UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q


(Mark One) x ☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ~~September~~June 30, ~~2017~~ 2018 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 Number1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number43-1301883

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 RegulationS-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, anon-accelerated filer, or a smaller reporting company, or emerging growth company. See definition of ~~"accelerated~~“accelerated filer,~~" "large~~” “large accelerated filer,~~" "smaller~~” “smaller reporting ~~company"~~company” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule12b-2 of the Exchange Act.


Large accelerated filer	~~[X]~~		[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 Rule12b-2 of the Exchange Act).

Yes [ ] No [X]

At ~~October~~July 31, ~~2017,~~2018, there were ~~6,139~~7,262 million common shares outstanding.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016

Operating Revenues
Service $ 36,378 $ 37,272 $ 109,372 $ 111,515
Equipment 3,290 3,618 9,498 10,430
Total operating revenues 39,668 40,890 118,870 121,945

Operating Expenses
Cost of services and sales
   Equipment 4,191 4,455 12,177 13,090
   Broadcast, programming and operations 5,284 4,909 15,156 14,239
   Other cost of services (exclusive of depreciation and
         amortization shown separately below)
9,431 9,526 27,714 28,436
Selling, general and administrative 8,317 9,013 24,917 26,363
Depreciation and amortization 6,042 6,579 18,316 19,718
Total operating expenses 33,265 34,482 98,280 101,846
Operating Income 6,403 6,408 20,590 20,099
Other Income (Expense)
Interest expense (1,686 ) (1,224 ) (4,374 ) (3,689 )
Equity in net income (loss) of affiliates 11 16 (148 ) 57
Other income (expense) – net 246 (7 ) 354 154
Total other income (expense) (1,429 ) (1,215 ) (4,168 ) (3,478 )
Income Before Income Taxes 4,974 5,193 16,422 16,621
Income tax expense 1,851 1,775 5,711 5,803
Net Income 3,123 3,418 10,711 10,818
Less: Net Income Attributable to Noncontrolling Interest (94 ) (90 ) (298 ) (279 )
Net Income Attributable to AT&T $ 3,029 $ 3,328 $ 10,413 $ 10,539
Basic Earnings Per Share Attributable to AT&T $ 0.49 $ 0.54 $ 1.69 $ 1.70
Diluted Earnings Per Share Attributable to AT&T $ 0.49 $ 0.54 $ 1.69 $ 1.70
Weighted Average Number of Common Shares
   Outstanding – Basic (in millions)
6,162 6,168 6,164 6,171
Weighted Average Number of Common Shares
   Outstanding – with Dilution (in millions)
6,182 6,189 6,184 6,191
Dividends Declared Per Common Share $ 0.49 $ 0.48 $ 1.47 $ 1.44
See Notes to Consolidated Financial Statements.
2
AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Net income $ 3,123 $ 3,418 $ 10,711 $ 10,818
Other comprehensive income (loss), net of tax:
    Foreign currency:
        Foreign currency translation adjustment (includes $10,
            $21, $6 and $21 attributable to noncontrolling interest),
            net of taxes of $74, $(91), $580 and $35
151 (225 ) 490 (51 )
    Available-for-sale securities:
        Net unrealized gains (losses), net of taxes of $28, $28, $72
            and $15
45 46 128 25
        Reclassification adjustment included in net income, net of
            taxes of $(50), $(3), $(54) and $(3)
(79 ) (5 ) (86 ) (5 )
     Cash flow hedges:
        Net unrealized gains (losses), net of taxes of $178, $240,
            $(94) and $99
330 446 (174 ) 183
        Reclassification adjustment included in net income, net of
            taxes of $5, $5, $15 and $15
10 10 29 29
     Defined benefit postretirement plans:
        Net prior service credit arising during period, net of
            taxes of $0, $0, $594 and $0
- - 969 -
        Amortization of net prior service credit included in net
            income, net of taxes of $(157), $(131), $(447) and $(393)
(256 ) (215 ) (731 ) (644 )
Other comprehensive income (loss) 201 57 625 (463 )
Total comprehensive income 3,324 3,475 11,336 10,355
Less: Total comprehensive income attributable to
        noncontrolling interest
(104 ) (111 ) (304 ) (300 )
Total Comprehensive Income Attributable to AT&T $ 3,220 $ 3,364 $ 11,032 $ 10,055
See Notes to Consolidated Financial Statements.
3
AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
September 30, December 31,
2017 2016
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 48,499 $ 5,788
Accounts receivable - net of allowances for doubtful accounts of $741 and $661 15,876 16,794
Prepaid expenses 1,258 1,555
Other current assets 10,724 14,232
Total current assets 76,357 38,369
Property, plant and equipment 326,240 319,648
   Less: accumulated depreciation and amortization (199,778 ) (194,749 )
Property, Plant and Equipment – Net 126,462 124,899
Goodwill 105,668 105,207
Licenses 96,071 94,176
Customer Lists and Relationships – Net 11,573 14,243
Other Intangible Assets – Net 7,775 8,441
Investments in Equity Affiliates 1,627 1,674
Other Assets 18,332 16,812
Total Assets $ 443,865 $ 403,821

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 8,551 $ 9,832
Accounts payable and accrued liabilities 28,928 31,138
Advanced billing and customer deposits 4,503 4,519
Accrued taxes 2,703 2,079
Dividends payable 3,008 3,008
Total current liabilities 47,693 50,576
Long-Term Debt 154,728 113,681
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 64,381 60,128
Postemployment benefit obligation 31,231 33,578
Other noncurrent liabilities 19,723 21,748
Total deferred credits and other noncurrent liabilities 115,335 115,454

Stockholders' Equity
Common stock ($1 par value, $14,000,000,000 authorized at September 30, 2017 and
   December 31, 2016: issued 6,495,231,088 at September 30, 2017 and December 31, 2016)
6,495 6,495
Additional paid-in capital 89,527 89,604
Retained earnings 36,074 34,734
Treasury stock (355,897,357 at September 30, 2017 and 356,237,141
   at December 31, 2016, at cost)
(12,716 ) (12,659 )
Accumulated other comprehensive income 5,580 4,961
Noncontrolling interest 1,149 975
Total stockholders' equity 126,109 124,110
Total Liabilities and Stockholders' Equity $ 443,865 $ 403,821
See Notes to Consolidated Financial Statements.
4
AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Nine months ended
September 30,
2017 2016
Operating Activities
Net income $ 10,711 $ 10,818
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization 18,316 19,718
   Undistributed loss (earnings) from investments in equity affiliates 171 (22 )
   Provision for uncollectible accounts 1,216 1,036
   Deferred income tax expense 3,254 3,011
   Net loss (gain) from sale of investments, net of impairments (114 ) (88 )
   Actuarial loss (gain) on pension and postretirement benefits (259 ) -
Changes in operating assets and liabilities:
   Accounts receivable (652 ) (1,108 )
   Other current assets (106 ) 1,805
   Accounts payable and other accrued liabilities (1,437 ) (1,173 )
   Equipment installment receivables and related sales 1,116 207
   Deferred fulfillment costs (1,102 ) (1,883 )
Retirement benefit funding (420 ) (770 )
Other - net
(1,420 ) (2,349 )
Total adjustments 18,563 18,384
Net Cash Provided by Operating Activities 29,274 29,202

Investing Activities
Capital expenditures:
   Purchase of property and equipment (15,756 ) (15,283 )
   Interest during construction (718 ) (669 )
Acquisitions, net of cash acquired 1,154 (2,922 )
Dispositions 56 184
(Purchases) sales of securities, net (2 ) 501
Net Cash Used in Investing Activities (15,266 ) (18,189 )

Financing Activities
Issuance of long-term debt 46,761 10,140
Repayment of long-term debt (10,309 ) (10,688 )
Purchase of treasury stock (460 ) (444 )
Issuance of treasury stock 26 137
Dividends paid (9,030 ) (8,850 )
Other 1,715 (534 )
Net Cash Provided by (Used in) Financing Activities 28,703 (10,239 )
Net increase in cash and cash equivalents 42,711 774
Cash and cash equivalents beginning of year 5,788 5,121
Cash and Cash Equivalents End of Period $ 48,499 $ 5,895
Cash paid during the nine months ended September 30 for:
   Interest $ 5,031 $ 4,430
   Income taxes, net of refunds $ 1,861 $ 3,166
See Notes to Consolidated Financial Statements.
5
AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
September 30, 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 (81 )
Balance at end of period $ 89,527

Retained Earnings
Balance at beginning of year $ 34,734
Net income attributable to AT&T ($1.69 per diluted share) 10,413
Dividends to stockholders ($1.47 per share) (9,075 )
Other 2
Balance at end of period $ 36,074

Treasury Stock
Balance at beginning of year (356 ) $ (12,659 )
Repurchase and acquisition of common stock (14 ) (530 )
Issuance of treasury stock 14 473
Balance at end of period (356 ) $ (12,716 )

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 619
Balance at end of period $ 5,580

Noncontrolling Interest
Balance at beginning of year $ 975
Net income attributable to noncontrolling interest 298
Distributions (270 )
Acquisition of noncontrolling interest 140
Translation adjustments attributable to noncontrolling interest, net of taxes 6
Balance at end of period $ 1,149

Total Stockholders' Equity at beginning of year $ 124,110
Total Stockholders' Equity at end of period $ 126,109
See Notes to Consolidated Financial Statements.
6

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,
	2018			2017			2018			2017
				As Adjusted						As Adjusted
Operating Revenues
Service	$	33,773		$	36,538		$	67,419		$	72,994
Equipment		4,080			3,299			8,472			6,208
Media		1,133			-			1,133			-
Total operating revenues		38,986			39,837			77,024			79,202

Operating Expenses
Cost of revenues
Equipment		4,377			4,138			9,225			7,986
Broadcast, programming and operations		5,449			4,898			10,615			9,872
Other cost of revenues (exclusive of depreciation and amortization shown separately below)		7,632			9,569			15,564			18,857
Selling, general and administrative		8,684			8,559			16,581			17,331
Depreciation and amortization		6,378			6,147			12,372			12,274
Total operating expenses		32,520			33,311			64,357			66,320
Operating Income		6,466			6,526			12,667			12,882
Other Income (Expense)
Interest expense		(2,023	)		(1,395	)		(3,794	)		(2,688	)
Equity in net income (loss) of affiliates		(16	)		14			(7	)		(159	)
Other income (expense) – net		2,353			925			4,055			1,413
Total other income (expense)		314			(456	)		254			(1,434	)
Income Before Income Taxes		6,780			6,070			12,921			11,448
Income tax expense		1,532			2,056			2,914			3,860
Net Income		5,248			4,014			10,007			7,588
Less: Net Income Attributable to Noncontrolling Interest		(116	)		(99	)		(213	)		(204	)
Net Income Attributable to AT&T	$	5,132		$	3,915		$	9,794		$	7,384

Basic Earnings Per Share Attributable to AT&T	$	0.81		$	0.63		$	1.56		$	1.19
Diluted Earnings Per Share Attributable to AT&T	$	0.81		$	0.63		$	1.56		$	1.19
Weighted Average Number of Common Shares Outstanding – Basic (in millions)		6,351			6,165			6,257			6,166
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)		6,374			6,184			6,277			6,185
Dividends Declared Per Common Share	$	0.50		$	0.49		$	1.00		$	0.98

See Notes to Consolidated Financial Statements.

~~SEPTEMBER~~

AT&T INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in millions

(Unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017
Net income	$	5,248		$	4,014		$	10,007		$	7,588
Other comprehensive income (loss), net of tax:
Foreign currency:
Translation adjustment (includes $(32), $(10), $(30) and $(4) attributable to noncontrolling interest), net of taxes of $(318), $115, $(143) and $506		(918	)		(33	)		(810	)		339
Available-for-sale securities:
Net unrealized gains (losses), net of taxes of $0, $29, $(4) and $44		-			50			(12	)		83
Reclassification adjustment included in net income, net of taxes of $0, $(7), $0 and $(4)		-			(12	)		-			(7	)
Cash flow hedges:
Net unrealized gains (losses), net of taxes of $(112), $(279), $68 and $(272)		(421	)		(517	)		253			(504	)
Reclassification adjustment included in net income, net of taxes of $3, $5, $6 and $10		11			9			23			19
Defined benefit postretirement plans:
Net prior service (cost) credit arising during period, net of taxes of $(12), $594, $173 and $594		(37	)		969			530			969
Amortization of net prior service credit included in net income, net of taxes of $(109), $(151), $(214) and $(290)		(334	)		(247	)		(657	)		(475	)
Other comprehensive income (loss)		(1,699	)		219			(673	)		424
Total comprehensive income		3,549			4,233			9,334			8,012
Less: Total comprehensive income attributable to noncontrolling interest		(84	)		(89	)		(183	)		(200	)
Total Comprehensive Income Attributable to AT&T	$	3,465		$	4,144		$	9,151		$	7,812

See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts


	June 30,			December 31,
	2018			2017
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	13,523		$	50,498
Accounts receivable - net of allowances for doubtful accounts of $804 and $663		25,492			16,522
Prepaid expenses		1,966			1,369
Other current assets		14,305			10,757
Total current assets		55,286			79,146
Noncurrent Inventories and Theatrical Film and Television Production Costs		5,849			-
Property, plant and equipment		324,889			313,499
Less: accumulated depreciation and amortization		(195,333	)		(188,277	)
Property, Plant and Equipment – Net		129,556			125,222
Goodwill		142,607			105,449
Licenses		96,802			96,136
Trademarks and Trade Names – Net		24,440			7,021
Distribution Networks – Net		17,403			-
Other Intangible Assets – Net		30,800			11,119
Investments in and Advances to Equity Affiliates		8,007			1,560
Other Assets		23,941			18,444
Total Assets	$	534,691		$	444,097


Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	21,672		$	38,374
Accounts payable and accrued liabilities		35,488			34,470
Advanced billing and customer deposits		5,914			4,213
Accrued taxes		1,889			1,262
Dividends payable		3,630			3,070
Total current liabilities		68,593			81,389
Long-Term Debt		168,495			125,972
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		59,665			43,207
Postemployment benefit obligation		28,791			31,775
Other noncurrent liabilities		25,017			19,747
Total deferred credits and other noncurrent liabilities		113,473			94,729

Stockholders’ Equity

Common stock ($1 par value, 14,000,000,000 authorized at June 30, 2018 and December 31, 2017: issued 7,620,748,598 at June 30, 2018 and 6,495,231,088 at December 31, 2017)		7,621			6,495
Additionalpaid-in capital		125,960			89,563
Retained earnings		56,555			50,500
Treasury stock (360,993,619 at June 30, 2018 and 355,806,544 at December 31, 2017, at cost)		(12,872	)		(12,714	)
Accumulated other comprehensive income		5,716			7,017
Noncontrolling interest		1,150			1,146
Total stockholders’ equity		184,130			142,007
Total Liabilities and Stockholders’ Equity	$	534,691		$	444,097

See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)


	Six months ended June 30,
	2018			2017
					As Adjusted
Operating Activities
Net income	$	10,007		$	7,588
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,372			12,274
Amortization of television and film costs		168			-
Undistributed earnings from investments in equity affiliates		235			167
Provision for uncollectible accounts		808			795
Deferred income tax expense		2,032			964
Net (gain) loss from investments, net of impairments		(29	)		12
Actuarial (gain) loss on pension and postretirement benefits		(2,726	)		(259	)
Changes in operating assets and liabilities:
Accounts receivable		233			119
Other current assets, inventories and theatrical film and television production costs		1,039			470
Accounts payable and other accrued liabilities		(3,890	)		(2,761	)
Equipment installment receivables and related sales		490			525
Deferred customer contract acquisition and fulfillment costs		(1,725	)		(796	)
Retirement benefit funding		(280	)		(280	)
Other – net		442			(1,148	)
Total adjustments		9,169			10,082
Net Cash Provided by Operating Activities		19,176			17,670

Investing Activities
Capital expenditures:
Purchase of property and equipment		(10,959	)		(10,750	)
Interest during construction		(267	)		(473	)
Acquisitions, net of cash acquired		(40,715	)		1,224
Dispositions		59			51
(Purchases) sales of securities, net		(218	)		169
Advances to and investments in equity affiliates, net		(1,035	)		-
Cash collections of deferred purchase price		500			382
Net Cash Used in Investing Activities		(52,635	)		(9,397	)

Financing Activities
Net change in short-term borrowings with original maturities of three months or less		2,227			(2	)
Issuance of other short-term borrowings		4,839			-
Issuance of long-term debt		26,478			24,115
Repayment of long-term debt		(29,447	)		(6,118	)
Purchase of treasury stock		(564	)		(458	)
Issuance of treasury stock		12			24
Dividends paid		(6,144	)		(6,021	)
Other		(1,121	)		77
Net Cash (Used in) Provided by Financing Activities		(3,720	)		11,617
Net (decrease) increase in cash and cash equivalents and restricted cash		(37,179	)		19,890
Cash and cash equivalents and restricted cash beginning of year		50,932			5,935
Cash and Cash Equivalents and Restricted Cash End of Period	$	13,753		$	25,825

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, 2018
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Issuance of stock		1,126			1,126
Balance at end of period		7,621		$	7,621


AdditionalPaid-In Capital
Balance at beginning of year				$	89,563
Issuance of common stock					35,473
Issuance of treasury stock					(4	)
Share-based payments					928
Balance at end of period				$	125,960


Retained Earnings
Balance at beginning of year				$	50,500
Net income attributable to AT&T ($1.56 per diluted share)					9,794
Dividends to stockholders ($1.00 per share)					(6,739	)
Cumulative effect of accounting changes					3,000
Balance at end of period				$	56,555


Treasury Stock
Balance at beginning of year		(356	)	$	(12,714	)
Repurchase and acquisition of common stock		(18	)		(607	)
Issuance of treasury stock		13			449
Balance at end of period		(361	)	$	(12,872	)


Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year				$	7,017
Other comprehensive income attributable to AT&T					(643	)
Amounts reclassified to retained earnings					(658	)
Balance at end of period				$	5,716


Noncontrolling Interest
Balance at beginning of year				$	1,146
Net income attributable to noncontrolling interest					213
Contributions					8
Distributions					(223	)
Acquisition of noncontrolling interest					1
Translation adjustments attributable to noncontrolling interest, net of taxes					(30	)
Cumulative effect of accounting changes					35
Balance at end of period				$	1,150


Total Stockholders’ Equity at beginning of year				$	142,007

Total Stockholders’ Equity at end of period				$	184,130

See Notes to Consolidated Financial Statements.

AT&T INC.

JUNE 30, ~~2017~~

2018

For ease of reading, AT&T Inc. is referred to as ~~"we," "AT&T"~~“we,” “AT&T” or the ~~"Company"~~“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 worldwide in the ~~communications~~telecommunications, media and ~~digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally.~~technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form10-K for the year ended December 31, ~~2016.~~2017. The results for the interim periods are not necessarily indicative of those for the full year.

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of PresentationThese 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 consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, ~~over which we exercise control.~~

including the operating results of recently acquired Time Warner Inc. (referred to as “Time Warner” or “WarnerMedia”) as of June 15, 2018 (see Note 8).

All significant intercompany transactions are eliminated in the consolidation process. Investments in ~~unconsolidated~~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'~~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 amounts have been conformed to the current period’s presentation, including impacts for the adoption of recent accounting standards and the realignment of certain business units within our reportable segments (see Note 4).

Tax ReformThe Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35% to 21% and required companies to pay aone-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Recognizing the late enactment of the Act and complexity of accurately accounting for its impact, the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin (SAB) 118 provided guidance that allows registrants to provide a reasonable estimate of the impact to their financial statements and adjust the reported impact in a measurement period not to exceed one year. We included the estimated impact of the Act in our financial results at or for the period ended December 31, 2017 and did not record any adjustments thereto during the first six months of 2018. Our future results could include additional adjustments, and those adjustments could be material.

Customer Fulfillment Costs During the second quarter of 2018, we updated our analysis of economic lives of customer relationships. As of April 1, 2018, we extended the amortization period to 58 months to better reflect the estimated economic lives of our entertainment group customers. This change in accounting estimate decreased other cost of revenues and impacted net income $126, or $0.02 per diluted share, in the second quarter of 2018.

Recently Adopted Accounting Standards

~~Income Taxes~~

Revenue Recognition As of January 1, ~~2017,~~2018, we adopted Accounting Standards Update (ASU) No. 2016-16, "Income Taxes (Topic 740)" (ASU 2016-16), with modified retrospective application, resulting in our recognition of an immaterial adjustment to retained earnings. Under ASU 2016-16, we recognize the income tax effects of intercompany sales or transfers of 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 sale or transfer to a third party or recognition of depreciation or impairment.

~~New Accounting Standards~~

~~Pension and Other Postretirement Benefits~~ ~~In March 2017, the~~ Financial Accounting Standards Board (FASB) ~~issued~~Accounting Standards Update (ASU)No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606), using the modified retrospective method, which does not allow us to adjust prior periods. We applied the rules to all open contracts existing as of January 1, 2018, recording an increase of $2,342 to retained earnings for the cumulative effect of the change, with an offsetting contract asset of $1,737, deferred contract acquisition costs of $1,454, other asset reductions of $239, other liability reductions of $212, deferred income taxes of $787 and noncontrolling interest of $35. (See Note 5)

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Pension and Other Postretirement Benefits As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2017-07, ~~"Compensation~~ “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit ~~Cost"~~Cost” (ASU2017-07)~~, which changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue~~. We are no longer allowed to present ~~service costs within our operating expenses but present~~interest, estimated return on assets and amortization of prior service credits ~~and other~~ components of our net periodic benefit cost in ~~"other~~our consolidated operating expenses, but rather are required to include those amounts in “other income (expense) – ~~net"~~net” in our consolidated statements of income. We continue to present service costs with the associated compensation costs within our operating expenses. As a practical expedient, we used the amounts disclosed as the estimated basis for applying the retrospective presentation requirement.

The following table presents our results under our historical method and as adjusted to reflect ASU2017-07 (presentation ofbenefit cost):


		*Pension and Postretirement Benefits*
		Historical Accounting Method			Effect of Adoption of ASU 2017-07				As Adjusted
For the three months ended June 30, 2018
Consolidated Statements of Income
Other cost of revenues	$		7,068	$		564		$		7,632
Selling, general and administrative expenses			6,896			1,788				8,684
Operating Income			8,818			(2,352	)			6,466
Other Income (Expense) – net			1			2,352				2,353
Net Income			5,248			-				5,248


For the three months ended June 30, 2017
Consolidated Statements of Income
Other cost of revenues	$		9,218	$		351		$		9,569
Selling, general and administrative expenses			8,113			446				8,559
Operating Income			7,323			(797	)			6,526
Other Income (Expense) – net			128			797				925
Net Income			4,014			-				4,014


For the six months ended June 30, 2018
Consolidated Statements of Income
Other cost of revenues	$		14,639	$		925		$		15,564
Selling, general and administrative expenses			13,652			2,929				16,581
Operating Income			16,521			(3,854	)			12,667
Other Income (Expense) – net			201			3,854				4,055
Net Income			10,007			-				10,007


For the six months ended June 30, 2017
Consolidated Statements of Income
Other cost of revenues	$		18,283	$		574		$		18,857
Selling, general and administrative expenses			16,600			731				17,331
Operating Income			14,187			(1,305	)			12,882
Other Income (Expense) – net			108			1,305				1,413
Net Income			7,588			-				7,588

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Cash Flows As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU2016-15). Under ASU2016-15, we continue to recognize cash receipts on owned equipment installment receivables as cash flows from operations. However, cash receipts on the deferred purchase price described in Note 9 are now required to be classified as cash flows from investing activities instead of cash flows from operating activities.

As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” (ASU2016-18). The primary impact of ASU2016-18 was to require us to include restricted cash in our reconciliation of beginning and ending cash and cash equivalents (restricted and unrestricted) on the face of the statements of cash flows. (See Note 11)

The following table presents our results under our historical method and as adjusted to reflect ASU2016-15 (cash receipts on deferred purchase price) and ASU2016-18 (restricted cash):


		*Cash Flows*
		Historical Accounting Method			Effect of Adoption of ASU 2016-15			Effect of Adoption of ASU 2016-18				As Adjusted
For the six months ended June 30, 2018
Consolidated Statements of Cash Flows
Equipment installment receivables and related sales	$		990		$	(500	)	$	-		$		490
Other – net			431			-			11				442
Cash Provided by (Used in) Operating Activities			19,665			(500	)		11				19,176
(Purchases) sales of securities – net			4			-			(222	)			(218	)
Cash collections of deferred purchase price			-			500			-				500
Cash (Used in) Provided by Investing Activities			(52,913	)		500			(222	)			(52,635	)
Change in cash and cash equivalents and restricted cash	$		(36,968	)	$	-		$	(211	)	$		(37,179	)


For the six months ended June 30, 2017
Consolidated Statements of Cash Flows
Changes in other current assets	$		471		$	-		$	(1	)	$		470
Equipment installment receivables and related sales			907			(382	)		-				525
Other – net			(1,041	)		-			(107	)			(1,148	)
Cash Provided by (Used in) Operating Activities			18,160			(382	)		(108	)			17,670
(Purchases) sales of securities – net			-			-			169				169
Cash collections of deferred purchase price			-			382			-				382
Cash (Used in) Provided by Investing Activities			(9,948	)		382			169				(9,397	)
Change in cash and cash equivalents and restricted cash	$		19,829		$	-		$	61		$		19,890

Financial Instruments As of January 1, 2018, we adopted ASUNo. 2016-01, “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU2016-01), which requires us to prospectively record changes in the fair value of our equity investments, except for those accounted for under the equity method, in net income instead of in accumulated other comprehensive income. As of January 1, 2018, we recorded an increase of $658 in retained earnings for the cumulative effect of the adoption of ASU2016-01, with an offset to accumulated other comprehensive income (accumulated OCI).

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

New Accounting Standards and Accounting Standards Not Yet Adopted

Leases In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842),” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASC 842 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding“right-of-use” assets. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. Through the same amendment, the FASB will allow lessors the option to make a policy election to treat lease and nonlease components as a single lease component under certain conditions. ASC 842 is effective for annual reporting periods beginning after December 15, ~~2017. See Note 5 for~~2018, subject to early adoption.

Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition of lease expense appears similar to our ~~components of net periodic benefit cost.~~

~~Revenue Recognition~~ ~~In May 2014,~~current methodology. We are continuing to evaluate the ~~FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASC 606),~~magnitude and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we planother potential impacts to adopt the standard using the "modified retrospective method." Under that method, we will apply the rules to all open 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 accounting standards.

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars in millions except per share amounts~~

our financial statements.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, is shown in the table below:


		Three months ended June 30,								Six months ended June 30,
		2018				2017				2018				2017
Numerators
Numerator for basic earnings per share:
Net Income	$		5,248		$		4,014		$		10,007		$		7,588
Less: Net income attributable to noncontrolling interest			(116	)			(99	)			(213	)			(204	)
Net Income attributable to AT&T			5,132				3,915				9,794				7,384
Dilutive potential common shares:
Share-based payment			4				2				9				6
Numerator for diluted earnings per share	$		5,136		$		3,917		$		9,803		$		7,390

Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding			6,351				6,165				6,257				6,166
Dilutive potential common shares:
Share-based payment (in shares)			23				19				20				19
Denominator for diluted earnings per share			6,374				6,184				6,277				6,185

Basic earnings per share attributable to AT&T	$		0.81		$		0.63		$		1.56		$		1.19
Diluted earnings per share attributable to AT&T	$		0.81		$		0.63		$		1.56		$		1.19

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Numerators
Numerator for basic earnings per share:
   Net Income $ 3,123 $ 3,418 $ 10,711 $ 10,818
   Less: Net income attributable to noncontrolling interest (94 ) (90 ) (298 ) (279 )
   Net Income attributable to AT&T 3,029 3,328 10,413 10,539
   Dilutive potential common shares:
      Share-based payment 3 3 9 9
Numerator for diluted earnings per share $ 3,032 $ 3,331 $ 10,422 $ 10,548
Denominators (000,000)
Denominator for basic earnings per share:
   Weighted average number of common shares outstanding 6,162 6,168 6,164 6,171
   Dilutive potential common shares:
      Share-based payment (in shares) 20 21 20 20
Denominator for diluted earnings per share 6,182 6,189 6,184 6,191
Basic earnings per share attributable to AT&T $ 0.49 $ 0.54 $ 1.69 $ 1.70
Diluted earnings per share attributable to AT&T $ 0.49 $ 0.54 $ 1.69 $ 1.70

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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)~~OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.



	Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) onAvailable- for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2017	$	(2,054)		$	660		$	1,402		$	7,009		$	7,017
Other comprehensive income (loss) before reclassifications		(780)			(12	)		253			530			(9	)
Amounts reclassified from accumulated OCI		-¹			-	¹		23	²		(657	)³		(634	)
Net other comprehensive income (loss)		(780)			(12	)		276			(127	)		(643	)
Amounts reclassified to retained earnings		-			(658	)⁴		-			-			(658	)
Balance as of June 30, 2018	$	(2,834)		$	(10	)	$	1,678		$	6,882		$	5,716



	Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) onAvailable- 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		343			83			(504	)		969			891
Amounts reclassified from accumulated OCI		-	¹		(7	)¹		19	²		(475	)³		(463	)
Net other comprehensive income (loss)		343			76			(485	)		494			428
Balance as of June 30, 2017	$	(1,652	)	$	617		$	259		$	6,165		$	5,389

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 7).

³	The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the consolidated statements of income (see Note 6).

⁴	With the adoption of ASU2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings (see Note 1).

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
484 128 (174) 969 1,407
Amounts reclassified
   from accumulated OCI
-
¹

(86)
¹

29
²

(731)
³

(788)
Net other comprehensive
   income (loss)
484 42 (145) 238 619
Balance as of September 30, 2017 $ (1,511) $ 583 $ 599 $ 5,909 $ 5,580

Foreign Currency Translation Adjustment Net Unrealized Gains (Losses) on Available-for-Sale Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income
Balance as of December 31, 2015 $ (1,198) $ 484 $ 16 $ 6,032 $ 5,334
Other comprehensive income
   (loss) before reclassifications
(72) 25 183 - 136
Amounts reclassified
   from accumulated OCI
-
¹

(5)
¹

29
²

(644)
³

(620)
Net other comprehensive
   income (loss)
(72) 20 212 (644) (484)
Balance as of September 30, 2016 $ (1,270) $ 504 $ 228 $ 5,388 $ 4,850
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).
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, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our 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 segment. We have ~~four~~five reportable segments: (1) Consumer Mobility, (2) Business Solutions, ~~(2)~~(3) Entertainment Group, ~~(3) Consumer Mobility~~(4) International, and ~~(4) International.~~

(5) WarnerMedia.

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. 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

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars in millions except per share amounts~~

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.

To most effectively implement our strategies for 2018, effective January 1, 2018, we retrospectively realigned certain responsibilities and operations within our reportable segments. The most significant of these changes is to report individual wireless accounts with employer discounts in our Consumer Mobility segment, instead of our Business Solutions segment. As a result of these realignments, $19,686 of goodwill from the Business Solutions segment was reallocated to the Consumer Mobility segment. Our reported segment results include the impact for the adoption of recent accounting standards, which affects the comparability between 2018 and 2017 (see Note 5).

With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset (see Note 8). For consolidated reporting, all amortization ofpre-acquisition released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historic content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historic content production cost amortization reported in the segment results was $189 for the16-day period ended June 30, 2018, $98 of which was forpre-acquisition released programming.

TheConsumer Mobility segmentprovides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We provide voice and data services, including high-speed internet over wireless devices.

TheBusiness Solutionssegment provides services to business customers, including multinational ~~companies;~~companies and governmental and wholesale ~~customers; and individual subscribers who purchase wireless services through employer-sponsored plans.~~customers. We provide advancedIP-based services including Virtual Private Networks (VPN); Ethernet-related ~~products~~products; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as ~~fixed~~ strategic services; as well as traditional data and voice products. We ~~utilize our wireless and wired networks to~~ provide a complete communications solution to our business customers.

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

The~~Consumer Mobility segment~~ provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our network to provide voice and data services, including high-speed internet, video and home monitoring 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 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.~~rates (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).

TheWarnerMediasegment provides global media and entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of Turner, HBO and Warner Bros. businesses.

~~In reconciling~~

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Corporate and Other items reconcile our segment results 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 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~~

Corporate, which consists of: (1) operations that are no longer integral to our operations or which we no longer actively market, (2) corporate support functions and operations, (3) impacts of ~~(1)~~corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net and (5) the recharacterization of programming cost amortization, which we continue to report with WarnerMedia segment operating expense, to consolidated amortization expense.

•

Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, ~~and (2) the noncash~~including amortization of intangible ~~assets acquired in acquisitions.~~assets.

·•

Certain significant items which 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)~~(2) losses resulting from abandonment or impairment of assets and ~~(4)~~(3) other items for which the segments are not being evaluated.

•

Eliminations, which remove transactions involving dealings between AT&T companies, including content licensing with WarnerMedia.

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 our satellite fleet.~~

Our domestic ~~communications~~ business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the three months ended June 30, 2018
		Revenues				Operations and Support Expenses				EBITDA				Depreciation and Amortization			Operating Income (Loss)				Equity in Net Income (Loss) of Affiliates				Segment Contribution
Consumer Mobility	$		14,869		$		8,085		$		6,784		$		1,806	$		4,978		$		-		$		4,978
Business Solutions			9,063				5,616				3,447				1,487			1,960				1				1,961
Entertainment Group			11,650				8,852				2,798				1,346			1,452				(20	)			1,432
International			1,951				1,803				148				313			(165	)			15				(150	)
WarnerMedia			1,275				794				481				30			451				(6	)			445
Segment Total			38,808				25,150				13,658				4,982			8,676		$		(10	)	$		8,666
Corporate and Other
Corporate			319				660				(341	)			118			(459	)
Acquisition-related items			-				321				(321	)			1,278			(1,599	)
Certain significant items			-				152				(152	)			-			(152	)
Eliminations			(141	)			(141	)			-				-			-
AT&T Inc.	$		38,986		$		26,142		$		12,844		$		6,378	$		6,466


For the six months ended June 30, 2018
		Revenues				Operations and Support Expenses				EBITDA				Depreciation and Amortization			Operating Income (Loss)				Equity in Net Income (Loss) of Affiliates				Segment Contribution
Consumer Mobility	$		29,855		$		16,609		$		13,246		$		3,613	$		9,633		$		-		$		9,633
Business Solutions			18,179				11,210				6,969				2,945			4,024				-				4,024
Entertainment Group			23,227				17,791				5,436				2,658			2,778				(11	)			2,767
International			3,976				3,607				369				645			(276	)			15				(261	)
WarnerMedia			1,275				794				481				30			451				(6	)			445
Segment Total			76,512				50,011				26,501				9,891			16,610		$		(2	)	$		16,608
Corporate and Other
Corporate			653				1,395				(742	)			141			(883	)
Acquisition-related items			-				388				(388	)			2,340			(2,728	)
Certain significant items			-				332				(332	)			-			(332	)
Eliminations			(141	)			(141	)			-				-			-
AT&T Inc.	$		77,024		$		51,985		$		25,039		$		12,372	$		12,667

For the three months ended September 30, 2017
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 17,061 $ 10,233 $ 6,828 $ 2,325 $ 4,503 $ - $ 4,503
Entertainment Group 12,648 9,953 2,695 1,379 1,316 (6 ) 1,310
Consumer Mobility 7,748 4,551 3,197 877 2,320 - 2,320
International 2,099 1,937 162 304 (142 ) 17 (125 )
Segment Total 39,556 26,674 12,882 4,885 7,997 $ 11 $ 8,008
Corporate and Other 201 89 112 21 91
Acquisition-related items - 134 (134 ) 1,136 (1,270 )
Certain significant items (89 ) 326 (415 ) - (415 )
AT&T Inc. $ 39,668 $ 27,223 $ 12,445 $ 6,042 $ 6,403

For the nine months ended September 30, 2017
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 51,016 $ 30,722 $ 20,294 $ 6,972 $ 13,322 $ - $ 13,322
Entertainment Group 37,953 29,112 8,841 4,256 4,585 (23 ) 4,562
Consumer Mobility 23,279 13,599 9,680 2,621 7,059 - 7,059
International 6,054 5,468 586 905 (319 ) 62 (257 )
Segment Total 118,302 78,901 39,401 14,754 24,647 $ 39 $ 24,686
Corporate and Other 657 397 260 54 206
Acquisition-related items - 622 (622 ) 3,508 (4,130 )
Certain significant items (89 ) 44 (133 ) - (133 )
AT&T Inc. $ 118,870 $ 79,964 $ 38,906 $ 18,316 $ 20,590

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the three months ended June 30, 2017
		Revenues			Operations and Support Expenses				EBITDA				Depreciation and Amortization			Operating Income (Loss)				Equity in Net Income (Loss) of Affiliates				Segment Contribution
Consumer Mobility	$		15,091	$		8,636		$		6,455		$		1,716	$		4,739		$		-		$		4,739
Business Solutions			9,667			6,053				3,614				1,483			2,131				-				2,131
Entertainment Group			12,661			9,561				3,100				1,458			1,642				(12	)			1,630
International			2,026			1,772				254				311			(57	)			25				(32	)
Segment Total			39,445			26,022				13,423				4,968			8,455		$		13		$		8,468
Corporate and Other
Corporate			392			766				(374	)			9			(383	)
Acquisition-related items			-			281				(281	)			1,170			(1,451	)
Certain significant items			-			95				(95	)			-			(95	)
AT&T Inc.	$		39,837	$		27,164		$		12,673		$		6,147	$		6,526


For the six months ended June 30, 2017
		Revenues			Operations and Support Expenses				EBITDA				Depreciation and Amortization			Operating Income (Loss)				Equity in Net Income (Loss) of Affiliates				Segment Contribution

Consumer Mobility	$		29,897	$		17,196		$		12,701		$		3,432	$		9,269		$		-		$		9,269
Business Solutions			19,288			12,051				7,237				2,943			4,294				-				4,294
Entertainment Group			25,262			19,166				6,096				2,878			3,218				(18	)			3,200
International			3,955			3,531				424				601			(177	)			45				(132	)
Segment Total			78,402			51,944				26,458				9,854			16,604		$		27		$		16,631
Corporate and Other
Corporate			800			1,637				(837	)			48			(885	)
Acquisition-related items			-			488				(488	)			2,372			(2,860	)
Certain significant items			-			(23	)			23				-			23
AT&T Inc.	$		79,202	$		54,046		$		25,156		$		12,274	$		12,882

For the three months ended September 30, 2016
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 17,767 $ 10,925 $ 6,842 $ 2,539 $ 4,303 $ - $ 4,303
Entertainment Group 12,720 9,728 2,992 1,504 1,488 - 1,488
Consumer Mobility 8,267 4,751 3,516 944 2,572 - 2,572
International 1,879 1,640 239 293 (54 ) 1 (53 )
Segment Total 40,633 27,044 13,589 5,280 8,309 $ 1 $ 8,310
Corporate and Other 270 270 - 17 (17 )
Acquisition-related items - 290 (290 ) 1,282 (1,572 )
Certain significant items (13 ) 299 (312 ) - (312 )
AT&T Inc. $ 40,890 $ 27,903 $ 12,987 $ 6,579 $ 6,408

For the nine months ended September 30, 2016
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Business Solutions $ 52,955 $ 32,584 $ 20,371 $ 7,568 $ 12,803 $ - $ 12,803
Entertainment Group 38,089 28,875 9,214 4,481 4,733 1 4,734
Consumer Mobility 24,781 14,343 10,438 2,798 7,640 - 7,640
International 5,374 4,951 423 868 (445 ) 24 (421 )
Segment Total 121,199 80,753 40,446 15,715 24,731 $ 25 $ 24,756
Corporate and Other 759 940 (181 ) 54 (235 )
Acquisition-related items - 818 (818 ) 3,949 (4,767 )
Certain significant items (13 ) (383 ) 370 - 370
AT&T Inc. $ 121,945 $ 82,128 $ 39,817 $ 19,718 $ 20,099

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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.


		Three months ended							Six months ended
		June 30,							June 30,
		2018			2017				2018			2017
Consumer Mobility	$		4,978		$	4,739		$		9,633		$	9,269
Business Solutions			1,961			2,131				4,024			4,294
Entertainment Group			1,432			1,630				2,767			3,200
International			(150	)		(32	)			(261	)		(132	)
WarnerMedia			445			-				445			-
Segment Contribution			8,666			8,468				16,608			16,631
Reconciling Items:
Corporate and Other			(459	)		(383	)			(883	)		(885	)
Merger and integration items			(321	)		(281	)			(388	)		(488	)
Amortization of intangibles acquired			(1,278	)		(1,170	)			(2,340	)		(2,372	)
Employee separation charges			(133	)		(60	)			(184	)		(60	)
Gain on wireless spectrum transactions			-			63				-			181
Natural disaster items			-			-				(104	)		-
Foreign currency devaluation			(19	)		(98	)			(44	)		(98	)
Segment equity in net income of affiliates			10			(13	)			2			(27	)
AT&T Operating Income			6,466			6,526				12,667			12,882
Interest Expense			2,023			1,395				3,794			2,688
Equity in net income (loss) of affiliates			(16	)		14				(7	)		(159	)
Other income (expense) - Net			2,353			925				4,055			1,413
Income Before Income Taxes	$		6,780		$	6,070		$		12,921		$	11,448

NOTE 5. REVENUE RECOGNITION

As of January 1, 2018, we adopted FASB ASU2014-09, “Revenue from Contracts with Customers (Topic 606),” as modified (ASC 606). With our adoption of ASC 606, we made a policy election to record certain regulatory fees, primarily Universal Service Fund (USF) fees, on a net basis. See the Notes to the Consolidated Financial Statements of our 2017 Annual Report on Form10-K for additional information regarding our policies prior to adoption of ASC 606.

When implementing ASC 606, we utilized the practical expedient allowing us to reflect the aggregate effect of all contract modifications occurring before the beginning of the earliest period presented when allocating the transaction price to performance obligations.

Service and Equipment Revenues

Our products and services are offered to customers in service-only contracts and in contracts that bundle equipment used to access the services and/or with other service offerings. Service revenue is recognized when services are provided, based upon either usage (e.g., minutes of traffic/bytes of data processed) or period of time (e.g., monthly service fees). We record the sale of equipment when title has passed and the products are accepted by the customer. Some contracts have fixed terms and others are cancellable on a short-term basis (i.e.,month-to-month arrangements).

Revenues from transactions between us and our customers are recorded net of regulatory fees and taxes. Cash incentives given to customers are recorded as a reduction of revenue. Nonrefundable, upfront service activation and setup fees associated with service arrangements are deferred and recognized over the associated service contract period or customer life. We record the sale of equipment and services to customers as gross revenue when we are the principal in the arrangement and net of the associated costs incurred when we act as an agent in the arrangement.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Our contracts allow for customers to frequently modify their arrangement, without incurring penalties in many cases. When a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be treated as a new contract or if it should be considered a change of the existing contract. We generally do not have significant impacts from contract modifications.

Service-Only Contracts and Standalone Equipment Sales

Revenue is recognized as service is provided or when control has transferred. For devices sold through indirect channels (e.g., national dealers), revenue is recognized when the dealer accepts the device, not upon activation.

Arrangements with Multiple Performance Obligations

Revenue recognized from fixed term contracts that bundle services and/or equipment are allocated based on the standalone selling price of all required performance obligations of the contract (i.e., each item included in the bundle). Promotional discounts are attributed to each required component of the arrangement, resulting in recognition over the contract term. Standalone selling prices are determined by assessing prices paid for service-only contracts (e.g., arrangements where customers bring their own devices) and standalone device pricing.

We offer the majority of our customers the option to purchase certain wireless devices in installments over a specified period of time, and, in many cases, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. For customers that elect these equipment installment payment programs, at the point of sale, we recognize revenue for the entire amount of revenue allocated to the customer receivable net of fair value of thetrade-in right guarantee. The difference between the revenue recognized and the consideration received is recorded as a note receivable when the devices are not discounted and our right to consideration is unconditional. When installment sales include promotional discounts (e.g., “buy one get one free”), the difference between revenue recognized and consideration received is recorded as a contract asset to be amortized over the contract term.

Less commonly, we offer certain customers highly discounted devices when they enter into a minimum service agreement term. For these contracts, we recognize equipment revenue at the point of sale based on a standalone selling price allocation. The difference between the revenue recognized and the cash received is recorded as a contract asset that will amortize over the contract term.

For contracts that require the use of certain equipment in order to receive service (e.g., AT&TU-verse^® and DIRECTV linear video services), we allocate the total transaction price to service if the equipment does not meet the criteria to be a distinct performance obligation.

Media Revenues

Media revenues are primarily derived from content production and distribution (i.e., content revenue), providing programming to distributors that have contracted to receive and distribute this programming to their subscribers (i.e., subscription revenue) and the sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others (i.e., advertising revenue).

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Disaggregation of Revenue

The following tables set forth disaggregated reported revenue by category:


For the three months ended June 30, 2018
		Consumer Mobility			Business Solutions			Entertainment Group			International			WarnerMedia				Corporate and Other				Total

Wireless service	$		11,853	$		1,829	$		-	$		417	$		-		$		-		$		14,099
Video entertainment			-			-			8,331			1,254			-				-				9,585
Strategic services			-			3,039			-			-			-				-				3,039
High-speed internet			-			-			1,981			-			-				-				1,981
Legacy voice and data			-			2,723			785			-			-				-				3,508
Content			-			-			-			-			487				-				487
Subscription			-			-			-			-			591				-				591
Advertising			-			-			-			-			208				-				208
Other media revenues			-			-			-			-			51				(1	)			50
Other service			-			691			550			-			-				320				1,561
Wireless equipment			3,016			584			-			280			-				-				3,880
Other equipment			-			197			3			-			-				-				200
Eliminations			-			-			-			-			(62	)			(141	)			(203	)
Total Operating Revenues	$		14,869	$		9,063	$		11,650	$		1,951	$		1,275		$		178		$		38,986

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


For the six months ended June 30, 2018
		Consumer Mobility			Business Solutions			Entertainment Group			International			WarnerMedia				Corporate and Other				Total
Wireless service	$		23,465	$		3,620	$		-	$		821	$		-		$		-		$		27,906
Video entertainment			-			-			16,690			2,608			-				-				19,298
Strategic services			-			6,109			-			-			-				-				6,109
High-speed internet			-			-			3,859			-			-				-				3,859
Legacy voice and data			-			5,561			1,604			-			-				-				7,165
Content			-			-			-			-			487				-				487
Subscription			-			-			-			-			591				-				591
Advertising			-			-			-			-			208				-				208
Other media revenues			-			-			-			-			51				(1	)			50
Other service			-			1,360			1,069			-			-				653				3,082
Wireless equipment			6,390			1,162			-			547			-				-				8,099
Other equipment			-			367			5			-			-				1				373
Eliminations			-			-			-			-			(62	)			(141	)			(203	)
Total Operating Revenues	$		29,855	$		18,179	$		23,227	$		3,976	$		1,275		$		512		$		77,024

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

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Business Solutions $ 4,503 $ 4,303 $ 13,322 $ 12,803
Entertainment Group 1,310 1,488 4,562 4,734
Consumer Mobility 2,320 2,572 7,059 7,640
International (125 ) (53 ) (257 ) (421 )
Segment Contribution 8,008 8,310 24,686 24,756
Reconciling Items:
  Corporate and Other 91 (17 ) 206 (235 )
  Merger and integration charges (134 ) (290 ) (622 ) (818 )
  Amortization of intangibles acquired (1,136 ) (1,282 ) (3,508 ) (3,949 )
  Actuarial gain (loss) - - 259 -
  Employee separation costs (208 ) (260 ) (268 ) (314 )
  Gain (loss) on wireless spectrum transactions - (22 ) 181 714
  Natural disaster costs and revenue credits (207 ) (30 ) (207 ) (30 )
  Venezuela devaluation - - (98 ) -
  Segment equity in net (income) loss of affiliates (11 ) (1 ) (39 ) (25 )
AT&T Operating Income 6,403 6,408 20,590 20,099
Interest expense 1,686 1,224 4,374 3,689
Equity in net income (loss) of affiliates 11 16 (148 ) 57
Other income (expense) - net 246 (7 ) 354 154
Income Before Income Taxes $ 4,974 $ 5,193 $ 16,422 $ 16,621

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Deferred Customer Contract Acquisition and Fulfillment Costs

Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $2,764 and $11,017 as of June 30, 2018, respectively, of which $1,250 and $3,715 were included in Other current assets on our consolidated balance sheets. For the six months ended June 30, 2018, we amortized $595 and $1,889 of these costs, respectively.

Contract Assets and Liabilities

A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.

The following table presents contract assets and liabilities and revenue recorded at or for the period ended June 30, 2018:


	June 30,
	2018

Contract asset	$	1,906
Contract liability		6,853

Beginning of period contract liability recorded as customer contract revenue during the period		3,839

Our consolidated balance sheet at June 30, 2018 included approximately $1,257 for the current portion of our contract asset in “Other current assets” and $5,723 for the current portion of our contract liability in “Advanced billings and customer deposits.”

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Remaining Performance Obligations

Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not includenon-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $41,838, of which we expect to recognize approximately 80% over the next two years, with the balance recognized thereafter.

The aggregate amount of transaction price allocated to remaining performance obligations included $13,623 related to WarnerMedia operations, which relates to the licensing of theatrical and television content that will be made available to customers at some point in the future. It excludes advertising and subscription arrangements that have an expected contract duration of one year or less.

Comparative Results

Prior to 2018, revenue recognized from contracts that bundle services and equipment was limited to the lesser of the amount allocated based on the relative selling price of the equipment and service already delivered or the consideration received from the customer for the equipment and service already delivered. Our prior accounting also separately recognized regulatory fees as operating revenue when received and as an expense when incurred. Sales commissions were previously expensed as incurred.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table presents our reported results under ASC 606 and our pro forma results using the historical accounting method:


For the three months ended June 30, 2018	As Reported		Historical Accounting Method
Consolidated Statements of Income:
Service Revenues	$	33,773	$	35,163
Equipment Revenues		4,080		3,611
Media Revenues		1,133		1,135
Total Operating Revenues		38,986		39,909
Other cost of revenue		7,632		8,535
Selling, general and administrative expenses		8,684		9,267
Total Operating Expenses		32,520		34,006
Operating income		6,466		5,903
Income before income taxes		6,780		6,217
Income tax expense		1,532		1,394
Net income		5,248		4,823
Net income attributable to AT&T		5,132		4,713

Basic Earnings per Share Attributable to AT&T	$	0.81	$	0.74
Diluted Earnings per Share Attributable to AT&T	$	0.81	$	0.74

For the six months ended June 30, 2018
Consolidated Statements of Income:
Service Revenues	$	67,419	$	70,232
Equipment Revenues		8,472		7,472
Media Revenues		1,133		1,135
Total Operating Revenues		77,024		78,839
Other cost of revenue		15,564		17,396
Selling, general and administrative expenses		16,581		17,764
Total Operating Expenses		64,357		67,372
Operating income		12,667		11,467
Income before income taxes		12,921		11,721
Income tax expense		2,914		2,620
Net income		10,007		9,101
Net income attributable to AT&T		9,794		8,900

Basic Earnings per Share Attributable to AT&T	$	1.56	$	1.42
Diluted Earnings per Share Attributable to AT&T	$	1.56	$	1.42

At June 30, 2018
Consolidated Balance Sheets:
Other current assets		14,305		11,961
Other Assets		23,941		21,983
Accounts payable and accrued liabilities		35,488		35,667
Advanced billings and customer deposits		5,914		5,978
Deferred income taxes		59,665		58,585
Other noncurrent liabilities		25,017		24,832
Retained earnings		56,555		53,313
Accumulated other comprehensive income		5,716		5,723
Noncontrolling interest		1,150		1,103

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 5.6. PENSION AND POSTRETIREMENT BENEFITS

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, ~~(Mobility II),~~ the primary holding company for our domestic wireless business, to the ~~pension~~ trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of ~~$9,354~~$8,829 at ~~September~~June 30, ~~2017.~~2018. 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. ~~Mobility II~~We distributed ~~$420~~$280 to the trust during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. So long as ~~those~~we make the distributions, ~~are made,~~ 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~~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.

The preferred equity interest is not transferable by the trust except through its put and call features. In early September 2017, AT&T notified the trust and the fiduciary of the preferred equity interest that AT&T committed that it would not exercise its call option of the preferred interest until at least September 9, 2022, which resulted in an increase in the fair value of the preferred interest of approximately $1,245.

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars in millions except per share amounts~~

We recognize actuarial gains and losses on pension and postretirement plan assets in our ~~operating~~consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. During the ~~second~~first quarter of ~~2017,~~2018, a substantive plan change involving the frequency of ~~considering potential~~future health reimbursement account credit increases was communicated to our retirees. ~~This~~During the second quarter of 2018, a written plan change ~~triggered~~involving the ability of certain participants of the pension plan to receive their benefit in a ~~remeasurement of~~lump-sum amount upon retirement was communicated to our ~~postretirement obligations and~~employees. These plan changes resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by ~~$1,563.~~$752, and increasing our liability by $50 in the first and second quarters of 2018, respectively. Such credits amortize through earnings over a period approximating the average service period to full eligibility. ~~Upon~~These plan changes also triggered a remeasurement of our ~~adoption~~postretirement and pension benefit obligations, resulting in an actuarial gain of ~~ASU 2017-07,~~$930 in the ~~amortization~~first quarter and $1,796 in the second quarter of ~~these prior service credits will be recorded~~2018. As a result of the plan changes and remeasurements, our pension and postretirement benefit obligation decreased $1,746 and $1,682, respectively.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in ~~other income (expense) – net.~~

millions except per share amounts

The following table details pension and postretirement benefit costs included in ~~operating expenses in~~ the accompanying consolidated statements of income. ~~A portion~~The service cost component of ~~these~~net periodic pension cost (benefit) is recorded in operating expenses ~~is capitalized~~in the consolidated statements of income while the remaining components are recorded in other income (expense) – net. Service costs are eligible for capitalization 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 with Corporate and Other (see Note 4).~~

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Pension cost:
   Service cost – benefits earned during the period $ 282 $ 278 $ 846 $ 834
   Interest cost on projected benefit obligation 484 495 1,452 1,485
   Expected return on assets (783 ) (778 ) (2,350 ) (2,336 )
   Amortization of prior service credit (31 ) (26 ) (93 ) (77 )
   Net pension (credit) cost $ (48 ) $ (31 ) $ (145 ) $ (94 )

Postretirement cost:
   Service cost – benefits earned during the period $ 32 $ 48 $ 107 $ 144
   Interest cost on accumulated postretirement benefit obligation 193 243 617 729
   Expected return on assets (81 ) (88 ) (240 ) (266 )
   Amortization of prior service credit (382 ) (320 ) (1,084 ) (958 )
   Actuarial (gain) loss - - (259 ) -
   Net postretirement (credit) cost $ (238 ) $ (117 ) $ (859 ) $ (351 )

   Combined net pension and postretirement (credit) cost $ (286 ) $ (148 ) $ (1,004 ) $ (445 )


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Pension cost:
Service cost – benefits earned during the period	$	284	$	282	$	575	$	564
Interest cost on projected benefit obligation		504		484		991		968
Expected return on assets		(755)		(784)		(1,515)		(1,567)
Amortization of prior service credit		(29)		(31)		(59)		(62)
Actuarial (gain) loss		(1,796)		-		(1,796)		-
Net pension (credit) cost	$	(1,792)	$	(49)	$	(1,804)	$	(97)


Postretirement cost:
Service cost – benefits earned during the period	$	26	$	34	$	55	$	75
Interest cost on accumulated postretirement benefit obligation		195		202		386		424
Expected return on assets		(75)		(79)		(152)		(159)
Amortization of prior service credit		(413)		(366)		(810)		(702)
Actuarial (gain) loss		-		(259)		(930)		(259)
Net postretirement (credit) cost	$	(267)	$	(468)	$	(1,451)	$	(621)


Combined net pension and postretirement (credit) cost	$	(2,059)	$	(517)	$	(3,255)	$	(718)

As part of our first- and second-quarter ~~2017 remeasurement,~~2018 remeasurements, we ~~decreased~~modified the weighted-average discount rate used to measure our ~~postretirement~~ benefit ~~obligation~~obligations increasing the rate to 4.10%. for the postretirement obligation and to 4.30% for the pension obligation. The discount rate in effect for determining ~~postretirement~~ service and interest costs after remeasurement is ~~4.50%~~4.30% and ~~3.30%~~3.70%, ~~respectively.~~

respectively, for postretirement and 4.40% and 4.00% for pension. As a result of our plan changes and remeasurements, the total estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the second half of 2018 is $882 ($665 net of tax) for postretirement benefits.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the ~~third~~second quarter ended ~~2017~~2018 and ~~2016,~~2017, net supplemental pension benefits costs not included in the table above were ~~$22~~$21 and $23. For the first ~~nine~~six months of ~~2017~~2018 and ~~2016,~~2017, net supplemental pension benefit costs were ~~$67~~$42 and ~~$70.~~$45.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 6.7. 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.

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, ~~2016.~~

2017.

Long-Term Debt and Other Financial Instruments

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

September 30, 2017 December 31, 2016
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures ¹
$ 162,450 $ 171,025 $ 122,381 $ 128,726
Bank borrowings 2 2 4 4
Investment securities 2,565 2,565 2,587 2,587
¹ Includes credit agreement borrowings.


	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Notes and debentures¹	$	180,209	$	182,732	$	162,526	$	171,938
Commercial paper		8,139		8,139		-		-
Bank borrowings		15		15		2		2
Investment securities²		3,511		3,511		2,447		2,447

¹Includes credit agreement borrowings.

² Excludes investments accounted for under the equity method.

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.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Following is the fair value leveling for ~~available-for-sale~~investment securities that are measured at fair value and derivatives as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016:~~

September 30, 2017
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
   Domestic equities $ 1,274 $ - $ - $ 1,274
   International equities 380 - - 380
   Fixed income bonds - 659 - 659
Asset Derivatives ¹

   Interest rate swaps - 45 - 45
   Cross-currency swaps - 967 - 967
Liability Derivatives ¹

   Interest rate swaps - (34 ) - (34 )
   Cross-currency swaps - (1,809 ) - (1,809 )
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, 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 Derivatives ¹

   Interest rate swaps - 79 - 79
   Cross-currency swaps - 89 - 89
Liability Derivatives ¹

   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.

2017. Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets” on our consolidated balance sheets.


	June 30, 2018
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	1,252	$	-	$	-	$	1,252
International equities		304		-		-		304
Fixed income equities		149		-		-		149
Available-for-Sale Debt Securities		-		890		-		890
Asset Derivatives
Cross-currency swaps		-		1,216		-		1,216
Foreign exchange contracts		-		55		-		55
Liability Derivatives
Interest rate swaps		-		(89)		-		(89)
Cross-currency swaps		-		(1,506)		-		(1,506)


	December 31, 2017
	Level 1		Level 2		Level 3		Total
Equity Securities
Domestic equities	$	1,142	$	-	$	-	$	1,142
International equities		321		-		-		321
Fixed income equities		-		152		-		152
Available-for-Sale Debt Securities		-		581		-		581
Asset Derivatives
Interest rate swaps		-		17		-		17
Cross-currency swaps		-		1,753		-		1,753
Liability Derivatives
Interest rate swaps		-		(31)		-		(31)
Cross-currency swaps		-		(1,290)		-		(1,290)

Investment Securities

Our investment securities include ~~equities, fixed income bonds~~both equity and ~~other securities.~~debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our ~~available-for-sale~~investment securities ~~was~~are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt 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~~

Upon the adoption of ASU2016-01, we reclassified $658 of such unrealized gains and losses on equity securities to retained earnings and beginning in 2018, gains and losses, both realized and unrealized, on equity securities measured at fair value are included in ~~"Other~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income using the specific identification method. ~~Unrealized~~

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The components comprising total gains and losses ~~net of tax,~~ on ~~available-for-sale~~equity 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~~as follows:


	Three months ended					Six months ended
	June 30,					June 30,
	2018			2017		2018			2017
Total gains (losses) recognized on equity securities	$	21		$	14	$	8		$	103
Gains (Losses) recognized on equity securities sold		(3	)		-		49			11
Unrealized gains (losses) recognized on equity securities held at end of period		24			14		(41	)		92

Debt securities of ~~the investment. Fixed income investments of $509~~$34 have maturities of less than one year, ~~$33~~$136 within one to three years, ~~$32~~$117 within three to five years and ~~$85~~$603 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~~“Other current ~~assets"~~assets” and our investment securities are recorded in ~~"Other Assets"~~“Other Assets” on the consolidated balance sheets.

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars in millions except per share amounts~~

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 HedgingWe designate ourfixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016,~~2017, no ineffectiveness was measured on interest rate swaps designated as fair value ~~hedges~~.

hedges.

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 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~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016,~~2017, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to ~~"Other~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify ~~$59~~$60 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~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income. In the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016,~~2017, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At ~~September~~June 30, ~~2017,~~2018, we had posted

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars in millions except per share amounts~~

collateral of ~~$837~~$580 (a deposit asset) and held collateral of ~~$338~~$687 (a receipt liability). Under the agreements, if AT~~&T's~~&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in ~~September,~~June, we would have been required to post additional collateral of ~~$141.~~$138. If DIRECTV Holdings ~~LLC's~~LLC’s credit rating had been downgraded belowBBB- (S&P), we would have been required to post additional collateral of ~~$221.~~$199. At December 31, ~~2016,~~2017, we had posted collateral of ~~$3,242~~$495 (a deposit asset) and held ~~no collateral.~~collateral of $968 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

September 30, December 31,
2017 2016
Interest rate swaps $ 10,775 $ 9,650
Cross-currency swaps 38,694 29,642
Total $ 49,469 $ 39,292

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

Effect of Derivatives on the Consolidated Statements of Income
Three months ended Nine months ended
September 30, September 30,
Fair Value Hedging Relationships 2017 2016 2017 2016
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (3 ) $ (54 ) $ (51 ) $ 17
Gain (Loss) on long-term debt 3 54 51 (17 )


	June 30, 2018		December 31, 2017
Interest rate swaps	$	7,333	$	9,833
Cross-currency swaps		36,092		38,694
Foreign exchange contracts		2,399		-
Total	$	45,824	$	48,527

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


Effect of Derivatives on the Consolidated Statements of Income
	Three months ended				Six months ended
	June 30,				June 30,
Fair Value Hedging Relationships	2018		2017		2018		2017
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps	$	(9)	$	(23)	$	(62)	$	(48)
Gain (Loss) on long-term debt		9		23		62		48

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

Three months ended Nine months ended
September 30, September 30,
Cash Flow Hedging Relationships 2017 2016 2017 2016
Cross-currency swaps:
     Gain (Loss) recognized in accumulated OCI $ 429 $ 686 $ (268 ) $ 282
Interest rate locks:
     Gain (Loss) recognized in accumulated OCI 79 - - -
     Interest income (expense) reclassified from
        accumulated OCI into income
(15 ) (15 ) (44 ) (44 )

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


	Three months ended				Six months ended
	June 30,				June 30,
Cash Flow Hedging Relationships	2018		2017		2018		2017
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	(533)	$	(717)	$	321	$	(697)
Interest rate locks:
Gain (Loss) recognized in accumulated OCI		-		(79)		-		(79)
Interest income (expense) reclassified from accumulated OCI into income		(14)		(14)		(29)		(29)

NOTE 7.8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

~~Auction 1000~~ ~~On April 13, 2017, the Federal Communications Commission (FCC) announced that~~ we were the successful bidder for $910 of spectrum in 18 markets. We provided the FCC an initial deposit of $2,348 in July 2016 and received a refund of $1,438 in April 2017, which was recorded as cash from investing activities on our consolidated statements of cash flows.

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars in millions except per share amounts~~

~~Dispositions~~

~~YP Holdings LLC~~ ~~In June 2017, YP Holdings LLC was acquired by Dex Media. Our results include a gain of $36 for our portion of the proceeds.~~

~~Pending Acquisitions~~

Time Warner ~~Inc.~~ On ~~October 22, 2016,~~June 14, 2018, 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~~completed our acquisition of Time Warner, common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at September 30, 2017, the total transaction value is approximately $105,834. 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.

~~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~~Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the ~~world's~~world’s largestpay-TV subscriber bases and ~~leading~~ scale in TV, mobile and broadband distribution.

We expect that the transaction will advance our~~The Merger Agreement~~direct-to-consumer efforts and provide us with the ability to develop innovative new offerings.

Under the merger agreement, each share of Time Warner stock was ~~approved~~exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on ~~February 15, 2017. The transaction has been approved by all requisite foreign jurisdictions~~our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and ~~remains subject to review by~~$42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On July 12, 2018, the U.S. Department of ~~Justice.~~Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to vigorously defend our legal position in the appellate court.

Our second-quarter 2018 operating results include the results of Time Warner following the acquisition date. The ~~transaction is expected to close before year-end 2017. If the Merger is terminated as a result of reaching the termination date (and at that time one or more~~fair values of the ~~conditions relating~~assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to ~~certain regulatory approvals have not been satisfied)~~value the intangible assets, consisting primarily of distribution network, released TV and film content,in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow 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, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or ~~there is a final, non-appealable order preventing~~replacement cost for the ~~transaction relating~~property, less an allowance for loss in value due to ~~antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would be obligated to pay~~depreciation. Our June 30, 2018, consolidated balance sheet includes the assets and liabilities of Time Warner, $500. On October 20, 2017, to facilitate obtaining final regulatory approval required to close the merger, AT&T and Time Warner elected to extend the October 22, 2017 termination date of the agreement for a short period of time.

~~Other Events~~

~~FirstNet~~ On March 30, 2017, the First Responder Network Authority (FirstNet) announced its selection of AT&T to build and manage the first nationwide broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. We expect to spend about $40,000, in part recoverable from FirstNet, over the life of the 25-year contract to build, operate and maintain the network. AT&T will construct and operate the network and provide sustainability payments to FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to be in the $75-$100 range annually, and when adjusted for inflation, we expect to be in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territorieswhich have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.been measured at fair value.

States have until December 28, 2017 to elect to opt-out of the federally funded program, after which any state that did not formally make an election will automatically be opted-in. We do not expect FirstNet to materially impact our 2017 results.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts



Assets acquired
Cash	$	1,655
Accounts receivable		9,166
All other current assets		3,405
Noncurrent inventory and theatrical film and television production costs		5,778
Property, plant and equipment		4,699
Intangible assets subject to amortization
Distribution network		17,480
Released television and film content		11,322
Trademarks and trade names		18,100
Other		10,290
Investments and other assets		9,669
Goodwill		38,102

Total assets acquired		129,666


Liabilities assumed
Current liabilities, excluding current portion of long-term debt		8,513
Long-term debt		22,846
Other noncurrent liabilities		19,192

Total liabilities assumed		50,551

Net assets acquired		79,115

Noncontrolling interest		(1	)

Aggregate value of consideration paid	$	79,114

These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecordedpre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units any changes in goodwill should be recorded.

Excluded from the table above are commitments of approximately $35,000 for future purchases primarily related to network programming obligations, including contracts to license sports programming.

Due to the proximity of the closing of this acquisition to the end of the quarter, we were not able to provide the requisite combined pro forma financial information.

Held-for-Sale

In June 2018, we entered into an agreement to sell 31 of our data centers to Brookfield Infrastructure Partners (Brookfield) for $1,100. We expect the transaction to close within the next six to eight months, subject to customary closing conditions.

We appliedheld-for-sale treatment to the assets associated with the data centers to be sold, which primarily consist of net property, plant and equipment of approximately $279 and goodwill of $236. These assets are included in “Other current assets,” on our June 30, 2018 consolidated balance sheet.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 8.9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a specified period of ~~up to 30 months~~time and, in many cases, once certain conditions are met, they ~~have the right~~may be eligible to trade in the original equipment for a new device ~~within a set period~~ and have the remaining unpaid balance ~~satisfied.~~paid or settled. As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, gross equipment installment receivables of ~~$4,176~~$5,853 and ~~$5,665~~$6,079 were included on our consolidated balance sheets, of which ~~$2,485~~$3,781 and ~~$3,425~~$3,340 are notes receivable that are included in ~~"Accounts~~“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 transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. ~~Since inception,~~As of June 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were ~~$4,019.~~

$5,723.

The following table sets forth a summary of equipment installment receivables sold during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Gross receivables sold $ 1,619 $ 1,485 $ 6,217 $ 5,812
Net receivables sold ¹
1,478 1,336 5,698 5,263
Cash proceeds received 1,292 891 4,139 3,538
Deferred purchase price recorded 285 463 1,767 1,745
Guarantee obligation recorded 65 - 139 -
¹Receivables net of allowance, imputed interest and trade-in right guarantees.

2017:


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Gross receivables sold	$	1,906	$	1,752	$	4,916	$	4,598
Net receivables sold¹		1,811		1,599		4,606		4,220
Cash proceeds received		1,532		1,415		3,927		2,847
Deferred purchase price recorded		307		293		826		1,482
Guarantee obligation recorded		72		74		195		74

¹ Receivables net of allowance, imputed interest andtrade-in right guarantees.

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of devicetrade-ins. The estimated value of the devicetrade-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 for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6)7).

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price and cash during the three months and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016:~~

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Fair value of repurchased receivables $ 567 $ 749 $ 1,281 $ 1,281
Carrying value of deferred purchase price 507 722 1,147 1,261
Gain (loss) on repurchases ¹
$ 60 $ 27 $ 134 $ 20
¹These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.

2017:


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Fair value of repurchased receivables	$	1,481	$	337	$	1,481	$	714
Carrying value of deferred purchase price		1,393		301		1,393		640
Gain (loss) on repurchases¹	$	88	$	36	$	88	$	74

¹ These gains (losses) are included in “Selling, general and administrative” in the consolidated statements of income.

At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, our deferred purchase price receivable was ~~$3,170~~$1,686 and ~~$3,090,~~$2,749, respectively, of which ~~$2,023~~$813 and ~~$1,606~~$1,781 are included in ~~"Other~~“Other current ~~assets"~~assets” on our consolidated balance sheets, with the remainder in ~~"Other~~“Other Assets."” The guarantee obligation at June 30, 2018 and December 31, 2017 was $362 and $204, respectively, of which $111 and $55 are included in “Accounts payable and accrued liabilities” on our consolidated balance sheets, with the remainder in “Other noncurrent liabilities.” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

The sales of equipment installment receivables did not have a material impact on our consolidated statements of income or to ~~"Total Assets"~~“Total Assets” reported on our consolidated balance sheets. We reflect ~~the~~cash receipts on owned equipment installment receivables as cash flows ~~related to the arrangement as operating activities~~from operations in our consolidated statements of cash ~~flows because~~flows. With the retrospective adoption of ASU2016-15 in 2018 (see Note 1), cash ~~received from the Purchasers upon both the sale of the receivables and the collection of~~receipts on the deferred purchase price are now classified as cash flows from investing activities instead of cash flows from operating activities for all periods presented.

The outstanding portfolio of installment receivables derecognized from our consolidated balance sheets, but which we continue to service, was $7,564 and $7,446 at June 30, 2018 and December 31, 2017.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS

Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value and include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is ~~not subject to significant interest rate risk.~~

~~Derecognized Installment Receivables~~

determined using the film forecast computation method.

The following table ~~sets forth a summary~~summarizes inventories and theatrical film and television production costs as of ~~equipment installment receivables that were sold to Purchasers and are no longer considered our assets.~~June 30, 2018:


	June 30, 2018
Inventories:
Programming costs, less amortization¹	$	4,252
Other inventory, primarily DVD andBlu-ray Discs		154
Total inventories		4,406
Less: current portion of inventory		(2,313	)
Total noncurrent inventories		2,093


Theatrical film production costs:²
Released, less amortization		6
Completed and not released		49
In production		1,249
Development andpre-production		171

Television production costs:²
Released, less amortization		168
Completed and not released		534
In production		1,556
Development andpre-production		23
Total theatrical film and television production costs		3,756
Total noncurrent inventories and theatrical film and television production costs	$	5,849

¹	Includes the costs of certain programming rights, primarily sports, for which payments have been made prior to the related rights being received.

²	Does not include $11,150 of acquired film and television library intangible assets as of June 30, 2018, which are included in “Other Intangible Assets – Net” on our consolidated balance sheet.

2017
Outstanding derecognized receivables at January 1, $ 7,232
Gross receivables sold 6,217
Collections on cash purchase price (3,556 )
Collections on deferred purchase price (665 )
Trade ins and other (295 )
Fair value of repurchased receivables (1,281 )
Outstanding derecognized receivables at September 30, $ 7,652

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 11. ADDITIONAL FINANCIAL INFORMATION

Cash and Cash Flow

We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments. The following summarizes cash and cash equivalents and restricted cash balances contained on our consolidated balance sheets:


	June 30,				December 31,
Cash and Cash Equivalents and Restricted Cash	2018		2017		2017			2016

Cash and cash equivalents	$	13,523	$	25,617	$	50,498		$	5,788
Restricted cash in Other current assets		12		6		6			7
Restricted cash in Other Assets		218		202		428			140
Cash and cash equivalents and restricted cash	$	13,753	$	25,825	$	50,932		$	5,935


					Six months ended
					June 30,
Consolidated Statements of Cash Flows					2018			2017
Cash paid (received) during the period for:
Interest					$	4,045		$	3,095
Income taxes, net of refunds						(757	)		1,470

Debt Transactions

As of June 30, 2018, our total long-term debt obligations totaled $190,167. During the first six months we completed the following debt activity:

●

For the purpose of providing financing in connection with our Time Warner acquisition, we drew the following on our lines of credit: $16,175 with JPMorgan Chase Bank, N.A., $2,500 with BNP Paribas and $2,250 with Bank of Nova Scotia.

●

Issuance of approximately $1,500 three-year floating rate note and other borrowings totaling $2,100.

●

Borrowings of approximately $7,900 of debt under our commercial paper program.

●

Net borrowings of approximately $1,000 by subsidiaries in Latin America.

●

Redemptions totaling approximately $4,550 for AT&T notes that matured prior to June 30, 2018.

●

Redemption of $21,235 of AT&T notes issued in anticipation of the Time Warner acquisition that were subject to mandatory redemption.

●

With the acquisition of Time Warner, we acquired $22,846 of debt, of which we repaid $2,000 for amounts outstanding under term credit agreements, $600 of notes and $765 of commercial paper borrowings.

AT&T INC.

JUNE 30, 2018

Item 2. ~~Management's~~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 worldwide in the ~~communications~~telecommunications, media and ~~digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally.~~technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying ~~notes. A reference~~notes (“Notes”). We completed the acquisition of Time Warner Inc. (referred to ~~a "Note" in this section refers~~as “Time Warner” or “WarnerMedia”) on June 14, 2018, and have included WarnerMedia results for the16-day period ended June 30, 2018. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from WarnerMedia prior to the ~~accompanying Notes~~acquisition are excluded.

Consolidated ResultsIn the first quarter of 2018, we adopted new revenue accounting rules that significantly affect the comparability of our consolidated and segment operating results (see Note 5). As a supplement to ~~Consolidated Financial Statements.~~

~~Consolidated~~our discussion of operating results, comparable financial results presented under the historical method of accounting are available in “Supplemental Results Under Historical Accounting Method.” Our financial results in the ~~third~~second quarter and for the first ~~nine~~six months of ~~2017~~2018, including impacts from new revenue accounting rules, and ~~2016~~2017 are summarized as follows:

Third Quarter Nine-Month Period
Percent Percent
2017 2016 Change 2017 2016 Change
Operating Revenues
   Service $ 36,378 $ 37,272 (2.4 )% $ 109,372 $ 111,515 (1.9 )%
   Equipment 3,290 3,618 (9.1 ) 9,498 10,430 (8.9 )
Total Operating Revenues 39,668 40,890 (3.0 ) 118,870 121,945 (2.5 )

Operating expenses
   Cost of services and sales
      Equipment 4,191 4,455 (5.9 ) 12,177 13,090 (7.0 )
      Broadcast, programming and
        operations
5,284 4,909 7.6 15,156 14,239 6.4
      Other cost of services 9,431 9,526 (1.0 ) 27,714 28,436 (2.5 )
   Selling, general and administrative 8,317 9,013 (7.7 ) 24,917 26,363 (5.5 )
   Depreciation and amortization 6,042 6,579 (8.2 ) 18,316 19,718 (7.1 )
Total Operating Expenses 33,265 34,482 (3.5 ) 98,280 101,846 (3.5 )
Operating Income 6,403 6,408 (0.1 ) 20,590 20,099 2.4
Income Before Income Taxes 4,974 5,193 (4.2 ) 16,422 16,621 (1.2 )
Net Income 3,123 3,418 (8.6 ) 10,711 10,818 (1.0 )
Net Income Attributable to AT&T $ 3,029 $ 3,328 (9.0 )% $ 10,413 $ 10,539 (1.2 )%


	Second Quarter							Six-Month Period
					Percent							Percent
	2018		2017		Change			2018		2017		Change
Operating Revenues
Service	$	33,773	$	36,538		(7.6	)%	$	67,419	$	72,994		(7.6	)%
Equipment		4,080		3,299		23.7			8,472		6,208		36.5
Media		1,133		-		-			1,133		-		-
Total Operating Revenues		38,986		39,837		(2.1	)		77,024		79,202		(2.7	)

Operating expenses
Cost of revenues
Equipment		4,377		4,138		5.8			9,225		7,986		15.5
Broadcast, programming and operations		5,449		4,898		11.2			10,615		9,872		7.5
Other cost of revenues		7,632		9,569		(20.2	)		15,564		18,857		(17.5	)
Selling, general and administrative		8,684		8,559		1.5			16,581		17,331		(4.3	)
Depreciation and amortization		6,378		6,147		3.8			12,372		12,274		0.8
Total Operating Expenses		32,520		33,311		(2.4	)		64,357		66,320		(3.0	)
Operating Income		6,466		6,526		(0.9	)		12,667		12,882		(1.7	)
Income Before Income Taxes		6,780		6,070		11.7			12,921		11,448		12.9
Net Income		5,248		4,014		30.7			10,007		7,588		31.9
Net Income Attributable to AT&T	$	5,132	$	3,915		31.1	%	$	9,794	$	7,384		32.6	%

Overview

Operating revenuesdecreased ~~$1,222,~~$851, or ~~3.0%~~2.1%, in the ~~third~~second quarter and ~~$3,075,~~$2,178, or ~~2.5%~~2.7%, for the first ~~nine~~six months of ~~2017.~~

2018.

Servicerevenues decreased ~~$894,~~$2,765, or ~~2.4%~~7.6%, in the ~~third~~second quarter and ~~$2,143,~~$5,575, or ~~1.9%~~7.6%, for the first ~~nine~~six months of ~~2017.~~2018. The decreases in the second quarter and first six months were primarily due to our adoption of a new revenue accounting standard, which included our policy election to record Universal Service Fund (USF) fees on a net basis and also resulted in less revenue allocation to the service component of bundled contracts. Also contributing to the decrease was the continued ~~declines~~decline in video services and legacy wireline voice and data ~~products and lower wireless service~~ products.

Equipmentrevenues ~~reflecting~~ increased adoption of unlimited plans. Additionally, we waived $89 in service revenues for customers in areas affected by natural disasters during the third quarter of 2017. These were partially offset by increased revenues from strategic business services.

~~Equipment~~ ~~revenues decreased $328,~~$781, or ~~9.1%~~23.7%, in the ~~third~~second quarter and ~~$932,~~$2,264, or ~~8.9%~~36.5%, for the first ~~nine~~six months of ~~2017.~~2018. The ~~decreases~~increases were ~~primarily~~ due to ~~lower wireless handset sales~~the adoption of new revenue accounting standards that contributed to higher revenue allocations from bundled contracts and ~~upgrades. Equipment revenue is becoming increasingly unpredictable as many customers are choosing to upgrade devices less frequently or are bringing their own~~the sale of higher-priced devices.

~~Operating expenses~~ ~~decreased $1,217, or 3.5%, in the third quarter and $3,566, or 3.5%, for the first nine months of 2017.~~

~~Equipment~~ expenses decreased $264, or 5.9%, in the third quarter and $913, or 7.0%, for the first nine months of 2017. The decreases were driven by a decline in devices sold reflecting a change in customer buying habits.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

~~Broadcast, programming~~

Media revenues for the second quarter and ~~operations~~first six months were $1,133 and in each case are attributable to the16-day period since acquiring WarnerMedia.

Operatingexpenses ~~increased $375,~~ decreased $791, or ~~7.6%~~2.4%, in the ~~third~~second quarter and ~~$917,~~$1,963, or ~~6.4%~~3.0%, for the first ~~nine~~six months of ~~2017, reflecting~~2018.

Equipmentexpenses increased $239, or 5.8%, in the second quarter and $1,239, or 15.5%, for the first six months of 2018. The increases during the second quarter and the first six months were driven by an increase in the sale of higher-priced devices.

Broadcast, programming and operations expenses increased $551, or 11.2%, in the second quarter and $743, or 7.5%, for the first six months of 2018. Expense increases during the second quarter and first six months were due to annual content cost increases and additional programming costs, including programming and production costs associated with WarnerMedia for ~~DIRECTV NOW.~~

the16-day period since acquisition.

Other cost of ~~services~~ revenuesexpenses decreased ~~$95,~~$1,937, or ~~1.0%~~20.2%, in the ~~third~~second quarter and ~~$722,~~$3,293, or ~~2.5%~~17.5%, for the first ~~nine~~six months of ~~2017.~~2018. The decreases during the second quarter and first six months reflect our ~~continued focus on~~adoption of new accounting rules, which included our policy election to record USF fees net. Also contributing to the decreases were lower expenses due to cost management and ~~the~~ utilization of automation and digitalization where appropriate, as well as lower Federal Universal Service Fund (USF) rates and fees. The decrease for the first nine months also includes an actuarial gain from the second-quarter 2017 remeasurement of our postretirement benefit obligation. These expense declines were partially offset by an increase in amortization of deferred customer fulfillment cost.

appropriate.

Selling, general and administrativeexpenses ~~decreased $696,~~increased $125, or ~~7.7%~~1.5%, in the ~~third~~second quarter and ~~$1,446,~~decreased $750, or ~~5.5%~~4.3%, for the first ~~nine~~six months of ~~2017.~~2018. The ~~decreases~~increase in the second quarter was primarily attributable to expenses from WarnerMedia, including acquisition-related expenses due to the closing of the Time Warner transaction. Also contributing to the second quarter increase were ~~attributable~~higher employee separation costs. Offsetting some of the increases during the second quarter, and contributing to the overall decrease during the first six months, was the effect of new accounting standards, which resulted in commissions being deferred and amortized over the contract period or expected customer life, in addition to expense reductions due to our disciplined cost ~~management, lower selling and wireless commission~~management. Partially offsetting the decrease during the first six months were higher costs from reduced volumes, fewer advertising costs, and, for the nine month period, the actuarial gain resulting from the second-quarter remeasurement of our postretirement benefit obligation. The decreases in the third quarter were partially offset by costs arising fromdue to natural disasters and, ~~for the first nine months, lower gains on wireless spectrum transactions during 2017 than~~ in the comparable period of 2016. We are continuing to assess network damage from the natural disasters that occurred in the third quarter as well as the recent fires in California, and expect additional pressure in the fourth quarter.

2017, gains on wireless spectrum transactions.

Depreciation and amortization expense ~~decreased $537,~~increased $231, or ~~8.2%~~3.8%, in the ~~third~~second quarter and ~~$1,402,~~$98, or ~~7.1%~~0.8%, for the first ~~nine~~six months of ~~2017.~~2018. Depreciation expense ~~decreased $393,~~increased $123, or ~~7.4%~~2.5%, in the ~~third~~second quarter and ~~$962,~~$130, or ~~6.1%~~1.3%, for the first ~~nine~~six months of ~~2017.~~2018. The ~~decreases~~increases were primarily due to ~~our fourth-quarter 2016 change in estimated useful lives and salvage values~~16-days of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease in the third quarter and $980 of the decrease for the first nine months. Also contributing to lower depreciation expenses were network assets becoming fully depreciated. These decreases were partially offset by increases resulting fromWarnerMedia results as well as ongoing capital spending for network upgrades and ~~expansion.~~

expansion offset by lower expense resulting from our fourth-quarter 2017 abandonment of certain copper network assets.

Amortization expense ~~decreased $144,~~increased $108, or ~~11.2%~~9.2%, in the ~~third~~second quarter and ~~$440,~~decreased $32, or ~~11.1%~~1.3%, for the first ~~nine~~six months of ~~2017~~2018. The increase in the second quarter was due to ~~lower~~the amortization of intangibles associated with the previously mentioned acquisition. For thesix-month period, the decrease was due to amortization of intangibles for ~~the~~ customer lists associated with ~~acquisitions.~~

prior acquisitions mostly offset by the WarnerMedia acquisition.

Operatingincomedecreased ~~$5,~~$60, or ~~0.1%~~0.9%, in the ~~third~~second quarter and ~~increased $491,~~decreased $215, or ~~2.4%~~1.7%, for the first ~~nine~~six months of ~~2017.~~2018. Our operating income margin in the ~~third~~second quarter increased from ~~15.7%~~16.4% in ~~2016~~2017 to ~~16.1%~~16.6% in ~~2017,~~2018, and for the first ~~nine~~six months increased from ~~16.5%~~16.3% in ~~2016~~2017 to ~~17.3%~~16.4% in ~~2017.~~

2018.

Interest expense increased ~~$462,~~$628, or ~~37.7%~~45.0%, in the ~~third~~second quarter and ~~$685,~~$1,106, or ~~18.6%~~41.1%, for the first ~~nine~~six months of ~~2017.~~2018. The ~~increases were~~increase was primarily due to higher debt balances ~~in anticipation of closing~~related to our acquisition of Time Warner, ~~Inc. (Time Warner)~~including interest expense on Time Warner notes for16-days, and an increase in average interest rates when compared to the prior year. ~~Financing fees related to pending acquisitions also contributed to higher interest expense in 2017.~~

Equity in net income (loss) of affiliates decreased ~~$5, or 31.3%,~~$30 in the ~~third~~second quarter of 2018 and ~~$205~~increased $152, or 95.6%, for the first ~~nine~~six months of ~~2017,~~2018. Results for the second quarter and the first six months of 2018 include net losses from investments acquired through our purchase of Time Warner. The increase in the first six months of 2018 was predominantly ~~from~~due to losses in the first quarter of 2017 from our legacy publishing business, ~~(which we~~which was sold in June ~~2017), partially offset by income from our investments in video-related businesses.~~2017.

~~Other income (expense) – net~~ increased $253 in the third quarter and $200 for the first nine months. The increases were primarily due to higher net gains from the sale of non-strategic assets and investments of $123 and $26, respectively, and growth in interest and dividend income of $91 and $146, including interest on cash held in anticipation of closing our acquisition of Time Warner.

~~Income taxes~~ increased $76, or 4.3%, in the third quarter and decreased $92, or 1.6%, for the first nine months of 2017. Our effective tax rate was 37.2% in the third quarter and 34.8% for the first nine months of 2017, as compared to 34.2% in the third quarter and 34.9% for the first nine months of 2016. The increase in the third quarter was primarily due to state-level legislation changes that resulted in a remeasurement of our deferred tax liabilities offset by lower income before income taxes. The decrease for the first nine months of 2017 was primarily due to lower income before income taxes and the

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

~~recognition~~

Other income (expense) – netincreased $1,428 in the second quarter and $2,642 for the first six months. The increases were primarily due to actuarial gains of $1,796 and $2,726, resulting from remeasurement of our pension and postretirement benefit obligations and increased interest income of $94 and $258, partially offset by premiums on the redemption of debt of $226 in the second quarter of 2018.

Income taxesdecreased $524, or 25.5%, in the second quarter of 2018 and decreased $946, or 24.5%, for the first six months of 2018. Our effective tax ~~benefits related~~rate was 22.6% in the second quarter and for the first six months of 2018, as compared to 33.9% for the second quarter and 33.7% for the first six months of 2017. The stand-alone effective tax rate of WarnerMedia was 20.3% for the16-day period ended June 30, 2018. The decreases in income tax expense and our effective tax rates for the second quarter and the first six months of 2018 were primarily due to the ~~restructuring~~December 2017 enactment of ~~a portion~~U.S. corporate tax reform, which reduced the federal tax rate from 35% to 21%. Partially offsetting the decreased tax rates was higher earnings in the second quarter and first six months of 2018. We continue to expect our ~~wireless business offset by state-level legislation changes.~~

Selected Financial and Operating Data
September 30,
Subscribers and connections in (000s) 2017 2016
Domestic wireless subscribers 138,826 133,338
Mexican wireless subscribers 13,779 10,698
North American wireless subscribers 152,605 144,036

North American branded subscribers 106,098 100,821
North American branded net additions 2,782 3,881

Domestic satellite and over-the-top video subscribers 21,392 20,777
AT&T U-verse® (U-verse) video subscribers 3,718 4,544
Latin America satellite video subscribers ¹
13,490 12,476
Total video subscribers 38,600 37,797

Total domestic broadband connections 15,715 15,618

Network access lines in service 12,249 14,603
U-verse VoIP connections 5,774 5,707

Debt ratio ²
56.4 % 50.1 %
Net debt ratio ³
39.7 % 47.8 %
Ratio of earnings to fixed charges ⁴
3.55 3.91
Number of AT&T employees 256,800 273,140

effective tax rate for 2018, including WarnerMedia, to be approximately 23%.


Selected Financial and Operating Data
	June 30,
Subscribers and connections in (000s)		2018	2017
Domestic wireless subscribers		146,889	136,102
Mexican wireless subscribers		16,398	13,082
North American wireless subscribers		163,287	149,184


North American branded subscribers		109,806	104,022
North American branded net additions		2,138	1,639

Domestic satellite video subscribers		19,984	20,856
AT&TU-verse^®(U-verse) video subscribers		3,680	3,853
DIRECTV NOW video subscribers		1,809	491
Latin America satellite video subscribers¹		13,713	13,622
Total video subscribers		39,186	38,822


Total domestic broadband connections		15,772	15,686

Network access lines in service		10,832	12,791
U-verse VoIP connections		5,449	5,853

Debt ratio²		50.8%	53.3%
Net debt ratio³		47.2%	43.8%
Ratio of earnings to fixed charges⁴		3.64	3.84
Number of AT&T employees		273,210	260,480

¹	Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. At March 31, 2018. SKY Mexico had 8.0 million subscribers.

²	Debt 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.

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

⁴	See Exhibit 12.

AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of ~~our International segment equity investments~~Financial Condition and Results of Operations - Continued

Dollars in ~~SKY Mexico, in which we own a 41.3% stake. At June 30, 2017, SKY Mexico had 8.0 million subscribers.~~

²~~Debt 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)~~millions except per share and ~~do not consider cash available to pay down debt. See our "Liquidity and Capital Resources" section for discussion.~~

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

⁴ ~~See Exhibit 12.~~

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 segment results presented in Note 4 and discussed below for each segment follow our internal management reporting. We analyze our 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 affiliates for investments managed within each segment. We have ~~four~~five reportable segments: (1) Consumer Mobility, (2) Business Solutions, ~~(2)~~(3) Entertainment Group ~~(3) Consumer Mobility~~(4) International, and ~~(4) International.~~

(5) WarnerMedia.

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. 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.

With our acquisition of WarnerMedia, programming released on or before the June 14, 2018 acquisition date was recorded at fair value as an intangible asset. For consolidated reporting, all amortization of24pre-acquisition

~~AT&T INC.~~

~~SEPTEMBER~~ released programming is reported as amortization expense on our consolidated income statement. To best present comparable results, we will continue to report the historic content production cost amortization as operations and support expense within the WarnerMedia segment. The amount of historic content production cost amortization reported in the segment results was $189 for the16-day period ended June 30, ~~2017~~

~~Item 2. Management's Discussion~~2018, $98 of which was forpre-acquisition released programming.

TheConsumer Mobility segmentprovides nationwide wireless service to consumers, wholesale and ~~Analysis of Financial Condition~~resale wireless subscribers located in the United States or in U.S. territories. We provide voice and ~~Results of Operations - Continued~~

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

data services, including high-speed internet over wireless devices.

TheBusiness Solutions segment provides services to business customers, including multinational ~~companies;~~companies and governmental and wholesale ~~customers; and individual subscribers who purchase wireless services through employer-sponsored plans.~~customers. We provide advancedIP-based services including Virtual Private Networks (VPN); Ethernet-related ~~products~~products; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as ~~fixed~~ strategic services; as well as traditional data and voice products. We ~~utilize our wireless and wired networks to~~ provide a complete ~~integrated~~ communications solution to our business customers.

The~~Consumer Mobility segment~~ provides nationwide wireless service to consumers, wholesale and resale wireless subscribers located in the United States or in U.S. territories. We utilize our networks to provide voice and data services, including high-speed internet, video and home monitoring 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 networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency ~~fluctuations.~~

~~Our operating assets are utilized by multiple segments~~fluctuations (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).

TheWarnerMediasegment provides global media and ~~consist~~entertainment services through television networks and film, using its brands to create, package and deliver high-quality content worldwide. The segment consists of ~~our wireless~~Turner, Home Box Office (HBO) and ~~wired networks as well as an international satellite fleet.~~Warner Bros. businesses.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Our domestic ~~communications~~ business strategies reflect bundled product offerings that increasingly cut across product lines and utilize our shared asset base. T~~herefore~~Therefore, asset information and capital expenditures by segment are not presented. Depreciation is allocated based on asset utilization by segment. ~~In expectation of the close of our acquisition of Time Warner, we are beginning to realign our operations and strategies.~~ We ~~are pushing~~push down administrative activities into the business units to better manage costs and serve our customers.

Consumer Mobility

Segment Results


	Second Quarter							Six-Month Period
	2018		2017		Percent Change			2018		2017		Percent Change
Segment operating revenues
Service	$	11,853	$	12,467		(4.9	)%	$	23,465	$	24,932		(5.9	)%
Equipment		3,016		2,624		14.9			6,390		4,965		28.7


Total Segment Operating Revenues		14,869		15,091		(1.5	)		29,855		29,897		(0.1	)



Segment operating expenses
Operations and support		8,085		8,636		(6.4	)		16,609		17,196		(3.4	)
Depreciation and amortization		1,806		1,716		5.2			3,613		3,432		5.3


Total Segment Operating Expenses		9,891		10,352		(4.5	)		20,222		20,628		(2.0	)


Segment Operating Income		4,978		4,739		5.0			9,633		9,269		3.9
Equity in Net Income of Affiliates		-		-		-			-		-		-


Segment Contribution	$	4,978	$	4,739		5.0	%	$	9,633	$	9,269		3.9	%

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


	June 30,				Percent
(in 000s)	2018		2017		Change
Consumer Mobility Subscribers
Postpaid		65,326		65,570		(0.4	)%
Prepaid		15,376		14,187		8.4
Branded		80,702		79,757		1.2
Reseller		8,484		10,182		(16.7	)
Total Consumer Mobility Subscribers		89,186		89,939		(0.8	)%


	Second Quarter									Six-Month Period
(in 000s)	2018			2017			Percent Change			2018			2017			Percent Change
Consumer Mobility Net Additions¹
Postpaid		(49	)		(28	)		(75.0	)%		(113	)		(310	)		63.5	%
Prepaid		356			267			33.3			548			549			(0.2	)
Branded Net Additions		307			239			28.5			435			239			82.0
Reseller		(451	)		(364	)		(23.9	)		(841	)		(951	)		11.6
Consumer Mobility Net Subscriber Additions		(144	)		(125	)		(15.2	)%		(406	)		(712	)		43.0	%

¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

Operating Revenuesdecreased $222, or 1.5%, in the second quarter and $42, or 0.1%, for the first six months of 2018. The decreases were due to lower service revenues resulting from customers choosing unlimited plans and the impact of newly adopted accounting rules, which include our policy election to record USF fees on a net basis. Lower service revenues were partially offset by higher equipment revenues.

Business Solutions
Segment Results
Third Quarter Nine-Month Period
2017 2016
Percent
Change
2017 2016
Percent
Change

Segment operating revenues
     Wireless service $ 8,034 $ 8,050 (0.2 )% $ 23,969 $ 23,868 0.4 %
     Fixed strategic services 3,087 2,913 6.0 9,089 8,469 7.3
     Legacy voice and data services 3,434 4,042 (15.0 ) 10,572 12,577 (15.9 )
     Other service and equipment 852 886 (3.8 ) 2,513 2,619 (4.0 )
     Wireless equipment 1,654 1,876 (11.8 ) 4,873 5,422 (10.1 )
Total Segment Operating Revenues 17,061 17,767 (4.0 ) 51,016 52,955 (3.7 )

Segment operating expenses
     Operations and support 10,233 10,925 (6.3 ) 30,722 32,584 (5.7 )
     Depreciation and amortization 2,325 2,539 (8.4 ) 6,972 7,568 (7.9 )
Total Segment Operating Expenses 12,558 13,464 (6.7 ) 37,694 40,152 (6.1 )
Segment Operating Income 4,503 4,303 4.6 13,322 12,803 4.1
Equity in Net Income of Affiliates - - - - - -
Segment Contribution $ 4,503 $ 4,303 4.6 % $ 13,322 $ 12,803 4.1 %

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

Servicerevenue decreased $614, or 4.9%, in the second quarter and $1,467, or 5.9%, for the first six months of 2018. The decreases were largely due to our adoption of a new accounting standard that included our policy election to no longer include USF fees in revenues which resulted in less revenue being allocated to the service component of bundled contracts. Also contributing to the decrease was the impact of customers continuing to shift to discounted monthly service charges under our unlimited plans, partially offset by higher prepaid service revenues resulting from growth in Cricket and AT&T PREPAID^SM subscribers. Since our unlimited plans have now been in effect for a year, service revenues on a comparable basis should increase for the remainder of 2018.

Equipment revenue increased $392, or 14.9%, in the second quarter and $1,425, or 28.7%, for the first six months of 2018. The increases in equipment revenues resulted from the sale of higher-priced devices as well as the adoption of new accounting standards that contributed to higher revenue allocations from bundled contracts. Equipment revenue is unpredictable as customers are choosing to upgrade devices less frequently or bring their own devices.

Operations and supportexpenses decreased $551, or 6.4%, in the second quarter and $587, or 3.4%, for the first six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Decreased operations and support expenses were primarily due to our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to the decrease were increased operational efficiencies, partially offset by increased equipment costs related to wireless equipment sales and upgrades.

Depreciation expense increased $90, or 5.2%, in the second quarter and $181, or 5.3%, for the first six months of 2018. The increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $239, or 5.0%, in the second quarter and $364, or 3.9%, for the first six months of 2018. Our Consumer Mobility segment operating income margin in the second quarter increased from 31.4% in 2017 to 33.5% in 2018, and for the first six months increased from 31.0% in 2017 to 32.3% in 2018. Our Consumer Mobility EBITDA margin in the second quarter increased from 42.8% in 2017 to 45.6% in 2018, and for the first six months increased from 42.5% in 2017 to 44.4% in 2018.

AT&T INC.

JUNE 30, 2018

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
	2018		2017		Percent Change			2018		2017		Percent Change
Segment operating revenues
Wireless service	$	1,829	$	2,004		(8.7	)%	$	3,620	$	4,007		(9.7)	%
Strategic services		3,039		2,958		2.7			6,109		5,862		4.2
Legacy voice and data services		2,723		3,423		(20.4	)		5,561		6,971		(20.2)
Other service and equipment		888		922		(3.7	)		1,727		1,800		(4.1)
Wireless equipment		584		360		62.2			1,162		648		79.3


Total Segment Operating Revenues		9,063		9,667		(6.2	)		18,179		19,288		(5.7)



Segment operating expenses
Operations and support		5,616		6,053		(7.2	)		11,210		12,051		(7.0)
Depreciation and amortization		1,487		1,483		0.3			2,945		2,943		0.1


Total Segment Operating Expenses		7,103		7,536		(5.7	)		14,155		14,994		(5.6)


Segment Operating Income		1,960		2,131		(8.0	)		4,024		4,294		(6.3)
Equity in Net Income of Affiliates		1		-		-			-		-		-


Segment Contribution	$	1,961	$	2,131		(8.0	)%	$	4,024	$	4,294		(6.3)	%

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


	June 30,				Percent
(in 000s)	2018		2017		Change
Business Wireless Subscribers
Postpaid		12,046		11,432		5.4	%
Prepaid¹		841		-		-
Branded		12,887		11,432		12.7
Reseller		98		73		34.2
Connected devices^1,2		44,718		34,658		29.0
Total Business Wireless Subscribers		57,703		46,163		25.0


Business IP Broadband Connections		1,017		992		2.5	%

¹	Beginning in the third quarter of 2017, we began reporting prepaid Internet of Things (IoT) connections, which primarily consist of connected cars, as a component of prepaid subscribers instead of connected devices.

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

September 30, Percent
(in 000s) 2017 2016 Change
Business Wireless Subscribers
   Postpaid/Branded 51,412 50,014 2.8 %
   Reseller 77 58 32.8
   Connected devices¹
35,909 29,355 22.3
Total Business Wireless Subscribers 87,398 79,427 10.0

Business IP Broadband Connections 1,017 963 5.6 %
¹Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems.
Excludes postpaid tablets.

Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change

Business Wireless Net Additions ^{1, 4}

   Postpaid/Branded 15 191 (92.1 )% (74 ) 509 - %
   Reseller 2 1 - 3 (34 ) -
   Connected devices ²
2,292 1,290 77.7 7,015 4,067 72.5
Business Wireless Net Subscriber Additions 2,309 1,482 55.8 6,944 4,542 52.9

Business Wireless Postpaid Churn ^{1, 3, 4}
1.01 % 0.97 % 4 BP 1.02 % 0.97 % 5 BP

Business IP Broadband Net Additions 25 15 66.7 % 41 52 (21.2 )%
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 primarily wholesale 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.

AT&T INC.

JUNE 30, 2018

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
(in 000s)	2018			2017			Percent Change			2018			2017		Percent Change

Business Wireless Net Additions¹
Postpaid		122			171			(28.7	)%		235			259		(9.3	)%
Prepaid²		97			-			-			146			-		-
Branded		219			171			28.1			381			259		47.1
Reseller		7			(4	)		-			9			1		-
Connected devices³		2,982			2,256			32.2			5,710			4,828		18.3
Business Wireless Net SubscriberAdditions		3,208			2,423			32.4			6,100			5,088		19.9


Business IP Broadband Net Additions		(4	)		12			-	%		(8	)		16		-	%

¹	Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

²	Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars, as a component of prepaid subscribers instead of connected devices.

³	Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

Operating Revenues decreased ~~$706,~~$604, or ~~4.0%~~6.2%, in the ~~third~~second quarter and ~~$1,939,~~$1,109 or ~~3.7%~~5.7%, for the first ~~nine~~six months of ~~2017. Revenue declines reflect technological~~2018, primarily due to our adoption of a new revenue accounting standard, which included our policy election to no longer include USF fees in revenue. Technological shifts away from legacy products, as well as decreasing wireless ~~equipment~~service revenues resulting from ~~changes in customer buying habits.~~customers shifting to unlimited plans, also contributed to revenue declines. These decreases were partially offset by ~~fixed~~continued but slowing growth in strategic services, which represent ~~41%~~46% ofnon-wireless ~~revenues. Our~~ (or fixed) revenues ~~continue to be pressured by slower fixed business investment.~~

and wireless equipment revenue.

Wireless servicerevenues decreased ~~$16,~~$175, or ~~0.2%~~8.7%, in the ~~third~~second quarter and ~~increased $101,~~$387, or ~~0.4%~~9.7%, for the first ~~nine~~six months of ~~2017.~~2018. The decrease ~~in the third quarter~~ was ~~primarily~~ due to ~~customers shifting to~~ our ~~unlimited plans as well as fewer migrations from our Consumer Mobility segment during the quarter. The increase~~adoption of a new accounting standard that resulted in ~~the first nine months was primarily due~~less revenue allocation to the ~~migration~~service component of ~~customers from~~bundled contracts and included our ~~Consumer Mobility segment.~~

policy election to no longer include USF fees in revenues.

At ~~September~~June 30, ~~2017,~~2018, we served ~~87.4~~57.7 million subscribers, an increase of ~~10.0%~~25.0% from the prior year. Postpaid subscribers increased 2.8% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased ~~22.3%~~29.0% from the prior ~~year reflecting growth in~~year. Connected devices include our connected car business and other data centric devices that ~~utilize~~connect to the network ~~to connect~~ and ~~control physical devices using~~rely on embedded computing systems and/or software, commonly ~~called the Internet of Things (IoT)~~.

~~AT&T INC.~~

~~SEPTEMBER 30, 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 effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the third quarter, business wireless postpaid churn increased to 1.01% in 2017 from 0.97% in 2016, and for the first nine months increased to 1.02% in 2017 from 0.97% in 2016.

~~Fixed strategic~~known as IoT.

Strategic servicesrevenues increased ~~$174,~~$81, or ~~6.0%~~2.7%, in the ~~third~~second quarter and ~~$620,~~$247, or ~~7.3%~~4.2%, for the first ~~nine~~six months of ~~2017.~~2018. Our revenues increased in the ~~third~~second quarter and first ~~nine~~six months of ~~2017~~2018 primarily due to: ~~Ethernet of $77 and $243;~~ Dedicated Internet services of ~~$46~~$26 and ~~$150;~~$63; Ethernet services of $20 and $56; VoIP of ~~$41~~$14 and ~~$159,~~$49; and Security services of $20 and $43, respectively.

Legacy wired voice and data servicerevenues decreased ~~$608,~~$700, or ~~15.0%~~20.4%, in the ~~third~~second quarter and ~~$2,005,~~$1,410, or ~~15.9%~~20.2%, for the first ~~nine~~six months of ~~2017. In the third quarter and first nine months of 2017, legacy voice billings decreased $324 and $1,068 and traditional data billings decreased $284 and $937, respectively. These decreases were~~2018. The decrease was primarily due to lower demand, as customers continue to shift to our more advancedIP-based offerings or to ~~competitors.~~

competitors, and our netting of USF fees in 2018.

Wireless equipment revenues ~~decreased $222,~~increased $224, or ~~11.8%~~62.2%, in the ~~third~~second quarter and ~~$549,~~$514, or ~~10.1%~~79.3%, for the first ~~nine~~six months of ~~2017. The decreases were~~2018, primarily due to ~~decreases~~the adoption of new accounting standards which increased the amount of revenue attributable to equipment from our bundled contracts.

AT&T INC.

JUNE 30, 2018

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

Dollars in ~~device upgrades reflecting a change in customer buying habits.~~

millions except per share and per subscriber amounts

Operations and supportexpenses decreased ~~$692,~~$437, or ~~6.3%~~7.2%, in the ~~third~~second quarter and ~~$1,862,~~$841, or ~~5.7%~~7.0%, for the first ~~nine~~six months of ~~2017.~~2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

Decreased operations and support expenses infor the ~~third~~second quarter and first ~~nine~~six months were primarily due to ~~lower equipment sales~~our adoption of new accounting rules, resulting in commission deferrals and ~~wireless upgrade transactions, which decreased equipment costs by $336 and $732, and~~netting of USF fees in 2018. Also contributing to declines were our ongoing efforts to automate and digitize our support activities, ~~improved results $146~~partially offset by higher costs from our implementation of FirstNet and ~~$543, respectively. As~~higher equipment costs from increased sales of September 30, 2017, approximately 45% of our network functions have been moved to software-based systems. Expense reductions also reflect lower administrative costs, contributing to a reduction in expenses of $49 and $213, and fewer traffic compensation andhigher-priced wireless interconnect costs, resulting in declines of $44 and $155, respectively, in access and interconnect costs. Lower selling and wireless commission costs also contributed to decreased expenses for the first nine months.

devices.

Depreciationexpense ~~decreased $214,~~increased $4, or ~~8.4%~~0.3%, in the ~~third~~second quarter and ~~$596,~~$2, or ~~7.9%~~0.1%, for the first ~~nine~~six months of ~~2017.~~2018. The ~~decreases~~increases were primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain network assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated, partially offset by ongoing capital spending for network upgrades and ~~expansion.~~

expansion, partially offset by updates to the asset lives of certain network assets and our fourth-quarter 2017 abandonment of certain copper network assets.

Operating income ~~increased $200,~~ decreased $171, or ~~4.6%~~8.0%, in the ~~third~~second quarter and ~~$519,~~$270, or ~~4.1%~~6.3%, for the first ~~nine~~six months of ~~2017.~~2018. Our Business Solutions segment operating income margin in the ~~third~~second quarter ~~increased~~decreased from ~~24.2%~~22.0% in ~~2016~~2017 to ~~26.4%~~21.6% in ~~2017,~~2018, and for the first ~~nine~~six months ~~increased~~decreased from ~~24.2%~~22.3% in ~~2016~~2017 to ~~26.1%~~22.1% in ~~2017.~~2018. Our Business Solutions EBITDA margin in the ~~third~~second quarter increased from ~~38.5%~~37.4% in ~~2016~~2017 to ~~40.0%~~38.0% in ~~2017,~~2018, and for the first ~~nine~~six months increased from ~~38.5%~~37.5% in ~~2016~~2017 to ~~39.8%~~38.3% in ~~2017.~~2018.

Entertainment Group

Segment Results


	Second Quarter									Six-Month Period
	2018			2017			Percent Change			2018			2017		Percent Change
Segment operating revenues
Video entertainment	$	8,331		$	9,153			(9.0	)%	$	16,690		$	18,173		(8.2	)%
High-speed internet		1,981			1,927			2.8			3,859			3,868		(0.2	)
Legacy voice and data services		785			981			(20.0	)		1,604			2,012		(20.3	)
Other service and equipment		553			600			(7.8	)		1,074			1,209		(11.2	)


Total Segment Operating Revenues		11,650			12,661			(8.0	)		23,227			25,262		(8.1	)



Segment operating expenses
Operations and support		8,852			9,561			(7.4	)		17,791			19,166		(7.2	)
Depreciation and amortization		1,346			1,458			(7.7	)		2,658			2,878		(7.6	)


Total Segment Operating Expenses		10,198			11,019			(7.5	)		20,449			22,044		(7.2	)


Segment Operating Income		1,452			1,642			(11.6	)		2,778			3,218		(13.7	)
Equity in Net Income (Loss) of Affiliates		(20	)		(12	)		(66.7	)		(11	)		(18)		38.9


Segment Contribution	$	1,432		$	1,630			(12.1	)%	$	2,767		$	3,200		(13.5	)%

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

Entertainment Group
Segment Results
Third Quarter Nine-Month Period
2017 2016
Percent
Change
2017 2016
Percent
Change

Segment operating revenues
     Video entertainment $ 9,200 $ 9,026 1.9 % $ 27,373 $ 26,893 1.8 %
     High-speed internet 1,916 1,892 1.3 5,784 5,562 4.0
     Legacy voice and data services 949 1,168 (18.8 ) 3,010 3,725 (19.2 )
     Other service and equipment 583 634 (8.0 ) 1,786 1,909 (6.4 )
Total Segment Operating Revenues 12,648 12,720 (0.6 ) 37,953 38,089 (0.4 )

Segment operating expenses
     Operations and support 9,953 9,728 2.3 29,112 28,875 0.8
     Depreciation and amortization 1,379 1,504 (8.3 ) 4,256 4,481 (5.0 )
Total Segment Operating Expenses 11,332 11,232 0.9 33,368 33,356 -
Segment Operating Income 1,316 1,488 (11.6 ) 4,585 4,733 (3.1 )
Equity in Net Income (Loss) of Affiliates (6 ) - - (23 ) 1 -
Segment Contribution $ 1,310 $ 1,488 (12.0 )% $ 4,562 $ 4,734 (3.6 )%

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

September 30, Percent
(in 000s) 2017 2016 Change
Video Connections
   Satellite 20,605 20,777 (0.8 )%
   U-verse 3,691 4,515 (18.3 )
   DIRECTV NOW ¹
787 - -
Total Video Connections 25,083 25,292 (0.8 )

Broadband Connections
   IP 13,367 12,752 4.8
   DSL 964 1,424 (32.3 )
Total Broadband Connections 14,331 14,176 1.1

Retail Consumer Switched Access Lines 4,996 6,155 (18.8 )
U-verse Consumer VoIP Connections 5,337 5,378 (0.8 )
Total Retail Consumer Voice Connections 10,333 11,533 (10.4 )%
¹Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial.

~~AT&T INC.~~

~~SEPTEMBER 30, 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~~

Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change
Video Net Additions
   Satellite¹
(251 ) 323 - % (407 ) 993 - %
   U-verse¹
(134 ) (326 ) 58.9 (562 ) (1,099 ) 48.9
   DIRECTV NOW²
296 - - 520 - -
Net Video Additions (89 ) (3 ) - (449 ) (106 ) -

Broadband Net Additions
   IP 125 156 (19.9 ) 479 396 21.0
   DSL (96 ) (161 ) 40.4 (327 ) (506 ) 35.4
Net Broadband Additions 29 (5 ) - % 152 (110 ) - %
¹Includes disconnections for customers that migrated to DIRECTV NOW.
²Consistent with industry practice, DIRECTV NOW includes over-the-top connections that are on a free-trial.


	June 30,				Percent
(in 000s)	2018		2017		Change
Video Connections
Satellite		19,984		20,856		(4.2	)%
U-verse		3,656		3,825		(4.4	)
DIRECTV NOW¹		1,809		491		-
Total Video Connections		25,449		25,172		1.1


Broadband Connections
IP		13,692		13,242		3.4
DSL		763		1,060		(28.0	)
Total Broadband Connections		14,455		14,302		1.1


Retail Consumer Switched Access Lines		4,333		5,257		(17.6	)
U-verse Consumer VoIP Connections		4,950		5,439		(9.0	)
Total Retail Consumer Voice Connections		9,283		10,696		(13.2	)%

¹	Consistent with industry practice, DIRECTV NOW includesover-the-top connections that are on a free-trial.


	Second Quarter									Six-Month Period
(in 000s)	2018			2017			Percent Change			2018			2017			Percent Change
Video Net Additions
Satellite¹		(286	)		(156	)		(83.3	)%		(474	)		(156	)		-	%
U-verse¹		24			(195	)		-			25			(428	)		-
DIRECTV NOW²		342			152			-			654			224			-
Net Video Additions		80			(199	)		-			205			(360	)		-


Broadband Net Additions
IP		76			112			(32.1	)		230			354			(35.0	)
DSL		(53	)		(104	)		49.0			(125	)		(231	)		45.9
Net Broadband Additions		23			8			-	%		105			123			(14.6	)%

¹	Includes disconnections for customers that migrated to DIRECTV NOW.

²	Consistent with industry practice, DIRECTV NOW includesover-the-top connections that are on a free-trial.

Operating revenuesdecreased ~~$72,~~$1,011, or ~~0.6%~~8.0%, in the ~~third~~second quarter and ~~$136,~~$2,035, or ~~0.4%~~8.1%, for the first ~~nine~~six months of ~~2017, largely~~2018, primarily due to lower video and legacy service revenues, ~~from legacy voice~~ and ~~data products, partially offset by growth in revenues from consumer IP broadband services.~~

to a lesser extent, new accounting rules.

As consumers continue to demand more mobile access to video, we provide streaming access to our subscribers, including mobile access for existing satellite andU-verse subscribers. In November 2016, we launched DIRECTV NOW, our ~~newest~~ video streaming option that does not require either satellite orU-verse service (commonly calledover-the-top video service).

Video entertainmentrevenues ~~increased $174,~~decreased $822, or ~~1.9%~~9.0%, in the ~~third~~second quarter and ~~$480,~~$1,483, or ~~1.8%~~8.2%, for the first ~~nine~~six months of ~~2017. These increases include~~2018, largely driven by a ~~third-quarter 2017 pay-per-view event and reflect a 4.5% and 3.3% increase~~4.2% decline in ~~average revenue per~~ linear ~~(combined satellite and U-verse)~~ video ~~connection. Advertising revenues also increased $41 and $113, respectively.~~

~~Linear~~subscribers. Ourover-the-top video subscriber ~~losses, and associated margin pressure, continued their recent trend,~~net adds more than offset our decline in linear video connections. However, this shift by our customers, consistent with ~~some~~the rest of the ~~losses due~~industry, from a premium linear service to our more economically pricedover-the-top video service has pressured our video revenues. Also contributing to the ~~impact from hurricanes as well as tightening of our credit policies. We are also seeing~~decrease was the impact of ~~customers wanting mobile and over-the-top offerings,~~newly adopted accounting rules, which ~~is contributing~~resulted in less revenue allocated to ~~growth in DIRECTV NOW connections and partially offsetting linear~~ video ~~subscriber losses. DIRECTV NOW connections continue to grow as we add eligible devices and increase content choices. Our strategy to bundle~~ services ~~has positively impacted subscriber trends and churn,~~when these services are bundled with ~~customers who bundle our wireless and video having nearly half the rate of churn as customers with a single service. Customers~~other offerings. Churn rose for subscribers with linear video ~~but no wireless~~only service, ~~through~~ partially reflecting price increases.

AT&T ~~increased churn during the quarter, partially due to pricing increases associated with annual content cost increases~~INC.

JUNE 30, 2018

Item 2. Management’s Discussion and ~~involuntary churn.~~

Analysis of Financial Condition and Results of Operations - Continued

Dollars in millions except per share and per subscriber amounts

High-speed internet revenues increased ~~$24,~~$54, or ~~1.3%~~2.8%, in the ~~third~~second quarter and ~~$222, or 4.0%,~~decreased slightly for the first ~~nine~~six months of 2018. During the quarter, we reviewed and refined the estimates used to allocate customer discounts amongst bundled services, contributing to higher high-speed internet revenues in the second quarter of 2018. When compared to 2017, ~~reflecting a 4.8% increase in~~ IP broadband subscribers ~~when compared~~increased 3.4%, to ~~the prior year. Average revenue per IP broadband connection (ARPU) decreased 3.7% in the third quarter and 0.8% for the first nine months of 2017.~~13.7 million subscribers at June 30, 2018. Our bundling strategy is ~~also~~ helping to lower churn ~~for broadband subscribers,~~ with subscribers who bundle broadband with another AT&T service having about ~~30% lower~~half the churn ~~than~~of broadband-only subscribers.

To compete more effectively against other broadband providers, ~~in the midst of ongoing declines in DSL subscribers,~~ we continued to deploy ourall-fiber, high-speed wireline network, which has improved customer retention rates. We also expect our planned 5G national deployment to aid in our ability to provide more locations with competitive broadband speeds.

Legacy voice and data servicerevenues decreased ~~$219,~~$196, or ~~18.8%~~20.0%, in the ~~third~~second quarter and ~~$715,~~$408, or ~~19.2%~~20.3%, for the first ~~nine~~six months of 2017. For the nine months ended September 30, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% for the September 30, 2016 period, and reflect third quarter and year to date2018, reflecting continued decreases ~~of $148 and $483~~ in local voice, ~~and~~ long-distance and ~~$70 and $232 in~~ traditional data ~~billings, respectively.~~services. The decreases reflect the continued migration of customers to our more advancedIP-based offerings or to

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

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

~~competitors. At September 30, 2017, approximately 7% of our broadband connections were DSL compared to 10% at September 30, 2016.~~

netting USF fees.

Operations and supportexpenses ~~increased $225,~~decreased $709, or ~~2.3%~~7.4%, in the ~~third~~second quarter and ~~increased $237,~~$1,375, or ~~0.8%~~7.2%, for the first ~~nine~~six months of ~~2017.~~2018. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, ~~which include~~including costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

~~Increased~~

Decreased operations and support expenses ~~in the third quarter and for the first nine months of 2017~~ were primarily ~~due~~impacted by our adoption of new accounting rules, resulting in commission deferrals and netting of USF fees in 2018. Also contributing to ~~annual content cost increases, a pay-per-view event, deferred customer fulfillment cost amortization, and video platform development costs. Partially offsetting these increases were~~ the ~~impact of~~decreases was our ongoing focus on cost efficiencies and merger synergies, ~~as well as~~lower employee-related expenses resulting from workforce reductions, lower amortization of fulfillment cost deferrals due to a longer estimated economic life for our entertainment group customers (see Note 1) and lower ~~marketing costs.~~

advertising costs, which were partially offset by annual content cost increases.

Depreciation expense decreased ~~$125,~~$112, or ~~8.3%~~7.7%, in the ~~third~~second quarter and ~~$225,~~$220, or ~~5.0%~~7.6%, for the first ~~nine~~six months of ~~2017.~~2018. The decreases were primarily due to our fourth-quarter ~~2016 change in estimated useful lives and salvage value~~2017 abandonment of certain ~~assets. Also contributing to lower depreciation expenses were~~copper network assets, ~~becoming fully depreciated. These decreases were~~partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased ~~$172,~~$190, or 11.6%, in the ~~third~~second quarter and ~~$148,~~$440, or ~~3.1%~~13.7%, for the first ~~nine~~six months of ~~2017.~~2018. Our Entertainment Group segment operating income margin in ~~third~~the second quarter decreased from ~~11.7%~~13.0% in ~~2016~~2017 to ~~10.4%~~12.5% in ~~2017,~~2018, and for the first ~~nine~~six months decreased from ~~12.4%~~12.7% in ~~2016~~2017 to ~~12.1%~~12.0% in ~~2017.~~2018. Our Entertainment Group segment EBITDA margin in the ~~third~~second quarter decreased from ~~23.5%~~24.5% in ~~2016~~2017 to ~~21.3%~~24.0% in ~~2017,~~2018, and for the first ~~nine~~six months decreased from ~~24.2%~~24.1% in ~~2016~~2017 to ~~23.3%~~23.4% in ~~2017.~~2018.

Consumer Mobility
Segment Results
Third Quarter Nine-Month Period
2017 2016
Percent
Change
2017 2016
Percent
Change

Segment operating revenues
     Service $ 6,507 $ 6,914 (5.9 )% $ 19,644 $ 20,805 (5.6 )%
     Equipment 1,241 1,353 (8.3 ) 3,635 3,976 (8.6 )
Total Segment Operating Revenues 7,748 8,267 (6.3 ) 23,279 24,781 (6.1 )

Segment operating expenses
     Operations and support 4,551 4,751 (4.2 ) 13,599 14,343 (5.2 )
     Depreciation and amortization 877 944 (7.1 ) 2,621 2,798 (6.3 )
Total Segment Operating Expenses 5,428 5,695 (4.7 ) 16,220 17,141 (5.4 )
Segment Operating Income 2,320 2,572 (9.8 ) 7,059 7,640 (7.6 )
Equity in Net Income of Affiliates - - - - - -
Segment Contribution $ 2,320 $ 2,572 (9.8 )% $ 7,059 $ 7,640 (7.6 )%

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

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

September 30, Percent
(in 000s) 2017 2016 Change
Consumer Mobility Subscribers
Postpaid 26,003 27,374 (5.0 )%
Prepaid ²
15,136 13,035 16.1
Branded 41,139 40,409 1.8
Reseller 9,800 12,566 (22.0 )
Connected devices ^{1, 2}
489 936 (47.8 )
Total Consumer Mobility Subscribers 51,428 53,911 (4.6 )%
¹ Includes data-centric devices such as session-based tablets, monitoring devices and postpaid automobile systems. Excludes

postpaid tablets. See (2) below.
² Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of

prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers that
were formerly included in connected devices.

Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change
Consumer Mobility Net Additions ^{1, 4}

Postpaid 102 21 - % 127 89 42.7 %
Prepaid ⁵
324 304 6.6 873 1,169 (25.3 )
Branded Net Additions 426 325 31.1 1,000 1,258 (20.5 )
Reseller (394 ) (316 ) (24.7 ) (1,345 ) (1,140 ) (18.0 )
Connected devices ^{2, 5}
(18 ) 41 - 87 14 -
Consumer Mobility Net Subscriber Additions 14 50 (72.0 )% (258 ) 132 - %

Total Churn ^{1, 3, 4}
2.37 % 2.11 % 26 BP 2.32 % 2.06 % 26 BP
Postpaid Churn ^{1, 3, 4}
1.17 % 1.19 % (2) BP 1.16 % 1.17 % (1) BP
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

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

postpaid tablets. See (5) below.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number

of wireless subscribers at the beginning of that month. 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 and a true-up to the reseller subscriber base, which were reflected in beginning of

period subscribers.
⁵ Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component

of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid
net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of ,
2017 and 2016, respectively.

~~Operating Revenues~~ ~~decreased $519, or 6.3%, in the third quarter and $1,502, or 6.1%,~~

International

Segment Results


	Second Quarter									Six-Month Period
	2018			2017			Percent Change			2018			2017			Percent Change
Segment operating revenues
Video entertainment	$	1,254		$	1,361			(7.9	)%	$	2,608		$	2,702			(3.5	)%
Wireless service		417			535			(22.1	)		821			1,010			(18.7	)
Wireless equipment		280			130			115.4			547			243			125.1
Total Segment Operating Revenues		1,951			2,026			(3.7	)		3,976			3,955			0.5

Segment operating expenses
Operations and support		1,803			1,772			1.7			3,607			3,531			2.2
Depreciation and amortization		313			311			0.6			645			601			7.3
Total Segment Operating Expenses		2,116			2,083			1.6			4,252			4,132			2.9
Segment Operating Income (Loss)		(165	)		(57	)		-			(276	)		(177	)		(55.9	)
Equity in Net Income (Loss) of Affiliates		15			25			(40.0	)		15			45			(66.7	)
Segment Contribution	$	(150	)	$	(32	)		-	%	$	(261	)	$	(132	)		(97.7	)%

The following tables highlight other key measures of performance for the first nine months of 2017. Decreased revenues reflect declines in postpaid service revenues due to customers migrating to our Business Solutions segment and choosing unlimited plans, partially offset by higher prepaid service revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted our consumer postpaid subscriber total and service revenue growth.International segment:


	June 30,				Percent
(in 000s)	2018		2017		Change
Mexican Wireless Subscribers
Postpaid		5,749		5,187		10.8	%
Prepaid		10,468		7,646		36.9
Branded		16,217		12,833		26.4
Reseller		181		249		(27.3	)
Total Mexican Wireless Subscribers		16,398		13,082		25.3


Latin America Satellite Subscribers
Total Latin America Satellite Subscribers¹		13,713		13,622		0.7	%

¹	Excludes subscribers of our International segment equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 8.0 million subscribers at March 31, 2018 and December 31, 2017.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

~~Service~~ revenue decreased $407, or 5.9%, in the third quarter and $1,161, or 5.6%, for the first nine months of 2017. The decreases were largely due to postpaid customers continuing to shift to discounted monthly service charges under our unlimited plans and the migration of subscribers to Business Solutions. Revenues from postpaid customers declined $419, or 8.6%, in the third quarter and $1,422, or 9.5%, for the first nine months of 2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 4.6% and 5.2%, respectively. The decreases were partially offset by higher prepaid service revenues of $155, or 10.7%, in the third quarter and $595, or 14.5%, for the first nine months primarily from growth in Cricket and AT&T PREPAID^SM ~~subscribers.~~

~~Equipment~~ revenue decreased $112, or 8.3%, in the third quarter and $341, or 8.6%, for the first nine months of 2017. The decreases in equipment revenues resulted from lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to upgrade devices less frequently or bring their own.

~~Operations and support~~ expenses decreased $200, or 4.2%, in the third quarter and $744, or 5.2%, for the first nine months of 2017. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

Decreased operations and support expenses for the third quarter were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment and selling and commission costs, and operational efficiencies. The nine-month period also reflects lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.

~~Depreciation~~ expense decreased $67, or 7.1%, in the third quarter and $177, or 6.3%, for the first nine months of 2017. The decreases were primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

~~Operating income~~ ~~decreased~~ ~~$252~~, or 9.8%, in the third quarter and $581, or 7.6%, for the first nine months of 2017. Our Consumer Mobility segment operating income margin in the third quarter decreased from 31.1% in 2016 to 29.9% in 2017, and for the first nine months decreased from 30.8% in 2016 to 30.3% in 2017. Our Consumer Mobility EBITDA margin in the third quarter decreased from 42.5% in 2016 to 41.3% in 2017, and for the first nine months decreased from 42.1% in 2016 to 41.6% in 2017.

International
Segment Results
Third Quarter Nine-Month Period
2017 2016
Percent
Change
2017 2016
Percent
Change

Segment operating revenues
     Video entertainment $ 1,363 $ 1,297 5.1 % $ 4,065 $ 3,649 11.4 %
     Wireless service 536 484 10.7 1,546 1,428 8.3
     Wireless equipment 200 98 - 443 297 49.2
Total Segment Operating Revenues 2,099 1,879 11.7 6,054 5,374 12.7

Segment operating expenses
     Operations and support 1,937 1,640 18.1 5,468 4,951 10.4
     Depreciation and amortization 304 293 3.8 905 868 4.3
Total Segment Operating Expenses 2,241 1,933 15.9 6,373 5,819 9.5
Segment Operating Income (Loss) (142 ) (54 ) - (319 ) (445 ) 28.3
Equity in Net Income (Loss)
   of Affiliates
17 1 - 62 24 -
Segment Contribution $ (125 ) $ (53 ) - % $ (257 ) $ (421 ) 39.0 %

~~AT&T INC.~~

~~SEPTEMBER 30, 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 following tables highlight other key measures of performance for the International segment:~~

September 30, Percent
(in 000s) 2017 2016 Change
Mexican Wireless Subscribers
   Postpaid 5,316 4,733 12.3 %
   Prepaid 8,231 5,665 45.3
Branded 13,547 10,398 30.3
Reseller 232 300 (22.7 )
Total Mexican Wireless Subscribers 13,779 10,698 28.8

Latin America Satellite Subscribers
   PanAmericana 8,201 7,139 14.9
   SKY Brazil ¹
5,289 5,337 (0.9 )
Total Latin America Satellite Subscribers 13,490 12,476 8.1 %
¹Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico
   had 8.0 million subscribers at June 30, 2017 and 7.9 million subscribers at September 30, 2016.

Third Quarter Nine-Month Period
(in 000s) 2017 2016
Percent
Change
2017 2016
Percent
Change

Mexican Wireless Net Additions
   Postpaid 129 163 (20.9 )% 351 444 (20.9 )%
   Prepaid 585 606 (3.5 ) 1,504 1,670 (9.9 )
Branded Net Additions 714 769 (7.2 ) 1,855 2,114 (12.3 )
Reseller (17 ) (26 ) 34.6 (49 ) (100 ) 51.0
Mexican Wireless
  Net Subscriber Additions
697 743 (6.2 ) 1,806 2,014 (10.3 )

Latin America Satellite Net Additions ¹

   PanAmericana 98 (36 ) - 163 73 -
   SKY Brazil (230 ) (12 ) - (260 ) (107 ) -
Latin America Satellite
Net Subscriber Additions ²
(132 ) (48 ) - % (97 ) (34 ) - %
¹ In 2017, we updated the methodology used to account for prepaid video connections, which were reflected in beginning of period

subscribers.
² Excludes SKY Mexico net subscriber losses of 13 for the six months ended June 30, 2017 and additions of 519 for the six

months of June 30, 2016.


	Second Quarter								Six-Month Period
(in 000s)	2018		2017			Percent Change			2018			2017			Percent Change
Mexican Wireless Net Additions
Postpaid		142		92			54.3	%		251			222			13.1	%
Prepaid		611		402			52.0			1,070			919			16.4
Branded Net Additions		753		494			52.4			1,321			1,141			15.8
Reseller		3		(18	)		-			(22	)		(32	)		31.3
Mexican Wireless Net Subscriber Additions		756		476			58.8			1,299			1,109			17.1


Latin America Satellite Net Additions
Latin America Satellite Net Subscriber Additions¹		140		(56	)		-	%		125			35			-	%

¹	Excludes SKY Mexico net subscriber losses of 92 and 18 for the quarter ended March 31, 2018 and 2017, respectively.

Operating Results

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

Operating revenues ~~increased $220,~~ decreased $75, or ~~11.7%~~3.7%, in the ~~third~~second quarter and ~~$680,~~increased $21, or ~~12.7%~~0.5%, for the first ~~nine~~six months of ~~2017. The increases include $66 and $416~~2018. Revenue from video services in Latin America decreased $107 and $94 due to ~~price increases driven primarily by macroeconomic conditions with mixed local currencies.~~foreign exchange pressures. Mexico wireless revenues increased ~~$154,~~$32, or ~~26.5%~~4.8%, in the ~~third~~second quarter and ~~$264,~~$115, or ~~15.3%~~9.2%, for the first ~~nine~~six months of ~~2017,~~2018, primarily due to growth in equipment revenues as we have increased our subscriber base, partially offset by competitive pricing for ~~services.~~

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

~~Item 2. Management's Discussion~~services, our shutdown of a legacy wholesale business and ~~Analysis~~our adoption of ~~Financial Condition and Results of Operations - Continued~~

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

the new U.S. revenue accounting standard.

Operations and support expenses increased ~~$297,~~$31, or ~~18.1%~~1.7%, in the ~~third~~second quarter and ~~$517,~~$76, or ~~10.4%~~2.2%, for the first ~~nine~~six months of ~~2017.~~2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits.

The ~~increases~~increase in ~~Latin America in the third quarter and for the first nine months were~~expenses is primarily due to higher programming, including World Cup programming costs in the second quarter, and other operating ~~costs. The nine-month period was~~costs partially offset by changes in foreign currency exchange rates and lower wholesale costs in Mexico. Approximately 15 % of our ~~reassessment of operating tax contingencies in Brazil. The increases~~expenses in Mexico ~~for~~and Latin America are U.S. dollar based, with the ~~first nine months were primarily driven by higher operational costs, including expenses associated with our network expansion and foreign currency pressures.~~

remainder in the local currency.

Depreciationexpense increased ~~$11,~~$2, or ~~3.8%~~0.6%, in the ~~third~~second quarter and ~~$37,~~$44, or ~~4.3%~~7.3%, for the first ~~nine~~six months of ~~2017.~~2018. The increases were primarily due to ~~updating the estimated asset lives for video equipment in Latin America and~~ higher capital spending in ~~Mexico.~~

Mexico as we essentially complete our network upgrades.

Operating income decreased ~~$88~~$108 in the ~~third~~second quarter and ~~increased $126,~~$99, or ~~28.3%~~55.9%, for the first ~~nine~~six months of ~~2017,~~2018, and were negatively impacted by foreign exchange pressure. Our International segment operating income margin in the ~~third~~second quarter decreased from ~~(2.9)% in 2016 to (6.8)~~(2.8)% in 2017 to (8.5)% in 2018, and for the first ~~nine~~six months ~~increased~~decreased from ~~(8.3)~~(4.5)% in ~~2016~~2017 to ~~(5.3)~~(6.9)% in ~~2017.~~2018. Our International EBITDA margin in the ~~third~~second quarter decreased from ~~12.7%~~12.5% in ~~2016~~2017 to ~~7.7%~~7.6% in ~~2017,~~2018, and for the first ~~nine~~six months ~~increased~~decreased from ~~7.9%~~10.7% in ~~2016~~2017 to ~~9.7%~~9.3% in ~~2017.~~2018.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

WarnerMedia

Segment Results for the period from June 15, 2018 to June 30, 2018


	Second Quarter								Six-Month Period
	2018			2017		Percent Change			2018			2017		Percent Change
Segment operating revenues
Content	$	487		$	-		-	%	$	487		$	-		-	%
Subscription		591			-		-			591			-		-
Advertising		208			-		-			208			-		-
Other		51			-		-			51			-		-
Intrasegment eliminations		(62	)		-		-			(62	)		-		-
Total Segment Operating Revenues		1,275			-		-			1,275			-		-

Segment operating expenses
Operations and support		794			-		-			794			-		-
Depreciation and amortization		30			-		-			30			-		-
Total Segment Operating Expenses		824			-		-			824			-		-
Segment Operating Income (Loss)		451			-		-			451			-		-
Equity in Net Income (Loss) of Affiliates		(6	)		-		-			(6	)		-		-
Segment Contribution	$	445		$	-		-	%	$	445		$	-		-	%

The WarnerMedia segment consists of the results of Time Warner after we completed our acquisition June 14, 2018. Our WarnerMedia segment operating income margin was 35.4% for the16-day period ended June 30, 2018. Consistent with our past practice, many of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results. The WarnerMedia segment consists of the following businesses:

●

Turner, consisting principally of cable networks and digital media properties.

●

HBO consisting principally of premium pay television and OTT services.

●

Warner Bros., consisting principally of television, feature film, home video and game production and distribution.

AT&T INC.

JUNE 30, 2018

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

WarnerMedia

Segment Results for the period from June 15, 2018 to June 30, 2018


	Second Quarter								Six-Month Period
	2018			2017		Percent Change			2018			2017		Percent Change
Segment operating revenues
Turner	$	549		$	-		-	%		$ 549		$	-		-	%
Warner Bros.		507			-		-			507			-		-
HBO		281			-		-			281			-		-
Intrasegment eliminations		(62	)		-		-			(62	)		-		-
Total Segment Operating Revenues		1,275			-		-			1,275			-		-

Segment Operating Contribution
Turner		280			-		-			280			-		-
Warner Bros.		90			-		-			90			-		-
HBO		105			-		-			105			-		-
Corporate		(13	)		-		-			(13	)		-		-
Intrasegment eliminations		(11	)		-		-			(11	)		-		-
Segment Operating Income (Loss)	$	451		$	-		-	%		$ 451		$	-		-	%

Operating Revenues were $1,275 for the16-day period ended June 30, 2018.

Contentrevenues were $487 for the period, including $455 from Warner Bros., $21 from Turner and $11 from HBO. Content revenues are derived from content production and distribution. Revenue from the distribution of television programs and series totaled $186 for Warner Bros. for the16-day period. Revenues from the distribution of feature films by Warner Bros., or theatrical revenues, were $222 and revenues from games and other totaled $47 for the period.

Subscription revenues were $591 for the period, including $314 from Turner, $270 from HBO and $7 from Warner Bros. Subscription revenues are derived from the provision of programming to operators and digital distributors who have contracted to receive and distribute programming to their customers. Revenues reflect higher domestic rates and growth at Turner’s international networks, partially offset by the impact of lower domestic subscribers and unfavorable foreign exchange rates. Subscriber trends remain stable with growth from virtual MVPDs and international offset by lower traditional subscribers.

Advertisingrevenues were $208 for the period, including $200 from Turner and $8 from Warner Bros. These revenues result from sale of advertising on our networks and digital properties and the digital properties we manage and/or operate for others.

Operations and support expenses were $794 for the period and are primarily attributable to programming expenses along with marketing costs. Programming expenses reflect higher original and acquired programming costs.

Depreciation expense was $30 for the16-day period ended June 30, 2018.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Supplemental Operating Information

As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility). See ~~"Discussion~~“Discussion and Reconciliation ofNon-GAAP ~~Measure"~~ Measures” for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.

AT&T Mobility Results


	Second Quarter							Six-Month Period
	2018		2017		Percent Change			2018		2017		Percent Change
Operating revenues
Service	$	13,682	$	14,471		(5.5	)%	$	27,085	$	28,939		(6.4)	%
Equipment		3,600		2,984		20.6			7,552		5,613		34.5


Total Operating Revenues		17,282		17,455		(1.0	)		34,637		34,552		0.2



Operating expenses
Operations and support		9,663		10,091		(4.2	)		19,765		19,976		(1.1)


EBITDA		7,619		7,364		3.5			14,872		14,576		2.0


Depreciation and amortization		2,113		1,988		6.3			4,208		3,980		5.7


Total Operating Expenses		11,776		12,079		(2.5	)		23,973		23,956		0.1


Operating Income	$	5,506	$	5,376		2.4	%	$	10,664	$	10,596		0.6	%

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


	June 30,				Percent Change
(in 000s)	2018		2017		Percent Change
Wireless Subscribers¹
Postpaid smartphones		60,183		59,178		1.7	%
Postpaid feature phones and data-centric devices		17,189		17,824		(3.6)
Postpaid		77,372		77,002		0.5
Prepaid³		16,217		14,187		14.3
Branded		93,589		91,189		2.6
Reseller		8,582		10,255		(16.3)
Connected devices^{2, 3}		44,718		34,658		29.0
Total Wireless Subscribers		146,889		136,102		7.9


Branded Smartphones		73,797		71,818		2.8
Smartphones under our installment programs at end of period		31,918		31,649		0.8	%

¹	Represents 100% of AT&T Mobility wireless subscribers.

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

³	Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars, as a component of prepaid subscribers.

AT&T Mobility Results
Third Quarter Nine-Month Period
2017 2016 Percent Change 2017 2016 Percent Change

Operating revenues
   Service $ 14,541 $ 14,964 (2.8 )% $ 43,613 $ 44,673 (2.4 )%
   Equipment 2,895 3,229 (10.3 ) 8,508 9,398 (9.5 )
Total Operating Revenues 17,436 18,193 (4.2 ) 52,121 54,071 (3.6 )

Operating expenses
   Operations and support 10,113 10,697 (5.5 ) 30,308 31,822 (4.8 )
EBITDA 7,323 7,496 (2.3 ) 21,813 22,249 (2.0 )
   Depreciation and amortization 2,010 2,107 (4.6 ) 5,999 6,244 (3.9 )
Total Operating Expenses 12,123 12,804 (5.3 ) 36,307 38,066 (4.6 )
Operating Income $ 5,313 $ 5,389 (1.4 )% $ 15,814 $ 16,005 (1.2 )%

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

September 30, Percent
(in 000s) 2017 2016 Change
Wireless Subscribers ¹

Postpaid smartphones 59,277 58,688 1.0 %
Postpaid feature phones and data-centric devices 18,138 18,700 (3.0 )
Postpaid 77,415 77,388 -
Prepaid ³
15,136 13,035 16.1
Branded 92,551 90,423 2.4
Reseller 9,877 12,624 (21.8 )
Connected devices ^{2, 3}
36,398 30,291 20.2
Total Wireless Subscribers 138,826 133,338 4.1

Branded Smartphones 72,242 69,752 3.6
Smartphones under our installment programs at end of period 31,207 29,382 6.2 %
¹ Represents 100% of AT&T Mobility wireless subscribers.

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

postpaid tablets. See (3) below.
³ Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component of

prepaid subscribers. The prepaid subscriber base at September 30, 2017 now includes approximately 543 subscribers
that were formerly included in connected devices.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

Third Quarter Nine-Month Period
Percent Percent
(in 000s) 2017 2016 Change 2017 2016 Change
Wireless Net Additions ^{1, 4}

Postpaid 117 212 (44.8 )% 53 598 (91.1 )%
Prepaid ⁵
324 304 6.6 873 1,169 (25.3 )
Branded Net Additions 441 516 (14.5 ) 926 1,767 (47.6 )
Reseller (392 ) (315 ) (24.4 ) (1,342 ) (1,174 ) (14.3 )
Connected devices ^{2, 5}
2,274 1,331 70.8 7,102 4,081 74.0
Wireless Net Subscriber Additions 2,323 1,532 51.6 6,686 4,674 43.0

Smartphones sold under our installment
programs during period
3,491 4,283 (18.5 )% 10,575 12,378 (14.6 )%

Total Churn^{3, 4}
1.32 % 1.45 % (13) BP 1.35 % 1.41 % (6) BP
Branded Churn^{3, 4}
1.70 % 1.63 % 7 BP 1.66 % 1.57 % 9 BP
Postpaid Churn^{3, 4}
1.07 % 1.05 % 2 BP 1.07 % 1.04 % 3 BP
Postpaid Phone Only Churn^{3, 4}
0.84 % 0.90 % (6) BP 0.84 % 0.90 % (6) BP
¹ Excludes acquisition-related additions during the period.

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

postpaid tablets. See (5) below.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number

of wireless subscribers at the beginning of that month. 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 and a true-up to the reseller subscriber base, which were reflected in beginning of period subscribers.

⁵ Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars, as a component

of prepaid subscribers, resulting in 97 additional prepaid net adds in the quarter. Had we restated our prior periods, prepaid
net adds for the comparable periods would have been 381 in the third quarter of 2016, and 1,060 and 1,324 for the first nine months of,
2017 and 2016, respectively.


	Second Quarter								Six-Month Period
(in 000s)	2018			2017			Percent Change		2018			2017			Percent Change
Wireless Net Additions¹
Postpaid⁵		73			143			(49.0)%		122			(51)			-	%
Prepaid⁴		453			267			69.7		694			549			26.4
Branded Net Additions		526			410			28.3		816			498			63.9
Reseller		(444	)		(368	)		(20.7)		(832	)		(950	)		12.4
Connected devices^{2, 4}		2,982			2,256			32.2		5,710			4,828			18.3
Wireless Net Subscriber Additions		3,064			2,298			33.3		5,694			4,376			30.1


Smartphones sold under our installment programs during period		3,644			3,583			1.7 %		7,637			7,084			7.8	%
Branded Churn³		1.50%			1.57%			(7) BP		1.57%			1.64%			(7) BP
Postpaid Churn³		1.02%			1.01%			1 BP		1.04%			1.07%			(3) BP
Postpaid Phone Only Churn^3,5		0.82%			0.79%			3 BP		0.83%			0.84%			(1) BP

¹	Excludes acquisition-related additions during the period.

²	Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes postpaid tablets. See (5) below.

³	Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for each month of that period.

⁴	Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars, as a component of prepaid subscribers, resulting in 97 and 146 additional prepaid net adds in the second quarter and first six months of 2018.

⁵	Postpaid phone net adds were 46 and (89) in the second quarter and 24 and (437) for the first six months of 2018 and 2017, respectively.

Operating income ~~decreased $76,~~ increased $130, or ~~1.4%~~2.4%, in the ~~third~~second quarter and ~~$191,~~$68, or ~~1.2%~~0.6%, for the first ~~nine~~six months of ~~2017.~~2018. The ~~third-quarter~~second-quarter operating income margin of AT&T Mobility increased from ~~29.6%~~30.8% in ~~2016~~2017 to ~~30.5%~~31.9% in ~~2017~~2018 and for the first ~~nine~~six months increased from ~~29.6%~~30.7% in ~~2016~~2017 to ~~30.3%~~30.8% in ~~2017.~~2018. AT&T ~~Mobility's third-quarter~~Mobility’s second-quarter EBITDA margin increased from ~~41.2%~~42.2% in ~~2016~~2017 to ~~42.0%~~44.1% in ~~2017~~2018 and for the first ~~nine~~six months increased from ~~41.1%~~42.2% in ~~2016~~2017 to ~~41.9%~~42.9% in ~~2017.~~2018. AT&T ~~Mobility's third-quarter~~Mobility’s second-quarter EBITDA service margin increased from ~~50.1%~~50.9% in ~~2016~~2017 to ~~50.4%~~55.7% in ~~2017~~2018 and for the first ~~nine~~six months increased from ~~49.8%~~50.4% in ~~2016~~2017 to ~~50.0%~~54.9% in ~~2017~~2018 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues).

Our 2018 margins were positively impacted by our policy election to net USF fees.

Subscriber Relationships

As the wireless industry ~~continues to mature,~~has matured, future wireless growth will ~~become~~ increasingly ~~dependent~~depend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings with our video and broadband services. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile video and data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a ~~maturing~~mature and highly competitive market, we have launched a wide variety of plans, including unlimited and bundled services, as well as equipment installment programs. ~~Beginning in~~

ARPU

Postpaid phone-only ARPU was $54.18 for the second quarter and $53.63 for the first ~~quarter~~six months of 2018, compared to $58.30 and $58.20 in 2017, ~~we expanded our unlimited wireless data plans to make them available to customers that do not subscribe to our video services.~~primarily reflecting lower revenues recognized under new revenue accounting standards. ARPU

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

~~ARPU~~

Postpaid phone-only ARPU was $58.29 for the third quarter and $58.23 for the first nine months of 2017, compared to $59.64 and $59.66 in 2016. Postpaid phone-only ARPU plus equipment installment billings was $68.95 for the third quarter and $68.94 for the first nine months of 2017, compared to $69.99 and $69.83 in 2016. ARPU

has also been affected by customers shifting to unlimited plans, which decreases overage revenues; however, customers are adding additional devices helping to offset that decline.

Churn

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. ~~Total~~Postpaid churn was slightly higher in the second quarter, but lower for the ~~third quarter and~~ first ~~nine~~six months of ~~2017. Postpaid churn was higher for the third quarter and first nine months of 2017, driven by~~2018, even with higher tablet churn. Postpaid ~~phone-only~~phone only churn was ~~lower~~higher in the ~~third~~second quarter, ~~and first nine months of 2017, despite competitive pressure in~~but lower for the ~~industry.~~

six months.

Branded Subscribers

Branded subscribers increased ~~1.1%~~0.5% in the ~~third~~second quarter of ~~2017~~2018 when compared to March 31, 2018 and increased 2.6% when compared to June 30, ~~2017~~2017. The year-over-year increase includes increases of 0.5% and ~~increased 2.4% when compared to September 30, 2016. Both the sequential~~14.3% in postpaid and ~~year-over-year increases reflect postpaid subscribers remaining essentially flat while~~ prepaid subscribers, ~~grew 6.7% and 16.1%,~~ respectively. Beginning in July 2017, we are reporting prepaid IoT connections, which primarily consist of "connected" cars where customers actively subscribe for vehicle connectivity, as a component of prepaid subscribers. The prepaid subscriber base at September

At June 30, ~~2017 now includes~~2018, approximately ~~543,000 subscribers that were formerly included in connected devices.~~

~~At September 30, 2017, 92%~~94% of our postpaid phone subscriber base used smartphones, compared to ~~90%~~92% at ~~September~~June 30, ~~2016,~~2017, with ~~more than 95%~~the majority of phone sales during both years attributable to smartphones. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. ~~Device connections on our Mobile Share and unlimited wireless data plans now represent 86% of our postpaid customer base, compared to 83% at September 30, 2016.~~ Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.

Our equipment installment purchase programs ~~including AT&T Next,~~ allow for postpaid subscribers to purchase certain devices in installments over a ~~period of up to 30 months. Additionally, after a~~ specified period of time, ~~AT&T Next subscribers also have~~with the ~~right~~option to trade in the original device for a new device ~~with a new installment plan~~ and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest.paid or settled once conditions are met. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. ~~At September 30, 2017, about 53%~~Over half of the postpaid smartphone base is on an equipment installment program ~~compared to 50% at September 30, 2016. Over 90%~~and the majority of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plans or Bring Your Own Device (BYOD). While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

Connected Devices

Connected ~~Devices~~devices includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Connected device subscribers increased ~~5.0%~~7.2% during the ~~third~~second quarter when compared to March 31, 2018 and 29.0% when compared to June 30, ~~2017 and 20.2% when compared to September 30, 2016.~~2017. During the ~~third~~second quarter and first ~~nine~~six months of ~~2017,~~2018, we added approximately ~~1.5~~1.9 million and ~~4.7~~3.6 million wholesale connected cars ~~respectively,~~ through agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

~~OTHER BUSINESS MATTERS~~

~~Time Warner Inc. Acquisition~~ In October 2016, we announced an agreement (Merger Agreement) to acquire 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). 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. The cash portion of the purchase price will be financed with new debt and cash. The transaction remains subject to review by the U.S. Department of Justice, but is

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

~~expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for~~

Supplemental Results Under Historical Accounting Method

As a supplemental discussion of our ~~financing arrangements.~~

~~FirstNet~~ ~~On March~~operating results, we are providing results under the comparative historical accounting method prior to our adoption of ASC 606 for the three-months ended June 30, ~~2017, the First Responder Network Authority (FirstNet) announced its selection of~~ 2018.


	Second Quarter
	Reported			Promotions & Other			USF		Commission Deferrals			Historical Accounting
Service Revenues
Consumer Mobility	$	11,853		$	(245	)		$ (358)	$	-		$	12,456
Business Solutions		8,282			(146	)		(384)		-			8,812
Entertainment Group		11,647			(44	)		(162)		-			11,853
International		1,671			(40	)		-		-			1,711
Corporate and Other		320			(7	)		(4)		-			331
AT&T Service Revenues		33,773			(482	)		(908)		-			35,163
AT&T Mobility		13,682			(390	)		(423)		-			14,495

Equipment Revenues
Consumer Mobility		3,016			291			-		-			2,725
Business Solutions		781			158			-		-			623
Entertainment Group		3			-			-		-			3
International		280			18			-		-			262
Corporate and Other		-			2			-		-			(2	)
AT&T Equipment Revenues		4,080			469			-		-			3,611
AT&T Mobility		3,600			451			-		-			3,149

Total Operating Revenues
Consumer Mobility		14,869			46			(358)		-			15,181
Business Solutions		9,063			12			(384)		-			9,435
Entertainment Group		11,650			(44	)		(162)		-			11,856
International		1,951			(22	)		-		-			1,973
WarnerMedia		1,275			(2	)		-		-			1,277
Corporate and Other		319			(5	)		(4)		-			328
Eliminations		(141	)		-			-		-			(141	)
AT&T Operating Revenues		38,986			(15	)		(908)		-			39,909
AT&T Mobility		17,282			61			(423)		-			17,644

Total Operating Expenses
Consumer Mobility		9,891			85			(358)		(298	)		10,462
Business Solutions		7,103			4			(384)		(63	)		7,546
Entertainment Group		10,198			2			(162)		(265	)		10,623
International		2,116			6			-		(47	)		2,157
WarnerMedia		824			(6	)		-		-			830
Corporate and Other		2,529			4			(4)		-			2,529
Eliminations		(141	)		-			-		-			(141	)
AT&T Operating Expenses		32,520			95			(908)		(673	)		34,006
AT&T Mobility		11,776			86			(423)		(333	)		12,446

Total Operating Income
Consumer Mobility		4,978			(39	)		-		298			4,719
Business Solutions		1,960			8			-		63			1,889
Entertainment Group		1,452			(46	)		-		265			1,233
International		(165	)		(28	)		-		47			(184	)
WarnerMedia		451			4			-		-			447
Corporate and Other		(2,210	)		(9	)		-		-			(2,201	)
AT&T Operating Income		6,466			(110	)		-		673			5,903
AT&T Mobility		5,506			(25	)		-		333			5,198

AT&T INC.

JUNE 30, 2018

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

Consumer Mobility

Supplemental Segment Results


	Second Quarter
	Reported 2018		Accounting Impact			Historical Method 2018		2017		Percent Change
Segment operating revenues
Service	$	11,853	$	(603	)	$	12,456	$	12,467		(0.1	)%
Equipment		3,016		291			2,725		2,624		3.8
Total Segment Operating Revenues		14,869		(312	)		15,181		15,091		0.6

Segment operating expenses
Operations and support		8,085		(571	)		8,656		8,636		0.2
EBITDA		6,784		259			6,525		6,455		1.1
Depreciation and amortization		1,806		-			1,806		1,716		5.2
Total Segment Operating Expenses		9,891		(571	)		10,462		10,352		1.1
Segment Operating Income		4,978		259			4,719		4,739		(0.4	)
Equity in Net Income of Affiliates		-		-			-		-		-
Segment Contribution	$	4,978	$	259		$	4,719	$	4,739		(0.4	)%


Operating Income Margin		33.5%					31.1%		31.4%		(30)BP
EBITDA Margin		45.6%					43.0%		42.8%		20 BP
EBITDA Service Margin		57.2%					52.4%		51.8%		60 BP

AT&T INC.

JUNE 30, 2018

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

Supplemental Segment Results


	Second Quarter
	Reported 2018		Accounting Impact		Historical Method 2018		2017		Percent Change
Segment operating revenues
Wireless service	$	1,829		$ (209)	$	2,038	$	2,004		1.7	%
Strategic services		3,039		(2)		3,041		2,958		2.8
Legacy voice and data services		2,723		(251)		2,974		3,423		(13.1)
Other service and equipment		888		(70)		958		922		3.9
Wireless equipment		584		160		424		360		17.8
Total Segment Operating Revenues		9,063		(372)		9,435		9,667		(2.4)

Segment operating expenses
Operations and support		5,616		(443)		6,059		6,053		0.1
EBITDA		3,447		71		3,376		3,614		(6.6)
Depreciation and amortization		1,487		-		1,487		1,483		0.3
Total Segment Operating Expenses		7,103		(443)		7,546		7,536		0.1
Segment Operating Income		1,960		71		1,889		2,131		(11.4)
Equity in Net Income of Affiliates		1		-		1		-		-
Segment Contribution	$	1,961	$	71	$	1,890	$	2,131		(11.3)	%


Operating Income Margin		21.6%				20.0%		22.0%		(200)	BP
EBITDA Margin		38.0%				35.8%		37.4%		(160)	BP

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Entertainment Group

Supplemental Segment Results


	Second Quarter
	Reported 2018			Accounting Impact		Historical Method 2018			2017			Percent Change
Segment operating revenues
Video entertainment	$	8,331		$	(107)	$	8,438		$	9,153			(7.8)	%
High-speed internet		1,981			-		1,981			1,927			2.8
Legacy voice and data services		785			(33)		818			981			(16.6)
Other service and equipment		553			(66)		619			600			3.2

Total Segment Operating Revenues		11,650			(206)		11,856			12,661			(6.4)


Segment operating expenses
Operations and support		8,852			(425)		9,277			9,561			(3.0)

EBITDA		2,798			219		2,579			3,100			(16.8)

Depreciation and amortization		1,346			-		1,346			1,458			(7.7)

Total Segment Operating Expenses		10,198			(425)		10,623			11,019			(3.6)

Segment Operating Income		1,452			219		1,233			1,642			(24.9)
Equity in Net Income (Loss) of Affiliates		(20)			-		(20)			(12)			(66.7)

Segment Contribution	$	1,432		$	219	$	1,213		$	1,630			(25.6	)%


Operating Income Margin		12.5	%				10.4	%		13.0	%		(260)	BP
EBITDA		24.0	%				21.8	%		24.5	%		(270)	BP

AT&T INC.

JUNE 30, 2018

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

International

Supplemental Segment Results


	Second Quarter
							Historical
	Reported			Accounting			Method						Percent
	2018			Impact			2018			2017			Change
Segment operating revenues
Video entertainment	$	1,254		$	-		$	1,254		$	1,361			(7.9)%
Wireless service		417			(40	)		457			535			(14.6)
Wireless equipment		280			18			262			130			-
Total Segment Operating Revenues		1,951			(22	)		1,973			2,026			(2.6)

Segment operating expenses
Operations and support		1,803			(41	)		1,844			1,772			4.1
EBITDA		148			19			129			254			(49.2)
Depreciation and amortization		313			-			313			311			0.6
Total Segment Operating Expenses		2,116			(41	)		2,157			2,083			3.6
Segment Operating Income (Loss)		(165	)		19			(184	)		(57	)		-
Equity in Net Income (Loss) of Affiliates		15			-			15			25			(40.0)
Segment Contribution	$	(150	)	$	19		$	(169	)	$	(32	)		- %


Operating Income Margin		-8.5	%					-9.3	%		-2.8	%		(650)BP
EBITDA Margin		7.6	%					6.5	%		12.5	%		(600)BP

AT&T Mobility Supplemental Results


	Second Quarter
						Historical
	Reported		Accounting			Method				Percent
	2018		Impact			2018		2017		Change
Operating revenues
Service	$	13,682	$	(813	)	$	14,495	$	14,471		0.2%
Equipment		3,600		451			3,149		2,984		5.5
Total Operating Revenues		17,282		(362	)		17,644		17,455		1.1

Operating expenses
Operations and support		9,663		(670	)		10,333		10,091		2.4
EBITDA		7,619		308			7,311		7,364		(0.7)
Depreciation and amortization		2,113		-			2,113		1,988		6.3
Total Operating Expenses		11,776		(670	)		12,446		12,079		3.0
Operating Income	$	5,506	$	308		$	5,198	$	5,376		(3.3) %


Operating Income Margin		31.9%					29.5%		30.8%		(130)BP
EBITDA Margin		44.1%					41.4%		42.2%		(80)BP
EBITDA Service Margin		55.7%					50.4%		50.9%		(50)BP

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

OTHER BUSINESS MATTERS

Time WarnerOn June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’s vast library of content and ability to ~~build~~create new premium content for audiences around the world with our extensive customer relationships and ~~manage~~distribution, one of the ~~first nationwide~~world’s largestpay-TV subscriber bases and scale in TV, mobile and broadband network dedicated to America's first responders. FirstNet will provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout.distribution. We expect that the transaction will advance ourdirect-to-consumer efforts and provide us with the ability to ~~spend about $40,000, in part recoverable from FirstNet, over~~develop innovative new content offerings.

Under the ~~life~~merger agreement, each share of ~~the 25-year contract~~Time Warner stock was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to ~~build, operate and maintain the network.~~trusts consolidated by AT&T, ~~will construct~~share-based payment arrangements and ~~operate the network and provide sustainability payments~~fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to FirstNet. Sustainability payments are required to be used for the operating expenses of FirstNet and to fund network improvements included in our $40,000 estimate. FirstNet's operating expenses are anticipated to beTime Warner shareholders, giving them an approximate 16% stake in the ~~$75-$100 range annually,~~combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and ~~when adjusted for inflation,~~$42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On July 12, 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we ~~expect~~will continue to bevigorously defend our legal position in the $3,000 range over the life of the 25-year contract. After FirstNet's operating expenses are paid, we anticipate that the remaining amount, expected to be in the $15,000 range, will be reinvested into the network. As of November 2, 2017, 30 states and territories have opted-in to the program, representing 38%, or approximately $6,900, of this total sustainability payment commitment. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states and territories electing to participate in FirstNet.

appellate court.

Litigation Challenging ~~DIRECTV's~~DIRECTV’s NFL SUNDAY TICKETMore than two dozen putative class actions were filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL). These cases were brought by residential and commercial DIRECTV subscribers that have purchased NFL SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have ~~"pooled"~~“pooled” their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge ~~"supra-competitive"~~“supra-competitive” prices for the NFL SUNDAY TICKET package. The complaints seek unspecified treble damages and ~~attorneys'~~attorneys’ fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management ofpre-trial proceedings. ~~In June 2016, the plaintiffs filed a consolidated amended complaint.~~ We vigorously dispute the allegations the complaints have asserted. In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. InIn June 2017, the court granted the NFL ~~defendants'~~defendants’ motion to dismiss the complaint without leave to amend, finding that: (1) the plaintiffs did not plead a viable market; (2) the plaintiffs did not plead facts supporting the contention that the exclusive agreement between the NFL and DIRECTV harms competition; (3) the claims failed to overcome the fact that the NFL and its teams must cooperate to sell broadcasts; and (4) the plaintiffs do not have standing to challenge the horizontal agreement among the NFL and the teams. In light of the order granting the motion to dismiss, the court denied ~~DIRECTV's~~DIRECTV’s motion to compel arbitration as moot. In July 2017, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit, which is pending.

The appeal has been fully briefed and we anticipate the oral argument will occur in 2019.

Federal Trade Commission Litigation Involving DIRECTVIn March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online ~~Shoppers'~~Shoppers’ Confidence Act. The ~~FTC's~~FTC’s allegations concern ~~DIRECTV's~~DIRECTV’s advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We vigorously dispute these allegations. A bench trial began onin August ~~14,~~ 2017, and was suspended ~~on August 25, 2017,~~ after the FTC rested its case, so that the court could consider ~~DIRECTV's~~DIRECTV’s motion for judgment. The hearing on the motion occurred onin October ~~25,~~ 2017, and the judge took it under advisement.

Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The ~~FTC's~~FTC’s allegations concern the application of AT~~&T's~~&T’s Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the ~~customer's~~customer’s billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts

posts, internet browsing and many other applications are typically unaffected. Contrary to the ~~FTC's~~FTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and, onin August ~~29,~~ 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC asked the Court of Appeals to reconsider the decision "“en banc,"” which the Court agreed to do. ~~The~~ In February 2018, the Court issued itsen banc ~~hearing was held on September 19, 2017. We do not expect a~~ decision, ~~until early 2018.~~finding that the FTC had jurisdiction to proceed with the lawsuit. In addition to the FTC case, several class actions ~~have been~~were filed ~~also~~ challenging our MBR program. We ~~vigorously dispute the allegations the complaints have asserted.~~

secured dismissals in each of these cases exceptRoberts v. AT&T ~~INC.~~

~~SEPTEMBER 30, 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~~

Mobility LLC, which is ongoing.

Labor Contracts ~~As of September 30, 2017, we employed~~ A contract covering approximately ~~257,000 persons. Approximately 46% of~~9,500 traditional wireline employees in our Midwest region expired in April 2018 and employees are ~~represented by~~working under the ~~Communications Workers of America, the International Brotherhood of Electrical Workers or other unions. After expiration~~terms of the ~~agreements, work~~prior contract, including benefits, while negotiations continue. In addition, a contract covering approximately 3,600 traditional wireline employees in our legacy AT&T Corp. business also expired in April 2018. Those employees are also working under the terms of their prior contract, including benefits, while negotiations continue. Work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

~~A summary of labor contract negotiations, by region or employee group, is as follows:~~

Approximately 20,000 mobility employees across the country are covered by a contract that expired in early 2017. We continue to negotiate with labor representatives. On October 30, 2017, we presented a contract that provides for, among other things, compounded annual wage increases totaling nearly 10% over the term of the contract and continued health care coverage. The contract is subject to acceptance and ratification.

·	Approximately 15,000 traditional wireline employees in our West region are covered by a contract that expired in April 2016. In August, these employees, along with 2,300 legacy DIRECTV non-management employees, ratified a new four-year contract that will expire in April 2020.

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. Since the Telecom Act was passed, the 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. ~~However, based on their public statements and written opinions, we expect the~~The new leadership at the FCC ~~to chart~~is charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on its public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. 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 allIP-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 April ~~20,~~ 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-based services, extends such light touch pricing regulation to high-speed ~~TDM~~Time Division Multiplex (TDM) transport services and to most of our TDM channel termination services, based on a competitive market test for such services. For those services that do not qualify for light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the ~~FCC's~~FCC’s decision. These appeals were consolidated in the U.S. Court of Appeals for the Eighth Circuit, where they remain pending.

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, includingso-called ~~"edge"~~ “edge” providers such as Google and Facebook. OnIn 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 June 2017,~~

AT&T INC.

JUNE 30, 2018

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

Privacy-related legislation has been considered in a number of states since the ~~FCC released an order clarifying that providers~~Congressional Review act was passed. The policy environment is complex and rapidly evolving. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the State of California enacted comprehensive privacy legislation that gives California consumers the right to know what personal information is being collected about them, to know whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right toopt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information. The new law could significantly affect how data markets operate and will impose implementation costs and challenges. We will continue to ~~be subject~~support congressional action to codify a set of standard consumer rules of the internet including a federal privacy ~~requirements~~framework, which would have the effect of preempting state law under ~~section 222~~the supremacy clause of ~~The Communications Act of 1934 (Communications Act), but not~~ the ~~more restrictive rules that were adopted in October 2016.~~

U.S. Constitution.

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The ~~FCC's decision~~Order, which represented a departure from longstanding bipartisan precedent, significantly expanded ~~its~~the FCC’s authority to regulate ~~the provision of fixed and mobile broadband internet access services. AT&T and other providers of~~

~~AT&T INC.~~

~~SEPTEMBER 30, 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~~

broadband internet access services, ~~challenged~~as well as internet interconnection arrangements. AT&T and several other parties appealed the ~~FCC's~~FCC’s order. In June 2016, a divided panel of the District of Columbia Court of Appeals upheld the FCC’s rules by a2-1 vote, and petitions for rehearing en banc were denied in May 2017. Petitions for a writ of Certiorari at the U.S. Supreme Court remain pending. Meanwhile, in December 2017, the FCC reversed its 2015 decision ~~before~~by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties, including several state Attorneys General, net neutrality advocacy groups and others, have appealed the FCC’s December 2017 decision. Those appeals, which initially were consolidated in the U.S. Court of Appeals for the Ninth Circuit, were transferred at the request of the parties to the D.C. Circuit. In June 2016, a panel of the Court of Appeals upheld the FCC's classification of broadband internet access and the attendant rules by a 2-1 vote. On May 1, 2017, the Court of Appeals denied requests for rehearing filed by AT&T and several other parties. In May 2017,addition, although the FCC ~~initiated~~order expressly preempted inconsistent state or local measures, a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. AT&T fully supports an open internet and believes that Congress should pass bipartisannumber of states are considering or have adopted legislation that ~~codifies core principles~~would reimpose the very rules the FCC repealed, and in some cases, establish additional requirements that go beyond the FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. AT&T expects that these measures could result in further litigation. We will continue to support congressional action to codify a set of ~~net neutrality while maintaining a stable regulatory environment conducive to investment, future innovation and economic growth. On September 28, 2017, AT&T and other parties filed with~~standard consumer rules for the ~~United States Supreme Court petitions for certiorari to review the Court of Appeals decision.~~

internet.

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 provideIP-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 our services. Regulatory reform and passage of legislation is uncertain and depends on many factors.

We provide wireless services in robustly competitive markets, but are subject to substantial 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'~~providers’ prices and offerings are generally not subject to state or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areas of consumer protection and the deployment of cell sites and equipment. The anticipated industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of ~~"small cell"~~“small cell” equipment and therefore increase the need for ~~a quick~~local permitting ~~process.~~

~~The~~processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede broadband services, including small cell equipment. In March 2018, the FCC ~~has recognized that~~adopted an order to streamline the ~~explosive growth~~wireless infrastructure review process in order to facilitate deployment of ~~bandwidth-intensive~~next-generation wireless ~~data services requires~~facilities. Among other actions, the ~~U.S. government~~order excludes most small cell facilities from federal review under the National Environmental Policy Act and the National Historic Preservation Act, while clarifying and streamlining the process for tribal participation in historic preservation reviews where such review is still required. In addition, to ~~make more spectrum available. The FCC finished its most recent auction~~date, 21 states have adopted legislation to facilitate small cell deployment.

AT&T INC.

JUNE 30, 2018

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

Dollars in ~~April 2017~~millions except per share and per subscriber amounts

Also facilitating the deployment of ~~certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction").~~

Innext-generation wireless facilities, in May 2014, 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 itscase-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation ~~"screen"~~“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"~~“low band” spectrum that exceedsone-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our ~~customers'~~customers’ needs.

As the wireless industry ~~continues to mature,~~has matured, future wireless growth will ~~become~~ increasingly ~~dependent~~depend on our ability to offer innovative ~~video~~services, plans and ~~data~~devices and to provide these services ~~and~~in bundled product offerings to best utilize a wireless network that has sufficient spectrum and capacity to support these ~~innovations.~~innovations on as broad a geographic basis as possible. We continue to invest significant capital in expanding our network capacity, as well as to secure and utilize spectrum that meets our long-term needs. To that end, we have:

·●

Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in theAWS-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~~First Responder Network Authority (FirstNet) contract, which provides us with access to a20 MHz of nationwide low band ~~20 MHz of spectrum, assuming all states opt-in.~~spectrum.

·●

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.

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

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

~~Dollars~~

Connect America Fund Phase II Auction (Auction 903) The FCC plans to conduct a reverse auction to award government funding to the lowest bidders in ~~millions except per share and per subscriber amounts~~

~~Tax Reform~~ ~~On November 2, 2017, the Tax Cuts and Jobs Act was introduced~~exchange for providing broadband service to rural, high-cost areas in the U.S. ~~House of Representatives. If enacted, we expect~~where it ~~would stimulate investment, job creation and economic growth which would result in a positive impact on demand~~is uneconomic for ~~our services. As written, we anticipate~~carriers to offer broadband. This is the ~~legislation~~first time the FCC will ~~have a positive impact on our consolidated operations and cash flows.~~

award universal service funding through an auction.

LIQUIDITY AND CAPITAL RESOURCES

~~In anticipation~~

With the completion of the Time Warner transaction, we had ~~$48,499~~$13,523 in cash and cash equivalents available at ~~September~~June 30, ~~2017.~~2018. Cash and cash equivalents included cash of ~~$3,707~~$3,457 and money market funds and other cash equivalents of ~~$44,792.~~$10,066. Approximately ~~$888~~$1,226 of our cash and cash equivalents resided in foreign jurisdictions and were ~~primarily~~ in foreign ~~currencies; these funds are primarily used~~currencies, some of which may be subject to ~~meet working capital requirements of foreign operations.~~

restrictions on repatriation.

Cash and cash equivalents ~~increased $42,711~~decreased $36,975 since December 31, ~~2016.~~2017. In the first ~~nine~~six months of ~~2017,~~2018, 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 and other customer receivables to third ~~parties. We also~~parties, issuance of commercial paper and long-term debt and collateral received a ~~$1,438~~ ~~deposit refund~~ from ~~the FCC.~~banks and other participants in our derivative arrangements. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, the acquisition of Time Warner and wireless spectrum, payment of operating expenses, funding capital expenditures, debt repayments, and dividends to ~~stockholders,~~stockholders.

We actively manage the timing of our vendor payments to optimize the use of our cash. Among other things, we seek to have vendor payments made on90-day or greater terms, while providing vendors with access to bank facilities that permit earlier payments at the vendors’ cost. For example, for payments to a key supplier, we have arrangements that allow us to extend payment terms between approximately 40 to 60 days at an additional cost to us. We believe these arrangements provide benefits to us relative to alternative financing arrangements. During the second quarter of 2018 and for the ~~acquisition of wireless spectrum and other operations. We discuss many~~first six months then ended, the net impact of these ~~factors~~cash management activities on our cash flows provided by operating activities was not material.

AT&T INC.

JUNE 30, 2018

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

Dollars in ~~detail below.~~

millions except per share and per subscriber amounts

On December 22, 2017, federal tax reform was enacted into law. Beginning with 2018, the Act reduces the U.S. federal corporate tax rate from 35% to 21% and permits immediate deductions for certain new assets. As a result, cash taxes will be significantly lower than they would have been in 2018 and beyond without federal tax reform.

Cash Provided by or Used in Operating Activities

During the first ~~nine~~six months of ~~2017,~~2018, cash provided by operating activities was ~~$29,274,~~$19,176, compared to ~~$29,202~~$17,670 for the first ~~nine~~six months of ~~2016.~~2017. Higher operating cash flows in ~~2017~~2018 were primarily due to net tax refunds and contributions from WarnerMedia, offset by higher ~~receipts from our sale of AT&T Next receivables~~interest payments and ~~working capital improvements.~~

acquisition-related costs.

Cash Used in or Provided by Investing Activities

For the first ~~nine~~six months of ~~2017,~~2018, cash used in investing activities totaled ~~$15,266~~$52,635, and consisted primarily of ~~$15,756~~$40,715 for acquisition costs related to Time Warner and other acquisitions and $10,959 for capital expenditures, excluding interest during construction.

Investing activities also include a refund from the FCC in the amount of $1,438 in April 2017, resulting from the conclusion of the FCC's 600 MHz Auction. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910.

The majority of our capital expenditures are spent on our networks, ~~our video services~~including product development and related support systems. Capital expenditures, excluding interest during construction, increased ~~$473~~$209 in the first ~~nine~~six months. ~~The increase was primarily due to our continued fiber buildout and timing~~We do not report capital expenditures at the segment level. During 2018, approximately $800 of assets for FirstNet build ~~schedules in 2017 compared~~have been placed into service with ~~2016. Additionally, in~~a net cash impact of $100. Total reimbursements from the government for FirstNet during the first six months of 2018 were $336.

In connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing)., which are excluded from our investing activities and reported as financing activities. We enter into these supplier arrangements when the terms provide benefits to us relative to alternative financing arrangements. For the first ~~nine~~six months of ~~2017,~~2018, vendor financing payments related to capital investments ~~was $897. We do not report capital expenditures at~~were approximately $257. During the ~~segment level.~~

~~We continue to expect~~first six months, we entered into $188 of new vendor financing commitments, with $825 of vendor financing payables included in on our ~~2017 capital expenditures to be in~~June 30, 2018 consolidated balance sheet, of which $340 are due within one year and the ~~$22,000 range,~~remainder are due between two and ~~we expect our capital expenditures to be in the 15% range of service revenues or lower for each of the years 2017 through 2019.~~ five years.

The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. ~~Our capital spending takes into account existing tax law and does not reflect anticipated tax reform.~~ We ~~continue to focus~~are also focused on ensuring DIRECTV merger commitments are met.

As of June 30, 2018, we market ourfiber-to-the-premises network to 9.2 million customer locations and are on track to meet our FCC commitment of 12.5 million locations bymid-2019.

In 2018, we expect Capital investment, which consists of capital expenditures plus vendor financing payments, of approximately $25,000, $22,000 net of expected FirstNet reimbursements and vendor financing.

Cash Provided by or Used in Financing Activities

For the first ~~nine~~six months of ~~2017,~~2018, cash ~~provided by~~used in financing activities totaled ~~$28,703~~$3,720 and included net proceeds of ~~$46,761~~$26,478, primarily resulting from drawing $20,925 on our Term Loan Credit Agreements in connection with our acquisition of Time Warner. Net proceeds for the ~~following long-term debt issuances:~~

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

·	~~February issuance of $750 of 3.800% global notes due 2024.~~

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

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

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

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

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

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

·	March draw of $300 on a private financing agreement with Banco Nacional de Mexico, S.A. due March 2019. The agreement contains terms similar to that provided under our syndicated credit arrangements; the interest rate is a market rate.

~~AT&T INC.~~

~~SEPTEMBER 30, 2017~~

~~Item 2. Management's Discussion~~first six months of 2018 also include a $1,500 three-year floating rate note and ~~Analysis~~$2,000 of ~~Financial Condition and Results~~notes issued by our subsidiary, Vrio Corp. (Vrio), see discussion below.

During the first six months of ~~Operations - Continued~~

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

·	~~May issuance of $1,500 floating rate global notes due 2021. The floating rate for the notes is based upon the three-month LIBOR, reset quarterly, plus 95 basis points.~~

·	~~May issuance of CAD$600 of 2.850% global notes due 2024 and CAD$750 of 4.850% global notes due 2047 (together, equivalent to $994, when issued).~~

·	~~June issuance of £1,000 of 3.550% global notes due 2037, subject to mandatory redemption (equivalent to $1,282 when issued).~~

June issuance of €750 of 1.050% global notes due 2023, €1,750 of 1.800% global notes due 2026, €1,500 of 2.350% global notes due 2029, €1,750 of 3.150% global notes due 2036 and €1,250 of floating rate global notes due 2023. All except the 2036 global notes are subject to mandatory redemption (together, equivalent to $7,883, when issued).

~~August issuance of $750 of floating rate notes due 2023,~~ $1,750 of 2.85% global notes due 2023, $3,000 of 3.40% global notes due 2024, $5,000 of 3.90% global notes due 2027, $4,500 of 4.90% global notes due 2037, $5,000 of 5.15% global notes due 2050 and $2,500 of 5.30% global notes due 2058. All are subject to mandatory redemption.

~~For~~2018, we redeemed $29,447 of debt. Approximately $21,236 were notes subject to mandatory redemption ~~($29,801),~~ if we dodid not ~~consummate the~~complete our acquisition of Time Warner ~~acquisition pursuant to the merger agreement, on or prior to~~by April 22, ~~2018, or, if prior to such date, the merger agreement is terminated, then in either case we must redeem certain~~2018. The remaining amount primarily consisted of the ~~notes at a redemption price equal to 101% of the principal amount of the notes, plus accrued but unpaid interest.~~

~~On October 27, 2017, we issued $1,150 of 5.35% global notes due 2066. The underwriters have an option to purchase up to an additional $173 aggregate principal amount within 30 days of the offering.~~

On October 30, 2017, we launched an exchange offer covering approximately $24,000 of notes issued by AT&T Inc., DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. due between 2020 and 2023. We may issue up to $8,000 of new AT&T Inc. notes, subject to increase, due 2028 and 2030. Also on October 30, 2017, we offered to exchange approximately $9,000 of high-coupon existing AT&T Inc. notes and existing subsidiary notes for new AT&T Inc. notes. The notes covered in the exchange have coupons ranging from 5.85% to 8.75% and maturities from 2022 to 2097. The existing AT&T Inc. notes may be exchanged for new AT&T Inc. notes due 2046 and the subsidiary bonds may be exchanged for new AT&T Inc. notes due 2046 or new AT&T Inc. notes with identical coupon and maturity as the existing subsidiary notes. We are also seeking consent of bondholders to modify the covenants of the subsidiary indentures to generally conform to AT&T Inc.'s indenture. ~~The exchange offers will expire on November 28, 2017.~~

~~During the first nine months of 2017, we redeemed or repaid $10,309 of debt, primarily consisting of the following:~~

following redemptions:

●

$~~1,142~~2,500 of ~~2.400% global~~5.500% notes due ~~2017.~~2018.

●

$750 of 1.750% notes due 2018.

●

$300 of 6.450% notes due 2018.

●

$1,000 of ~~1.600% global~~5.600% notes due ~~2017.~~2018.

●

$~~500~~1,000 of ~~floating rate~~ notes ~~due 2017.~~issued by our subsidiary, Vrio.

·	~~£750 of 5.875% global notes due 2017.~~

·●	~~$750 repayment of a private financing agreement with Export Development Canada due 2017.~~

·	$~~1,150 of 1.700% global notes due 2017.~~

·	~~$4,155~~2,000 repayment of amounts outstanding under ~~our syndicated credit agreement.~~WarnerMedia’s Term Credit Agreement.

●

$600 of 6.875% WarnerMedia notes due 2018.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately ~~4.4%~~4.3% as of ~~September~~June 30, ~~2017, compared to 4.2%~~2018 and 4.4% as of December 31, ~~2016.~~2017. We had ~~$162,450~~$180,209 of total notes and debentures outstanding at ~~September~~June 30, ~~2017,~~2018, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately ~~$37,260.~~$36,146.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

As a result of ~~September~~the Time Warner acquisition, we acquired debt with a fair value of $22,846 at the time of acquisition, of which $18,876 at face value remained on our balance sheet as of June 30, 2018. The face value of the remaining debt acquired is summarized primarily as follows:

●

$1,108 maturing between 2018 and 2019 with an interest rate ranging from 1.250% to 2.100%.

●

$6,906 maturing between 2020 and 2024 with an interest rate ranging from 1.950% to 9.150%.

●

$5,898 maturing between 2025 and 2034 with an interest rate ranging from 2.950% to 7.700%.

●

$4,964 maturing between 2035 and 2045 with an interest rate ranging from 4.650% to 8.300%.

At June 30, 2018, we had $21,672 of debt maturing within one year, including $8,139 of commercial paper borrowing and $13,323 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

●

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

●

An accretingzero-coupon note that may be redeemed each May until maturity in 2022. In May 2017, $1 was redeemed by the holder for $1. If the remainder of thezero-coupon note (issued for principal of $500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592.

Vrio, a consolidated holding company for our Latin American digital entertainment services units, DIRECTV Latin American and SKY Brasil, subsidiaries of Vrio, entered into the following long-term debt issuances:

●

April 5, 2018 issuance of $650 of 6.25% notes due 2023 and $350 of 6.875% notes due 2028. These notes were redeemed following our April 2018 withdrawal of the planned IPO of Vrio.

●

April 11, 2018 borrowing of approximately $1,000 of debt denominated in Brazilian reais that matures in 2023. The floating rate for the facility is based upon the Brazil interbank deposit rate annualized (DI Rate), plus 175 basis points.

On July 25, 2018 we issued $750 of 5.625% global notes due 2067. The underwriters have an option to purchase up to an additional $113 aggregate principal amount within 30 days of the offering.

On July 30, 2018 we issued €2,250 ($2,637 U.S. dollar equivalent) floating rate global notes due 2020.

At June 30, 2018, we had approximately ~~388~~376 million shares remaining from ~~2013 and 2014~~share repurchase authorizations ~~from our~~approved by the Board of Directors ~~to repurchase shares of our common stock.~~in 2013 and 2014. During the first ~~nine~~six months of ~~2017,~~2018, we repurchased approximately 713 million shares ~~totaling $279~~ under these authorizations. ~~In 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 ~~$9,030~~$6,144 during the first ~~nine~~six months of ~~2017,~~2018, compared with ~~$8,850~~$6,021 for the first ~~nine~~six months of ~~2016,~~2017, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in ~~October 2016.~~December 2017. Dividends declared by our Board of Directors totaled ~~$0.49 per share in the third quarter and $1.47~~$1.00 per share in the first ~~nine~~six months of ~~2017~~2018 and ~~$0.48~~$0.98 per share ~~in the third quarter and $1.44~~ for the first ~~nine~~six months of ~~2016.~~2017. Our dividend policy considers the

~~AT&T INC.~~

~~SEPTEMBER 30, 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~~

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 September 30, 2017, we had $8,551 of debt maturing within one year, $8,379 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

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

·	An accreting zero-coupon note that may be redeemed each May until maturity in 2022. In May 2017, $1 was redeemed by the holder for $1. If the remainder of the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,029.

Credit Facilities

The 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 Form10-K.

We use credit facilities as a tool in managing our liquidity status. ~~In December 2015,~~At June 30, 2018, we ~~entered into a~~had no amounts outstanding on our five-year $12,000 revolving credit ~~agreement of which no amounts are outstanding as of~~agreement.

In September ~~30, 2017. On September 5, 2017 we repaid all of the amounts outstanding under our $9,155 syndicated credit agreement and terminated the facility. On September 29,~~ 2017, we entered into a ~~five-year~~ $2,250 syndicated term loan credit agreement containing (i) a three-year $750 term loan facility (the ~~"Tranche~~“Tranche A ~~Facility)~~Facility”), (ii) a four-year $750 term loan facility (the ~~"Tranche~~“Tranche B ~~Facility"~~Facility”) and (iii) a five-year $750 term loan facility (the ~~"Tranche~~“Tranche C ~~Facility"~~Facility”), with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. ~~No amounts are outstanding under~~We drew on the Tranche A Facility, the Tranche B Facility orand the Tranche C Facility during the first quarter of 2018, with $2,250 in advances outstanding as of ~~September~~June 30, ~~2017.~~2018.

AT&T INC.

JUNE 30, 2018

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 also ~~enter into~~utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment ~~purchases.~~

purchases, as well as a commercial paper program.

In ~~connection with our pending Merger with~~anticipation of the Time Warner acquisition, we entered into ~~a $30,000 bridge loan credit agreement ("Bridge Loan") and~~ a $10,000 term loan agreement ("(“Term ~~Loan"~~Loan”). ~~Following the August issuances of $22,500 of global notes,~~In February 2018, we ~~reduced the commitments under the Bridge Loan to $0 and terminated the facility. No amounts will be borrowed under~~amended the Term Loan ~~prior~~ to extend the ~~closing of~~commitment termination date to December 31, 2018 and increased the ~~Merger. Borrowings under~~commitments to $16,175 from $10,000. We drew on the Term Loan ~~will be used solely~~for the acquisition during the second quarter of 2018, with $16,175 outstanding as of June 30, 2018.

On June 13, 2018, we entered into an additional $2,500 Term Loan Credit Agreement (“June 2018 Term Loan”) to finance a portion of the cash ~~to be paid in~~consideration of the ~~Merger, the refinancing of debt of~~ Time Warner acquisition. We accordingly drew on the agreement, with $2,500 outstanding as of June 30, 2018.

On June 26, 2018, we repaid and ~~its subsidiaries and~~terminated the ~~payment~~$2,000 unsecured term loan agreement that Time Warner had in place at the time the merger closed. At June 14, 2018, Time Warner had approximately $1,100 of ~~related expenses.~~

commercial paper outstanding, all of which was repaid by July 23, 2018.

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a netdebt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than3.5-to-1. As of ~~September~~June 30, ~~2017,~~2018, we were in compliance with the covenants for our credit facilities.

Collateral Arrangements

During the first ~~nine~~six months of ~~2017,~~2018, we ~~received $2,743~~posted $365 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. At September 30, 2017, we had posted collateral assets of $837 and received collateral liabilities of $338, compared to December 31, 2016, posted collateral assets of $3,242 and no collateral liabilities. (See Note 6)

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and ~~stockholders'~~stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At ~~September~~June 30, ~~2017,~~2018, our debt ratio was ~~56.4%~~50.8%, compared to ~~50.1%~~53.3% at ~~September~~June 30, ~~2016,~~2017 and ~~49.9%~~53.6% at December 31, ~~2016.~~2017. Our net debt ratio was ~~39.7%~~47.2% at ~~September~~June 30, 2018, compared to 43.8% at June 30, 2017 ~~compared to 47.8% at September 30, 2016~~ and ~~47.5%~~37.2% at December 31, ~~2016.~~2017. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

During the first ~~nine~~six months of ~~2017,~~2018, we received ~~$4,217~~$4,212 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

~~AT&T INC.~~

~~SEPTEMBER 30, 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 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 ~~pension~~ trust used to pay benefits under our qualified pension plans. The preferred equity interest had a value of ~~$9,354~~$8,829 as of ~~September~~June 30, ~~2017,~~2018, and ~~$8,477~~$9,155 as of December 31, ~~2016,~~2017, 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. ~~Mobility II~~We distributed ~~$420~~$280 to the trust during the first ~~nine~~six months of ~~2017.~~2018. So long as ~~those~~we make the distributions, ~~are made,~~ the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares.

During the third quarter, AT&T notified the trust and the fiduciary of the preferred interest that AT&T would not exercise its call option of the preferred interest until at least September 9, 2022, which raised the valuation of the preferred interest by approximately $1,245.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

Item 2. ~~Management's~~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 OFNON-GAAP ~~MEASURE~~ MEASURES

We believe the following ~~measure is~~measures are 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~~These supplemental ~~measure~~measures should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.

Supplemental Operational ~~Measure~~

Measures

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 removenon-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.


	Three Months Ended
	June 30, 2018									June 30, 2017

	Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility
Operating Revenues
Wireless service	$	11,853	$	1,829	$	-		$	13,682	$	12,467	$	2,004	$	-		$	14,471
Strategic services		-		3,039		(3,039	)		-		-		2,958		(2,958	)		-
Legacy voice and data services		-		2,723		(2,723	)		-		-		3,423		(3,423	)		-
Other service and equipment		-		888		(888	)		-		-		922		(922	)		-
Wireless equipment		3,016		584		-			3,600		2,624		360		-			2,984
Total Operating Revenues		14,869		9,063		(6,650	)		17,282		15,091		9,667		(7,303	)		17,455
Operating Expenses
Operations and support		8,085		5,616		(4,038	)		9,663		8,636		6,053		(4,598	)		10,091
EBITDA		6,784		3,447		(2,612	)		7,619		6,455		3,614		(2,705	)		7,364
Depreciation and amortization		1,806		1,487		(1,180	)		2,113		1,716		1,483		(1,211	)		1,988
Total Operating Expense		9,891		7,103		(5,218	)		11,776		10,352		7,536		(5,809	)		12,079
Operating Income	$	4,978	$	1,960	$	(1,432	)	$	5,506	$	4,739	$	2,131	$	(1,494	)	$	5,376

¹Business wireline operations reported in Business Solutions segment.

Three Months Ended
September 30, 2017 September 30, 2016
Consumer Mobility Business Solutions
Adjustments¹
AT&T Mobility Consumer Mobility Business Solutions
Adjustments¹
AT&T Mobility
Operating Revenues
   Wireless service $ 6,507 $ 8,034 $ - $ 14,541 $ 6,914 $ 8,050 $ - $ 14,964
   Fixed strategic services - 3,087 (3,087 ) - - 2,913 (2,913 ) -
   Legacy voice and data services - 3,434 (3,434 ) - - 4,042 (4,042 ) -
   Other service and equipment - 852 (852 ) - - 886 (886 ) -
   Wireless equipment 1,241 1,654 - 2,895 1,353 1,876 - 3,229
Total Operating Revenues 7,748 17,061 (7,373 ) 17,436 8,267 17,767 (7,841 ) 18,193

Operating Expenses
   Operations and support 4,551 10,233 (4,671 ) 10,113 4,751 10,925 (4,979 ) 10,697
EBITDA 3,197 6,828 (2,702 ) 7,323 3,516 6,842 (2,862 ) 7,496
   Depreciation and amortization 877 2,325 (1,192 ) 2,010 944 2,539 (1,376 ) 2,107
Total Operating Expense 5,428 12,558 (5,863 ) 12,123 5,695 13,464 (6,355 ) 12,804
Operating Income $ 2,320 $ 4,503 $ (1,510 ) $ 5,313 $ 2,572 $ 4,303 $ (1,486 ) $ 5,389
¹Non-wireless (fixed) operations reported in Business Solutions segment.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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

Dollars in millions except per share and per subscriber amounts


	Six Months Ended
	June 30, 2018									June 30, 2017

	Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility
Operating Revenues
Wireless service	$	23,465	$	3,620	$	-		$	27,085	$	24,932	$	4,007	$	-		$	28,939
Strategic services		-		6,109		(6,109	)		-		-		5,862		(5,862	)		-
Legacy voice and data services		-		5,561		(5,561	)		-		-		6,971		(6,971	)		-
Other service and equipment		-		1,727		(1,727	)		-		-		1,800		(1,800	)		-
Wireless equipment		6,390		1,162		-			7,552		4,965		648		-			5,613
Total Operating Revenues		29,855		18,179		(13,397	)		34,637		29,897		19,288		(14,633	)		34,552
Operating Expenses
Operations and support		16,609		11,210		(8,054	)		19,765		17,196		12,051		(9,271	)		19,976
EBITDA		13,246		6,969		(5,343	)		14,872		12,701		7,237		(5,362	)		14,576
Depreciation and amortization		3,613		2,945		(2,350	)		4,208		3,432		2,943		(2,395	)		3,980
Total Operating Expense		20,222		14,155		(10,404	)		23,973		20,628		14,994		(11,666	)		23,956
Operating Income	$	9,633	$	4,024	$	(2,993	)	$	10,664	$	9,269	$	4,294	$	(2,967	)	$	10,596

¹Business wireline operations reported in Business Solutions segment.

Nine Months Ended
September 30, 2017 September 30, 2016
Consumer Mobility Business Solutions
Adjustments¹
AT&T Mobility Consumer Mobility Business Solutions
Adjustments¹
AT&T Mobility
Operating Revenues
   Wireless service $ 19,644 $ 23,969 $ - $ 43,613 $ 20,805 $ 23,868 $ - $ 44,673
   Fixed strategic services - 9,089 (9,089 ) - - 8,469 (8,469 ) -
   Legacy voice and data services - 10,572 (10,572 ) - - 12,577 (12,577 ) -
   Other service and equipment - 2,513 (2,513 ) - - 2,619 (2,619 ) -
   Wireless equipment 3,635 4,873 - 8,508 3,976 5,422 - 9,398
Total Operating Revenues 23,279 51,016 (22,174 ) 52,121 24,781 52,955 (23,665 ) 54,071

Operating Expenses
   Operations and support 13,599 30,722 (14,013 ) 30,308 14,343 32,584 (15,105 ) 31,822
EBITDA 9,680 20,294 (8,161 ) 21,813 10,438 20,371 (8,560 ) 22,249
   Depreciation and amortization 2,621 6,972 (3,594 ) 5,999 2,798 7,568 (4,122 ) 6,244
Total Operating Expense 16,220 37,694 (17,607 ) 36,307 17,141 40,152 (19,227 ) 38,066
Operating Income $ 7,059 $ 13,322 $ (4,567 ) $ 15,814 $ 7,640 $ 12,803 $ (4,438 ) $ 16,005
¹Non-wireless (fixed) operations reported in Business Solutions segment.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At ~~September~~June 30, ~~2017,~~2018, we had interest rate swaps with a notional value of ~~$10,775~~$7,333 and a fair value of ~~$11.~~

$(89).

We havefixed-to-fixed andfloating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of ~~$38,694~~$36,092 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of ~~$(842)~~$(290) at ~~September~~June 30, ~~2017.~~

2018.

We have foreign exchange contracts with a U.S. dollar notional value of $2,399 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. These foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings and qualify as cash flow hedges with a net fair value of $55 at June 30, 2018.

We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.

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~~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~~registrant’s disclosure controls and procedures as of ~~September~~June 30, ~~2017.~~2018. Based on that evaluation, the chief executive officer and chief financial officer concluded that the ~~registrant's~~registrant’s disclosure controls and procedures were effective as of ~~September~~June 30, ~~2017.~~2018.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

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"~~“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'~~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'~~plans’ costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation 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 toIP-based infrastructure, including the withdrawal of legacyTDM-based services; universal service; broadband deployment; wireless equipment siting regulations; E911 services; competition policy; privacy; net ~~neutrality, including the FCC's order classifying broadband as Title II services subject to much more comprehensive regulation;~~neutrality; unbundled network elements and other wholesale obligations; multi-channel video programming distributor services and equipment; availability of new spectrum, on fair and balanced terms; and wireless and satellite license awards and renewals.

·●

The final outcome of state and federal legislative efforts involving issues that are important to our business, including deregulation ofIP-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.

·●

U.S. and foreign laws and regulations regarding privacy, personal data protection and user consent are complex and rapidly evolving and could result in impact to our business plans, increased costs, or claims against us that may harm our reputation.

●

Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP andover-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 totals and segment operating margins.

·●

Our ability to develop attractive and profitable product/service offerings to offset increasing ~~competition.~~competition and increasing fragmentation of customer viewing habits.

·●

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~~ non-regulation of comparable alternative technologies (e.g., ~~VoIP)~~VoIP and data usage).

·●

The continued development and delivery of attractive and profitable video and broadband offerings; the extent to which regulatory andbuild-out requirements apply to our offerings; our ability to match speeds offered by our competitors 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 video, wireless service and devices and device financing plans.

·●

Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits.

●

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~~

The U.S. Department of Justice prevailing on its appeal of the court decision permitting our ~~acquisition of DIRECTV.~~

·	~~Our ability to close our pending~~ acquisition of Time Warner Inc. ~~and~~

●

Our ability to successfully ~~reorganize our~~integrate the former Time Warner Inc. operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.

·●

Our ability to take advantage of the desire of advertisers to change traditional video advertising models.

●

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, including foreign exchange fluctuations as well as regulatory and political uncertainty.

·●

Changes in our corporate strategies, such as changing 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.

AT&T INC.

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2018

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form10-K was filed. ~~For~~

Our ability to successfully integrate our June 2018 acquisition of Time Warner, including the ~~third quarter 2017, there were no such material developments.~~risk that the costs savings and revenue synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of Time Warner’s existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.

We completed our acquisition of Time Warner in June 2018. We believe that the acquisition will give us the scale, resources and ability to deploy video content more efficiently to more customers than otherwise possible and to provide very attractive integrated offerings of video, broadband and wireless services; compete more effectively against other video providers as well as other technology, media and communications companies; create premium advertising opportunities, and produce cost and revenue synergies. We must integrate a large number of operational and administrative systems, which may involve significant management time and create uncertainty for employees, customers and suppliers. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. This acquisition also has increased the amount of debt on our balance sheet leading to additional interest expense and, due to the additional shares issued, will result in additional cash being required for any dividends declared. Both of these factors could put pressure on our financial flexibility to continue capital investments, develop new services and declare future dividends. In addition, events outside our control, including changes in regulation and laws as well as economic trends, could adversely affect our ability to realize the expected benefits from this acquisition. Following the closing, the U.S. Department of Justice filed an appeal of the court decision allowing us to complete the acquisition; we believe the lower court decision will be upheld.

AT&T INC.
JUNE 30, 2018
PART II – OTHER INFORMATION - CONTINUED
Dollars in millions except per share amounts
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the ~~third~~second quarter of ~~2017~~2018 is as follows:
      (a)    (b)    (c)    (d)
Period    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 Programs¹    Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs
April 1, 2018 -
April 30, 2018
   6,318,863    $ 32.99    6,317,000    381,979,000
May 1, 2018 -
May 31, 2018
   6,319,909    33.37    6,317,000    375,662,000
June 1, 2018 -
June 30, 2018
   738,393    33.23    -    375,662,000
Total
   13,377,165    $ 33.18    12,634,000
¹
~~(a)~~ ~~(b)~~ ~~(c)~~ ~~(d)~~
~~Period~~
~~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~~
~~July 1, 2017 -~~
~~July 31, 2017~~
  ~~19,060~~ $ ~~37.45~~ - ~~388,296,000~~
~~August 1, 2017 -~~
~~August 31, 2017~~
  ~~16,379~~ ~~38.88~~ - ~~388,296,000~~
~~September 1, 2017 -~~
~~September 30, 2017~~
~~618,928~~ ~~38.08~~ - ~~388,296,000~~
~~Total~~ ~~654,367~~ $ ~~38.10~~ -
¹In 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, 63,861~~
² Of the shares repurchased, 10,957 shares were acquired through the withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
³~~Of the shares repurchased, 590,506~~
³ Of the shares repurchased, 732,208 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.
50
~~AT&T INC.~~
~~SEPTEMBER 30, 2017~~
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as a part of this report:
Exhibit ~~Filed~~ ~~Incorporated by Reference~~
~~Number~~ ~~Exhibit Description~~ ~~Herewith~~ ~~Form~~ ~~Period Ending~~ ~~Exhibit~~ ~~Filing Date~~
~~10-a~~
~~Resolution Regarding John Donovan~~
x
~~10-b~~
~~Resolution Regarding John Stankey~~
x
~~10-c~~
~~Resolution Regarding John Stephens~~
x
~~10-d~~
~~AT&T Health Plan~~
x
~~10-e~~
~~2005 Supplemental Employee Retirement Plan~~
~~8-K~~ ~~10.1~~ ~~10/4/2017~~
~~10-f~~
~~Term Loan Credit Agreement~~
x
12
~~Computation of Ratios of Earnings to Fixed Charges~~
x
31 ~~Rule 13a-14(a)/15d-14(a) Certifications~~
~~31.1 Certification of Principal Executive Officer~~
x
~~31.2 Certification of Principal Financial Officer~~
x
32
~~Section 1350 Certifications~~
x
~~101~~ ~~XBRL Instance Document~~ x
51
~~SIGNATURE~~
Number Exhibit Description

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

~~November 3, 2017~~

~~AT&T Inc.~~
~~/s/ John J. Stephens~~
~~John J. Stephens~~
~~Senior Executive Vice President~~
    ~~and Chief Financial Officer~~

52
10-a AT&T Health Plan
10-b Agreement between Robert Quinn and AT&T Inc.
12 Computation of Ratios of Earnings to Fixed Charges
31 Rule13a-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
70

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.

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
Numerators
Numerator for basic earnings per share:
Net Income	$	3,123		$	3,418		$	10,711		$	10,818
Less: Net income attributable to noncontrolling interest		(94	)		(90	)		(298	)		(279	)
Net Income attributable to AT&T		3,029			3,328			10,413			10,539
Dilutive potential common shares:
Share-based payment		3			3			9			9
Numerator for diluted earnings per share	$	3,032		$	3,331		$	10,422		$	10,548
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		6,162			6,168			6,164			6,171
Dilutive potential common shares:
Share-based payment (in shares)		20			21			20			20
Denominator for diluted earnings per share		6,182			6,189			6,184			6,191
Basic earnings per share attributable to AT&T	$	0.49		$	0.54		$	1.69		$	1.70
Diluted earnings per share attributable to AT&T	$	0.49		$	0.54		$	1.69		$	1.70

		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			484			128			(174)			969			1,407
Amounts reclassified from accumulated OCI			-	¹		(86)	¹		29	²		(731)	³		(788)
Net other comprehensive income (loss)			484			42			(145)			238			619
Balance as of September 30, 2017		$	(1,511)		$	583		$	599		$	5,909		$	5,580

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

	September 30, 2017						December 31, 2016
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Notes and debentures ¹		$	162,450		$	171,025		$	122,381		$	128,726
Bank borrowings			2			2			4			4
Investment securities			2,565			2,565			2,587			2,587
¹ Includes credit agreement borrowings.

	2017
Outstanding derecognized receivables at January 1,	$	7,232
Gross receivables sold		6,217
Collections on cash purchase price		(3,556	)
Collections on deferred purchase price		(665	)
Trade ins and other		(295	)
Fair value of repurchased receivables		(1,281	)
Outstanding derecognized receivables at September 30,	$	7,652

	Third Quarter							Nine-Month Period
					Percent							Percent
	2017		2016		Change			2017		2016		Change
Operating Revenues
Service	$	36,378	$	37,272		(2.4	)%	$	109,372	$	111,515		(1.9	)%
Equipment		3,290		3,618		(9.1	)		9,498		10,430		(8.9	)
Total Operating Revenues		39,668		40,890		(3.0	)		118,870		121,945		(2.5	)

Operating expenses
Cost of services and sales
Equipment		4,191		4,455		(5.9	)		12,177		13,090		(7.0	)
Broadcast, programming and operations		5,284		4,909		7.6			15,156		14,239		6.4
Other cost of services		9,431		9,526		(1.0	)		27,714		28,436		(2.5	)
Selling, general and administrative		8,317		9,013		(7.7	)		24,917		26,363		(5.5	)
Depreciation and amortization		6,042		6,579		(8.2	)		18,316		19,718		(7.1	)
Total Operating Expenses		33,265		34,482		(3.5	)		98,280		101,846		(3.5	)
Operating Income		6,403		6,408		(0.1	)		20,590		20,099		2.4
Income Before Income Taxes		4,974		5,193		(4.2	)		16,422		16,621		(1.2	)
Net Income		3,123		3,418		(8.6	)		10,711		10,818		(1.0	)
Net Income Attributable to AT&T	$	3,029	$	3,328		(9.0	)%	$	10,413	$	10,539		(1.2	)%

	Three Months Ended
	September 30, 2017									September 30, 2016
	Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility
Operating Revenues
Wireless service	$	6,507	$	8,034	$	-		$	14,541	$	6,914	$	8,050	$	-		$	14,964
Fixed strategic services		-		3,087		(3,087	)		-		-		2,913		(2,913	)		-
Legacy voice and data services		-		3,434		(3,434	)		-		-		4,042		(4,042	)		-
Other service and equipment		-		852		(852	)		-		-		886		(886	)		-
Wireless equipment		1,241		1,654		-			2,895		1,353		1,876		-			3,229
Total Operating Revenues		7,748		17,061		(7,373	)		17,436		8,267		17,767		(7,841	)		18,193

Operating Expenses
Operations and support		4,551		10,233		(4,671	)		10,113		4,751		10,925		(4,979	)		10,697
EBITDA		3,197		6,828		(2,702	)		7,323		3,516		6,842		(2,862	)		7,496
Depreciation and amortization		877		2,325		(1,192	)		2,010		944		2,539		(1,376	)		2,107
Total Operating Expense		5,428		12,558		(5,863	)		12,123		5,695		13,464		(6,355	)		12,804
Operating Income	$	2,320	$	4,503	$	(1,510	)	$	5,313	$	2,572	$	4,303	$	(1,486	)	$	5,389
¹Non-wireless (fixed) operations reported in Business Solutions segment.


	(a)		(b)		(c)		(d)
Period	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 Programs¹		Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs

April 1, 2018 - April 30, 2018		6,318,863	$	32.99		6,317,000		381,979,000
May 1, 2018 - May 31, 2018		6,319,909		33.37		6,317,000		375,662,000
June 1, 2018 - June 30, 2018		738,393		33.23		-		375,662,000
Total		13,377,165	$	33.18		12,634,000

¹
	~~(a)~~	~~(b)~~		~~(c)~~	~~(d)~~
~~Period~~	~~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~~

~~July 1, 2017 -~~ ~~July 31, 2017~~	~~19,060~~	$	~~37.45~~	-	~~388,296,000~~
~~August 1, 2017 -~~ ~~August 31, 2017~~	~~16,379~~		~~38.88~~	-	~~388,296,000~~
~~September 1, 2017 -~~ ~~September 30, 2017~~	~~618,928~~		~~38.08~~	-	~~388,296,000~~
~~Total~~	~~654,367~~	$	~~38.10~~	-
¹In 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.

²	Of the shares repurchased, 10,957 shares were acquired through the withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
³~~Of the shares repurchased, 590,506~~

³	Of the shares repurchased, 732,208 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.

August 2, 2018

/s/ John J. Stephens

John J. Stephens

Senior Executive Vice President
and Chief Financial Officer