AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three Months Ended
March 31,
2016 2015

Operating Revenues
Service $ 37,101 $ 28,962
Equipment 3,434 3,614
Total operating revenues 40,535 32,576

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

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

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

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

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
	Three months ended						Three months ended
	March 31,						March 31,
	2016			2015			2017			2016
Net income	$	3,885		$	3,339		$	3,574		$	3,885
Other comprehensive income, net of tax:
Other comprehensive income (loss), net of tax:
Foreign currency:
Foreign currency translation adjustment, net of taxes of $(10) and $(104)		(44	)		(186	)
Foreign currency translation adjustment (includes $6 and $0 attributable to noncontrolling interest), net of taxes of $391 and $(10)								372			(44	)
Available-for-sale securities:
Net unrealized gains (losses), net of taxes of $(15) and $19		(26	)		33
Reclassification adjustment included in net income, net of taxes of $(2) and $(3)		(3	)		(5	)
Net unrealized gains (losses), net of taxes of $15 and $(15)								33			(26	)
Reclassification adjustment included in net income, net of taxes of $3, and $(2)								5			(3	)
Cash flow hedges:
Net unrealized gains (losses), net of taxes of $67 and $(190)		124			(354	)
Reclassification adjustment included in net income, net of taxes of $5 and $4		10			7
Net unrealized gains, net of taxes of $7 and $67								13			124
Reclassification adjustment included in net income, net of taxes of $5 and $5								10			10
Defined benefit postretirement plans:
Amortization of net prior service credit included in net income, net of taxes of $(131) and $(131)		(215	)		(215	)
Amortization of net prior service credit included in net income, net of taxes of $(139) and $(131)								(228	)		(215	)
Other comprehensive income (loss)		(154	)		(720	)		205			(154	)
Total comprehensive income		3,731			2,619			3,779			3,731
Less: Total comprehensive income attributable to noncontrolling interest		(82	)		(76	)		(111	)		(82	)
Total Comprehensive Income Attributable to AT&T	$	3,649		$	2,543		$	3,668		$	3,649
See Notes to Consolidated Financial Statements.

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

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

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

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

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

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

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

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

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

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
	March 31, 2017
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Issuance of stock		-			-
Balance at end of period		6,495		$	6,495

Additional Paid-In Capital
Balance at beginning of year				$	89,604
Issuance of treasury stock					4
Share-based payments					(197	)
Balance at end of period				$	89,411

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

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

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

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

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

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

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

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

Cash paid (received) during the three months ended March 31 for:
   Interest $ 1,459 $ 1,021
   Income taxes, net of refunds $ 477 $ (247 )
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
March 31, 2016
Shares Amount

Common Stock
Balance at beginning of year 6,495 $ 6,495
Issuance of stock - -
Balance at end of period 6,495 $ 6,495

Additional Paid-In Capital
Balance at beginning of year $ 89,763
Issuance of treasury stock (41 )
Share-based payments (308 )
Balance at end of period $ 89,414

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

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

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year $ 5,334
Other comprehensive loss attributable to AT&T (154 )
Balance at end of period $ 5,180

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. The results for the interim periods are not necessarily indicative of those for the full year.

In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

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

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

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

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

Recently Adopted Accounting Standards

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

New Accounting Standards

~~Leases~~Pension and Other Postretirement Benefits In ~~February 2016,~~March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. ~~2016-02, "Leases~~2017-07, "Compensation – Retirement Benefits (Topic ~~842)"~~715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU ~~2016-02)~~2017-07), which ~~replaces existing leasing rules with a comprehensive lease measurement~~changes the presentation of periodic benefit cost components. Under ASU 2017-07, we will continue to present service costs within our operating expenses but present amortization of prior service credits and ~~recognition standard and expanded disclosure requirements.~~other components of our net periodic benefit cost in "other income (expense)" in our consolidated statements of income. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding "right-of-use" assets. Leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.

~~Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. The income statement recognition appears similar to our current methodology.~~

~~ASU 2016-02 becomes~~2017-07 is effective for annual reporting periods beginning after December 15, ~~2018, subject to early adoption. We have just begun~~2017. See Note 5 for our ~~evaluation~~components of the impact on our financial statements, as well as available adoption methods, but we believe our implementation of the revenue recognition standard discussed below could influence the timing of our adoption of ASU 2016-02.net periodic benefit cost.

Revenue Recognition In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ~~(ASU 2014-09)~~(ASC 606), and has ~~since~~ modified the standard with ASU 2015-14, "Deferral of the Effective Date," ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," and ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." These standards replacethereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ~~ASU 2014-09,~~ASC 606, as amended, becomes effective for annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the ~~standard.~~

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

~~Dollars in millions except per share amounts~~

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

~~Upon initial evaluation, we believe the key changes~~

AT&T INC.

MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

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

NOTE 2. EARNINGS PER SHARE

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

	Three months ended						Three months ended
	March 31,						March 31,
	2016			2015			2017			2016
Numerators
Numerator for basic earnings per share:
Net income	$	3,885		$	3,339
Net Income							$	3,574		$	3,885
Less: Net income attributable to noncontrolling interest		(82	)		(76	)		(105	)		(82	)
Net income attributable to AT&T		3,803			3,263
Net Income attributable to AT&T								3,469			3,803
Dilutive potential common shares:
Share-based payment		4			4			4			4
Numerator for diluted earnings per share	$	3,807		$	3,267		$	3,473		$	3,807
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common shares outstanding		6,172			5,203
Weighted average number of common shares outstanding								6,166			6,172
Dilutive potential common shares:
Share-based payment (in shares)		18			16			20			18
Denominator for diluted earnings per share		6,190			5,219			6,186			6,190
Basic earnings per share attributable to AT&T	$	0.62		$	0.63		$	0.56		$	0.62
Diluted earnings per share attributable to AT&T	$	0.61		$	0.63		$	0.56		$	0.61

AT&T INC.

MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. OTHER COMPREHENSIVE INCOME

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

Following our 2015 acquisitions of DIRECTV and wireless businesses in Mexico, we have additional foreign operations that are exposed to fluctuations in the exchange rates used to convert operations, assets and liabilities into U.S. dollars. Since December 31, 2015, when compared to the U.S. dollar, the Brazilian real exchange rate has appreciated 9.3%, the Argentine peso exchange rate has depreciated 13.7% and the Mexican peso exchange rate has depreciated 0.4%.

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

~~Dollars in millions except per share amounts~~

		Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) on Available-for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2016		$	(1,995)		$	541		$	744		$	5,671		$	4,961
Other comprehensive income (loss) before reclassifications			366			33			13			-			412
Amounts reclassified from accumulated OCI			-	¹		5	¹		10	²		(228)	³		(213)
Net other comprehensive income (loss)			366			38			23			(228)			199
Balance as of March 31, 2017		$	(1,629)		$	579		$	767		$	5,443		$	5,160

		Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) on Available-for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2015		$	(1,198)		$	484		$	16		$	6,032		$	5,334
Other comprehensive income (loss) before reclassifications			(44)			(26)			124			-			54
Amounts reclassified from accumulated OCI			-	¹		(3)	¹		10	²		(215)	³		(208)
Net other comprehensive income (loss)			(44)			(29)			134			(215)			(154)
Balance as of March 31, 2016		$	(1,242)		$	455		$	150		$	5,817		$	5,180
¹	(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
²	(Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
³	The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction
	labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income
	(see Note 5).

At March 31, 2016, and for the period ended:

Foreign
Currency
Translation
Adjustment

Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities

Net Unrealized
Gains (Losses)
on Cash Flow
Hedges

Defined Benefit
Postretirement
Plans

Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2015 $ (1,198) $ 484 $ 16 $ 6,032 $ 5,334
Other comprehensive income
   (loss) before reclassifications
(44) (26) 124 -    54
Amounts reclassified
   from accumulated OCI
-
¹
(3)
²
10
³
(215)
⁴
(208)
Net other comprehensive
   income (loss)
(44) (29) 134 (215) (154)
Balance as of March 31, 2016 $ (1,242) $ 455 $ 150 $ 5,817 $ 5,180

At March 31, 2015, and for the period ended:

Foreign
Currency
Translation
Adjustment

Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities

Net Unrealized
Gains (Losses)
on Cash Flow
Hedges

Defined Benefit
Postretirement
Plans

Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2014 $ (26) $ 499 $ 741 $ 6,847 $ 8,061
Other comprehensive income
   (loss) before reclassifications
(186) 33 (354) -    (507)
Amounts reclassified
   from accumulated OCI
-
¹
(5)
²
7
³
(215)
⁴
(213)
Net other comprehensive
   income (loss)
(186) 28 (347) (215) (720)
Balance as of March 31, 2015 $ (212) $ 527 $ 394 $ 6,632 $ 7,341
¹
Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
²
(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
³
(Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
⁴
The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).

NOTE 4. SEGMENT INFORMATION

Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. Due to recent organizational changes and our July 24, 2015, acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we revised our operating segments to align with our new management structure and organizational responsibilities. We analyze our ~~operating~~ segments based on ~~segment contribution,~~Segment Contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each ~~operating~~ segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment Group, (3) Consumer Mobility and (4) International.

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

~~Dollars in millions except per share amounts~~

We also evaluate segment performance based on ~~segment operating income before depreciation and amortization, which we refer to as~~ EBITDA and/or EBITDA ~~margin.~~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 to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.

AT&T INC.

MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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

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

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

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

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

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

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

Interest expense and other income (expense) – net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results. ~~Therefore, these items are also not included in each segment's reportable results.~~

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

AT&T INC.

MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

Operating
Income
(Loss)

Equity in
Net
Income
(Loss) of
Affiliates

Segment
Contribution
Business Solutions $ 17,609 $ 10,802 $ 6,807 $ 2,508 $ 4,299 $ - $ 4,299
Entertainment Group 12,658 9,578 3,080 1,488 1,592 3 1,595
Consumer Mobility 8,328 4,912 3,416 922 2,494 - 2,494
International 1,667 1,588 79 277 (198) 14 (184)
Segment Total 40,262 26,880 13,382 5,195 8,187 $ 17 $ 8,204
Corporate and Other 273 377 (104) 17 (121)
Acquisition-related items - 295 (295) 1,351 (1,646)
Certain significant items - (711) 711 - 711
AT&T Inc. $ 40,535 $ 26,841 $ 13,694 $ 6,563 $ 7,131

For the three months ended March 31, 2015
Revenue
Operations
and
Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income
(Loss)

Equity in
Net
Income
(Loss) of
Affiliates

Segment
Contribution
Business Solutions $ 17,557 $ 11,073 $ 6,484 $ 2,342 $ 4,142 $ - $ 4,142
Entertainment Group 5,660 4,859 801 1,065 (264) (6) (270)
Consumer Mobility 8,778 5,541 3,237 1,002 2,235 - 2,235
International 236 218 18 28 (10) - (10)
Segment Total 32,231 21,691 10,540 4,437 6,103 $ (6) $ 6,097
Corporate and Other 345 234 111 20 91
Acquisition-related items - 299 (299) 121 (420)
Certain significant items - 217 (217) - (217)
AT&T Inc. $ 32,576 $ 22,441 $ 10,135 $ 4,578 $ 5,557

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

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

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

~~Dollars in millions except per share amounts~~

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

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

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

~~Substantially all~~

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

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a ~~fair~~ value of ~~$8,787~~$8,426 at March 31, ~~2016.~~2017. The trust is entitled to receive cumulative cash distributions of $560 per annum, which ~~will be~~are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and ~~will be~~ accounted for as contributions. We distributed $140 to the trust during the three months ended March 31, ~~2016.~~2017. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. ~~We have also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2015.~~

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

AT&T INC.

MARCH 31, ~~2016~~2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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

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

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

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

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

The ~~increase of $59~~decrease in the combined net pension and postretirement costs in the first quarter reflects higher amortization of ~~2016 is primarily~~prior service credits due to aplan changes, including changes to future costs for continued retiree healthcare coverage. The reduction also reflects decreasing corporate bond rates, which contributed to lower ~~expected return on assets resulting from a decrease in the value in the plan assets.~~interest costs.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended ~~2016~~2017 and ~~2015,~~2016, net supplemental ~~retirement~~ pension benefits costs not included in the table above were ~~$23~~$22 and ~~$20, respectively.~~$23.

NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

Level 1

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

Level 2

Inputs to the valuation methodology include:

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

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

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

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

Level 3

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

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

Long-Term Debt and Other Financial Instruments

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

	March 31, 2016					December 31, 2015						March 31, 2017						December 31, 2016
	Carrying		Fair			Carrying			Fair			Carrying			Fair			Carrying			Fair
	Amount		Value			Amount			Value			Amount			Value			Amount			Value
Notes and debentures¹	$	129,229		$	137,865		$	124,847		$	128,993		$	132,379		$	138,944		$	122,381		$	128,726
Bank borrowings		4			4			4			4			3			3			4			4
Investment securities		2,592			2,592			2,704			2,704			2,640			2,640			2,587			2,587
¹Includes credit agreement borrowings.

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

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

	March 31, 2017
	Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,253	$	-		$	-	$	1,253
International equities		639		-			-		639
Fixed income bonds		-		501			-		501
Asset Derivatives¹
Interest rate swaps		-		62			-		62
Cross-currency swaps		-		235			-		235
Liability Derivatives¹
Interest rate swaps		-		(20	)		-		(20	)
Cross-currency swaps		-		(3,635	)		-		(3,635	)
¹Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.

March 31, 2016
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
   Domestic equities $ 1,111 $ - $ - $ 1,111
   International equities 541 - - 541
   Fixed income bonds - 676 - 676
Asset Derivatives¹

   Interest rate swaps - 197 - 197
   Cross-currency swaps - 519 - 519
Liability Derivatives¹

   Cross-currency swaps - (2,582 ) - (2,582 )
¹Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.

AT&T INC.

MARCH 31, ~~2016~~2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

	December 31, 2016
	Level 1		Level 2			Level 3		Total
Available-for-Sale Securities
Domestic equities	$	1,215	$	-		$	-	$	1,215
International equities		594		-			-		594
Fixed income bonds		-		508			-		508
Asset Derivatives¹
Interest rate swaps		-		79			-		79
Cross-currency swaps		-		89			-		89
Liability Derivatives¹
Interest rate swaps		-		(14	)		-		(14	)
Cross-currency swaps		-		(3,867	)		-		(3,867	)
¹Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.

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

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

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

Investment Securities

Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of ~~$99~~$236 have maturities of less than one year, ~~$308~~$58 within one to three years, ~~$65~~$47 within three to five years and ~~$204~~$160 for five or more years.

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

Derivative Financial Instruments

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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

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

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

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, ~~2016,~~2017, we had posted collateral of ~~$1,743~~$2,846 (a deposit asset) and held ~~collateral of $111 (a receipt liability).~~no collateral. Under the agreements, if ~~our~~AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of ~~$130.~~$123. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) ~~and below Baa3 (Moody's)~~, we would ~~owe an~~have been required to post additional ~~$195.~~collateral of $246. At December 31, ~~2015,~~2016, we had posted collateral of ~~$2,343~~$3,242 (a deposit asset) and held ~~collateral of $124 (a receipt liability).~~no collateral. We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following isare the notional ~~amount~~amounts of our outstanding derivative positions:

	March 31,		December 31,		March 31,			December 31,
	2016		2015		2017			2016
Interest rate swaps	$	7,050	$	7,050		$	10,450		$	9,650
Cross-currency swaps		29,642		29,642			29,642			29,642
Foreign exchange contracts		3		100
Total	$	36,695	$	36,792		$	40,092		$	39,292

AT&T INC.

MARCH 31, ~~2016~~2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships	Three months ended
	March 31,
	2017				2016
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps		$	(25	)		$	66
Gain (Loss) on long-term debt			25				(66	)

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

Effect of Derivatives on the Consolidated Statements of Income
Fair Value Hedging Relationships Three months ended
March 31, March 31,
2016 2015
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ 66 $ 41
Gain (Loss) on long-term debt (66 ) (41 )

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

	Three months ended						Three months ended
	March 31,			March 31,			March 31,
Cash Flow Hedging Relationships	2016			2015			2017				2016
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI	$	191		$	(228	)		$	20			$	191
Interest rate locks:
Gain (Loss) recognized in accumulated OCI		-			(316	)
Interest income (expense) reclassified from accumulated OCI into income		(15	)		(11	)			(15	)			(15	)

NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Subsequent and Pending Acquisitions

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

~~DIRECTV~~ ~~In July 2015, we completed~~Time Warner is a global leader in media and entertainment whose major businesses encompass an array of some of the most respected and successful media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our ~~acquisition~~extensive customer relationships and distribution, one of ~~DIRECTV, a~~the world's largest pay-TV subscriber bases and leading ~~provider of digital television entertainment services~~scale in ~~both the United States~~TV, mobile and ~~Latin America. For accounting purposes, the transaction was valued at $47,409. Our operating results include the results of DIRECTV following the acquisition date.~~broadband distribution.

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

The fair value estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired aretransaction is expected to ~~be collectable. We have not identified any material unrecorded pre-acquisition contingencies where~~close before year-end 2017. If the ~~related asset, liability or impairment~~Merger 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 achieveterminated as a result of ~~acquisition. Prior to~~reaching the ~~finalization~~termination date (and at that time one or more of the ~~purchase price allocation, if information becomes available that~~conditions relating to certain regulatory approvals have not been satisfied) or there is a final, non-appealable order preventing the transaction relating to antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would ~~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.~~obligated to pay Time Warner $500.

AT&T INC.

MARCH 31, ~~2016~~

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

~~Dollars in millions except per share amounts~~2017

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

Assets acquired
Cash $ 4,797
Accounts receivable 2,026
All other current assets 1,535
Property, plant and equipment 9,331
Intangible assets not subject to amortization
   Orbital slots 11,946
   Trade name 1,371
Intangible assets subject to amortization
   Customer lists and relationships 19,508
   Trade name 2,915
   Other 457
Investments and other assets 2,388
Goodwill 34,449
Total assets acquired 90,723

Liabilities assumed
Current liabilities, excluding current portion of long-term debt 5,733
Long-term debt 20,585
Other noncurrent liabilities 16,642
Total liabilities assumed 42,960
Net assets acquired 47,763
Noncontrolling interest (354 )
Aggregate value of consideration paid $ 47,409

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

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

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

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

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

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

~~AT&T INC.~~

~~MARCH 31, 2016~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Auction 1000 On April 13, 2017, the 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.

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 expects to provide 20 MHz of valuable telecommunications spectrum and success-based payments of $6,500 over the next five years to support network buildout. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.

NOTE 8. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a period of up to 30 months ~~with~~and, in many cases, they have the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of March 31, ~~2016,~~2017 and December 31, ~~2015,~~2016, gross equipment installment receivables of ~~$5,079~~$4,119 and ~~$5,719~~$5,665 were included on our consolidated balance sheets, of which ~~$3,007~~$2,346 and ~~$3,239~~$3,425 are notes receivable that are included in "Accounts receivable - net."

In 2014, we entered into ~~the first of a series of~~an uncommitted ~~agreements~~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 ~~these agreements,~~this agreement, we transferred ~~the~~certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Under the terms of the ~~arrangements,~~agreement, we continue to bill and collect the payments from our customers on behalf of ~~our customers for~~ the ~~receivables sold.~~Purchasers. Since inception, cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $3,740.

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

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

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

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

~~During~~

AT&T INC.

MARCH 31, 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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

At March 31, ~~2016,~~2017 and December 31, ~~2015,~~2016, our deferred purchase price receivable was ~~$2,975~~$3,813 and ~~$2,961,~~$3,090, respectively, of which ~~$1,469~~$2,049 and ~~$1,772 is~~$1,606 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.

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

Derecognized Installment Receivables

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

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

Dollars in millions except per share and per subscriber amounts

RESULTS OF OPERATIONS

AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During 2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico, and the following discussion of changes in our operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from acquired businesses prior to acquisition are excluded. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results Our financial results in the first quarter of ~~2016~~2017 and ~~2015~~2016 are summarized as follows:

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

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

First Quarter
2016 2015
Percent
Change

Operating Revenues
   Service $ 37,101 $ 28,962 28.1 %
   Equipment 3,434 3,614 (5.0 )
Total Operating Revenues 40,535 32,576 24.4
Operating expenses
   Cost of services and sales
     Equipment 4,375 4,546 (3.8 )
     Broadcast, programming and operations 4,629 1,122 -
     Other cost of services 9,396 8,812 6.6
   Selling, general and administrative 8,441 7,961 6.0
   Depreciation and amortization 6,563 4,578 43.4
Total Operating Expenses 33,404 27,019 23.6
Operating Income 7,131 5,557 28.3
Income Before Income Taxes 6,007 4,728 27.1
Net Income 3,885 3,339 16.4
Net Income Attributable to AT&T $ 3,803 $ 3,263 16.5 %

Overview

Operating revenues ~~increased $7,959,~~decreased $1,170, or ~~24.4%~~2.9%, in the first quarter of ~~2016.~~2017.

Servicerevenues ~~increased $8,139,~~decreased $645, or ~~28.1%~~1.7%, in the first quarter of ~~2016.~~2017. The ~~increase~~decrease was primarily due to ~~our 2015 acquisitions of DIRECTV and wireless operations in Mexico and gains in IP broadband and fixed strategic business services. These were partially offset by~~ continued declines in ~~our~~ legacy wireline voice and data products ~~as well as from customers choosing to purchase devices through installment payment agreements, which entitle them to a~~and lower ~~monthly~~wireless service ~~rate under our wireless~~revenues reflecting adoption of unlimited and Mobile Share plans. These were partially offset by increased revenues from video and strategic business services.

Equipmentrevenues decreased ~~$180,~~$525, or ~~5.0%~~15.3%, in the first quarter of ~~2016. This decline reflects fewer~~2017. The decrease was primarily due to lower wireless handset sales, ~~additional promotional activities during 2016~~driven by a low rate of customer device upgrades and ~~lower~~strong Bring Your Own Device (BYOD) participation. Equipment revenue ~~related to~~ ~~customer premises equipment. Revenue declines were partially offset by the continuing trend of our wireless~~is becoming increasingly unpredictable as customers ~~to purchase higher priced devices and an increase in customers~~are choosing to ~~purchase~~upgrade devices ~~on installment when compared to~~less frequently or bring their own.

Operating expenses decreased $903, or 2.7%, in the ~~prior year.~~first quarter of 2017.

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

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

AT&T INC.

MARCH 31, ~~2016~~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

Other cost of services expenses decreased $331, or 3.5%, in the first quarter of 2017. The decrease reflects our continued cost structure management and utilizing automation and digitalization where appropriate. Federal Universal Service Fund (USF) rates and fees were also lower when compared to the prior year. These expense declines were partially offset by higher handset insurance costs.

Selling, general and administrative expenses increased $46, or 0.5%, in the first quarter of 2017. Expenses include an increase of approximately $618 resulting from lower gains on wireless spectrum transactions in the first quarter of 2017 than in the comparable period of 2016. Offsetting this increase were lower advertising costs, decreased expenses for merger and integration-related activities and reductions from our disciplined cost management.

Depreciation and amortization expense decreased $436, or 6.6%, in the first quarter of 2017. Depreciation expense decreased $288, or 5.5%, in the first quarter. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage values of certain assets associated with our transition to an IP-based network, which accounted for $327 of the decrease. This decrease was partially offset by increases resulting from ongoing capital spending for upgrades and expansion.

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

Operating income decreased $267, or 3.7%, for the first quarter of 2017. Our operating income margin in the first quarter decreased from 17.6% in 2016 to 17.4% in 2017.

Interest expense increased $86, or 7.1%, in the first quarter of 2017. The increases were primarily due to higher average rates and debt balances when compared to the prior year.

Equity in net income of affiliates decreased $186 in the first quarter of 2017, predominantly from losses from our legacy publishing business, partially offset by income from our investments in video-related businesses.

Other income (expense) – net We had other expense of $20 in the first quarter of 2017 and other income of $70 in the first quarter of 2016. Results in the first quarter of 2017 included net losses on the sale of non-strategic assets and investments of $61 and interest and dividend income of $30.

Other income (expense) in the first quarter of 2016 included net gains on the sale of non-strategic assets and investments of $44 and interest and dividend income of $29.

Income taxes decreased $318, or 15.0%, in the first quarter of 2017. Our effective tax rate was 33.5% for the first quarter of 2017, as compared to 35.3% for the first quarter of 2016. The decrease in income tax expense and our effective tax rate for the first quarter of 2017 was primarily due to lower income before income taxes in 2017 and the recognition of tax benefits related to the restructuring of a portion of our wireless business.

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

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

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

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

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

Total domestic broadband connections		15,695			15,764

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

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

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

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

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

~~Selling, general and administrative~~ expenses increased $480, or 6.0%, in the first quarter of 2016. The increase was primarily due to our acquisitions in 2015 and increased advertising activity in 2016. The increases were largely offset by a $736 noncash gain on wireless spectrum transactions, lower wireless commission expenses and lower employee separation charges.

~~Depreciation and amortization~~ expense increased $1,985, or 43.4%, in the first quarter of 2016. Amortization expense increased $1,228 due to the amortization of intangibles from recent acquisitions. Depreciation expense increased $757 primarily due to the previously mentioned acquisitions and ongoing capital spending for network upgrades.

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

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

~~Equity in net income of affiliates~~ increased $13 in the first quarter of 2016. This increase primarily resulted from earnings from investments acquired in our purchase of DIRECTV in the third quarter of 2015, partially offset by lower earnings from Otter Media Holdings and YP Holdings LLC.

~~Other income (expense) – net~~ We had other income of $70 in the first quarter of both 2016 and 2015. Results in the first quarter of 2016 and 2015 included a net gain on the sale of investments of $44 and $33 and interest and dividend income of $29 and $19, respectively.

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

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

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

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

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

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

Total domestic broadband connections 15,764 16,097

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

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

¹Excludes subscribers of our International segment equity investments in SKY ~~Mexico.~~Mexico, in which we own a 41% stake. At December 31, 2016, SKY Mexico had 8.0 million subscribers.

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

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

⁴ See Exhibit 12.

Segment Results

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

We also evaluate segment performance based on ~~segment operating income before depreciation and amortization, which we refer to as~~ EBITDA and/or EBITDA ~~margin.~~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 ~~operating income before depreciation and amortization,~~EBITDA divided by total revenues.

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

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

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

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

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

Business Solutions
Segment Results
	First Quarter							First Quarter
	2016		2015		Percent Change			2017		2016		Percent Change
	2016		2015		Percent Change			2017		2016		Percent Change
Segment operating revenues
Wireless service	$	7,855	$	7,515		4.5	%	$	7,929	$	7,855		0.9	%
Fixed strategic services		2,786		2,549		9.3			2,974		2,751		8.1
Legacy voice and data services		4,338		4,754		(8.8	)		3,630		4,373		(17.0	)
Other service and equipment		859		846		1.5			817		859		(4.9	)
Wireless equipment		1,771		1,893		(6.4	)		1,498		1,771		(15.4	)
Total Segment Operating Revenues		17,609		17,557		0.3			16,848		17,609		(4.3	)

Segment operating expenses
Operations and support		10,802		11,073		(2.4	)		10,176		10,802		(5.8	)
Depreciation and amortization		2,508		2,342		7.1			2,312		2,508		(7.8	)
Total Segment Operating Expenses		13,310		13,415		(0.8	)		12,488		13,310		(6.2	)
Segment Operating Income		4,299		4,142		3.8			4,360		4,299		1.4
Equity in Net Income (Loss) of Affiliates		-		-		-
Equity in Net Income of Affiliates									-		-		-
Segment Contribution	$	4,299	$	4,142		3.8	%	$	4,360	$	4,299		1.4	%

AT&T INC.

MARCH 31, ~~2016~~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 table highlights other key measures of performance for the Business Solutions segment:

First Quarter
2016 2015
Percent
Change

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

Business Wireless Net Additions²

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

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

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

³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
The following tables highlight other key measures of performance for the Business Solutions segment:

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

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

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

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

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

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

Operating ~~revenues~~ Revenues~~increased $52,~~ decreased $761, or ~~0.3%~~4.3%, in the first quarter of ~~2016.~~2017. Revenue ~~growth was driven by~~declines reflect technological shifts away from legacy products, as well as decreasing wireless ~~service~~equipment revenues ~~and increased fixed strategic business services. Revenue increases~~resulting from changes in customer buying habits. Our second-quarter 2016 sale of certain hosting operations also negatively impacted revenue comparability. These decreases were partially offset by continued ~~declines~~growth in ~~our legacy voice~~wireless services and ~~data products, lower equipment revenue and foreign exchange pressures.~~fixed strategic services, which represent 40% of non-wireless revenues.

Wireless service revenues increased ~~$340,~~$74, or ~~4.5%~~0.9%, in the first quarter of ~~2016.~~2017. The revenue increase is primarily due to ~~customer migrations~~the migration of customers from our Consumer Mobility ~~segment and reflects smartphone and tablet gains.~~segment.

At March 31, ~~2016,~~2017, we served ~~75.8~~82.4 million subscribers, an increase of ~~13.2%~~8.7% from the prior year. Postpaid subscribers increased ~~6.3%~~4.1% from the prior year reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased ~~28.1%~~17.0% from the prior year reflecting growth in our connected car business ~~customers using tracking, monitoring~~ and other ~~sensor-embedded~~data centric devices ~~on their equipment.~~that utilize the network to connect and control physical devices using embedded computing systems and/or software, commonly called the Internet of Things (IoT).

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the first quarter, business wireless postpaid churn increased to 1.07% in 2017 from 1.02% in ~~2016 from 0.90% in 2015.~~2016.

Fixed strategic services revenues increased ~~$237,~~$223, or ~~9.3%~~8.1%, in the first quarter of ~~2016.~~2017. Our revenues ~~which were negatively impacted by foreign exchange rates,~~ increased in the first quarter of ~~2016~~2017 primarily due ~~to increases in:~~to: Ethernet of ~~$65, AT&T~~$73; Dedicated Internet ~~(formally known as Ethernet access to Managed Internet Services) of $54, U-verse~~ services of ~~$50,~~$59; IP Broadband, Voice, and ~~VPN~~Video of ~~$26.~~$44; and VoIP of $43.

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

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

Legacy wired voice and data service revenues decreased ~~$416,~~$743, or ~~8.8%~~17.0%, in the first quarter of ~~2016. Traditional data revenues~~2017. Legacy voice billings in the first quarter of ~~2016~~2017 decreased ~~$229~~$402 and ~~long-distance and local voice revenues~~traditional data billings decreased ~~$183.~~$341. The decreases were primarily due to lower demand, as customers continue to shift to our more advanced IP-based offerings or ~~our competitors.~~to competitors, and the sale of certain hosting operations in 2016.

~~Other service and~~Wireless equipmentrevenues ~~increased $13,~~decreased $273, or ~~1.5%~~15.4%, in the first quarter of 2016. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and customer premises equipment.

~~Wireless equipment~~ ~~revenues decreased $122, or 6.4%,~~2017. The decrease in the first quarter ~~of 2016. The decrease~~was primarily due to decreases in equipment revenues resulted from a decrease in handsets sold to postpaid customers and increased promotional activities during the quarter. The decreases were partially offset by an increase in purchases of devices on installment payment agreements rather than the device subsidy model.handset upgrades.

Operations and support expenses decreased ~~$271,~~$626, or ~~2.4%~~5.8%, in the first quarter of ~~2016.~~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 costs, such as compensation and benefits.

~~The~~Decreased operations and support expenses in the first quarter ~~decrease was~~were primarily due to ~~declines of $170 in~~lower wireless equipment ~~and $161 in wireless commissions costs, reflecting a decrease in sale volumes~~sales and upgrade transactions, ~~as well as~~which decreased equipment costs $248, and efforts to automate and digitize our support activities, which improved results approximately $170. Expense reductions also reflect lower ~~average commission rates. Access~~USF rates, contributing to a $77 reduction in USF fees, and fewer traffic compensation and wireless interconnect costs, ~~also declined $59,~~ resulting ~~from lower~~in a $51 decline in access and interconnect ~~and roaming~~ costs. ~~Partially offsetting these decreases were higher advertising expenses, wireless handset insurance claims and bad debt expense driven by a higher AT&T Next~~^SM ~~(AT&T Next) subscriber base.~~

Depreciation expense ~~increased $166,~~decreased $196, or ~~7.1%~~7.8%, in the first quarter of ~~2016.~~2017. The ~~increases~~decreases 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, partially offset by fully depreciated assets.~~expansion.

Operating income increased ~~$157,~~$61, or ~~3.8%~~1.4%, in the first quarter of ~~2016.~~2017. Our Business Solutions segment operating income margin in the first quarter increased from ~~23.6% in 2015 to~~ 24.4% in ~~2016.~~2016 to 25.9% in 2017. Our Business Solutions EBITDA margin in the first quarter increased from ~~36.9% in 2015 to~~ 38.7% in ~~2016.~~2016 to 39.6% in 2017.

Entertainment Group
Segment Results
First Quarter
2016 2015
Percent
Change

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

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

AT&T INC.

MARCH 31, ~~2016~~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

Entertainment Group
Segment Results
	First Quarter
	2017			2016		Percent Change
	2017			2016		Percent Change
Segment operating revenues
Video entertainment	$	9,020		$	8,904		1.3	%
High-speed internet		1,941			1,803		7.7
Legacy voice and data services		1,056			1,313		(19.6	)
Other service and equipment		606			638		(5.0	)
Total Segment Operating Revenues		12,623			12,658		(0.3	)

Segment operating expenses
Operations and support		9,601			9,578		0.2
Depreciation and amortization		1,419			1,488		(4.6	)
Total Segment Operating Expenses		11,020			11,066		(0.4	)
Segment Operating Income		1,603			1,592		0.7
Equity in Net Income (Loss) of Affiliates		(6	)		3		-
Segment Contribution	$	1,597		$	1,595		0.1	%

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

First Quarter
2016 2015
Percent
Change

(in 000s)
Video Connections
   Satellite 20,112 - -
   U-verse 5,232 5,969 (12.3 )
Total Video Connections 25,344 5,969 -

Video Net Additions

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

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

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

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

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

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

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

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

~~Video entertainment~~ revenues increased $7,033 in the first quarter of 2016. The first quarter increase was primarily related to our acquisition of DIRECTV. We are now focusing our sales efforts on satellite service as there are lower content costs for satellite subscribers. U-verse video revenue was flat in the first quarter of 2016, primarily due to a 12.3% decrease in U-verse video connections, when compared to 2015.

~~High-speed Internet~~ revenues increased $250, or 16.1%, in the first quarter of 2016. When compared to 2015, IP broadband connections increased 6.3%, to 12.5 million connections at March 31, 2016; however, first quarter net additions were lower due to fewer U-verse sales promotions in the year. The churn of video customers also contributed to lower net additions as a portion of those video subscribers also choose to disconnect their IP broadband service.

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

AT&T INC.

MARCH 31, ~~2016~~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

	First Quarter
	2017			2016			Percent Change
(in 000s)	2017			2016			Percent Change
Linear Video Net Additions ¹
Satellite		-			328			-	%
U-verse		(233	)		(382	)		39.0
Linear Net Video Additions		(233	)		(54	)		-

Broadband Net Additions
IP		242			186			30.1
DSL		(127	)		(181	)		29.8
Net Broadband Additions		115			5			-	%
¹Includes disconnections for customers that migrated to DIRECTV NOW.

Operating revenues decreased $35, or 0.3%, in the first quarter of 2017, largely due to lower revenues from legacy voice and data products, substantially offset by growth in revenues from consumer IP broadband and satellite video services.

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

Video entertainment revenues increased $116, or 1.3%, in the first quarter of 2017, primarily due to a 1.8% increase in average revenue per linear video connection. Our continued focus on satellite service and the lower marginal content costs associated with those subscribers contributed to increased video revenue. However, this strategy contributed to lower U-verse video revenue and connections. More than 80% of our linear video subscribers are on the DIRECTV platform. Our decline in linear video connections for the first quarter of 2017 reflects, in part, the migration of satellite customers to DIRECTV NOW. Churn rose for subscribers with linear video only service, partially reflecting annual content cost increases.

High-speed internet revenues increased $138, or 7.7%, in the first quarter of 2017. When compared to 2016, IP broadband subscribers increased 4.7%, to 13.1 million subscribers at March 31, 2017, reflecting higher IP broadband net additions. Also contributing to higher revenues was a 3.3% increase in average revenue per IP broadband connection.

To compete more effectively against other broadband providers, we continued to deploy our all-fiber, high-speed wireline network, which has improved customer retention rates in those areas.

Legacy voice and data service revenues decreased $257, or 19.6%, in the first quarter of 2017. For the quarter ended March 31, 2017, legacy voice and data services represented approximately 8% of our total Entertainment Group revenue compared to 10% at March 31, 2016, and reflect decreases of $174 in local voice and long-distance, and $83 in traditional data billings. The decreases reflect the continued migration of customers to our more advanced IP-based offerings or to competitors. At March 31, 2017, approximately 8% of our broadband connections were DSL compared to 12% at March 31, 2016.

Operations and support expenses increased ~~$4,719,~~$23, or ~~97.1%~~0.2%, in the first quarter of ~~2016.~~2017. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, ~~including~~which include costs of operating and maintaining our networks, ~~and providing video content,~~ as well as personnel charges for compensation and benefits.

~~The first quarter increase was primarily due to our acquisition of DIRECTV in the third quarter of 2015, which increased our first quarter Entertainment Group~~Increased operations and support expenses ~~by $4,823. The DIRECTV related increases~~ were primarily due to annual content cost increases and the ~~recognition~~impact of ~~additional content costs for satellite subscribers, customer support~~storms and ~~service related charges and advertising expenses.~~

flooding on the West Coast in 2017. Partially offsetting these increases was the ~~increased~~impact of our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses ~~were lower employee charges~~ resulting from ~~ongoing~~ workforce reductions and ~~our focus on cost initiatives.~~lower advertising costs.

~~Depreciation~~ expense increased $423, or 39.7%, in the first quarter of 2016. The increase was primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

~~Operating income~~ increased $1,856 in the first quarter of 2016. Our Entertainment Group segment operating income margin increased from (4.7)% in 2015 to 12.6% in 2016. Our Entertainment Group segment EBITDA margin in the first quarter increased from 14.2% in 2015 to 24.3% in 2016.

Consumer Mobility
Segment Results
First Quarter
2016 2015
Percent
Change

Segment operating revenues
     Service $ 6,943 $ 7,297 (4.9 ) %
     Equipment 1,385 1,481 (6.5 )
Total Segment Operating Revenues 8,328 8,778 (5.1 )

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

AT&T INC.

MARCH 31, ~~2016~~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

Depreciation expense decreased $69, or 4.6%, in the first quarter of 2017. The decrease was primarily due to our fourth-quarter 2016 change in estimated useful lives and salvage value of certain assets. Also contributing to lower depreciation expenses were network assets becoming fully depreciated assets. These decreases were offset by ongoing capital spending for network upgrades and expansion.

Operating income increased $11, or 0.7%, in the first quarter of 2017. Our Entertainment Group segment operating income margin in the first quarter increased from 12.6% in 2016 to 12.7% in 2017. Our Entertainment Group segment EBITDA margin in the first quarter decreased from 24.3% in 2016 to 23.9% in 2017.

Consumer Mobility
Segment Results
	First Quarter
	2017		2016		Percent Change
	2017		2016		Percent Change
Segment operating revenues
Service	$	6,609	$	6,943		(4.8	)%
Equipment		1,131		1,385		(18.3	)
Total Segment Operating Revenues		7,740		8,328		(7.1	)

Segment operating expenses
Operations and support		4,528		4,912		(7.8	)
Depreciation and amortization		873		922		(5.3	)
Total Segment Operating Expenses		5,401		5,834		(7.4	)
Segment Operating Income		2,339		2,494		(6.2	)
Equity in Net Income of Affiliates		-		-		-
Segment Contribution	$	2,339	$	2,494		(6.2	)%

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

	March 31,
(in 000s)	2017		2016		Percent Change
Consumer Mobility Subscribers
Postpaid		26,510		28,294		(6.3	)%
Prepaid		13,844		12,171		13.7
Branded		40,354		40,465		(0.3	)
Reseller		10,549		13,313		(20.8	)
Connected devices ¹		961		896		7.3
Total Consumer Mobility Subscribers		51,864		54,674		(5.1	)%
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

AT&T INC.

MARCH 31, 2017

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

First Quarter
2016 2015
Percent
Change

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

Consumer Mobility Net Additions ²

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

Total Churn ^{2, 3}
2.11% 2.04% 7 BP
Postpaid Churn ^{2, 3}
1.24% 1.20% 4 BP
¹Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
²Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
³Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
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

	First Quarter
	2017			2016			Percent Change
(in 000s)	2017			2016			Percent Change
Consumer Mobility Net Additions ^{1, 4}
Postpaid		(66	)		(4	)		-	%
Prepaid		282			500			(43.6	)
Branded Net Additions		216			496			(56.5	)
Reseller		(588	)		(378	)		(55.6	)
Connected devices ²		19			(26	)		-
Consumer Mobility Net Subscriber Additions		(353	)		92			-	%

Total Churn ^{1, 3, 4}		2.42	%		2.11	%	31 BP
Postpaid Churn ^{1, 3, 4}		1.22	%		1.24	%	(2) BP
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
² Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a 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.

Operating Revenues decreased ~~$450,~~$588, or ~~5.1%~~7.1%, in the first quarter of ~~2016.~~2017. Decreased revenues reflect declines in postpaid service revenues due to customers ~~choosing Mobile Share plans and~~ migrating to our Business Solutions segment and choosing unlimited and Mobile Share 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.

Service revenue decreased ~~$354,~~$334, or ~~4.9%~~4.8%, in the first quarter of ~~2016.~~2017. The decrease was largely due to ~~a $516 decline from~~the migration of subscribers to Business Solutions and postpaid customers continuing to shift to ~~no-device-subsidy plans, which allow for~~ discounted monthly service charges under our unlimited and Mobile Share ~~plans and~~plans. Revenues from postpaid customers declined $507, or 9.9%, in the ~~migration~~first quarter of ~~subscribers to Business Solutions.~~2017. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately ~~4.2%~~5.4%. The ~~decrease was~~decreases were partially offset by ~~a $204 increase in~~higher prepaid service revenues ~~which includes services sold under the~~of $239, or 18.4%, primarily from growth in Cricket ~~brand.~~subscribers.

Equipment revenue decreased ~~$96,~~$254, or ~~6.5%~~18.3%, in the first quarter of ~~2016.~~2017. The decrease in equipment revenues resulted from ~~a decrease in handsets sold~~lower handset sales and upgrades. As previously discussed, equipment revenue is becoming increasingly unpredictable as customers are choosing to ~~postpaid customers and increased promotional activities, partially offset by an increase in handsets sold to prepaid customers and~~upgrade devices ~~purchased on installment payment agreements rather than the device subsidy model.~~less frequently or bring their own.

Operations and support expenses decreased ~~$629,~~$384, or ~~11.4%~~7.8%, in the first quarter of ~~2016.~~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 were primarily due to lower volumes of wireless equipment sales and upgrades, which decreased equipment costs $257. Also contributing to the declines were increased operational efficiencies and lower marketing and advertising costs resulting from the timing of scheduled ad campaigns and integrated advertising.

Depreciationexpense decreased $49, or 5.3%, in the first quarter of 2017. The decrease was primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased $155, or 6.2%, in the first quarter of 2017. Our Consumer Mobility segment operating income margin in the first quarter increased from 29.9% in 2016 to 30.2% in 2017. Our Consumer Mobility EBITDA margin in the first quarter increased from 41.0% in 2016 to 41.5% in 2017.

AT&T INC.

MARCH 31, ~~2016~~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

International
Segment Results
	First Quarter
	2017			2016			Percent Change
Segment operating revenues
Video entertainment	$	1,341		$	1,130			18.7	%
Wireless service		475			455			4.4
Wireless equipment		113			82			37.8
Total Segment Operating Revenues		1,929			1,667			15.7

Segment operating expenses
Operations and support		1,759			1,588			10.8
Depreciation and amortization		290			277			4.7
Total Segment Operating Expenses		2,049			1,865			9.9
Segment Operating Income (Loss)		(120	)		(198	)		39.4
Equity in Net Income (Loss) of Affiliates		20			14			42.9
Segment Contribution	$	(100	)	$	(184	)		45.7	%

~~Decreased operations and support expenses in~~The following tables highlight other key measures of performance for the ~~first quarter were primarily due to the following:~~International segment:

·	Selling and commission expenses decreased $205 primarily due to lower sales volumes and lower average commission rates, including those paid under the AT&T Next program, combined with fewer upgrade transactions.

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

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

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

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

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

International
Segment Results
First Quarter
2016 2015
Percent
Change

Segment operating revenues
     Video entertainment $ 1,130 $ - -
     Wireless 455 215 -
     Equipment 82 21 -
Total Segment Operating Revenues 1,667 236 -

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

(in 000s)	First Quarter
	2017		2016		Percent Change
Mexican Wireless Subscribers
Postpaid		5,095		4,404		15.7	%
Prepaid		7,244		4,445		63.0
Branded		12,339		8,849		39.4
Reseller		267		364		(26.6	)
Total Mexican Wireless Subscribers		12,606		9,213		36.8

Latin America Satellite Subscribers
PanAmericana		8,090		7,094		14.0
SKY Brazil ¹		5,588		5,342		4.6
Total Latin America Satellite Subscribers		13,678		12,436		10.0	%
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 December 31, 2016 and 7.7 million subscribers at March 31, 2016.

AT&T INC.

MARCH 31, ~~2016~~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

	First Quarter
(in 000s)	2017			2016			Percent Change
Mexican Wireless Net Additions
Postpaid		130			116			12.1	%
Prepaid		517			450			14.9
Branded Net Additions		647			566			14.3
Reseller		(14	)		(37	)		62.2
Mexican Wireless Net Subscriber Additions		633			529			19.7

Latin America Satellite Net Additions ¹
PanAmericana		52			28			85.7
SKY Brazil		39			(101	)		-
Latin America Satellite Net Subscriber Additions ²		91			(73	)		-	%
¹In 2017, we updated the methodology used to account for prepaid video connections. The impact of this change is excluded.
²SKY Mexico had net subscriber additions of 100,000 for the quarter ended December 31, 2016, and 398,000 for the quarter ended March 31, 2016.

~~The following table highlights other key measures of performance for the International segment:~~

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

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

Operating Results

Our International segment consists of the Latin American operations acquired ~~in our July 2015 acquisition of~~with DIRECTV as well as ~~the~~our Mexican wireless ~~operations acquired earlier in 2015 (see Note 7).~~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 ~~$1,431, with $1,130~~$262, or 15.7%, in the first quarter of 2017. The increase in the first quarter includes $211, or 18.7%, from video services in Latin America driven by price increases and ~~$301 attributable to additional~~favorable foreign currency exchange rates. Mexico wireless revenues increased $51, or 9.5%, in ~~Mexico.~~the first quarter of 2017, primarily due to an increase in our subscriber base and higher equipment sales offset by lower ARPU (average revenue per average wireless subscriber) and foreign currency pressure.

Operations and support expenses increased ~~$1,370~~$171, or 10.8%, in the first quarter 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 providing video content ~~as well as~~and personnel expenses, such as compensation and benefits. The increase in expenses is primarily due to higher programming and other operating costs in Latin America, and favorable foreign currency exchange rates.

Depreciation expense increased ~~$249~~$13, or 4.7%, in ~~2016.~~the first quarter of 2017. The increase was primarily due to updating the ~~acquisition of DIRECTV and the Nextel Mexico wireless property.~~estimated asset lives for video equipment in Latin America.

Operating income ~~decreased $188.~~increased $78, or 39.4%, in the first quarter of 2017. Our International segment operating income margin in the first quarter ~~was~~increased from (11.9)% ~~for~~in 2016 ~~compared~~ to ~~(4.2)~~(6.2)% ~~for 2015.~~in 2017. Our International EBITDA margin in the first quarter ~~was~~increased from 4.7% ~~for~~in 2016 ~~and 7.6% for 2015.~~to 8.8% in 2017.

AT&T INC.

MARCH 31, ~~2016~~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

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 and Reconciliation of Non-GAAP Measure" 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
	First Quarter
	2017		2016		Percent Change
	2017		2016		Percent Change
Operating revenues
Service	$	14,538	$	14,798		(1.8	)%
Equipment		2,629		3,156		(16.7	)
Total Operating Revenues		17,167		17,954		(4.4	)

Operating expenses
Operations and support		9,998		10,624		(5.9	)
EBITDA		7,169		7,330		(2.2	)
Depreciation and amortization		1,997		2,056		(2.9	)
Total Operating Expenses		11,995		12,680		(5.4	)
Operating Income	$	5,172	$	5,274		(1.9	)%

AT&T Mobility Results
First Quarter
2016 2015
Percent
Change

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

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

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

	First Quarter				Percent Change
(in 000s)	2017		2016		Percent Change
Wireless Subscribers ¹
Postpaid smartphones		59,025		58,258		1.3	%
Postpaid feature phones and data-centric devices		18,324		18,880		(2.9	)
Postpaid		77,349		77,138		0.3
Prepaid		13,844		12,171		13.7
Branded		91,193		89,309		2.1
Reseller		10,625		13,378		(20.6	)
Connected devices ²		32,400		27,758		16.7
Total Wireless Subscribers		134,218		130,445		2.9

Branded Smartphones		71,274		68,271		4.4
Smartphones under our installment programs at end of period		31,583		28,548		10.6	%
¹Represents 100% of AT&T Mobility wireless subscribers.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

3132

AT&T INC.

MARCH 31, ~~2016~~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


	First Quarter
	2017			2016			Percent Change
(in 000s)	2017			2016			Percent Change
Wireless Net Additions ^{1, 4}
Postpaid		(191	)		129			-	%
Prepaid		282			500			(43.6	)
Branded Net Additions		91			629			(85.5	)
Reseller		(582	)		(400	)		(45.5	)
Connected devices ²		2,572			1,552			65.7
Wireless Net Subscriber Additions		2,081			1,781			16.8

Smartphones sold under our installment programs during period		3,501			4,135			(15.3	)%

Total Churn^{3, 4}		1.46	%		1.42	%	4 BP
Branded Churn^{3, 4}		1.71	%		1.63	%	8 BP
Postpaid Churn^{3, 4}		1.12	%		1.10	%	2 BP
Postpaid Phone Only Churn^{3, 4}		0.90	%		0.96	%	(6) BP
¹ Excludes acquisition-related additions during the period.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³ Calculated by dividing the aggregate number of wireless subscribers who canceled service during a 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.

The following table highlights other key measures of performance for AT&T Mobility:

First Quarter
2016 2015
Percent
Change

(in 000s)
Wireless Subscribers ¹

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

Net Additions ³

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

Total Churn ⁴
1.42% 1.40% 2 BP
Branded Churn ⁴
1.63% 1.59% 4 BP
Postpaid Churn ⁴
1.10% 1.02% 8 BP
¹Represents 100% of AT&T Mobility wireless subscribers.
²Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
³Excludes acquisition-related additions during the period.
⁴Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.

Operating income ~~increased $565,~~decreased $102, or ~~12.0%~~1.9%, in the first quarter of ~~2016.~~2017. The first-quarter operating income margin of AT&T Mobility increased from ~~25.9% in 2015 to~~ 29.4% in ~~2016.~~2016 to 30.1% in 2017. AT&T Mobility's first-quarter EBITDA margin increased from ~~36.9% in 2015 to~~ 40.8% in ~~2016.~~2016 to 41.8% in 2017. AT&T Mobility's first-quarter EBITDA service margin ~~increased~~decreased from ~~45.3% in 2015 to~~ 49.5% in ~~2016.~~2016 to 49.3% in 2017 (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.)

Subscriber Relationships

As the wireless industry continues to mature, ~~we believe that~~ future wireless growth will become increasingly ~~depend~~dependent on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including unlimited and Mobile Share, ~~and AT&T Next. Additionally,~~as well as equipment installment programs. Beginning in the first quarter of ~~2016,~~2017, we ~~introduced an integrated offer that allows for~~expanded our unlimited wireless data ~~when combined with~~plans to make them available to customers that do not subscribe to our video ~~services, ending~~services.

ARPU

Postpaid phone-only ARPU was $58.09 and postpaid phone-only ARPU plus equipment installment billings was $68.81 for the first quarter ~~with more than 3.0 million subscribers on these packages.~~of 2017, compared to $59.53 and $69.54 in 2016.

Churn

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn and postpaid churn were higher for the first quarter of 2017, reflecting higher tablets churn. Postpaid phone only churn was lower in the first quarter of 2017 despite competitive pressure in the industry.

AT&T INC.

MARCH 31, ~~2016~~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

Branded Subscribers

~~ARPU~~

Postpaid phone-only ARPU (average revenue per average wireless subscriber) was $59.53 at March 31, 2016 and $59.98 at March 31, 2015. Postpaid phone-only ARPU plus AT&T Next subscriber installment billings increased 5.1%Branded subscribers decreased 0.1% in the first quarter of 2017 when compared to December 31, 2016 ~~due~~and increased 2.1% when compared to ~~the continuing growth of the AT&T Next program.~~

~~Churn~~

March 31, 2016. The ~~effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was slightly higher~~sequential decrease reflects a 0.6% decline in ~~the first quarter of 2016. Postpaid churn was also higher reflecting continuing competitive pressure in the industry.~~

~~Branded Subscribers~~

~~Branded~~postpaid subscribers ~~increased 3.6% in the first quarter of 2016, which included~~partially offset by a ~~21.3%~~2.3% increase in prepaid ~~subscribers~~subscribers. The year-over-year increase includes increases of 0.3% and ~~a 1.3% increase~~13.7% in postpaid ~~subscribers.~~ and prepaid subscribers, respectively.

At March 31, ~~2016, 88%~~2017, 91% of our postpaid phone subscriber base used smartphones, compared to ~~84%~~88% at March 31, ~~2015.~~2016. 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. ~~About half of our Mobile Share accounts have chosen data plans with 10 gigabytes or higher and 38% have chosen plans with 15 gigabytes or higher.~~ Device connections on our Mobile Share and unlimited wireless data plans now represent ~~77%~~85% of our postpaid customer ~~base.~~base, compared to 81% at March 31, 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~~and/or minimize subscriber churn.

~~During the first quarter of 2016, we discontinued offering subsidized smartphones to most of our customers. Under this no-subsidy model, subscribers must~~Our equipment installment purchase ~~a device on installments under the~~programs, including AT&T Next, program or choose to bring their own device, with no annual service contract. Over 90% of postpaid smartphone gross adds and upgrades during the first quarter of 2016 were either AT&T Next or BYOD. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

~~Our AT&T Next program allows~~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, ~~they~~AT&T Next subscribers also have the right to trade in the original device for a new device with a new installment plan and have the remaining unpaid balance satisfied. For installment programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers ~~on the AT&T Next program~~choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. At March 31, 2017, about 54% of the postpaid smartphone base is on an equipment installment program compared to 49% at March 31, 2016. Of the postpaid smartphone gross adds and upgrades during the first quarter of 2017, 92% were either equipment installment plans or BYOD, compared to 91% in 2016. While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

Connected Devices

Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased ~~26.4% in~~2.6% during the first quarter ofwhen compared to December 31, 2016 and 16.7% when compared to March 31, 2016. During the first quarter of ~~2016,~~2017, we added approximately ~~1.2~~1.6 million "connected" cars through agreements with various ~~carmakers.~~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 Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share of Time Warner common stock, or approximately $85,400 at the date of the announcement (Merger). 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 expected to close before year-end 2017. See Note 7 for additional details of the transaction and "Liquidity" for a discussion of our financing arrangements.

Straight Path Communications Acquisition As announced on April 10, 2017, we offered to acquire Straight Path Communications, Inc. (Straight Path), which holds a nationwide portfolio of millimeter wave spectrum, including 39 GHz and 28 GHz licenses. Subsequent to our agreement, Straight Path received a proposal from an unsolicited bidder. The process is ongoing at the time of this filing.

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 expects to 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 over the life of the 25-year contract to build, deploy, operate and maintain the network. The actual reach of the network and our investment over the 25-year period will be determined by the number of individual states electing to participate in FirstNet. We do not expect FirstNet to materially impact our 2017 results given the timing of the state opt-in process.

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

Litigation Challenging DIRECTV's NFL ~~Sunday Ticket~~SUNDAY TICKET More than two dozen putative class actions ~~have been~~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.~~SUNDAY TICKET. The plaintiffs allege that (i) the 32 NFL teams have unlawfully agreed not to compete with each other in the market for nationally televised NFL football games and instead have "pooled" their broadcasts and assigned to the NFL the exclusive right to market them; and (ii) the NFL and DIRECTV have entered into an unlawful exclusive distribution agreement that allows DIRECTV to charge "supra-competitive" prices for the NFL ~~Sunday Ticket~~SUNDAY TICKET package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. In December 2015, the Judicial Panel on Multidistrict Litigation transferred the cases outside the Central District of California to that court for consolidation and management of pre-trial proceedings. In June 2016, the plaintiffs filed a consolidated amended complaint. We vigorously dispute the allegations the complaints have asserted.

~~AT&T INC.~~

~~MARCH 31,~~ In August 2016, DIRECTV filed a motion to compel arbitration and the NFL defendants filed a motion to dismiss the complaint. The court held a hearing on both motions on February 13, 2017. The court has not yet ruled.

~~Item 2. Management's Discussion~~SportsNet LA Litigation On November 2, 2016, the U.S. Department of Justice filed a civil antitrust complaint in federal court (Central District of California) against DIRECTV Group Holdings, LLC and ~~Analysis~~AT&T Inc., as successor in interest to DIRECTV, alleging that DIRECTV, in 2014, unlawfully exchanged strategic information with certain competitors in connection with negotiations with SportsNet LA about carrying the Los Angeles Dodgers games. The complaint alleges that DIRECTV's conduct violated Section 1 of ~~Financial Condition~~the Sherman Act. The complaint seeks a declaration that DIRECTV's conduct unlawfully restrained trade and ~~Results~~seeks an injunction (1) barring DIRECTV and AT&T from engaging in unlawful information sharing in connection with future negotiations for video programming distribution, (2) requiring DIRECTV and AT&T to monitor relevant communications between their executives and competitors and to periodically report to the Department of ~~Operations - Continued~~Justice, and (3) requiring DIRECTV and AT&T to implement training and compliance programs. The complaint asks that the government be awarded its litigation costs. We vigorously dispute these allegations. On March 23, 2017, the parties advised the court that they have finalized a settlement to resolve the case.

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

Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We ~~are disputing~~vigorously dispute these ~~allegations vigorously.~~allegations. On April 4, 2017, we reported to the court that we had reached a written settlement with the FTC Bureau of Consumer Protection. Commission approval is still required. The court scheduled trial to begin on August 14, 2017, if Commission approval has not been secured by that date.

Unlimited Data Plan Claims In October 2014, the FTC filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern the application of AT&T's Maximum Bit Rate (MBR) program to customers who enrolled in our Unlimited Data Plan from 2007-2010. MBR temporarily reduces in certain instances the download speeds of a small portion of our legacy Unlimited Data Plan customers each month after the customer exceeds a designated amount of data during the customer's billing cycle. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, ~~Internet~~internet browsing and many other applications are typically unaffected. Contrary to the FTC's allegations, ~~which we vigorously dispute,~~ our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and on August 29, 2016, issued its decision reversing the ~~appeal is now pending before~~district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC has asked the Court ~~while limited discovery proceeds in~~of Appeals to reconsider the ~~District Court. Oral argument~~decision but the Court has not ruled on ~~the appeal is presently set for June 17, 2016.~~that request. In addition to the FTC case, several class actions have been filed also challenging our MBR program. We vigorously dispute the allegations the complaints have asserted.

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

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

~~South Coast Air Quality~~Labor Contracts ~~On January 15, 2016, AT&T Mobility received an offer to enter into an administrative settlement with California's South Coast Air Quality Management District associated with a Notice~~As of ~~Violation (NOV) received in 2015. The 2015 NOV alleged violations~~March 31, 2017, we employed approximately 265,000 persons. Approximately 48% of ~~local environmental air permitting and emissions rules issued~~our employees are represented by the ~~District in connection with operation~~Communications Workers of ~~a back-up power generator system at one AT&T Mobility facility. After conclusion~~America, the International Brotherhood of its investigation and discussion, the parties resolved the alleged violations set forth in the NOV without admission of fault by AT&T Mobility for a payment of civil penalties in an amount less than one hundred thousand dollars.

~~Labor Contracts~~ A contract covering approximately 9,000 mobility employees in the Southwest region, which expired in February 2016, was ratified on April 14, 2016. A contract covering nearly 16,000 traditional wireline employees in our West region expired in April 2016 and employees are working under the terms of the prior contract, including benefits, while negotiations continue.Electrical Workers or other unions. After expiration of the ~~current~~ agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached. A separate contract covering only benefits with approximately 40,000 employees in our mobility business expires in 2016, though there is a no strike/no lock-out clause. Contracts covering wages and other non-benefit working terms for these mobility employees are structured on a regional basis.

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

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

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

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

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

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

AT&T INC.

MARCH 31, ~~2016~~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

COMPETITIVE AND REGULATORY ENVIRONMENT

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

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

In March 2017, the FCC circulated a draft order proposing to significantly reduce regulation of the bulk data connections that telecom companies provide to businesses otherwise known as special access services or business data services. That order, which was adopted on April 20, 2017, maintains light touch pricing regulation of packet-based services, largely eliminates pricing regulation of high-speed TDM transport services, and establishes a competitive market test for granting pricing flexibility for other TDM services. For those services that do not meet the competitive test, the order allows companies to offer volume and term discounts, as well as contract tariffs. The order establishes a period of permissive detariffing with a date certain for mandatory detariffing in all areas that meet the competitive market test.

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

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

In February 2015, the FCC released an order ~~reclassifying~~classifying both fixed and mobile consumer broadband ~~Internet~~internet access services as telecommunications services, subject to comprehensive regulation under the Telecom Act. The FCC's decision significantly ~~expands the FCC's~~expanded its existing authority to regulate the provision of fixed and mobile broadband ~~Internet~~internet access services. On April 26, 2017, the FCC announced that, in May 2017, it will initiate a proceeding to reverse its 2015 decision to classify broadband internet access services as telecommunications services. On a separate track, AT&T and other providers of broadband ~~Internet~~internet access services ~~have~~ challenged the FCC's decision before the U.S. Court of Appeals for the D.C. Circuit. ~~We expect~~In June 2016, a panel of the Court of Appeals upheld the FCC's rules by a 2-1 vote. In July 2016, AT&T and several of the other parties that challenged the rules filed petitions with the Court of Appeals asking that the case be reheard either by the panel or by the full Court of Appeals. On May 1, 2017, those rehearing petitions were rejected by the D.C. Circuit. Parties now have 90 days from issuance of that decision ~~on AT&T's appeal in~~to determine whether to seek review by the ~~first half~~U.S. Supreme Court. The outcome of ~~2016.~~the April 26, 2017 FCC proceedings could influence the court rulings.

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

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

AT&T INC.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

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

The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. ~~Government~~government to make more spectrum available. ~~In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the "AWS-3 Auction") and also authorized the~~The FCC ~~to conduct an "incentive~~finished its most recent auction~~" to make available for wireless broadband use~~ in April 2017 of certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction"). ~~We participated in~~

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

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

As the ~~separate consideration of low band spectrum acquisitions might affect AT&T's~~wireless industry continues to mature, future wireless growth will become increasingly dependent on our ability to ~~expand~~offer innovative video and data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We continue to invest significant capital in ~~these bands (low band~~expanding our network capacity, as well as to secure and utilize spectrum ~~has better propagation characteristics than "high band" spectrum). We seek to ensure~~ that meets our long-term needs. To that end, we ~~have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.~~have:

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

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

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

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

AT&T INC.

MARCH 31, ~~2016~~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

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

~~LIQUIDITY~~DISCUSSION AND ~~CAPITAL RESOURCES~~RECONCILIATION OF NON-GAAP MEASURE

We ~~had $10,008 in cash~~believe the following measure is relevant and ~~cash equivalents available at March 31, 2016. Cash and cash equivalents included cash~~useful information to investors as it is used by management as a method of ~~$2,114 and money market funds and other cash equivalents~~comparing performance with that of ~~$7,894. Approximately $939~~many of our ~~cash and cash equivalents resided~~competitors. This supplemental measure should be considered in ~~foreign jurisdictions, some of which is subject~~addition to, restrictions on repatriation. Cash and cash equivalents increased $4,887 since December 31, 2015. In the first three months of 2016, cash inflows were primarily provided by cash receipts from operations, including cash from our sale and transfer of certain equipment installment receivables to third parties, and long-term debt issuances. These inflows were offset by cash used to meet the needs of the business, including, but not ~~limited to, payment~~as a substitute of, ~~operating expenses; funding capital expenditures; debt repayments; dividends to stockholders;~~our consolidated and ~~the acquisition of wireless spectrum. We discuss many of these factors in detail below.~~segment financial information.

~~Cash Provided~~Supplemental Operational Measure

We provide a supplemental discussion of our domestic wireless operations that is calculated by ~~or Used in Operating Activities~~

~~During the first three months~~combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of ~~2016, cash provided by operating activities was $7,900, compared to $6,738 for the first three months of 2015. Higher operating cash flows in 2016 were primarily due to~~ our ~~acquisition of DIRECTV and partially offset by the timing of working capital payments.~~supplemental AT&T Mobility results.

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

For the first three months of 2016, cash used in investing activities totaled $4,308 and consisted primarily of $4,451 for capital expenditures, excluding interest during construction, and $165 for the acquisition of wireless spectrum and other operations. These expenditures were partially offset by net cash receipts of $445 from the sale of securities.

Virtually all of our capital expenditures are spent on our communications networks and our video services and support systems for our digital entertainment services. Capital expenditures, excluding interest during construction, increased $603 in the first three months. The increase was primarily due to our wireless network expansion in Mexico, DIRECTV operations and fiber buildout. In connection with capital improvements to our wireless network in Mexico, we also negotiated favorable payment terms (referred to as vendor financing). For the first three months of 2016, we deferred $43 of vendor financing related to capital additions to future periods. We do not report capital expenditures at the segment level.

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

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

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

Dollars in millions except per share and per subscriber amounts

LIQUIDITY AND CAPITAL RESOURCES

We had $14,884 in cash and cash equivalents available at March 31, 2017. Cash and cash equivalents included cash of $3,307 and money market funds and other cash equivalents of $11,577. Approximately $1,303 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation.

Cash and cash equivalents increased $9,096 since December 31, 2016. In the first three months of 2017, cash inflows were primarily provided by the issuance of long-term debt, and cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables to third parties. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, funding capital expenditures, debt repayments, dividends to stockholders, and the acquisition of wireless spectrum and other operations. We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities

During the first three months of 2017, cash provided by operating activities was $9,218, compared to $7,900 for the first three months of 2016. Higher operating cash flows in 2017 were primarily due to lower tax payments and working capital improvements.

Cash Used in or Provided by Investing Activities

For the first three months of 2017, cash used in investing activities totaled $6,171 and consisted primarily of $5,784 for capital expenditures, excluding interest during construction, and $162 for the acquisition of business operations and wireless spectrum.

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

We continue to expect our 2017 capital expenditures to be in the $22,000 range, 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. The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. Our capital spending also takes into account existing tax law and does not reflect anticipated tax reform. We are also focused on ensuring DIRECTV merger commitments are met.

Cash Provided by or Used in Financing Activities

For the first three months of ~~2016,~~2017, cash provided by financing activities totaled ~~$1,295~~$6,049 and included net proceeds of ~~$5,978~~$12,440 primarily from the following long-term debt issuances:

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

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

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

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

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

·	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.

MARCH 31, 2017

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

Dollars in millions except per share and per subscriber amounts

During the first three months of ~~2016,~~2017, we redeemed ~~$2,296~~$3,053 of debt, primarily consisting ~~primarily~~ of the following:

·	~~February redemption~~$1,142 of ~~$1,250 of AT&T Floating Rate Notes due 2016.~~

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

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

~~On May 3, 2016, we agreed to sell the following debt amounts:~~

·	~~$750 of 2.300%~~2.400% global notes due ~~2019.~~2017.

·	$~~750~~1,000 of ~~2.800%~~1.600% global notes due ~~2021.~~

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

·	~~$900 of 4.125% global notes due 2026.~~2017.

·	$500 of ~~4.800% global~~floating rate notes due ~~2044.~~2017.

~~These notes will be reopening~~The FCC's 600 MHz Auction concluded in April 2017. We submitted winning bids to purchase spectrum licenses in 18 markets for which we paid $910. With our previous deposit made in July 2016, we received a refund from the FCC in the amount of ~~existing series of notes. The transactions are expected to close~~$1,438 on ~~May 12, 2016, and proceeds will be used to pay down amounts outstanding under our $9,155 Syndicated Credit Agreement (discussed below).~~April 19, 2017.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately ~~4.1%~~4.3% as of March 31, ~~2016, and 4.0%~~2017, compared to 4.2% as of December 31, ~~2015.~~2016. We had ~~$129,229~~$132,379 of total notes and debentures outstanding at March 31, ~~2016,~~2017, which included Euro, British pound sterling, Swiss ~~Franc,~~franc, Brazilian real, Mexican peso and Canadian dollar denominated debt ofthat totaled approximately ~~$26,852.~~$24,941.

As of March 31, ~~2016,~~2017, we had approximately ~~407~~396 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. During the first three months of 2017, we did not repurchase any shares under these authorizations. In ~~2016, our priority will be~~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 ~~$2,947~~$3,009 during the first three months of ~~2016,~~2017, compared with ~~$2,434~~$2,947 for the first three months of ~~2015,~~2016, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in October 2016, partially offset by the impact of the decline in shares outstanding ~~resulting from our acquisition of DIRECTV.~~due to repurchases in 2016. Dividends declared by our Board of Directors totaled ~~$0.48~~$0.49 per share in the first ~~quarter~~three months of ~~2016~~2017 and ~~$0.47~~$0.48 per share for the first three months of ~~2015.~~2016. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

At March 31, ~~2016,~~2017, we had ~~$8,399~~$12,681 of debt maturing within one year, ~~$7,874~~$12,507 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:

·	$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021. No such put was exercised during April ~~2016.~~2017.

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

Credit Facilities

37The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.

We use credit facilities as a tool in managing our liquidity status. In December 2015, we entered into a five-year $12,000 revolving credit agreement of which no amounts are outstanding as of March 31, 2017. We also have a $9,155 syndicated credit agreement, of which $4,155 remains outstanding as of March 31, 2017 ($2,286 of which is payable March 2018).

In connection with our pending Merger with Time Warner, we have also entered into a $30,000 bridge loan credit agreement ("Bridge Loan") and a $10,000 term loan agreement ("Term Loan"). No amounts will be borrowed under either the Bridge Loan or the Term Loan prior to the closing of the Merger. Borrowings under either agreement will be used solely to finance a portion of the cash to be paid in the Merger, the refinancing of debt of Time Warner and its subsidiaries and the payment of related expenses.

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 net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31, 2017, we were in compliance with the covenants for our credit facilities.

AT&T INC.

MARCH 31, ~~2016~~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

~~Credit Facilities~~

On December 11, 2015, we entered into a five-year, $12,000 credit agreement (the "Revolving Credit Agreement") with Citibank, N.A. (Citibank), as administrative agent, replacing our $5,000 credit agreement that would have expired in December 2018. At the same time, AT&T and the lenders terminated their obligations under the existing revolving $3,000 credit agreement with Citibank that would have expired in December 2017.

In January 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent. We also entered into the 18 Month Credit Agreement with Mizuho as initial lender and agent. The 18-Month Credit Agreement was repaid and terminated in March 2016.

~~Revolving Credit Agreement~~

In the event advances are made under the Revolving Credit Agreement, those advances would be used for general corporate purposes. Advances are not conditioned on the absence of a material adverse change. All advances must be repaid no later than the date on which lenders are no longer obligated to make any advances under the agreement. We can terminate, in whole or in part, amounts committed by the lenders in excess of any outstanding advances; however, we cannot reinstate any such terminated commitments. We also may request that the total amount of the lender's commitments be increased by an integral multiple of $25 effective on a date that is at least 90 days prior to the scheduled termination date then in effect, provided that no event of default has occurred and in no event shall the total amount of the lender's commitments at any time exceed $14,000. At March 31, 2016, we had no advances outstanding under the Revolving Credit Agreement and we have complied with all covenants.

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

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

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

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

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

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

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

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

~~AT&T INC.~~

~~MARCH 31, 2016~~

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

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

~~The Syndicated Credit Agreement~~

In March 2015, AT&T borrowed all amounts available under the Tranche A Facility and the Tranche B Facility. Amounts borrowed under the Tranche A Facility will be due on March 2, 2018. Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with 25 percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due on March 2, 2020.

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

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

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

Collateral Arrangements

During the first three months of ~~2016,~~2017, we received ~~$587~~$396 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 ~~foreign currency exchange rates, interest rates,~~ credit ratings and netting agreements. (See Note 6)

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At March 31, ~~2016,~~2017, our debt ratio was ~~51.2%~~51.6%, compared to ~~51.5%~~51.2% at March 31, ~~2015,~~2016, and ~~50.5%~~49.9% at December 31, ~~2015.~~2016. Our net debt ratio was 45.8% at March 31, 2017, compared to 47.3% at March 31, 2016 ~~compared to 49.1% at March 31, 2015,~~ and ~~48.5%~~47.5% at December 31, ~~2015.~~2016. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

During ~~2016,~~the first three months of 2017, we received ~~$1,610~~$1,446 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless ~~business,~~operations, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of ~~$8,787~~$8,426 as of March 31, ~~2016,~~2017, and ~~$8,714~~$8,477 as of December 31, ~~2015,~~2016, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which ~~will be~~are distributed quarterly in equal amounts. We distributed $140 to the trust during the first ~~quarter~~three months of ~~2016.~~2017. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares. At the time of the contribution of the preferred equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal income tax return for each of 2015 and 2016.

AT&T INC.

MARCH 31, ~~2016~~2017

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At March 31, ~~2016,~~2017, we had interest rate swaps with a notional value of ~~$7,050~~$10,450 and a fair value of ~~$197.~~$42.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of ~~$(2,063)~~$(3,400) at March 31, ~~2016.~~2017.

~~We also have foreign exchange contracts with a notional value of $3 and a fair value of $0.~~

Item 4. Controls and Procedures

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

402017.

AT&T INC.

MARCH 31, ~~2016~~2017

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

·	Our ability to integrate our acquisition of DIRECTV.

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

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

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

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

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

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

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

AT&T INC.

MARCH 31, ~~2016~~2017

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

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

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

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

Period
(a)
~~(a)~~
(b) (c) (d)
Total Number of
Shares (or Units)
Purchased^{1,21, 2, 3}

~~(b)~~

Average Price Paid
Per Share (or Unit)

~~(c)~~
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs¹

~~(d)~~
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs

January 1, ~~2016~~2017 -
January 31, ~~2016~~2017
    ~~541,982~~ 658,242 $ 40.95 - -    ~~406,550,000~~ 395,550,000
February 1, ~~2016~~2017 -
February ~~29, 2016~~28, 2017
~~448~~ 1,782,268 41.86 - -    ~~406,550,000~~ 395,550,000
March 1, ~~2016~~2017 -
March 31, ~~2016~~2017
~~9,074~~ 2,346,758 41.91 - -    ~~406,550,000~~ 395,550,000
Total ~~551,504~~ 4,787,268 $ - 41.74 -
¹
In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations have no expiration date.
²
~~All~~Of the shares repurchased, 4,244,764 shares were acquired through the withholding of taxes on the vesting of restricted stock and performance shares or ~~through the payment in stock of taxes~~ on the exercise price of options.
³
Of the shares repurchased, 542,504 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit Association (VEBA) trusts.
42
45
AT&T INC.
MARCH 31, ~~2016~~2017

Item 6. Exhibits

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

~~10-a~~
12
~~2016 Incentive~~
10-a Stock Purchase and Deferral Plan
10-b Cash Deferral Plan
12 Computation of Ratios of Earnings to Fixed Charges
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32 Section 1350 Certifications
101 XBRL Instance Document
43
46
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.

May ~~5, 2016~~4, 2017

AT&T Inc.

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

4447

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

	(Mark One) x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, ~~2016~~2017 or
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

At March 31, 2016, and for the period ended:
		Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) on Available- for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2015		$	(1,198)		$	484		$	16		$	6,032		$	5,334
Other comprehensive income (loss) before reclassifications			(44)			(26)			124			-			54
Amounts reclassified from accumulated OCI			-	¹		(3)	²		10	³		(215)	⁴		(208)
Net other comprehensive income (loss)			(44)			(29)			134			(215)			(154)
Balance as of March 31, 2016		$	(1,242)		$	455		$	150		$	5,817		$	5,180

At March 31, 2015, and for the period ended:
		Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) on Available- for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2014		$	(26)		$	499		$	741		$	6,847		$	8,061
Other comprehensive income (loss) before reclassifications			(186)			33			(354)			-			(507)
Amounts reclassified from accumulated OCI			-	¹		(5)	²		7	³		(215)	⁴		(213)
Net other comprehensive income (loss)			(186)			28			(347)			(215)			(720)
Balance as of March 31, 2015		$	(212)		$	527		$	394		$	6,632		$	7,341
¹	Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
²	(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
³	(Gains) losses are included in interest expense in the consolidated statements of income. See Note 6 for additional information.
⁴	The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services and sales and Selling, general and administrative in the consolidated statements of income (see Note 5).

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

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

Assets acquired
Cash	$	4,797
Accounts receivable		2,026
All other current assets		1,535
Property, plant and equipment		9,331
Intangible assets not subject to amortization
Orbital slots		11,946
Trade name		1,371
Intangible assets subject to amortization
Customer lists and relationships		19,508
Trade name		2,915
Other		457
Investments and other assets		2,388
Goodwill		34,449
Total assets acquired		90,723

Liabilities assumed
Current liabilities, excluding current portion of long-term debt		5,733
Long-term debt		20,585
Other noncurrent liabilities		16,642
Total liabilities assumed		42,960
Net assets acquired		47,763
Noncontrolling interest		(354	)
Aggregate value of consideration paid	$	47,409

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

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