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 ~~June 30, 2016~~March 31, 2017 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"~~filer," "smaller reporting company" and ~~"smaller reporting~~"emerging growth 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	[ ]
			Emerging growth company	[ ]

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes [ ] No [ ]

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 ~~July 31, 2016~~April 30, 2017, there were ~~6,152~~6,148 million common shares outstanding.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

Operating Revenues
Service $ 37,142 $ 29,541 $ 74,243 $ 58,503
Equipment 3,378 3,474 6,812 7,088
Total operating revenues 40,520 33,015 81,055 65,591

Operating Expenses
Cost of services and sales
   Equipment 4,260 4,353 8,635 8,899
   Broadcast, programming and operations 4,701 1,148 9,330 2,270
   Other cost of services (exclusive of depreciation and
         amortization shown separately below)
9,514 9,578 18,910 18,390
Selling, general and administrative 8,909 7,467 17,350 15,428
Depreciation and amortization 6,576 4,696 13,139 9,274
Total operating expenses 33,960 27,242 67,364 54,261
Operating Income 6,560 5,773 13,691 11,330
Other Income (Expense)
Interest expense (1,258 ) (932 ) (2,465 ) (1,831 )
Equity in net income of affiliates 28 33 41 33
Other income (expense) – net 91 48 161 118
Total other income (expense) (1,139 ) (851 ) (2,263 ) (1,680 )
Income Before Income Taxes 5,421 4,922 11,428 9,650
Income tax expense 1,906 1,738 4,028 3,127
Net Income 3,515 3,184 7,400 6,523
Less: Net Income Attributable to Noncontrolling Interest (107 ) (102 ) (189 ) (178 )
Net Income Attributable to AT&T $ 3,408 $ 3,082 $ 7,211 $ 6,345
Basic Earnings Per Share Attributable to AT&T $ 0.55 $ 0.59 $ 1.17 $ 1.22
Diluted Earnings Per Share Attributable to AT&T $ 0.55 $ 0.59 $ 1.17 $ 1.22
Weighted Average Number of Common Shares
   Outstanding – Basic (in millions) 6,174 5,204 6,173 5,204
Weighted Average Number of Common Shares
   Outstanding – with Dilution (in millions)
6,195 5,220 6,193 5,220
Dividends Declared Per Common Share $ 0.48 $ 0.47 $ 0.96 $ 0.94
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
	Three months ended
	March 31,
	2017			2016

Operating Revenues
Service	$	36,456		$	37,101
Equipment		2,909			3,434
Total operating revenues		39,365			40,535

Operating Expenses
Cost of services and sales
Equipment		3,848			4,375
Broadcast, programming and operations		4,974			4,629
Other cost of services (exclusive of depreciation and amortization shown separately below)		9,065			9,396
Selling, general and administrative		8,487			8,441
Depreciation and amortization		6,127			6,563
Total operating expenses		32,501			33,404
Operating Income		6,864			7,131
Other Income (Expense)
Interest expense		(1,293	)		(1,207	)
Equity in net income (loss) of affiliates		(173	)		13
Other income (expense) – net		(20	)		70
Total other income (expense)		(1,486	)		(1,124	)
Income Before Income Taxes		5,378			6,007
Income tax expense		1,804			2,122
Net Income		3,574			3,885
Less: Net Income Attributable to Noncontrolling Interest		(105	)		(82	)
Net Income Attributable to AT&T	$	3,469		$	3,803
Basic Earnings Per Share Attributable to AT&T	$	0.56		$	0.62
Diluted Earnings Per Share Attributable to AT&T	$	0.56		$	0.61
Weighted Average Number of Common Shares Outstanding – Basic (in millions)		6,166			6,172
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)		6,186			6,190
Dividends Declared Per Common Share	$	0.49		$	0.48
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
		Three months ended						Six months ended						Three months ended
		June 30,						June 30,						March 31,
		2016			2015			2016			2015			2017			2016
Net income		$	3,515		$	3,184		$	7,400		$	6,523		$	3,574		$	3,885
Other comprehensive income (loss), net of tax:
Foreign Currency:
Foreign currency translation adjustment, net of taxes of $136, $1, $126 and $(103)			218			1			174			(185	)
Foreign currency:
Foreign currency translation adjustment (includes $6 and $0 attributable to noncontrolling interest), net of taxes of $391 and $(10)															372			(44	)
Available-for-sale securities:
Net unrealized gains (losses), net of taxes of $2, $0, $(13) and $19			5			1			(21	)		34
Reclassification adjustment included in net income, net of taxes of $2, $(2), $0 and $(5)			3			(4	)		-			(9	)
Net unrealized gains (losses), net of taxes of $15 and $(15)															33			(26	)
Reclassification adjustment included in net income, net of taxes of $3, and $(2)															5			(3	)
Cash flow hedges:
Net unrealized gains (losses), net of taxes of $(208), $(52), $(141) and $(242)			(387	)		(95	)		(263	)		(449	)
Reclassification adjustment included in net income, net of taxes of $5, $5, $10 and $9			9			10			19			17
Net unrealized gains, net of taxes of $7 and $67															13			124
Reclassification adjustment included in net income, net of taxes of $5 and $5															10			10
Defined benefit postretirement plans:
Amortization of net prior service credit included in net income, net of taxes of $(131), $(131), $(262) and $(262)			(214	)		(214	)		(429	)		(429	)
Amortization of net prior service credit included in net income, net of taxes of $(139) and $(131)															(228	)		(215	)
Other comprehensive income (loss)			(366	)		(301	)		(520	)		(1,021	)		205			(154	)
Total comprehensive income			3,149			2,883			6,880			5,502			3,779			3,731
Less: Total comprehensive income attributable to noncontrolling interest			(107	)		(102	)		(189	)		(178	)		(111	)		(82	)
Total Comprehensive Income Attributable to AT&T		$	3,042		$	2,781		$	6,691		$	5,324		$	3,668		$	3,649
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	March 31,			December 31,
	2017			2016
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	14,884		$	5,788
Accounts receivable - net of allowances for doubtful accounts of $699 and $661		15,078			16,794
Prepaid expenses		1,418			1,555
Other current assets		14,347			14,232
Total current assets		45,727			38,369
Property, plant and equipment		319,108			319,648
Less: accumulated depreciation and amortization		(193,816	)		(194,749	)
Property, Plant and Equipment – Net		125,292			124,899
Goodwill		105,593			105,207
Licenses		94,617			94,176
Customer Lists and Relationships – Net		13,366			14,243
Other Intangible Assets – Net		8,295			8,441
Investments in Equity Affiliates		1,551			1,674
Other Assets		17,462			16,812
Total Assets	$	411,903		$	403,821

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year	$	12,681		$	9,832
Accounts payable and accrued liabilities		27,120			31,138
Advanced billing and customer deposits		4,493			4,519
Accrued taxes		3,384			2,079
Dividends payable		3,012			3,008
Total current liabilities		50,690			50,576
Long-Term Debt		120,568			113,681
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		61,100			60,128
Postemployment benefit obligation		33,404			33,578
Other noncurrent liabilities		21,160			21,748
Total deferred credits and other noncurrent liabilities		115,664			115,454

Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2017 and
December 31, 2016: issued 6,495,231,088 at March 31, 2017 and December 31, 2016)		6,495			6,495
Additional paid-in capital		89,411			89,604
Retained earnings		35,175			34,734
Treasury stock (347,741,277 at March 31, 2017 and 356,237,141
at December 31, 2016, at cost)		(12,400	)		(12,659	)
Accumulated other comprehensive income		5,160			4,961
Noncontrolling interest		1,140			975
Total stockholders' equity		124,981			124,110
Total Liabilities and Stockholders' Equity	$	411,903		$	403,821
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
	Three months ended
	March 31,
	2017			2016
Operating Activities
Net income	$	3,574		$	3,885
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,127			6,563
Undistributed loss (earnings) from investments in equity affiliates		182			(13	)
Provision for uncollectible accounts		393			374
Deferred income tax expense		480			1,346
Net loss (gain) from sale of investments, net of impairments		61			(44	)
Changes in operating assets and liabilities:
Accounts receivable		445			43
Other current assets		228			1,319
Accounts payable and other accrued liabilities		(1,778	)		(3,990	)
Equipment installment receivables and related sales		579			454
Deferred fulfillment costs		(436	)		(542	)
Retirement benefit funding		(140	)		(140	)
Other - net		(497	)		(1,355	)
Total adjustments		5,644			4,015
Net Cash Provided by Operating Activities		9,218			7,900

Investing Activities
Capital expenditures:
Purchase of property and equipment		(5,784	)		(4,451	)
Interest during construction		(231	)		(218	)
Acquisitions, net of cash acquired		(162	)		(165	)
Dispositions		6			81
Sale of securities, net		-			445
Net Cash Used in Investing Activities		(6,171	)		(4,308	)

Financing Activities
Net change in short-term borrowings with original maturities of three months or less		(1	)		-
Issuance of long-term debt		12,440			5,978
Repayment of long-term debt		(3,053	)		(2,296	)
Purchase of treasury stock		(177	)		-
Issuance of treasury stock		21			89
Dividends paid		(3,009	)		(2,947	)
Other		(172	)		471
Net Cash Provided by Financing Activities		6,049			1,295
Net increase in cash and cash equivalents		9,096			4,887
Cash and cash equivalents beginning of year		5,788			5,121
Cash and Cash Equivalents End of Period	$	14,884		$	10,008
Cash paid (received) during the three months ended March 31 for:
Interest	$	1,643		$	1,459
Income taxes, net of refunds	$	(160	)	$	477
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
June 30, December 31,
2016 2015
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 7,208 $ 5,121
Accounts receivable - net of allowances for doubtful accounts of $642 and $704 15,830 16,532
Prepaid expenses 1,197 1,072
Other current assets 11,770 13,267
Total current assets 36,005 35,992
Property, plant and equipment 313,018 306,227
   Less: accumulated depreciation and amortization (189,481 ) (181,777 )
Property, Plant and Equipment – Net 123,537 124,450
Goodwill 105,252 104,568
Licenses 94,098 93,093
Customer Lists and Relationships - Net 16,259 18,208
Other Intangible Assets – Net 9,107 9,409
Investments in Equity Affiliates 1,677 1,606
Other Assets 15,873 15,346
Total Assets $ 401,808 $ 402,672

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 9,528 $ 7,636
Accounts payable and accrued liabilities 26,746 30,372
Advanced billing and customer deposits 4,465 4,682
Accrued taxes 2,773 2,176
Dividends payable 2,953 2,950
Total current liabilities 46,465 47,816
Long-Term Debt 117,308 118,515
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 58,216 56,181
Postemployment benefit obligation 34,023 34,262
Other noncurrent liabilities 21,425 22,258
Total deferred credits and other noncurrent liabilities 113,664 112,701

Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2016 and
   December 31, 2015: issued 6,495,231,088 at June 30, 2016 and December 31, 2015) 6,495 6,495
Additional paid-in capital 89,486 89,763
Retained earnings 34,950 33,671
Treasury stock (343,397,505 at June 30, 2016 and 350,291,239
   at December 31, 2015, at cost) (12,343 ) (12,592 )
Accumulated other comprehensive income 4,814 5,334
Noncontrolling interest 969 969
Total stockholders' equity 124,371 123,640
Total Liabilities and Stockholders' Equity $ 401,808 $ 402,672
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, 2017
	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				$	89,604
Issuance of treasury stock					4
Share-based payments					(197	)
Balance at end of period				$	89,411

Retained Earnings
Balance at beginning of year				$	34,734
Net income attributable to AT&T ($0.56 per diluted share)					3,469
Dividends to stockholders ($0.49 per share)					(3,030	)
Other					2
Balance at end of period				$	35,175

Treasury Stock
Balance at beginning of year		(356	)	$	(12,659	)
Repurchase and acquisition of common stock		(5	)		(200	)
Issuance of treasury stock		13			459
Balance at end of period		(348	)	$	(12,400	)

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year				$	4,961
Other comprehensive income attributable to AT&T					199
Balance at end of period				$	5,160

Noncontrolling Interest
Balance at beginning of year				$	975
Net income attributable to noncontrolling interest					105
Distributions					(77	)
Acquisition of noncontrolling interest					131
Translation adjustments attributable to noncontrolling interest, net of taxes					6
Balance at end of period				$	1,140

Total Stockholders' Equity at beginning of year				$	124,110
Total Stockholders' Equity at end of period				$	124,981
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Six months ended
June 30,
2016 2015
Operating Activities
Net income $ 7,400 $ 6,523
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization 13,139 9,274
   Undistributed earnings from investments in equity affiliates (22 ) (23 )
   Provision for uncollectible accounts 705 535
   Deferred income tax expense 1,767 1,244
   Net gain from sale of investments, net of impairments (85 ) (50 )
Changes in operating assets and liabilities:
   Accounts receivable 543 434
   Other current assets 1,069 732
   Accounts payable and accrued liabilities (3,059 ) (1,125 )
Retirement benefit funding (280 ) (455 )
Other - net
(2,970 ) (1,191 )
Total adjustments 10,807 9,375
Net Cash Provided by Operating Activities 18,207 15,898

Investing Activities
Capital expenditures:
   Purchase of property and equipment (9,702 ) (8,328 )
   Interest during construction (437 ) (339 )
Acquisitions, net of cash acquired (485 ) (20,954 )
Dispositions 107 72
Sale of securities, net 500 1,890
Other - (1 )
Net Cash Used in Investing Activities (10,017 ) (27,660 )

Financing Activities
Issuance of long-term debt 10,140 33,958
Repayment of long-term debt (9,129 ) (2,919 )
Purchase of treasury stock (197 ) -
Issuance of treasury stock 119 20
Dividends paid (5,899 ) (4,873 )
Other (1,137 ) (2,071 )
Net Cash (Used in) Provided by Financing Activities (6,103 ) 24,115
Net increase in cash and cash equivalents 2,087 12,353
Cash and cash equivalents beginning of year 5,121 8,603
Cash and Cash Equivalents End of Period $ 7,208 $ 20,956
Cash paid (received) during the six months ended June 30 for:
   Interest $ 2,914 $ 2,178
   Income taxes, net of refunds $ 2,468 $ (71 )
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)
June 30, 2016
Shares Amount
Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
Balance at end of period 6,495 $ 6,495

Additional Paid-In Capital
Balance at beginning of year $ 89,763
Issuance of treasury stock (43 )
Share-based payments (258 )
Change related to acquisition of interests held by noncontrolling owners 24
Balance at end of period $ 89,486

Retained Earnings
Balance at beginning of year $ 33,671
Net income attributable to AT&T ($1.17 per diluted share) 7,211
Dividends to stockholders ($0.96 per share) (5,932 )
Balance at end of period $ 34,950

Treasury Stock
Balance at beginning of year (350 ) $ (12,592 )
Repurchase and acquisition of common stock (7 ) (294 )
Issuance of treasury stock 14 543
Balance at end of period (343 ) $ (12,343 )

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 (520 )
Balance at end of period $ 4,814

Noncontrolling Interest
Balance at beginning of year $ 969
Net income attributable to noncontrolling interest 189
Distributions (164 )
Acquisition of interest held by noncontrolling owners (25 )
Balance at end of period $ 969

Total Stockholders' Equity at beginning of year $ 123,640
Total Stockholders' Equity at end of period $ 124,371
See Notes to Consolidated Financial Statements.

AT&T INC.

MARCH 31, 2017

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. 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, 2016. The results for the interim periods are not necessarily indicative of those for the full year.

~~JUNE 30, 2016~~

In the tables throughout this document, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

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

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

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain ~~prior period~~ amounts have been ~~conformed~~reclassified to conform to the current period's ~~presentation, including~~presentation.

Recently Adopted Accounting Standards

Income Taxes As of January 1, 2017, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our ~~2015 change in accounting~~recognition of an immaterial adjustment to ~~capitalize customer set-up and installation costs and amortize them over~~retained earnings. Under ASU 2016-16, we recognize the ~~expected economic life~~income tax effects of the ~~customer relationship. The consolidated statements~~intercompany sales or transfers of ~~income also include revisions~~assets other than inventory (e.g., intellectual property or property, plant and equipment) during the period of intercompany sale or transfer instead of the period of either the sale or transfer to ~~present "Equipment"~~a third party or recognition of depreciation or impairment.

New Accounting Standards

Pension and ~~"Broadcast, programming and operations" costs separately from "Other cost of services."~~

~~Leases~~Other Postretirement Benefits In ~~February 2016,~~March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. ~~2016-02, "Leases~~2017-07, "Compensation – Retirement Benefits (Topic ~~842)"~~715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU ~~2016-02)~~2017-07), which ~~replaces existing leasing rules with a comprehensive lease measurement~~changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and ~~recognition standard and expanded disclosure requirements.~~other components of our net periodic benefit cost in "other income (expense)" in our consolidated statements of income. 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~~2017-07 is effective for annual reporting periods beginning after December 15, ~~2018, subject to early adoption. We have just begun~~2017. See Note 5 for our ~~evaluation~~components 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.net periodic benefit cost.

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

~~The FASB allows two adoption methods under ASU 2014-09.~~standard using the "modified retrospective method." Under ~~one~~that 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~~we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous ~~rules ("modified retrospective method"). We continue to evaluate the available adoption methods.~~

accounting standards.
7

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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.

~~Customer Fulfillment Costs~~ During the second quarter of 2016, we updated our analysis of the economic lives of customer relationships, which included a review of satellite customer data following the DIRECTV acquisition. As of April 1, 2016, to better reflect the estimated economic lives of satellite and certain business customer relationships, we extended the period to approximately 4.5 years. This change in accounting estimate decreased other cost of services and impacted net income $82, or $0.01 per diluted share, in the second quarter of 2016.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2017 and 2016, ~~and 2015,~~ is shown in the table below:

	Three months ended						Six months ended						Three months ended
	June 30,						June 30,						March 31,
	2016			2015			2016			2015			2017			2016
Numerators
Numerator for basic earnings per share:
Net Income	$	3,515		$	3,184		$	7,400		$	6,523		$	3,574		$	3,885
Less: Net income attributable to noncontrolling interest		(107	)		(102	)		(189	)		(178	)		(105	)		(82	)
Net Income attributable to AT&T		3,408			3,082			7,211			6,345			3,469			3,803
Dilutive potential common shares:
Share-based payment		2			2			6			6			4			4
Numerator for diluted earnings per share	$	3,410		$	3,084		$	7,217		$	6,351		$	3,473		$	3,807
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		6,174			5,204			6,173			5,204			6,166			6,172
Dilutive potential common shares:
Share-based payment (in shares)		21			16			20			16			20			18
Denominator for diluted earnings per share		6,195			5,220			6,193			5,220			6,186			6,190
Basic earnings per share attributable to AT&T	$	0.55		$	0.59		$	1.17		$	1.22		$	0.56		$	0.62
Diluted earnings per share attributable to AT&T	$	0.55		$	0.59		$	1.17		$	1.22		$	0.56		$	0.61

AT&T INC.

MARCH 31, 2017

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.

Following 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 18.9%, the Argentine peso exchange rate has depreciated 16.4% and the Mexican peso exchange rate has depreciated 6.2%.

		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, 2016		$	(1,995)		$	541		$	744		$	5,671		$	4,961
Other comprehensive income (loss) before reclassifications			366			33			13			-			412
Amounts reclassified from accumulated OCI			-	¹		5	¹		10	²		(228)	³		(213)
Net other comprehensive income (loss)			366			38			23			(228)			199
Balance as of March 31, 2017		$	(1,629)		$	579		$	767		$	5,443		$	5,160

		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)	¹		10	²		(215)	³		(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
¹	(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
²	(Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
³	The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction
	labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income
	(see Note 5).

~~AT&T INC.~~

~~JUNE 30, 2016~~

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

~~Dollars in millions except per share amounts~~

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
174 (21) (263) -    (110)
Amounts reclassified
   from accumulated OCI
-
¹
-
²
19
³
(429)
⁴
(410)
Net other comprehensive
   income (loss)
174 (21) (244) (429) (520)
Balance as of June 30, 2016 $ (1,024) $ 463 $ (228) $ 5,603 $ 4,814

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
(185) 34 (449) -    (600)
Amounts reclassified
   from accumulated OCI
-
¹
(9)
²
17
³
(429)
⁴
(421)
Net other comprehensive
   income (loss)
(185) 25 (432) (429) (1,021)
Balance as of June 30, 2015 $ (211) $ 524 $ 309 $ 6,418 $ 7,040
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).

NOTE 4. SEGMENT INFORMATION

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

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

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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

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

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

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

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

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

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

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

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended March 31, 2017
	Revenues		Operations and Support Expenses			EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates			Segment Contribution
Business Solutions	$	16,848	$	10,176		$	6,672		$	2,312	$	4,360		$	-		$	4,360
Entertainment Group		12,623		9,601			3,022			1,419		1,603			(6	)		1,597
Consumer Mobility		7,740		4,528			3,212			873		2,339			-			2,339
International		1,929		1,759			170			290		(120	)		20			(100	)
Segment Total		39,140		26,064			13,076			4,894		8,182		$	14		$	8,196
Corporate and Other		225		221			4			31		(27	)
Acquisition-related items		-		207			(207	)		1,202		(1,409	)
Certain significant items		-		(118	)		118			-		118
AT&T Inc.	$	39,365	$	26,374		$	12,991		$	6,127	$	6,864

For the three months ended March 31, 2016
	Revenues		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 June 30, 2016
Revenue
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 17,579 $ 10,857 $ 6,722 $ 2,521 $ 4,201 $ - $ 4,201
Entertainment Group 12,711 9,569 3,142 1,489 1,653 (2 ) 1,651
Consumer Mobility 8,186 4,680 3,506 932 2,574 - 2,574
International 1,828 1,723 105 298 (193 ) 9 (184 )
Segment Total 40,304 26,829 13,475 5,240 8,235 $ 7 $ 8,242
Corporate and Other 216 293 (77 ) 20 (97 )
Acquisition-related items - 233 (233 ) 1,316 (1,549 )
Certain significant items - 29 (29 ) - (29 )
AT&T Inc. $ 40,520 $ 27,384 $ 13,136 $ 6,576 $ 6,560

For the six months ended June 30, 2016
Revenue
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 35,188 $ 21,659 $ 13,529 $ 5,029 $ 8,500 $ - $ 8,500
Entertainment Group 25,369 19,147 6,222 2,977 3,245 1 3,246
Consumer Mobility 16,514 9,592 6,922 1,854 5,068 - 5,068
International 3,495 3,311 184 575 (391 ) 23 (368 )
Segment Total 80,566 53,709 26,857 10,435 16,422 $ 24 $ 16,446
Corporate and Other 489 670 (181 ) 37 (218 )
Acquisition-related items - 528 (528 ) 2,667 (3,195 )
Certain significant items - (682 ) 682 - 682
AT&T Inc. $ 81,055 $ 54,225 $ 26,830 $ 13,139 $ 13,691

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended June 30, 2015
Revenue
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 17,664 $ 10,972 $ 6,692 $ 2,460 $ 4,232 $ - $ 4,232
Entertainment Group 5,782 4,913 869 1,065 (196 ) (12 ) (208 )
Consumer Mobility 8,755 5,202 3,553 934 2,619 - 2,619
International 491 529 (38 ) 93 (131 ) - (131 )
Segment Total 32,692 21,616 11,076 4,552 6,524 $ (12 ) $ 6,512
Corporate and Other 323 236 87 24 63
Acquisition-related items - 694 (694 ) 120 (814 )
Certain significant items - - - - -
AT&T Inc. $ 33,015 $ 22,546 $ 10,469 $ 4,696 $ 5,773

For the six months ended June 30, 2015
Revenue
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 35,221 $ 22,045 $ 13,176 $ 4,802 $ 8,374 $ - $ 8,374
Entertainment Group 11,442 9,772 1,670 2,130 (460 ) (18 ) (478 )
Consumer Mobility 17,533 10,743 6,790 1,936 4,854 - 4,854
International 727 747 (20 ) 121 (141 ) - (141 )
Segment Total 64,923 43,307 21,616 8,989 12,627 $ (18 ) $ 12,609
Corporate and Other 668 470 198 44 154
Acquisition-related items - 993 (993 ) 241 (1,234 )
Certain significant items - 217 (217 ) - (217 )
AT&T Inc. $ 65,591 $ 44,987 $ 20,604 $ 9,274 $ 11,330

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

	First Quarter
	2017			2016
Business Solutions	$	4,360		$	4,299
Entertainment Group		1,597			1,595
Consumer Mobility		2,339			2,494
International		(100	)		(184	)
Segment Contribution		8,196			8,204
Reconciling Items:
Corporate and Other		(27	)		(121	)
Merger and integration charges		(207	)		(295	)
Amortization of intangibles acquired		(1,202	)		(1,351	)
Employee separation costs		-			(25	)
Gain on wireless spectrum transactions		118			736
Segment equity in net (income) loss of affiliates		(14	)		(17	)
AT&T Operating Income		6,864			7,131
Interest expense		1,293			1,207
Equity in net income (loss) of affiliates		(173	)		13
Other income (expense) - net		(20	)		70
Income Before Income Taxes	$	5,378		$	6,007

~~AT&T INC.~~

~~JUNE 30, 2016~~

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

~~Dollars in millions except per share amounts~~

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

Second Quarter Six-Month Period
2016 2015 2016 2015
Business Solutions $ 4,201 $ 4,232 $ 8,500 $ 8,374
Entertainment Group 1,651 (208 ) 3,246 (478 )
Consumer Mobility 2,574 2,619 5,068 4,854
International (184 ) (131 ) (368 ) (141 )
Segment Contribution 8,242 6,512 16,446 12,609
Reconciling Items:
  Corporate and Other (97 ) 63 (218 ) 154
  Merger and integration charges (233 ) (694 ) (528 ) (993 )
  Amortization of intangibles acquired (1,316 ) (120 ) (2,667 ) (241 )
  Employee separation charges (29 ) - (54 ) (217 )
  Gain on wireless spectrum transactions - - 736 -
  Segment equity in net (income) loss
    of affiliates
(7 ) 12 (24 ) 18
AT&T Operating Income 6,560 5,773 13,691 11,330
Interest expense 1,258 932 2,465 1,831
Equity in net income of affiliates 28 33 41 33
Other income (expense) - net 91 48 161 118
Income Before Income Taxes $ 5,421 $ 4,922 $ 11,428 $ 9,650

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

~~Substantially all~~

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

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of ~~$8,704~~$8,426 at ~~June 30, 2016.~~March 31, 2017. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed ~~$280~~$140 to the trust during the ~~six~~three months ended ~~June 30, 2016.~~March 31, 2017. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. ~~We also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2015.~~

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

1312

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

	Three months ended
	March 31,
	2017			2016
Pension cost:
Service cost – benefits earned during the period	$	282		$	278
Interest cost on projected benefit obligation		484			495
Expected return on assets		(783	)		(778	)
Amortization of prior service credit		(31	)		(26	)
Net pension (credit) cost	$	(48	)	$	(31	)

Postretirement cost:
Service cost – benefits earned during the period	$	41		$	48
Interest cost on accumulated postretirement benefit obligation		222			243
Expected return on assets		(80	)		(89	)
Amortization of prior service credit		(336	)		(319	)
Net postretirement (credit) cost	$	(153	)	$	(117	)

Combined net pension and postretirement (credit) cost	$	(201	)	$	(148	)

Three months ended Six months ended
June 30, June 30,
2016 2015 2016 2015
Pension cost:
   Service cost – benefits earned during the period $ 278 $ 300 $ 556 $ 599
   Interest cost on projected benefit obligation 495 473 990 947
   Expected return on assets (780 ) (826 ) (1,558 ) (1,652 )
   Amortization of prior service credit (25 ) (26 ) (51 ) (52 )
   Net pension (credit) cost $ (32 ) $ (79 ) $ (63 ) $ (158 )

Postretirement cost:
   Service cost – benefits earned during the period $ 48 $ 56 $ 96 $ 111
   Interest cost on accumulated postretirement benefit obligation 243 241 486 483
   Expected return on assets (89 ) (105 ) (178 ) (210 )
   Amortization of prior service credit (319 ) (319 ) (638 ) (639 )
   Net postretirement (credit) cost $ (117 ) $ (127 ) $ (234 ) $ (255 )

   Combined net pension and postretirement (credit) cost $ (149 ) $ (206 ) $ (297 ) $ (413 )

The decrease in the combined net pension and postretirement ~~credit of $57~~costs in the ~~second~~first quarter ~~and $116 for the first six months~~reflects higher amortization of ~~2016 is primarily~~prior service credits due to aplan changes, including changes to future costs for continued retiree healthcare coverage. The reduction also reflects decreasing corporate bond rates, which contributed to lower ~~expected return on assets resulting from a decrease in the value in the plan assets.~~interest costs.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the ~~second~~first quarter ended ~~2016~~2017 and ~~2015,~~2016, net supplemental pension benefits costs not included in the table above were ~~$24~~$22 and ~~$21. For the first six months of 2016 and 2015, net supplemental pension benefit costs were $47 and $41.~~$23.

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

Level 1

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

Level 2

Inputs to the valuation methodology include:

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

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

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

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

Level 3

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

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

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

1413

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, ~~2015.~~2016.

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:

	June 30, 2016					December 31, 2015						March 31, 2017						December 31, 2016
	Carrying		Fair			Carrying			Fair			Carrying			Fair			Carrying			Fair
	Amount		Value			Amount			Value			Amount			Value			Amount			Value
Notes and debentures¹	$	125,568		$	137,112		$	124,847		$	128,993		$	132,379		$	138,944		$	122,381		$	128,726
Bank borrowings		4			4			4			4			3			3			4			4
Investment securities		2,550			2,550			2,704			2,704			2,640			2,640			2,587			2,587
¹ Includes credit agreement borrowings.

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

Following is the fair value leveling for available-for-sale securities and derivatives as of ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015:~~2016:

	June 30, 2016											March 31, 2017
	Level 1		Level 2			Level 3		Total				Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,111	$	-		$	-	$	1,111			$	1,253	$	-		$	-	$	1,253
International equities		547		-			-		547				639		-			-		639
Fixed income bonds		-		621			-		621				-		501			-		501
Asset Derivatives¹
Interest rate swaps		-		202			-		202				-		62			-		62
Cross-currency swaps		-		100			-		100				-		235			-		235
Liability Derivatives¹
Interest rate swaps													-		(20	)		-		(20	)
Cross-currency swaps		-		(3,821	)		-		(3,821	)			-		(3,635	)		-		(3,635	)
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.	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.										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.

1514

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

	December 31, 2016
	Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,215	$	-		$	-	$	1,215
International equities		594		-			-		594
Fixed income bonds		-		508			-		508
Asset Derivatives¹
Interest rate swaps		-		79			-		79
Cross-currency swaps		-		89			-		89
Liability Derivatives¹
Interest rate swaps		-		(14	)		-		(14	)
Cross-currency swaps		-		(3,867	)		-		(3,867	)
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.

December 31, 2015
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
   Domestic equities $ 1,132 $ - $ - $ 1,132
   International equities 569 - - 569
   Fixed income bonds - 680 - 680
Asset Derivatives¹

   Interest rate swaps - 136 - 136
   Cross-currency swaps - 556 - 556
   Foreign exchange contracts - 3 - 3
Liability Derivatives¹

   Cross-currency swaps - (3,466 ) - (3,466 )
¹Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.

Investment Securities

Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of ~~$95~~$236 have maturities of less than one year, ~~$287~~$58 within one to three years, ~~$62~~$47 within three to five years and ~~$177~~$160 for five or more years.

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

Derivative Financial Instruments

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the ~~six~~three months ended ~~June 30,~~March 31, 2017 and March 31, 2016, ~~and June 30, 2015,~~ no ineffectiveness was measured on interest rate swaps designated as fair value ~~hedges.~~

hedges.

1615

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the ~~six~~three months ended ~~June 30,~~March 31, 2017 and March 31, 2016, ~~and June 30, 2015,~~ no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

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

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the ~~six~~three months ended ~~June 30,~~March 31, 2017 and March 31, 2016, ~~and June 30, 2015,~~ no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At ~~June 30, 2016,~~March 31, 2017, we had posted collateral of ~~$3,154~~$2,846 (a deposit asset) and held ~~collateral of $8 (a receipt liability).~~no collateral. Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in ~~June,~~March, we would have been required to post additional collateral of ~~$151.~~$123. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) ~~and below Baa3 (Moody's)~~, we would ~~owe an~~have been required to post additional ~~$275.~~collateral of $246. At December 31, ~~2015,~~2016, we had posted collateral of ~~$2,343~~$3,242 (a deposit asset) and held ~~collateral of $124 (a receipt liability).~~no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

	June 30,		December 31,		March 31,			December 31,
	2016		2015		2017			2016
Interest rate swaps	$	7,050	$	7,050		$	10,450		$	9,650
Cross-currency swaps		29,642		29,642			29,642			29,642
Foreign exchange contracts		-		100
Total	$	36,692	$	36,792		$	40,092		$	39,292

1716

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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,
	2017				2016
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps		$	(25	)		$	66
Gain (Loss) on long-term debt			25				(66	)

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 Six months ended
June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 5 $ (30 ) $ 71 $ 11
Gain (Loss) on long-term debt (5 ) 30 (71 ) (11 )

In addition, the net swap settlements that accrued and settled in the quarter ended ~~June 30~~March 31 were offset against interest expense.

													Three months ended
	Three months ended						Six months ended						March 31,
Cash Flow Hedging Relationships	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			2017				2016
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	(595	)	$	(102	)	$	(404	)	$	(330	)		$	20			$	191

Interest rate locks:
Gain (Loss) recognized in accumulated OCI		-			(45	)		-			(361	)
Interest income (expense) reclassified from accumulated OCI into income		(14	)		(15	)		(29	)		(26	)			(15	)			(15	)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Subsequent and Pending Acquisitions

Time Warner Inc. On October 22, 2016, we entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at December 31, 2016, the total transaction value is approximately $108,200. Each share of Time Warner common stock will be exchanged for $53.75 per share in cash and a number of shares of AT&T common stock equal to the exchange ratio. If the average stock price (as defined in the Merger Agreement) at the time of closing the Merger is between (or equal to) $37.411 and $41.349 per share, the exchange ratio will be the quotient of $53.75 divided by the average stock price. If the average stock price is greater than $41.349, the exchange ratio will be 1.300. If the average stock price is less than $37.411, the exchange ratio will be 1.437. Post-transaction, Time Warner shareholders will own between 14.4% and 15.7% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding. The cash portion of the purchase price will be financed with new debt and cash.

~~DIRECTV~~ ~~In July 2015, we completed~~Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our ~~acquisition~~extensive customer relationships and distribution, one of ~~DIRECTV, a~~the world's largest pay-TV subscriber bases and leading ~~provider of digital television entertainment services~~scale in ~~both the United States~~TV, mobile 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.~~broadband distribution.

The ~~fair values of the assets acquired~~Merger Agreement was approved by Time Warner shareholders on February 15, 2017 and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 under the Fair Value Measurement and Disclosure framework, other than long-term debt assumed in the acquisition (see Note 6). The income approach was primarily usedremains subject 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 generatedreview by the ~~asset. Projected cash flows~~U.S. Department of Justice. The Federal Communications Commission (FCC) has stated that it does not believe it will need to review the deal as no licenses are ~~discounted at~~involved. It is also a ~~required rate of return~~condition to closing that ~~reflects~~necessary consents from foreign governmental entities must be obtained. The transaction is expected to close before year-end 2017. If the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used primarily for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieveMerger is terminated as a result of reaching the ~~acquisition.~~termination date (and at that time one or more of the conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to pay Time Warner $500.

1817

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

~~The following table summarizes~~

Auction 1000 On April 13, 2017, the ~~fair values~~FCC announced that we were the successful bidder for $910 of spectrum in 18 markets. We provided the ~~DIRECTV assets acquired~~FCC an initial deposit of $2,348 in July 2016 and ~~liabilities assumed and related deferred income taxes that existed as~~received a refund of ~~the acquisition date.~~$1,438 in April 2017.

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

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

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

~~Nextel Mexico~~FirstNet ~~In April 2015, we completed our acquisition of~~On March 30, 2017, the subsidiaries of NII Holdings Inc., operating its wireless business in Mexico, for $1,875, including approximately $427 of net debt and other adjustments. The subsidiaries offered service under the name Nextel Mexico.

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

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

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

~~AWS-3 Auction~~ ~~In January 2015, we submitted winning bids of $18,189 in the Advanced Wireless Service (AWS)-3 Auction (FCC Auction 97), a portion of which represented spectrum clearing and~~ First Responder Network Authority ~~funding. We provided the Federal Communications Commission (FCC) an initial down payment~~(FirstNet) announced its selection of ~~$921 in October 2014~~AT&T to build and ~~paid the remaining $17,268 in~~manage the first ~~quarter~~nationwide broadband network dedicated to America's first responders. FirstNet expects to provide 20 MHz of ~~2015.~~valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.

~~AT&T INC.~~

~~JUNE 30, 2016~~

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

~~Dollars in millions except per share amounts~~

NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, gross equipment installment receivables of ~~$4,427~~$4,119 and ~~$5,719~~$5,665 were included on our consolidated balance sheets, of which ~~$2,512~~$2,346 and ~~$3,239~~$3,425 are notes receivable that are included in "Accounts receivable - net."

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transferred ~~the~~certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. ~~To date,~~Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were ~~$3,673.~~$3,740.

The following table sets forth a summary of equipment installment receivables sold during the three months ended March 31, 2017 and ~~six months ended June 30, 2016 and 2015:~~2016:

	Three months ended
	March 31,
	2017			2016
Gross receivables sold		$	2,846		$	2,482
Net receivables sold ¹			2,621			2,256
Cash proceeds received			1,432			1,521
Deferred purchase price recorded			1,189			719
¹Receivables net of allowance, imputed interest and trade-in right guarantees.

Three months ended Six months ended
June 30, June 30,
2016 2015 2016 2015
Gross receivables sold $ 1,845 $ 1,728 $ 4,327 $ 4,363
Net receivables sold¹
1,671 1,555 3,927 3,936
Cash proceeds received 1,126 1,049 2,647 2,573
Deferred purchase price recorded 563 505 1,282 1,363
¹Receivables net of allowance, imputed interest and trade-in right guarantees.

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

~~During~~

AT&T INC.

MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table shows the ~~first quarter of 2016, we repurchased~~ equipment installment receivables, previously sold to the Purchasers, ~~with a fair value of $532. These transactions reduced our current~~which we repurchased in exchange for the associated deferred purchase price ~~receivable by $539, resulting in a loss of $7~~ during the ~~first quarter. This loss is included in "Selling, general~~three months ended March 31, 2017 and ~~administrative" in the consolidated statements of income.~~2016:

	Three months ended
	March 31,
	2017			2016
Fair value of repurchased receivables		$	377		$	532
Carrying value of deferred purchase price			339			539
Gain (loss) on repurchases ¹		$	38		$	(7	)
¹These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.

At ~~June 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, our deferred purchase price receivable was ~~$3,426~~$3,813 and ~~$2,961,~~$3,090, respectively, of which ~~$1,901~~$2,049 and ~~$1,772 is~~$1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

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

Derecognized Installment Receivables

The following table sets forth a summary of equipment installment receivables that were sold to Purchasers and are no longer considered our assets.

	2017
Outstanding derecognized receivables at January 1,	$	7,232
Gross receivables sold		2,846
Collections on cash purchase price		(1,128	)
Collections on deferred purchase price		(185	)
Fees		(23	)
Trade ins and other		(73	)
Fair value of repurchased receivables		(377	)
Outstanding derecognized receivables at March 31,	$	8,292

2019

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico, and the following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), 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. 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 ~~second~~first quarter of 2017 and ~~for the first six months of~~ 2016 ~~and 2015~~ are summarized as follows:

	First Quarter
	2017		2016		Percent Change
	2017		2016		Percent Change
Operating Revenues
Service	$	36,456	$	37,101		(1.7	)%
Equipment		2,909		3,434		(15.3	)
Total Operating Revenues		39,365		40,535		(2.9	)

Operating expenses
Cost of services and sales
Equipment		3,848		4,375		(12.0	)
Broadcast, programming and operations		4,974		4,629		7.5
Other cost of services		9,065		9,396		(3.5	)
Selling, general and administrative		8,487		8,441		0.5
Depreciation and amortization		6,127		6,563		(6.6	)
Total Operating Expenses		32,501		33,404		(2.7	)
Operating Income		6,864		7,131		(3.7	)
Income Before Income Taxes		5,378		6,007		(10.5	)
Net Income		3,574		3,885		(8.0	)
Net Income Attributable to AT&T	$	3,469	$	3,803		(8.8	)%

Second Quarter Six-Month Period
2016 2015
Percent
Change
2016 2015
Percent
Change

Operating Revenues
   Service $ 37,142 $ 29,541 25.7 % $ 74,243 $ 58,503 26.9 %
   Equipment 3,378 3,474 (2.8 ) 6,812 7,088 (3.9 )
Total Operating Revenues 40,520 33,015 22.7 81,055 65,591 23.6

Operating expenses
   Cost of services and sales
      Equipment 4,260 4,353 (2.1 ) 8,635 8,899 (3.0 )
      Broadcast, programming and
        operations
4,701 1,148 - 9,330 2,270 -
      Other cost of services 9,514 9,578 (0.7 ) 18,910 18,390 2.8
   Selling, general and administrative 8,909 7,467 19.3 17,350 15,428 12.5
   Depreciation and amortization 6,576 4,696 40.0 13,139 9,274 41.7
Total Operating Expenses 33,960 27,242 24.7 67,364 54,261 24.1
Operating Income 6,560 5,773 13.6 13,691 11,330 20.8
Income Before Income Taxes 5,421 4,922 10.1 11,428 9,650 18.4
Net Income 3,515 3,184 10.4 7,400 6,523 13.4
Net Income Attributable to AT&T $ 3,408 $ 3,082 10.6 % $ 7,211 $ 6,345 13.6 %

Overview

Operating revenues ~~increased $7,505,~~decreased $1,170, or ~~22.7%~~2.9%, in the ~~second~~first quarter ~~and $15,464, or 23.6%, for the first six months~~ of ~~2016.~~2017.

Service revenues ~~increased $7,601,~~decreased $645, or ~~25.7%~~1.7%, in the ~~second~~first quarter ~~and $15,740, or 26.9%, for the first six months~~ of ~~2016.~~2017. The ~~increases were~~decrease was primarily due to ~~our 2015 acquisition of DIRECTV and increases in IP broadband and fixed strategic business services. These were partially offset by~~ continued declines in ~~our~~ legacy wireline voice and data products and lower wireless service revenues reflecting adoption of unlimited and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.

Equipment revenues decreased $525, or 15.3%, in the first quarter of 2017. The decrease was primarily due to lower wireless handset sales, driven by a ~~true-up that increased the discounts recorded on Ethernet services. The second quarter revenues were also lower~~low rate of customer device upgrades and strong Bring Your Own Device (BYOD) participation. Equipment revenue is becoming increasingly unpredictable as ~~a result of more~~ customers are choosing to ~~purchase~~upgrade devices ~~through installment payment agreements, which entitle them to lower monthly service rates under our wireless Mobile Share plans.~~less frequently or bring their own.

Equipment expenses decreased $527, or 12.0%, in the first quarter of 2017. The decrease was driven by a decline in devices sold reflecting a change in customer buying habits.

Broadcast, programming and operations expenses increased $345, or 7.5%, in the first quarter of 2017, reflecting annual content cost increases.

2120

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

~~Equipment~~ revenues decreased $96, or 2.8%, in the second quarter and $276, or 3.9%, for the first six months of 2016. These declines reflect fewer wireless handset sales and additional promotional offers during 2016. Revenue declines were partially offset by the continuing trend of our wireless customers choosing to purchase higher priced devices and an increase in customers choosing to purchase devices on installment when compared to the prior year.

~~Operating expenses~~ ~~increased $6,718, or 24.7%, in the second quarter and $13,103, or 24.1%, for the first six months of 2016.~~

~~Equipment~~ expenses decreased $93, or 2.1%, in the second quarter and $264, or 3.0%, for the first six months of 2016. The decreases were primarily due to the decline in devices sold to postpaid subscribers and vendor incentives, partially offset by increased sales volumes to our prepaid and international wireless customers.

~~Broadcast, programming and operations~~ ~~expenses increased $3,553 in the second quarter and $7,060 for the first six months of 2016 due to our acquisition of DIRECTV, slightly offset by fewer AT&T U-verse~~^® ~~(U-verse) subscribers.~~

Other cost of services expenses decreased ~~$64,~~$331, or ~~0.7%~~3.5%, in the ~~second~~first quarter ~~and increased $520, or 2.8%, for the first six months~~ of ~~2016.~~2017. The decrease inreflects our continued cost structure management and utilizing automation and digitalization where appropriate. Federal Universal Service Fund (USF) rates and fees were also lower when compared to the second quarter was primarily attributable to higher 2015 expenses of $364 of network rationalization charges and merger-related expenses, combined with lower network and access charges in 2016 and our change in accounting estimate related to customer fulfillment costs (see Note 1). The decrease was mostly offset by higher expenses resulting from our acquisition of DIRECTV, higher compensation- related costs for programs tied to our stock price and an increase in noncash financing-related costs associated with our pension and postretirement benefits.

The increase for the first six months 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.prior year. These ~~increases~~expense declines were partially offset by ~~prior year network rationalization charges, a decline in network and access charges and lower employee separation charges.~~higher handset insurance costs.

Selling, general and administrative expenses increased ~~$1,442,~~$46, or ~~19.3%~~0.5%, in the ~~second~~first quarter ~~and $1,922, or 12.5%, for the first six months~~ of ~~2016. The increases were primarily due to our acquisitions in 2015 and increased advertising activity in 2016, partially offset by~~2017. Expenses include an increase of approximately $618 resulting from lower ~~wireless commission expenses. The increase for the first six months was also offset by a $736 noncash gain~~gains on wireless spectrum transactions in the first quarter of 2017 than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger and ~~lower employee separation charges.~~integration-related activities and reductions from our disciplined cost management.

Depreciation and amortization expense ~~increased $1,880,~~decreased $436, or ~~40.0%~~6.6%, in the ~~second~~first quarter ~~and $3,865, or 41.7%, for the first six months~~ of ~~2016. Amortization expense increased $1,197 in the second quarter and $2,425 for the first six months of 2016 due to the amortization of intangibles from recent acquisitions.~~

2017. Depreciation expense ~~increased $683,~~decreased $288, or ~~14.9%~~5.5%, in the ~~second quarter and $1,440, or 15.9%, for the~~ first ~~six months of 2016.~~quarter. The ~~increase~~decrease was primarily due to ~~previously mentioned acquisitions~~our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease. This decrease was partially offset by increases resulting from ongoing capital spending for ~~network upgrades.~~upgrades and expansion.

Amortization expense decreased $148, or 11.0%, in the first quarter of 2017 due to lower amortization of intangibles for the customer lists associated with acquisitions.

Operating income ~~increased $787,~~decreased $267, or ~~13.6%, in the second quarter and $2,361, or 20.8%~~3.7%, for the first ~~six months~~quarter of ~~2016.~~2017. Our operating income margin in the ~~second~~first quarter decreased from ~~17.5% in 2015 to 16.2%~~17.6% in 2016 ~~and the first six months decreased from 17.3%~~to 17.4% in ~~2015 to 16.9% in 2016.~~2017.

Interest expense increased ~~$326,~~$86, or ~~35.0%~~7.1%, in the ~~second~~first quarter ~~and $634, or 34.6%, for the first six months~~ of ~~2016.~~2017. The increases were primarily due to higher average rates and debt balances ~~including debt issued and debt acquired in connection with our acquisition of DIRECTV. The increase for~~when compared to the ~~first six months was slightly offset by higher capitalized interest resulting from the spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction (see Note 7).~~

~~AT&T INC.~~

~~JUNE 30, 2016~~prior year.

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

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

Equity in net income of affiliates decreased ~~$5, or 15.2%,~~$186 in the ~~second~~first quarter ~~and increased $8, or 24.2%, for the first six months~~ of ~~2016. Equity in net~~2017, predominantly from losses from our legacy publishing business, partially offset by income ~~of affiliates is primarily attributable to the results~~ from our investments in ~~the Game Show Network, SKY Mexico, YP Holdings LLC and Otter Media Holdings.~~video-related businesses.

Other income (expense) – net We had other ~~income~~expense of ~~$91~~$20 in the ~~second~~first quarter ~~and $161 for the first six months~~ of ~~2016, compared to~~2017 and other income of ~~$48~~$70 in the ~~second~~first quarter ~~and $118 for the first six months~~ of ~~2015.~~2016. Results in the ~~second~~first quarter of 2017 included net losses on the sale of non-strategic assets and ~~for~~investments of $61 and interest and dividend income of $30.

Other income (expense) in the first ~~six months~~quarter of 2016 included net gains on the sale of non-strategic assets and investments of ~~$41 and $85~~$44 and interest and dividend income of ~~$38 and $67.~~

Other income in the second quarter and for the first six months of 2015 included net gains on the sale of non-strategic assets and investments of $17 and $50 and interest and dividend income of $26 and $45.$29.

Income taxes ~~increased $168,~~decreased $318, or ~~9.7%~~15.0%, in the ~~second~~first quarter ~~and $901, or 28.8%, for the first six months~~ of ~~2016.~~2017. Our effective tax rate was ~~35.2%~~33.5% for ~~both~~ the ~~second~~first quarter ~~and first six months~~ of ~~2016,~~2017, as compared to 35.3% for the ~~second~~first quarter ~~and 32.4% for the first six months~~ of ~~2015.~~2016. The ~~increases~~decrease in income tax expense and our effective tax rate for the ~~second~~first quarter ~~and the first six months~~ of ~~2016 were~~2017 was primarily due to ~~higher~~lower income before income taxes in ~~2016. In 2015, we recognized~~2017 and the recognition of tax benefits related to the restructuring of a portion of our ~~Business Solutions segment, which contributed to lower tax expense~~wireless business.

AT&T INC.

MARCH 31, 2017

Item 2. Management's Discussion and ~~the effective tax rate for the first six months~~Analysis of ~~2015.~~Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

Selected Financial and Operating Data
June 30,
Subscribers and connections in (000s) 2016 2015
Domestic wireless subscribers 131,805 123,902
Mexican wireless subscribers 9,955 8,550
North American wireless subscribers 141,760 132,452

North American branded subscribers 99,557 95,049
North American branded net additions¹
2,596 1,280

Domestic satellite video subscribers 20,454 -
U-verse video subscribers 4,869 5,971
Latin America satellite video subscribers ²
12,523 -
Total video subscribers 37,846 5,971

Total domestic broadband connections 15,641 15,961

Network access lines in service 15,285 18,116
U-verse VoIP connections 5,593 5,381

Debt ratio ³
50.5 % 55.5 %
Net Debt Ratio ⁴
47.6 % 45.2 %
Ratio of earnings to fixed charges⁵
4.01 4.18
Number of AT&T employees 277,200 250,730

Selected Financial and Operating Data
	March 31,
Subscribers and connections in (000s)	2017			2016
Domestic wireless subscribers		134,218			130,445
Mexican wireless subscribers		12,606			9,213
North American wireless subscribers		146,824			139,658

North American branded subscribers		103,532			98,158
North American branded net additions		738			1,195

Domestic satellite video subscribers		21,012			20,112
AT&T U-verse® (U-verse) video subscribers		4,048			5,260
Latin America satellite video subscribers ¹		13,678			12,436
Total video subscribers		38,738			37,808

Total domestic broadband connections		15,695			15,764

Network access lines in service		13,363			15,975
U-verse VoIP connections		5,858			5,484

Debt ratio ²		51.6	%		51.2	%
Net debt ratio ³		45.8	%		47.3	%
Ratio of earnings to fixed charges ⁴		3.80			4.22
Number of AT&T employees		264,530			280,870

¹At~~June 30, 2015, our Mexican wireless subscribers have been excluded.~~

²Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At ~~March~~December 31, 2016, SKY Mexico had ~~7.7~~8.0 million subscribers.

³²Debt 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.

⁴³Net debt ratios are calculated by deriving total debt (debt maturing within one year plus long-term debt) less cash available by total capital (total debt plus total stockholders' equity).

⁵⁴ See Exhibit 12.

~~AT&T INC.~~

~~JUNE 30, 2016~~

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

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

Segment Results

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

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

AT&T INC.

MARCH 31, 2017

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

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
	2017		2016		Percent Change
	2017		2016		Percent Change
Segment operating revenues
Wireless service	$	7,929	$	7,855		0.9	%
Fixed strategic services		2,974		2,751		8.1
Legacy voice and data services		3,630		4,373		(17.0	)
Other service and equipment		817		859		(4.9	)
Wireless equipment		1,498		1,771		(15.4	)
Total Segment Operating Revenues		16,848		17,609		(4.3	)

Segment operating expenses
Operations and support		10,176		10,802		(5.8	)
Depreciation and amortization		2,312		2,508		(7.8	)
Total Segment Operating Expenses		12,488		13,310		(6.2	)
Segment Operating Income		4,360		4,299		1.4
Equity in Net Income of Affiliates		-		-		-
Segment Contribution	$	4,360	$	4,299		1.4	%

2423

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

Business Solutions
Segment Results
Second Quarter Six-Month Period
2016 2015
Percent
Change
2016 2015
Percent
Change

Segment operating revenues
     Wireless service $ 7,963 $ 7,756 2.7 % $ 15,818 $ 15,271 3.6 %
     Fixed strategic services 2,797 2,580 8.4 5,559 5,099 9.0
     Legacy voice and data services 4,158 4,681 (11.2 ) 8,521 9,465 (10.0 )
     Other service and equipment 886 854 3.7 1,744 1,700 2.6
     Wireless equipment 1,775 1,793 (1.0 ) 3,546 3,686 (3.8 )
Total Segment Operating Revenues 17,579 17,664 (0.5 ) 35,188 35,221 (0.1 )

Segment operating expenses
     Operations and support 10,857 10,972 (1.0 ) 21,659 22,045 (1.8 )
     Depreciation and amortization 2,521 2,460 2.5 5,029 4,802 4.7
Total Segment Operating Expenses 13,378 13,432 (0.4 ) 26,688 26,847 (0.6 )
Segment Operating Income 4,201 4,232 (0.7 ) 8,500 8,374 1.5
Equity in Net Income of Affiliates - - - - - -
Segment Contribution $ 4,201 $ 4,232 (0.7 ) % $ 8,500 $ 8,374 1.5 %

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

(in 000s)
June 30,
2016

June 30,
2015

Percent
Change

Business Wireless Subscribers
   Postpaid/Branded 49,432 46,697 5.9 %
   Reseller 52 19 -
   Connected devices¹
28,061 22,462 24.9
Total Business Wireless Subscribers 77,545 69,178 12.1

Business IP Broadband Connections 948 872 8.7 %
¹Includes data-centric devices such as monitoring devices and automobile systems. Excludes postpaid tablets.

~~AT&T INC.~~

~~JUNE 30, 2016~~

	March 31,
(in 000s)	2017		2016		Percent Change
Business Wireless Subscribers
Postpaid/Branded		50,839		48,844		4.1	%
Reseller		76		64		18.8
Connected devices¹		31,439		26,863		17.0
Total Business Wireless Subscribers		82,354		75,771		8.7

Business IP Broadband Connections		980		928		5.6	%
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

	First Quarter
	2017			2016
(in 000s)	2017			2016			Percent Change

Business Wireless Net Additions ^{1, 4}
Postpaid/Branded		(125	)		133			-	%
Reseller		6			(22	)		-
Connected devices ²		2,553			1,578			61.8
Business Wireless Net Subscriber Additions		2,434			1,689			44.1

Business Wireless Postpaid Churn ^{1, 3, 4}		1.07	%		1.02	%	5 BP

Business IP Broadband Net Additions		4			17			(76.5	)%
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
² Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
⁴ 2017 excludes the impact of the 2G shutdown, which was reflected in beginning of period subscribers.

~~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~~

Second Quarter Six-Month Period
2016 2015
Percent
Change
2016 2015
Percent
Change

(in 000s)
Business Wireless Net Additions^{1, 4}

   Postpaid/Branded 185 288 (35.8 ) % 318 585 (45.6 ) %
   Reseller (13) 3 - (35) 6 -
   Connected devices ²
1,199 1,478 (18.9 ) 2,777 2,502 11.0
Business Wireless Net Subscriber Additions 1,371 1,769 (22.5 ) 3,060 3,093 (1.1 )

Business Wireless Postpaid Churn^{1, 3, 4}
0.91% 0.91% - 0.97% 0.90% 7 BP

Business IP Broadband Net Additions 20 23 (13.0 ) % 37 50 (26.0 ) %
¹Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

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

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.

⁴Includes the impacts of the expected shutdown of our U.S. 2G network.

Operating Revenues decreased ~~$85,~~$761, or ~~0.5%~~4.3%, in the ~~second~~first quarter ~~and $33, or 0.1%, for the first six months~~ of ~~2016.~~2017. Revenue ~~decreases were due to continued~~ declines reflect technological shifts away from legacy products, as well as decreasing wireless equipment revenues resulting from changes in ~~our legacy voice and data products, lower equipment revenue, the~~customer buying habits. Our second-quarter 2016 sale of certain hosting operations ~~and foreign exchange pressures.~~also negatively impacted revenue comparability. These decreases were partially offset by ~~increased~~continued growth in wireless ~~service revenues~~services and fixed strategic ~~services.~~services, which represent 40% of non-wireless revenues.

3835

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

Labor Contracts~~A contract covering~~ As of March 31, 2017, we employed approximately ~~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~~265,000 persons. Approximately 48% of our ~~West region expired in April 2016 and~~ employees are ~~working under~~represented by the ~~terms~~Communications Workers of America, the ~~prior contract, including benefits, while negotiations continue.~~International Brotherhood of Electrical Workers or other unions. After expiration of the ~~current~~ agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

~~For our U.S. mobility employees, contracts covering wages~~A summary of labor contract negotiations, by region or employee group, is as follows:

·	Approximately 20,000 traditional wireline employees in the Southwest ratified a new contract in April 2017. The new contract will expire in April 2021.

·	Approximately 5,000 traditional wireline employees primarily in the Midwest are covered by a contract that expires in June 2017. In April, we reached a tentative agreement on a new five-year contract that is subject to ratification.

·	Approximately 20,000 mobility employees across the country are covered by contracts that expired in early 2017. We continue to negotiate with labor representatives.

·	Approximately 15,000 traditional wireline employees in our West region are covered by contracts that expired in April 2016. We continue to negotiate with labor representatives.

·	Approximately 11,000 former DIRECTV employees were eligible for and chose union representation. Bargaining has resulted in approximately 80% of these employees now being covered under ratified contracts that expire between 2017 and 2021.

AT&T INC.

MARCH 31, 2017

Item 2. Management's Discussion and ~~other non-benefit working terms are structured on a regional basis, with a separate national contract primarily covering medical benefits. Approximately 40,000 employees are covered~~Analysis of Financial Condition and Results of Operations - Continued

Dollars in ~~this separate contract that has a no strike/no lock-out clause. On August 3, 2016, we reached a tentative agreement on this contract that was due to expire on December 31, 2016.~~millions except per share and per subscriber amounts

COMPETITIVE AND REGULATORY ENVIRONMENT

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

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. ~~However, since~~Since the Telecom Act was passed, the ~~FCC~~Federal Communications Commission (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. WeHowever, based on their public statements and written opinions, we expect the new leadership at the FCC to chart a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. In addition, 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 March 2017, the FCC circulated a draft order proposing to significantly reduce regulation of the bulk data connections that telecom companies provide to businesses otherwise known as special access services or business data services. That order, which was adopted on April 20, 2017, maintains light touch pricing regulation of packet-based services, largely eliminates pricing regulation of high-speed TDM transport services, and establishes a competitive market test for granting pricing flexibility for other TDM services. For those services that do not meet the competitive test, the order allows companies to offer volume and term discounts, as well as contract tariffs. The order establishes a period of permissive detariffing with a date certain for mandatory detariffing in all areas that meet the competitive market test.

In January 2017, the FCC removed from its list of active proceedings proposed rules on cable set-top boxes.

In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. On April 3, 2017, the President signed a resolution passed by Congress repealing the new rules under the Congressional Review Act, which prohibits the issuance of a new rule that is substantially the same as a rule repealed under its provisions, or the reissuance of the repealed rule, unless the new or reissued rule is specifically authorized by a subsequent act of Congress.

In February 2015, the FCC released an order ~~reclassifying~~classifying 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~~expanded its existing authority to regulate the provision of fixed and mobile broadband internet access services. On April 26, 2017, the FCC announced that, in May 2017, it will initiate a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. On a separate track, AT&T and other providers of broadband internet access services challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. OnIn June ~~14,~~ 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. OnIn July ~~29,~~ 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court of Appeals. On May 1, 2017, those rehearing petitions were rejected by the D.C. Circuit. Parties now have 90 days from issuance of that decision to determine whether to seek review by the U.S. Supreme Court. ~~Those petitions remain pending.~~

The outcome of the April 26, 2017 FCC ~~is in~~proceedings could influence the process of adopting new rules that could restrict our commercial flexibility in the provision of video, special access, business and advertising services. New rules are expected before the end of 2016. If new rules are adopted, we expect to appeal any rule that we believe to restrain on our business unlawfully.court rulings.

~~AT&T INC.~~

~~JUNE 30, 2016~~

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

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

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

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

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

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. ~~Government~~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~~The FCC ~~to conduct an "incentive~~finished its most recent auction~~" to make available for wireless broadband use~~ in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction"). ~~We participated in~~

On March 30, 2017, FirstNet announced that it awarded AT&T the ~~AWS-3 Auction.~~contract for constructing and operating the nationwide public safety broadband network. The ~~600 MHz Auction (Auction 1000) began on March 29, 2016, and the multiple phases of Auction 1000 are expected to progress over the next several months.~~

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

In May 2014, ~~in a separate proceeding,~~ the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. ~~In addition,~~The spectrum screen (including the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in markets that cover as much as 70-80 percent of the U.S. population.low band screen) recently increased by 23 MHz. On balance, the order and the ~~new~~ spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs, but because AT&T uses more "low band" spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T's ability to expand capacity in these bands (low band spectrum has better propagation characteristics than "high band" spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.needs.

As the wireless industry continues to mature, ~~we believe that~~ future wireless growth will become increasingly ~~depend~~dependent on our ability to offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to face spectrum and capacity constraints on our wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our ~~capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless~~long-term needs. To that end, 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.have:

·	Submitted winning bids for 251 AWS spectrum licenses for a near-nationwide contiguous block of high-quality AWS spectrum in the AWS-3 Auction.

·	Redeployed spectrum previously used for basic 2G services to support more advanced mobile internet services on our 3G and 4G networks.

·	Secured the FirstNet contract, which provides us with access to a nationwide low band 20 MHz of spectrum, assuming all states opt in.

Invested in 5G and millimeter-wave technologies with our in-process acquisition of Fiber Tower Corporation, which holds significant amounts of spectrum in the millimeter wave bands (28 GHz and 39 GHz) that the FCC recently reallocated for mobile broadband services. These bands will help to accelerate our entry into 5G services.

4038

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE

We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

Supplemental Operational Measure

We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.

Supplemental Operational Measure
	Three Months Ended
	March 31, 2017									March 31, 2016
	Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility
Operating Revenues
Wireless service	$	6,609	$	7,929	$	-		$	14,538	$	6,943	$	7,855	$	-		$	14,798
Fixed strategic services		-		2,974		(2,974	)		-		-		2,751		(2,751	)		-
Legacy voice and data services		-		3,630		(3,630	)		-		-		4,373		(4,373	)		-
Other service and equipment		-		817		(817	)		-		-		859		(859	)		-
Wireless equipment		1,131		1,498		-			2,629		1,385		1,771		-			3,156
Total Operating Revenues		7,740		16,848		(7,421	)		17,167		8,328		17,609		(7,983	)		17,954

Operating Expenses
Operations and support		4,528		10,176		(4,706	)		9,998		4,912		10,802		(5,090	)		10,624
EBITDA		3,212		6,672		(2,715	)		7,169		3,416		6,807		(2,893	)		7,330
Depreciation and amortization		873		2,312		(1,188	)		1,997		922		2,508		(1,374	)		2,056
Total Operating Expenses		5,401		12,488		(5,894	)		11,995		5,834		13,310		(6,464	)		12,680
Operating Income	$	2,339	$	4,360	$	(1,527	)	$	5,172	$	2,494	$	4,299	$	(1,519	)	$	5,274
¹Non-wireless (fixed) operations reported in Business Solutions segment.

AT&T INC.

MARCH 31, 2017

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

LIQUIDITY AND CAPITAL RESOURCES

We had ~~$7,208~~$14,884 in cash and cash equivalents available at ~~June 30, 2016.~~March 31, 2017. Cash and cash equivalents included cash of ~~$2,408~~$3,307 and money market funds and other cash equivalents of ~~$4,800.~~$11,577. Approximately ~~$600~~$1,303 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation.

Cash and cash equivalents increased ~~$2,087~~$9,096 since December 31, ~~2015.~~2016. In the first ~~six~~three months of ~~2016,~~2017, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third ~~parties, and long-term debt issuances.~~parties. 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;~~expenditures, debt ~~repayments;~~repayments, dividends to ~~stockholders;~~stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities

During the first ~~six~~three months of ~~2016,~~2017, cash provided by operating activities was ~~$18,207,~~$9,218, compared to ~~$15,898~~$7,900 for the first ~~six~~three months of ~~2015.~~2016. Higher operating cash flows in ~~2016~~2017 were primarily due to ~~our acquisition of DIRECTV offset by the timing of~~lower tax payments and working capital ~~payments.~~improvements.

Cash Used in or Provided by Investing Activities

For the first ~~six~~three months of ~~2016,~~2017, cash used in investing activities totaled ~~$10,017~~$6,171 and consisted primarily of ~~$9,702~~$5,784 for capital expenditures, excluding interest during construction, and ~~$485~~$162 for the acquisition of business operations and wireless ~~spectrum, Quickplay Media, Inc. and other operations. These expenditures were partially offset by net cash receipts of $500 from the sale of securities.~~spectrum.

~~Virtually all~~The majority of our capital expenditures are spent on our ~~wireless and wireline~~ networks, our video services and related support systems. Capital expenditures, excluding interest during construction, increased ~~$1,374~~$1,333 in the first ~~six~~three months. The increase was primarily due to our ~~wireless network expansion in Mexico, DIRECTV operations and~~ continued fiber ~~buildout. In~~buildout and timing of build schedules in 2017 compared with 2016. Additionally, in connection with capital improvements, ~~to our wireless network in Mexico,~~ we ~~also negotiated~~negotiate favorable payment terms (referred to as vendor financing). For the first ~~six~~three months of ~~2016, we excluded $138 of~~2017, vendor financing related to capital ~~investments.~~investments was $107. We do not report capital expenditures at the segment level.

We continue to expect our ~~2016~~2017 capital ~~investment, which includes our capital~~ expenditures ~~plus vendor financing payments related to our Mexico network, for our existing businesses~~ to be in the $22,000 range, and we expect our capital ~~investment~~expenditures to be in the ~~15 percent~~15% range of service revenues or lower for each of the years ~~2016~~2017 through ~~2018.~~2019. The amount of capital ~~investment~~expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on ensuring DIRECTV merger commitments are met.

Cash Provided by or Used in Financing Activities

For the first ~~six~~three months of ~~2016,~~2017, cash ~~used in~~provided by financing activities totaled ~~$6,103~~$6,049 and included net proceeds of ~~$10,140~~$12,440 primarily from the following long-term debt issuances:

·	February issuance of $1,250 of ~~2.800%~~3.200% global notes due ~~2021.~~2022.

·	February issuance of ~~$1,500~~$750 of ~~3.600%~~3.800% global notes due ~~2023.~~2024.

·	February issuance of ~~$1,750~~$2,000 of ~~4.125%~~4.250% global notes due ~~2026.~~2027.

·	February issuance of ~~$1,500~~$3,000 of ~~5.650%~~5.250% global notes due 2037.

·	February issuance of $2,000 of 5.450% global notes due 2047.

·	~~May~~February issuance of ~~$750~~$1,000 of ~~2.300%~~5.700% global notes due ~~2019.~~2057.

·	~~May~~March issuance of ~~$750~~$1,430 of ~~2.800%~~5.500% global notes due ~~2021.~~2047.

·	~~May~~March issuance of ~~$1,100 of 3.600%~~$800 floating rate global notes due ~~2023.~~2020. The floating rate for the notes is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 65 basis points.

·	~~May issuance~~March draw of ~~$900 of 4.125% global notes~~$300 on a private financing agreement with Banco Nacional de Mexico, S.A. due ~~2026.~~

·	~~May issuance of $500 of 4.800% global notes due 2044.~~March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate.

4140

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

During the first ~~six~~three months of ~~2016,~~2017, we redeemed ~~$9,129~~$3,053 of debt, primarily consisting of the following:

·	~~February redemption~~$1,142 of ~~$1,250 of AT&T Floating Rate Notes~~2.400% global notes due ~~2016.~~2017.

·	~~March prepayment~~$1,000 of ~~the remaining $1,000 outstanding under a $2,000 18-month credit agreement by and between AT&T and Mizuho.~~1.600% global notes due 2017.

·	~~May redemption~~$500 of ~~$1,750 of 2.950% global~~floating rate notes due ~~2016.~~

·	~~June prepayment of $5,000 of outstanding advances under our $9,155 Syndicated Credit Agreement (See "Credit Facilities" below).~~2017.

InThe FCC's 600 MHz Auction concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910. With our previous deposit made in July 2016, we ~~made~~received a ~~refundable deposit with~~refund from the FCC ~~for~~in the ~~upcoming Auction 1000.~~amount of $1,438 on April 19, 2017.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately ~~4.2% as of June 30, 2016, compared to 4.1%~~4.3% as of March 31, ~~2016, and 4.0%~~2017, compared to 4.2% as of December 31, ~~2015.~~2016. We had ~~$125,568~~$132,379 of total notes and debentures outstanding at ~~June 30, 2016,~~March 31, 2017, which included Euro, British pound sterling, Swiss ~~Franc,~~franc, Brazilian real, Mexican peso and Canadian dollar denominated debt ofthat totaled approximately ~~$25,826.~~$24,941.

As of ~~June 30, 2016,~~March 31, 2017, we had approximately ~~402~~396 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first ~~six~~three months of ~~2016,~~2017, we ~~repurchased approximately 5 million~~did not repurchase any shares ~~for $197.~~under these authorizations. In ~~2016,~~2017, we intend to use free cash flow (operating cash flows less construction and capital expenditures) after dividends primarily to pay down debt.

We paid dividends of ~~$5,899~~$3,009 during the first ~~six~~three months of ~~2016,~~2017, compared with ~~$4,873~~$2,947 for the first ~~six~~three months of ~~2015,~~2016, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016, partially offset by the impact of the decline in shares outstanding ~~resulting from our acquisition of DIRECTV.~~due to repurchases in 2016. Dividends declared by our Board of Directors totaled ~~$0.48~~$0.49 per share in the ~~second quarter~~first three months of 2017 and ~~$0.96~~$0.48 per share for the first ~~six~~three months of ~~2016 and $0.47 per share in the second quarter and $0.94 per share for the first six months of 2015.~~2016. 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 ~~June 30, 2016,~~March 31, 2017, we had ~~$9,528~~$12,681 of debt maturing within one year, ~~$9,004~~$12,507 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 2017.

·	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

OnThe following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

We use credit facilities as a tool in managing our liquidity status. In December ~~11,~~ 2015, we entered into a five-year $12,000 revolving credit agreement ~~(the "Revolving Credit Agreement") with Citibank, N.A. (Citibank),~~of which no amounts are outstanding as ~~administrative agent, replacing our $5,000~~of March 31, 2017. We also have a $9,155 syndicated 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.of which $4,155 remains outstanding as of March 31, 2017 ($2,286 of which is payable March 2018).

In ~~January 2015,~~connection with our pending Merger with Time Warner, we have also entered into a ~~$9,155~~$30,000 bridge loan credit agreement ~~(the "Syndicated Credit Agreement"~~("Bridge Loan") ~~containing (i)~~and a ~~$6,286~~$10,000 term loan ~~facility (the "Tranche A Facility"~~agreement ("Term Loan") ~~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.~~

~~AT&T INC.~~

~~JUNE 30, 2016~~

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

~~Dollars in millions except per share and per subscriber~~. No amounts

~~Revolving Credit Agreement~~

In will be borrowed under either the ~~event advances are made under~~Bridge Loan or the Revolving Credit Agreement, those advances would be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under the agreement. We can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. We also may request that the total amount of the lender's commitments be increased by an integral multiple of $25 effective on a date that is at least 90 daysTerm Loan 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~~closing of the ~~lender's commitments at any time exceed $14,000. At June 30, 2016, we had no advances outstanding~~Merger. Borrowings under either agreement will be used solely to finance a portion of the ~~Revolving Credit Agreement~~cash to be paid in the Merger, the refinancing of debt of Time Warner and ~~we have complied with all covenants.~~its subsidiaries and the payment of related expenses.

~~The obligations~~Each 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. Weour credit and ~~lenders representing more than 50% of the facility amount may agree to extend their commitments for two one-year periods beyond the December 11, 2020 termination date, under certain circumstances.~~

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

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

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

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

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

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

~~The events~~ As of ~~default contained~~March 31, 2017, we were in compliance with the ~~Revolving Credit Agreement are customary~~covenants for 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.

~~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 on March 2, 2018. Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with 25 percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due on March 2, 2020. In June 2016, we repaid $4,000 of the outstanding debt under the Tranche A Facility and $1,000 of the outstanding debt under the Tranche B Facility. After repayment, the amortization in the Tranche B Facility has been satisfied.

our credit facilities.

4341

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

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

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

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

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

Collateral Arrangements

During the first ~~six~~three months of ~~2016,~~2017, we ~~posted $928~~received $396 of additional cash collateral, on a net basis, tofrom banks and other participants in our derivative ~~arrangements, due mainly to the U.S. dollar strengthening versus the British pound sterling.~~arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At ~~June 30, 2016,~~March 31, 2017, our debt ratio was ~~50.5%~~51.6%, compared to ~~55.5%~~51.2% at ~~June 30, 2015,~~March 31, 2016, and ~~50.5%~~49.9% at December 31, ~~2015.~~2016. Our net debt ratio was ~~47.6%~~45.8% at ~~June 30, 2016,~~March 31, 2017, compared to ~~45.2%~~47.3% at ~~June 30, 2015,~~March 31, 2016 and ~~48.5%~~47.5% at December 31, ~~2015.~~2016. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

During the first ~~six~~three months of ~~2016,~~2017, we received ~~$2,773~~$1,446 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of ~~$8,704~~$8,426 as of ~~June 30, 2016,~~March 31, 2017, and ~~$8,714~~$8,477 as of December 31, ~~2015,~~2016, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. We distributed ~~$280~~$140 to the trust during the first ~~six~~three months of ~~2016.~~2017. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares. At the time of the contribution of the preferred equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal income tax return for each of 2015 and 2016.

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At ~~June 30, 2016,~~March 31, 2017, we had interest rate swaps with a notional value of ~~$7,050~~$10,450 and a fair value of ~~$202.~~$42.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of ~~$(3,721)~~$(3,400) at ~~June 30, 2016.~~March 31, 2017.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of ~~June 30, 2016.~~March 31, 2017. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of ~~June 30, 2016.~~March 31, 2017.

AT&T INC.

~~JUNE 30, 2016~~MARCH 31, 2017

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and ~~Over The Top Video~~over-the-top video service), subscriber reluctance to purchase new wireless handsets, and our ability to maintain capital expenditures.

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

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

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

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

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

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

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

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

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

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

·	Our ability to integrate our acquisition of DIRECTV.

·	Our ability to close our pending acquisition of Time Warner Inc. and successfully integrate its operations.

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

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

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

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

·	The uncertainty and impact of anticipated regulatory and corporate tax reform, which may impact the overall economy and incentives for business investments.

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

4644

AT&T INC.

~~JUNE 30, 2016~~

MARCH 31, 2017

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the ~~second~~first quarter ~~2016,~~2017, there were no such material developments.

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

(c) A summary of our repurchases of common stock during the ~~second~~first quarter of ~~2016~~2017 is as follows:

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

~~April 1, 2016 -~~
~~April 30, 2016~~Period
(a)      ~~14,308~~(b) (c) $ -(d)
Total Number of Shares (or Units) Purchased ^{1, 2, 3}
Average Price Paid Per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs ¹
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
- ~~406,550,000~~
~~May 1, 2016 -~~
~~May 31, 2016~~
~~3,001,139~~ ~~38.43~~ ~~3,000,000~~ ~~403,550,000~~
~~June 1, 2016 -~~
~~June 30, 2016~~
~~2,658,815~~ ~~40.87~~ ~~2,000,000~~ ~~401,550,000~~
~~Total~~ ~~5,674,262~~ $ ~~39.40~~ ~~5,000,000~~
January 1, 2017 -
January 31, 2017
    658,242 $ 40.95 - 395,550,000
February 1, 2017 -
February 28, 2017
1,782,268 41.86 - 395,550,000
March 1, 2017 -
March 31, 2017
2,346,758 41.91 - 395,550,000
Total 4,787,268 $ 41.74 -
¹
In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date.
²
Of the shares repurchased, ~~32,522~~4,244,764 shares were acquired through the withholding of taxes on the vesting of restricted stock and performance shares or ~~through the payment in stock of taxes~~ on the exercise price of options.
³
Of the shares repurchased, ~~641,740~~542,504 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.

4745
AT&T INC.
~~JUNE 30, 2016~~
MARCH 31, 2017

Item 6. Exhibits

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

10-a Stock Purchase and Deferral Plan
10-b Cash Deferral Plan
12 Computation of Ratios of Earnings to Fixed Charges
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32 Section 1350 Certifications
101 XBRL Instance Document

46
48
SIGNATURE

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

~~August~~May 4, ~~2016~~2017

AT&T Inc.

/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer

49
47

	March 31,
(in 000s)	2017		2016		Percent Change
Linear Video Connections
Satellite		21,012		20,112		4.5	%
U-verse		4,020		5,232		(23.2	)
Total Linear Video Connections		25,032		25,344		(1.2	)

Broadband Connections
IP		13,130		12,542		4.7
DSL		1,164		1,749		(33.4	)
Total Broadband Connections		14,294		14,291		-

Retail Consumer Switched Access Lines		5,533		6,888		(19.7	)
U-verse Consumer VoIP Connections		5,470		5,225		4.7
Total Retail Consumer Voice Connections		11,003		12,113		(9.2	)%

(in 000s)	June 30, 2016		June 30, 2015		Percent Change
Video Connections
Satellite		20,454		-		-	%
U-verse		4,841		5,946		(18.6	)
Total Video Connections		25,295		5,946		-

Broadband Connections
IP		12,596		12,013		4.9
DSL		1,585		2,415		(34.4	)
Total Broadband Connections		14,181		14,428		(1.7	)

Retail Consumer Switched Access Lines		6,515		8,142		(20.0	)
U-verse Consumer VoIP Connections		5,300		5,170		2.5
Total Retail Consumer Voice Connections		11,815		13,312		(11.2	) %

	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		174			(21)			(263)			-			(110)
Amounts reclassified from accumulated OCI		-	¹		-	²		19	³		(429)	⁴		(410)
Net other comprehensive income (loss)		174			(21)			(244)			(429)			(520)
Balance as of June 30, 2016	$	(1,024)		$	463		$	(228)		$	5,603		$	4,814

	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		(185)			34			(449)			-			(600)
Amounts reclassified from accumulated OCI		-	¹		(9)	²		17	³		(429)	⁴		(421)
Net other comprehensive income (loss)		(185)			25			(432)			(429)			(1,021)
Balance as of June 30, 2015	$	(211)		$	524		$	309		$	6,418		$	7,040
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).

For the three months ended June 30, 2016
	Revenue		Operations and Support Expenses			EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates			Segment Contribution
Business Solutions	$	17,579	$	10,857		$	6,722		$	2,521	$	4,201		$	-		$	4,201
Entertainment Group		12,711		9,569			3,142			1,489		1,653			(2	)		1,651
Consumer Mobility		8,186		4,680			3,506			932		2,574			-			2,574
International		1,828		1,723			105			298		(193	)		9			(184	)
Segment Total		40,304		26,829			13,475			5,240		8,235		$	7		$	8,242
Corporate and Other		216		293			(77	)		20		(97	)
Acquisition-related items		-		233			(233	)		1,316		(1,549	)
Certain significant items		-		29			(29	)		-		(29	)
AT&T Inc.	$	40,520	$	27,384		$	13,136		$	6,576	$	6,560

For the six months ended June 30, 2016
	Revenue		Operations and Support Expenses			EBITDA			Depreciation and Amortization		Operating Income (Loss)			Equity in Net Income (Loss) of Affiliates			Segment Contribution
Business Solutions	$	35,188	$	21,659		$	13,529		$	5,029	$	8,500		$	-		$	8,500
Entertainment Group		25,369		19,147			6,222			2,977		3,245			1			3,246
Consumer Mobility		16,514		9,592			6,922			1,854		5,068			-			5,068
International		3,495		3,311			184			575		(391	)		23			(368	)
Segment Total		80,566		53,709			26,857			10,435		16,422		$	24		$	16,446
Corporate and Other		489		670			(181	)		37		(218	)
Acquisition-related items		-		528			(528	)		2,667		(3,195	)
Certain significant items		-		(682	)		682			-		682
AT&T Inc.	$	81,055	$	54,225		$	26,830		$	13,139	$	13,691

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

	Second Quarter						Six-Month Period
	2016			2015			2016			2015
Business Solutions	$	4,201		$	4,232		$	8,500		$	8,374
Entertainment Group		1,651			(208	)		3,246			(478	)
Consumer Mobility		2,574			2,619			5,068			4,854
International		(184	)		(131	)		(368	)		(141	)
Segment Contribution		8,242			6,512			16,446			12,609
Reconciling Items:
Corporate and Other		(97	)		63			(218	)		154
Merger and integration charges		(233	)		(694	)		(528	)		(993	)
Amortization of intangibles acquired		(1,316	)		(120	)		(2,667	)		(241	)
Employee separation charges		(29	)		-			(54	)		(217	)
Gain on wireless spectrum transactions		-			-			736			-
Segment equity in net (income) loss of affiliates		(7	)		12			(24	)		18
AT&T Operating Income		6,560			5,773			13,691			11,330
Interest expense		1,258			932			2,465			1,831
Equity in net income of affiliates		28			33			41			33
Other income (expense) - net		91			48			161			118
Income Before Income Taxes	$	5,421		$	4,922		$	11,428		$	9,650

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

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

AT&T Mobility Results
	Second Quarter							Six-Month Period							First Quarter
	2016		2015		Percent Change			2016		2015		Percent Change			2017		2016		Percent Change
	2016		2015		Percent Change			2016		2015		Percent Change			2017		2016		Percent Change
Operating revenues
Service	$	14,912	$	15,115		(1.3	) %	$	29,710	$	29,927		(0.7	) %	$	14,538	$	14,798		(1.8	)%
Equipment		3,013		3,189		(5.5	)		6,169		6,563		(6.0	)		2,629		3,156		(16.7	)
Total Operating Revenues		17,925		18,304		(2.1	)		35,879		36,490		(1.7	)		17,167		17,954		(4.4	)

Operating expenses
Operations and support		10,502		10,973		(4.3	)		21,126		22,445		(5.9	)		9,998		10,624		(5.9	)
EBITDA		7,423		7,331		1.3			14,753		14,045		5.0			7,169		7,330		(2.2	)
Depreciation and amortization		2,081		2,031		2.5			4,137		4,036		2.5			1,997		2,056		(2.9	)
Total Operating Expenses		12,583		13,004		(3.2	)		25,263		26,481		(4.6	)		11,995		12,680		(5.4	)
Operating Income	$	5,342	$	5,300		0.8	%	$	10,616	$	10,009		6.1	%	$	5,172	$	5,274		(1.9	)%