UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q


(Mark One) x ☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ~~March 31,~~June 30, 2018 or
☐
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware

I.R.S. Employer Identification Number43-1301883

208 S. Akard St., Dallas, Texas 75202

Telephone Number: (210)821-4105

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or emerging growth company. See definition of ~~"accelerated~~“accelerated filer,~~" "large~~” “large accelerated filer,~~" "smaller~~” “smaller reporting ~~company"~~company” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule12b-2 of the Exchange Act.


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

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

Yes [ ] No [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes [ ] No [X]

At ~~April 30,~~July 31, 2018, there were ~~6,141~~7,262 million common shares outstanding.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended
March 31,
2018 2017
As Adjusted
Operating Revenues
Service $ 33,646 $ 36,456
Equipment 4,392 2,909
Total operating revenues 38,038 39,365

Operating Expenses
Cost of services and sales
   Equipment 4,848 3,848
   Broadcast, programming and operations 5,166 4,974
   Other cost of services (exclusive of depreciation and
         amortization shown separately below)
7,932 9,288
Selling, general and administrative 7,897 8,772
Depreciation and amortization 5,994 6,127
Total operating expenses 31,837 33,009
Operating Income 6,201 6,356
Other Income (Expense)
Interest expense (1,771 ) (1,293 )
Equity in net income (loss) of affiliates 9 (173 )
Other income (expense) – net 1,702 488
Total other income (expense) (60 ) (978 )
Income Before Income Taxes 6,141 5,378
Income tax expense 1,382 1,804
Net Income 4,759 3,574
Less: Net Income Attributable to Noncontrolling Interest (97 ) (105 )
Net Income Attributable to AT&T $ 4,662 $ 3,469
Basic Earnings Per Share Attributable to AT&T $ 0.75 $ 0.56
Diluted Earnings Per Share Attributable to AT&T $ 0.75 $ 0.56
Weighted Average Number of Common Shares Outstanding – Basic (in millions) 6,161 6,166
Weighted Average Number of Common Shares Outstanding – with Dilution (in millions)
6,180 6,186
Dividends Declared Per Common Share $ 0.50 $ 0.49
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
Three months ended
March 31,
2018 2017
Net income $ 4,759 $ 3,574
Other comprehensive income (loss), net of tax:
    Foreign currency:
        Translation adjustment (includes $2 and $6 attributable to noncontrolling interest),
            net of taxes of $175 and $391
108 372
    Available-for-sale securities:
        Net unrealized gains (losses), net of taxes of $(4) and $15 (12 ) 33
        Reclassification adjustment included in net income, net of taxes of $0, and $3 - 5
     Cash flow hedges:
        Net unrealized gains, net of taxes of $180 and $7 674 13
        Reclassification adjustment included in net income, net of taxes of $3 and $5 12 10
     Defined benefit postretirement plans:
        Net prior service credit arising during period, net of taxes of $185 and $0 567 -
        Amortization of net prior service credit included in net income, net of taxes of $(105)
            and $(139)
(323 ) (228 )
Other comprehensive income (loss) 1,026 205
Total comprehensive income 5,785 3,779
Less: Total comprehensive income attributable to noncontrolling interest (99 ) (111 )
Total Comprehensive Income Attributable to AT&T $ 5,686 $ 3,668
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
March 31, December 31,
2018 2017
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 48,872 $ 50,498
Accounts receivable - net of allowances for doubtful accounts of $642 and $663 16,290 16,522
Prepaid expenses 1,335 1,369
Other current assets 12,008 10,757
Total current assets 78,505 79,146
Property, plant and equipment 317,127 313,499
   Less: accumulated depreciation and amortization (192,003 ) (188,277 )
Property, Plant and Equipment – Net 125,124 125,222
Goodwill 105,482 105,449
Licenses 96,556 96,136
Customer Lists and Relationships – Net 9,878 10,676
Other Intangible Assets – Net 7,201 7,464
Investments in and Advances to Equity Affiliates 2,623 1,560
Other Assets 20,974 18,444
Total Assets $ 446,343 $ 444,097

Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year $ 29,322 $ 38,374
Accounts payable and accrued liabilities 31,569 34,470
Advanced billings and customer deposits 5,081 4,213
Accrued taxes 1,534 1,262
Dividends payable 3,074 3,070
Total current liabilities 70,580 81,389
Long-Term Debt 133,724 125,972
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 45,730 43,207
Postemployment benefit obligation 30,116 31,775
Other noncurrent liabilities 19,117 19,747
Total deferred credits and other noncurrent liabilities 94,963 94,729

Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2018 and
   December 31, 2017: issued 6,495,231,088 at March 31, 2018 and December 31, 2017) 6,495 6,495
Additional paid-in capital 89,404 89,563
Retained earnings 55,067 50,500
Treasury stock (347,690,578 at March 31, 2018 and 355,806,544
   at December 31, 2017, at cost) (12,432 ) (12,714 )
Accumulated other comprehensive income 7,386 7,017
Noncontrolling interest 1,156 1,146
Total stockholders' equity 147,076 142,007
Total Liabilities and Stockholders' Equity $ 446,343 $ 444,097
See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Three months ended
March 31,
2018 2017
As Adjusted
Operating Activities
Net income $ 4,759 $ 3,574
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization 5,994 6,127
   Undistributed earnings from investments in equity affiliates (2 ) 182
   Provision for uncollectible accounts 438 393
   Deferred income tax expense 1,222 480
   Net (gain) loss from investments, net of impairments 2 61
   Actuarial (gain) loss on pension and postretirement benefits (930 ) -
Changes in operating assets and liabilities:
   Accounts receivable (439 ) 445
   Other current assets 614 229
   Accounts payable and other accrued liabilities (1,962 ) (1,582 )
   Equipment installment receivables and related sales 505 394
   Deferred customer contract acquisition and fulfillment costs (826 ) (436 )
Retirement benefit funding (140 ) (140 )
Other - net
(288 ) (762 )
Total adjustments 4,188 5,391
Net Cash Provided by Operating Activities 8,947 8,965

Investing Activities
Capital expenditures:
   Purchase of property and equipment (5,957 ) (5,784 )
   Interest during construction (161 ) (231 )
Acquisitions, net of cash acquired (234 ) (162 )
Dispositions 56 6
Sales (purchases) of securities, net (116 ) 17
Advances to and investments in equity affiliates, net (1,007 ) -
Cash collections of deferred purchase price 267 185
Net Cash Used in Investing Activities (7,152 ) (5,969 )

Financing Activities
Issuance of long-term debt 2,565 12,440
Repayment of long-term debt (4,911 ) (3,053 )
Purchase of treasury stock (145 ) (177 )
Issuance of treasury stock 11 21
Dividends paid (3,070 ) (3,009 )
Other 2,048 (173 )
Net Cash (Used in) Provided by Financing Activities (3,502 ) 6,049
Net (decrease) increase in cash and cash equivalents and restricted cash (1,707 ) 9,045
Cash and cash equivalents and restricted cash beginning of year 50,932 5,935
Cash and Cash Equivalents and Restricted Cash End of Period $ 49,225 $ 14,980
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, 2018
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 $ 89,563
Issuance of treasury stock (4 )
Share-based payments (155 )
Balance at end of period $ 89,404

Retained Earnings
Balance at beginning of year $ 50,500
Net income attributable to AT&T ($0.75 per diluted share) 4,662
Dividends to stockholders ($0.50 per share) (3,092 )
Cumulative effect of accounting changes 2,997
Balance at end of period $ 55,067

Treasury Stock
Balance at beginning of year (356 ) $ (12,714 )
Repurchase and acquisition of common stock (4 ) (164 )
Issuance of treasury stock 12 446
Balance at end of period (348 ) $ (12,432 )

Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
Balance at beginning of year $ 7,017
Other comprehensive income attributable to AT&T 1,024
Amounts reclassified to retained earnings (655 )
Balance at end of period $ 7,386

Noncontrolling Interest
Balance at beginning of year $ 1,146
Net income attributable to noncontrolling interest 97
Distributions (124 )
Translation adjustments attributable to noncontrolling interest, net of taxes 2
Cumulative effect of accounting changes 35
Balance at end of period $ 1,156

Total Stockholders' Equity at beginning of year $ 142,007
Total Stockholders' Equity at end of period $ 147,076
See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED STATEMENTS OF INCOME

Dollars in millions except per share amounts

(Unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017
				As Adjusted						As Adjusted
Operating Revenues
Service	$	33,773		$	36,538		$	67,419		$	72,994
Equipment		4,080			3,299			8,472			6,208
Media		1,133			-			1,133			-
Total operating revenues		38,986			39,837			77,024			79,202

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

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

See Notes to Consolidated Financial Statements.

~~MARCH 31,~~

AT&T INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Dollars in millions

(Unaudited)


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

See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions except per share amounts


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


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

Stockholders’ Equity

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

See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in millions

(Unaudited)


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

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

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

See Notes to Consolidated Financial Statements.

AT&T INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Dollars and shares in millions except per share amounts

(Unaudited)


	June 30, 2018
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Issuance of stock		1,126			1,126
Balance at end of period		7,621		$	7,621


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


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


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


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


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


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

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

See Notes to Consolidated Financial Statements.

AT&T INC.

JUNE 30, 2018

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of PresentationThese consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and ~~affiliates.~~

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

All significant intercompany transactions are eliminated in the consolidation process. Investments in less than majority-owned subsidiaries and partnerships where we have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method ~~investees'~~investees’ other comprehensive income (OCI) items, including translation adjustments. We treat distributions received from equity method investees as returns on investment and classify them as cash flows from operating activities until those distributions exceed our cumulative equity in the earnings of that investment. We treat the excess amount as a return of investment and classify it as cash flows from investing activities.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain amounts have been conformed to the current ~~period's~~period’s presentation, including impacts for the adoption of recent accounting standards and the realignment of certain business units within our reportable segments (see Note 4).

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

~~AT&T INC.~~

~~MARCH 31,~~

Customer Fulfillment Costs During the second quarter of 2018,

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

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

in the second quarter of 2018.

Recently Adopted Accounting Standards

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

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

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


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


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


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


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

Historical Effect of
Accounting Adoption of As
Method ASU 2017-07 Adjusted
For the three months ended March 31, 2018
Consolidated Statements of Income
Other cost of services $ 7,572 $ 360 $ 7,932
Selling, general and administrative expenses 6,755 1,142 7,897
Operating Income 7,703 (1,502 ) 6,201
Other Income (Expense) - net 200 1,502 1,702
Net Income 4,759 - 4,759

For the three months ended March 31, 2017
Consolidated Statements of Income
Other cost of services $ 9,065 $ 223 $ 9,288
Selling, general and administrative expenses 8,487 285 8,772
Operating Income 6,864 (508 ) 6,356
Other Income (Expense) - net (20 ) 508 488
Net Income 3,574 - 3,574

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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

As of January 1, 2018, we adopted, with retrospective application, ASUNo. 2016-18, ~~"Statement~~ “Statement of Cash Flows (Topic 230) – Restricted Cash,"” (ASU2016-18). The primary impact of ASU2016-18 was to require us to include restricted cash in our reconciliation of beginning and ending cash and cash equivalents (restricted and unrestricted) on the face of the statements of cash flows. (See Note ~~10)~~

11)

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

Historical Effect of Effect of
Accounting Adoption of Adoption of As
Method ASU 2016-15 ASU 2016-18 Adjusted
For the three months ended March 31, 2018
Consolidated Statements of Cash Flows
Equipment installment receivables and related sales $ 772 $ (267 ) $ - $ 505
Other - net (322 ) - 34 (288 )
Cash Provided by (Used in) Operating Activities 9,180 (267 ) 34 8,947
Sales (purchases) of securities - net - - (116 ) (116 )
Cash collections of deferred purchase price - 267 - 267
Cash Used in Investing Activities (7,303 ) 267 (116 ) (7,152 )
Change in cash and cash equivalents and restricted cash $ (1,625 ) $ - $ (82 ) $ (1,707 )

For the three months ended March 31, 2017
Consolidated Statements of Cash Flows
Changes in other current assets $ 228 $ - $ 1 $ 229
Equipment installment receivables and related sales 579 (185 ) - 394
Other - net (693 ) - (69 ) (762 )
Cash Provided by Operating Activities 9,218 (185 ) (68 ) 8,965
Sales (purchases) of securities - net - - 17 17
Cash collections of deferred purchase price - 185 - 185
Cash Used in Investing Activities (6,171 ) 185 17 (5,969 )
Change in cash and cash equivalents and restricted cash $ 9,096 $ - $ (51 ) $ 9,045


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


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

Financial Instruments As of January 1, 2018, we adopted ASUNo. 2016-01, ~~"Financial~~ “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial ~~Liabilities"~~Liabilities” (ASU2016-01), which requires us to prospectively record changes in the fair value of our equity investments, except for those accounted for under the equity method, in net income instead of in accumulated other comprehensive income. As of January 1, 2018, we recorded an increase of ~~$655~~$658 in retained earnings for the cumulative effect of the adoption of ASU2016-01, with an offset to accumulated other comprehensive income (accumulated OCI).

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

New Accounting Standards and Accounting Standards Not Yet Adopted

Leases In February 2016, the FASB issued ASUNo. 2016-02, ~~"Leases~~ “Leases (Topic 842),"” as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASC 842 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding ~~"right-of-use" assets, and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.~~“right-of-use” assets. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP.

In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. Through the same amendment, the FASB will allow lessors the option to make a policy election to treat lease and nonlease components as a single lease component under certain conditions. ASC 842 is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption.

Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. ~~At adoption, we will recognize a right-to-use asset and corresponding lease liability on our consolidated balance sheets.~~ The income statement recognition of lease expense appears similar to our current methodology. We are continuing to evaluate the magnitude and other potential impacts to our financial statements.

NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months and six months ended ~~March 31,~~June 30, 2018 and 2017, is shown in the table below:


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

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

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

Three months ended
March 31,
2018 2017
Numerators
Numerator for basic earnings per share:
   Net Income $ 4,759 $ 3,574
   Less: Net income attributable to noncontrolling interest (97 ) (105 )
   Net Income attributable to AT&T 4,662 3,469
   Dilutive potential common shares:
      Share-based payment 5 4
Numerator for diluted earnings per share $ 4,667 $ 3,473
Denominators (000,000)
Denominator for basic earnings per share:
   Weighted average number of common shares outstanding 6,161 6,166
   Dilutive potential common shares:
      Share-based payment (in shares) 19 20
Denominator for diluted earnings per share 6,180 6,186
Basic earnings per share attributable to AT&T $ 0.75 $ 0.56
Diluted earnings per share attributable to AT&T $ 0.75 $ 0.56

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. OTHER COMPREHENSIVE INCOME

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



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



	Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) onAvailable- for-Sale Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Postretirement Plans			Accumulated Other Comprehensive Income
Balance as of December 31, 2016	$	(1,995	)	$	541		$	744		$	5,671		$	4,961
Other comprehensive income (loss) before reclassifications		343			83			(504	)		969			891
Amounts reclassified from accumulated OCI		-	¹		(7	)¹		19	²		(475	)³		(463	)
Net other comprehensive income (loss)		343			76			(485	)		494			428
Balance as of June 30, 2017	$	(1,652	)	$	617		$	259		$	6,165		$	5,389

¹	(Gains) losses are included in Other income (expense) – net in the consolidated statements of income.

²	(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7).

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

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

Foreign Currency Translation Adjustment Net Unrealized Gains (Losses) on Available-for-Sale Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Defined Benefit Postretirement Plans Accumulated Other Comprehensive Income
Balance as of December 31, 2017 $ (2,054) $ 660 $ 1,402 $ 7,009 $ 7,017
Other comprehensive income
   (loss) before reclassifications
106 (12) 674 567 1,335
Amounts reclassified
   from accumulated OCI
-
¹

-
¹

12
²

(323)
³

(311)
Net other comprehensive
   income (loss)
106 (12) 686 244 1,024
Amounts reclassified to
   retained earnings
- (655)
⁴

- - (655)
Balance as of March 31, 2018 $ (1,948) $ (7) $ 2,088 $ 7,253 $ 7,386

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
¹(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
²(Gains) losses are included in Interest expense in the consolidated statements of income. See Note 7 for additional information.
³The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the
   consolidated statements of income (see Note 6).
⁴With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments
   are reclassified to retained earnings (see Note 1).

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 4. SEGMENT INFORMATION

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

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

~~Dollars in millions except per share amounts~~

(5) WarnerMedia.

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

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

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

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

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

TheEntertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories.

TheInternational 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 (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).

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

~~In reconciling~~

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Corporate and Other items reconcile our segment results to consolidated operating income and income before income taxes, ~~Corporate~~ and ~~Other~~ includes: (1) operations that are not considered reportable segments and that are no longer integral to our operations or which we no longer actively market, (2) corporate support functions and operations, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, and (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense) – net.

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

·•

~~Acquisition-related items~~

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

•

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

·•

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

•

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

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

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

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


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


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

For the three months ended March 31, 2018
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization

Operating
Income (Loss)

Equity in Net
Income (Loss) of
Affiliates

Segment
Contribution

Consumer Mobility $ 14,986 $ 8,524 $ 6,462 $ 1,807 $ 4,655 $ - $ 4,655
Business Solutions 9,185 5,638 3,547 1,462 2,085 (1 ) 2,084
Entertainment Group 11,577 8,939 2,638 1,312 1,326 9 1,335
International 2,025 1,804 221 332 (111 ) - (111 )
Segment Total 37,773 24,905 12,868 4,913 7,955 $ 8 $ 7,963
Corporate and Other 265 691 (426 ) 19 (445 )
Acquisition-related items - 67 (67 ) 1,062 (1,129 )
Certain significant items - 180 (180 ) - (180 )
AT&T Inc. $ 38,038 $ 25,843 $ 12,195 $ 5,994 $ 6,201

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

Consumer Mobility $ 14,806 $ 8,560 $ 6,246 $ 1,716 $ 4,530 $ - $ 4,530
Business Solutions 9,692 6,040 3,652 1,465 2,187 - 2,187
Entertainment Group 12,601 9,605 2,996 1,420 1,576 (6 ) 1,570
International 1,929 1,759 170 290 (120 ) 20 (100 )
Segment Total 39,028 25,964 13,064 4,891 8,173 $ 14 $ 8,187
Corporate and Other 337 829 (492 ) 34 (526 )
Acquisition-related items - 207 (207 ) 1,202 (1,409 )
Certain significant items - (118 ) 118 - 118
AT&T Inc. $ 39,365 $ 26,882 $ 12,483 $ 6,127 $ 6,356

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


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


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

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

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

First Quarter
2018 2017
Consumer Mobility $ 4,655 $ 4,530
Business Solutions 2,084 2,187
Entertainment Group 1,335 1,570
International (111 ) (100 )
Segment Contribution 7,963 8,187
Reconciling Items:
  Corporate and Other (445 ) (526 )
  Amortization of intangibles acquired (1,062 ) (1,202 )
  Merger and integration charges (67 ) (207 )
  Venezuela devaluation (25 ) -
  Employee separation costs (51 ) -
  Natural disaster charges (104 ) -
  Gain on wireless spectrum transactions - 118
  Segment equity in net (income) loss of affiliates (8 ) (14 )
AT&T Operating Income 6,201 6,356
Interest expense 1,771 1,293
Equity in net income (loss) of affiliates 9 (173 )
Other income (expense) - net 1,702 488
Income Before Income Taxes $ 6,141 $ 5,378

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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


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

NOTE 5. REVENUE RECOGNITION

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

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

~~Contracts with Customers~~

Service and Equipment Revenues

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

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

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Our contracts allow for customers to frequently modify their arrangement, without incurring penalties in many cases. When a contract is modified, we evaluate the change in scope or price of the contract to determine if the modification should be

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

~~Dollars in millions except per share amounts~~

treated as a new contract or if it should be considered a change of the existing contract. We generally do not have significant impacts from contract modifications.

Service-Only Contracts and Standalone Equipment Sales

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

Arrangements with Multiple Performance Obligations

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

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

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

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

~~Disaggregation~~

Media Revenues

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

~~The following table sets forth disaggregated reported revenue by category:~~

For the three months ended March 31, 2018

Consumer
Mobility

Business
Solutions

Entertainment
Group
International Other AT&T Inc.

Wireless service $ 11,612 $ 1,791 $ - $ 404 $ - $ 13,807
Video entertainment - - 8,359 1,354 - 9,713
Strategic services - 3,138 - - - 3,138
High-speed internet - - 1,878 - - 1,878
Legacy voice and data - 2,839 819 - - 3,658
Other service - 669 519 - 264 1,452
Wireless equipment 3,374 578 - 267 - 4,219
Other equipment - 170 2 - 1 173
$ 14,986 $ 9,185 $ 11,577 $ 2,025 $ 265 $ 38,038

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Disaggregation of Revenue

The following tables set forth disaggregated reported revenue by category:


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

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

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts


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

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Deferred Customer Contract Acquisition and Fulfillment Costs

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

Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were ~~$2,117~~$2,764 and ~~$10,763~~$11,017 as of ~~March 31,~~June 30, 2018, respectively, of which ~~$782~~$1,250 and ~~$4,062~~$3,715 were included in Other current assets on our consolidated balance sheets. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, we amortized ~~$263~~$595 and ~~$1,047~~$1,889 of these costs, respectively.

Contract Assets and Liabilities

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

The following table presents contract assets and liabilities and revenue recorded at or for the period ended ~~March 31,~~June 30, 2018:

March 31,
2018

Contract asset $ 1,757
Contract liability 5,510

Beginning of period contract liability recorded as customer contract revenue during period 3,625


	June 30,
	2018

Contract asset	$	1,906
Contract liability		6,853

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

Our consolidated balance sheet at June 30, 2018 included approximately ~~$1,252~~$1,257 for the current portion of our contract asset in ~~"Other~~“Other current ~~assets"~~assets” and ~~$4,882~~$5,723 for the current portion of our contract liability in ~~"Advanced~~“Advanced billings and customer deposits."”

~~Transaction Price Allocated to~~

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Remaining Performance Obligations

~~Our remaining~~

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

Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average ~~device price and average~~ service component for the ~~portfolio.~~portfolio and the average device price. As of ~~March 31,~~June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was ~~$27,836,~~$41,838, of which we expect to recognize approximately ~~50%~~80% over the ~~remainder of 2018,~~next two years, with the balance recognized thereafter.

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

Comparative Results

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

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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


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

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

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

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

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

At or for the three months ended March 31, 2018
As
Reported
Historical Accounting Method
Consolidated Statements of Income:
  Service Revenues $ 33,646 $ 35,069
  Equipment Revenues 4,392 3,861
  Total Operating Revenues 38,038 38,930
  Other cost of services 7,932 8,861
  Selling, general and administrative expenses 7,897 8,497
  Total Operating Expenses 31,837 33,366
  Operating income 6,201 5,564
  Income before income taxes 6,141 5,504
  Income tax expense 1,382 1,226
  Net income 4,759 4,278
  Net income attributable to AT&T 4,662 4,187

  Basic Earnings per Share Attributable to AT&T $ 0.75 $ 0.68
  Diluted Earnings per Share Attributable to AT&T $ 0.75 $ 0.68

Consolidated Balance Sheets:
  Other current assets 12,008 10,124
  Other Assets 20,974 19,164
  Accounts payable and accrued liabilities 31,569 31,748
  Advanced billings and customer deposits 5,081 5,140
  Deferred income taxes 45,730 44,787
  Other noncurrent liabilities 19,117 18,990
  Retained earnings 55,067 52,250
  Accumulated other comprehensive income 7,386 7,375
  Noncontrolling interest 1,156 1,115

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 6. PENSION AND POSTRETIREMENT BENEFITS

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

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC, the primary holding company for our domestic wireless business, to the trust used to pay pension benefits under our qualified pension plans. The preferred equity interest had a value of ~~$8,944~~$8,829 at ~~March 31,~~June 30, 2018. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly by AT&T Mobility II LLC to the trust, in equal amounts and accounted for as contributions. We distributed ~~$140~~$280 to the trust during the ~~three~~six months ended ~~March 31,~~June 30, 2018. 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~~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 recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) – net at our annual measurement date of December 31, unless earlier remeasurements are required. During the first quarter of 2018, a substantive plan change involving the frequency of future health reimbursement account

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

~~Dollars in millions except per share amounts~~

credit increases was communicated to our retirees. ~~This~~During the second quarter of 2018, a written plan change involving the ability of certain participants of the pension plan to receive their benefit in alump-sum amount upon retirement was communicated to our employees. These plan changes resulted in additional prior service credits recognized in other comprehensive income, reducing our liability by ~~$752.~~$752, and increasing our liability by $50 in the first and second quarters of 2018, respectively. Such credits amortize through earnings over a period approximating the average service period to full eligibility. ~~The~~These plan ~~change~~changes also triggered a remeasurement of our postretirement and pension benefit ~~obligation,~~obligations, resulting in an actuarial gain of $930 ~~recognized~~ in the first quarter and $1,796 in the second quarter of ~~2018, for~~2018. As a ~~total reduction~~result of the plan changes and remeasurements, our pension and postretirement benefit obligation decreased $1,746 and $1,682, respectively.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in ~~our liability of $1,682.~~

millions except per share amounts

The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in other income (expense) – net. S~~ervice~~Service costs are eligible for capitalization as part of internal construction projects, providing a small reduction in the net expense recorded.

Three months ended
March 31,
2018 2017
Pension cost:
   Service cost – benefits earned during the period $ 291 $ 282
   Interest cost on projected benefit obligation 487 484
   Expected return on assets (760 ) (783 )
   Amortization of prior service credit (30 ) (31 )
   Net pension (credit) cost $ (12 ) $ (48 )

Postretirement cost:
   Service cost – benefits earned during the period $ 29 $ 41
   Interest cost on accumulated postretirement benefit obligation 191 222
   Expected return on assets (77 ) (80 )
   Amortization of prior service credit (397 ) (336 )
   Actuarial (gain) loss (930 ) -
   Net postretirement (credit) cost $ (1,184 ) $ (153 )

   Combined net pension and postretirement (credit) cost $ (1,196 ) $ (201 )


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


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


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

As part of our ~~first-quarter~~first- and second-quarter 2018 ~~remeasurement,~~remeasurements, we ~~increased~~modified the weighted-average discount rate used to measure our ~~postretirement~~ benefit ~~obligation~~obligations increasing the rate to 4.10%. for the postretirement obligation and to 4.30% for the pension obligation. The discount rate in effect for determining ~~postretirement~~ service and interest costs after remeasurement is 4.30% and 3.70%, ~~respectively.~~respectively, for postretirement and 4.40% and 4.00% for pension. As a result of our plan ~~change~~changes and ~~remeasurement,~~remeasurements, the total estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the ~~remainder~~second half of 2018 is ~~$1,237~~$882 ($~~933~~665 net of tax) for postretirement benefits.

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

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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


Level 1		Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access.


Level 2		Inputs to the valuation methodology include:

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

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

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

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


Level 3		Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

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

The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2017.

Long-Term Debt and Other Financial Instruments

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

March 31, 2018 December 31, 2017
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures¹
$ 161,161 $ 169,388 $ 162,526 $ 171,938
Bank borrowings 2 2 2 2
Investment securities²
2,584 2,584 2,447 2,447
¹ Includes credit agreement borrowings.

² Excludes investments accounted for under the equity method.


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

¹Includes credit agreement borrowings.

² Excludes investments accounted for under the equity method.

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

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of ~~March 31,~~June 30, 2018 and December 31, 2017. Derivatives designated as hedging instruments are reflected as ~~"Other~~“Other assets,~~" "Other~~” “Other noncurrent ~~liabilities"~~liabilities” and, for a portion of interest rate swaps, ~~"Other~~“Other current ~~assets"~~assets” on our consolidated balance sheets.

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

~~Dollars in millions except per share amounts~~

March 31, 2018
Level 1 Level 2 Level 3 Total
Equity Securities
   Domestic equities $ 1,065 $ - $ - $ 1,065
   International equities 294 - - 294
   Fixed income equities - 149 - 149
Available-for-Sale Debt Securities - 777 - 777
Asset Derivatives
   Interest rate swaps - 10 - 10
   Cross-currency swaps - 2,761 - 2,761
   Foreign exchange contracts - 12 - 12
Liability Derivatives
   Interest rate swaps - (78 ) - (78 )
   Cross-currency swaps - (706 ) - (706 )
   Foreign exchange contracts - (15 ) - (15 )

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


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


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

Investment Securities

Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Prior to 2018, realized gains and losses on investment securities were included in "Other income (expense) – net" in the consolidated statements of income, while unrealized gains and losses, net of tax, were recorded in accumulated OCI. ASU 2016-01 required unrealized gains and losses, net of tax, on equity securities to also be included in "Other income (expense) – net" while debt securities will continue to be recorded in accumulated OCI.

Upon the adoption of ASU2016-01, we reclassified ~~$655~~$658 of such unrealized gains and losses on equity securities to retained earnings and beginning in 2018, gains and losses, both realized and unrealized, on equity securities measured at fair value are included in ~~"Other~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income using the specific identification method.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The components comprising total gains and losses on equity securities are as follows:

Three months ended
March 31,
2018 2017
Total gains (losses) recognized on equity securities $ (13 ) $ 89
Gains (Losses) recognized on equity securities sold 52 11
Unrealized gains (losses) recognized on equity securities held at end of period (65 ) 78

~~Unrealized~~

The components comprising total gains and losses ~~that~~on equity securities are ~~considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment.~~

as follows:


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

Debt securities of ~~$18~~$34 have maturities of less than one year, ~~$137~~$136 within one to three years, ~~$63~~$117 within three to five years and ~~$559~~$603 for five or more years.

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

Derivative Financial Instruments

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

Fair Value HedgingWe designate ourfixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the ~~three~~six months ended ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017, no ineffectiveness was measured on interest rate swaps designated as fair value ~~hedges~~.

hedges.

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

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as ~~"Other~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the ~~three~~six months ended ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to ~~"Other~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income. Over the next 12 months, we expect to reclassify ~~$59~~$60 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to ~~"Other~~“Other income (expense) – ~~net"~~net” in the consolidated statements of income. In the ~~three~~six months ended ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.

Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At ~~March 31,~~June 30, 2018, we had posted collateral of ~~$125~~$580 (a deposit asset) and held collateral of ~~$2,672~~$687 (a receipt liability). Under the agreements, if AT~~&T's~~&T’s credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in ~~March,~~June, we would have been required to post additional collateral of ~~$84.~~$138. If DIRECTV Holdings ~~LLC's~~LLC’s credit rating had been downgraded belowBBB- (S&P), we would have been required to post additional collateral of ~~$72.~~$199. At December 31, 2017, we had posted collateral of $495 (a deposit asset) and held collateral of $968 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.

Following are the notional amounts of our outstanding derivative positions:

March 31, December 31,
2018 2017
Interest rate swaps $ 8,333 $ 9,833
Cross-currency swaps 36,092 38,694
Foreign exchange contracts 2,908 -
Total $ 47,333 $ 48,527

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,
2018 2017
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $ (53 ) $ (25 )
Gain (Loss) on long-term debt 53 25


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

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


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

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

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Cash Flow Hedging Relationships Three months ended
March 31,
2018 2017
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI $ 854 $ 20
Interest rate locks:
Interest income (expense) reclassified from accumulated OCI into income (15 ) (15 )


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

NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

~~Pending Acquisition~~

Acquisitions

Time Warner ~~Inc.~~ On ~~October 22, 2016,~~June 14, 2018, we ~~entered into and announced a merger agreement (Merger Agreement) to acquire Time Warner Inc. (Time Warner) in a 50% cash and 50% stock transaction for $107.50 per share~~completed our acquisition of Time Warner, common stock, or approximately $85,400 at the date of the announcement (Merger). Combined with Time Warner's net debt at March 31, 2018, the total transaction value is approximately $105,962. 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.

~~Time Warner is a global~~ leader in media and entertainment whose major businesses encompass an array of some of the most respected ~~and successful~~ media brands. The deal combines Time ~~Warner's~~Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the ~~world's~~world’s largestpay-TV subscriber bases and ~~leading~~ scale in TV, mobile and broadband distribution.

We expect that the transaction will advance ourdirect-to-consumer efforts and provide us with the ability to develop innovative new offerings.

Under the merger agreement, each share of Time Warner stock was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On ~~November 20, 2017,~~July 12, 2018, the ~~United States~~U.S. Department of Justice ~~filed a complaint in~~(DOJ) appealed the U.S. District ~~Court, District~~Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to vigorously defend our legal position in the appellate court.

Our second-quarter 2018 operating results include the results of ~~Columbia seeking a permanent injunction to prevent AT&T from acquiring~~ Time Warner ~~alleging that~~following the ~~effect~~acquisition date. The fair values of the ~~transaction "may~~assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content,in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be ~~substantially~~generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to ~~lessen competition"~~replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in ~~violation~~value due to depreciation. Our June 30, 2018, consolidated balance sheet includes the assets and liabilities of ~~federal antitrust law.~~ Time Warner, which have been measured at fair value.

AT&T ~~disputes the government allegations,~~INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts



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

Total assets acquired		129,666


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

Total liabilities assumed		50,551

Net assets acquired		79,115

Noncontrolling interest		(1	)

Aggregate value of consideration paid	$	79,114

These estimates are preliminary in nature and ~~believes the merger is pro-consumer and pro-competition, and ultimately~~subject to adjustments, which could be material. Any necessary adjustments will be ~~approved. The trial began in late March 2018, with oral arguments concluding on April 30, 2018. In light~~finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecordedpre-acquisition contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the ~~trial date~~consideration transferred and ~~allowing time for a decision, both AT&T and Time Warner elected to further extend~~ the ~~termination date~~fair value of the ~~merger agreement~~net assets acquired, and represents the future economic benefits that we expect to ~~June 21, 2018. If the Merger is terminated~~achieve as a result of ~~reaching~~ the ~~extended termination date (and at that time one or more~~acquisition. Prior to the finalization of the ~~conditions relating~~purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to ~~certain regulatory approvals have~~be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units any changes in goodwill should be recorded.

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

Due to the proximity of the closing of this acquisition to the end of the quarter, we were not ~~been satisfied), or there is a final, non-appealable order preventing~~able to provide the requisite combined pro forma financial information.

Held-for-Sale

In June 2018, we entered into an agreement to sell 31 of our data centers to Brookfield Infrastructure Partners (Brookfield) for $1,100. We expect the transaction ~~relating~~ to ~~antitrust laws, communications laws, utilities laws or foreign regulatory laws, then under certain circumstances, we would~~close within the next six to eight months, subject to customary closing conditions.

We appliedheld-for-sale treatment to the assets associated with the data centers to be ~~obligated to pay Time Warner $500.~~sold, which primarily consist of net property, plant and equipment of approximately $279 and goodwill of $236. These assets are included in “Other current assets,” on our June 30, 2018 consolidated balance sheet.

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 9. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES

We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled. As of ~~March 31,~~June 30, 2018 and December 31, 2017, gross equipment installment receivables of ~~$4,798~~$5,853 and $6,079 were included on our consolidated balance sheets, of which ~~$2,627~~$3,781 and $3,340 are notes receivable that are included in ~~"Accounts~~“Accounts receivable - net."

”

In 2014, we entered into an uncommitted agreement pertaining to the sale of equipment installment receivables and related security with Citibank and various other relationship banks as purchasers (collectively, the Purchasers). Under this agreement, we transfer certain receivables to the Purchasers for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Since 2014, we have made beneficial modifications to the agreement. During 2017, we modified the agreement and entered into a second uncommitted agreement with the Purchasers such that we receive more upfront cash consideration at the time the receivables are transferred to the Purchasers. Additionally, in the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

~~Dollars in millions except per share amounts~~

Purchasers equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation to the Purchasers for this estimated amount at the time the receivables are transferred. Under the terms of the agreement, we continue to bill and collect the payments from our customers on behalf of the Purchasers. As of ~~March 31,~~June 30, 2018, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were ~~$5,569.~~

$5,723.

The following table sets forth a summary of equipment installment receivables sold during the three and six months ended ~~March 31,~~June 30, 2018 and 2017:

Three months ended
March 31,
2018 2017
Gross receivables sold $ 3,010 $ 2,846
Net receivables sold¹
2,795 2,621
Cash proceeds received 2,395 1,432
Deferred purchase price recorded 519 1,189
Guarantee obligation recorded 123 -
¹Receivables net of allowance, imputed interest and trade-in right guarantees.


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

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

The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of devicetrade-ins. The estimated value of the devicetrade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table shows the equipment installment receivables, previously sold to the Purchasers, which we repurchased in exchange for the associated deferred purchase price and cash during the three months and six months ended ~~March 31,~~June 30, 2018 and ~~2017. We did not repurchase any installment receivables~~2017:


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

¹ These gains (losses) are included in “Selling, general and administrative” in the ~~quarter ended March 31, 2018.~~

Three months ended
March 31,
2018 2017
Fair value of repurchased receivables $ - $ 377
Carrying value of deferred purchase price - 339
Gain (loss) on repurchases¹
$ - $ 38
¹These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.

consolidated statements of income.

At ~~March 31,~~June 30, 2018 and December 31, 2017, our deferred purchase price receivable was ~~$3,009~~$1,686 and $2,749, respectively, of which ~~$1,996~~$813 and $1,781 are included in ~~"Other~~“Other current ~~assets"~~assets” on our consolidated balance sheets, with the remainder in ~~"Other~~“Other Assets."” The guarantee obligation at ~~March 31,~~June 30, 2018 and December 31, 2017 was ~~$309~~$362 and $204, respectively, of which ~~$94~~$111 and $55 are included in ~~"Accounts~~“Accounts payable and accrued ~~liabilities"~~liabilities” on our consolidated balance sheets, with the remainder in ~~"Other~~“Other noncurrent liabilities."” Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.

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

activities for all periods presented.

The outstanding portfolio of installment receivables derecognized from our consolidated balance sheets, but which we continue to service, was ~~$8,895~~$7,564 and $7,446 at ~~March 31,~~June 30, 2018 and December 31, 2017.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 10. INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS

Film and television production costs are stated at the lower of cost, less accumulated amortization, or fair value and include the unamortized cost of completed theatrical films and television episodes, theatrical films and television series in production and undeveloped film and television rights. The amount of capitalized film and television production costs recognized as broadcast, programming and operations expenses for a given period is determined using the film forecast computation method.

The following table summarizes inventories and theatrical film and television production costs as of June 30, 2018:


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


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

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

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

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

AT&T INC.

JUNE 30, 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE ~~10.~~11. ADDITIONAL FINANCIAL INFORMATION

Cash and Cash Flow

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


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

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


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

Debt Transactions

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

March 31, December 31,
Cash and Cash Equivalents and Restricted Cash 2018 2017 2017 2016

   Cash and cash equivalents $ 48,872 $ 14,884 $ 50,498 $ 5,788
   Restricted cash in Other current assets 8 7 6 7
   Restricted cash in Other Assets 345 89 428 140
   Cash and cash equivalents and restricted cash $ 49,225 $ 14,980 $ 50,932 $ 5,935

Three months ended
March 31,
Consolidated Statements of Cash Flows 2018 2017
Cash paid (received) during the period for:
Interest $ 2,408 $ 1,643
Income taxes, net of refunds (1,089 ) (160 )

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

RESULTS OF OPERATIONS

AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the ~~communications~~telecommunications, media and ~~digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally.~~technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying ~~notes. A reference~~notes (“Notes”). We completed the acquisition of Time Warner Inc. (referred to ~~a "Note" in this section refers~~as “Time Warner” or “WarnerMedia”) on June 14, 2018, and have included WarnerMedia results for the16-day period ended June 30, 2018. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from WarnerMedia prior to the accompanying Notes to Consolidated Financial Statements. Certain amounts have been conformed to the current period's presentation, including impacts for the adoption of recent accounting standards (see Note 1) and the realignment of certain business units within our reportable segments (see Note 4).

acquisition are excluded.

Consolidated ResultsIn the first quarter of 2018, we adopted new revenue accounting rules that significantly affect the comparability of our consolidated and segment operating results (see Note 5). As a supplement to our discussion of operating results, comparable financial results presented under the historical method of accounting isare available in ~~"Supplemental~~“Supplemental Results Under Historical Accounting Method."” Our ~~reported~~ financial results in the second quarter and for the first ~~quarter~~six months of 2018, including impacts from new revenue accounting rules, and 2017 are summarized as follows:

First Quarter
Percent
2018 2017 Change

Operating Revenues
   Service $ 33,646 $ 36,456 (7.7 )%
   Equipment 4,392 2,909 51.0
Total Operating Revenues 38,038 39,365 (3.4 )

Operating expenses
   Cost of services and sales
      Equipment 4,848 3,848 26.0
      Broadcast, programming and operations 5,166 4,974 3.9
      Other cost of services 7,932 9,288 (14.6 )
   Selling, general and administrative 7,897 8,772 (10.0 )
   Depreciation and amortization 5,994 6,127 (2.2 )
Total Operating Expenses 31,837 33,009 (3.6 )
Operating Income 6,201 6,356 (2.4 )
Income Before Income Taxes 6,141 5,378 14.2
Net Income 4,759 3,574 33.2
Net Income Attributable to AT&T $ 4,662 $ 3,469 34.4 %


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

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

Overview

Operating revenuesdecreased ~~$1,327,~~$851, or ~~3.4%~~2.1%, in the second quarter and $2,178, or 2.7%, for the first ~~quarter~~six months of 2018.

Servicerevenues decreased ~~$2,810,~~$2,765, or ~~7.7%~~7.6%, in the second quarter and $5,575, or 7.6%, for the first six months of 2018. The decreases in the second quarter ~~of 2018, reflecting~~and first six months were primarily due to our adoption of a new revenue accounting standard, which included our policy election to record Universal Service Fund (USF) fees on a net basis and also resulted in less revenue allocation to the service component of bundled contracts. Also contributing to the decrease was the continued decline in video services and legacy wireline voice and data ~~products, video services and lower wireless service revenues driven by customer migration to unlimited wireless plans.~~

products.

Equipmentrevenues increased ~~$1,483,~~$781, or ~~51.0%~~23.7%, in the second quarter and $2,264, or 36.5%, for the first ~~quarter~~six months of ~~2018, driven by increased device sales and upgrades.~~2018. The increases were due to the adoption of new revenue accounting standards ~~also~~that contributed to higher revenue allocations from bundled ~~contracts.~~contracts and the sale of higher-priced devices.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Media revenues for the second quarter and first six months were $1,133 and in each case are attributable to the~~Operating expenses~~16-day period since acquiring WarnerMedia.

Operatingexpensesdecreased ~~$1,172,~~$791, or ~~3.6%~~2.4%, in the second quarter and $1,963, or 3.0%, for the first ~~quarter~~six months of 2018.

Equipmentexpenses increased ~~$1,000,~~$239, or ~~26.0%~~5.8%, in the second quarter and $1,239, or 15.5%, for the first six months of 2018. The increases during the second quarter ~~of 2018,~~and the first six months were driven by an increase in the sale of higher-priced ~~devices as well as an overall increase in handset volumes.~~

devices.

Broadcast, programming and operations expenses increased ~~$192,~~$551, or ~~3.9%~~11.2%, in the second quarter and $743, or 7.5%, for the first six months of 2018. Expense increases during the second quarter ~~of 2018, reflecting~~and first six months were due to annual content cost increases and additional programming ~~costs.~~

costs, including programming and production costs associated with WarnerMedia for the16-day period since acquisition.

Other cost of ~~services~~ revenuesexpenses decreased ~~$1,356,~~$1,937, or ~~14.6%~~20.2%, in the second quarter and $3,293, or 17.5%, for the first six months of 2018. The decreases during the second quarter ~~of 2018, primarily due to~~and first six months reflect our adoption of new accounting rules, which included our policy election to record USF fees net. Also contributing to the ~~decrease~~decreases were lower expenses due to cost management and utilization of automation and digitalization where appropriate.

Selling, general and administrativeexpenses ~~decreased $875,~~increased $125, or ~~10.0%~~1.5%, in the second quarter and decreased $750, or 4.3%, for the first six months of 2018. The increase in the second quarter ~~of 2018,~~was primarily attributable to expenses from WarnerMedia, including acquisition-related expenses due to ~~commission deferrals resulting from~~the closing of the Time Warner transaction. Also contributing to the second quarter increase were higher employee separation costs. Offsetting some of the increases during the second quarter, and contributing to the overall decrease during the first six months, was the effect of new accounting standards, which ~~are now~~resulted in commissions being deferred and amortized over the contract period or expected customer ~~life. Also contributing~~life, in addition to ~~the decrease were lower expenses for merger and integration-related activities and~~ expense reductions due to our disciplined cost management. Partially offsetting the decrease ~~are~~during the first six months were higher costs ~~arising from~~due to natural disasters and, in the comparable period of 2017, gains on wireless spectrum transactions.

Depreciation and amortization expense ~~decreased $133,~~increased $231, or ~~2.2%~~3.8%, in the second quarter and $98, or 0.8%, for the first ~~quarter~~six months of 2018. ~~Amortization~~Depreciation expense ~~decreased $140,~~increased $123, or ~~11.6%~~2.5%, in the ~~first~~second quarter ~~of 2018 due to lower amortization of intangibles~~and $130, or 1.3%, for the ~~customer lists associated with acquisitions.~~

~~Depreciation expense increased $7, or 0.1%, in the~~ first ~~quarter.~~six months of 2018. The ~~increase was~~increases were primarily due to16-days of WarnerMedia results as well as ongoing capital spending for network upgrades and expansion offset by lower expense resulting from our fourth-quarter 2017 abandonment of certain copper network assets.

~~Operating income~~

Amortization expense increased $108, or 9.2%, in the second quarter and decreased ~~$155,~~$32, or ~~2.4%~~1.3%, for the first six months of 2018. The increase in the second quarter was due to the amortization of intangibles associated with the previously mentioned acquisition. For thesix-month period, the decrease was due to amortization of intangibles for customer lists associated with prior acquisitions mostly offset by the WarnerMedia acquisition.

Operatingincomedecreased $60, or 0.9%, in the second quarter and decreased $215, or 1.7%, for the first six months of 2018. Our operating income margin in the ~~first~~second quarter increased from ~~16.1%~~16.4% in 2017 to 16.6% in 2018, and for the first six months increased from 16.3% in 2017 to 16.4% in 2018.

Interest expense increased ~~$478,~~$628, or ~~37.0%~~45.0%, in the second quarter and $1,106, or 41.1%, for the first ~~quarter~~six months of 2018. The increase was primarily due to higher debt balances ~~in anticipation of closing~~related to our acquisition of Time Warner, ~~Inc. (Time Warner),~~including interest expense on Time Warner notes for16-days, and an increase in average interest rates when compared to the prior year.

Equity in net income (loss) of affiliates decreased $30 in the second quarter of 2018 and increased ~~$182~~$152, or 95.6%, for the first six months of 2018. Results for the second quarter and the first six months of 2018 include net losses from investments acquired through our purchase of Time Warner. The increase in the first ~~quarter~~six months of 2018 was predominantly due to losses in the first quarter of 2017 from our legacy publishing business, which was sold in June 2017.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Other income (expense) – netincreased ~~$1,214~~$1,428 in the second quarter and $2,642 for the first ~~quarter of 2018.~~six months. The ~~increase was~~increases were primarily due to an actuarial ~~gain~~gains of ~~$930~~$1,796 and $2,726, resulting from remeasurement of our pension and postretirement benefit ~~obligation~~obligations and increased interest income of ~~$164.~~

$94 and $258, partially offset by premiums on the redemption of debt of $226 in the second quarter of 2018.

Income taxesdecreased ~~$422,~~$524, or ~~23.4%~~25.5%, in the second quarter of 2018 and decreased $946, or 24.5%, for the first ~~quarter~~six months of 2018. Our effective tax rate was ~~22.5%~~22.6% in the second quarter and for the first ~~quarter~~six months of 2018, as compared to ~~33.5%~~33.9% for the second quarter and 33.7% for the first ~~quarter~~six months of 2017. The ~~decrease~~stand-alone effective tax rate of WarnerMedia was 20.3% for the16-day period ended June 30, 2018. The decreases in income tax expense and our effective tax ~~rate~~rates for the second quarter and the first ~~quarter~~six months of 2018 ~~was~~were primarily due to the December 2017 enactment of U.S. corporate tax reform, which reduced the federal tax rate from 35% to 21%. Partially offsetting the decreased tax ~~rate~~rates was higher ~~earnings.~~earnings in the second quarter and first six months of 2018. We continue to expect our effective tax rate for 2018, including WarnerMedia, to be approximately 23%.


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


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

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


Total domestic broadband connections		15,772	15,686

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

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

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

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

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

⁴	See Exhibit 12.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Selected Financial and Operating Data
March 31,
Subscribers and connections in (000s) 2018 2017
Domestic wireless subscribers 143,832 133,804
Mexican wireless subscribers 15,642 12,606
North American wireless subscribers 159,474 146,410

North American branded subscribers 108,566 103,118
North American branded net additions 858 735

Domestic satellite video subscribers 20,270 21,012
AT&T U-verse® (U-verse) video subscribers 3,657 4,048
DIRECTV NOW video subscribers 1,467 339
Latin America satellite video subscribers¹
13,573 13,678
Total video subscribers 38,967 39,077

Total domestic broadband connections 15,775 15,695

Network access lines in service 11,288 13,363
U-verse VoIP connections 5,585 5,858

Debt ratio²
52.6% 51.6%
Net debt ratio³
36.8% 45.8%
Ratio of earnings to fixed charges⁴
3.56 3.80
Number of AT&T employees 249,240 264,530

¹~~Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41% stake. At December 31, 2017, 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.

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

⁴ ~~See Exhibit 12.~~

Segment Results

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

(5) WarnerMedia.

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

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

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

TheBusiness Solutions segment provides services to business customers, including multinational companies and governmental and wholesale customers. We provide advancedIP-based services including Virtual Private Networks (VPN); Ethernet-related products; FlexWare, a service that relies on Software Defined Networking and Network Function Virtualization to provide application-based routing, and broadband, collectively referred to as strategic services; as well as traditional data and voice products. We provide a complete communications solution to our business customers.

TheEntertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the United States or in U.S. territories.

TheInternational segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency, and operating results are converted to U.S. dollars using official exchange rates. Our International segment is subject to foreign currency fluctuations (operations in countries with highly inflationary economies consider the U.S. dollar as the functional currency).

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Consumer Mobility
Segment Results
First Quarter
2018 2017
Percent
Change

Segment operating revenues
     Service $ 11,612 $ 12,465 (6.8 )%
     Equipment 3,374 2,341 44.1
Total Segment Operating Revenues 14,986 14,806 1.2

Segment operating expenses
     Operations and support 8,524 8,560 (0.4 )
     Depreciation and amortization 1,807 1,716 5.3
Total Segment Operating Expenses 10,331 10,276 0.5
Segment Operating Income 4,655 4,530 2.8
Equity in Net Income of Affiliates - - -
Segment Contribution $ 4,655 $ 4,530 2.8 %

Consumer Mobility

Segment Results


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


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



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


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


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


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

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


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


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

¹ Excludes migrations between AT&T ~~INC.~~

~~MARCH 31, 2018~~

~~Item 2. Management's Discussion~~segments and/or subscriber categories and ~~Analysis of Financial Condition and Results of Operations - Continued~~

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

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

March 31, Percent
(in 000s) 2018 2017 Change
Consumer Mobility Subscribers
Postpaid 65,489 65,692 (0.3 )%
Prepaid 14,928 13,844 7.8
Branded 80,417 79,536 1.1
Reseller 8,910 10,549 (15.5 )
Total Consumer Mobility Subscribers 89,327 90,085 (0.8 )%

First Quarter
Percent
(in 000s) 2018 2017 Change
Consumer Mobility Net Additions¹

Postpaid (64 ) (282 ) 77.3 %
Prepaid 192 282 (31.9 )
Branded Net Additions 128 - -
Reseller (390 ) (587 ) 33.6
Consumer Mobility Net Subscriber Additions (262 ) (587 ) 55.4 %
¹Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

acquisition-related additions during the period.

Operating Revenues~~increased $180,~~decreased $222, or ~~1.2%~~1.5%, in the second quarter and $42, or 0.1%, for the first ~~quarter~~six months of 2018. The ~~increase was~~decreases were due to ~~higher equipment revenues, partially offset by~~ lower service revenues resulting from customers choosing unlimited plans and the impact of newly adopted accounting rules, which include our policy election to record USF fees on a net basis. Lower service revenues were partially offset by higher equipment revenues.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Servicerevenue decreased ~~$853,~~$614, or ~~6.8%~~4.9%, in the second quarter and $1,467, or 5.9%, for the first ~~quarter~~six months of 2018. The ~~decrease was~~decreases were largely due to our adoption of a new accounting standard that included our policy election to no longer include USF fees in revenues ~~and~~which resulted in less revenue ~~allocation~~being allocated to the service component of bundled contracts. Also contributing to the decrease was the impact of customers continuing to shift to discounted monthly service charges under our unlimited plans, partially offset by higher prepaid service revenues resulting from growth in Cricket and AT&T PREPAID^SM subscribers.

Since our unlimited plans have now been in effect for a year, service revenues on a comparable basis should increase for the remainder of 2018.

Equipment revenue increased ~~$1,033,~~$392, or ~~44.1%~~14.9%, in the second quarter and $1,425, or 28.7%, for the first ~~quarter~~six months of 2018. The ~~increase~~increases in equipment revenues resulted from the sale of higher-priced devices as well as ~~an overall increase in handset volumes. The~~the adoption of new accounting standards ~~also~~that contributed to higher revenue allocations from bundled contracts. Equipment revenue is unpredictable as customers are choosing to upgrade devices less frequently or bring their own devices.

Operations and supportexpenses decreased ~~$36,~~$551, or ~~0.4%~~6.4%, in the second quarter and $587, or 3.4%, for the first ~~quarter~~six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel expenses, such as compensation and benefits.

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

Depreciation expense increased ~~$91,~~$90, or ~~5.3%~~5.2%, in the second quarter and $181, or 5.3%, for the first ~~quarter~~six months of 2018. The ~~increase was~~increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

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

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

~~Operating income~~ increased $125, or 2.8%, in the first quarter of 2018. Our Consumer Mobility segment operating income margin in the first quarter increased from 30.6% in 2017 to 31.1% in 2018. Our Consumer Mobility EBITDA margin in the first quarter increased from 42.2% in 2017 to 43.1% in 2018.

Business Solutions
Segment Results
First Quarter
Percent
2018 2017 Change
Segment operating revenues
     Wireless service $ 1,791 $ 2,003 (10.6 )%
     Strategic services 3,138 2,974 5.5
     Legacy voice and data services 2,839 3,549 (20.0 )
     Other service and equipment 839 878 (4.4 )
     Wireless equipment 578 288 -
Total Segment Operating Revenues 9,185 9,692 (5.2 )

Segment operating expenses
     Operations and support 5,638 6,040 (6.7 )
     Depreciation and amortization 1,462 1,465 (0.2 )
Total Segment Operating Expenses 7,100 7,505 (5.4 )
Segment Operating Income 2,085 2,187 (4.7 )
Equity in Net Income (Loss) of Affiliates (1 ) - -
Segment Contribution $ 2,084 $ 2,187 (4.7 )%

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

Business Solutions

Segment Results ~~of Operations - Continued~~

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


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


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



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


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


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


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

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


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


Business IP Broadband Connections		1,017		992		2.5	%

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

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

March 31, Percent
(in 000s) 2018 2017 Change
Business Wireless Subscribers
   Postpaid 11,942 11,243 6.2 %
   Prepaid¹
743 - -
Branded 12,685 11,243 12.8
Reseller 92 76 21.1
Connected devices^{1, 2}
41,728 32,400 28.8
Total Business Wireless Subscribers 54,505 43,719 24.7

Business IP Broadband Connections 1,021 980 4.2 %
¹ Beginning in the third quarter of 2017, we began reporting prepaid Internet of Things (IoT) connections, which primarily consist of

   connected cars, as a component of prepaid subscribers instead of connected devices.
² Includes data-centric devices such as session-based tablets and automobile systems. Excludes postpaid tablets.

First Quarter
Percent
(in 000s) 2018 2017 Change

Business Wireless Net Additions¹

Postpaid 113 88 28.4 %
Prepaid²
49 - -
Branded 162 88 84.1
Reseller 2 5 (60.0 )
Connected devices³
2,728 2,572 6.1
Business Wireless Net Subscriber Additions 2,892 2,665 8.5

Business IP Broadband Net Additions (4 ) 4 - %
¹ Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.

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

component of prepaid subscribers instead of connected devices.
³ Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts


	Second Quarter									Six-Month Period
(in 000s)	2018			2017			Percent Change			2018			2017		Percent Change

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


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

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

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

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

Operating Revenues decreased ~~$507,~~$604, or ~~5.2%~~6.2%, in the second quarter and $1,109 or 5.7%, for the first ~~quarter~~six months of 2018, primarily due to our adoption of a new revenue accounting standard, which included our policy election to no longer include USF fees in revenue. Technological shifts away from legacy products, as well as decreasing wireless service revenues resulting from customers shifting to unlimited plans, also contributed to revenue declines. These decreases were partially offset by continued but slowing growth in strategic services, which represent 46% ofnon-wireless (or fixed) revenues and wireless equipment revenue.

Wireless servicerevenues decreased ~~$212,~~$175, or ~~10.6%~~8.7%, in the second quarter and $387, or 9.7%, for the first ~~quarter~~six months of 2018. The decrease was ~~largely~~ due to our adoption of a new accounting standard that resulted in less revenue allocation to the service component of bundled contracts and included our policy election to no longer include USF fees in revenues.

At ~~March 31,~~June 30, 2018, we served ~~54.5~~57.7 million subscribers, an increase of ~~24.7%~~25.0% from the prior year. Connected devices, which have lower average revenue per average subscriber (ARPU) and churn, increased ~~28.8%~~29.0% from the prior ~~year reflecting growth in~~year. Connected devices include our connected car business and other data centric devices that ~~utilize~~connect to the network ~~to connect~~ and ~~control physical devices using~~rely on embedded computing systems and/or software, commonly known as IoT. ~~Postpaid subscribers increased 6.2% from the prior year reflecting the addition of new customers, partially offset by continuing competitive pressures in the industry.~~

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

Strategic servicesrevenues increased ~~$164,~~$81, or ~~5.5%~~2.7%, in the second quarter and $247, or 4.2%, for the first ~~quarter~~six months of 2018. Our revenues increased in the second quarter and first ~~quarter~~six months of 2018 primarily due to: Dedicated Internet ~~Services~~services of ~~$37;~~$26 and $63; Ethernet services of ~~$36;~~$20 and $56; VoIP of ~~$35;~~$14 and $49; and Security ~~Services~~services of ~~$23;~~$20 and ~~VPN of $22.~~

$43, respectively.

Legacy wired voice and data servicerevenues decreased ~~$710,~~$700, or ~~20.0%~~20.4%, in the second quarter and $1,410, or 20.2%, for the first ~~quarter~~six months of 2018. The decrease was primarily due to lower demand, as customers continue to shift to our more advancedIP-based offerings or to competitors, and our netting of USF fees in 2018.

Wireless equipment revenues increased ~~$290~~$224, or 62.2%, in the second quarter and $514, or 79.3%, for the first ~~quarter~~six months of 2018, primarily due to the adoption of new accounting standards which increased the amount of revenue attributable to equipment from our bundled contracts.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Operations and supportexpenses decreased ~~$402,~~$437, or ~~6.7%~~7.2%, in the second quarter and $841, or 7.0%, for the first ~~quarter~~six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

Decreased operations and support expenses for the second quarter and first six months were primarily due to our adoption of new accounting rules, ~~which included our policy election to record~~resulting in commission deferrals and netting of USF fees ~~on a net basis.~~in 2018. Also contributing to declines were our ongoing efforts to automate and digitize our support activities, partially offset by higher costs from our implementation of FirstNet and higher equipment costs from increased sales of higher-priced wireless devices.

Depreciationexpense ~~decreased $3,~~increased $4, or ~~0.2%~~0.3%, in the second quarter and $2, or 0.1%, for the first ~~quarter~~six months of 2018. The ~~decrease was~~increases were primarily due to ongoing capital spending for network upgrades and expansion, partially offset by updates to the asset lives of certain network assets and our fourth-quarter 2017 abandonment of certain copper network ~~assets, partially offset by ongoing capital spending for network upgrades and expansion.~~

assets.

Operating income decreased ~~$102,~~$171, or ~~4.7%~~8.0%, in the second quarter and $270, or 6.3%, for the first ~~quarter~~six months of 2018. Our Business Solutions segment operating income margin in the ~~first~~second quarter ~~increased~~decreased from ~~22.6%~~22.0% in 2017 to ~~22.7%~~21.6% in 2018, and for the first six months decreased from 22.3% in 2017 to 22.1% in 2018. Our Business Solutions EBITDA margin in the ~~first~~second quarter increased from ~~37.7%~~37.4% in 2017 to ~~38.6%~~38.0% in 2018, and for the first six months increased from 37.5% in 2017 to 38.3% in 2018.

Entertainment Group

Segment Results


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


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



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


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


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


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

Entertainment Group
Segment Results
First Quarter
Percent
2018 2017 Change
Segment operating revenues
     Video entertainment $ 8,359 $ 9,020 (7.3 )%
     High-speed internet 1,878 1,941 (3.2 )
     Legacy voice and data services 819 1,031 (20.6 )
     Other service and equipment 521 609 (14.4 )
Total Segment Operating Revenues 11,577 12,601 (8.1 )

Segment operating expenses
     Operations and support 8,939 9,605 (6.9 )
     Depreciation and amortization 1,312 1,420 (7.6 )
Total Segment Operating Expenses 10,251 11,025 (7.0 )
Segment Operating Income 1,326 1,576 (15.9 )
Equity in Net Income (Loss) of Affiliates 9 (6 ) -
Segment Contribution $ 1,335 $ 1,570 (15.0 )%

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

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

March 31, Percent
2018 2017 Change
Video Connections
   Satellite 20,270 21,012 (3.5 )%
   U-verse 3,632 4,020 (9.7 )
   DIRECTV NOW¹
1,467 339 -
Total Video Connections 25,369 25,371 -

Broadband Connections
   IP 13,616 13,130 3.7
   DSL 816 1,164 (29.9 )
Total Broadband Connections 14,432 14,294 1.0

Retail Consumer Switched Access Lines 4,535 5,533 (18.0 )
U-verse Consumer VoIP Connections 5,105 5,470 (6.7 )
Total Retail Consumer Voice Connections 9,640 11,003 (12.4 )%
¹Consistent with industry practice, free or substantially free-trial DIRECTV NOW connections are included in Over-the-Top.

First Quarter
Percent
(in 000s) 2018 2017 Change
Video Net Additions
   Satellite¹
(188 ) - - %
   U-verse¹
1 (233 ) -
   DIRECTV NOW 312 72 -
Net Video Additions 125 (161 ) -

Broadband Net Additions
   IP 154 242 (36.4 )
   DSL (72 ) (127 ) 43.3
Net Broadband Additions 82 115 (28.7 )%
¹Includes disconnections for customers that migrated to DIRECTV NOW.


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


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


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

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


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


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

¹	Includes disconnections for customers that migrated to DIRECTV NOW.

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

Operating revenuesdecreased ~~$1,024,~~$1,011, or 8.0%, in the second quarter and $2,035, or 8.1%, infor the first ~~quarter~~six months of 2018, primarily due to lower video and legacy service revenues, and to a lesser extent, new accounting rules.

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

Video entertainmentrevenues decreased ~~$661,~~$822, or ~~7.3%~~9.0%, in the second quarter and $1,483, or 8.2%, for the first ~~quarter~~six months of 2018, largely driven by a ~~4.5%~~4.2% decline in linear video subscribers. Ourover-the-top video subscriber net adds more than offset our decline in linear video connections. However, this shift by our customers, consistent with the rest of the industry, from a premium linear service to our more economically pricedover-the-top video service has pressured our video revenues. Also contributing to the decrease was the impact of newly adopted accounting rules, which resulted in less revenue allocated to video services when ~~video~~these services are bundled with other offerings. Churn rose for subscribers with linear video only service, partially reflecting price increases.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

High-speed internet revenues ~~decreased $63,~~increased $54, or ~~3.2%~~2.8%, in the second quarter and decreased slightly for the first six months of 2018. During the quarter, we reviewed and refined the estimates used to allocate customer discounts amongst bundled services, contributing to higher high-speed internet revenues in the second quarter of ~~2018~~, ~~primarily due to a 7.1% decrease in average revenue per IP broadband connection, reflecting our simplified pricing structure.~~2018. When compared to 2017, IP broadband subscribers increased ~~3.7%~~3.4%, to ~~13.6~~13.7 million subscribers at ~~March 31, 2018, reflecting higher IP broadband net additions.~~June 30, 2018. Our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service having about half the churn of broadband-only subscribers.

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

Legacy voice and data servicerevenues decreased ~~$212,~~$196, or ~~20.6%~~20.0%, in the second quarter and $408, or 20.3%, for the first ~~quarter~~six months of 2018, reflecting continued decreases in local voice, long-distance and traditional data services. The decreases reflect the continued migration of customers to our more advancedIP-based offerings or to competitors, and the impact of netting USF fees.

Operations and supportexpenses decreased ~~$666,~~$709, or ~~6.9%~~7.4%, in the second quarter and $1,375, or 7.2%, for the first ~~quarter~~six months of 2018. Operations and support expenses consist of costs associated with providing video content, and expenses incurred to provide our products and services, including costs of operating and maintaining our networks, as well as personnel charges for compensation and benefits.

Decreased operations and support expenses were primarily impacted by our adoption of new accounting rules, resulting in ~~commissions~~commission deferrals and netting of USF fees in 2018. Also contributing to the ~~decrease~~decreases was ~~the impact of~~ our ongoing focus on cost efficiencies and merger synergies, lower employee-related expenses resulting from workforce reductions, lower amortization of fulfillment cost deferrals due to a longer estimated economic life for our entertainment group customers (see Note 1) and lower advertising costs, which were partially offset by annual content cost increases.

Depreciation expense decreased ~~$108,~~$112, or ~~7.6%~~7.7%, in the second quarter and $220, or 7.6%, for the first ~~quarter~~six months of 2018. The ~~decrease was~~decreases were primarily due to our fourth-quarter 2017 abandonment of certain copper network assets, partially offset by ongoing capital spending for network upgrades and expansion.

Operating income decreased ~~$250,~~$190, or ~~15.9%~~11.6%, in the second quarter and $440, or 13.7%, for the first ~~quarter~~six months of 2018. Our Entertainment Group segment operating income margin in the ~~first~~second quarter decreased from ~~12.5%~~13.0% in 2017 to ~~11.5%~~12.5% in 2018, and for the first six months decreased from 12.7% in 2017 to 12.0% in 2018. Our Entertainment Group segment EBITDA margin in the ~~first~~second quarter decreased from ~~23.8%~~24.5% in 2017 to ~~22.8%~~24.0% in 2018, and for the first six months decreased from 24.1% in 2017 to 23.4% in 2018.

International
Segment Results
First Quarter
2018 2017
Percent
Change

Segment operating revenues
     Video entertainment $ 1,354 $ 1,341 1.0 %
     Wireless service 404 475 (14.9 )
     Wireless equipment 267 113 136.3
Total Segment Operating Revenues 2,025 1,929 5.0

Segment operating expenses
     Operations and support 1,804 1,759 2.6
     Depreciation and amortization 332 290 14.5
Total Segment Operating Expenses 2,136 2,049 4.2
Segment Operating Income (Loss) (111 ) (120 ) 7.5
Equity in Net Income (Loss) of Affiliates - 20 -
Segment Contribution $ (111 ) $ (100 ) (11.0 )%

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

International

Segment Results


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

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

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


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


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

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

March 31, Percent
(in 000s) 2018 2017 Change
Mexican Wireless Subscribers
   Postpaid 5,607 5,095 10.0 %
   Prepaid 9,857 7,244 36.1
Branded 15,464 12,339 25.3
Reseller 178 267 (33.3 )
Total Mexican Wireless Subscribers 15,642 12,606 24.1

Latin America Satellite Subscribers
Total Latin America Satellite Subscribers¹
13,573 13,678 (0.8 )%
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, 2017 and March 31, 2017.

First Quarter
(in 000s) 2018 2017
Percent
Change

Mexican Wireless Net Additions
Postpaid 109 130 (16.2 )%
Prepaid 459 517 (11.2 )
Branded Net Additions 568 647 (12.2 )
Reseller (25 ) (14 ) (78.6 )
Mexican Wireless Net Subscriber Additions 543 633 (14.2 )

Latin America Satellite Net Additions
Latin America Satellite Net Subscriber Additions¹
(15 ) 91 - %
¹SKY Mexico had net subscriber losses of 12 for the quarter ended December 31, 2017 and 18 for the quarter ended March 31, 2017.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts


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


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

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

Operating Results

Our International segment consists of the Latin American satellite video operations as well as our Mexican wireless operations. 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 $96,~~ decreased $75, or ~~5.0%~~3.7%, in the second quarter and increased $21, or 0.5%, for the first ~~quarter~~six months of 2018. ~~The increase in the first quarter includes $13, or 1.0%,~~Revenue from video services in Latin America ~~driven by prices increases offset by~~decreased $107 and $94 due to foreign ~~currency~~exchange pressures. Mexico wireless revenues increased ~~$83,~~$32, or ~~14.1%~~4.8%, in the second quarter and $115, or 9.2%, for the first ~~quarter~~six months of ~~2018. Our Mexican wireless~~2018, primarily due to growth in equipment revenues ~~reflect~~as we have increased our subscriber ~~growth and increased equipment sales,~~base, partially offset by competitive pricing ~~approximately $90 from the~~for services, our shutdown of a legacy wholesale business and our adoption of the new U.S. revenue accounting standard.

Operations and support expenses increased ~~$45,~~$31, or ~~2.6%~~1.7%, in the second quarter and $76, or 2.2%, for the first ~~quarter~~six months of 2018. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and providing video content and personnel expenses, such as compensation and benefits. The increase in expenses is primarily due to higher programming, including World Cup programming costs in the second quarter, and other operating costs partially offset by changes in foreign currency exchange rates and lower wholesale costs in Mexico.

Approximately 15 % of our expenses in Mexico and Latin America are U.S. dollar based, with the remainder in the local currency.

Depreciationexpense increased ~~$42,~~$2, or ~~14.5%~~0.6%, in the second quarter and $44, or 7.3%, for the first ~~quarter~~six months of 2018. The ~~increase was~~increases were primarily due to higher capital spending in ~~Mexico.~~Mexico as we essentially complete our network upgrades.

Operating income decreased $108 in the second quarter and $99, or 55.9%, for the first six months of 2018, and were negatively impacted by foreign exchange pressure. Our International segment operating income margin in the second quarter decreased from (2.8)% in 2017 to (8.5)% in 2018, and for the first six months decreased from (4.5)% in 2017 to (6.9)% in 2018. Our International EBITDA margin in the second quarter decreased from 12.5% in 2017 to 7.6% in 2018, and for the first six months decreased from 10.7% in 2017 to 9.3% in 2018.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

~~Operating income~~ ~~increased $9, or 7.5%, in~~

WarnerMedia

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


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

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

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

●

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

●

HBO consisting principally of premium pay television and OTT services.

●

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

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

WarnerMedia

Segment Results for the period from ~~(6.2)%~~June 15, 2018 to June 30, 2018


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

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

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

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

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

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

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

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

AT&T INC.

JUNE 30, 2018

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

Dollars in ~~2017 to (5.5)% in 2018. Our International EBITDA margin in the first quarter increased from 8.8% in 2017 to 10.9% in 2018.~~

millions except per share and per subscriber amounts

Supplemental Operating Information

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

AT&T Mobility Results


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


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



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


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


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


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


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

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


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


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

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

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

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

AT&T Mobility Results
First Quarter
2018 2017
Percent
Change

Operating revenues
   Service $ 13,403 $ 14,468 (7.4 )%
   Equipment 3,952 2,629 50.3
Total Operating Revenues 17,355 17,097 1.5

Operating expenses
   Operations and support 10,102 9,885 2.2
EBITDA 7,253 7,212 0.6
   Depreciation and amortization 2,095 1,992 5.2
Total Operating Expenses 12,197 11,877 2.7
Operating Income $ 5,158 $ 5,220 (1.2 )%

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

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

March 31, Percent
(in 000s) 2018 2017 Change
Wireless Subscribers¹

   Postpaid smartphones 60,002 59,025 1.7 %
   Postpaid feature phones and data-centric devices 17,429 17,910 (2.7 )
Postpaid 77,431 76,935 0.6
Prepaid³
15,671 13,844 13.2
Branded 93,102 90,779 2.6
Reseller 9,002 10,625 (15.3 )
Connected devices^{2, 3}
41,728 32,400 28.8
Total Wireless Subscribers 143,832 133,804 7.5

Branded Smartphones 73,403 71,274 3.0
Smartphones under our installment programs at end of period 32,456 31,583 2.8 %
¹ Represents 100% of AT&T Mobility wireless subscribers.
² Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
³ Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars,
as a component of prepaid subscribers.

First Quarter
Percent
(in 000s) 2018 2017 Change
Wireless Net Additions¹

   Postpaid 49 (194 ) - %
   Prepaid⁴
241 282 (14.5 )
Branded Net Additions 290 88 -
Reseller (388 ) (582 ) 33.3
Connected devices^{2, 4}
2,728 2,572 6.1
Wireless Net Subscriber Additions 2,630 2,078 26.6

Smartphones sold under our installment programs during period 3,993 3,501 14.1 %

Branded Churn³
1.65 % 1.71 % (6) BP
Postpaid Churn³
1.06 % 1.12 % (6) BP
Postpaid Phone Only Churn³
0.84 % 0.90 % (6) BP
¹ Excludes acquisition-related additions during the period.

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

  postpaid tablets.
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.
⁴Beginning in the third quarter of 2017, we began reporting prepaid IoT connections, which primarily consist of connected cars,

as a component of prepaid subscribers, resulting in 49 additional prepaid net adds in the first quarter of 2018.


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


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

¹	Excludes acquisition-related additions during the period.

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

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

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

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

Operating income ~~decreased $62,~~ increased $130, or ~~1.2%~~2.4%, in the second quarter and $68, or 0.6%, for the first ~~quarter~~six months of 2018. The ~~first-quarter~~second-quarter operating income margin of AT&T Mobility ~~decreased~~increased from ~~30.5%~~30.8% in 2017 to ~~29.7%~~31.9% in 2018 and for the first six months increased from 30.7% in 2017 to 30.8% in 2018. AT&T ~~Mobility's first-quarter~~Mobility’s second-quarter EBITDA margin ~~decreased~~increased from 42.2% in 2017 to ~~41.8%~~44.1% in 2018 and for the first six months increased from 42.2% in 2017 to 42.9% in 2018. AT&T ~~Mobility's first-quarter~~Mobility’s second-quarter EBITDA service margin increased from ~~49.8%~~50.9% in 2017 to

~~AT&T INC.~~

~~MARCH 31,~~ 55.7% in 2018

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

~~Dollars~~for the first six months increased from 50.4% in ~~millions except per share and per subscriber amounts~~

~~54.1%~~2017 to 54.9% in 2018 (EBITDA service margin is operating income before depreciation and amortization, divided by total service ~~revenues.)~~revenues). Our 2018 margins were positively impacted by our policy election to net USF fees.

Subscriber Relationships

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

ARPU

Postpaid phone-only ARPU was ~~$53.04~~$54.18 for the second quarter and $53.63 for the first ~~quarter~~six months of 2018, compared to ~~$58.09~~$58.30 and $58.20 in 2017, primarily reflecting lower revenues recognized under new revenue accounting standards. ARPU

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

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

Churn

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

second quarter, but lower for the six months.

Branded Subscribers

Branded subscribers increased ~~0.3%~~0.5% in the ~~first~~second quarter of 2018 when compared to ~~December~~March 31, ~~2017~~2018 and increased 2.6% when compared to ~~March 31,~~June 30, 2017. ~~The sequential increase reflects a 2.2% increase in prepaid subscribers, partially offset by a 0.1% decline in postpaid subscribers.~~ The year-over-year increase includes increases of ~~0.6%~~0.5% and ~~13.2%~~14.3% in postpaid and prepaid subscribers, respectively.

At ~~March 31,~~June 30, 2018, ~~93%~~approximately 94% of our postpaid phone subscriber base used smartphones, compared to ~~91%~~92% at ~~March 31,~~June 30, 2017, with the majority of phone sales during both years attributable to smartphones. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.

Our equipment installment purchase programs allow for postpaid subscribers to purchase certain devices in installments over a specified period of time, with the option to trade in the original device for a new device and have the remaining unpaid balance paid or settled once conditions are met. A significant percentage of our customers choosing equipment installment programs pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers. Over half of the postpaid smartphone base is on an equipment installment program and the majority of postpaid smartphone gross adds and upgrades for all periods presented were either equipment installment plans or Bring Your Own Device (BYOD). While BYOD customers do not generate equipment revenue or expense, the service revenue helps improve our margins.

Connected Devices

Connected devices includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Connected device subscribers increased ~~7.0%~~7.2% during the ~~first~~second quarter ~~when compared to December 31, 2017 and 28.8%~~ when compared to March 31, 2018 and 29.0% when compared to June 30, 2017. During the second quarter and first ~~quarter~~six months of 2018, we added approximately ~~1.8~~1.9 million and 3.6 million wholesale connected cars through agreements with various carmakers, and experienced strong growth in other IoT connections as well. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Supplemental Results Under Historical Accounting Method

As a supplemental discussion of our operating results, we are providing results under the comparative historical accounting method prior to our adoption of ASC ~~606.~~606 for the three-months ended June 30, 2018.


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

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

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

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

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

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Consumer Mobility

Supplemental Segment Results


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

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


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

For the three months ended March 31, 2018
Reported Promotions & Other USF Commission Deferrals Total Impact Historical Accounting
Service Revenues
Consumer Mobility $ 11,612 $ (259 ) $ (353 ) $ - $ (612 ) $ 12,224
Business Solutions 8,437 (145 ) (396 ) - (541 ) 8,978
Entertainment Group 11,575 (41 ) (172 ) - (213 ) 11,788
International 1,758 (50 ) - - (50 ) 1,808
Corporate/Other 264 1 (8 ) - (7 ) 271
AT&T Service Revenues 33,646 (494 ) (929 ) - (1,423 ) 35,069
AT&T Mobility 13,403 (399 ) (415 ) - (814 ) 14,217

Equipment Revenues
Consumer Mobility 3,374 331 - - 331 3,043
Business Solutions 748 190 - - 190 558
Entertainment Group 2 - - - - 2
International 267 10 - - 10 257
Corporate/Other 1 - - - - 1
AT&T Equipment Revenues 4,392 531 - - 531 3,861
AT&T Mobility 3,952 521 - - 521 3,431

Total Operating Revenues
Consumer Mobility 14,986 72 (353 ) - (281 ) 15,267
Business Solutions 9,185 45 (396 ) - (351 ) 9,536
Entertainment Group 11,577 (41 ) (172 ) - (213 ) 11,790
International 2,025 (40 ) - - (40 ) 2,065
Corporate/Other 265 1 (8 ) - (7 ) 272
AT&T Operating Revenues 38,038 37 (929 ) - (892 ) 38,930
AT&T Mobility 17,355 122 (415 ) - (293 ) 17,648

Total Operating Expenses
Consumer Mobility 10,331 37 (353 ) (334 ) (650 ) 10,981
Business Solutions 7,100 2 (396 ) (29 ) (423 ) 7,523
Entertainment Group 10,251 - (172 ) (242 ) (414 ) 10,665
International 2,136 (2 ) - (33 ) (35 ) 2,171
Corporate/Other 2,019 3 (8 ) (2 ) (7 ) 2,026
AT&T Operating Expenses 31,837 40 (929 ) (640 ) (1,529 ) 33,366
AT&T Mobility 12,197 40 (415 ) (337 ) (712 ) 12,909

Total Operating Income
Consumer Mobility 4,655 35 - 334 369 4,286
Business Solutions 2,085 43 - 29 72 2,013
Entertainment Group 1,326 (41 ) - 242 201 1,125
International (111 ) (38 ) - 33 (5 ) (106 )
Corporate/Other (1,754 ) (2 ) - 2 - (1,754 )
AT&T Operating Income 6,201 (3 ) - 640 637 5,564
AT&T Mobility 5,158 82 - 337 419 4,739

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Business Solutions

Supplemental Segment Results


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

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


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

Consumer Mobility
Supplemental Segment Results
First Quarter
Historical
Reported Impact of Method Percent
2018 ASC 606 2018 2017 Change
Segment operating revenues
     Service $ 11,612 $ (612) $ 12,224 $ 12,465 (1.9) %
     Equipment 3,374 331 3,043 2,341 30.0
Total Segment Operating Revenues 14,986 (281) 15,267 14,806 3.1

Segment operating expenses
     Operations and support 8,524 (650) 9,174 8,560 7.2
EBITDA 6,462 369 6,093 6,246 (2.4)
     Depreciation and amortization 1,807 - 1,807 1,716 5.3
Total Segment Operating Expenses 10,331 (650) 10,981 10,276 6.9
Segment Operating Income 4,655 369 4,286 4,530 (5.4)
Equity in Net Income of Affiliates - - - - -
Segment Contribution $ 4,655 $ 369 $ 4,286 $ 4,530 (5.4) %

Operating Income Margin 31.1% 28.1% 30.6% (250) BP
EBITDA Margin 43.1% 39.9% 42.2% (230) BP
EBITDA Service Margin 55.6% 49.8% 50.1% (30) BP

Business Solutions
Supplemental Segment Results
First Quarter
Historical
Reported Impact of Method Percent
   2018 ASC 606 2018 2017 Change
Segment operating revenues
     Wireless service $ 1,791 $ (203) $ 1,994 $ 2,003 (0.4) %
     Strategic services 3,138 (2) 3,140 2,974 5.6
     Legacy voice and data services 2,839 (267) 3,106 3,549 (12.5)
     Other service and equipment 839 (69) 908 878 3.4
     Wireless equipment 578 190 388 288 34.7
Total Segment Operating Revenues 9,185 (351) 9,536 9,692 (1.6)

Segment operating expenses
     Operations and support 5,638 (423) 6,061 6,040 0.3
EBITDA 3,547 72 3,475 3,652 (4.8)
     Depreciation and amortization 1,462 - 1,462 1,465 (0.2)
Total Segment Operating Expenses 7,100 (423) 7,523 7,505 0.2
Segment Operating Income 2,085 72 2,013 2,187 (8.0)
Equity in Net Income of Affiliates (1) - (1) - -
Segment Contribution $ 2,084 $ 72 $ 2,012 $ 2,187 (8.0) %

Operating Income Margin 22.7% 21.1% 22.6% (150) BP
EBITDA Margin 38.6% 36.4% 37.7% (130) BP

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Entertainment Group

Supplemental Segment Results


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

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


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

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

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

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

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

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


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

Entertainment Group
Supplemental Segment Results
First Quarter
Historical
Reported Impact of Method Percent
2018 ASC 606 2018 2017 Change
Segment operating revenues
     Video entertainment $ 8,359 $ (106) $ 8,465 $ 9,020 (6.2) %
     High-speed internet 1,878 - 1,878 1,941 (3.2)
     Legacy voice and data services 819 (35) 854 1,031 (17.2)
     Other service and equipment 521 (72) 593 609 (2.6)
Total Segment Operating Revenues 11,577 (213) 11,790 12,601 (6.4)

Segment operating expenses
     Operations and support 8,939 (414) 9,353 9,605 (2.6)
EBITDA 2,638 201 2,437 2,996 (18.7)
     Depreciation and amortization 1,312 - 1,312 1,420 (7.6)
Total Segment Operating Expenses 10,251 (414) 10,665 11,025 (3.3)
Segment Operating Income 1,326 201 1,125 1,576 (28.6)
Equity in Net Income (Loss) of Affiliates 9 - 9 (6) -
Segment Contribution $ 1,335 $ 201 $ 1,134 $ 1,570 (27.8) %

Operating Income Margin 11.5 % 9.5 % 12.5 % (300) BP
EBITDA Margin 22.8 % 20.7 % 23.8 % (310) BP

International
Supplemental Segment Results
First Quarter
Historical
   Reported Impact of Method Percent
2018 ASC 606 2018 2017 Change
Segment operating revenues
     Video entertainment $ 1,354 $ - $ 1,354 $ 1,341 1.0 %
     Wireless service 404 (50) 454 475 (4.4)
     Wireless equipment 267 10 257 113 -
Total Segment Operating Revenues 2,025 (40) 2,065 1,929 7.1

Segment operating expenses
     Operations and support 1,804 (35) 1,839 1,759 4.5
EBITDA 221 (5) 226 170 32.9
     Depreciation and amortization 332 - 332 290 14.5
Total Segment Operating Expenses 2,136 (35) 2,171 2,049 6.0
Segment Operating Income (Loss) (111) (5) (106) (120) 11.7
Equity in Net Income (Loss) of Affiliates - - - 20 -
Segment Contribution $ (111) $ (5) $ (106) $ (100) (6.0) %

Operating Income Margin -5.5% -5.1% -6.2% 110 BP
EBITDA Margin 10.9% 10.9% 8.8% 210 BP

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

International

Supplemental Segment Results


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

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


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

AT&T Mobility Supplemental Results


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

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


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

AT&T Mobility Supplemental Results
First Quarter
Historical
Reported Impact of Method Percent
2018 ASC 606 2018 2017 Change
Operating revenues
   Service $ 13,403 $ (814) $ 14,217 $ 14,468 (1.7) %
   Equipment 3,952 521 3,431 2,629 30.5
Total Operating Revenues 17,355 (293) 17,648 17,097 3.2

Operating expenses
   Operations and support 10,102 (712) 10,814 9,885 9.4
EBITDA 7,253 419 6,834 7,212 (5.2)
   Depreciation and amortization 2,095 - 2,095 1,992 5.2
Total Operating Expenses 12,197 (712) 12,909 11,877 8.7
Operating Income $ 5,158 $ 419 $ 4,739 $ 5,220 (9.2) %

Operating Income Margin 29.7% 26.9% 30.5% (360) BP
EBITDA Margin 41.8% 38.7% 42.2% (350) BP
EBITDA Service Margin 54.1% 48.1% 49.8% (170) BP

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

OTHER BUSINESS MATTERS

Time WarnerOn June 14, 2018, we completed our acquisition of Time Warner, ~~Inc. Acquisition~~a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner’s vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world’s largestpay-TV ~~In October 2016, we announced an~~subscriber bases and scale in TV, mobile and broadband distribution. We expect that the transaction will advance ourdirect-to-consumer efforts and provide us with the ability to develop innovative new content offerings.

Under the merger agreement, ~~(Merger Agreement) to acquire Time Warner in a 50% cash and 50% stock transaction for $107.50 per~~each 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~~was exchanged for $53.75 cash plus 1.437 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, share-based payment arrangements and fractional shares, which were settled in cash, AT&T issued 1,125,517,510 shares to Time Warner shareholders, giving them an approximate 16% stake in the combined company. Based on our $32.52 per share closing stock price on June 14, 2018, we paid Time Warner shareholders $36,599 in ~~cash and a number of shares of~~ AT&T ~~common~~ stock ~~equal to~~and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,114. On July 12, 2018, the ~~exchange ratio. See "Liquidity" for a discussion of our financing arrangements.~~

~~In November 2017, the United States~~U.S. Department of Justice ~~filed a complaint in~~(DOJ) appealed the U.S. District ~~Court, District of Columbia seeking a permanent injunction~~Court’s decision permitting the merger. We believe the DOJ’s appeal is without merit and we will continue to ~~prevent AT&T from acquiring Time Warner, alleging that~~vigorously defend our legal position in the ~~effect of the transaction "may be substantially to lessen competition" in violation of federal antitrust law.~~ AT&T disputes the government allegations, and believes the merger is pro-consumer and pro-competition, and ultimately will be approved. The trial began in late March 2018, with oral arguments concluding on April 30, 2018. In light of the trial date and allowing time for a decision, both AT&T and Time Warner elected to further extend the termination date of the merger agreement to June 21, 2018.

appellate court.

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

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

horizontal agreement among the NFL and the teams. In light of the order granting the motion to dismiss, the court denied ~~DIRECTV's~~DIRECTV’s motion to compel arbitration as moot. In July 2017, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit, which is pending. WeThe appeal has been fully briefed and we anticipate ~~that, following the briefing,~~ the oral argument will occur in ~~the fall of 2018.~~

2019.

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

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

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

posts, internet browsing and many other applications are typically unaffected. Contrary to the ~~FTC's~~FTC’s allegations, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and, onin August ~~29,~~ 2016, issued its decision reversing the district court and finding that the FTC lacked jurisdiction to proceed with the action. The FTC asked the Court of Appeals to reconsider the decision "“en banc,"” which the Court agreed to do. ~~The~~ ~~en banc~~ ~~hearing was held in September 2017. On~~In February ~~26,~~ 2018, the Court issued itsen banc decision, finding that the FTC had jurisdiction to proceed with the lawsuit. In addition to the FTC case, several class actions were filed challenging our MBR program. We secured dismissals in each of these cases exceptRoberts v. AT&T Mobility LLC, which is ongoing.

Labor Contracts A contract covering approximately 9,500 traditional wireline employees in our Midwest region expired in April 2018 and employees are working under the terms of the prior contract, including benefits, while negotiations continue. In addition, a contract covering approximately 3,600 traditional wireline employees in our legacy AT&T Corp. business also expired in April 2018. Those employees are also working under the terms of their prior contract, including benefits, while negotiations continue. Work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached.

COMPETITIVE AND REGULATORY ENVIRONMENT

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

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

In April ~~20,~~ 2017, the FCC adopted an order that maintains light touch pricing regulation of packet-based services, extends such light touch pricing regulation to high-speed Time Division Multiplex (TDM) transport services and to most of our TDM channel termination services, based on a competitive market test for such services. For those services that do not qualify for

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

light touch regulation, the order allows companies to offer volume and term discounts, as well as contract tariffs. Several parties appealed the ~~FCC's~~FCC’s decision. These appeals were consolidated in the U.S. Court of Appeals for the Eighth Circuit, where they remain pending.

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

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Privacy-related legislation has been considered in a number of states since the Congressional Review act was passed. The policy environment is complex and rapidly evolving. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the State of California enacted comprehensive privacy legislation that gives California consumers the right to know what personal information is being collected about them, to know whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right toopt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information. The new law could significantly affect how data markets operate and will impose implementation costs and challenges. We will continue to support congressional action to codify a set of standard consumer rules of the internet including a federal privacy framework, which would have the effect of preempting state law under the supremacy clause of the U.S. Constitution.

In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the ~~FCC's~~FCC’s authority to regulate broadband internet access services, as well as internet interconnection arrangements. AT&T and several other parties appealed the ~~FCC's~~FCC’s order. In June 2016, a divided panel of the District of Columbia Court of Appeals upheld the ~~FCC's~~FCC’s rules by a2-1 vote, and petitions for rehearing en banc were denied in May 2017. Petitions for a writ of Certiorari at the U.S. Supreme Court remain pending. Meanwhile, onin December ~~14,~~ 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties, including several state Attorneys General, net neutrality advocacy groups and others, have appealed the ~~FCC's~~FCC’s December 2017 decision. Those appeals, which initially were consolidated in the U.S. Court of Appeals for the Ninth Circuit, were transferred at the request of the parties to the D.C. Circuit. In addition, although the FCC order expressly preempted inconsistent state or local measures, a number of states are considering or have adopted legislation that would reimpose the very rules the FCC repealed, and in some cases, establish additional requirements that go beyond the ~~FCC's~~FCC’s February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. AT&T expects that these measures could result in further litigation. We will continue to support congressional action to codify a set of standard consumer rules for the internet.

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

We provide wireless services in robustly competitive markets, but are subject to substantial governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications ~~providers'~~providers’ prices and offerings are generally not subject to state or local regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the areas of consumer protection and the deployment of cell sites and equipment. The anticipated industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of ~~"small cell"~~“small cell” equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede broadband services, including small cell equipment. OnIn March ~~22,~~ 2018, the FCC adopted an order to streamline the wireless infrastructure review process in order to facilitate deployment of next-generation wireless facilities. Among other actions, the order excludes most small cell facilities from federal review under the National Environmental Policy Act and the National Historic Preservation Act, while clarifying and streamlining the process for tribal participation in historic preservation reviews where such review is still required. In addition, to date, 21 states have adopted legislation to facilitate small cell deployment.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

Also facilitating the deployment of next-generation wireless facilities, in May 2014, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

could acquire, retaining itscase-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation ~~"screen"~~“screen” that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of ~~"low band"~~“low band” spectrum that exceedsone-third of the available low band spectrum as presumptively harmful to competition. The spectrum screen (including the low band screen) recently increased by 23 MHz. On balance, the order and the spectrum screen should allow AT&T to obtain additional spectrum to meet our ~~customers'~~customers’ needs.

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

·●

Submitted winning bids for 251 Advanced Wireless Services (AWS) spectrum licenses for a near-nationwide contiguous block of high-quality spectrum in theAWS-3 Auction.

·●

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

·●

Secured the First Responder Network Authority (FirstNet) contract, which provides us with access to 20 MHz of nationwide low band spectrum.

·●

Invested in 5G and millimeter-wave technologies with our 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.

Connect America Fund Phase II Auction (Auction 903) The FCC plans to conduct a reverse auction to award government funding to the lowest bidders in exchange for providing broadband service to rural, high-cost areas in the U.S. where it is uneconomic for carriers to offer broadband. This is the first time the FCC will award universal service funding through an auction.

LIQUIDITY AND CAPITAL RESOURCES

~~In anticipation~~

With the completion of the Time Warner transaction, ~~closing,~~ we had ~~$48,872~~$13,523 in cash and cash equivalents available at March 31, 2018, a portion of which will now be used to fund the redemption price for those bonds that were subject to mandatory redemption as a result of the acquisition not having been completed by April 22,June 30, 2018. Cash and cash equivalents included cash of ~~$3,851~~$3,457 and money market funds and other cash equivalents of ~~$45,021.~~$10,066. Approximately ~~$1,906~~$1,226 of our cash and cash equivalents resided in foreign jurisdictions and were in foreign currencies, some of which may be subject to restrictions on repatriation.

Cash and cash equivalents decreased ~~$1,626~~$36,975 since December 31, 2017. In the first ~~three~~six months of 2018, cash inflows were primarily provided by the cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment receivables and other customer receivables to third parties, issuance of commercial paper and long-term debt and collateral received from banks and other participants in our derivative arrangements. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, the acquisition of Time Warner and wireless spectrum, payment of operating expenses, funding capital expenditures, debt repayments, and dividends to ~~stockholders, and the acquisition of wireless spectrum and other operations.~~ stockholders.

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

AT&T INC.

JUNE 30, 2018

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

Dollars in ~~detail below.~~

millions except per share and per subscriber amounts

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

Cash Provided by or Used in Operating Activities

During the ~~three~~first six months of 2018, cash provided by operating activities was ~~$8,947,~~$19,176, compared to ~~$8,965~~$17,670 for the ~~three~~first six months of 2017. ~~Slightly lower~~Higher operating cash flows in 2018 were primarily due to net tax refunds and contributions from WarnerMedia, offset by higher interest payments ~~on higher debt balances resulting from debt issued in anticipation of the Time Warner acquisition~~ and ~~the timing of working capital transactions including higher payments for handset sales, partially offset by net tax refunds.~~

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

acquisition-related costs.

Cash Used in or Provided by Investing Activities

For the first ~~three~~six months of 2018, cash used in investing activities totaled ~~$7,152~~$52,635, and consisted primarily of ~~$5,957~~$40,715 for acquisition costs related to Time Warner and other acquisitions and $10,959 for capital expenditures, excluding interest during construction. ~~During the quarter, we also advanced approximately $1,000 to an equity investment.~~

The majority of our capital expenditures are spent on our networks, including product development and related support systems. Capital expenditures, excluding interest during construction, increased ~~$173~~$209 in the first ~~quarter and included~~six months. We do not report capital expenditures at the segment level. During 2018, approximately ~~$140 related to FirstNet. We did not receive any~~$800 of assets for FirstNet build have been placed into service with a net cash impact of $100. Total reimbursements from the government for FirstNet during the first ~~quarter~~six months of ~~2018. We do not report capital expenditures at the segment level.~~

2018 were $336.

In connection with capital improvements, we negotiate favorable payment terms (referred to as vendor financing), which are excluded from our investing activities and reported as financing activities. We enter into these supplier arrangements when the terms provide benefits to us relative to alternative financing arrangements. For the first ~~three~~six months of 2018, vendor financing payments related to capital investments were approximately ~~$170.~~

$257. During the first six months, we entered into $188 of new vendor financing commitments, with $825 of vendor financing payables included in on our June 30, 2018 consolidated balance sheet, of which $340 are due within one year and the remainder are due between two and five years.

The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring DIRECTV merger commitments are met. As of ~~March 31,~~June 30, 2018, we market ourfiber-to-the-premises network to ~~8.2~~9.2 million customer locations and are on track to meet our FCC commitment of 12.5 million locations bymid-2019.

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

Cash Provided by or Used in Financing Activities

For the first ~~three~~six months of 2018, cash used in financing activities totaled ~~$3,502~~$3,720 and included net proceeds of ~~$2,565,~~$26,478, primarily resulting from drawing ~~$2,250~~$20,925 on our ~~Nova Scotia~~Term Loan Credit ~~Agreement.~~

~~In anticipation~~Agreements in connection with our acquisition of Time Warner. Net proceeds for the first six months of 2018 also include a $1,500 three-year floating rate note and $2,000 of notes issued by our ~~Time Warner acquisition, during 2017,~~subsidiary, Vrio Corp. (Vrio), see discussion below.

During the first six months of 2018, we ~~issued~~redeemed $29,447 of debt. Approximately $21,236 were notes ~~that were~~ subject to mandatory redemption if we did not complete our acquisition of Time Warner ~~was not completed~~ by April 22, 2018. The ~~U.S. Dollar equivalent of all such notes issued was $30,372 as of March 31, 2018. In light~~remaining amount primarily consisted of the civil antitrust lawsuit challenging the transaction, during the first quarter, we initiated two exchanges, offering holders cash and similar global notes that are not subject to mandatory redemption. In February 2018, we exchanged €4,078 global notes and redeemed €18 global notes (combined $5,048 U.S. dollar equivalent value as of March 31, 2018). In April 2018, we exchanged $3,868 global notes and redeemed $1,775. Additionally, we repurchased $1,321 of these bonds on the open market during the first quarter of 2018 and $1,995 through May 2, 2018. The remaining $16,365 of notes subject to mandatory redemption are scheduled to be redeemed on May 23, 2018, at the special mandatory redemption price equal to 101% of the principal amount plus accrued but unpaid interest.

following redemptions:

●

$2,500 of 5.500% notes due 2018.

●

$750 of 1.750% notes due 2018.

●

$300 of 6.450% notes due 2018.

●

$1,000 of 5.600% notes due 2018.

●

$1,000 of notes issued by our subsidiary, Vrio.

●

$2,000 repayment of amounts outstanding under WarnerMedia’s Term Credit Agreement.

●

$600 of 6.875% WarnerMedia notes due 2018.

Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3% as of June 30, 2018 and 4.4% as of ~~March 31, 2018 and~~ December 31, 2017. We had ~~$161,161~~$180,209 of total notes and debentures outstanding at ~~March 31,~~June 30, 2018, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately ~~$38,924.~~$36,146.

~~During the first three months~~

AT&T INC.

JUNE 30, 2018

Item 2. Management’s Discussion and Analysis of ~~2018, we redeemed $4,911~~Financial Condition and Results of ~~debt, primarily consisting~~Operations - Continued

Dollars in millions except per share and per subscriber amounts

As a result of the ~~following:~~

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

●

$~~2,500 of 5.500% notes due 2018.~~1,108 maturing between 2018 and 2019 with an interest rate ranging from 1.250% to 2.100%.

●

$~~841 of 3.900% notes due 2018 (original maturity of 2027; subject~~6,906 maturing between 2020 and 2024 with an interest rate ranging from 1.950% to ~~special mandatory redemption)~~9.150%.

●

$~~750 of 1.750% notes due 2018.~~5,898 maturing between 2025 and 2034 with an interest rate ranging from 2.950% to 7.700%.

●

$~~431 of 3.400% notes due 2018 (original maturity of 2024; subject~~4,964 maturing between 2035 and 2045 with an interest rate ranging from 4.650% to ~~special mandatory redemption)~~8.300%.

·	~~$300 of 6.450% notes due 2018.~~

·	~~$49 of 5.150% notes due 2018 (original maturity of 2050; subject to special mandatory redemption).~~

At ~~March 31,~~June 30, 2018, we had ~~$29,322~~$21,672 of debt maturing within one year, ~~$29,128~~including $8,139 of ~~which was related to~~commercial paper borrowing and $13,323 of long-term debt ~~issuances, including notes subject to mandatory redemption on May 23, 2018.~~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 2018.~~

●

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

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

~~In anticipation of our planned initial public offering (IPO) of~~

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

●

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

●

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

On ~~April 19,~~July 25, 2018 we ~~withdrew the planned IPO~~issued $750 of ~~Vrio. We~~5.625% global notes due 2067. The underwriters have an option to ~~redeem these~~purchase up to an additional $113 aggregate principal amount within 30 days of the offering.

On July 30, 2018 we issued €2,250 ($2,637 U.S. dollar equivalent) floating rate global notes ~~if the IPO does not close within 180 days.~~

due 2020.

At ~~March 31,~~June 30, 2018, we had approximately ~~388~~376 million shares remaining from share repurchase authorizations approved by the Board of Directors in 2013 and 2014. During the first ~~three~~six months of 2018, we ~~did not repurchase any~~repurchased approximately 13 million shares under these authorizations.

We paid dividends of ~~$3,070~~$6,144 during the first ~~three~~six months of 2018, compared with ~~$3,009~~$6,021 for the first ~~three~~six months of 2017, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in December 2017. Dividends declared by our Board of Directors totaled ~~$0.50~~$1.00 per share in the first ~~three~~six months of 2018 and ~~$0.49~~$0.98 per share for the first ~~three~~six months of 2017. 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.

Credit Facilities

The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form10-K.

We use credit facilities as a tool in managing our liquidity status. At ~~March 31,~~June 30, 2018, we had no amounts outstanding on our five-year $12,000 revolving credit agreement.

In September ~~29,~~ 2017, we entered into a ~~five-year~~ $2,250 syndicated term loan credit agreement containing (i) a three-year $750 term loan facility (the ~~"Tranche~~“Tranche A ~~Facility"~~Facility”), (ii) a four-year $750 term loan facility (the ~~"Tranche~~“Tranche B ~~Facility"~~Facility”) and (iii) a five-year $750 term loan facility (the ~~"Tranche~~“Tranche C ~~Facility"~~Facility”), with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. We drew on the Tranche A Facility, the Tranche B Facility and the Tranche C Facility during the first quarter of 2018, with $2,250 in advances outstanding as of ~~March 31,~~June 30, 2018.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases, as well as a commercial paper program.

In ~~connection with our pending Merger with~~anticipation of the Time Warner acquisition, we entered into a $10,000 term loan agreement ("(“Term ~~Loan"~~Loan”). OnIn February 2, 2018, we amended the Term Loan to extend the commitment termination date to December 31, 2018 and increased the commitments to $16,175 from $10,000. ~~No amounts will be borrowed under~~We drew on the Term Loan ~~prior to~~for the ~~closing~~acquisition during the second quarter of ~~the Merger. Borrowings under the~~2018, with $16,175 outstanding as of June 30, 2018.

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

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

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

Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a netdebt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than3.5-to-1. As of ~~March 31,~~June 30, 2018, we were in compliance with the covenants for our credit facilities.

Collateral Arrangements

During the first ~~three~~six months of 2018, we ~~received $2,075~~posted $365 of additional cash collateral, on a net basis, from banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)

Other

Our total capital consists of debt (long-term debt and debt maturing within one year) and ~~stockholders'~~stockholders’ equity. Our capital structure does not include debt issued by our equity method investments. At ~~March 31,~~June 30, 2018, our debt ratio was ~~52.6%~~50.8%, compared to ~~51.6%~~53.3% at ~~March 31,~~June 30, 2017 and 53.6% at December 31, 2017. Our net debt ratio was ~~36.8%~~47.2% at ~~March 31,~~June 30, 2018,

~~AT&T INC.~~

~~MARCH 31, 2018~~

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

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

compared to ~~45.8%~~43.8% at ~~March 31,~~June 30, 2017 and 37.2% at December 31, 2017. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.

During the first ~~three~~six months of 2018, we received ~~$2,458~~$4,212 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities.

In 2013, we made a voluntary contribution of a preferred equity interest in AT&T Mobility II LLC (Mobility), the holding company for our U.S. wireless operations, to the trust used to pay ~~pension~~ benefits under our qualified pension plans. The preferred equity interest had a value of ~~$8,944~~$8,829 as of ~~March 31,~~June 30, 2018, and $9,155 as of December 31, 2017, does not have any voting rights and has a liquidation value of $8,000. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts. We distributed ~~$140~~$280 to the trust during the first ~~three~~six months of 2018. 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&T INC.

~~MARCH 31,~~

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts

DISCUSSION AND RECONCILIATION OFNON-GAAP ~~MEASURE~~ MEASURES

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

Supplemental Operational ~~Measure~~

Measures

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


	Three Months Ended
	June 30, 2018									June 30, 2017

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

¹Business wireline operations reported in Business Solutions segment.

Supplemental Operational Measure
Three Months Ended
March 31, 2018 March 31, 2017
Consumer Mobility Business Solutions
Adjustments¹
AT&T Mobility Consumer Mobility Business Solutions
Adjustments¹
AT&T Mobility
Operating Revenues
   Wireless service $ 11,612 $ 1,791 $ - $ 13,403 $ 12,465 $ 2,003 $ - $ 14,468
   Strategic services - 3,138 (3,138 ) - - 2,974 (2,974 ) -
   Legacy voice and data services - 2,839 (2,839 ) - - 3,549 (3,549 ) -
   Other service and equipment - 839 (839 ) - - 878 (878 ) -
   Wireless equipment 3,374 578 - 3,952 2,341 288 - 2,629
Total Operating Revenues 14,986 9,185 (6,816 ) 17,355 14,806 9,692 (7,401 ) 17,097

Operating Expenses
   Operations and support 8,524 5,638 (4,060 ) 10,102 8,560 6,040 (4,715 ) 9,885
EBITDA 6,462 3,547 (2,756 ) 7,253 6,246 3,652 (2,686 ) 7,212
   Depreciation and amortization 1,807 1,462 (1,174 ) 2,095 1,716 1,465 (1,189 ) 1,992
Total Operating Expense 10,331 7,100 (5,234 ) 12,197 10,276 7,505 (5,904 ) 11,877
Operating Income $ 4,655 $ 2,085 $ (1,582 ) $ 5,158 $ 4,530 $ 2,187 $ (1,497 ) $ 5,220
¹ Business wireline operations reported in Business Solutions segment.

AT&T INC.

JUNE 30, 2018

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

Dollars in millions except per share and per subscriber amounts


	Six Months Ended
	June 30, 2018									June 30, 2017

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

¹Business wireline operations reported in Business Solutions segment.

~~MARCH 31,~~

AT&T INC.

JUNE 30, 2018

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions except per share amounts

At ~~March 31,~~June 30, 2018, we had interest rate swaps with a notional value of ~~$8,333~~$7,333 and a fair value of ~~$(68)~~$(89).

We havefixed-to-fixed andfloating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $36,092 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of ~~$2,055~~$(290) at ~~March 31,~~June 30, 2018.

We have foreign exchange contracts with a U.S. dollar notional value of ~~$2,908~~$2,399 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. ~~We expect to settle these contracts on May 23, 2018, when we redeem the foreign-denominated notes subject to mandatory redemption.~~ These foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings and qualify as cash flow hedges with a net fair value of ~~$(3)~~$55 at ~~March 31,~~June 30, 2018. ~~(See Note 7)~~

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

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange ~~Commission's~~Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the ~~registrant's~~registrant’s disclosure controls and procedures as of ~~March 31,~~June 30, 2018. Based on that evaluation, the chief executive officer and chief financial officer concluded that the ~~registrant's~~registrant’s disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2018.

AT&T INC.

~~MARCH 31,~~

JUNE 30, 2018

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

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

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

The continued development and delivery of attractive and profitable video and broadband offerings; the extent to which regulatory andbuild-out requirements apply to our offerings; our ability to match speeds offered by our competitors and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

·●

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

·●

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

●

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

·●

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

·●

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

·●

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

·●

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

·●

~~Our ability to close~~

The U.S. Department of Justice prevailing on its appeal of the court decision permitting our ~~pending~~ acquisition of Time Warner Inc. ~~and~~

●

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

·●

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

●

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

·●

Our increased exposure to ~~video competition and~~ foreign economies, including foreign exchange fluctuations as well as regulatory and political uncertainty.

·●

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

·●

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

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,~~

JUNE 30, 2018

PART II – OTHER INFORMATION

Dollars in millions except per share amounts

Item 1.1A. Risk Factors

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

Our ability to successfully integrate our June 2018 acquisition of Time Warner, including the ~~first quarter~~risk that the costs savings and revenue synergies from the acquisition may not be fully realized or may take longer to realize than expected; our costs in financing the acquisition and potential adverse effects on our share price and dividend amount due to the issuance of additional shares; the addition of Time Warner’s existing debt to our balance sheet; disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.

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

AT&T INC.

JUNE 30, 2018 ~~there were no such material developments.~~

PART II – OTHER INFORMATION - CONTINUED
Dollars in millions except per share amounts
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the ~~first~~second quarter of 2018 is as follows:
      (a)    (b)    (c)    (d)
Period    Total Number of
Shares (or Units)
Purchased^{1, 2, 3}    Average Price Paid
Per Share (or Unit)    Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs¹    Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs
April 1, 2018 -
April 30, 2018
   6,318,863    $ 32.99    6,317,000    381,979,000
May 1, 2018 -
May 31, 2018
   6,319,909    33.37    6,317,000    375,662,000
June 1, 2018 -
June 30, 2018
   738,393    33.23    -    375,662,000
Total
   13,377,165    $ 33.18    12,634,000
¹
~~(a)~~ ~~(b)~~ ~~(c)~~ ~~(d)~~
~~Period~~
~~Total Number of Shares (or Units) Purchased~~ ^{1, 2, 3}
~~Average Price Paid Per Share (or Unit)~~
~~Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs~~ ¹
~~Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs~~
~~January 1, 2018 -~~
~~January 31, 2018~~
    ~~882,386~~ $ ~~38.19~~ - ~~388,296,000~~
~~February 1, 2018 -~~
~~February 28, 2018~~
~~1,425,911~~ ~~39.11~~ - ~~388,296,000~~
~~March 1, 2018 -~~
~~March 31, 2018~~
~~2,053,893~~ ~~37.08~~ - ~~388,296,000~~
~~Total~~ ~~4,362,190~~ $ ~~38.10~~ -
¹In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common
stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock.
The authorizations have no expiration date.
²~~Of the shares repurchased, 3,798,282~~
² Of the shares repurchased, 10,957 shares were acquired through the withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
³~~Of the shares repurchased, 563,908~~
³ Of the shares repurchased, 732,208 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.

53

~~AT&T INC.~~
~~MARCH 31, 2018~~
Item 6. Exhibits

The following exhibits are filed or incorporated by reference as a part of this report:
Exhibit
12
Number
Exhibit Description
10-a AT&T Health Plan
10-b Agreement between Robert Quinn and AT&T Inc.
12 Computation of Ratios of Earnings to Fixed Charges
31
Rule13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32
Section 1350 Certifications
101 XBRL Instance Document
70

SIGNATURE

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

	Historical			Effect of
	Accounting			Adoption of			As
	Method			ASU 2017-07			Adjusted
For the three months ended March 31, 2018
Consolidated Statements of Income
Other cost of services	$	7,572		$	360		$	7,932
Selling, general and administrative expenses		6,755			1,142			7,897
Operating Income		7,703			(1,502	)		6,201
Other Income (Expense) - net		200			1,502			1,702
Net Income		4,759			-			4,759

For the three months ended March 31, 2017
Consolidated Statements of Income
Other cost of services	$	9,065		$	223		$	9,288
Selling, general and administrative expenses		8,487			285			8,772
Operating Income		6,864			(508	)		6,356
Other Income (Expense) - net		(20	)		508			488
Net Income		3,574			-			3,574

	Three months ended
	March 31,
	2018			2017
Numerators
Numerator for basic earnings per share:
Net Income	$	4,759		$	3,574
Less: Net income attributable to noncontrolling interest		(97	)		(105	)
Net Income attributable to AT&T		4,662			3,469
Dilutive potential common shares:
Share-based payment		5			4
Numerator for diluted earnings per share	$	4,667		$	3,473
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding		6,161			6,166
Dilutive potential common shares:
Share-based payment (in shares)		19			20
Denominator for diluted earnings per share		6,180			6,186
Basic earnings per share attributable to AT&T	$	0.75		$	0.56
Diluted earnings per share attributable to AT&T	$	0.75		$	0.56

	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, 2017	$	(2,054)		$	660		$	1,402		$	7,009		$	7,017
Other comprehensive income (loss) before reclassifications		106			(12)			674			567			1,335
Amounts reclassified from accumulated OCI		-	¹		-	¹		12	²		(323)	³		(311)
Net other comprehensive income (loss)		106			(12)			686			244			1,024
Amounts reclassified to retained earnings		-			(655)	⁴		-			-			(655)
Balance as of March 31, 2018	$	(1,948)		$	(7)		$	2,088		$	7,253		$	7,386

	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
¹(Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
²(Gains) losses are included in Interest expense in the consolidated statements of income. See Note 7 for additional information.
³The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the
consolidated statements of income (see Note 6).
⁴With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments
are reclassified to retained earnings (see Note 1).

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

	First Quarter
	2018			2017
Consumer Mobility	$	4,655		$	4,530
Business Solutions		2,084			2,187
Entertainment Group		1,335			1,570
International		(111	)		(100	)
Segment Contribution		7,963			8,187
Reconciling Items:
Corporate and Other		(445	)		(526	)
Amortization of intangibles acquired		(1,062	)		(1,202	)
Merger and integration charges		(67	)		(207	)
Venezuela devaluation		(25	)		-
Employee separation costs		(51	)		-
Natural disaster charges		(104	)		-
Gain on wireless spectrum transactions		-			118
Segment equity in net (income) loss of affiliates		(8	)		(14	)
AT&T Operating Income		6,201			6,356
Interest expense		1,771			1,293
Equity in net income (loss) of affiliates		9			(173	)
Other income (expense) - net		1,702			488
Income Before Income Taxes	$	6,141		$	5,378

At or for the three months ended March 31, 2018	As Reported		Historical Accounting Method
Consolidated Statements of Income:
Service Revenues	$	33,646	$	35,069
Equipment Revenues		4,392		3,861
Total Operating Revenues		38,038		38,930
Other cost of services		7,932		8,861
Selling, general and administrative expenses		7,897		8,497
Total Operating Expenses		31,837		33,366
Operating income		6,201		5,564
Income before income taxes		6,141		5,504
Income tax expense		1,382		1,226
Net income		4,759		4,278
Net income attributable to AT&T		4,662		4,187

Basic Earnings per Share Attributable to AT&T	$	0.75	$	0.68
Diluted Earnings per Share Attributable to AT&T	$	0.75	$	0.68

Consolidated Balance Sheets:
Other current assets		12,008		10,124
Other Assets		20,974		19,164
Accounts payable and accrued liabilities		31,569		31,748
Advanced billings and customer deposits		5,081		5,140
Deferred income taxes		45,730		44,787
Other noncurrent liabilities		19,117		18,990
Retained earnings		55,067		52,250
Accumulated other comprehensive income		7,386		7,375
Noncontrolling interest		1,156		1,115

	March 31, 2018						December 31, 2017
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Notes and debentures¹		$	161,161		$	169,388		$	162,526		$	171,938
Bank borrowings			2			2			2			2
Investment securities²			2,584			2,584			2,447			2,447
¹ Includes credit agreement borrowings.
² Excludes investments accounted for under the equity method.

For the three months ended March 31, 2018
	Reported			Promotions & Other			USF			Commission Deferrals			Total Impact			Historical Accounting
Service Revenues
Consumer Mobility	$	11,612		$	(259	)	$	(353	)	$	-		$	(612	)	$	12,224
Business Solutions		8,437			(145	)		(396	)		-			(541	)		8,978
Entertainment Group		11,575			(41	)		(172	)		-			(213	)		11,788
International		1,758			(50	)		-			-			(50	)		1,808
Corporate/Other		264			1			(8	)		-			(7	)		271
AT&T Service Revenues		33,646			(494	)		(929	)		-			(1,423	)		35,069
AT&T Mobility		13,403			(399	)		(415	)		-			(814	)		14,217

Equipment Revenues
Consumer Mobility		3,374			331			-			-			331			3,043
Business Solutions		748			190			-			-			190			558
Entertainment Group		2			-			-			-			-			2
International		267			10			-			-			10			257
Corporate/Other		1			-			-			-			-			1
AT&T Equipment Revenues		4,392			531			-			-			531			3,861
AT&T Mobility		3,952			521			-			-			521			3,431

Total Operating Revenues
Consumer Mobility		14,986			72			(353	)		-			(281	)		15,267
Business Solutions		9,185			45			(396	)		-			(351	)		9,536
Entertainment Group		11,577			(41	)		(172	)		-			(213	)		11,790
International		2,025			(40	)		-			-			(40	)		2,065
Corporate/Other		265			1			(8	)		-			(7	)		272
AT&T Operating Revenues		38,038			37			(929	)		-			(892	)		38,930
AT&T Mobility		17,355			122			(415	)		-			(293	)		17,648

Total Operating Expenses
Consumer Mobility		10,331			37			(353	)		(334	)		(650	)		10,981
Business Solutions		7,100			2			(396	)		(29	)		(423	)		7,523
Entertainment Group		10,251			-			(172	)		(242	)		(414	)		10,665
International		2,136			(2	)		-			(33	)		(35	)		2,171
Corporate/Other		2,019			3			(8	)		(2	)		(7	)		2,026
AT&T Operating Expenses		31,837			40			(929	)		(640	)		(1,529	)		33,366
AT&T Mobility		12,197			40			(415	)		(337	)		(712	)		12,909

Total Operating Income
Consumer Mobility		4,655			35			-			334			369			4,286
Business Solutions		2,085			43			-			29			72			2,013
Entertainment Group		1,326			(41	)		-			242			201			1,125
International		(111	)		(38	)		-			33			(5	)		(106	)
Corporate/Other		(1,754	)		(2	)		-			2			-			(1,754	)
AT&T Operating Income		6,201			(3	)		-			640			637			5,564
AT&T Mobility		5,158			82			-			337			419			4,739

Supplemental Operational Measure
	Three Months Ended
	March 31, 2018									March 31, 2017
	Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments¹			AT&T Mobility
Operating Revenues
Wireless service	$	11,612	$	1,791	$	-		$	13,403	$	12,465	$	2,003	$	-		$	14,468
Strategic services		-		3,138		(3,138	)		-		-		2,974		(2,974	)		-
Legacy voice and data services		-		2,839		(2,839	)		-		-		3,549		(3,549	)		-
Other service and equipment		-		839		(839	)		-		-		878		(878	)		-
Wireless equipment		3,374		578		-			3,952		2,341		288		-			2,629
Total Operating Revenues		14,986		9,185		(6,816	)		17,355		14,806		9,692		(7,401	)		17,097

Operating Expenses
Operations and support		8,524		5,638		(4,060	)		10,102		8,560		6,040		(4,715	)		9,885
EBITDA		6,462		3,547		(2,756	)		7,253		6,246		3,652		(2,686	)		7,212
Depreciation and amortization		1,807		1,462		(1,174	)		2,095		1,716		1,465		(1,189	)		1,992
Total Operating Expense		10,331		7,100		(5,234	)		12,197		10,276		7,505		(5,904	)		11,877
Operating Income	$	4,655	$	2,085	$	(1,582	)	$	5,158	$	4,530	$	2,187	$	(1,497	)	$	5,220
¹ Business wireline operations reported in Business Solutions segment.


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

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

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

~~January 1, 2018 -~~ ~~January 31, 2018~~	~~882,386~~	$	~~38.19~~	-	~~388,296,000~~
~~February 1, 2018 -~~ ~~February 28, 2018~~	~~1,425,911~~		~~39.11~~	-	~~388,296,000~~
~~March 1, 2018 -~~ ~~March 31, 2018~~	~~2,053,893~~		~~37.08~~	-	~~388,296,000~~
~~Total~~	~~4,362,190~~	$	~~38.10~~	-
¹In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common
stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock.

²	Of the shares repurchased, 10,957 shares were acquired through the withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
³~~Of the shares repurchased, 563,908~~

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


Exhibit
12 Number		Exhibit Description
10-a		AT&T Health Plan
10-b		Agreement between Robert Quinn and AT&T Inc.
12		Computation of Ratios of Earnings to Fixed Charges
31		Rule13a-14(a)/15d-14(a) Certifications
		31.1 Certification of Principal Executive Officer
		31.2 Certification of Principal Financial Officer
32		Section 1350 Certifications
101		XBRL Instance Document

~~May 3, 2018~~

August 2, 2018

/s/ John J. Stephens

John J. Stephens

Senior Executive Vice President
and Chief Financial Officer