobile solutions represented 53% of total ABS revenues, compared to 51% at March 31, 2014.~~

~~Wireless~~ revenues increased $413, or 4.6%, in the first quarter of 2015. Growth in ABS postpaid subscribers of 9.8% contributed to total revenue growth in the first quarter of 2015. ABS wireless revenues consist of services provided to businesses as well as revenue from wireless customers who pay lower negotiated rates through their employers. Revenue increases reflect the impact of equipment installment plans, which resulted in equipment revenue growth of 44.9%, and a 2.4% decline in service revenue.

~~Wireline~~ revenues decreased $382, or 4.4%, in the first quarter of 2015. Revenues in the first quarter of 2015 were negatively impacted by the sale of our Connecticut operations in 2014, our exit from low-margin wholesale businesses and foreign exchange rates. The decline in revenues continues to be driven by migrations to alternative technologies, increasing price competition and sustained economic pressure. These declines were partially offset by growth in our strategic business services, including the continued success of our VPN and Cloud services.

While our wholesale revenues continue to be negatively impacted by increasing competition and our strategic decisions to change offerings, we are experiencing lower revenue declines than in prior quarters for services provided to small and medium-sized businesses.

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

~~OTHER BUSINESS MATTERS~~

~~DIRECTV Acquisition~~ In May 2014, we announced a merger agreement to acquire DIRECTV in a stock-and-cash transaction for ninety-five dollars per share of DIRECTV's common stock, or approximately $48,500 at the date of announcement. As of March 31, 2015, DIRECTV had approximately $15,129 in net debt. Each DIRECTV shareholder will receive cash of $28.50 per share and $66.50 per share in our stock subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if our average stock price is below $34.90 per share at closing and 1.724 AT&T shares if our average stock price is above $38.58 at closing. If our average stock price (calculated in accordance with the merger agreement with DIRECTV) is between $34.90 and $38.58 at closing, then DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value. DIRECTV is a premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers.

The merger agreement was adopted by DIRECTV's stockholders on September 25, 2014 and the transaction remains subject to review by the Federal Communications Commission (FCC) and the Department of Justice and to other closing conditions. It is also a condition that all necessary consents by certain foreign governmental entities have been obtained and are in full force and effect. The transaction is still expected to close in the second quarter of 2015. The merger agreement provides certain mutual termination rights for us and DIRECTV, including the right of either party to terminate the agreement if the merger is not consummated by May 18, 2015, subject to extension in certain cases to a date no later than November 13, 2015. Either party may also terminate the agreement if an order permanently restraining, enjoining, or otherwise prohibiting consummation of the merger becomes final and nonappealable. In October 2014, DIRECTV and the National Football League renewed their agreement for the "NFL Sunday Ticket" service substantially on the terms discussed between AT&T and DIRECTV, satisfying one of the conditions to closing the merger. Under certain circumstances relating to a competing transaction, DIRECTV may be required to pay a termination fee to us in connection with or following a termination of the agreement.

Based on synergies we expect to realize with the acquisition, we have also committed to the following upon closing of the transaction: (1) expanding or enhancing our deployment of both wireline and fixed wireless broadband to at least 15 million customer locations across 48 states, with most of the locations in underserved rural areas, (2) adhering to the FCC's Open Internet protections established in 2010 for three years after closing, regardless of whether the FCC re-establishes such protections for other industry participants following the D.C. Circuit's vacating of those rules, (3) for three years after closing, offering standalone retail broadband Internet access service at reasonable market-based prices, including a service of at least 6 Mbps down (where feasible) at guaranteed prices, in areas where we offer wireline broadband service today, and (4) offering, for three years after closing, standalone DIRECTV satellite video service at nationwide package prices that do not differ between customers in AT&T's wireline footprint and customers outside our current 21-state wireline footprint.

~~Nextel Mexico Acquisition~~On April 30, 2015, we completed our acquisition of the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, less approximately $427 of net debt and other adjustments. The subsidiaries offer service under the name Nextel Mexico.

~~GSF Telecom Acquisition~~ On January 16, 2015, we completed our acquisition of 100 percent of the stock of Mexican wireless company GSF Telecom for $2,500, less net debt at closing, which was approximately $700. GSF Telecom offers service under both the Iusacell and Unefon brand names in Mexico with a network that covers about 70 percent of Mexico's population of approximately 120 million.

~~Spectrum Acquisitions~~ In January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum licenses, comprised of 42 G Block licenses, 37 H Block licenses, 58 I Block licenses, and 114 J Block licenses, in the AWS-3 Auction (FCC Auction 97) for $18,189 (see "Liquidity and Capital Resources"). We will cover approximately 96 percent of the U.S. population with high-value contiguous AWS-3 spectrum. In 2016, we also intend to bid at least $9,000 in connection with the 600 MHz auction (see "Competitive and Regulatory Environment"), provided there is sufficient spectrum available in the auction without undue impairments to give us a viable path to at least a 2x10 MHz nationwide spectrum footprint.

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

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 ~~Federal Trade Commission (FTC)~~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 ~~which~~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.~~month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is ~~authorized by the FCC and~~ 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, which we vigorously dispute, 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. ~~We have asked~~In May 2015, the Court granted our motion to certify its decision for ~~permission to appeal the denial~~immediate appeal. The United States Court of ~~the motion immediately. If the Court grants the motion, we will then ask~~Appeals for the Ninth Circuit ~~Court of Appeals~~subsequently granted our petition to accept the appeal, soand the appeal is now pending before that Court while limited discovery proceeds in the District Court. Oral argument on the appeal is presently set for June 17, 2016. 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 ~~threshold question of jurisdiction may~~NAL is unlawful and should be withdrawn, because we have fully ~~litigated~~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.

South Coast Air Quality On January 15, 2016, AT&T Mobility received an offer to enter into an administrative settlement with California's South Coast Air Quality Management District associated with a Notice of Violation (NOV) received in 2015. The 2015 NOV alleged violations of local environmental air permitting and emissions rules issued by the District in connection with operation of a back-up power generator system at one AT&T Mobility facility. After conclusion of its investigation and discussion, the parties ~~incur~~resolved the ~~expense~~alleged violations set forth in the NOV without admission of ~~discovery.~~fault by AT&T Mobility for a payment of civil penalties in an amount less than one hundred thousand dollars.

Labor Contracts ~~Contracts~~A contract covering approximately ~~17,000~~9,000 mobility employees in the Southwest region, which expired in February 2016, was ratified on April 14, 2016. A contract covering nearly 16,000 traditional wireline employees in our West region expired in April ~~2015~~2016 and employees are ~~currently~~ working under the terms of the ~~expired agreements. The~~prior contract, ~~covering approximately 24,000 traditional wireline employees in our nine-state Southeast region will expire in August 2015. Upon 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. A separate contract covering only benefits with approximately 40,000 employees in our mobility business expires in 2016, though there is a no strike/no lock-out clause. Contracts covering wages and other non-benefit working terms for these mobility employees are structured on a regional basis.

AT&T INC.

MARCH 31, 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

COMPETITIVE AND REGULATORY ENVIRONMENT

OverviewAT&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, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.~~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 have challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. We expect a decision on AT&T's appeal in the first half of 2016.

Though early in the rulemaking process, the FCC is considering a number of regulatory changes that could restrict our commercial flexibility in the provision of video, special access, business, and advertising services.

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 ~~new video entrants~~us to ~~acquire~~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 ~~services.~~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.

We provide wireless services in robustly competitive markets, but ~~those services~~ 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 ~~service~~ 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.

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

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, which began in October 2014 and closed in January 2015 (see "Other Business Matters").~~Auction. The ~~FCC announced that the~~ 600 MHz Auction ~~has been postponed until 2016.~~(Auction 1000) began on March 29, 2016, and the multiple phases of Auction 1000 are expected to progress over the next several months.

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 ~~the incentive auction 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"~~(low band spectrum has better propagation characteristics than "high band" spectrum). ~~Also, a competitor has filed a petition asking the FCC to increase the percentage of spectrum for which we would be prohibited from bidding in the incentive auction. That petition is pending.~~ 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.

AT&T INC.

MARCH 31, 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

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 ~~are facing significant~~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.

~~Net Neutrality~~ In February 2015, the FCC released an order in response to the D.C. Circuit's January 2014 decision adopting new rules, and reclassifying both fixed and mobile consumer broadband Internet access services as telecommunications services, subject to comprehensive regulation under the Act. The FCC's decision significantly expands the FCC's existing authority to regulate the provision of fixed and mobile broadband Internet access services. The FCC also asserted jurisdiction over Internet interconnection arrangements, which until now have been unregulated. These actions could have an adverse impact on our fixed and mobile broadband services and operating results. AT&T and several other parties, including US Telecom and CTIA trade groups, have appealed the FCC's order. On May 1, 2015, AT&T and several other parties filed a request for a stay of the order with the FCC.

~~Intercarrier Compensation/Universal Service~~ In October 2011, the FCC adopted an order fundamentally overhauling its high-cost universal service program and its existing intercarrier compensation (ICC) rules, which govern payments between carriers for the exchange of traffic. The order also established a new ICC regime that will result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments over a six-year transition. In May 2014, the United States Court of Appeals for the Tenth Circuit denied all challenges to the universal service and intercarrier compensation rules adopted in the 2011 order. In May 2015, the U.S. Supreme Court denied all petitions to review this decision.

~~AT&T INC.~~

~~MARCH 31, 2015~~

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

~~Dollars in millions except per share amounts~~

LIQUIDITY AND CAPITAL RESOURCES

We had ~~$4,444~~$10,008 in cash and cash equivalents available at March 31, ~~2015.~~2016. Cash and cash equivalents included cash of ~~$533~~$2,114 and money market funds and other cash equivalents of ~~$3,911.~~$7,894. Approximately $939 of our cash and cash equivalents resided in foreign jurisdictions, some of which is subject to restrictions on repatriation. Cash and cash equivalents ~~decreased $4,159~~increased $4,887 since December 31, ~~2014.~~2015. In the first three months of ~~2015,~~2016, cash inflows were primarily provided by ~~long-term debt issuances and~~ cash receipts from operations, including cash from our sale and transfer of certain equipment installment receivables to third ~~parties.~~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,~~expenses; funding capital expenditures; debt repayments; dividends to stockholders; and the acquisition of wireless ~~spectrum and GSF Telecom, funding capital expenditures, collateral posting (see Note 6), and dividends to stockholders.~~spectrum. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities

During the first three months of ~~2015,~~2016, cash provided by operating activities was ~~$6,738,~~$7,900, compared to ~~$8,799~~$6,738 for the first three months of ~~2014. Lower~~2015. Higher operating cash flows in ~~2015~~2016 were primarily due to our acquisition of DIRECTV and partially offset by the timing of working capital payments.

Cash Used in or Provided by Investing Activities

For the first three months of ~~2015,~~2016, cash used in investing activities totaled ~~$21,587~~$4,308 and consisted primarily ~~of:~~

·	~~$17,678 for acquisitions of spectrum licenses, most notably the remaining payment for AWS spectrum licenses from the FCC in the AWS-3 Auction.~~

·	~~$1,836~~of $4,451 for capital expenditures, excluding interest during construction, and $165 for the ~~acquisition of GSF Telecom and other operations.~~

·	~~$3,848 for capital expenditures, excluding interest during construction.~~

~~During the first three months, we also received $1,890 upon the maturity of certain short-term investments.~~

~~On April 30, 2015, we completed our~~ acquisition of ~~Nextel Mexico, for $1,875, less approximately $427 of net debt~~wireless spectrum and other ~~adjustments.~~operations. These expenditures were partially offset by net cash receipts of $445 from the sale of securities.

Virtually all of our capital expenditures are spent on our ~~wireless~~communications networks and ~~wireline networks,~~ our ~~U-verse~~video services and support systems for our ~~communications~~digital entertainment services. Capital expenditures, excluding interest during construction, ~~decreased $1,868~~increased $603 in the first three months. ~~Our Wireless segment represented 45% of~~The increase was primarily due to our ~~total spending~~wireless network expansion in Mexico, DIRECTV operations and ~~decreased 42%~~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 three ~~months. Wireless expenditures were primarily used for the ongoing deployment~~months of ~~LTE equipment. The Wireline segment, which includes U-verse services, represented 54%~~2016, we deferred $43 of ~~the total~~vendor financing related to capital additions to future periods. We do not report capital expenditures ~~and decreased 22% in~~at the ~~first three months. Our declines in Wireless and Wireline~~ segment capital expenditures reflected our completion of various Project VIP initiatives in 2014. Capital expenditures for our new International segment include spending for GSF Telecom after the acquisition date.level.

We continue to expect our ~~2015~~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 ~~$18,000~~$22,000 range, ~~excluding expenditures~~and we expect our capital investment to be in the 15 percent range of service revenues or lower for ~~newly acquired businesses.~~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 and our expenditures may also be influenced by regulatory considerations. We expect to support our business and spectrum acquisitions with a combination of debt issuances, cash from operations, and asset sales.met.

~~Cash Provided by or Used in Financing Activities~~

~~For the first three months of 2015, cash provided by financing activities totaled $10,690 and included net proceeds of $16,572 from the following long-term debt issuances:~~

·	~~February 2015 issuance of $2,619 of 4.600% global notes due 2045.~~

·	~~March 2015 borrowings under a variable rate term loan facility due 2018, variable rate term loan facility due 2020 and variable rate 18-month credit agreement due 2016, together totaling $11,155.~~

·	~~March 2015 issuance of €1,250 of 1.300% global notes due 2023 and €1,250 of 2.450% global notes due 2035 (together, equivalent to $2,844, when issued).~~

AT&T INC.

MARCH 31, ~~2015~~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 May 2015, we issued $17,500~~Cash Provided by or Used in Financing Activities

For the first three months of 2016, cash provided by financing activities totaled $1,295 and included net proceeds of $5,978 from the following long-term debt ~~to be used for general corporate purposes, including funding previously announced acquisitions. Details of the notes are as follows:~~issuances:

·	~~$3,000~~February issuance of ~~2.450%~~$1,250 of 2.800% global notes due ~~2020, subject to mandatory redemption.~~2021.

·	~~$2,750~~February issuance of ~~3.000%~~$1,500 of 3.600% global notes due ~~2022, subject to mandatory redemption.~~2023.

·	~~$5,000~~February issuance of ~~3.400%~~$1,750 of 4.125% global notes due ~~2025.~~2026.

·	~~$2,500~~February issuance of ~~4.500%~~$1,500 of 5.650% global notes due ~~2035.~~2047.

·	~~$3,500 of 4.750% global notes due 2046, subject to mandatory redemption.~~

·	~~$750 floating rate global notes due 2020. The floating rate for the note is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 93 basis points.~~

If we do not consummate the DIRECTV acquisition pursuant to the merger agreement, on or prior to November 30, 2015 or, if prior to such date, the merger agreement is terminated, then in either case we must redeem certain of the notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.

~~We do not currently anticipate the issuance of additional U.S. dollar denominated senior notes for the remainder of 2015.~~

During the first three months of ~~2015,~~2016, we redeemed ~~$596~~$2,296 of debt, consisting primarily ~~consisting~~ of ~~$587~~the following:

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

·	March prepayment of the remaining $1,000 of the outstanding advances under the $2,000 18-month credit agreement (the "18-month Credit Agreement") by and between AT&T and Mizuho. (See "Credit Facilities" below).

In March 2016, we completed a debt exchange covering $16,049 of notes of various ~~senior~~series issued by DIRECTV with stated rates of 1.75% to 6.375% for $16,049 in new AT&T Inc. global notes ~~in connection~~ with stated rates of 1.75% to 6.375% plus a $16 cash payment.

On May 3, 2016, we agreed to sell the ~~GSF Telecom acquisition.~~following debt amounts:

·	$750 of 2.300% global notes due 2019.

·	$750 of 2.800% global notes due 2021.

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

·	$900 of 4.125% global notes due 2026.

·	$500 of 4.800% global notes due 2044.

These notes will be reopening of existing series of notes. The transactions are expected to close on May 12, 2016, and proceeds will be used to pay down amounts outstanding under our $9,155 Syndicated Credit Agreement (discussed below).

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately ~~3.9%~~4.1% as of March 31, ~~2015,~~2016, and ~~4.2%~~4.0% as of December 31, ~~2014.~~2015. We had ~~$96,026~~$129,229 of total notes and debentures outstanding at March 31, ~~2015,~~2016, which included Euro, British pound sterling, Swiss Franc, Brazilian real and Canadian dollar denominated debt of approximately ~~$25,169.~~$26,852.

As of March 31, ~~2015,~~2016, we had approximately ~~415~~407 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. ~~Upon completing our acquisition of DIRECTV,~~In 2016, our priority will be to use free cash flow (operating cash flows less construction and capital expenditures) after dividends to pay down debt.

We paid dividends of ~~$2,434~~$2,947 during the first three months of ~~2015,~~2016, compared with ~~$2,398~~$2,434 for the first three months of ~~2014,~~2015, primarily reflecting the increase in ~~the quarterly dividend approved by our Board of Directors in December 2014, partially offset by the impact of the decline in~~ shares outstanding ~~due to repurchases in 2014.~~resulting from our acquisition of DIRECTV. Dividends declared by our Board of Directors totaled ~~$0.47~~$0.48 per share in the first quarter of ~~2015~~2016 and ~~$0.46~~$0.47 per share for the first three months of ~~2014.~~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.

At March 31, ~~2015,~~2016, we had ~~$8,181~~$8,399 of debt maturing within one year, ~~$8,130~~$7,874 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. No such put was exercised during April ~~2015.~~2016.

·	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~~

We have a $5,000 revolving credit agreement with a syndicate of banks that expires in December 2018 (the "December 2018 Facility") and a $3,000 revolving credit agreement with a syndicate of banks that expires in December 2017 (the "December 2017 Facility"). There were no advances outstanding under the December 2018 Facility or the December 2017 Facility at March 31, 2015.37

AT&T INC.

MARCH 31, ~~2015~~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

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, replacing our $5,000 credit agreement that would have expired in December 2018. At the same time, AT&T and the lenders terminated their obligations under the existing revolving $3,000 credit agreement with Citibank that would have expired in December 2017.

In January ~~21,~~ 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. ~~On that date, we~~We also entered into ~~a $2,000 18-month credit agreement (the "18-Month~~the 18 Month Credit ~~Agreement")~~Agreement with Mizuho as initial lender and agent. The 18-Month Credit Agreement was repaid and terminated in March 2016.

~~On March 2, 2015, we borrowed $9,155~~Revolving Credit Agreement

In the event advances are made under the ~~Syndicated~~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 March 31, 2016, we had no advances outstanding under the Revolving Credit Agreement and ~~$2,000~~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 ~~18-Month~~Revolving Credit Agreement would bear interest, at ~~floating~~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 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, ~~rates. We used these advances~~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 ~~general corporate purposes, including acquisition related payments.~~an agreement of this type and such events would result in the acceleration or permit the lenders to accelerate, as applicable, required payments and would increase the Applicable Margin by 2.00% per annum.

AT&T INC.

MARCH 31, 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

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 ~~and payable~~ on March 2, 2018. ~~The Tranche A Facility interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 100 basis points when issued).~~ Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with ~~twenty-five~~25 percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due ~~and payable~~ on March 2, 2020.

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 ~~interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 112.5 basis points when issued). Amounts borrowed under the 18-Month~~will equal 1.125%, 1.250% or 1.375% per annum, depending on AT&T's credit rating.

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 ~~be due and payable on September 2, 2016. The 18-Month Credit Agreement interest rate equals three-month LIBOR, reset quarterly, plus~~maintain, as of the ~~Applicable Margin (or 80 basis points when issued).~~last day of each fiscal quarter of not more than 3.5-to-1.

~~At March 31, 2015, we had advances outstanding~~The events of ~~$9,155 under~~default contained in the Syndicated Credit Agreement are customary for an agreement of this type and ~~were~~such events would result in ~~compliance with all covenants. At March 31, 2015, we had advances outstanding of $2,000 under~~ the ~~18-Month Credit Agreement~~acceleration or permit the lenders to accelerate, as applicable, required payments and ~~were in compliance with all covenants. Additional details regarding~~would increase the ~~Syndicated Credit Agreement and 18-Month Credit Agreement are available in our Annual Report on Form 10-K for the year ended December 31, 2014.~~Applicable Margin by 2.00% per annum.

Collateral Arrangements

During the first ~~quarter~~three months of ~~2015,~~2016, we ~~posted $2,572~~received $587 of additional cash collateral, on a net basis, tofrom banks and other participants in our derivative arrangements. ~~Subsequent to the end of the quarter, approximately $911 of the collateral has been returned to AT&T.~~ Cash postings under these arrangements vary with changes in foreign currency exchange rates, interest rates, credit ratings and netting agreements. (See Note ~~6.)~~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 March 31, ~~2015,~~2016, our debt ratio was ~~52.5%~~51.2%, compared to ~~46.6%~~51.5% at March 31, ~~2014,~~2015, and ~~48.6%~~50.5% at December 31, ~~2014.~~2015. Our net debt ratio was 47.3% at March 31, 2016, compared to 49.1% at March 31, 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.~~issuances and repayments.

During ~~2015,~~2016, we received ~~$1,532~~$1,610 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar ~~opportunities in 2015.~~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 wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of ~~$8,970~~$8,787 as of March 31, ~~2015,~~2016, and ~~$9,021~~$8,714 as of December 31, ~~2014,~~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 will be distributed quarterly in equal amounts. We distributed $140 to the trust during the first quarter of ~~2015.~~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 ~~2014,~~ 2015 and 2016.

AT&T INC.

MARCH 31, ~~2015~~2016

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At March 31, ~~2015,~~2016, we had interest rate swaps with a notional value of ~~$6,550~~$7,050 and a fair value of ~~$194.~~$197.

For the three months ended March 31, 2015:
	Wireless			Wireline			International			Corporate and Other			Consolidated Results
Service	$	14,812		$	13,935		$	215		$	-		$	28,962
Equipment		3,374			213			21			6			3,614
Total segment operating revenues		18,186			14,148			236			6			32,576
Operations and support expenses		11,681			10,263			219			379			22,542
Depreciation and amortization expenses		2,058			2,476			44			-			4,578
Total segment operating expenses		13,739			12,739			263			379			27,120
Segment operating income (loss)		4,447			1,409			(27	)		(373	)		5,456
Interest expense		-			-			-			899			899
Equity in net income (loss) of affiliates		(4	)		(7	)		-			11			-
Other income (expense) – net		-			-			-			70			70
Segment income (loss) before income taxes	$	4,443		$	1,402		$	(27	)	$	(1,191	)	$	4,627

For the three months ended March 31, 2014:
	Wireless			Wireline			International			Corporate and Other			Consolidated Results
Service	$	15,387		$	14,389		$	-		$	-		$	29,776
Equipment		2,479			212			-			9			2,700
Total segment operating revenues		17,866			14,601			-			9			32,476
Operations and support expenses		10,882			10,457			-			242			21,581
Depreciation and amortization expenses		1,931			2,684			-			2			4,617
Total segment operating expenses		12,813			13,141			-			244			26,198
Segment operating income (loss)		5,053			1,460			-			(235	)		6,278
Interest expense		-			-			-			860			860
Equity in net income (loss) of affiliates		(20	)		1			-			107			88
Other income (expense) – net		-			-			-			145			145
Segment income (loss) before income taxes	$	5,033		$	1,461		$	-		$	(843	)	$	5,651

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

	First Quarter
	2016			2015
Business Solutions	$	4,299		$	4,142
Entertainment Group		1,595			(270	)
Consumer Mobility		2,494			2,235
International		(184	)		(10	)
Segment Operating Contribution		8,204			6,097
Reconciling Items:
Corporate and Other		(121	)		91
Merger and integration charges		(295	)		(299	)
Amortization of intangibles acquired		(1,351	)		(121	)
Employee separation charges		(25	)		(217	)
Gain on wireless spectrum transactions		736			-
Segment equity in net (income) loss of affiliates		(17	)		6
AT&T Operating Income		7,131			5,557
Interest Expense		1,207			899
Equity in net income (loss) of affiliates		13			-
Other income (expense) - Net		70			70
Income Before Income Taxes	$	6,007		$	4,728

AT&T Business Solutions
Operating Revenues
	First Quarter
	2015		2014			Percent Change
	2015		2014			Percent Change
ABS operating revenues
Wireless	$	9,445		$	9,032		4.6	%
Wireline		8,288			8,670		(4.4	)
Total ABS Operating Revenues	$	17,733		$	17,702		0.2	%