UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
                                                                                 
(Mark One)
 
x
 
 
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
 
or
 
 
 
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
       
For the transition period from            to

Commission File Number 1-8610

AT&T INC.

Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883

208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                                                                                                                                        Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                                                                                                                               Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                                                                                                                                            Yes [   ]   No [X]

At October 31, 2015, there were 6,152 million common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements

AT&T INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
Dollars in millions except per share amounts
 
(Unaudited)
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
       
As Adjusted
       
As Adjusted
 
Operating Revenues
               
Service
 
$
35,625
   
$
29,790
   
$
94,128
   
$
89,122
 
Equipment
   
3,466
     
3,167
     
10,554
     
8,886
 
Total operating revenues
   
39,091
     
32,957
     
104,682
     
98,008
 
                                 
Operating Expenses
                               
Cost of services and sales
                               
   Equipment
   
4,501
     
4,432
     
13,400
     
12,503
 
   Broadcast, programming and operations
   
4,081
     
1,038
     
6,351
     
3,019
 
   Other cost of services (exclusive of depreciation and
         amortization shown separately below)
   
9,214
     
8,866
     
27,604
     
26,167
 
Selling, general and administrative
   
9,107
     
8,475
     
24,535
     
24,932
 
Depreciation and amortization
   
6,265
     
4,539
     
15,539
     
13,706
 
Total operating expenses
   
33,168
     
27,350
     
87,429
     
80,327
 
Operating Income
   
5,923
     
5,607
     
17,253
     
17,681
 
Other Income (Expense)
                               
Interest expense
   
(1,146
)
   
(1,016
)
   
(2,977
)
   
(2,757
)
Equity in net income (loss) of affiliates
   
15
     
(2
)
   
48
     
188
 
Other (expense) income – net
   
(57
)
   
42
     
61
     
1,456
 
Total other income (expense)
   
(1,188
)
   
(976
)
   
(2,868
)
   
(1,113
)
Income Before Income Taxes
   
4,735
     
4,631
     
14,385
     
16,568
 
Income tax expense
   
1,657
     
1,444
     
4,784
     
5,914
 
Net Income
   
3,078
     
3,187
     
9,601
     
10,654
 
Less: Net Income Attributable to Noncontrolling Interest
   
(84
)
   
(57
)
   
(262
)
   
(213
)
Net Income Attributable to AT&T
 
$
2,994
   
$
3,130
   
$
9,339
   
$
10,441
 
Basic Earnings Per Share Attributable to AT&T
 
$
0.50
   
$
0.60
   
$
1.71
   
$
2.00
 
Diluted Earnings Per Share Attributable to AT&T
 
$
0.50
   
$
0.60
   
$
1.71
   
$
2.00
 
Weighted Average Number of Common Shares
                               
   Outstanding – Basic (in millions)
   
5,924
     
5,198
     
5,447
     
5,208
 
Weighted Average Number of Common Shares
                               
   Outstanding – with Dilution (in millions)
   
5,943
     
5,214
     
5,463
     
5,224
 
Dividends Declared Per Common Share
 
$
0.47
   
$
0.46
   
$
1.41
   
$
1.38
 
See Notes to Consolidated Financial Statements.
                               
2
AT&T INC.
                       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
             
Dollars in millions
               
(Unaudited)
                       
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
       
As Adjusted
       
As Adjusted
 
Net income
 
$
3,078
   
$
3,187
   
$
9,601
   
$
10,654
 
Other comprehensive income (loss), net of tax:
                               
    Foreign Currency:
                               
        Translation adjustment (includes $(20), $(1), $(20) and $0
            attributable to noncontrolling interest), net of taxes of
            $(535), $(22), $(638) and $(17)
   
(1,039
)
   
(35
)
   
(1,224
)
   
(29
)
        Reclassification adjustment included in net income,
            net of taxes of $0, $0, $0 and $224
   
-
     
-
     
-
     
416
 
    Available-for-sale securities:
                               
        Net unrealized gains (losses), net of taxes of $(49), $(15), $(30)
           and $19
   
(85
)
   
(29
)
   
(51
)
   
30
 
        Reclassification adjustment included in net income, net of
           taxes of $2, $(1), $(3) and $(9)
   
3
     
(1
)
   
(6
)
   
(15
)
     Cash flow hedges:
                               
        Net unrealized gains (losses), net of taxes of $(237), $201,
           $(479) and $148
   
(441
)
   
370
     
(890
)
   
272
 
        Reclassification adjustment included in net income,
           net of taxes of $6, $3, $15 and $14
   
11
     
8
     
28
     
29
 
     Defined benefit postretirement plans:
                               
        Amortization of net prior service credit included in
           net income, net of taxes of $(131), $(146), $(393)
           and $(435)
   
(215
)
   
(239
)
   
(644
)
   
(718
)
        Reclassification adjustment included in net income, net of
           taxes $0, $0, $0 and $33
   
-
     
-
     
-
     
61
 
Other comprehensive income (loss)
   
(1,766
)
   
74
     
(2,787
)
   
46
 
Total comprehensive income
   
1,312
     
3,261
     
6,814
     
10,700
 
Less: Total comprehensive income attributable to
     noncontrolling interest
   
(64
)
   
(56
)
   
(242
)
   
(213
)
Total Comprehensive Income Attributable to AT&T
 
$
1,248
   
$
3,205
   
$
6,572
   
$
10,487
 
See Notes to Consolidated Financial Statements.
                               
3
AT&T INC.
 
CONSOLIDATED BALANCE SHEETS
 
Dollars in millions except per share amounts
 
   
September 30,
   
December 31,
 
   
2015
   
2014
 
Assets
 
(Unaudited)
   
As Adjusted
 
Current Assets
       
Cash and cash equivalents
 
$
6,202
   
$
8,603
 
Accounts receivable - net of allowances for doubtful accounts of $656 and $454
   
16,329
     
14,527
 
Prepaid expenses
   
1,166
     
831
 
Other current assets
   
11,254
     
9,802
 
Total current assets
   
34,951
     
33,763
 
Property, plant and equipment
   
302,194
     
282,295
 
   Less: accumulated depreciation and amortization
   
(179,358
)
   
(169,397
)
Property, Plant and Equipment – Net
   
122,836
     
112,898
 
Goodwill
   
105,966
     
69,692
 
Licenses
   
93,063
     
60,824
 
Customer Lists and Relationships - Net
   
19,608
     
812
 
Other Intangible Assets – Net
   
8,236
     
5,327
 
Investments in Equity Affiliates
   
1,744
     
250
 
Other Assets
   
13,585
     
13,659
 
Total Assets
 
$
399,989
   
$
297,225
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Debt maturing within one year
 
$
7,535
   
$
6,056
 
Accounts payable and accrued liabilities
   
28,280
     
23,592
 
Advanced billing and customer deposits
   
4,640
     
4,105
 
Accrued taxes
   
4,591
     
1,136
 
Dividends payable
   
2,892
     
2,438
 
Total current liabilities
   
47,938
     
37,327
 
Long-Term Debt
   
119,395
     
76,011
 
Deferred Credits and Other Noncurrent Liabilities
               
Deferred income taxes
   
53,044
     
38,549
 
Postemployment benefit obligation
   
36,396
     
37,079
 
Other noncurrent liabilities
   
20,427
     
17,989
 
Total deferred credits and other noncurrent liabilities
   
109,867
     
93,617
 
                 
Stockholders' Equity
               
Common stock ($1 par value, 14,000,000,000 authorized at September 30, 2015 and
               
   December 31, 2014: issued 6,495,231,088 at September 30, 2015 and December 31, 2014)
   
6,495
     
6,495
 
Additional paid-in capital
   
89,717
     
91,108
 
Retained earnings
   
32,627
     
31,081
 
Treasury stock (342,990,428 at September 30, 2015 and 1,308,318,131
               
   at December 31, 2014, at cost)
   
(12,309
)
   
(47,029
)
Accumulated other comprehensive income
   
5,294
     
8,061
 
Noncontrolling interest
   
965
     
554
 
Total stockholders' equity
   
122,789
     
90,270
 
Total Liabilities and Stockholders' Equity
 
$
399,989
   
$
297,225
 
See Notes to Consolidated Financial Statements.
               
4
AT&T INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Dollars in millions
 
(Unaudited)
           
   
Nine months ended
 
   
September 30,
 
   
2015
   
2014
 
Operating Activities
     
As Adjusted
 
Net income
 
$
9,601
   
$
10,654
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   Depreciation and amortization
   
15,539
     
13,706
 
   Undistributed earnings from investments in equity affiliates
   
(36
)
   
(45
)
   Provision for uncollectible accounts
   
895
     
692
 
   Deferred income tax expense
   
1,539
     
1,450
 
   Net gain from sale of investments, net of impairments
   
(46
)
   
(1,374
)
Changes in operating assets and liabilities:
               
   Accounts receivable
   
453
     
(1,269
)
   Other current assets
   
350
     
(840
)
   Accounts payable and accrued liabilities
   
1,279
     
4,790
 
Retirement benefit funding
   
(595
)
   
(420
)
Other - net
   
(2,284
)
   
(1,751
)
Total adjustments
   
17,094
     
14,939
 
Net Cash Provided by Operating Activities
   
26,695
     
25,593
 
                 
Investing Activities
               
Construction and capital expenditures:
               
   Capital expenditures
   
(13,356
)
   
(16,829
)
   Interest during construction
   
(566
)
   
(178
)
Acquisitions, net of cash acquired
   
(30,694
)
   
(2,053
)
Dispositions
   
79
     
6,074
 
Sales (purchases) of securities, net
   
1,490
     
(1,996
)
Return of advances to and investments in equity affiliates
   
-
     
3
 
Other
   
-
     
(1
)
Net Cash Used in Investing Activities
   
(43,047
)
   
(14,980
)
                 
Financing Activities
               
Net change in short-term borrowings with original maturities of three months or less
   
(1
)
   
(16
)
Issuance of long-term debt
   
33,967
     
8,564
 
Repayment of long-term debt
   
(9,962
)
   
(10,376
)
Purchase of treasury stock
   
-
     
(1,617
)
Issuance of treasury stock (excluding acquisition of DIRECTV)
   
133
     
34
 
Dividends paid
   
(7,311
)
   
(7,170
)
Other
   
(2,875
)
   
(913
)
Net Cash Provided by (Used in) Financing Activities
   
13,951
     
(11,494
)
Net decrease in cash and cash equivalents
   
(2,401
)
   
(881
)
Cash and cash equivalents beginning of year
   
8,603
     
3,339
 
Cash and Cash Equivalents End of Period
 
$
6,202
   
$
2,458
 
Cash paid during the nine months ended September 30 for:
               
   Interest
 
$
3,462
   
$
3,351
 
   Income taxes, net of refunds
 
$
873
   
$
1,337
 
See Notes to Consolidated Financial Statements.
 
5
AT&T INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
Dollars and shares in millions except per share amounts
 
(Unaudited)
 
   
September 30, 2015
 
   
Shares
   
Amount
 
       
As Adjusted
 
Common Stock
       
Balance at beginning of year
   
6,495
   
$
6,495
 
Issuance of stock
   
-
     
-
 
Balance at end of period
   
6,495
   
$
6,495
 
                 
Additional Paid-In Capital
               
Balance at beginning of year
         
$
91,108
 
Issuance of treasury stock
           
(1,593
)
Share-based payments
           
202
 
Balance at end of period
         
$
89,717
 
                 
Retained Earnings
               
Balance at beginning of year
         
$
31,081
 
Net income attributable to AT&T ($1.71 per diluted share)
           
9,339
 
Dividends to stockholders ($1.41 per share)
           
(7,793
)
Balance at end of period
         
$
32,627
 
                 
Treasury Stock
               
Balance at beginning of year
   
(1,308
)
 
$
(47,029
)
Repurchase of common stock
   
(1
)
   
(10
)
Issuance of treasury stock
   
967
     
34,730
 
Balance at end of period
   
(342
)
 
$
(12,309
)
                 
Accumulated Other Comprehensive Income Attributable to AT&T, net of tax
               
Balance at beginning of year
         
$
8,061
 
Other comprehensive loss attributable to AT&T
           
(2,767
)
Balance at end of period
         
$
5,294
 
                 
Noncontrolling Interest
               
Balance at beginning of year
         
$
554
 
Net income attributable to noncontrolling interest
           
262
 
Distributions
           
(214
)
Acquisition of noncontrolling interests
           
383
 
Translation adjustments attributable to noncontrolling interest, net of taxes
           
(20
)
Balance at end of period
         
$
965
 
                 
Total Stockholders' Equity at beginning of year
         
$
90,270
 
Total Stockholders' Equity at end of period
         
$
122,789
 
See Notes to Consolidated Financial Statements.
               
6
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in millions except per share amounts
 
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

Basis of Presentation   Throughout this document, AT&T Inc. is referred to as "AT&T," "we" or the "Company." These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of those for the full year. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates, including the results of DIRECTV for the 68-day period ended September 30, 2015. Our subsidiaries and affiliates operate in the communications and digital entertainment services industry, providing services and equipment that deliver voice, video and broadband services domestically and internationally.

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

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain amounts have been reclassified to conform to the current period's presentation, including our presentation of "Equipment" and "Broadcast, programming and operations" expenses separately from other cost of services in the consolidated statements of income.

Due to recent organizational changes and our July 24, 2015 acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we are revising our operating segments to align with the new management structure and organizational responsibilities. We have revised our prior-period presentation to conform to our current reporting. (See Note 4)

Customer Fulfillment Costs   In August 2015, with our acquisition of DIRECTV, we announced a change in accounting for customer set-up and installation costs. Historically we have followed an accounting policy of deferring customer set-up and installation costs only to the extent of deferred revenues recorded for upfront fees (e.g., activation charges), and to expense any costs that exceed deferred revenues. After discussing this change with the Securities and Exchange Commission, we changed our accounting to a preferable method of capitalizing these costs and amortizing them over the expected economic life of the customer relationship of approximately four years, subject to an assessment of the recoverability of such costs. This change in accounting principle impacts video, broadband Internet and wireline voice services and is considered preferable in that it provides an accurate reflection of assets (i.e., the contractual customer relationship obtained through the set-up and installation) generated by those specific business activities. Our new accounting method is more comparable with the accounting method used in the cable entertainment industry. With our acquisition of DIRECTV, changing to this accounting method will enhance comparability to other companies in the industry. This change in accounting does not have an impact on our wireless results, due to the absence of these types of expenses in those business activities.

The cumulative effect of the change on Retained Earnings as of January 1, 2014, was an increase of approximately $3,128 on our consolidated balance sheets. This change did not have an impact on cash provided by or used in operations for any period presented.
7
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following tables present our results under our historical method and as adjusted to reflect the accounting change:
             
   
Historical
Accounting
Method
   
As
Adjusted
   
Effect of
Change
 
For the three months ended September 30, 2015
           
Other cost of services
 
$
9,290
   
$
9,214
   
$
(76
)
Income tax expense
   
1,628
     
1,657
     
29
 
Net Income
   
3,031
     
3,078
     
47
 
Net Income Attributable to AT&T
   
2,947
     
2,994
     
47
 
                         
Basic Earnings per Share Attributable to AT&T
 
$
0.50
   
$
0.50
   
$
-
 
Diluted Earnings per Share Attributable to AT&T
   
0.50
     
0.50
     
-
 
                         
At September 30, 2015 or for the nine months ended
                       
Other cost of services
 
$
27,842
   
$
27,604
   
$
(238
)
Income tax expense
   
4,694
     
4,784
     
90
 
Net Income
   
9,453
     
9,601
     
148
 
Net Income Attributable to AT&T
   
9,191
     
9,339
     
148
 
                         
Basic Earnings per Share Attributable to AT&T
 
$
1.68
   
$
1.71
   
$
0.03
 
Diluted Earnings per Share Attributable to AT&T
   
1.68
     
1.71
     
0.03
 
                         
Other current assets
 
$
9,579
   
$
11,254
   
$
1,675
 
Other Assets
   
10,671
     
13,585
     
2,914
 
Deferred income taxes
   
51,949
     
53,044
     
1,095
 
Retained earnings
   
29,133
     
32,627
     
3,494
 

             
   
Historical
Accounting
Method
   
As
Adjusted
   
Effect of
Change
 
For the three months ended September 30, 2014
           
Other cost of services
 
$
9,071
   
$
8,866
   
$
(205
)
Income tax expense
   
1,367
     
1,444
     
77
 
Net Income
   
3,059
     
3,187
     
128
 
Net Income Attributable to AT&T
   
3,002
     
3,130
     
128
 
                         
Basic Earnings per Share Attributable to AT&T
 
$
0.58
   
$
0.60
   
$
0.02
 
Diluted Earnings per Share Attributable to AT&T
   
0.58
     
0.60
     
0.02
 
                         
For the nine months ended September 30, 2014
                       
Other cost of services
 
$
26,552
   
$
26,167
   
$
(385
)
Income tax expense
   
5,769
     
5,914
     
145
 
Net Income
   
10,414
     
10,654
     
240
 
Net Income Attributable to AT&T
   
10,201
     
10,441
     
240
 
                         
Basic Earnings per Share Attributable to AT&T
 
$
1.96
   
$
2.00
   
$
0.04
 
Diluted Earnings per Share Attributable to AT&T
   
1.95
     
2.00
     
0.05
 
 
8
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
             
   
Historical
Accounting
Method
   
As
Adjusted
   
Effect of
Change
 
At December 31, 2014
           
Other current assets
 
$
8,067
   
$
9,802
   
$
1,735
 
Other Assets
   
10,998
     
13,659
     
2,661
 
Accrued taxes
   
1,091
     
1,136
     
45
 
Deferred income taxes
   
37,544
     
38,549
     
1,005
 
Retained earnings
   
27,736
     
31,081
     
3,345
 

New Accounting Standards

Revenue Recognition   In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. ASU 2014-09 becomes effective for annual reporting periods beginning after December 15, 2017, following the July 2015 approval of a one-year deferral of the effective date by the FASB. While we continue to evaluate the impact of the new standard on revenue and costs of acquisition as well as available adoption methods, the requirement to defer costs is not expected to have a significant impact on our operating results as a result of our policy change on fulfillment costs.

Long-Term Debt and Debt Issuance Costs   In April 2015, the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which will result in the reclassification of debt issuance costs from "Other Assets" to inclusion as a reduction of our reportable "Long-Term Debt" balance on our consolidated balance sheets. Since ASU 2015-03 does not address deferred issuance costs for line-of-credit arrangements, the FASB issued ASU No. 2015-15, "Interest—Imputation of Interest:  Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" (ASU 2015-15), in August 2015. ASU 2015-15 allows a company to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings, classify them as an asset, and amortize them over the term of the arrangements. ASU 2015-03 becomes effective January 1, 2016, subject to early adoption, and will require full retrospective application. We do not expect these new standards to have a material impact on our consolidated balance sheets.

Business Combinations   In September 2015, the FASB issued ASU No 2015-16, "Business Combinations—Simplifying the Accounting for Measurement-Period Adjustments" (ASU 2015-16), which will result in the ability to recognize, in current-period earnings, any changes in provisional amounts during the measurement period after the closing of an acquisition, instead of retroactively accounting for these changes. ASU 2015-16 becomes effective January 1, 2016, subject to early adoption, and will require prospective application to adjustments to provisional amounts that occur after the effective date of ASU 2015-16. We are evaluating the impact of the new standard on our operating results.
 
9
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 2. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014, is shown in the table below:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Numerators
               
Numerator for basic earnings per share:
               
   Net Income
 
$
3,078
   
$
3,187
   
$
9,601
   
$
10,654
 
   Less:  Net income attributable to noncontrolling interest
   
(84
)
   
(57
)
   
(262
)
   
(213
)
   Net Income attributable to AT&T
   
2,994
     
3,130
     
9,339
     
10,441
 
   Dilutive potential common shares:
                               
      Share-based payment
   
3
     
2
     
9
     
9
 
Numerator for diluted earnings per share
 
$
2,997
   
$
3,132
   
$
9,348
   
$
10,450
 
Denominators (000,000)
                               
Denominator for basic earnings per share:
                               
   Weighted average number of common shares outstanding
   
5,924
     
5,198
     
5,447
     
5,208
 
   Dilutive potential common shares:
                               
      Share-based payment (in shares)
   
19
     
16
     
16
     
16
 
Denominator for diluted earnings per share
   
5,943
     
5,214
     
5,463
     
5,224
 
Basic earnings per share attributable to AT&T
 
$
0.50
   
$
0.60
   
$
1.71
   
$
2.00
 
Diluted earnings per share attributable to AT&T
 
$
0.50
   
$
0.60
   
$
1.71
   
$
2.00
 

10
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 3. OTHER COMPREHENSIVE INCOME

Changes in the balances of each component included in accumulated other comprehensive income (accumulated OCI) are presented below. All amounts are net of tax and exclude noncontrolling interest.
 
At September 30, 2015 and for the period ended:
 
 
   
 
   
 
   
 
   
 
Foreign
Currency
Translation
Adjustment
 
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
Postretirement
Plans
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2014
$
 (26)
 
$
 499 
 
$
 741 
 
$
 6,847 
 
$
 8,061 
Other comprehensive income
   (loss) before reclassifications
 
 (1,204)
 
 
 (51)
 
 
 (890)
 
 
 -   
 
 
 (2,145)
Amounts reclassified
   from accumulated OCI
 
 -   
  1 
 
 (6)
  2 
 
 28 
  3 
 
 (644)
  4 
 
 (622)
Net other comprehensive
   income (loss)
 
 (1,204)
 
 
 (57)
 
 
 (862)
 
 
 (644)
 
 
 (2,767)
Balance as of September 30,
   2015
$
 (1,230)
 
$
 442 
 
$
 (121)
 
$
 6,203 
 
$
 5,294 
 
                             
At September 30, 2014 and for the period ended:
 
 
   
 
   
 
   
 
   
 
Foreign
Currency
Translation
Adjustment
 
Net Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
 
Net Unrealized
Gains (Losses)
on Cash Flow
Hedges
 
Defined Benefit
Postretirement
Plans
 
Accumulated
Other
Comprehensive
Income
Balance as of December 31, 2013
$
 (367)
 
$
 450 
 
$
 445 
 
$
 7,352 
 
$
 7,880 
Other comprehensive income
   (loss) before reclassifications
 
 (29)
 
 
 30 
 
 
 272 
 
 
 -   
 
 
 273 
Amounts reclassified
   from accumulated OCI
 
 416 
  1 
 
 (15)
  2 
 
 29 
  3 
 
 (657)
  4 
 
 (227)
Net other comprehensive
   income (loss)
 
 387 
 
 
 15 
 
 
 301 
 
 
 (657)
 
 
 46 
Balance as of September 30,
   2014
$
 20 
 
$
 465 
 
$
 746 
 
$
 6,695 
 
$
 7,926 
  1  Translation (gain) loss reclassifications are included in Other income (expense) - net in the consolidated statements of income.
  2  (Gains) losses are included in Other income (expense) - net in the consolidated statements of income.
  3  (Gains) losses are included in Interest expense in the consolidated statements of income. See Note 6 for additional information.
  4  The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Other cost of services and Selling, general and administrative in the consolidated statements of income (see Note 5). Actuarial loss
   reclassifications related to our equity method investees are included in Other income (expense) - net in the consolidated statements of income.
 
11
AT&T INC.
SEPTEMBER 30, 2015

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. Due to recent organizational changes and our July 24, 2015 acquisition of DIRECTV, effective for the quarter ended September 30, 2015, we are revising our operating segments to align with our new management structure and organizational responsibilities. We analyze our operating segments based on segment contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income of affiliates for investments managed within each operating segment. We have four reportable segments: (1) Business Solutions, (2) Entertainment and Internet Services, (3) Consumer Mobility and (4) International. We have revised our prior-period presentation to conform to our current reporting.

We also evaluate segment performance based on segment operating income before depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. For AT&T, EBITDA is defined as operating income before 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.

The Business Solutions segment provides both wireless and wireline services to business customers and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN), Ethernet-related products and broadband (strategic business services) as well as traditional data and voice products. Services in this segment utilize our wireless and wired network and are marketed to provide a complete communications solution to our business customers.

The Entertainment and Internet Services segment provides video, Internet and voice communication services to residential customers located in the U.S. or in U.S. territories. Services utilize our copper and IP-based wired network and/or our satellite technology to provide video, high speed Internet and voice services.

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

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided primarily to residential customers using satellite technology. Wireless services utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries transact in their local currency and operating results are converted to U.S. dollars using official exchange rates. The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is the Sistema Marginal de Divisas (SIMADI), which was 199.65 and 199.42 Venezuelan bolivars per U.S. dollar at July 24, 2015 and September 30, 2015, respectively. Our International segment is subject to foreign currency fluctuations.

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

Certain operating items are not allocated to our business segments:
·
Acquisition-related items include (1) operations and support items associated with the merger and integration of newly acquired businesses, and (2) the noncash amortization of intangible assets acquired in acquisitions.
·
Certain significant items include (1) noncash actuarial gains and losses from pension and other postretirement benefits, (2) employee separation charges associated with voluntary and/or strategic offers, (3) abandonment or impairments of assets and (4) other items for which the segments are not being evaluated.
12
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

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

Our operating assets are shared by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.
 
13
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

For the three months ended September 30, 2015
 
   
Revenue
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
17,692
   
$
10,921
   
$
6,771
   
$
2,474
   
$
4,297
   
$
-
   
$
4,297
 
Entertainment and Internet Services
   
10,858
     
8,450
     
2,408
     
1,389
     
1,019
     
2
     
1,021
 
Consumer Mobility
   
8,784
     
5,065
     
3,719
     
976
     
2,743
     
-
     
2,743
 
International
   
1,526
     
1,384
     
142
     
225
     
(83
)
   
(4
)
   
(87
)
Segment Total
   
38,860
     
25,820
     
13,040
     
5,064
     
7,976
     
(2
)
   
7,974
 
Corporate and Other
   
316
     
315
     
1
     
3
     
(2
)
               
Acquisition-related items
   
(85
)
   
611
     
(696
)
   
1,198
     
(1,894
)
               
Certain significant items
   
-
     
157
     
(157
)
   
-
     
(157
)
               
AT&T Inc.
 
$
39,091
   
$
26,903
   
$
12,188
   
$
6,265
   
$
5,923
                 
                                                         
For the nine months ended September 30, 2015
 
   
Revenue
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
52,913
   
$
32,966
   
$
19,947
   
$
7,276
   
$
12,671
   
$
-
   
$
12,671
 
Entertainment and Internet Services
   
22,300
     
18,222
     
4,078
     
3,519
     
559
     
(16
)
   
543
 
Consumer Mobility
   
26,317
     
15,808
     
10,509
     
2,912
     
7,597
     
-
     
7,597
 
International
   
2,253
     
2,131
     
122
     
346
     
(224
)
   
(4
)
   
(228
)
Segment Total
   
103,783
     
69,127
     
34,656
     
14,053
     
20,603
     
(20
)
   
20,583
 
Corporate and Other
   
984
     
785
     
199
     
47
     
152
                 
Acquisition-related items
   
(85
)
   
1,604
     
(1,689
)
   
1,439
     
(3,128
)
               
Certain significant items
   
-
     
374
     
(374
)
   
-
     
(374
)
               
AT&T Inc.
 
$
104,682
   
$
71,890
   
$
32,792
   
$
15,539
   
$
17,253
                 
14
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
For the three months ended September 30, 2014
 
   
Revenue
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
17,487
   
$
11,295
   
$
6,192
   
$
2,331
   
$
3,861
   
$
-
   
$
3,861
 
Entertainment and Internet Services
   
5,553
     
4,781
     
772
     
1,109
     
(337
)
   
-
     
(337
)
Consumer Mobility
   
9,208
     
5,731
     
3,477
     
950
     
2,527
     
(1
)
   
2,526
 
International
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Segment Total
   
32,248
     
21,807
     
10,441
     
4,390
     
6,051
     
(1
)
   
6,050
 
Corporate and Other
   
709
     
791
     
(82
)
   
24
     
(106
)
               
Acquisition-related items
   
-
     
213
     
(213
)
   
125
     
(338
)
               
Certain significant items
   
-
     
-
     
-
     
-
     
-
                 
AT&T Inc.
 
$
32,957
   
$
22,811
   
$
10,146
   
$
4,539
   
$
5,607
                 
                                                         
For the nine months ended September 30, 2014
 
   
Revenue
   
Operations
and Support
Expenses
   
EBITDA
   
Depreciation
and
Amortization
   
Operating
Income (Loss)
   
Equity in Net
Income (Loss) of
Affiliates
   
Segment
Contribution
 
Business Solutions
 
$
51,877
   
$
32,836
   
$
19,041
   
$
7,009
   
$
12,032
   
$
-
   
$
12,032
 
Entertainment and Internet Services
   
16,640
     
14,182
     
2,458
     
3,396
     
(938
)
   
-
     
(938
)
Consumer Mobility
   
27,247
     
17,173
     
10,074
     
2,846
     
7,228
     
(1
)
   
7,227
 
International
   
-
     
-
     
-
     
-
     
-
     
153
     
153
 
Segment Total
   
95,764
     
64,191
     
31,573
     
13,251
     
18,322
     
152
     
18,474
 
Corporate and Other
   
2,244
     
2,027
     
217
     
77
     
140
                 
Acquisition-related items
   
-
     
403
     
(403
)
   
378
     
(781
)
               
Certain significant items
   
-
     
-
     
-
     
-
     
-
                 
AT&T Inc.
 
$
98,008
   
$
66,621
   
$
31,387
   
$
13,706
   
$
17,681
                 
15
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following table is a reconciliation of operating income (loss) to "Income Before Income Taxes" reported on our consolidated statements of income.
 
                                  
   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
2015
   
2014
 
Business Solutions 
 
$
4,297
   
$
3,861
   
$
12,671
   
$
12,032
 
Entertainment and Internet Services 
   
1,021
     
(337
)
   
543
     
(938
)
Consumer Mobility 
   
2,743
     
2,526
     
7,597
     
7,227
 
International 
   
(87
)
   
-
     
(228
)
   
153
 
Segment Contribution 
   
7,974
     
6,050
     
20,583
     
18,474
 
Reconciling Items: 
                               
  Corporate and Other 
   
(2
)
   
(106
)
   
152
     
140
 
  Merger and integration charges 
   
(696
)
   
(213
)
   
(1,689
)
   
(403
)
  Amortization of intangibles acquired 
   
(1,198
)
   
(125
)
   
(1,439
)
   
(378
)
  Employee separation charges 
   
(122
)
   
-
     
(339
)
   
-
 
  Other (expenses) credits 
   
(35
)
   
-
     
(35
)
   
-
 
  Less: segment equity in net (income) loss
    of affiliates 
   
2
     
1
     
20
     
(152
)
AT&T Operating Income 
   
5,923
     
5,607
     
17,253
     
17,681
 
Interest Expense 
   
1,146
     
1,016
     
2,977
     
2,757
 
Equity in net income (loss) of affiliates 
   
15
     
(2
)
   
48
     
188
 
Other income (expense) - Net 
   
(57
)
   
42
     
61
     
1,456
 
Income Before Income Taxes 
 
$
4,735
   
$
4,631
   
$
14,385
   
$
16,568
 

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all 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 December 2014, we offered an opportunity for certain management employees who were retirement eligible as of March 31, 2015 to elect an enhanced, full lump sum payment option of their accrued pension if they retired on or before March 31, 2015. The lump sum value totaled approximately $1,200 which was distributed in 2015. We recorded special termination benefits of approximately $150 as a result of this offer.

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 $8,838 at September 30, 2015. The trust is entitled to receive cumulative cash distributions of $560 per annum, which are distributed quarterly in equal amounts and accounted for as contributions. We distributed $420 to the trust during the nine months ended September 30, 2015. So long as we make the distributions, we will have no limitations on our ability to declare a dividend or repurchase shares. This preferred equity interest is a plan asset under ERISA and is recognized as such in the plan's separate financial statements. However, because the preferred equity interest is not unconditionally transferable to an unrelated party, it is not reflected in plan assets in our consolidated financial statements and instead has been eliminated in consolidation. We also agreed to make a cash contribution to the trust of $175 no later than the due date of our federal income tax return for 2014. This contribution was made in June 2015.
 
16
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
    We acquired DIRECTV on July 24, 2015. DIRECTV sponsors a noncontributory defined benefit pension plan, which provides benefits to most employees based on either years of service and final average salary, or eligible compensation while employed by DIRECTV. DIRECTV also maintains (1) a postretirement benefit plan for those retirees eligible to participate in health care and life insurance benefits generally until they reach age 65 and (2) an unfunded nonqualified pension plan for certain eligible employees. We have recorded the fair value of the DIRECTV plans using assumptions and accounting policies consistent with those disclosed by AT&T. Upon acquisition, the excess of projected benefit obligation over the plan assets was recognized as a liability and previously existing deferred actuarial gains and losses and unrecognized service costs or benefits were eliminated.
We recognize actuarial gains and losses on pension and postretirement plan assets in our operating results at our annual measurement date of December 31, unless earlier remeasurements are required. The following table details pension and postretirement benefit costs included in operating expenses in the accompanying consolidated statements of income; expense credits are denoted with parentheses. A portion of these expenses is capitalized as part of internal construction projects, providing a small reduction in the net expense recorded.

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Pension cost:
               
   Service cost – benefits earned during the period
 
$
305
   
$
282
   
$
904
   
$
846
 
   Interest cost on projected benefit obligation
   
477
     
661
     
1,424
     
1,984
 
   Expected return on assets
   
(832
)
   
(849
)
   
(2,484
)
   
(2,549
)
   Amortization of prior service credit
   
(25
)
   
(24
)
   
(77
)
   
(71
)
   Net pension (credit) cost
 
$
(75
)
 
$
70
   
$
(233
)
 
$
210
 
                                 
Postretirement cost:
                               
   Service cost – benefits earned during the period
 
$
55
   
$
59
   
$
166
   
$
175
 
   Interest cost on accumulated postretirement benefit obligation
   
242
     
365
     
725
     
1,094
 
   Expected return on assets
   
(105
)
   
(165
)
   
(315
)
   
(491
)
   Amortization of prior service credit
   
(320
)
   
(362
)
   
(959
)
   
(1,086
)
   Net postretirement (credit) cost
 
$
(128
)
 
$
(103
)
 
$
(383
)
 
$
(308
)
                                 
   Combined net pension and postretirement (credit) cost
 
$
(203
)
 
$
(33
)
 
$
(616
)
 
$
(98
)

Our combined net pension and postretirement cost decreased $170 in the third quarter and $518 for the first nine months of 2015. Our combined net pension and postretirement cost decreased $223 in the third quarter and $669 for the first nine months due to the change in the method used to estimate the service and interest components of net periodic benefit cost for pension and other postretirement benefits. While this change, which was made in the fourth quarter of 2014, provides a more precise measurement of interim service and interest costs, it will not affect the measurement of our total benefit obligations as of December 31 or our annual net periodic benefit cost as the change in the service and interest costs is completely offset in the actuarial gain or loss reported. The decrease in cost resulting from this change was partially offset by lower amortization of prior service credits as previous postretirement plan changes have become fully amortized, our lower expected long-term rate of return on our postretirement plan assets and updated assumed mortality rates.

We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. Net supplemental retirement pension benefits cost, which is not included in the table above, was $22 in the third quarter of 2015, of which $20 was interest cost, and $63 for the first nine months, of which $57 was interest cost. In 2014, net supplemental retirement pension benefits cost was $29 in the third quarter, of which $27 was interest cost, and $87 for the first nine months, of which $82 was interest cost.
 
17
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 6. FAIR VALUE MEASUREMENTS AND DISCLOSURE

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

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

Level 2 Inputs to the valuation methodology include:
·
Quoted prices for similar assets and liabilities in active markets.
·
Quoted prices for identical or similar assets or liabilities in inactive markets.
·
Inputs other than quoted market prices that are observable for the asset or liability.
·
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
·
Fair value is often based on developed models in which there are few, if any, external observations.

The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should 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, 2014.

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

 
September 30, 2015
 
December 31, 2014
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
 
Notes and debentures
$
126,042
   
$
129,524
   
$
81,632
   
$
90,367
 
Bank borrowings
 
4
     
4
     
5
     
5
 
Investment securities
 
2,644
     
2,644
     
2,735
     
2,735
 

The carrying value of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
 
18
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Following is the fair value leveling for available-for-sale securities and derivatives as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Available-for-Sale Securities
             
   Domestic equities
$
1,094
   
$
-
   
$
-
   
$
1,094
 
   International equities
 
561
     
-
     
-
     
561
 
   Fixed income bonds
 
-
     
737
     
-
     
737
 
Asset Derivatives 1 
                             
   Interest rate swaps
 
-
     
217
     
-
     
217
 
   Cross-currency swaps
 
-
     
796
     
-
     
796
 
Liability Derivatives 1 
                             
   Cross-currency swaps
 
-
     
(3,202
)
   
-
     
(3,202
)
   Foreign exchange contracts
 
-
     
(1
)
   
-
     
(1
)
 
                             
 
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Available-for-Sale Securities
                             
   Domestic equities
$
1,160
   
$
-
   
$
-
   
$
1,160
 
   International equities
 
553
     
-
     
-
     
553
 
   Fixed income bonds
 
-
     
836
     
-
     
836
 
Asset Derivatives 1 
                             
   Interest rate swaps
 
-
     
157
     
-
     
157
 
   Cross-currency swaps
 
-
     
1,243
     
-
     
1,243
 
   Interest rate locks
 
-
     
5
     
-
     
5
 
Liability Derivatives 1 
                             
   Cross-currency swaps
 
-
     
(1,506
)
   
-
     
(1,506
)
   Interest rate locks
 
-
     
(133
)
   
-
     
(133
)
  1  Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" in our consolidated balance sheets.
 

Investment Securities
Our investment securities include equities, fixed income bonds and other securities. A substantial portion of the fair values of our available-for-sale securities was estimated based on quoted market prices. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Realized gains and losses on securities are included in "Other income (expense) – net" in the consolidated statements of income using the specific identification method. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in accumulated OCI. Unrealized losses that are considered other than temporary are recorded in "Other income (expense) – net" with the corresponding reduction to the carrying basis of the investment. Fixed income investments of $93 have maturities of less than one year, $379 within one to three years, $52 within three to five years, and $213 for five or more years.

Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments are recorded in "Other current assets" and our investment securities are recorded in "Other assets" on the consolidated balance sheets.
 
19
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

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

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

Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount. Accrued and realized gains or losses from interest rate swaps impact interest expense in the consolidated statements of income. Unrealized gains on interest rate swaps are recorded at fair market value as assets, and unrealized losses on interest rate swaps are recorded at fair market value as liabilities. Changes in the fair values of the interest rate swaps are exactly offset by changes in the fair value of the underlying debt. Gains or losses realized upon early termination of our fair value hedges are recognized in interest expense. In the nine months ended September 30, 2015 and September 30, 2014, no ineffectiveness was measured on interest rate swaps designated as fair value 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 denominations to fixed U.S. denominated amounts, to be exchanged at a specified rate, usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign-denominated rate to a fixed U.S. denominated interest rate.

Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses on derivatives designated as cash flow hedges are recorded at fair value as liabilities, both for the period they are outstanding. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into interest expense in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) – net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cross-currency swaps each quarter. In the nine months ended September 30, 2015 and September 30, 2014, no ineffectiveness was measured on cross-currency swaps designated as cash flow hedges.

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

We hedge a portion of the exchange risk involved in anticipation of highly probable foreign currency-denominated transactions. In anticipation of these transactions, we often enter into foreign exchange contracts to provide currency at a fixed rate. Some of these instruments are designated as cash flow hedges while others remain nondesignated. Gains and losses at the time we settle or take delivery on our designated foreign exchange contracts are amortized into income in the same period the hedged transaction affects earnings, except where an amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) – net" in the consolidated statements of income. In the nine months ended September 30, 2015 and September 30, 2014, no ineffectiveness was measured on foreign exchange contracts designated as cash flow hedges.
 
20
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
Collateral and Credit-Risk Contingency   We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At September 30, 2015, we had posted collateral of $1,807 (a deposit asset) and held collateral of $379 (a receipt liability). Under the agreements, if our credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in September, we would have been required to post additional collateral of $105. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- (S&P) and below Baa3 (Moody's) we would owe an additional $92. At December 31, 2014, we had posted collateral of $530 (a deposit asset) and held collateral of $599 (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), against the fair value of the derivative instruments.

Following is the notional amount of our outstanding derivative positions:

   
September 30,
   
December 31,
 
   
2015
   
2014
 
Interest rate swaps
 
$
7,050
   
$
6,550
 
Cross-currency swaps
   
29,642
     
26,505
 
Interest rate locks
   
-
     
6,750
 
Foreign exchange contracts
   
23
     
-
 
Total
 
$
36,715
   
$
39,805
 

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
 
Nine months ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
Interest rate swaps (Interest expense):
             
     Gain (Loss) on interest rate swaps
$
54
   
$
(70
)
 
$
65
   
$
(59
)
     Gain (Loss) on long-term debt
 
(54
)
   
70
     
(65
)
   
59
 

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

   
Three months ended
   
Nine months ended
 
Cash Flow Hedging Relationships
 
September 30, 2015
   
September 30, 2014
   
September 30, 2015
   
September 30, 2014
 
Cross-currency swaps:
               
     Gain (Loss) recognized in accumulated OCI
 
$
(678
)
 
$
567
   
$
(1,008
)
 
$
418
 
                                 
Interest rate locks:
                               
     Gain (Loss) recognized in accumulated OCI
   
-
     
-
     
(361
)
   
-
 
     Interest income (expense) reclassified from
        accumulated OCI into income
   
(17
)
   
(11
)
   
(43
)
   
(33
)
                                 
Foreign exchange contracts:
                               
     Gain (Loss) recognized in accumulated OCI
   
-
     
-
     
-
     
(2
)
 
21
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
NOTE 7. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS

Acquisitions

DIRECTV  On July 24, 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. The acquisition represents an opportunity for us to integrate a unique and complementary set of assets and achieve substantial cost synergies over time, as well as generate revenue from pay television in Latin America. Our distribution scale will enable us to offer consumers bundles including video, high-speed broadband and mobile services, using all the sales channels of both companies. We believe the combined company will be a content distribution leader across mobile, video and broadband platforms.

Under the merger agreement, each share of DIRECTV stock was exchanged for $28.50 cash plus 1.892 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 954,407,524 shares to DIRECTV shareholders, giving them an approximate 16% stake in the combined company, based on common shares outstanding. Based on our $34.29 per share closing stock price on July 24, 2015, the aggregate value of consideration paid to DIRECTV shareholders was $47,404, including $32,727 of AT&T stock and $14,378 in cash and $299 for share-based payment arrangements.

Our third-quarter 2015 operating results include the results from DIRECTV following the acquisition date. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, other than long-term debt assumed in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of acquired technology and customer relationships. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. Our September 30, 2015 consolidated balance sheet includes the assets and liabilities of DIRECTV, which have been measured at fair value.
 
22
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

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

   
DIRECTV 
Assets acquired
   
Cash
 
$
4,763
 
Accounts receivable
   
2,116
 
All other current assets
   
1,795
 
Property, plant and equipment (including satellites)
   
8,811
 
Intangible assets not subject to amortization
       
   Orbital slots
   
11,946
 
   Trade name (Latin America)
   
1,371
 
Intangible assets subject to amortization
       
   Customer lists and relationships
   
19,803
 
   Trade name (U.S.)
   
1,634
 
   Other
   
324
 
Investments and other assets
   
3,730
 
Goodwill
   
35,343
 
Total assets acquired
   
91,636
 
         
Liabilities assumed
       
Current liabilities, excluding current portion of long-term debt
   
5,886
 
Long-term debt
   
20,500
 
Other noncurrent liabilities
   
17,492
 
Total liabilities assumed
   
43,878
 
Net assets acquired
   
47,758
 
Noncontrolling interest
   
(354
)
Aggregate value of consideration paid
 
$
47,404
 

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

23
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts
 
The following unaudited pro forma consolidated results of operations assume that the acquisition of DIRECTV was completed as of January 1 for each of the fiscal years shown below:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Total operating revenues 1
 
$
41,230
   
$
41,301
   
$
123,346
   
$
122,263
 
Net Income Attributable to AT&T
   
2,985
     
3,429
     
9,210
     
11,065
 
                                 
Basic Earnings Per Share Attributable to AT&T
 
$
0.50
   
$
0.56
   
$
1.69
   
$
1.80
 
Diluted Earnings Per Share Attributable to AT&T
 
$
0.50
   
$
0.55
   
$
1.69
   
$
1.79
 
1 Reflects revenue declines resulting from our fourth-quarter 2014 sale of our Connecticut wireline operations.

Nonrecurring adjustments included in the pro forma results above consist of the following:  At June 30, 2015, due to the continued economic uncertainty and lack of liquidity in all three of the official currency exchange mechanisms in Venezuela, DIRECTV changed the exchange rate used to measure its Venezuelan subsidiary's monetary assets and liabilities into U.S. dollars from Sistema Complementario de Administración de Divisas (SICAD) to SIMADI. The significant change in exchange rates also required the reevaluation of the recoverability of fixed and intangible assets and inventory, which resulted in an impairment charge of $1,060 recorded in DIRECTV's consolidated statement of operations. Prior to DIRECTV's June 30, 2015 change to the SIMADI, operating results for the six months ended June 30, 2015 were measured using the SICAD exchange rate which resulted in revenues in Venezuela of approximately $500 and operating profit before depreciation and amortization of approximately $180. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

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

The preliminary values of assets acquired were: $376 in licenses, $1,391 in property, plant and equipment, $65 in customer lists and $414 of goodwill.

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

The preliminary values of assets acquired were: $920 in licenses, $712 in property, plant and equipment, $311 in customer lists, $26 in trade names and $1,124 of goodwill.

AWS-3 Auction   In January 2015, we submitted winning bids for 251 Advanced Wireless Service (AWS) spectrum licenses in the AWS-3 Auction (FCC Auction 97) for $18,189. We provided the Federal Communications Commission (FCC) an initial down payment of $921 in October 2014 and paid the remaining $17,268 in the first quarter of 2015. The interest associated with this acquisition will be excluded from interest expense and capitalized until this spectrum is ready for its intended use.
 
24
AT&T INC.
SEPTEMBER 30, 2015

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Dollars in millions except per share amounts

NOTE 8. GOODWILL
As part of our organizational realignment discussed in Note 4, the goodwill from the previous Wireless segment was allocated to the Business Solutions and Consumer Mobility segments and the goodwill from the previous Wireline segment was allocated to the Business Solutions and Entertainment and Internet Services segment. The allocation was based on the relative fair value of the portions of the previous Wireless and Wireline segments which were moved into the new Business Solutions, Entertainment and Internet Services and Consumer Mobility segments.

Changes in the carrying amounts of goodwill, by segment were as follows:

   
Wireless
   
Wireline
   
Business Solutions
   
Entertainment
and Internet
Services
   
Consumer Mobility
   
International
   
Total
 
Balance as of December 31, 2013
 
$
36,106
   
$
33,167
   
$
-
   
$
-
   
$
-
   
$
-
   
$
69,273
 
Goodwill Acquired
   
367
     
-
     
-
     
-
     
-
     
-
     
367
 
Other
   
(4
)
   
56
     
-
     
-
     
-
     
-
     
52
 
Balance as of December 31, 2014
   
36,469
     
33,223
     
-
     
-
     
-
     
-
     
69,692
 
Goodwill Acquired
   
6
     
-
     
-
     
31,653
     
-
     
5,228
     
36,887
 
Foreign Currency Translation Adjustments
   
-
     
-
     
-
     
-
     
-
     
(610
)
   
(610
)
Allocation of Goodwill
   
(36,471
)
   
(33,226
)
   
44,763
     
8,422
     
16,512
     
-
     
-
 
Other
   
(4
)
   
3
     
-
     
-
     
-
     
(2
)
   
(3
)
Balance as of September 30, 2015
 
$
-
   
$
-
   
$
44,763
   
$
40,075
   
$
16,512
   
$
4,616
   
$
105,966
 

The majority of our goodwill acquired during 2015 related to our acquisitions of DIRECTV, Nextel Mexico and GSF Telecom (see Note 7). The allocation of goodwill represents goodwill previously assigned to our Wireless and Wireline segments. Other changes to our goodwill in 2015 include foreign currency translation adjustments and the final valuation of Leap Wireless, Inc. (Leap). The majority of our goodwill acquired during 2014 related to our acquisition of Leap. Other changes to our goodwill during 2014 include adjustments related to closing the sale of our Connecticut wireline operations.
25
AT&T INC.
SEPTEMBER 30, 2015

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 period of up to 30 months, with the right to trade in the original equipment for a new device within a set period and have the remaining unpaid balance satisfied. As of September 30, 2015 and December 31, 2014, gross equipment installment receivables of $4,428 and $4,265 were included on our consolidated balance sheets, of which $2,690 and $2,514 are notes receivable that are included in "Accounts receivable, net."

On June 27, 2014, we entered into the first of a series of uncommitted agreements pertaining to the sale of equipment installment receivables and related security with Citibank, N.A. and various other relationship banks as purchasers (collectively, the Purchasers). Under these agreements, we transferred the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables. Under the terms of the arrangements, we continue to bill and collect on behalf of our customers for the receivables sold. To date, we have collected and remitted approximately $3,394 (net of fees), of which $421 was returned as deferred purchase price.

The following table sets forth a summary of equipment installment receivables sold during the three months and nine months ended September 30, 2015 and 2014:

 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
Gross receivables sold
 
$
1,601
   
$
1,028
   
$
5,964
   
$
2,665
 
Net receivables sold 1 
   
1,431
     
885
     
5,367
     
2,276
 
Cash proceeds received
   
980
     
556
     
3,553
     
1,375
 
Deferred purchase price recorded
   
456
     
324
     
1,819
     
889
 
  1  Receivables net of allowance, imputed interest and trade-in right guarantees.
 

The deferred purchase price was initially recorded at estimated fair value, which was based on remaining installment payments expected to be collected, adjusted by the expected timing and value of device trade-ins, and is subsequently carried at the lower of cost or net realizable value. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 6).
During the third quarter of 2015, we repurchased installment receivables previously sold to the Purchasers, with a fair value of $412. This transaction reduced our current deferred purchase price receivable by $314, resulting in a gain of $98 in the third quarter of 2015. This gain is included in "Selling, general and administrative" in the consolidated statements of income.
At September 30, 2015, our deferred purchase price receivable was $2,869, of which $1,676 is included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." At December 31, 2014, our deferred purchase price receivable was $1,606, which is included in "Other Assets." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the amount of our deferred purchase price at any point in time.
The sales of equipment installment receivables did not have a material impact in our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect the cash flows related to the arrangement as operating activities in our consolidated statements of cash flows because the cash received from the Purchasers upon both the sale of the receivables and the collection of the deferred purchase price is not subject to significant interest rate risk.
26
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share amounts
RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate in the communications and digital entertainment services industry. Our subsidiaries and affiliates provide services and equipment that deliver voice, video and broadband services both domestically and internationally. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash. We completed our acquisition of DIRECTV on July 24, 2015, and have included DIRECTV results for the 68-day period ended September 30, 2015. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from DIRECTV prior to the acquisition are excluded. Certain amounts have been reclassified to conform to the current period's presentation.

Consolidated Results  Our financial results in the third quarter and for the first nine months of 2015 and 2014 are summarized as follows:

   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
 
Operating Revenues
                       
   Service
 
$
35,625
   
$
29,790
     
19.6
%
 
$
94,128
   
$
89,122
     
5.6
%
   Equipment
   
3,466
     
3,167
     
9.4
     
10,554
     
8,886
     
18.8
 
Total Operating Revenues
   
39,091
     
32,957
     
18.6
     
104,682
     
98,008
     
6.8
 
                                                 
Operating expenses
                                               
   Cost of services and sales
                                               
      Equipment
   
4,501
     
4,432
     
1.6
     
13,400
     
12,503
     
7.2
 
      Broadcast, programming and
        operations
   
4,081
     
1,038
     
-
     
6,351
     
3,019
     
-
 
      Other cost of services (exclusive
        of depreciation and amortization
        shown separately below)
   
9,214
     
8,866
     
3.9
     
27,604
     
26,167
     
5.5
 
   Selling, general and administrative
   
9,107
     
8,475
     
7.5
     
24,535
     
24,932
     
(1.6
)
   Depreciation and amortization
   
6,265
     
4,539
     
38.0
     
15,539
     
13,706
     
13.4
 
Total Operating Expenses
   
33,168
     
27,350
     
21.3
     
87,429
     
80,327
     
8.8
 
Operating Income
   
5,923
     
5,607
     
5.6
     
17,253
     
17,681
     
(2.4
)
Income Before Income Taxes
   
4,735
     
4,631
     
2.2
     
14,385
     
16,568
     
(13.2
)
Net Income
   
3,078
     
3,187
     
(3.4
)
   
9,601
     
10,654
     
(9.9
)
Net Income Attributable to AT&T
 
$
2,994
   
$
3,130
     
(4.3
) %
 
$
9,339
   
$
10,441
     
(10.6
) %

Overview
Operating revenues increased $6,134, or 18.6%, in the third quarter and $6,674, or 6.8%, for the first nine months of 2015.

Service   revenues increased $5,835, or 19.6%, in the third quarter and $5,006, or 5.6%, for the first nine months of 2015. The increases were primarily due to our acquisition of DIRECTV and our new wireless operations in Mexico. Also contributing to the revenue increases were gains in fixed strategic business services and IP broadband, offset by continued declines in our legacy voice and data products.
 
27
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Equipment   revenues increased $299, or 9.4%, in the third quarter and $1,668, or 18.8%, for the first nine months of 2015. This growth reflected the continuing trend by our postpaid wireless subscribers to choose devices on installment purchase rather than the device subsidy model, which resulted in higher equipment revenue recognized from device sales.

Operating   expenses increased $5,818, or 21.3%, in the third quarter and $7,102, or 8.8%, for the first nine months of 2015.

Equipment expenses increased $69, or 1.6%, in the third quarter and $897, or 7.2%, for the first nine months of 2015. Expense increases in the third quarter are primarily due to customers choosing higher priced wireless devices. The increase for the first nine months is primarily due to the continuing trend of customers choosing higher-priced wireless devices.

Broadcast, programming and operations expenses increased $3,043 in the third quarter and $3,332 for the first nine months of 2015 due to our acquisition of DIRECTV. Also contributing to the increase were higher content costs for our AT&T U-verse ® (U-verse) subscribers.

Other cost of services expenses increased $348, or 3.9%, in the third quarter and $1,437, or 5.5%, for the first nine months of 2015. Included in other costs of services were net expense deferrals of $428 in the third quarter and $590 for the first nine months of 2015, compared to $205 in the third quarter and $385 for the first nine months of 2014, resulting from our deferral and amortization of customer fulfillment costs. Expense increases include network rationalization charges related to Leap Wireless International, Inc. (Leap) totaling $250 in the three months and $614 for the first nine months. Also contributing to the expense increases were merger and integration charges, wireless handset insurance costs and the addition of DIRECTV. These increases were partially offset by lower Universal Service Fund and Connect America Fund fees and the fourth-quarter 2014 sale of our Connecticut wireline operations.

Selling, general and administrative   expenses increased $632, or 7.5%, in the third quarter and decreased $397, or 1.6%, for the first nine months of 2015. The increase in the third quarter was primarily due to our acquisition of DIRECTV offset by lower employee, sales and wireless commission expenses. The decrease for the first nine months was due to lower employee, sales, wireless commission, advertising and marketing expenses and the fourth-quarter 2014 sale of our Connecticut wireline operations, partially offset by the acquisition of DIRECTV.

Depreciation and amortization expense increased $1,726, or 38.0%, in the third quarter and $1,833, or 13.4%, for the first nine months of 2015. Amortization expense increased $1,072 in the third quarter and $1,061 for the first nine months of 2015 due to the amortization of intangibles from recent acquisitions. Amortization expense is not allocated to the operating segments.

Depreciation expense increased $654, or 14.8%, in the third quarter and $772, or 5.8%, for the first nine months of 2015. The increase was primarily due to the acquisitions of DIRECTV and our wireless properties in Mexico, ongoing capital spending for network upgrades and extending the estimated useful life of software. The increases were partially offset by abandonment of certain wireline network assets, which occurred in 2014.

Operating   income increased $316, or 5.6%, in the third quarter and decreased $428, or 2.4%, for the first nine months of 2015. Our operating income margin in the third quarter decreased from 17.0% in 2014 to 15.2% in 2015, and from 18.0% in 2014 to 16.5% in 2015 for the first nine months, and include the impact of higher acquisition-related charges in 2015.

Interest expense increased $130, or 12.8%, in the third quarter and $220, or 8.0%, for the first nine months of 2015. The increases were primarily due to higher average debt balances, including debt issued and debt acquired in connection with our acquisition of DIRECTV and spectrum acquired in the Advanced Wireless Service (AWS)-3 Auction. The increases were partially offset by lower average interest rates and an increase in capitalized interest resulting from spectrum acquired in the AWS-3 Auction (see Note 7).

Equity in net income of affiliates increased $17, in the third quarter and decreased $140, or 74.5%, for the first nine months of 2015. Results for the third quarter and first nine months include earnings from equity method investments acquired in the purchase of DIRECTV in the third quarter of 2015. The decrease for the first nine months primarily resulted from the sale of shares of América Móvil, S.A. de C.V. (América Móvil) in June 2014.
 
28
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Other income (expense) – net We had other expense of $57 in the third quarter and other income of $61 for the first nine months of 2015, compared to other income of $42 in the third quarter and $1,456 for the first nine months of 2014. Results in the third quarter and for the first nine months of 2015 included foreign exchange losses of $73 and $68, net (losses) gains on the sale of investments of $(4) and $46 and interest and dividend income of $29 and $74, respectively.

Other income in the third quarter of 2014 included interest and dividend income of $15, foreign exchange gains of $10 and a net gain on the sale of various investments of $9. Results for the first nine months of 2014 included net gains on the sale of América Móvil shares and other investments of $1,376, interest and dividend income of $51 and foreign exchange gains of $9.

Income taxes increased $213, or 14.8%, in the third quarter and decreased $1,130, or 19.1%, for the first nine months of 2015. Our effective tax rate was 35.0% for the third quarter and 33.3% for the first nine months of 2015, as compared to 31.2% for the third quarter and 35.7% for the first nine months of 2014. The higher effective tax rate for the third quarter was primarily due to a favorable tax adjustment recorded in third quarter 2014. The lower effective tax rate for the first nine months were primarily due to the sale of América Móvil shares in 2014, and the recognition of tax benefits related to the restructuring of a portion of our enterprise business in 2015.

Selected Financial and Operating Data
               
   
September 30,
 
Subscribers and connections in (000s)
 
2015
   
2014
 
Domestic wireless subscribers
   
126,406
     
118,650
 
Mexican wireless subscribers
   
8,091
     
-
 
Total wireless subscribers
   
134,497
     
118,650
 
 
               
Domestic satellite video subscribers
   
19,570
     
-
 
U-verse video subscribers 1 
   
5,880
     
6,067
 
Latin America satellite video subscribers 2 
   
12,544
     
-
 
Total video subscribers
   
37,994
     
6,067
 
 
               
Total domestic broadband connections
   
15,832
     
16,486
 
 
               
Network access lines in service 1 
   
17,352
     
21,464
 
U-Verse VoIP connections 1 
   
5,443
     
4,756
 
 
               
Debt ratio 3 
   
50.8
%
   
43.9
%
Net Debt Ratio 4 
   
48.3
%
   
42.5
%
Ratio of earnings to fixed charges 5 
   
3.85
     
5.08
 
Number of AT&T employees 6 
   
281,240
     
247,700
 
1 Reflects the October 2014 sale of our Connecticut wireline operations.
2 Excludes subscribers of our International segment equity investments in SKY Mexico.
3 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.
4 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).
5 See exhibit 12.
6 Reflects acquisition activity.
 
29
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Segment Results

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

We also evaluate segment performance based on segment operating income before depreciation and amortization, which we refer to as EBITDA and/or EBITDA margin. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is operating income before depreciation and amortization, divided by total revenues. (See Note 4)

The Business Solutions segment provides both wireless and wireline services to business customers and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN), Ethernet-related products and broadband (strategic business services) as well as traditional data and voice products. Services in this segment utilize our wireless and wired network and are marketed to provide a complete communications solution to our business customers.

The Entertainment and Internet Services segment provides video, Internet and voice communication services to residential customers located in the U.S. or in U.S. territories. Services utilize our copper and IP-based wired network and/or our satellite technology to provide video, high speed Internet and voice services.

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

The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided primarily to residential customers using satellite technology. Wireless services utilize our regional and national networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries transact in their local currency and operating results are converted to U.S. dollars using official exchange rates. The exchange rate used to report net monetary assets and operating results of our Venezuelan subsidiary is the Sistema Marginal de Divisas (SIMADI), which was 199.65 and 199.42 Venezuelan bolivars per U.S. dollar at July 24, 2015 and September 30, 2015, respectively. Our International segment is subject to foreign currency fluctuations.

Our operating assets are shared by multiple segments and consist of our wireless and wired networks as well as an international satellite fleet. We manage our assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segment are not presented. Depreciation is allocated based on network usage or asset utilization by segment.

We discuss capital expenditures in "Liquidity and Capital Resources."
 
30
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Business Solutions
                       
Segment Results
                                                  
   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
 
Segment operating revenues
                       
     Wireless service
 
$
7,732
   
$
7,542
     
2.5
%
 
$
23,003
   
$
22,593
     
1.8
  %
     Fixed strategic services
   
2,763
     
2,454
     
12.6
     
8,083
     
7,103
     
13.8
 
     Legacy voice and data services
   
4,499
     
4,928
     
(8.7
)
   
13,743
     
15,055
     
(8.7
)
     Other services
   
885
     
977
     
(9.4
)
   
2,585
     
2,834
     
(8.8
)
     Wireless equipment
   
1,813
     
1,586
     
14.3
     
5,499
     
4,292
     
28.1
 
Total Segment Operating Revenues
   
17,692
     
17,487
     
1.2
     
52,913
     
51,877
     
2.0
 
                                                 
Segment operating expenses
                                               
     Operations and support
   
10,921
     
11,295
     
(3.3
)
   
32,966
     
32,836
     
0.4
 
     Depreciation and amortization
   
2,474
     
2,331
     
6.1
     
7,276
     
7,009
     
3.8
 
Total Segment Operating Expenses
   
13,395
     
13,626
     
(1.7
)
   
40,242
     
39,845
     
1.0
 
Segment Operating Income
   
4,297
     
3,861
     
11.3
     
12,671
     
12,032
     
5.3
 
Equity in Net Income of Affiliates
   
-
     
-
     
-
     
-
     
-
     
-
 
Segment Contribution
 
$
4,297
   
$
3,861
     
11.3
%
 
$
12,671
   
$
12,032
     
5.3
  %

The following table highlights other key measures of performance for the Business Solutions segment:
 
                             
Third Quarter
   
Nine-Month Period
 
2015
 
2014
 
Percent
Change
   
2015
   
2014
 
Percent
Change
 
(in 000s)
Business Wireless Subscribers
               
    Postpaid
         
47,414
     
44,063
     
7.6
  %
    Reseller
         
83
     
6
     
-
 
    Connected devices 1
              
24,064
     
18,482
     
30.2
 
Total Business Wireless Subscribers
             
71,561
     
62,551
     
14.4
 
                             
Business Wireless Net Additions 2
                             
    Postpaid
   
265
     
545 
     
(51.4
) %
   
850
     
1,498
     
(43.3
)
    Reseller
   
8
     
(4)
 
   
-
     
14
     
4
     
-
 
    Connected devices 1
   
1,602
     
1,275 
     
25.6
     
4,104
     
2,144
     
91.4
 
Business Wireless Net Subscriber Additions
   
1,875
     
1,816  
     
3.2
     
4,968
     
3,646
     
36.3
 
                                               
Business Wireless Postpaid Churn 2, 3
   
1.05
%
   
0.84 %
 
21 BP
     
0.95
%
   
0.84 %
 
11 BP
 
                                               
Business IP Broadband Connections
                           
891
     
791
     
12.6
 
Business IP Broadband Net Additions
   
20
     
43 
     
(53.5
) %
   
70
     
159
     
(56.0
) %
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
2 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of 
  the churn rate for each month of that period.
 
 
31
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Operating Revenues increased $205, or 1.2%, in the third quarter and $1,036, or 2.0%, for the first nine months of 2015. Revenue growth was driven by mobility revenues and continued growth in fixed strategic business services, partially offset by continued declines in our legacy voice and data services and foreign exchange pressures.

Wireless service revenues increased $190, or 2.5%, in the third quarter and $410, or 1.8%, for the first nine months of 2015. The revenue increases reflect smartphone and tablet gains as well as customer migrations from our Consumer Mobility segment.

When compared to September 30, 2014, business wireless subscribers increased 14.4%, to 71.6 million subscribers at September 30, 2015. Postpaid subscribers increased 7.6% reflecting the addition of new customers as well as migrations from our Consumer Mobility segment, partially offset by continuing competitive pressures in the industry. Connected devices, which have lower average revenue per average subscriber (ARPU) and lower churn, increased 30.2% reflecting growth in business customers using tracking, monitoring and other sensor-embedded devices on their equipment.

The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. In the third quarter, business wireless postpaid churn increased from 0.84% in 2014 to 1.05% in 2015 and for the first nine months increased from 0.84% to 0.95%, respectively.

Fixed strategic services revenues increased $309, or 12.6%, in the third quarter and $980, or 13.8%, for the first nine months of 2015. Our revenues, which were negatively impacted by foreign exchange rates, increased in the third quarter and for the first nine months due to: Ethernet increases of $103 and $318, U-verse services increases of $63 and $185, Ethernet access to Managed Internet Services increases of $48 and $140 and VPN increases of $12 and $109.

Legacy wired voice and data service revenues decreased $429, or 8.7%, in the third quarter and $1,312, or 8.7%, for the first nine months of 2015. Traditional data revenues decreased $252 and $766 and long-distance and local voice revenues decreased $178 and $549. The decreases were primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings, or our competitors.

Other service revenues decreased $92, or 9.4%, in the third quarter and $249, or 8.8%, for the first nine months of 2015. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from other managed services, outsourcing, government professional service and equipment. The declines in the third quarter and for the first nine months are primarily due to lower project-based and equipment revenues, as well as impacts from foreign exchange rates.

Wireless equipment revenues increased $227, or 14.3%, in the third quarter and $1,207, or 28.1%, for the first nine months of 2015. The increase was primarily due to the increase in handsets sold under our AT&T Next SM (AT&T Next) program and the increase in sales of higher-priced smartphones .

Operations and support expenses decreased $374, or 3.3%, in the third quarter and increased $130, or 0.4%, for the first nine months of 2015. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.

Expense decreases in the third quarter were primarily due to:
·
Lower commission costs of $304 primarily due to lower average commission rates and fewer upgrade transactions.
·
Reductions of $58 in access costs, primarily due to lower interconnect, roaming and traffic compensations costs.
·
Lower customer service costs of $45 primarily due to our simplified offers and increased efforts to take care of customers on their first call.
·
Lower employee charges resulting from workforce reductions and other cost initiatives.

Partially offsetting the decreases in the third quarter were higher wireless handset insurance cost of $130 due to higher claim rates and costs per claim.
 
32
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Expense increases for the first nine months were primarily due to:
·
Increased equipment expense of $765 due to the continuing trend of customers choosing higher-cost devices.
·
Higher wireless handset insurance cost of $304 resulting from higher claim rates and costs per claim.

Partially offsetting the increases for the first nine months were:
·
Lower commission costs of $437 primarily due to lower average commission rates and fewer upgrade transactions..
·
Lower customer service costs of $160 primarily due to our simplified offers and increased efforts to take care of customers on their first call.
·
Reductions of $159 in access costs, primarily due to lower interconnect, roaming and traffic compensations costs.
·
Lower employee charges resulting from workforce reductions and other cost initiatives.

Depreciation expense increased $143, or 6.1%, in the third quarter and $267, or 3.8%, for the first nine months of 2015. The increases in the third quarter and for first nine months were primarily due to the increase in ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets.

Operating income increased $436, or 11.3%, in the third quarter and $639, or 5.3%, for the first nine months of 2015. Our Business Solutions segment operating income margin in the third quarter was 24.3% in 2015 and 22.1% in 2014, and for the first nine months 23.9% in 2015 and 23.2% in 2014. Our Business Solutions EBITDA margin in the third quarter was 38.3% in 2015 and 35.4% in 2014, and for the first nine months 37.7% in 2015 and 36.7% in 2014.

Entertainment and Internet Services
 
Segment Results
                                                
   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
 
Segment operating revenues
                       
     Video entertainment
 
$
7,162
   
$
1,719 
     
-
   
$
11,024
   
$
5,016 
     
-
 
     High-speed Internet
   
1,685
     
1,414 
     
19.2
     
4,861
     
4,040 
     
20.3
 
     Legacy voice and data
       services
   
1,419
     
1,834 
     
(22.6
)
   
4,547
     
5,897 
     
(22.9
)
     Equipment and other
   
592
     
586 
     
1.0
     
1,868
     
1,687 
     
10.7
 
Total Segment Operating Revenues
   
10,858
     
5,553 
     
95.5
     
22,300
     
16,640 
     
34.0
 
                                                 
Segment operating expenses
                                               
     Operations and support
   
8,450
     
4,781 
     
76.7
     
18,222
     
14,182 
     
28.5
 
     Depreciation and amortization
   
1,389
     
1,109 
     
25.2
     
3,519
     
3,396 
     
3.6
 
Total Segment Operating Expenses
   
9,839
     
5,890 
     
67.0
     
21,741
     
17,578 
     
23.7
 
Segment Operating Income
   
1,019
     
(337)
 
   
-
     
559
     
(938)
 
   
-
 
Equity in Net Income (Loss)
   of Affiliates
   
2
     
- 
     
-
     
(16
)
   
- 
     
-
 
Segment Contribution
 
$
1,021
   
$
(337)
 
   
-
   
$
543
   
$
(938)
 
   
-
 
 
33
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
The following table highlights other key measures of performance for the Entertainment and Internet Services segment:
 
                                    
 
 
Third Quarter
   
Nine-Month Period
 
 
 
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
(in 000s)
Video Connections
                       
   Satellite
               
19,570
     
 - 
     
-
 
   U-verse
               
5,854
     
5,848 
     
0.1
 
Total Video Connections
                   
25,424
     
5,848 
     
-
 
 
                                   
Video Net Additions 1 
                                   
   Satellite
   
26
     
- 
     
-
     
26
     
- 
     
-
 
   U-verse
   
(92
)
   
212 
     
-
     
(66
)
   
591 
     
-
 
Net Video Additions
   
(66
)
   
212 
     
-
     
(40
)
   
591 
     
-
 
 
                                               
Broadband Connections
                                               
   IP
                           
12,185
     
11,010 
     
10.7
 
   DSL
                           
2,137
     
3,455 
     
(38.1
)
Total Broadband Connections
                           
14,322
     
14,465 
     
(1.0
)
 
                                               
Broadband Net Additions
                                               
   IP
   
172
     
547 
     
(68.6
)
   
802
     
1,527 
     
(47.5
)
   DSL
   
(278
)
   
(479)
 
   
42.0
     
(922
)
   
(1,375)
 
   
32.9
 
Net Broadband Additions
   
(106
)
   
68 
     
-
     
(120
)
   
152 
     
-
 
 
                                               
Retail Consumer Switched Access Lines
                           
7,675
     
9,851 
     
(22.1
)
U-verse Consumer VoIP Connections
                           
5,216
     
4,530 
     
15.1
 
Total Retail Consumer Voice Connections
                           
12,891
     
14,381 
     
(10.4
) %
  1  Excludes acquisition-related additions during the period.
 

Operating revenues increased $5,305, or 95.5%, in the third quarter and $5,660, or 34.0%, for the first nine months of 2015. Our July 2015 acquisition of DIRECTV was largely responsible for higher revenues beginning in the third quarter of 2015. Also contributing to that gain was continued strong growth in U-verse video and consumer IP broadband, which more than offset lower revenues from legacy voice and data products.

Video entertainment revenues increased $5,443 in the third quarter and $6,008 for the first nine months of 2015, primarily related to our acquisition of DIRECTV. With our acquisition of DIRECTV, we are now focusing our sales efforts on satellite service as there are lower content costs for DIRECTV.

High-speed Internet revenues increased $271, or 19.2%, in the third quarter and $821, or 20.3%, for the first nine months of 2015. When compared to September 30, 2014, IP broadband subscribers increased 10.7%, to 12.2 million subscribers at September 30, 2015; however, third-quarter net additions were lower due to fewer U-verse sales promotions in the quarter and churn of video customers, some of which also purchased broadband service.

Legacy voice and data service revenues decreased $415, or 22.6%, in the third quarter and $1,350, or 22.9%, for the first nine months of 2015. The revenue decreases were due to a $264 and $886 decrease in long-distance and local voice revenues and a $150 and $464 decrease in traditional data revenues, which include circuit-based services.
34
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Equipment and other revenues increased $6, or 1.0%, in the third quarter and $181, or 10.7%, for the first nine months of 2015.
 
Operations and support expenses increased $3,669, or 76.7%, in the third quarter and $4,040, or 28.5%, for the first nine months of 2015. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks, providing video content and personnel costs, such as compensation and benefits.

Increased operations and support expenses were primarily due to our acquisition of DIRECTV, which increased our Entertainment and Internet Services operations and support expenses $3,905. The increases were attributable to higher broadcast programming and content costs, which were primarily due to our addition of DIRECTV, but also included content cost pressures for our U-verse services. Partially offsetting increased expenses were lower employee charges resulting from workforce reductions, lower equipment costs and our focus on cost initiatives.

Depreciation expenses increased $280, or 25.2%, in the third quarter and $123, or 3.6%, for the first nine months of 2015, primarily due to our acquisition of DIRECTV and ongoing capital spending for network upgrades and expansion, partially offset by fully depreciated assets.

Operating income increased $1,356 in the third quarter and $1,497 for the first nine months of 2015. Our Entertainment and Internet Services segment operating income margin in the third quarter was 9.4% in 2015 and (6.1)% in 2014, and for the first nine months was 2.5% in 2015 and (5.6)% in 2014. Our Entertainment and Internet Services EBITDA margin in the third quarter was 22.2% in 2015 and 13.9% in 2014, and the first nine months was 18.3% in 2015 and 14.8% in 2014.

Consumer Mobility
                       
Segment Results
                                              
   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent Change
 
 
Segment operating revenues
                       
     Postpaid wireless
 
$
5,527
   
$
6,071 
     
(9.0
) %
 
$
16,783
   
$
18,490 
     
(9.2
) %
     Prepaid wireless
   
1,198
     
1,163 
     
3.0
     
3,411
     
3,106 
     
9.8
 
     Other service revenue
   
638
     
646 
     
(1.2
)
   
1,825
     
1,768 
     
3.2
 
     Equipment
   
1,421
     
1,328 
     
7.0
     
4,298
     
3,883 
     
10.7
 
Total Segment Operating Revenues
   
8,784
     
9,208 
     
(4.6
)
   
26,317
     
27,247 
     
(3.4
)
                                                 
Segment operating expenses
                                               
     Operations and support
   
5,065
     
5,731 
     
(11.6
)
   
15,808
     
17,173 
     
(7.9
)
     Depreciation and amortization
   
976
     
950 
     
2.7
     
2,912
     
2,846 
     
2.3
 
Total Segment Operating Expenses
   
6,041
     
6,681 
     
(9.6
)
   
18,720
     
20,019 
     
(6.5
)
Segment Operating Income
   
2,743
     
2,527 
     
8.5
     
7,597
     
7,228 
     
5.1
 
Equity in Net Income (Loss)
   of Affiliates
   
-
     
(1)
 
   
-
     
-
     
(1)
 
   
-
 
Segment Contribution
 
$
2,743
   
$
2,526 
     
8.6
  %
 
$
7,597
   
$
7,227 
     
5.1
  %
 
35
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
The following table highlights other key measures of performance for the Consumer Mobility segment:
 
                                   
 
 
Third Quarter
   
Nine-Month Period
 
 
 
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
(in 000s)
Consumer Mobility Subscribers
                       
   Postpaid
               
29,257
     
31,043 
     
(5.8
) %
   Prepaid
               
10,988
     
10,026 
     
9.6
 
   Reseller
               
13,647
     
13,877 
     
(1.7
)
   Connected devices 1 
               
953
     
1,153 
     
(17.3
)
Total Consumer Mobility Subscribers
                   
54,845
     
56,099 
     
(2.2
)
 
                                   
Consumer Mobility Net Additions 2 
                                   
   Postpaid
   
23
     
240 
     
(90.4
) %
   
289
     
938 
     
(69.2
)
   Prepaid
   
466
     
(46)
 
   
-
     
895
     
(244)
 
   
-
 
   Reseller
   
149
     
91 
     
63.7
     
(218
)
   
(286)
 
   
23.8
 
   Connected devices 1 
   
-
     
(94)
 
   
-
     
(109
)
   
(351)
 
   
68.9
 
Consumer Mobility Net Subscriber Additions
   
638
     
191 
     
-
     
857
     
57 
     
-
 
 
                                               
Consumer Mobility Postpaid Churn 2, 3 
   
1.33 %
 
   
1.20 %
 
 
13 BP
     
1.23 %
 
   
1.15 %
 
 
8 BP
 
Total Consumer Mobility Churn 2, 3 
   
1.90 %
 
   
2.03 %
 
 
(13) BP
     
1.93 %
 
   
2.00 %
 
 
(7) BP
 
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
2 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
 
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of
  the churn rate for each month of that period.
 

Operating Revenues decreased $424, or 4.6%, in the third quarter and $930, or 3.4%, for the first nine months of 2015. Consumer Mobility revenues reflect declines in postpaid service revenues due to the success of Mobile Share Value plans and migrations of customers to our Business Solutions segment, offset by higher prepaid service revenues and an increase in equipment revenues. Our business wireless offerings allow for individual subscribers to purchase wireless services through employer-sponsored plans for a reduced price. The migration of these subscribers to the Business Solutions segment negatively impacted consumer postpaid subscriber and service revenues growth.

Postpaid wireless revenues decreased $544, or 9.0%, in the third quarter and $1,707, or 9.2%, for the first nine months of 2015. These decreases were largely due to customers continuing to shift to no-device-subsidy plans, which allow for discounted monthly service charges under our Mobile Share plans and the migration of subscribers to Business Solutions. Without the migration of customers to Business Solutions, postpaid wireless revenues would have decreased approximately 4% in the third quarter and for the first nine months.

Prepaid wireless revenues increased $35, or 3.0%, in the third quarter and $305, or 9.8%, for the first nine months of 2015. Our prepaid services, which include services sold under the Cricket brand, are monthly prepaid services. Prepaid wireless revenues increased primarily due to growth in the subscriber base and our March 2014 acquisition of Leap.

Other service revenue decreased $8, or 1.2%, in the third quarter and increased $57, or 3.2%, for the first nine months of 2015.

Equipment revenue increased $93, or 7.0%, in the third quarter and $415, or 10.7%, for the first nine months of 2015. These increases were primarily related to the increase in devices sold under our AT&T Next program and the increase in sales of higher-priced smartphones.
 
36
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Operations and support expenses decreased $666, or 11.6%, in the third quarter and $1,365, or 7.9%, for the first nine months of 2015. Operations and support expenses consist of costs incurred to provide our products and services, including costs of operating and maintaining our networks and personnel costs, such as compensation and benefits.
 
Decreased operations and support expenses in the third quarter were primarily due to the following:
·
Selling and commission expenses decreased $202 primarily due to lower average commission rates, including those paid under the AT&T Next program, combined with fewer upgrade transactions.
·
Network costs decreased $135 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.
·
Customer service costs decreased $108 primarily due to lower call volumes, reductions in professional services and contract labor, and lower payroll costs.
·
Other cost of service decreased $90 primarily due to incollect roaming fee rate declines, which were partially offset by increased data volume.
 
Decreased operations and support expenses for the first nine months were primarily due to the following:
·
Selling and commission expenses decreased $403 primarily due to lower average commission rates, including those paid under the AT&T Next program, partially offset by an increase in rates associated with Cricket sales.
·
Network costs decreased $299 primarily due to lower interconnect costs resulting from our ongoing network transition to more efficient Ethernet/IP-based technologies.
·
Customer service costs decreased $187 primarily due to reduced salaries and benefits, lower outsourced vendor and professional services from reduced call volumes and integration activities.
·
Other cost of service decreased $168 primarily due to incollect roaming fee rate declines, which were partially offset by increased data volume.
Depreciation expense increased $26, or 2.7%, in the third quarter and $66, or 2.3%, for the first nine months of 2015 primarily due to ongoing capital spending for network upgrades and expansion partially offset by fully depreciated assets.

Operating income increased $216, or 8.5%, in the third quarter and $369, or 5.1%, for the first nine months of 2015. Our Consumer Mobility segment operating income margin in the third quarter was 31.2% in 2015 and 27.4% in 2014, and for the first nine months was 28.9% in 2015 and 26.5% in 2014. Our Consumer Mobility EBITDA margin in the third quarter was 42.3% in 2015 and 37.8% in 2014, and for the first nine months 39.9% in 2015 and 37.0% in 2014.
37
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
International
                       
Segment Results
                       
   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
Segment operating revenues
                       
     Video entertainment
 
$
945
   
$
-
     
-
   
$
945
   
$
-
     
-
 
     Wireless
   
494
     
-
     
-
     
1,153
     
-
     
-
 
     Equipment
   
87
     
-
     
-
     
155
     
-
     
-
 
Total Segment Operating Revenues
 
$
1,526
   
$
-
     
-
   
$
2,253
   
$
-
     
-
 
                                                 
Segment operating expenses
                                               
     Operations and support
 
$
1,384
   
$
-
     
-
   
$
2,131
   
$
-
     
-
 
     Depreciation and amortization
   
225
     
-
     
-
     
346
     
-
     
-
 
Total Segment Operating Expenses
   
1,609
     
-
     
-
     
2,477
     
-
     
-
 
Segment Operating Income (Loss)
   
(83
)
   
-
     
-
     
(224
)
   
-
     
-
 
Equity in Net Income (Loss)
     of Affiliates
   
(4
)
   
-
     
-
     
(4
)
   
153
     
-
 
Segment Contribution
 
$
(87
)
 
$
-
     
-
   
$
(228
)
 
$
153
     
-
 

Operating Results
Our International segment consists of the Latin American operations acquired in our July 2015 acquisition of DIRECTV as well as the Mexican wireless operations acquired earlier in 2015 (see Note 7). Our International segment operating income margin was (5.4)% in the third quarter and (9.9)% for the first nine months of 2015. Our International EBITDA margin was 9.3% in the third quarter and 5.4% for the first nine months of 2015.

Operating revenues   consist of wireless service and equipment revenues from subscribers in Mexico as well as video entertainment revenues from DIRECTV subscribers in Latin America. Our operating revenues were $1,526 in the third quarter of 2015, with $945 attributable to video services in Latin America and $581 of wireless revenues in Mexico. For the first nine months of 2015 operating revenues were $2,253, with $1,308 attributable to wireless revenues in Mexico and $945 in video services in Latin America.

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. Operating expenses in the third quarter were $1,609 and operating loss was $83. For the first nine months of 2015, our operating expenses were $2,477 and operating loss was $224.

Connections Summary
At September 30, 2015, we had approximately 8.1 million wireless subscribers in Mexico and 12.5 million video connections in Latin America, including 5.5 million in Brazil. During the third quarter of 2015, our Mexico wireless business had a net loss of 231,000 subscribers, mainly prepaid customers, and our Latin America operations had a net loss of 113,000 video connections. Since acquisition, our Mexico wireless business had a net loss of 689,000 subscribers.
 
38
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined AT&T Mobility operations.
                         
AT&T Mobility Results
                                            
   
Third Quarter
   
Nine-Month Period
 
   
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
 
 Operating revenues
                       
   Service
 
$
15,095
   
$
15,423
     
(2.1
) %
 
$
45,022
   
$
45,958
     
(2.0
) %
   Equipment
   
3,234
     
2,914
     
11.0
     
9,797
     
8,175
     
19.8
 
Total Operating Revenues
   
18,329
     
18,337
     
-
     
54,819
     
54,133
     
1.3
 
                                                 
 Operating expenses
                                               
   Operations and support
   
10,865
     
11,683
     
(7.0
)
   
33,310
     
34,021
     
(2.1
)
EBITDA
   
7,464
     
6,654
     
12.2
     
21,509
     
20,112
     
6.9
 
   Depreciation and amortization
   
2,046
     
1,909
     
7.2
     
6,082
     
5,785
     
5.1
 
Total Operating Expenses
   
12,911
     
13,592
     
(5.0
)
   
39,392
     
39,806
     
(1.0
)
Operating Income
 
$
5,418
   
$
4,745
     
14.2
  %
 
$
15,427
   
$
14,327
     
7.7
  %
 
39
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
The following table highlights other key measures of performance for AT&T Mobility:
 
                                    
 
 
Third Quarter
   
Nine-Month Period
 
 
 
2015
   
2014
   
Percent
Change
   
2015
   
2014
   
Percent
Change
 
(in 000s)
Wireless Subscribers 1 
                       
   Postpaid smartphones
               
57,733
     
55,791 
     
3.5
%
   Postpaid feature phones and data-centric devices
                      
18,938
     
19,314 
     
(1.9
)
Postpaid
               
76,671
     
75,105 
     
2.1
 
Prepaid
               
10,988
     
10,026 
     
9.6
 
Reseller
               
13,729
     
13,884 
     
(1.1
)
Connected devices 2 
               
25,018
     
19,635 
     
27.4
 
Total Wireless Subscribers
                   
126,406
     
118,650 
     
6.5
 
 
                                   
Net Additions 3 
                                   
   Postpaid
   
289
     
785 
     
(63.2
) %
   
1,140
     
2,436 
     
(53.2
)
   Prepaid
   
466
     
(46)
 
   
-
     
895
     
(244)
 
   
-
 
   Reseller
   
156
     
87 
     
79.3
     
(205
)
   
(281)
 
   
27.0
 
   Connected devices 2 
   
1,602
     
1,181 
     
35.6
     
3,995
     
1,792 
     
-
 
Net Subscriber Additions
   
2,513
     
2,007 
     
25.2
     
5,825
     
3,703 
     
57.3
 
 
                                               
Mobile Share connections
                           
59,592
     
46,909 
     
27.0
 
Smartphones under our installment program at
   end of period
                           
23,487
     
10,133 
     
-
 
Smartphones sold under our installment program
   during period
   
4,074
     
3,401 
     
19.8
  %
   
11,998
     
9,411 
     
27.5
%
 
                                               
Total Churn 4 
   
1.33 %
 
   
1.36 %
 
 
(3) BP
     
1.35 %
 
   
1.41 %
 
 
(6) BP
 
Postpaid Churn 4 
   
1.16 %
 
   
0.99 %
 
 
17 BP
     
1.06 %
 
   
0.97 %
 
 
9 BP
 
1 Represents 100% of AT&T Mobility wireless subscribers.
 
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
 
3 Excludes acquisition-related additions during the period.
 
4 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a period divided by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average of the churn rate for each month of that period.
 

Operating income increased $673, or 14.2%, in the third quarter and $1,100, or 7.7%, for the first nine months of 2015. The operating income margin of AT&T Mobility was 29.6% in the third quarter of 2015 compared to 25.9% in 2014 and 28.1% for the first nine months of 2015 compared to 26.5%. AT&T Mobility's EBITDA margin in the third quarter was 40.7% in 2015 and 36.3% in 2014, and for the first nine months 39.2% in 2015 and 37.2% in 2014. AT&T Mobility's EBITDA service margin in the third quarter was 49.4% in 2015 and 43.1% in 2014, and for the first nine months 47.8% in 2015 and 43.8% in 2014. (EBITDA service margin is operating income before depreciation and amortization, divided by total service revenues.) AT&T Mobility's operating results reflect strong adoption of AT&T Next, BYOD (bring your own devices) customers, lower smartphone gross adds and strong operational efficiencies.

Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible. To attract and retain subscribers in a maturing market, we have launched a wide variety of plans, including Mobile Share and Mobile Share Value (collectively referred to as Mobile Share) and AT&T Next.
 
40
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
ARPU
Postpaid phone-only ARPU (average revenue per average wireless subscriber) decreased 2.6% compared to the third quarter of 2014 and 4.7% compared to the first nine months of 2014 reflecting subscribers' continued adoption of AT&T Next and Mobile Share Value plans. Postpaid phone-only ARPU plus Next subscriber installment billings (postpaid phone-only ARPU plus AT&T Next) increased 4.9% and 3.0% compared to the same periods last year, as expected due to the continuing growth of the AT&T Next program. Compared to the second quarter of 2015, postpaid phone-only ARPU decreased 0.7% and postpaid phone-only ARPU plus AT&T Next increased 0.8%.

Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Total churn was lower for the third quarter and first nine months of 2015. Postpaid churn was higher for both the third quarter and the first nine months reflecting continuing competitive pressures in the industry.

Postpaid
Postpaid subscribers increased 0.2% during the third quarter when compared to June 30, 2015 and 2.1% when compared to September 30, 2014. At September 30, 2015, 86% of our postpaid phone subscriber base used smartphones, compared to 81% at September 30, 2014. About 98% of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. A growing percentage of our postpaid smartphone subscribers are on usage-based data plans, with approximately 50.4 million subscribers on these plans as compared to 46.1 million subscribers in the prior year. About half of our Mobile Share accounts have chosen data plans with 10 gigabytes or higher. Device connections on our Mobile Share plans now represent over 77% of our postpaid customer base. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and minimize subscriber churn.

Historically, our postpaid customers had signed two-year service contracts when they purchased subsidized handsets. However, through our Mobile Share plans, we offer postpaid services at lower prices for those customers who either bring their own devices (BYOD) or participate in our AT&T Next program. Approximately 71% of all postpaid smartphone gross adds and upgrades during the third quarter of 2015 chose AT&T Next. While BYOD customers do not generate equipment revenue or incur additional expenses for device subsidy, the service revenue helps improve our margins.

Our AT&T Next program allows for postpaid subscribers to purchase certain devices in installments over a period of up to 30 months. Additionally, after a specified period of time, they also have the right to trade in the original device for a new device and have the remaining unpaid balance satisfied. For customers that elect these trade-in programs, we recognize equipment revenue at the time of the sale for the amount of the customer receivable, net of the fair value of the trade-in right guarantee and imputed interest. A significant percentage of our customers on the AT&T Next program pay a lower monthly service charge, which results in lower service revenue recorded for these subscribers.

Prepaid
In the first quarter of 2015, we updated our definition of prepaid subscribers to exclude session-based tablets, which are now included with connected devices. Prepaid subscribers now consist primarily of phone users. Prepaid subscribers increased 5.3% during the third quarter when compared to June 30, 2015 and 9.6% when compared to September 30, 2014.

Connected Devices
Connected Devices includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Connected device subscribers increased 6.8% when compared to June 30, 2015 and 27.4% when compared to September 30, 2014. During the third-quarter 2015, we added approximately 1.0 million "connected" cars through agreements with various carmakers. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.

41
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
OTHER BUSINESS MATTERS

DIRECTV  In July 2015, we completed our acquisition of DIRECTV, a leading provider of digital television entertainment services in both the United States and Latin America. The acquisition gives us a unique and complementary set of assets and the opportunity to achieve substantial cost synergies over time, as well as increasing revenue from pay television in Latin America. Our distribution scale will enable us to offer consumers attractive combinations of video, high-speed broadband and mobile services, using all the sales channels of both companies. We believe the combined company will be a content distribution leader across mobile, video and broadband platforms.

Under the merger agreement, each share of DIRECTV stock was exchanged for $28.50 cash plus 1.892 shares of our common stock. After adjustment for shares issued to trusts consolidated by AT&T, stock based payment arrangements and fractional shares, which were settled in cash, AT&T issued 954,407,524 shares to DIRECTV shareholders, giving them an approximate 16% stake in the combined company, based on common shares outstanding. Based on our $34.29 per share closing stock price on July 24, 2015, the aggregate value of consideration paid to DIRECTV shareholders was $47,404, including $32,727 of AT&T stock and $14,378 in cash and $299 for shared based payment arrangements.

The Federal Communications Commission (FCC) approved the transaction subject to the following conditions:
·
Fiber to the Premises Deployment – Within four years, we will offer our all-fiber Internet access service to at least 12.5 million customer locations such as residences, home offices and very small businesses. Combined with our existing high-speed broadband network, at least 25.7 million customer locations will have access to broadband speeds of 45Mbps or higher by the end of the four-year build. While the addition of medium and large businesses do not count towards the commitments, we will have the opportunity to provide services to those customers as part of this expansion. In addition, we will offer 1 Gbps fiber Internet access service pursuant to applicable E-rate rules to any eligible school or library requesting that service within or contiguous to our all-fiber footprint.
·
Discounted Broadband Services Program – Within our 21-state area, we will offer a discounted fixed broadband service to low-income households that qualify for the government's Supplemental Nutrition Assistance Program. In locations where it is available, service with speeds of at least 10Mbps will be offered for ten dollars per month. Elsewhere, 5Mbps service will be offered for ten dollars per month or, in some locations, 3Mbps service will be offered for five dollars per month.
·
Non-Discriminatory Usage-Based Practices – We are required to refrain from using usage-based allowances or other retail terms and conditions on our fixed broadband Internet access service, as defined in the order, to discriminate in favor of our own online video services. We can and will continue to offer discounts on integrated bundles of our video and fixed broadband services.
·
Internet Interconnection Disclosure Requirements – We will submit to the FCC new interconnection agreements we enter into with peering networks and with "on-net" customers that purchase Managed Internet Service to exchange Internet traffic with other AT&T customers. We will develop, together with an independent expert, a methodology for measuring the performance of our Internet traffic exchange and regularly report these metrics to the FCC.
·
Compliance Program and Reporting – We will appoint a Company Compliance Officer to develop and implement a plan to ensure compliance with these merger conditions. We will engage an independent, third-party compliance officer to evaluate the plan and our implementation. Both AT&T and the independent compliance officer will submit periodic reports to the FCC.
The conditions will remain in effect for four years from July 24, 2015. A condition may be extended once for two years if the FCC makes a formal finding that we have violated the condition in whole or in part.

Litigation Challenging DIRECTV's NFL Sunday Ticket  More than a dozen putative class actions have been filed in the U.S. District Courts for the Central District of California and the Southern District of New York against DIRECTV and the National Football League (NFL) alleging that the NFL and DIRECTV violated federal antitrust law in connection with the NFL Sunday Ticket package. Among other things, the complaints allege that plaintiffs have been overcharged for the televised presentation of out-of-market NFL games due to DIRECTV's exclusive agreement with the NFL to broadcast out-of-market games through the Sunday Ticket package. The complaints seek unspecified treble damages and attorneys' fees along with injunctive relief. The first complaint, Abrahamian v. National Football League, Inc., et al., was served in June 2015. We vigorously dispute these allegations.
42
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Federal Trade Commission Litigation Involving DIRECTV In March 2015, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against DIRECTV seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act and Section 4 of the Restore Online Shoppers' Confidence Act. The FTC's allegations concern DIRECTV's advertising, marketing and sale of programming packages. The FTC alleges that DIRECTV did not adequately disclose all relevant terms. We are disputing these allegations vigorously.

Unlimited Data Plan Claims   In October 2014, the Federal Trade Commission (FTC) filed a civil suit in the U.S. District Court for the Northern District of California against AT&T Mobility, LLC seeking injunctive relief and unspecified money damages under Section 5 of the Federal Trade Commission Act. The FTC's allegations concern AT&T's Maximum Bit Rate (MBR) program, which temporarily reduces the download speeds of a small portion of our legacy Unlimited Data Plan customers each month. MBR is an industry-standard practice that is designed to affect only the most data-intensive applications (such as video streaming). Texts, emails, tweets, social media posts, Internet browsing, and many other applications are typically unaffected. Contrary to the FTC's allegations, which we vigorously dispute, our MBR program is permitted by our customer contracts, was fully disclosed in advance to our Unlimited Data Plan customers, and was implemented to protect the network for the benefit of all customers. In March 2015, our motion to dismiss the litigation on the grounds that the FTC lacked jurisdiction to file suit was denied. In May 2015, the Court granted our motion to certify its decision for immediate appeal. The United States Court of Appeals for the Ninth Circuit subsequently granted our petition to accept the appeal, and the appeal is now pending before that Court while limited discovery proceeds in the District Court.

On June 17, 2015, the FCC issued a Notice of Apparent Liability and Order (NAL) to AT&T Mobility, LLC concerning our MBR policy that applies to Unlimited Data Plan customers. The NAL alleges that we violated the FCC's Open Internet Transparency Rule by using the term "unlimited" in connection with the offerings subject to the MBR policy and by failing adequately to disclose the speed reductions that apply once a customer reaches a specified data threshold. The NAL proposes a forfeiture penalty of $100, and further proposes to order us to correct any misleading and inaccurate statements about our unlimited plans, inform customers of the alleged violation, revise our disclosures to address the alleged violation and inform these customers that they may cancel their plans without penalty after reviewing the revised disclosures. On July 17, 2015, we filed our response to the NAL. We believe that the NAL is unlawful and should be withdrawn, because we have fully complied with the Open Internet Transparency Rule and the FCC has no authority to impose the proposed remedies. The matter is currently pending before the FCC.

Labor Contracts   New three-year agreements covering approximately 17,000 traditional wireline employees, which expired in April, have been ratified. On October 20, 2015, we reached tentative four-year agreements on three southeast regional contracts covering 24,000 traditional wireline employees. These southeast contracts remain subject to ratification by the union membership.

COMPETITIVE AND REGULATORY ENVIRONMENT

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

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. However, since the Telecom Act was passed, the FCC and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. We are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not extended to broadband or wireless services, which are subject to vigorous competition.
43
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
We provide satellite video service through our subsidiary DIRECTV, whose satellites are licensed by the FCC. The Communications Act of 1934 and other related acts give the FCC broad authority to regulate the U.S. operations of DIRECTV. In addition, states representing a majority of our local service access lines have adopted legislation that enables us to provide U-verse video 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 competitive video services. We also are supporting efforts to update and improve regulatory treatment for retail services. Regulatory reform and passage of legislation is uncertain and depends on many factors.
 
We provide wireless services in robustly competitive markets, but those services are subject to substantial and increasing governmental regulation. Wireless communications providers must obtain licenses from the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the FCC rules and policies governing the use of the spectrum. While wireless communications providers' prices and service offerings are generally not subject to state regulation, states sometimes attempt to regulate or legislate various aspects of wireless services, such as in the area of consumer protection.
 
The FCC has recognized that the explosive growth of bandwidth-intensive wireless data services requires the U.S. Government to make more spectrum available. In February 2012, Congress set forth specific spectrum blocks to be auctioned and licensed by February 2015 (the "AWS-3 Auction"), and also authorized the FCC to conduct an "incentive auction," to make available for wireless broadband use certain spectrum that is currently used by broadcast television licensees (the "600 MHz Auction"). We participated in the AWS-3 Auction. The FCC announced that the 600 MHz Auction (Auction 1000) is scheduled to begin on March 29, 2016.
 
In May 2014, in a separate proceeding, the FCC issued an order revising its policies governing mobile spectrum holdings. The FCC rejected the imposition of caps on the amount of spectrum any carrier could acquire, retaining its case-by-case review policy. Moreover, it increased the amount of spectrum that could be acquired before exceeding an aggregation "screen" that would automatically trigger closer scrutiny of a proposed transaction. On the other hand, it indicated that it will separately consider an acquisition of "low band" spectrum that exceeds one-third of the available low band spectrum as presumptively harmful to competition. In addition, the FCC imposed limits on certain bidders in the 600 MHz Auction, including AT&T, restricting them from bidding on up to 40 percent of the available spectrum in the incentive auction in markets that cover as much as 70-80 percent of the U.S. population. On balance, the order and the new spectrum screen should allow AT&T to obtain additional spectrum to meet our customers' needs, but because AT&T uses more "low band" spectrum in its network than some other national carriers, the separate consideration of low band spectrum acquisitions might affect AT&T's ability to expand capacity in these bands ("low band" spectrum has better propagation characteristics than "high band" spectrum). We seek to ensure that we have the opportunity, through the auction process and otherwise, to obtain the spectrum we need to provide our customers with high-quality service in the future.
 
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative data services and a wireless network that has sufficient spectrum and capacity to support these innovations. We are facing significant spectrum and capacity constraints on our wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any long-term spectrum solution will require that the FCC make additional spectrum available to the wireless industry to meet the expanding needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.
 
Net Neutrality  In February 2015, the FCC released an order in response to the D.C. Circuit's January 2014 decision adopting new rules, and reclassifying both fixed and mobile consumer broadband Internet access services as telecommunications services, subject to comprehensive regulation under the Act. The FCC's decision significantly expands the FCC's existing authority to regulate the provision of fixed and mobile broadband Internet access services. The FCC also asserted jurisdiction over Internet interconnection arrangements, which until now have been unregulated. These actions could have an adverse impact on our fixed and mobile broadband services and operating results. AT&T and several other parties, including US Telecom and CTIA trade groups, have appealed the FCC's order. The case is scheduled for oral argument in December 2015. 
44
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
LIQUIDITY AND CAPITAL RESOURCES

We had $6,202 in cash and cash equivalents available at September 30, 2015. Cash and cash equivalents included cash of $2,699 and money market funds and other cash equivalents of $3,503. Approximately $828 of our cash and cash equivalents resided in foreign jurisdictions, some of which are subject to restrictions on repatriation. Cash and cash equivalents decreased $2,401 since December 31, 2014. We also had $400 in short-term investments, which we included in "Other current assets" on our consolidated balance sheets. In the first nine months of 2015, cash inflows were primarily provided by long-term debt issuances and cash receipts from operations, including cash from our sale and transfer of certain equipment installment receivables to third parties. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses; acquisitions of wireless spectrum, DIRECTV, GSF Telecom Holdings, S.A.P.I. de C.V. (GSF Telecom) and Nextel Mexico; funding capital expenditures; debt repayments; dividends to stockholders; and collateral posting (see Note 6). We discuss many of these factors in detail below.

Cash Provided by or Used in Operating Activities
During the first nine months of 2015, cash provided by operating activities was $26,695, compared to $25,593 for the first nine months of 2014. Higher operating cash flows in 2015 were primarily due to increased operating results resulting from our acquisition of DIRECTV. Higher proceeds from the sale of equipment installment receivables in 2015, offset by timing of other working capital payments, also impacted operating cash flows.

Cash Used in or Provided by Investing Activities
For the first nine months of 2015, cash used in investing activities totaled $43,047 and consisted primarily of:
·
$17,703 for acquisitions of spectrum licenses, largely due to the remaining payment for AWS spectrum licenses in the AWS-3 Auction.
·
$13,356 for capital expenditures, excluding interest during construction.
·
$12,991 for the acquisitions of DIRECTV, GSF Telecom, Nextel Mexico and other operations.

During the first nine months, we also received $1,890 upon the maturity of certain short-term investments and paid $400 for additional short-term investments.

Virtually all of our capital expenditures are spent on our wireless and wireline networks, our video services and support systems for our communications and video services. Capital expenditures, excluding interest during construction, decreased $3,473 in the first nine months, reflecting the completion of our LTE build and other Project VIP initiatives in 2014. Capital expenditures also include spending for DIRECTV, GSF Telecom and Nextel Mexico after the acquisition dates.   As part of our organization realignment, we no longer allocate capital expenditures to our segments.

We expect our 2015 capital expenditures to be in the $21,000 range, and we expect our capital expenditures to be in the 15 percent range of service revenues or lower from 2016 through 2018. The amount of capital investment is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring merger commitments are met.
45
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
 
Cash Provided by or Used in Financing Activities
For the first nine months of 2015, cash provided by financing activities totaled $13,951 and included net proceeds of $33,967 from the following long-term debt issuances:
·
February 2015 issuance of $2,619 of 4.600% global notes due 2045.
·
March 2015 borrowings under a variable rate term loan facility due 2018, variable rate term loan facility due 2020 and variable rate 18-month credit agreement due 2016, together totaling $11,155.
·
March 2015 issuance of €1,250 of 1.300% global notes due 2023 and €1,250 of 2.450% global notes due 2035 (together, equivalent to $2,844, when issued).
·
May 2015 issuance of $3,000 of 2.450% global notes due 2020; $2,750 of 3.000% global notes due 2022; $5,000 of 3.400% global notes due 2025; $2,500 of 4.500% global notes due 2035; $3,500 of 4.750% global notes due 2046; and $750 floating rate global notes due 2020. The floating rate for the note is based upon the three-month London Interbank Offered Rate (LIBOR), reset quarterly, plus 93 basis points.

During the first nine months of 2015, we redeemed $9,962 of debt, primarily consisting of the following:
·
Redemption of $899 of various senior notes in connection with the January 2015 GSF Telecom acquisition and April 2015 Nextel Mexico acquisition.
·
April 2015 redemption of €1,250 (approximately $1,975 at maturity) of AT&T 6.125% notes due 2015.
·
August 2015 redemption of $1,500 of AT&T 2.500% notes due August 2015.
·
September 2015 redemption of $1,000 of 0.800% notes due December 2015; $1,000 of 0.900% AT&T notes due February 2016; $750 of 3.125% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due February 2016; and $1,500 of 3.500% of DIRECTV senior notes due March 2016.
·
September 2015 prepayment of $1,000 of the outstanding advances under the $2,000 18-month credit agreement (the "18-Month Credit Agreement") by and between AT&T and Mizuho. (See the "Credit Facilities" discussion below.)
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.0% as of September 30, 2015, compared to 3.8% as of June 30, 2015, and 4.2% as of December 31, 2014. We had $126,042 of total notes and debentures outstanding at September 30, 2015, which included Euro, British pound sterling, Swiss Franc, Canadian dollar and Brazilian real denominated debt of approximately $27,073.

As of September 30, 2015, we had approximately 415 million shares remaining from 2013 and 2014 authorizations from our Board of Directors to repurchase shares of our common stock. With the completion of the DIRECTV acquisition, our priority will be to use free cash flow (operating cash flows less construction and capital expenditures) after dividends to pay down debt.

We paid dividends of $7,311 during the first nine months of 2015, compared with $7,170 for the first nine months of 2014, primarily reflecting the increase in the quarterly dividend approved by our Board of Directors in December 2014, partially offset by the impact of the decline in shares outstanding (prior to our completion of the DIRECTV merger), due to repurchases in 2014. Dividends declared by our Board of Directors totaled $0.47 per share in the third quarter and $1.41 per share for the first nine months of 2015 and $0.46 per share in the third quarter and $1.38 per share for the first nine months of 2014. With significantly higher outstanding shares of AT&T common stock due to the DIRECTV merger, our total dividend payments for 2015 will be higher when compared to 2014. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

At September 30, 2015, we had $7,535 of debt maturing within one year, $7,380 of which was related to long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
·
$1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021.
·
An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the zero-coupon note (issued for principal of $500 in 2007) is held to maturity, the redemption amount will be $1,030.
 
46
AT&T INC.
SEPTEMBER 30, 2015

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Dollars in millions except per share amounts
Credit Facilities
We have a $5,000 revolving credit agreement with a syndicate of banks that expires in December 2018 (the "December 2018 Facility") and a $3,000 revolving credit agreement with a syndicate of banks that expires in December 2017 (the "December 2017 Facility"). There were no advances outstanding under the December 2018 Facility or the December 2017 Facility at September 30, 2015.

On January 21, 2015, we entered into a $9,155 credit agreement (the "Syndicated Credit Agreement") containing (i) a $6,286 term loan facility (the "Tranche A Facility") and (ii) a $2,869 term loan facility (the "Tranche B Facility"), with certain investment and commercial banks and Mizuho Bank, Ltd. ("Mizuho"), as administrative agent. On that date, we also entered into the 18-Month Credit Agreement with Mizuho as initial lender and agent.

On March 2, 2015, we borrowed $9,155 under the Syndicated Credit Agreement and $2,000 under the 18-Month Credit Agreement at floating interest rates. We used these advances for general corporate purposes, including acquisition related payments. Amounts borrowed under the Tranche A Facility will be due and payable on March 2, 2018. The Tranche A Facility interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 100 basis points when issued). Amounts borrowed under the Tranche B Facility will be subject to amortization from March 2, 2018, with twenty-five percent of the aggregate principal amount thereof being payable prior to March 2, 2020, and all remaining principal amount due and payable on March 2, 2020. The Tranche B Facility interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 112.5 basis points when issued). Outstanding amounts borrowed under the 18-Month Credit Agreement will be due and payable on September 2, 2016. The 18-Month Credit Agreement interest rate equals three-month LIBOR, reset quarterly, plus the Applicable Margin (or 80 basis points when issued).

At September 30, 2015, we had advances outstanding of $9,155 under the Syndicated Credit Agreement and were in compliance with all covenants. At September 30, 2015, we had advances outstanding of $1,000 under the 18-Month Credit Agreement and were in compliance with all covenants. Additional details regarding the Syndicated Credit Agreement and 18-Month Credit Agreement are available in our Annual Report on Form 10-K for the year ended December 31, 2014.

Collateral Arrangements
During the first nine months of 2015, we posted $1,496 of additional cash collateral, on a net basis, to banks and other participants in our derivative arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 6)

Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At September 30, 2015, our debt ratio, which includes the debt raised in anticipation of our recently closed DIRECTV acquisition, was 50.8%, compared to 55.6% at June 30, 2015, and 47.6% at December 31, 2014. Our net debt ratio was 48.2% at September 30, 2015, compared to 45.3% at June 30, 2015, and 41.5% at December 31, 2014. The debt ratio is affected by the same factors that affect total capital, and reflects our debt issuances during the first half of 2015, inclusion of DIRECTV debt and additional outstanding shares of AT&T common stock in our balance sheet as of the acquisition date, and debt redemptions for the first nine months of 2015.

During 2015, we received $3,642 from the monetization of various assets, primarily the sale of certain equipment installment receivables. We plan to continue to explore similar opportunities during the remainder of 2015.

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 $8,838 as of September 30, 2015, and $9,021 as of December 31, 2014, 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 $420 to the trust during the first nine months of 2015. So long as we make the distributions, the terms of the preferred equity interest will not impose any limitations on our ability to declare a dividend or repurchase shares. At the time of the contribution of the preferred equity interest, we agreed to annual cash contributions to the trust of $175 no later than the due date for our federal income tax return for each of 2014, 2015 and 2016. The 2014 contribution of $175 was made to the trust during the second quarter of 2015.
47
AT&T INC.
SEPTEMBER 30, 2015

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Dollars in millions except per share amounts
At September 30, 2015, we had interest rate swaps with a notional value of $7,050 and a fair value of $217.

We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $29,642 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(2,406) at September 30, 2015.

We also have foreign exchange contracts with a notional value of $23 and a fair value of $0.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of September 30, 2015. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of September 30, 2015.

Internal control Over Financial Reporting

There have been no changes in the registrant's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the registrant's third quarter of 2015 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Due to the timing of our acquisitions of GSF Telecom, Nextel Mexico and DIRECTV, we will exclude the operations of these recently acquired companies as we continue to evaluate the internal controls over financial reporting of each entity. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recent business combination may be omitted from management's report on internal control over financial reporting in the first year of consolidation.
 
48
AT&T INC.
SEPTEMBER 30, 2015

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
 
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
 
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
·
Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.
·
Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
·
Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends, and unfavorable or delayed implementation of healthcare legislation, regulations or related court decisions.
·
The final outcome of FCC and other federal or state agency proceedings (including judicial review, if any, of such proceedings) involving issues that are important to our business, including, without limit, intercarrier compensation, interconnection obligations, pending Notices of Apparent Liability, the transition from legacy technologies to IP-based infrastructure including the withdrawal of legacy TDM-based services, universal service, broadband deployment, E911 services, competition policy, net neutrality, including the FCC's order reclassifying broadband as Title II services subject to much more fulsome regulation, unbundled network elements and other wholesale obligations, availability of new spectrum from the FCC 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 of IP-based services, relief from Carrier of Last Resort obligations, and elimination of state commission review of the withdrawal of services.
·
Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
·
Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies or delivery methods (e.g., cable, wireless, VoIP and Over The Top Video service) and our ability to maintain capital expenditures.
·
The extent of competition and the resulting pressure on customer and access line totals and segment operating margins.
·
Our ability to develop attractive and profitable product/service offerings to offset increasing competition.
·
The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).
·
The continued development and delivery of attractive and profitable video offerings through satellite and U-verse; the extent to which regulatory and build-out requirements apply to our offerings; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
·
Our continued ability to attract and offer a diverse portfolio of wireless service and devices, device financing plans, and maintain margins.
·
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 data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
·
The outcome of pending, threatened or potential litigation, including patent and product safety claims by or against third parties.
·
The impact on our networks, including satellites operated by DIRECTV, and business from major equipment failures; security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced, and in the case of satellites launched, in a timely and cost-effective manner from suppliers; 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.
·
The issuance by the Internal Revenue Service and/or state or foreign tax authorities of new tax regulations or changes to existing standards and actions by federal, state, local or foreign tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions.
·
Our ability to integrate our acquisition of DIRECTV.
·
Our ability to adequately fund our wireless operations, including payment for additional spectrum, network upgrades and technological advancements.
·
Our increased exposure to video competition and foreign economies due to our recent acquisitions of DIRECTV and Mexican wireless properties, including foreign exchange fluctuations, as well as regulatory and political uncertainty in Latin America.
·
Changes in our corporate strategies, such as changing network 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 reduction in government spending and reluctance of businesses and consumers to spend in general and on our products and services specifically, due to this fiscal uncertainty.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
49
AT&T INC.
SEPTEMBER 30, 2015

PART II – OTHER INFORMATION
Dollars in millions except per share amounts
 
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed.

Our ability to successfully integrate our July 2015 acquisition of DIRECTV, including the risk that the cost savings and any other 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 DIRECTV'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 DIRECTV in July 2015. We believe that the acquisition will give us the scale, resources and ability to deploy video services to more customers than otherwise possible and to provide an integrated bundle of broadband, video and wireless services enabling us to compete more effectively against cable operators as well as other technology, media and communications companies. In addition, we believe the acquisition will result in cost savings, especially in the area of video content costs, and other potential synergies, enabling us to expand and enhance our broadband deployment and provide more video options across multiple fixed and mobile devices. We must comply with various regulatory conditions and integrate a large number of video network and other operational systems and administrative systems. The integration process may also result in significant expenses and charges against earnings, both cash and noncash. While we have successfully merged large companies into our operations in the past, delays in the process could have a material adverse effect on our revenues, expenses, operating results and financial condition. This acquisition has increased the amount of debt on our balance sheet (both from DIRECTV's debt and the indebtedness needed to pay a portion of the purchase price) leading to additional interest expense and, due to additional shares being 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 of 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.
50
AT&T INC.
SEPTEMBER 30, 2015

PART II – OTHER INFORMATION - Continued
Dollars in millions except per share amounts
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
   
                   
(c) A summary of our repurchases of common stock during the third quarter of 2015 is as follows:
 
                 
Period
(a)
 
 
 
 
Total Number of
Shares (or Units)
Purchased 1, 2
 
(b)
 
 
 
 
 
Average Price Paid
Per Share (or Unit)
 
(c)
 
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs 1 
 
(d)
 
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) That May Yet Be
Purchased Under The
Plans or Programs
 
                 
July 1, 2015 -
July 31, 2015
 28,296 
 
$
 -   
 
 -   
 
 414,550,000 
August 1, 2015 -
August 31, 2015
 7,006 
   
 -   
 
 -   
 
 414,550,000 
September 1, 2015 -
September 30, 2015
 425 
   
 -   
 
 -   
 
 414,550,000 
Total
 35,727 
 
$
 -   
 
 -   
   
  1  In March 2014, our Board of Directors approved a fourth authorization to repurchase up to 300 million shares of our common stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock. The authorizations
   have no expiration date.
  2  All shares were acquired through the withholding of taxes on the vesting of restricted stock or through the payment in stock of taxes on the exercise price of options.
 
51
AT&T INC.
SEPTEMBER 30, 2015

Item 6. Exhibits

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.
   
10-a
2011 Incentive Plan, amended September 24, 2015
10-b
Cash Deferral Plan, amended September 24, 2015
10-c
Administrative Plan, amended September 24, 2015
10-d
Stock Purchase and Deferral Plan, amended September 24, 2015
10-e
Supplemental Life Insurance Plan, amended September 24, 2015
10-f
DIRECTV Deferred Compensation Plan for Non-Employee Directors
12
Computation of Ratios of Earnings to Fixed Charges
18
Letter regarding change in Accounting Principles
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1      Certification of Principal Executive Officer
31.2      Certification of Principal Financial Officer
32
Section 1350 Certifications
99.1
The unaudited consolidated balance sheets of DIRECTV as of June 30, 2015 and the consolidated statements of income, consolidated statements of cash flows and consolidated statements of stockholders' equity and comprehensive income of DIRECTV for the period ended June 30, 2015, and the notes related thereto (incorporated by reference to Item 1 of DIRECTV's Quarterly Report on Form 10-Q/A filed October 20, 2015 (SEC File No. 001-34554)).
101
XBRL Instance Document
 
 
52
 
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.
 

 
 
 
 
November 5, 2015   
 
 
AT&T Inc.
 
 
 
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
    and Chief Financial Officer
 
 
 
 
 
 
53
AT&T INC.
2011 Incentive Plan
Article 1.
Establishment and Purpose .
1.1
Establishment of the Plan .  AT&T Inc., a Delaware corporation (the "Company" or "AT&T"), hereby establishes an incentive compensation plan (the "Plan"), as set forth in this document.
1.2
Purpose of the Plan .  The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of the Company's shareowners, and by providing Participants with an incentive for outstanding performance.
1.3
Effective Date of the Plan .  The Plan is effective on May 1, 2011.
Article 2.
Definitions .  Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized:
(a)
"Applicable Law" means the legal requirements relating to the administration of options and share-based or performance-based awards under any applicable laws of the United States, any other country, and any provincial, state, or local subdivision, any applicable stock exchange or automated quotation system rules or regulations, as such laws, rules, regulations and requirements shall be in place from time to time.
(b)
"Award" means, individually or collectively, a grant or award under this Plan of Stock Options, Restricted Stock (including unrestricted Stock), Restricted Stock Units, Performance Units, or Performance Shares.
(c)
"Award Agreement" means an agreement which may be entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan.
(d)
"Board" or "Board of Directors" means the AT&T Board of Directors.
(e)
"Cause" means willful and gross misconduct on the part of an Employee that is materially and demonstrably detrimental to the Company or any Subsidiary as determined by the Company in its sole discretion.
(f)
"Change in Control" shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities; or (2) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new Director whose election by the Board of Directors or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (3) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets.
1

(g)
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
(h)
"Committee" means the committee or committees of the Board of Directors given authority to administer the Plan as provided in Article 3.
(i)
"Director" means any individual who is a member of the AT&T Board of Directors.
(j)
"Disability" means, absence of an Employee from work under the relevant Company or Subsidiary long term disability plan.
(k)
"Employee" means any employee of the Company or of one of the Company's Subsidiaries.  "Employment" means the employment of an Employee by the Company or one of its Subsidiaries.  Directors who are not otherwise employed by the Company shall not be considered Employees under this Plan.
(l)
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto.
(m)
"Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee.
2

(n)
"Fair Market Value" means the closing price on the New York Stock Exchange ("NYSE") for a Share on the relevant date, or if such date was not a trading day, the next preceding trading date, all as determined by the Company.  A trading day is any day that the Shares are traded on the NYSE.  In lieu of the foregoing, the Committee may, from time to time, select any other index or measurement to determine the Fair Market Value of Shares under the Plan, including but not limited to an average determined over a period of trading days.
(o)
"Insider" means an Employee who is, on the relevant date, an officer, director, or ten percent (10%) beneficial owner of the Company, as those terms are defined under Section 16 of the Exchange Act.
(p)
"Officer Level Employee" means a Participant who is an officer level Employee for compensation purposes as indicated on the records of AT&T.
(q)
"Option" means an option to purchase Shares from AT&T.
(r)
"Participant" means an Employee or former Employee who holds an outstanding Award granted under the Plan.
(s)
"Performance Unit" and "Performance Share" each mean an Award granted to an Employee pursuant to Article 8 herein.
(t)
"Retirement" or to "Retire" means the Participant's Termination of Employment for any reason other than death, Disability or for Cause, on or after the earlier of the following dates, or as otherwise provided by the Committee: (1) for Officer Level Employees, the date the Participant is at least age fifty-five (55) and has five (5) years of net credited service; or (2) the date the Participant has attained one of the following combinations of age and service, except as otherwise indicated below:
Net Credited Service
Age
10 years or more
65 or older
20 years or more
55 or older
25 years or more
50 or older
30 years or more
Any age

For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as "Pension Eligibility Service" under the AT&T Pension Benefit Plan – Nonbargained Program ("Pension Plan"), as that may be amended from time to time, except that service with an Employer shall be counted as though the Employer were a "Participating Company" under the Pension Plan and the Employee was a participant in the Pension Plan.
3
 
(u)
 "Senior Manager" means a Participant who is a senior manager for compensation purposes as indicated on the records of AT&T.
(v)
"Shares" or "Stock" means the shares of common stock of the Company.
(w)
"Subsidiary" means any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a fifty percent (50%) or greater ownership interest.  The Committee may, at its sole discretion, designate, on such terms and conditions as the Committee shall determine, any other corporation, partnership, limited liability company, venture other entity a Subsidiary for purposes of this Plan.
(x)
"Termination of Employment" or a similar reference means the event where the Employee is no longer an Employee of the Company or of any Subsidiary, including but not limited to where the employing company ceases to be a Subsidiary.  With respect to any Award that provides "nonqualified deferred compensation" within the meaning of Section 409A of the Code, "Termination of Employment" shall mean a "separation from service" as defined under Section 409A of the Code.
Article 3.
Administration .
3.1
The Committee .  Administration of the Plan shall be as follows:
(a)
With respect to Insiders, the Plan and Awards hereunder shall be administered by the Human Resources Committee of the Board or such other committee as may be appointed by the Board for this purpose (each of the Human Resources Committee and such other committee is the "Disinterested Committee"), where each Director on such Disinterested Committee is a "Non-Employee Director," as that term is used in Rule 16b-3 under the Exchange Act (or any successor designation for determining the committee that may administer plans, transactions or awards exempt under Section 16(b) of the Exchange Act), as that rule may be modified from time to time.
(b)
With respect to persons who are not Insiders, the Plan and Awards hereunder shall be administered by each of the Disinterested Committee and such other committee, if any, to which the Board may delegate such authority (such other Committee shall be the "Non-Insider Committee"), and each such Committee shall have full authority to administer the Plan and all Awards hereunder, except as otherwise provided herein or by the Board.  The Disinterested Committee may, from time to time, limit the authority of the Non-Insider Committee in any way.  Any Committee may be replaced by the Board at any time.
4

(c)
Except as otherwise indicated from the context, references to the "Committee" in this Plan shall be to either of the Disinterested Committee or the Non-Insider Committee.
3.2
Authority of the Committee .  The Committee shall have complete control over the administration of the Plan and shall have the authority in its sole discretion to (a) exercise all of the powers granted to it under the Plan, (b) construe, interpret and implement the Plan, grant terms and grant notices, and all Award Agreements, (c) prescribe, amend and rescind rules and regulations relating to the Plan, including rules governing its own operations, (d) make all determinations necessary or advisable in administering the Plan, (e) correct any defect, supply any omission and reconcile any inconsistency in the Plan, (f) amend the Plan to reflect changes in applicable law (whether or not the rights of the holder of any Award are adversely affected, unless otherwise provided by the Committee), (g) grant Awards and determine who shall receive Awards, when such Awards shall be granted and the terms and conditions of such Awards, including, but not limited to, conditioning the exercise, vesting, payout or other term of condition of an Award on the achievement of Performance Goals (defined below), (h) unless otherwise provided by the Committee, amend any outstanding Award in any respect, not materially adverse to the Participant, including, without limitation, to (1) accelerate the time or times at which the Award becomes vested, unrestricted or may be exercised (and, in connection with such acceleration, the Committee may provide that any Shares acquired pursuant to such Award shall be Restricted Shares, which are subject to vesting, transfer, forfeiture or repayment provisions similar to those in the Participant's underlying Award), (2) accelerate the time or times at which shares of Common Stock are delivered under the Award (and, without limitation on the Committee's rights, in connection with such acceleration, the Committee may provide that any shares of Common Stock delivered pursuant to such Award shall be Restricted Shares, which are subject to vesting, transfer, forfeiture or repayment provisions similar to those in the Grantee's underlying Award), or (3) waive or amend any goals, restrictions or conditions applicable to such Award, or impose new goals, restrictions and determine at any time whether, to what extent and under what circumstances and method or methods (1) Awards may be (A) settled in cash, shares of Stock, other securities, other Awards or other property (in which event, the Committee may specify what other effects such settlement will have on the Participant's Award), (B) exercised or (C) canceled, forfeited or suspended, (2) Shares, other securities, cash, other Awards or other property and other amounts payable with respect to an Award may be deferred either automatically or at the election of the Participant or of the Committee, or (3) Awards may be settled by the Company or any of its Subsidiaries or any of its or their designees.
No Award may be made under the Plan after April 30, 2021.
5

References to determinations or other actions by AT&T or the Company, herein, shall mean actions authorized by the Committee, the Chairman of the Board of AT&T, the Senior Executive Vice President of AT&T in charge of Human Resources or their respective successors or duly authorized delegates, in each case in the discretion of such person, provided, however, only the Disinterested Committee may take action with respect to Insiders with regard to granting or determining the terms of Awards or other matters that would require the Disinterested Committee to act in order to comply with Rule 16b-3 promulgated under the Exchange Act.
All determinations and decisions made by AT&T pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive, and binding on all persons, including but not limited to the Company, its stockholders, Employees, Participants, and their estates and beneficiaries.
Article 4.
Shares Subject to the Plan .
4.1
Number of Shares .  Subject to adjustment as provided in Section 4.3 herein, the number of Shares available for issuance under the Plan shall not exceed ninety (90) million Shares.  The Shares granted under this Plan may be either authorized but unissued or reacquired Shares.  The Disinterested Committee shall have full discretion to determine the manner in which Shares available for grant are counted in this Plan.
4.2
Share Accounting .  Without limiting the discretion of the Committee under this section, unless otherwise provided by the Disinterested Committee, the following rules will apply for purposes of the determination of the number of Shares available for grant under the Plan or compliance with the foregoing limits:
(a)
If an outstanding Award for any reason expires or is terminated or canceled without having been exercised or settled in full, or if Shares acquired pursuant to an Award subject to forfeiture are forfeited under the terms of the Plan or the relevant Award, the Shares allocable to the terminated portion of such Award or such forfeited Shares shall again be available for issuance under the Plan.
(b)
Shares shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash, other than an Option.
(c)
If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of Shares owned by the Participant, or an Option is settled without the payment of the exercise price, the number of shares available for issuance under the Plan shall be reduced by the gross number of shares for which the Option is exercised.
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4.3
Adjustments in Authorized Plan Shares and Outstanding Awards .  In the event of any merger, reorganization, consolidation, recapitalization, separation, split-up, liquidation, Share combination, Stock split, Stock dividend, or other change in the corporate structure of the Company affecting the Shares, an adjustment shall be made in the number and class of Shares which may be delivered under the Plan (including but not limited to individual limits), and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and/or the number of outstanding Options, Shares of Restricted Stock, and Performance Shares (and Performance Units and other Awards whose value is based on a number of Shares) constituting outstanding Awards, as may be determined to be appropriate and equitable by the Disinterested Committee, in its sole discretion, to prevent dilution or enlargement of rights.
Article 5.
Eligibility and Participation .
5.1
Eligibility .  All management Employees are eligible to receive Awards under this Plan.
5.2
Actual Participation .  Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award.  No Employee is entitled to receive an Award unless selected by the Committee.
Article 6.
Stock Options .
6.1
Grant of Options .  Subject to the terms and provisions of the Plan, Options may be granted to eligible Employees at any time and from time to time, and under such terms and conditions, as shall be determined by the Committee.  In addition, the Committee may, from time to time, provide for the payment of dividend equivalents on Options, prospectively and/or retroactively, on such terms and conditions as the Committee may require.  The Committee shall have discretion in determining the number of Shares subject to Options granted to each Employee; provided, however, that no single Employee may receive Options under this Plan for more than one percent (1%) of the Shares approved for issuance under this Plan during any calendar year.  The Committee may not grant Incentive Stock Options, as described in Section 422 of the Code, under this Plan.
6.2
Form of Issuance .  Each Option grant may be issued in the form of an Award Agreement and/or may be recorded on the books and records of the Company for the account of the Participant.  If an Option is not issued in the form of an Award Agreement, then the Option shall be deemed granted as determined by the Committee.  The terms and conditions of an Option shall be set forth in the Award Agreement, in the notice of the issuance of the grant, or in such other documents as the Committee shall determine.  Such terms and conditions shall include the Exercise Price, the duration of the Option, the number of Shares to which an Option pertains (unless otherwise provided by the Committee, each Option may be exercised to purchase one Share), and such other provisions as the Committee shall determine.
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6.3
Exercise Price .  Unless a greater Exercise Price is determined by the Committee, the Exercise Price for each Option Awarded under this Plan shall be equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted.  Subject to adjustment as provided in Section 4.3 herein or as otherwise provided herein, the terms of an Option may not be amended to reduce the exercise price nor may Options be cancelled or exchanged for cash, other awards or Options with an exercise price that is less than the exercise price of the original Options .
6.4
Duration of Options .  Each Option shall expire at such time as the Committee shall determine at the time of grant (which duration may be extended by the Committee); provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant.  In the event the Committee does not specify the expiration date of an Option, then such Option will expire on the tenth (10th) anniversary date of its grant, except as otherwise provided herein.
6.5
Vesting of Options .  A grant of Options shall vest at such times and under such terms and conditions as determined by the Committee; provided, however, unless another vesting period is provided by the Committee at or before the grant of an Option, one-third of the Options will vest on each of the first three anniversaries of the grant; if one Option remains after equally dividing the grant by three, it will vest on the first anniversary of the grant, if two Options remain, then one will vest on each of the first two anniversaries.  The Committee shall have the right to accelerate the vesting of any Option; however, the Chairman of the Board or the Senior Executive Vice President-Human Resources, or their respective successors, or such other persons designated by the Committee, shall have the authority to accelerate the vesting of Options for any Participant who is not an Insider.
6.6
Exercise of Options .  Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant.  Exercises of Options may be effected only on days and during the hours that the New York Stock Exchange is open for regular trading.  The Company may change or limit the times or days Options may be exercised.  If an Option expires on a day or at a time when exercises are not permitted, then the Options may be exercised no later than the immediately preceding date and time that the Options were exercisable.
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An Option shall be exercised by providing notice to the designated agent selected by the Company (if no such agent has been designated, then to the Company), in the manner and form determined by the Company, which notice shall be irrevocable, setting forth the exact number of Shares with respect to which the Option is being exercised and including with such notice payment of the Exercise Price, as applicable.  When an Option has been transferred, the Company or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option.  No Option may be exercised with respect to a fraction of a Share.
6.7
Payment .  Unless otherwise determined by the Committee, the Exercise Price shall be paid in full at the time of exercise.  No Shares shall be issued or transferred until full payment has been received or the next business day thereafter, as determined by AT&T.
The Committee may, from time to time, determine or modify the method or methods of exercising Options or the manner in which the Exercise Price is to be paid.    Unless otherwise provided by the Committee in full or in part:
(a)
Payment may be made in cash.
(b)
Payment may be made by delivery of Shares owned by the Participant in partial (if in partial payment, then together with cash) or full payment.
(c)
If the Company has designated a stockbroker to act as the Company's agent to process Option exercises, an Option may be exercised by issuing an exercise notice together with instructions to such stockbroker irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a sale order) a sufficient portion of the Shares to be received from the Option exercise to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to the Company.  In the event the stockbroker sells any Shares on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and the Company disclaims any responsibility for the actions of the stockbroker in making any such sales.  No Shares shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to the Company.
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(d)
At any time, the Committee may, in addition to or in lieu of the foregoing, provide that an Option may be "stock settled," which shall mean upon exercise of an Option, the Company may fully satisfy its obligation under the Option by delivering that number of shares of Stock found by taking the difference between (a) the FMV of the Stock on the exercise date, multiplied by the number of Options being exercised and (b) the total Exercise Price of the Options being exercised, and dividing such difference by the FMV of the Stock on the exercise date.
If payment is made by the delivery of Shares, the value of the Shares delivered shall be equal to the then most recent Fair Market Value of the Shares established before the exercise of the Option.
Restricted Stock may not be used to pay the Exercise Price.
6.8
Termination of Employment .  Unless otherwise provided by the Committee, the following limitations on exercise of Options shall apply upon Termination of Employment:
(a)
Termination by Death or Disability .  In the event of the Participant's Termination of Employment by reason of death or Disability, all outstanding Options granted to that Participant shall immediately vest as of the date of Termination of Employment and may be exercised, if at all, no more than five (5) years from the date of the Termination of Employment, unless the Options, by their terms, expire earlier.
(b)
Termination for Cause .  In the event of the Participant's Termination of Employment by the Company for Cause, all outstanding Options held by the Participant shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options.
(c)
Retirement or Other Termination of Employment .  In the event of the Participant's Termination of Employment for any reason other than the reasons set forth in (a) or (b), above:
(i)
If upon the Participant's Termination of Employment, the Participant is eligible to Retire, then all outstanding unvested Options granted to that Participant shall immediately vest as of the date of the Participant's Termination of Employment;
(ii)
All outstanding Options which are vested as of the effective date of Termination of Employment may be exercised, if at all, no more than five (5) years from the date of Termination of Employment if the Participant is eligible to Retire, or three (3) months from the date of the Termination of Employment if the Participant is not eligible to Retire, as the case may be, unless in either case the Options, by their terms, expire earlier; and
(iii)
In the event of the death of the Participant after Termination of Employment, this paragraph (c) shall still apply and not paragraph (a), above.
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(d)
Options not Vested at Termination .  Except as provided in paragraphs (a) and (c)(i), above, all Options held by the Participant which are not vested on or before the effective date of Termination of Employment shall immediately be forfeited to the Company (and the Shares subject to such forfeited Options shall once again become available for issuance under the Plan).
(e)
Other Terms and Conditions.  Notwithstanding the foregoing, the Committee may, in its sole discretion, establish different, or waive, terms and conditions pertaining to the effect of Termination of Employment on Options, whether or not the Options are outstanding, but no such modification shall shorten the terms of Options issued prior to such modification or otherwise be materially adverse to the Participant.
6.9
Restrictions on Exercise and Transfer of Options .  Unless otherwise provided by the Committee:
(a)
During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative.  After the death of the Participant, except as otherwise provided by AT&T's Rules for Employee Beneficiary Designations, an Option shall only be exercised by the holder thereof (including, but not limited to, an executor or administrator of a decedent's estate) or his or her guardian or legal representative.
(b)
No Option shall be transferable except: (i) in the case of the Participant, only upon the Participant's death and in accordance with the AT&T Rules for Employee Beneficiary Designations; and (ii) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution.
Article 7.
Restricted Stock.
7.1
Grant of Restricted Stock .  Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts and upon such terms and conditions as the Committee shall determine.  In addition to any other terms and conditions imposed by the Committee, vesting of Restricted Stock may be conditioned upon the achievement of Performance Goals in the same manner as provided in Section 8.4, herein, with respect to Performance Shares.  No Employee may be awarded, in any calendar year, a number of Shares in the form of Restricted Stock (or Restricted Stock Units) exceeding one percent (1%) of the Shares approved for issuance under this Plan.
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7.2
Restricted Stock Agreement .  The Committee may require, as a condition to receiving a Restricted Stock Award, that the Participant enter into a Restricted Stock Award Agreement, setting forth the terms and conditions of the Award.  In lieu of a Restricted Stock Award Agreement, the Committee may provide the terms and conditions of an Award in a notice to the Participant of the Award, on the Stock certificate representing the Restricted Stock, in the resolution approving the Award, or in such other manner as it deems appropriate.
7.3
Transferability .  Except as otherwise provided in this Article 7, and subject to any additional terms in the grant thereof, Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until fully vested.
7.4
Restrictions .  The Restricted Stock shall be subject to such vesting terms, including the achievement of Performance Goals (as described in Section 8.4), as may be determined by the Committee.  Unless otherwise provided by the Committee, to the extent Restricted Stock is subject to any condition to vesting, if such condition or conditions are not satisfied by the time the period for achieving such condition has expired, such Restricted Stock shall be forfeited.  The Committee may impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including but not limited to a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock and/or restrictions under applicable Federal or state securities laws; and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions.  The Committee may also grant Restricted Stock without any terms or conditions in the form of vested Stock Awards.
The Company shall also have the right to retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as the Shares are fully vested and all conditions and/or restrictions applicable to such Shares have been satisfied.
7.5
Removal of Restrictions .  Except as otherwise provided in this Article 7 or otherwise provided in the grant thereof, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after completion of all conditions to vesting, if any.  However, the Committee, in its sole discretion, shall have the right to immediately vest the shares and waive all or part of the restrictions and conditions with regard to all or part of the Shares held by any Participant at any time.
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7.6
Voting Rights, Dividends and Other Distributions .  Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights and shall receive all dividends and distributions paid with respect to such Shares.  The Committee may require that dividends and other distributions, other than regular cash dividends, paid to Participants with respect to Shares of Restricted Stock be subject to the same restrictions and conditions as the Shares of Restricted Stock with respect to which they were paid.  If any such dividends or distributions are paid in Shares, the Shares shall automatically be subject to the same restrictions and conditions as the Shares of Restricted Stock with respect to which they were paid.
7.7
Termination of Employment Due to Death or Disability .  In the event of the Participant's Termination of Employment by reason of death or Disability, all restrictions imposed on outstanding Shares of Restricted Stock held by the Participant shall immediately lapse and the Restricted Stock shall immediately become fully vested as of the date of Termination of Employment.
7.8
Termination of Employment for Other Reasons .  Unless otherwise provided by the Committee, in the event of the Participant's Termination of Employment for any reason other than those specifically set forth in Section 7.7 herein, all Shares of Restricted Stock held by the Participant which are not vested as of the effective date of Termination of Employment immediately shall be forfeited and returned to the Company.
7.9
Restricted Stock Units .  In lieu of or in addition to Restricted Stock, the Committee may grant Restricted Stock Units under such terms and conditions as shall be determined by the Committee.  Restricted Stock Units shall be subject to the same terms and conditions under this Plan as Restricted Stock except as otherwise provided in this Plan or as otherwise provided by the Committee.  Except as otherwise provided by the Committee, the award shall be settled and pay out promptly upon vesting (to the extent permitted by Section 409A of the Code), and the Participant holding such Restricted Stock Units shall receive, as determined by the Committee, Shares (or cash equal to the Fair Market Value of the number of Shares as of the date the award becomes payable) equal to the number of such Restricted Stock Units. Restricted Stock Units shall not be transferable, shall have no voting rights, and shall not receive dividends, but shall, unless otherwise provided by the Committee, receive dividend equivalents at the time and at the same rate as dividends are paid on Shares with the same record and pay dates. Upon a Participant's Termination of Employment due to Death or Disability, his or her Restricted Stock Units will vest, and in the case of Death, will pay out promptly, and in the case of Disability, will only pay out in accordance with the terms of the grant (without regard to the Termination due to Disability).  If the Participant dies after Termination of Employment, vested Restricted Stock Units will be promptly paid out.
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Article 8.
Performance Units and Performance Shares .
8.1
Grants of Performance Units and Performance Shares .  Subject to the terms of the Plan, Performance Shares and Performance Units may be granted to eligible Employees at any time and from time to time, as determined by the Committee.  The Committee shall have complete discretion in determining the number of Performance Units and/or Performance Shares Awarded to each Participant and the terms and conditions of each such Award.
8.2
Value of Performance Shares and Units .
(a)
A Performance Share is equivalent in value to a Share.  In any calendar year, no individual may be awarded Performance Shares having a potential payout of Shares exceeding one percent (1%) of the Shares approved for issuance under this Plan.
(b)
A Performance Unit shall be equal in value to a fixed dollar amount determined by the Committee.  In any calendar year, no individual may be Awarded Performance Units having a potential payout equivalent exceeding the Fair Market Value, as of the date of granting the Award, of one percent (1%) of the Shares approved for issuance under this Plan.  The number of Shares equivalent to the potential payout of a Performance Unit shall be determined by dividing the maximum cash payout of the Award by the Fair Market Value per Share on the effective date of the grant.  The Committee may denominate a Performance Unit Award in dollars instead of Performance Units.  A Performance Unit Award may be referred to as a "Key Executive Officer Short Term Award."
8.3
Performance Period .  The Performance Period for Performance Shares and Performance Units is the period over which the Performance Goals are measured.  The Performance Period is set by the Committee for each Award; however, in no event shall an Award have a Performance Period of less than one year.
8.4
Performance Goals .  For each Award of Performance Shares or Performance Units, the Committee shall establish (and may establish for other Awards) performance objectives ("Performance Goals") for the Company, its Subsidiaries, and/or divisions of any of foregoing, using the Performance Criteria and other factors set forth in (a) and (b), below.  It may also use other criteria or factors in establishing Performance Goals in addition to or in lieu of the foregoing.  A Performance Goal may be stated as an absolute value or as a value determined relative to an index, budget, prior period, similar measures of a peer group of other companies or other standard selected by the Committee.  Performance Goals shall include payout tables, formulas or other standards to be used in determining the extent to which the Performance Goals are met, and, if met, the number of Performance Shares and/or Performance Units which would be converted into Stock and/or cash (or the rate of such conversion) and distributed to Participants in accordance with Section 8.6.  Unless previously canceled or reduced, Performance Shares and Performance Units which may not be converted because of failure in whole or in part to satisfy the relevant Performance Goals or for any other reason shall be canceled at the time they would otherwise be distributable.  When the Committee desires an Award of Performance Shares, Performance Units, Restricted Stock or Restricted Stock Units to qualify under Section 162(m) of the Code, as amended, the Committee shall establish or modify the Performance Goals for the respective Award prior to or within 90 days of the beginning of the Performance Period relating to such Performance Goal, and not later than after twenty-five percent (25%) of such period has elapsed.  For all other Awards, the Performance Goals must be established before the end of the respective Performance Period.
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(a)
The Performance Criteria which the Committee is authorized to use, in its sole discretion, are any of the following criteria or any combination thereof, including but not limited to the offset against each other of any combination of the following criteria:
(1)
Financial performance of the Company (on a consolidated basis), of one or more of its Subsidiaries, and/or a division of any of the foregoing.  Such financial performance may be based on net income, Value Added (after- tax cash operating profit less depreciation and less a capital charge), EBITDA (earnings before interest, taxes, depreciation and amortization), revenues, sales, expenses, costs, gross margin, operating margin, profit margin, pre-tax profit, market share, volumes of a particular product or service or category thereof, including but not limited to the product's life cycle (for example, products introduced in the last two years), number of customers or subscribers, number of items in service, including but not limited to every category of access or other telecommunication or television lines, return on net assets, return on assets, return on capital, return on invested capital, cash flow, free cash flow, operating cash flow, operating revenues, operating expenses, and/or operating income.
(2)
Service performance of the Company (on a consolidated basis), of one or more of its Subsidiaries, and/or of a division of any of the foregoing.  Such service performance may be based upon measured customer perceptions of service quality.  Employee satisfaction, employee retention, product development, completion of a joint venture or other corporate transaction, completion of an identified special project, and effectiveness of management.
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(3)
The Company's Stock price, return on stockholders' equity, total stockholder return (Stock price appreciation plus dividends, assuming the reinvestment of dividends), and/or earnings per Share.
(4)
Impacts of acquisitions, dispositions, or restructurings, on any of the foregoing.

(b)
If the matters in a specific category below have a collective net impact (whether positive or negative) on net income, after taxes and available and collectible insurance, that exceed $500 million in a calendar year, then such matters (as well as any related effects on cash flow, if applicable) shall be excluded in determining whether or the extent to which the relevant Performance Goals applicable to such year are met:
Categories:
(1)  changes in accounting principles;
(2)  extraordinary items;
(3)  changes in Federal tax law;
(4)  changes in the tax laws of the states; 
(5)  expenses caused by natural disasters, including but not limited to floods, hurricanes, and earthquakes;
(6)  expenses resulting from intentionally caused damage to property of the Company or its Subsidiaries taken as a whole;
(7)  non-cash accounting write-downs of goodwill and other intangible assets.

In addition, where matters in a specific category have a collective net impact (whether positive or negative) on net income, after taxes and available and collectible insurance, that exceed $200 million but not $500 million in a calendar year, then such matters (as well as any related effects on cash flow, if applicable) shall also be excluded in determining the achievement of the relevant Performance Goals but only if the combined net effect of matters in all such categories (exceeding $200 million but not $500 million) exceeds $500 million.
Gains and losses related to the assets and liabilities from pension plans and other post retirement benefit plans (and any associated tax effects) shall be disregarded in determining whether or the extent to which a Performance Goal has been met.  
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Unless otherwise provided by the Committee at any time, no such adjustment shall be made for a current or former executive officer to the extent such adjustment would cause an Award to fail to satisfy the performance based exemption of Section 162(m) of the Code.

8.5
Dividend Equivalents on Performance Shares .  Unless otherwise provided by the Committee, a cash payment ("Dividend Equivalent") in an amount equal to the dividend payable on one Share shall be made to a Participant for each Performance Share held by such Participant on the record date for the dividend.  Such Dividend Equivalent, if any, will be payable at the time the relevant AT&T common stock dividend is payable or at such other time as determined by the Committee, and may be modified or terminated by the Committee at any time.  Notwithstanding the foregoing, unless otherwise provided by the Committee, Dividend Equivalents paid with respect to Performance Shares granted to an Officer Level Employee shall only be paid on the number of Performance Shares actually distributed and such payment shall be made when the related Performance Shares are distributed.
8.6
Form and Timing of Payment of Performance Units and Performance Shares .  As soon as practicable after the applicable Performance Period has ended and all other conditions (other than Committee actions) to conversion and distribution of a Performance Share and/or Performance Unit Award have been satisfied (or, if applicable, at such other time determined by the Committee at or before the establishment of the Performance Goal), the Committee shall determine whether and the extent to which the Performance Goals were met for the applicable Performance Units and Performance Shares.  If Performance Goals have been met, then the number of Performance Units and Performance Shares to be converted into Stock and/or cash and distributed to the Participants shall be determined in accordance with the Performance Goals for such Awards, subject to any limits imposed by the Committee.  Payment of Performance Units and Performance Shares shall be made in a single lump sum, as soon as reasonably administratively possible following the determination of the number of Shares or amount of cash to which the Participant is entitled but not later than the 15 th day of the third month following the end of the applicable Performance Period.  Performance Units will be distributed to Participants in the form of cash.  Performance Shares will be distributed to Participants in the form of fifty percent (50%) Stock and fifty percent (50%) Cash, or at the Participant's election, one hundred percent (100%) Stock or one hundred percent (100%) Cash.  In the event the Participant is no longer an Employee at the time of the distribution, then the distribution shall be one hundred (100%) in cash, provided the Participant may elect to take fifty percent (50%) or one hundred percent (100%) in Stock.  At any time prior to the distribution of the Performance Shares and/or Performance Units, unless otherwise provided by the Committee or prohibited by this Plan (such as in the case of a Change in Control), the Committee shall have the authority to reduce or eliminate the number of Performance Units or Performance Shares to be converted and distributed, or to cancel any part or all of a grant or award of Performance Units or Performance Shares, or to mandate the form in which the Award shall be paid (i.e., in cash, in Stock or both, in any proportions determined by the Committee).  Not withstanding anything to the contrary in this Plan, after a Change in Control, the payout of Performance Units and Performance Shares shall be determined exclusively by the attainment of the Performance Goals in effect prior to the Change in Control, and such Performance Goals may not be modified after such Change in Control.  In addition, after a Change in Control, other than an adjustment to the awards based on the extent to which the Performance Goals were achieved, AT&T shall not reduce or eliminate the number of Performance Units or Performance Shares or cancel any part or all of a grant or award of Performance Units or Performance Shares.
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Unless otherwise provided by the Committee, any election to take a greater amount of cash or Stock with respect to Performance Shares must be made in the calendar year prior to the calendar year in which the Performance Shares are distributed.
8.7
For the purpose of converting Performance Shares into cash and distributing the same to the holders thereof (or for determining the amount of cash to be deferred), the value of a Performance Share shall be the Fair Market Value of a Share on the date the Committee authorizes the payout of Awards.  Performance Shares to be distributed in the form of Stock will be converted at the rate of one (1) Share per Performance Share. Termination of Employment Due to Death .  In the event of the Participant's Termination of Employment by reason of death during a Performance Period, the Participant shall receive a lump sum payout of the related outstanding Performance Units and Performance Shares calculated as if all unfinished Performance Periods had ended with one hundred percent (100%) of the Performance Goals achieved, valued as of the first business day of the calendar year following the date of Termination of Employment and payable as soon thereafter as reasonably possible but not later than the 15th day of the third month after the end of the calendar year in which such death occurred.  Where the amount or part of Dividend Equivalents is determined by the number of Performance Shares that are paid out or is otherwise determined by a performance measure, and the related Performance Period for the Dividend Equivalents was not completed at death, then the Dividend Equivalents will be calculated as though one hundred percent (100%) of the goals were achieved and paid as soon as reasonably possible.
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8.8
Termination of Employment for Other than Death or Disability .  Unless the Committee determines otherwise at any time, in the event of the Participant's Termination of Employment during the Performance Period for a reason other than due to death or Disability (and other than for Cause), then upon such Termination, the amount of the Participant's Performance Units and number of Performance Shares shall be adjusted; the revised Awards shall be determined by multiplying the amount of the Performance Units and the number of Performance Shares, as applicable, by the number of months the Participant worked at least one day during the respective Performance Period divided by the number of months in the Performance Period, to be paid, if at all, at the same time and under the same terms that such outstanding Performance Units or Performance Shares would otherwise be paid; provided, however, if the Participant is not Retirement eligible and Terminates Employment voluntarily during the Performance Period for a grant of Performance Units or Performance Shares, then such Award shall be cancelled upon such Termination.  A Termination shall be deemed to be voluntary if it is recorded as such on the records of the Company, as determined by the Company in its sole discretion.
8.9
Termination of Employment for Cause .  In the event of the Termination of Employment of a Participant by the Company for Cause, all Performance Units and Performance Shares shall be forfeited by the Participant to the Company.
8.10
Nontransferability .  Performance Units and Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than in accordance with the AT&T Rules for Employee Beneficiary Designations.
Article 9.
Beneficiary Designation .  In the event of the death of a Participant, distributions or Awards under this Plan, other than Restricted Stock, shall pass in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time.  A Participant's most recent Beneficiary Designation that is applicable to awards under the 1996 Stock and Incentive Plan, the 2001 Incentive Plan, or the 2006 Incentive Plan will also apply to distributions or awards under this Plan unless and until the Participant provides to the contrary in accordance with the procedures set forth in such Rules.
Article 10.
Employee Matters .
10.1
Employment Not Guaranteed .  Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's Employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or one of its Subsidiar ies.
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10.2
Participation .  No Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.
10.3
Loyalty Conditions and Enforcement .  This section relates solely to Awards granted to a Participant who is an Officer Level Employee or a Senior Manager as of the date the Award is made.
(a)
Each Award under the Plan is intended to closely align the Participant's long-term interests with those of the Company and its shareholders, and the conditions set forth in subsections (b) or (d) hereof (collectively, the "Loyalty Conditions") are intended to protect the Company's critical need for each Participant's loyalty to the Company and its shareholders.  If any Participant does not comply with a Loyalty Condition, either during employment or within the periods described below following Termination of Employment for any reason, then the Participant is acting contrary to the long-term interests of the Company, and there will be a failure of the consideration on which the Participant received any Award or Awards pursuant to the Plan.  Accordingly, unless otherwise provided in the Award, as a condition of such Award, the Participant is deemed to agree that he shall not, without obtaining the written consent of AT&T in advance, violate the Loyalty Provisions of this Section 10.3.  Unless otherwise expressly provided in an Award Agreement, if the Participant violates a Loyalty Condition, then the Company may terminate any outstanding, unexercised, unexpired, unpaid, or deferred Awards ("Award Termination"), rescind any exercise, payment or delivery pursuant to any Award or Awards ("Rescission"), or recapture any cash or Shares (whether restricted or unrestricted) issued pursuant to any Award or Awards, or proceeds from the Participant's sale of such Shares ("Recapture").
(b)
During the Participant's employment with the Company and any of its Subsidiaries and for a period of two years after a Termination of Employment for any reason, a Participant shall not, without the Company's prior written authorization, (i) disclose to anyone outside the Company or use, other than in the Company's business, any Confidential Information, or (ii) disclose any trade secrets of the Company, as that term is defined under Applicable Law, for as long as such information is not generally known to the Company's competitors through no fault or negligence of the Participant.
" Confidential Information " means all information belonging to, or otherwise relating to the business of the Company, which is not generally known, regardless of the manner in which it is stored or conveyed to Participant, and which the Company has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure.  Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by Participant.  For example, Confidential Information includes, but is not limited to, information concerning the Company's business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Company, or any of the products or services made, developed or sold by the Company.  Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by Participant from a third party; (iii) was known to Participant prior to receipt from the Company; or (iv) was independently developed by Participant or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by Participant or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Agreement.
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(c)
Coincidentally with the exercise, receipt of payment, or delivery of cash or Shares pursuant to an Award, the Company may require that the Participant shall give a certification to the Company in writing if the Participant is not for any reason in full compliance with the terms and conditions of the Plan, including its Loyalty Conditions.  If a Termination of Employment has occurred for any reason, the Participant's certification shall state the name and address of the Participant's then-current employer or any entity for which the Participant performs business services and the Participant's title, and shall identify any organization or business in which the Participant owns an equity interest of greater than five percent.
(d)
If the Company determines, in its sole and absolute discretion, that (i) a Participant has violated any of the Loyalty Conditions, or (ii) during his or her employment by the Company or any of its Subsidiaries, or within two years after the Termination of Employment for any reason, a Participant has engaged in any of the following conduct:
(i)
  owned, operated or controlled, or participated in the ownership, operation or control of, any business enterprise (including, without limitation, any corporation, partnership, proprietorship or other venture) that competes with the Company in the Restricted Business (defined below) anywhere in the Restricted Territory (defined below);
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(ii)
  become employed as an officer or executive by any business enterprise (including, without limitation, any corporation, partnership, proprietorship or other venture) that competes with the Company in the Restricted Business anywhere in the Restricted Territory, if such employment or engagement requires Participant to compete against the Company in the Restricted Business;
(iii)
  solicited any nonclerical employee of the Company with whom the Participant had Contact during his or her employment to terminate employment with the Company; or
(iv)
  committed any breach of Participant's fiduciary duty or the duty of loyalty, as determined by Applicable Law,
then the Committee may, in its sole and absolute discretion, impose an Award Termination, Rescission, and/or Recapture with respect to any or all of the Participant's Awards, including any Shares or cash associated therewith, or any proceeds thereof.  For purposes of this Agreement, the term "Restricted Business" means the business of providing communications or connectivity services, including both wireless and wire-lined telephone, messaging, Internet, data, and related services; the term "Restricted Territory" shall mean the state in which the Participant maintained his or her principal office with the Company on the date the Award was granted; and the term "Contact" means interaction between the Participant and the nonclerical employee during performance of Participant's job responsibilities on behalf of the Company.
(e)
Within ten days after receiving notice from the Company of any such activity described in subsection (d) above, the Participant shall deliver to the Company the cash or Shares acquired pursuant to any and all Awards, or, if Participant has sold the Shares, the gain realized, or payment received as a result of the rescinded exercise, payment, or delivery; provided, that if the Participant returns Shares that the Participant purchased pursuant to the exercise of an Option (or the gains realized from the sale of such Shares), the Company shall promptly refund the exercise price, without earnings or interest, that the Participant paid for the Shares.  Any payment by the Participant to the Company pursuant to this Section shall be made either in cash or by returning to the Company the number of Shares that the Participant received in connection with the rescinded exercise, payment, or delivery.  It shall not be a basis for Award Termination, Rescission or Recapture if, after a Termination of Employment, the Participant purchases, as an investment or otherwise, stock or other securities of an organization engaged in the Restricted Business, so long as (i) such stock or other securities are listed upon a recognized securities exchange or traded over the counter, and (ii) such investment does not represent more than a ten percent (10%) equity interest in the organization or business.
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(f)
Notwithstanding the foregoing provisions of this Section, the Company has sole and absolute discretion not to require Award Termination, Rescission and/or Recapture, and its determination not to require Award Termination, Rescission and/or Recapture with respect to any particular act by a particular Participant or Award shall not in any way reduce or eliminate the Company's authority to require Award Termination, Rescission and/or Recapture with respect to any other act or Participant or Award.  Nothing in this Section shall be construed to impose obligations on the Participant to refrain from engaging in lawful competition with the Company after the Participant's Termination of Employment that does not violate subsections (b) or (d) of this Section, other than any obligations that are part of any separate agreement between the Company and the Participant or that arise under Applicable Law.
(g)
All administrative and discretionary authority given to the Company under this Section shall be exercised by the most senior human resources executive of the Company or such other person or committee (including without limitation the Committee) as the Committee may designate from time to time.
(h)
If any provision within this Section is determined to be unenforceable or invalid under any applicable law, such provision will be applied to the maximum extent permitted by Applicable Law, and shall automatically be deemed amended in a manner consistent with its objectives and any limitations required under Applicable Law.
10.4
Reimbursement of Company for Unearned or Ill-gotten Gains.  Unless otherwise specifically provided in an Award Agreement, and to the extent permitted by Applicable Law, if the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, the Committee may, without obtaining the approval or consent of the Company's shareholders or of any Participant, require that any Participant who personally engaged in one of more acts of fraud or misconduct that have caused or partially caused the need for such restatement or any current or former chief executive officer, chief financial officer, or executive officer, regardless of their conduct,  to reimburse the Company for all or any portion of any Awards granted or settled under this Plan (with each such case being a "Reimbursement"), or the Committee may require the Termination or Rescission of, or the Recapture associated with, any Award, in excess of the amount the Participant would have received under the accounting restatement.
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Article 11.
Reserved.
Article 12.
Amendment, Modification, and Termination .
12.1
Amendment, Modification, and Termination .  The Board or the Disinterested Committee may at any time and from time to time, alter or amend the Plan or any Award in whole or in part or suspend or terminate the Plan in whole or in part.
12.2
Awards Previously Granted .  No termination, amendment, or modification of the Plan or any Award (other than Performance Shares or Performance Units) shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award; provided, however, that any such modification made for the purpose of complying with Section 409A of the Code may be made by the Company without the consent of any Participant.
12.3
Delay in Payment .   To the extent required in order to avoid the imposition of any interest and/or additional tax under Section 409A(a)(1)(B) of the Code, any amount that is considered deferred compensation under the Plan or Agreement and that is required to be postponed pursuant to Section 409A of the Code, following the a Participant's Termination of Employment shall be delayed for six months if a Participant is deemed to be a "specified employee" as defined in Section 409A(a)(2)(i)(B) of the Code; provided that, if the Participant dies during the postponement period prior to the payment of the postponed amount, the amounts withheld on account of Section 409A shall be paid to the executor or administrator of the decedent's estate within 60 days following the date of his death.  A "Specified Employee" means any Participant who is a "key employee" (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the twelve (12) month period ending on each December 31st (such twelve (12) month period is referred to below as the "identification period").  All Participants who are determined to be key employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Specified Employees for purposes of the Plan during the twelve (12) month period that begins on the first day of the 4th month following the close of such identification period.
Article 13.
Withholding .
13.1
Tax Withholding .  Unless otherwise provided by the Committee, the Company shall deduct or withhold an amount sufficient to satisfy Federal, state, and local taxes (including but not limited to the Participant's employment tax obligations) required by law to be withheld with respect to any taxable event arising or as a result of this Plan ("Withholding Taxes").
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13.2
Share Withholding .  Unless otherwise provided by the Committee, upon the exercise of Options, the lapse of restrictions on Restricted Stock, the distribution of Performance Shares in the form of Stock, or any other taxable event hereunder involving the transfer of Stock to a Participant, the Company shall withhold Stock equal in value, using the Fair Market Value on the date determined by the Company to be used to value the Stock for tax purposes, to the Withholding Taxes applicable to such transaction.
Any fractional Share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of the Company, paid in cash to the Participant.
Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 6.7(b)(ii), herein, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds.  For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the Fair Market Value of the Stock.
If permitted by the Committee, prior to the end of any Performance Period a Participant may elect to have a greater amount of Stock withheld from the distribution of Performance Shares to pay withholding taxes; provided, however, the Committee may prohibit or limit any individual election or all such elections at any time.
Alternatively, or in combination with the foregoing, the Committee may require Withholding Taxes to be paid in cash by the Participant or by the sale of a portion of the Stock being distributed in connection with an Award, or by a combination thereof.
Article 14.
Successors .
All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
Article 15.
Legal Construction .
15.1
Gender and Number .  Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.
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15.2
Severability .  In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
15.3
Requirements of Law .  The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
15.4
Errors .  At any time AT&T may correct any error made under the Plan without prejudice to AT&T.  Such corrections may include, among other things, changing or revoking an issuance of an Award.
15.5
Elections and Notices .  Notwithstanding anything to the contrary contained in this Plan, all elections and notices of every kind shall be made on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including but not limited to elections or notices through electronic means, over the Internet or otherwise.  An election shall be deemed made when received by AT&T (or its designated agent, but only in cases where the designated agent has been appointed for the purpose of receiving such election), which may waive any defects in form.  AT&T may limit the time an election may be made in advance of any deadline.
Where any notice or filing required or permitted to be given to AT&T under the Plan, it shall be delivered to the principal office of AT&T, directed to the attention of the Senior Executive Vice President-Human Resources of AT&T or his or her successor.  Such notice shall be deemed given on the date of delivery.
Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to the Participant's work or home address as shown on the records of AT&T or, at the option of AT&T, to the Participant's e-mail address as shown on the records of AT&T.
It is the Participant's responsibility to ensure that the Participant's addresses are kept up to date on the records of AT&T.  In the case of notices affecting multiple Participants, the notices may be given by general distribution at the Participants' work locations.
15.6
Governing Law .  To the extent not preempted by Federal law, the Plan, and all awards and agreements hereunder, and any and all disputes in connection therewith, shall be governed by and construed in accordance with the substantive laws of the State of Texas, without regard to conflict or choice of law principles which might otherwise refer the construction, interpretation or enforceability of this Plan to the substantive law of another jurisdiction.
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15.7
Venue .  Because awards under the Plan are granted in Texas, except as otherwise agreed by the Participant and the Company in a Mandatory Arbitration Agreement, records relating to the Plan and awards thereunder are located in Texas, and the Plan and awards thereunder are administered in Texas, the Company and the Participant to whom an award under this Plan is granted, for themselves and their successors and assigns, irrevocably submit to the exclusive and sole jurisdiction and venue of the state or federal courts of Texas with respect to any and all disputes arising out of or relating to this Plan, the subject matter of this Plan or any awards under this Plan, including but not limited to any disputes arising out of or relating to the interpretation and enforceability of any awards or the terms and conditions of this Plan.  To achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Plan, except as otherwise agreed by the Participant and the Company in a Mandatory Arbitration Agreement, and to ensure consistency in application and interpretation of the Governing Law to the Plan, the parties agree that (a) sole and exclusive appropriate venue for any such action shall be an appropriate federal or state court in Dallas County, Texas, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Texas court, and no other, (c) such Texas court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto and (d) that the parties waive any and all objections and defenses to bringing any such action before such Texas court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens .
15.8
409A Compliance .  Awards under the Plan may be structured to be exempt from or be subject to Section 409A of the Code.  To the extent that Awards granted under the Plan are subject to Section 409A of the Code, the Plan will be construed and administered in a manner that enables the Plan and such Awards to comply with the provisions of Section 409A of the Code.

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Administrative Plan
Effective September 24, 2015
The benefits under this Plan are offered by AT&T Inc. ("AT&T") to persons who have been identified by AT&T as executive officers of AT&T under Rule 3b-7 of the Securities Exchange Act of 1934 ("Executive Officers").
Administration of Plan .  The Plan or the benefits hereunder may be modified or terminated by the Human Resources Committee in its sole discretion at any time.
Except to the extent otherwise provided herein, the Vice President responsible for Human Resources (or the successor to such position) shall be the Administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions in accordance with its terms.  The Administrator, in his or her sole discretion, may establish, adopt or revise rules, as he or she may deem necessary or advisable for the administration of the Plan, including the allocation or limitation of benefits.
The Administrator may adopt another plan or plans, not to exceed the benefits included herein, for the benefit of non Executive Officer employees or former employees of AT&T and/or its subsidiaries, as the Administrator may determine in his or her sole discretion and on such terms and conditions as the Administrator shall determine.  In addition, the Administrator may provide current or former non Executive Officer employees with:
(a) an amount equal to that necessary to offset the Federal, state and local income taxes, as well as associated employment taxes, of the recipient (including taxes on tax reimbursements) resulting from the benefits in such plan or plans, other than (1) the monthly automobile allowance, and (2) personal use of aircraft; and/or
(b) social club and country club memberships as approved by the CEO or the Administrator (without the limits otherwise provided in this Plan).
The benefit under (a), above, shall also apply to Executive Officers who retired prior to 2010.  The Administrator may, from time to time, revise the plan solely to increase the financial limits on benefits, not to exceed the corresponding proportional increase in the consumer price index from January 1, 2003, through the date of change.
All decisions of the Administrator shall be final and binding unless the Board of Directors or its delegate should determine otherwise.
No Employment Rights .  Nothing herein shall constitute a contract of continuing employment or in any manner obligate AT&T or any Executive Officer to continue the employment relationship of, or obligate an Executive Officer to continue in the service of AT&T or any Affiliate.
Non-Transferability .  No recipient of benefits under this Plan nor any other person shall have any right to sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey any of the benefits hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable.
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Notice .  Any notice required or permitted to be given to the Administrator under the Plan shall be sufficient if in writing and hand delivered, or sent by certified mail, to the principal office of AT&T, directed to the attention of the Senior Executive Vice President-Human Resources.  Any notice required or permitted to be given to any other person shall be sufficient if in writing and hand delivered, or sent by certified mail, to the person at the person's last known mailing address as reflected on the records of his or her employing company.  Notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for certification.
Validity .  In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this plan.
Applicable Law .  This Plan shall be governed and construed in accordance with the laws of the State of Texas to the extent not preempted by the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA").
Automobile .  Each Executive Officer may receive the use of a four-door automobile or an automobile allowance and expenses associated with the operation of the automobile.  The Administrator shall determine the amount of the allowance for each Executive Officer provided that the allowance shall not exceed $2,000 per month.
Company Services .  Each Executive Officer may receive reasonable communications and entertainment services.   Such services shall only be provided by AT&T, except wireline and Internet services where AT&T service is not reasonably available.
Financial Counseling.   Executive Officers may receive income tax preparation services and financial planning services from a list of designated providers not to exceed $14,000 per year.
Estate Planning.   Executive Officers may receive estate planning documentation services not to exceed $10,000 per year.  The Estate Planning limit restarts in the event of a company-initiated relocation to another state.
Annual Limits.   Expenses will be charged against the annual limits for the calendar year based on the date of the invoice.
Clubs.   Executive Officers may receive social club and country club memberships (along with transfer fees) as approved by the CEO or the Administrator.  Executive officers, but not persons other than Executive Officers, shall be limited to transferable country club memberships and shall not receive other country club fees, including dues and assessments.
AT&T does not reimburse for any expenses incurred in connection with a membership in a club that discriminates in its membership policies based on race, creed, gender or ethnic origin.  The Administrator shall report annually to the Human Resources Committee any changes in memberships for the Chief Executive Officer.
Executive Protection .  Based upon the concern for the security of Executive Officers, the need to secure their optimum availability for business purposes and to permit uninterrupted communications between them, the Executive Officers are authorized to receive home security services, and, whenever feasible, to use AT&T provided aircraft in connection with business travel.  The Chief Executive Officer may use such aircraft for personal travel.  Other Executive Officers may also use such aircraft for personal travel where the Chief Executive Officer, in his or her sole discretion, deems such personal use appropriate.
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Officers may also use such aircraft for personal travel where the Chief Executive Officer, in his or her sole discretion, deems such personal use appropriate.

 
Except where prohibited by law, Executive Officers shall be required to reimburse the Company for the incremental cost of personal use of AT&T provided aircraft.  For Executive Officers other than the Chief Executive Officer, the Chief Executive Officer may determine, in his or her sole discretion, that such reimbursement is not required.

Retirement.   Upon the Retirement of an Executive Officer, he or she may receive up to an additional amount for financial consulting reasonably in connection with his/her Retirement, as follows:  In any given year, 1. for retirements occurring from January 1 through June 30 (inclusive), the amount will be $20,000 in the calendar year of retirement; 2. for retirements occurring from July 1 through November 30 (inclusive), the amount will be $10,000 in the calendar year of retirement and $10,000 in the immediately following calendar year; and 3. for retirements occurring from December 1 through December 31 (inclusive), the amount will be $20,000 in the year following retirement.  A Retired Executive Officer shall continue to receive the communications benefits until death and his or her survivor shall receive the communications benefit for six (6) billing cycles.  After the Retirement of an Executive Officer on or before December 31, 2009, he or she shall continue to receive the financial counseling and estate planning benefits until his or her death.  Executive Officers that retire on or after January 1, 2010 shall continue to receive the financial counseling and estate planning benefits for up to 36 months following retirement or until the end of the year following the year of death, whichever occurs earlier.  After the death of an Executive Officer or Retired Executive Officer, his or her survivor shall receive the communications benefit for 6 billing cycles and shall receive the financial counseling and estate planning benefits for the remainder of the year of death and the immediately following calendar year.  In a Retired Executive Officer's final calendar year of eligibility, the Annual Limits shall be pro-rated on a monthly basis, based on the number of full or partial months the Retired Executive Officer worked in the calendar year of Retirement divided by twelve (12).
Loyalty Conditions.
This Section applies to Executive Officers who are actively employed on or after January 1, 2010.
Executive Officers acknowledge that no coverage and benefits would be provided under this Plan on and after January 1, 2010 but for the loyalty conditions and covenants set forth below, and that the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan coverage and benefits for the Executive Officers on or after January 1, 2010.  Accordingly, as a condition of receiving coverage and any Plan benefits on or after January 1, 2010, each Executive Officer is deemed to agree that he shall not, without obtaining the written consent of AT&T in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in this Section.  Further, notwithstanding any other provision of this Plan, all coverage and benefits under this Plan on and after January 1, 2010 with respect to an Executive Officer and his or her Dependents shall be subject in their entirety to the enforcement provisions below if the Executive Officer, without the Administrator's consent participates in an activity that constitutes engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as defined below.
Definitions .  For purposes of this Section and of the Plan generally:
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an "Employer Business" shall mean AT&T, any subsidiary, or any business in which AT&T or a subsidiary or an affiliated company of AT&T has a substantial ownership or joint venture interest;
"engaging in competition with AT&T" shall mean, while employed by an Employer Business or within two (2) years after the Executive Officer's termination of employment, engaging by the Executive Officer in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business.  "Engaging in competition with AT&T" shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer Business.  "Engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee or director of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.
"engaging in conduct disloyal to AT&T" means, while employed by an Employer Business or within two (2) years after the Executive Officer's termination of employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by AT&T or its affiliates during the one (1) year prior to the termination of the Executive Officer's employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T and its affiliates; (ii) soliciting, encouraging, or inducing any vendor or supplier with which the Executive Officer had business contact on behalf of any Employer Business during the two (2) years prior to the termination of the Executive Officer's employment, for any reason to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or its affiliate; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom Executive Officer had business contact, whether in person or by other media, on behalf of any Employer Business during the two (2) years prior to the termination of Executive Officer's employment for any reason ("Customer"), to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business.  "Engaging in conduct disloyal to AT&T" also means, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.
"Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to the Executive Officer, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure.  Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by the Executive Officer.  For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business.  Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by the Executive Officer from a third party; (iii) was known to the Executive Officer prior to receipt from the Employer Business; or (iv) was independently developed by the Executive Officer or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by the Executive Officer or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.
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Forfeiture of Benefits.   Coverage and benefits under this Plan shall be forfeited and shall not be provided under this Plan for any period as to which the Administrator determines that, within the time period and without the written consent specified, the Executive Officer has been either engaging in competition with AT&T or engaging in conduct disloyal to AT&T.
Equitable Relief.   The parties recognize that any Executive Officer's breach of any of the covenants in this Section will cause irreparable injury to AT&T, will represent a failure of the consideration under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to provide the Executive Officer with the opportunity to receive Plan coverage and benefits, and that monetary damages would not provide AT&T with an adequate or complete remedy that would warrant AT&T's continued sponsorship of the Plan and payment of Plan benefits for all Executive Officers.  Accordingly, in the event of an Executive Officer's actual or threatened breach of the covenants herein, the Administrator, in addition to all other rights and acting as a fiduciary under ERISA on behalf of all Executive Officers, shall have a fiduciary duty (in order to assure that AT&T receives fair and promised consideration for its continued Plan sponsorship and funding) to seek an injunction restraining the Executive Officer from breaching the covenants in this Section.  In addition, AT&T shall pay for any Plan expenses that the Administrator incurs hereunder, and shall be entitled to recover from the Executive Officer its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies.  To enforce its repayment rights with respect to an Executive Officer, the Plan shall have a first priority, equitable lien on all Plan benefits provided to or for the Executive Officer and his or her Dependents.  In the event the Administrator succeeds in enforcing the terms of this Article through a written settlement with the Executive Officer or a court order granting an injunction hereunder, the Executive Officer shall be entitled to collect Plan benefits prospectively, if the Executive Officer is otherwise entitled to such benefits, net of any fees and costs assessed pursuant hereto (which fees and costs shall be paid to AT&T as a repayment on behalf of the Executive Officer), provided that the Executive Officer complies with said settlement or injunction.
Uniform Enforcement.   In recognition of AT&T's need for nationally uniform standards for the Plan administration, it is an absolute condition in consideration of any Executive Officer's accrual or receipt of benefits under the Plan after January 1, 2010 that each and all of the following conditions apply to all Executive Officers and to any benefits that are paid or are payable under the Plan:

(1)
To the maximum extent applicable ERISA shall control all issues and controversies hereunder, and the Administrator shall serve for purposes hereof as a "fiduciary" of the Plan, and as its "named fiduciary" within the meaning of ERISA.
(2)
All litigation between the parties relating to this Article shall occur in federal court, which shall have exclusive jurisdiction, any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA to the extent it is applicable.
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(3)
If the Administrator determines in its sole discretion either (I) that AT&T or its affiliate that employed the Executive Officer terminated the Executive Officer's employment for cause, or (II) that equitable relief enforcing the Executive Officer's covenants under this Section is either not reasonably available, not ordered by a court of competent jurisdiction, or circumvented because the Executive Officer has sued in state court, or has otherwise sought remedies not available under ERISA (to the extent applicable), then in any and all of such instances the Executive Officer shall not be entitled to collect any Plan benefits, and if any Plan benefits have been paid to the Executive Officer, the Executive Officer shall immediately repay all Plan benefits to the Plan (which shall be used to pay Plan administrative expenses or Plan benefits) upon written demand from the Administrator.  Furthermore, the Executive Officer shall hold AT&T and its affiliates harmless from any loss, expense, or damage that may arise from any of the conduct described in clauses (I) and (II) hereof.
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AT&T INC.
CASH DEFERRAL PLAN
Adopted November 19, 2004
As amended through September 24, 2015

Article 1 − Statement of Purpose
The purpose of the Cash Deferral Plan ("Plan") is to provide savings opportunities to a select group of management employees of AT&T Inc. ("AT&T") and its Subsidiaries.
Article 2 − Definitions
For the purpose of this Plan, the following words and phrases shall have the meanings indicated, unless the context indicates otherwise:
Annual Bonus.  The award designated the "Annual Bonus" by AT&T (including but not limited to an award that may be paid in more frequent installments than annually), together with any individual discretionary award made in connection therewith, or comparable awards, if any, determined by AT&T to be used in lieu of these awards.
Base Compensation.  The following types of cash-based compensation paid by an Employer (but not including payments made by a non-Employer, such as state disability payments), before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of an Employer, including but not limited to a plan that includes a qualified cash or deferral arrangement under Section 401(k) of the Code:
(a)  base salary;
(b)  lump sum payments in lieu of a base salary increase; and
(c)  Annual Bonus.
Payments by an Employer under a disability plan made in lieu of any compensation described above, shall be deemed to be a part of the respective form of compensation it replaces for purposes of this definition.  Base Compensation does not include zone allowances or any other geographical differential and shall not include payments made in lieu of unused vacation or other paid days off, and such payments shall not be contributed to this Plan.
Determinations by AT&T (the Committee with respect to Officer Level Employees) of the items that make up Base Compensation shall be final.  The Committee may, from time to time, add or subtract types of compensation to or from the definition of "Base Compensation" provided, however, any such addition or subtraction shall be effective only with respect to the next period in which a Participant may make an election to establish a Cash Deferral Account.  Base Compensation that was payable in a prior Plan Year but paid in a later Plan Year shall not be used to determine Employee Contributions in the later Plan Year.
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Business Day.  Any day during regular business hours that AT&T is open for business.
Cash Deferral Account or Account.  The Account or Accounts established annually by an election by a Participant to make Employee Contributions to the Plan with each account relating to a Plan Year.  For each Plan Year after 2008, there shall be a separate Cash Deferral Account for Base Compensation (excluding Annual Bonus) and a separate Cash Deferral Account for the Short Term Incentive Award and/or Annual Bonus.  Earnings on each of Employee Contributions shall accrue to the respective Cash Deferral Accounts where they are earned.
Change in Control.  With respect to AT&T's direct and indirect ownership of an Employer, a "Change in the effective control of a Corporation," as defined in Treasury Regulation Section 1.409A−3(i)(5)(vi)(A)(1), regardless of whether the Employer is a corporation or non-corporate entity as permitted by the regulation, and using "50 percent" in lieu of "30 percent" in such regulation.  A Change in Control will not apply to AT&T itself.
Chief Executive Officer.  The Chief Executive Officer of AT&T Inc.
Code.  References to the Code shall be to provisions of the Internal Revenue Code of 1986, as amended, including regulations promulgated thereunder and successor provisions.  Similarly, references to regulations shall include amendments and successor provisions.
Committee.  The Human Resources Committee of the Board of Directors of AT&T Inc.
Disability.  Absence of an Employee from work with an Employer under the relevant Employer's disability plan.
Eligible Employee.  An Employee who:
(a) is a full or part time, salaried Employee of AT&T or an Employer in which AT&T has a direct or indirect 100% ownership interest and who is on active duty or Leave of Absence (but only while such Employee is deemed by the Employer to be an Employee of such Employer);
(b) is, as determined by AT&T, a member of Employer's "select group of management or highly compensated employees" within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA"), which is deemed to include each Officer Level  Employee; and
(c) has an employment status which has been approved by AT&T to be eligible to participate in this Plan or is an Officer Level Employee.
Notwithstanding the foregoing, AT&T (the Committee with respect to Officer Level Employees) may, from time to time, exclude any Employee or group of Employees from being deemed an "Eligible Employee" under this Plan.
In the event a court or other governmental authority determines that an individual was improperly excluded from the class of persons who would be permitted to make Employee Contributions during a particular time for any reason, that individual shall not be permitted to make such contributions for purposes of the Plan for the period of time prior to such determination.
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Employee.  Any person employed by an Employer and paid on an Employer's payroll system, excluding persons hired for a fixed maximum term and excluding persons who are neither citizens nor permanent residents of the United States, all as determined by AT&T.  For purposes of this Plan, a person on Leave of Absence who otherwise would be an Employee shall be deemed to be an Employee.
Employee Contributions.  Amounts credited to a Cash Deferral Account pursuant to Section 4.1 (Election to Make Contributions) of the Plan.
Employer.  AT&T Inc. or any of its Subsidiaries.
Incentive Award.  A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan, the 2006 Incentive Plan or any successor plan, or any other award that the Committee specifically permits to be contributed to a Cash Deferral Account under this Plan (regardless of the purpose of the award).
Leave of Absence.  Where a person is absent from employment with an Employer on a leave of absence, military leave, sick leave, or Disability, where the leave is given in order to prevent a break in the continuity of term of employment, and permission for such leave is granted (and not revoked) in conformity with the rules of the Employer that employs the individual, as adopted from time to time, and the Employee is reasonably expected to return to service.  Except as set forth below, the leave shall not exceed six (6) months for purposes of this Plan, and the Employee shall Terminate Employment upon termination of such leave if the Employee does not return to work prior to or upon expiration of such six (6) month period, unless the individual retains a right to reemployment under law or by contract.  A twenty-nine (29) month limitation shall apply in lieu of such six (6) month limitation if the leave is due to the Employee being "disabled" (within the meaning of Treasury Regulation §1.409A−3(i)(4)).  A Leave of Absence shall not commence or shall be deemed to cease under the Plan where the Employee has incurred a Termination of Employment.
Officer Level Employee.  Any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934, as amended, and any Employee that is an "officer level" Employee for compensation purposes as shown on the records of AT&T.
Participant.  An Employee or former Employee who participates in this Plan.
Plan Interest Rate.  An annual rate of interest equal to Moody's Long-Term Corporate Bond Yield Average for the September preceding the calendar year during which the interest rate will apply.  The Committee may choose another method of calculating the Plan Interest Rate, but such other method may only apply to Cash Deferral Units that Participants have not yet elected to establish.
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Plan Year.  Each of the following shall be a Plan year:  the period from January 1, 2005 through January 15, 2006; the period January 16, 2006 through December 31, 2006; and, for all later Plan Years, it is defined as the period from January 1 through December 31.
Retirement or Retire.  Termination of Employment on or after the date the Participant has attained one of the following combinations of age and Net Credited Service:
Net Credited Service                                            Age
10 years or more                                                        65 or older
20 years or more                                                        55 or older
25 years or more                                                        50 or older
30 years or more                                                        Any age
For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as "Pension Eligibility Service" under the AT&T Pension Benefit Plan – Nonbargained Program ("Pension Plan"), as the same existed on October 1, 2008, except that service with an Employer shall be counted as though the Employer were a "Participating Company" under the Pension Plan and the Employee was a participant in the Pension Plan.
Senior Manager.  Any Employee who is a "senior manager" for compensation purposes as shown on the records of AT&T.
Short Term Incentive Award.  A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan, together with any individual discretionary award made in connection therewith; an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including, but not limited to, Performance Units granted under the 2006 Incentive Plan or any successor plan.  It shall also include any other award that the Committee designates as a Short Term Incentive Award specifically for purposes of this Plan (regardless of the purpose of the award) provided the deferral election is made in accordance with Section 409A.
Specified Employee.  Any Participant who is a "Key Employee" (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the 12-month period ending on each December 31st (such 12-month period is referred to below as the "identification period").  All Participants who are determined to be Key Employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4th month following the close of such identification period.
Subsidiary.  Any corporation, partnership, venture or other entity or business with which AT&T would be considered a single employer under Sections 414(a) and (c) of the Code, using 50% as the ownership threshold as provided under Section 409A of the Code.
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Termination of Employment.  References herein to "Termination of Employment," "Terminate Employment" or a similar reference, shall mean the event where the Employee has a "separation from service," as defined under Section 409A, with all Employers.  For purposes of this Plan, a Termination of Employment with respect to an Employer also shall be deemed to occur when such Employer incurs a Change in Control.
Article 3 − Administration of the Plan
3.1              The Committee.
Except as delegated by this Plan or by the Committee, the Committee shall be the administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions and all questions of administration, interpretation and application of the Plan, including, without limitation, questions and determinations of eligibility entitlement to benefits and payment of benefits, all in its sole and absolute discretion.  The Committee may further establish, adopt or revise such rules and regulations and such additional terms and conditions regarding participation in the Plan as it may deem necessary or advisable for the administration of the Plan.  References in this Plan to determinations or other actions by AT&T, herein, shall mean actions authorized by the Committee, the Chief Executive Officer, the Senior Executive Vice President of AT&T in charge of Human Resources, or their respective successors or duly authorized delegates, in each case in the discretion of such person.  All decisions by the Committee, its delegate or AT&T, as applicable, shall be final and binding.
3.2              Claims and Appeals.
(a)              Claims.  A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Executive Compensation Administration Department, setting forth his or her claim. The request must be addressed to the AT&T Executive Compensation Administration Department at its then principal place of business.
(b)              Claim Decision.  Upon receipt of a claim, the AT&T Executive Compensation Administration Department shall review the claim and provide the Claimant with a written notice of its decision within a reasonable period of time, not to exceed ninety (90) days, after the claim is received. If the AT&T Executive Compensation Administration Department determines that special circumstances require an extension of time beyond the initial ninety (90)-day claim review period, the AT&T Executive Compensation Administration Department shall notify the Claimant in writing within the initial ninety (90)-day period and explain the special circumstances that require the extension and state the date by which the AT&T Executive Compensation Administration Department expects to render its decision on the claim. If this notice is provided, the AT&T Executive Compensation Administration Department may take up to an additional ninety (90) days (for a total of one hundred eighty (180) days after receipt of the claim) to render its decision on the claim.
If the claim is denied by the AT&T Executive Compensation Administration Department, in whole or in part, the AT&T Executive Compensation Administration Department shall provide a written decision using language calculated to be understood by the Claimant and setting forth:  (i) the specific reason or reasons for such denial; (ii) specific references to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) a description of the Plan's procedures for review of denied claims and the steps to be taken if the Claimant wishes to submit the claim for review; (v) the time limits for requesting a review of a denied claim under this section and for conducting the review under this section; and (vi) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review under this section.
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(c)              Request for Review. Within sixty (60) days after the receipt by the Claimant of the written decision on the claim provided for in this section, the Claimant may request in writing that the Committee review the determination of the AT&T Executive Compensation Administration Department.  Such request must be addressed to the Committee at the address for giving notice under this Plan.  To assist the Claimant in deciding whether to request a review of a denied claim or in preparing a request for review of a denied claim, a Claimant shall be provided, upon written request to the Committee and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim.  The Claimant or his or her duly authorized representative may, but need not, submit a statement of the issues and comments in writing, as well as other documents, records or other information relating to the claim for consideration by the Committee.  If the Claimant does not request a review of the AT&T Executive Compensation Administration Department's decision by the Committee within such sixty (60)-day period, the Claimant shall be barred and estopped from challenging the determination of the AT&T Executive Compensation Administration Department.
(d)              Review of Decision. Within sixty (60) days after the Committee's receipt of a request for review, the Administrator will review the decision of the AT&T Executive Compensation Administration Department.  If the Committee determines that special circumstances require an extension of time beyond the initial sixty (60)-day review period, the Committee shall notify the Claimant in writing within the initial sixty (60)-day period and explain the special circumstances that require the extension and state the date by which the Committee expects to render its decision on the review of the claim.  If this notice is provided, the Committee may take up to an additional sixty (60) days (for a total of one hundred twenty (120) days after receipt of the request for review) to render its decision on the review of the claim.
During its review of the claim, the Committee shall:
(1)              Take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial review of the claim conducted pursuant to this section;
(2)              Follow reasonable procedures to verify that its benefit determination is made in accordance with the applicable Plan documents; and
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(3)              Follow reasonable procedures to ensure that the applicable Plan provisions are applied to the Participant to whom the claim relates in a manner consistent with how such provisions have been applied to other similarly-situated Participants.
After considering all materials presented by the Claimant, the Committee will render a decision, written in a manner designed to be understood by the Claimant.  If the Committee denies the claim on review, the written decision will include (i) the specific reasons for the decision; (ii) specific references to the pertinent provisions of this Plan on which the decision is based; (iii) a statement that the Claimant is entitled to receive, upon request to the Committee and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA.
The Committee shall serve as the final review committee under the Plan and shall have sole and complete discretionary authority to administer, interpret, construe and apply the Plan provisions, and determine all questions of administration, interpretation, construction, and application of the Plan, including questions and determinations of eligibility, entitlement to benefits and the type, form and amount of any payment of benefits, all in its sole and absolute discretion.  The Committee shall further have the authority to determine all relevant facts and related issues, and all documents, records and other information relevant to a claim conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Plan. Decisions by the Committee shall be conclusive and binding on all parties and not subject to further review.
In any case, a Participant or Beneficiary may have further rights under ERISA.  The Plan provisions require that Participants or Beneficiary pursue all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.
Article 4 − Contributions
4.1              Election to Make Contributions.
(a)  The Committee shall establish dates and other conditions for participation in the Plan and making contributions as it deems appropriate.  Except as otherwise provided by the Committee, each year an Employee who is an Eligible Employee as of September 30 may thereafter make an election on or prior to the last Business Day of the immediately following November (such election shall be cancelled if the Employee is not an Eligible Employee on the last day such an election may be made) to contribute on a pre-tax basis, through payroll deductions, any combination of the following:
(1)  From 1% to 50% (in whole percentage increments) of the Participant's monthly Base Compensation, other than Annual Bonus, during the calendar year (the Plan Year for such contributions) following the calendar year of such election.  Employees who are below the level of Senior Manager, as shown on the records of AT&T at the time of the election, may contribute no more than 25% or such other amount as determined by AT&T.
(2)  Up to 95% (in whole percentage increments) of a Short Term Incentive Award, or up to 50% (in whole percentage increments) of Annual Bonus (25% for Employees who are below the level of Senior Manager), in each case such contributions shall be made during the second calendar year (which is the Plan Year for such contributions) following the year of such election, except that in 2008 a separate election may be made with respect to contributions to be made in 2009.  An Employee may make such an election with respect to the type of Award (Short Term Incentive Award or Annual Bonus) that the Employee is under as of the time the Employee's eligibility to make such election is determined.  If because of a promotion or otherwise, the Employee receives a different type of Award instead of or in partial or full replacement for the type of Award subject to the Employee's election for the relevant Plan Year, the election will apply to the other Award as well, including but not limited to any individual discretionary award related thereto.
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(b)  The Committee may permit an Eligible Employee to make an election to make other contributions under this Plan with compensation other than Base Compensation or Short Term Incentive Awards on such terms and conditions as such Committee may permit from time to time provided that any such election is made in accordance with Section 409A of the Code.
(c)  Notwithstanding anything to the contrary in this Plan, no election shall be effective to the extent it would permit an Employee Contribution or distribution to be made that is not in compliance with Section 409A of the Code.  To the extent such election related to Employee Contributions that complied with such statute and regulations, thereunder, that portion of the election shall remain valid, except as otherwise provided under this Plan.
(d)  To the extent permitted by Section 409A of the Code, AT&T may refuse or terminate, in whole or in part, any election to make contributions to the Plan at any time; provided, however, only the Committee may take such action with respect to persons who are Officer Level Employees.
(e)  In the event the Participant takes a hardship withdrawal pursuant to Treasury Regulation §1.401(k)−1 from a benefit plan qualified under the Code and sponsored by an Employer, any election to make Employee Contributions by such Participant shall be cancelled on a prospective basis, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.
(f)  To the extent a Participant makes contributions to the Plan where the payment of which would be deductible by AT&T under Section 162(m) of the Code without regard to the size of the distribution, such contributions and earnings thereon shall be distributed first.
(g)  With respect to a Plan Year, an Employee may elect to (1) make Employee Contributions of Base Compensation other than Annual Bonus to this Plan but only if the Employee elects to contribute at least 6% of Base Compensation other than Annual Bonus for the same Plan Year to the Stock Purchase and Deferral Plan and/or (2) make Employee Contributions of Annual Bonus to this Plan but only if the Employee elects to contribute at least 6% of Annual Bonus for the same Plan Year to the Stock Purchase and Deferral Plan.
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4.2              Contributions to a Cash Deferral Account.
(a)  Employee Contributions shall be made pursuant to a proper election, only during the Participant's lifetime; provided, however, with respect to Employee Contribution elections made prior to 2007, the Employee must remain an Eligible Employee while making any such contributions.  In the event of a Change in Control of an Employer, subsequent compensation from the Employer may not be contributed to the Plan.  The Employer may continue the then current elections of the participants under a subsequent plan in order to comply with applicable tax laws.
(b)  A Participant's contributions shall be credited to the Participant's Cash Deferral Account on the day the compensation – from which the contribution is to be deducted – is to be paid ("paid," as used in this Plan, includes amounts contributed to the Plan that would have been paid were it not for an election under this Plan), as determined by the relevant Employer.  Earnings on each Cash Deferral Account shall be recorded on Participant's statements quarterly.  The Committee may modify or change this paragraph (b) from time to time.
4.3              Earnings on Cash Deferral Accounts.
During a calendar year, the Participant's Cash Deferral Account shall accrue interest on amounts held by such Account at the Plan Interest Rate for such year, compounded quarterly on the last day of each quarter.  Interest will accrue on unpaid amounts in the Cash Deferral Account from the date credited to such Account.
Article 5 − Distributions
5.1              Distributions of Cash Deferral Accounts.
(a)  Initial Election with Respect to a Cash Deferral Account.  At the time the Participant makes an election to make Employee Contributions with respect to a Cash Deferral Account, the Participant shall also elect the calendar year of the distribution of the Cash Deferral Account and the number of installments.  The Participant may elect either of the following:
(1)  Specified Date Distribution.  That the distribution of the Cash Deferral Account commence in the calendar year specified by the Participant, but no later than the 10th calendar year after the Plan Year the Cash Deferral Account commenced, in up to Ten (10) installments.  However, for purposes of Initial Elections with respect to Plan Years prior to 2009 only, in the event the Participant Terminates Employment prior to the calendar year of the distribution, the Cash Deferral Account must commence distribution the calendar year following the calendar year of the Termination of Employment, with the same number of installments, unless the Employee has made an irrevocable election under (b), below. For example, if the Participant elected a 2010 distribution with five (5) installments, but Terminated Employment in 2007, the Cash Deferral Account would commence distribution in 2008.

(2)  Retirement Distribution.  That the distribution of the Cash Deferral Account commence the calendar year following the calendar year of Retirement in up to (10) installments.  If the Participant Terminates Employment while not Retirement eligible, the distribution shall commence the calendar year following the calendar year of Termination of Employment, but shall be limited to five (5) installments.  This distribution alternative will not be available for Initial Elections made after 2007.
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If no timely distribution election is made by the Participant, then the Participant will be deemed to have made an election to have the Cash Deferral Account distributed in a single installment in the first calendar year after the calendar year Employee Contributions were first made.
(b)  If an Employee elected a Specified Date Distribution for a Cash Deferral Account, the Employee may elect to delay the Specified Date Distribution commencement date and, as part of such delay election elect a new number of installments; provided, however, Termination of Employment will not accelerate the distribution, unlike the initial deferral election.  Unless otherwise provided by the Committee, the election of a new distribution commencement date for a Cash Deferral Account must be made on or after October 1, and on or before the last Business Day of the next following December, of the calendar year that is the second calendar year preceding the calendar year in which the distribution would otherwise commence.  To make this election, the Participant must be an Eligible Employee both on the September 30 immediately preceding such election and on the last day such an election may be made.  For example, an election to defer a scheduled distribution that would otherwise commence in 2010 must be made during the period from October 1, 2008, through the last business day of December 2008, and the Participant must be an Eligible Employee both on September 30, 2008, and the last business day of December 2008.  The new distribution election must delay commencement of the distribution by five (5) years.  An election to delay the Specified Date Distribution commencement date of a Cash Deferral Account may not be made in the same calendar year the election to establish the Cash Deferral Account is made.  Notwithstanding anything to the contrary in this Plan, (1) such election to delay the Specified Date Distribution commencement date must be made at least 12 months prior to the date of the first scheduled payment under the prior distribution election and (2) the election shall not take effect until at least 12 months after the date on which the election is made.
(c)  A Participant's Cash Deferral Account shall be distributed to the Participant on March 10 (or as soon thereafter as administratively practicable, as determined by AT&T) of the calendar year elected by the Participant for the Account.  In the event the distribution is to be made to a "Specified Employee" as a result of the Participant's Termination of Employment (other than as a result of a Change in Control), the distribution shall not occur until the later of such March 10 or six (6) months after the Termination of Employment, except it shall be distributed upon the Participant's earlier death in accordance with this Plan.  The distributions shall continue annually on each successive March 10 (or such other date as determined by AT&T) until the number of installments elected by the Participant is reached.  In each installment, AT&T shall distribute to the Participant that portion of the Participant's Cash Deferral Account that is equal to the total dollar amount of the Participant's Account divided by the number of remaining installments.
(d)  The Committee may establish other distribution alternatives from time to time, but such alternatives may be offered no earlier than the next period in which a Participant may make an election to establish a Cash Deferral Account.
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5.2              Death of the Participant.
In the event of the death of a Participant, notwithstanding anything to the contrary in this Plan, all undistributed Cash Deferral Accounts shall be distributed to the Participant's beneficiary in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time, within the later of 90 days following such determination or the end of the calendar year in which determination was made.

5.3              Unforeseeable Emergency Distribution.
If a Participant experiences an "Unforeseeable Emergency," the Participant may submit a written petition to AT&T (the Committee in the case of Officer Level Employees), to receive a partial or full distribution of his Cash Deferral Account(s).  In the event that AT&T (the Committee in the case of Officer Level Employees), upon review of the written petition of the Participant, determines in its sole discretion that the Participant has suffered an "Unforeseeable Emergency," AT&T shall make a distribution to the Participant from the Participant's Cash Deferral Accounts, on a pro-rata basis, within the later of 90 days following such determination or the end of the calendar year in which determination was made, subject to the following:
(a)              "Unforeseeable Emergency" shall mean a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's legal spouse, the Participant's beneficiary, or the Participant's dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant's property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.  Whether a Participant is faced with an Unforeseeable Emergency permitting a distribution is to be determined based on the relevant facts and circumstances of each case, but, in any case, a distribution on account of Unforeseeable Emergency shall not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant's assets, to the extent the liquidation of such assets would not cause severe financial hardship, or by cessation of deferrals under the Plan.
(b)              The amount of a distribution to be made because of an Unforeseeable Emergency shall not exceed the amount reasonably necessary, as determined by AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution).  Determinations of the amount reasonably necessary to satisfy the emergency need shall take into account any additional compensation that is available if the plan provides for cancellation of a deferral election upon a payment due to an Unforeseeable Emergency.  The determination of amounts reasonably necessary to satisfy the Unforeseeable Emergency need is not required to, but may, take into account any additional compensation that, due to the Unforeseeable Emergency, is available under another nonqualified deferred compensation plan but has not actually been paid, or that is available due to the Unforeseeable Emergency under another plan that would provide for deferred compensation except due to the application of the effective date provisions under Treasury Regulation § 1.409A−6.
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(c)              Upon such distribution on account of an Unforeseeable Emergency under this Plan, any election to make Employee Contributions by such Participant shall be immediately cancelled, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

5.4              Ineligible Participant.
Notwithstanding any other provisions of this Plan to the contrary, if AT&T receives an opinion from counsel selected by AT&T, or a final determination is made by a Federal, state or local government or agency, acting within its scope of authority, to the effect that an individual's continued participation in the Plan would violate applicable law, then such person shall not make further contributions to the Plan to the extent permitted by Section 409A of the Code.

Article 6 − Transition Provisions
6.1              2005 Cash Deferral Accounts.
Notwithstanding Article 4 to the contrary, if an Employee is an Eligible Employee on September 30, 2004, the Employee may make an election under Article 4 on or prior to December 15, 2004, with respect to the establishment of a Cash Deferral Account for the contribution of Base Compensation and/or Incentive Awards that would otherwise be paid during the period from January 1, 2005, through January 15, 2006, which shall be the Plan Year for such Cash Deferral Account.
6.2              2007 Amendments.
Amendments made to the Plan on November 15, 2007, shall be effective January 1, 2008, except for amendments to this Article 7, which shall be effective upon adoption.  Any Participants electing prior to November 15, 2007, to make Employee Contributions in 2008 shall have their elections canceled if they do not consent by December 14, 2007, to all prior amendments to this Plan and to the Stock Purchase and Deferral Plan.  Subject to the foregoing consent requirements, all Employee Contribution elections made prior to 2008, including but not limited to elections to contribute cash with respect to Performance Shares granted that would be distributed under the 2001 Incentive Plan or a successor plan, shall remain in force, subject to all other terms of the amended Plan.
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6.3              2008 Amendments.  For the 2008 Plan Year, only Salary and Short Term Incentive Awards paid after Termination of Employment may be contributed to the Plan. Article 7 − Discontinuation, Termination, Amendment.
7.1              AT&T's Right to Discontinue Offering Cash Deferral Accounts.
The Committee may at any time discontinue offerings of Cash Deferral Accounts or contributions under the Plan.  Any such discontinuance shall have no effect upon existing Cash Deferral Accounts or the terms or provisions of this Plan as applicable to such Accounts.
7.2              AT&T's Right to Terminate Plan.
The Committee may terminate the Plan at any time.  Upon termination of the Plan, contributions shall no longer be made under the Plan.
After termination of the Plan, Participants shall continue to earn interest on undistributed amounts and shall continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of Participant's elections and this Plan.  Notwithstanding the foregoing, the termination of the Plan shall be made solely in accordance with Section 409A of the Code and in no event shall cause the accelerated distribution of any Account unless such termination is effected in accordance with Section 409A of the Code.
7.3              Amendment.
The Committee may at any time amend the Plan in whole or in part; provided, however, that no amendment, including but not limited to an amendment to this section, shall be effective, without the consent of a Participant, to alter, to the material detriment of such Participant, any of the Cash Deferral Accounts of the Participant, other than as provided elsewhere in this section.  For purposes of this section, an alteration to the material detriment of a Participant shall include, but not be limited to, a material reduction in the period of time over which the Participant's Cash Deferral Account may be distributed to a Participant, any reduction in the amounts credited to the Participant's Cash Deferral Accounts, or any reduction in the Plan Interest Rate (other than as it may fluctuate in accordance with its terms) for Cash Deferral Accounts previously elected by the Participant.  Any such consent may be in a writing, telecopy, or e-mail or in another electronic format.  An election to make Employee Contributions shall be conclusively deemed to be the consent of the Participant to any and all amendments to the Plan prior to such election, and such consent shall be a condition to making any election with respect to Employee Contributions.
The Plan is established in order to provide deferred compensation to a select group of management and highly compensated employees with in the meaning of Sections 201(2) and 301(a)(3) of ERISA.  To the extent legally required, the Code and ERISA shall govern the Plan, and if any provision hereof is in violation of an applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith to the extent permitted under the Code and ERISA.  The Company also reserves the right to make such other changes as may facilitate implementation of Section 409A of the Code.  Provided, however, that in no event shall any such amendments be made in violation of the requirements of Section 409A of the Code.
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Article 8 − Miscellaneous
8.1              Tax Withholding.
Upon a distribution from a Participant's Cash Deferral Account, AT&T shall withhold sufficient amounts to satisfy the minimum amount of Federal, state, and local taxes required by law to be withheld as a result of such distribution.
8.2              Loyalty Conditions for Officer Level Employees and Senior Managers.
Each Officer Level Employee or a Senior Manager who elects to make Employee Contributions under Section 4.1 of this Plan shall be subject to the agreements and conditions of this section.
(a)              By making an Employee Contribution election under Section 4.1 of this Plan after September 1, 2009, a Participant acknowledges that AT&T would be unwilling to provide for such an election but for the loyalty conditions and covenants set forth in this section, and that the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan benefits for the Participants.  Accordingly, as a condition to making an Employee Contribution election under Section 4.1 of this Plan after September 1, 2009, each such electing Participant is deemed to agree that he shall not, without obtaining the written consent of the Committee in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in this section.
(b)              Definitions .  For purposes of this section and of the Plan generally:
(i)
an "Employer Business" shall mean AT&T Inc. and any of its Subsidiaries, or any business in which they or any affiliate of theirs has a substantial ownership or joint venture interest;
(ii)
"engaging in competition with AT&T" shall mean, while employed by AT&T or any of its Subsidiaries, or within two (2) years after Participant's Termination of Employment, engaging by the Participant in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business.  "Engaging in competition with AT&T" shall not include owning a non-substantial publicly traded interest as a shareholder in a business that competes with an Employer Business.  "Engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.
(iii)
"engaging in conduct disloyal to AT&T" means, while employed by AT&T or any of its Subsidiaries, or within two (2) years after Participant's Termination of Employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by AT&T or any of its Subsidiaries during the one (1) year prior to the Participant's Termination of Employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T or any of its Subsidiaries; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Participant had business contact on behalf of any Employer Business during the two (2) years prior to the Participant's Termination of Employment (regardless of the reason for that termination) to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or any of its Subsidiaries; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom Participant had business contact, whether in person or by other media ("Customer"), on behalf of any Employer Business during the two (2) years prior to the Participant's Termination of Employment (regardless of the reason for that termination), to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business.  "Engaging in conduct disloyal to AT&T" shall also mean, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.
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(iv)
"Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to Participant, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure.  Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by Participant.  For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business.  Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by Participant from a third party; (iii) was known to Participant prior to receipt from the Employer Business; or (iv) was independently developed by Participant or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by Participant or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.
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(c)              Equitable Relief.  The parties recognize that any Participant's breach of any of the covenants in this section will cause irreparable injury to the AT&T, will represent a failure of the consideration under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to provide the Participant with the opportunity to receive Plan benefits, and that monetary damages would not provide AT&T with an adequate or complete remedy that would warrant AT&T's continued sponsorship of the Plan (including the accrual or granting of Share Units, Matching Share Units and Options) for all Participants.  Accordingly, in the event of a Participant's actual or threatened breach of the covenants in this section, the Committee, in addition to all other rights and acting as a fiduciary under ERISA on behalf of all Participants, shall have a fiduciary duty (in order to assure that AT&T receives fair and promised consideration for its continued Plan sponsorship and funding) to seek an injunction restraining the Participant from breaching the covenants in this Section.  AT&T shall pay for any Plan expenses that the Committee incurs hereunder, and shall be entitled to recover from the Participant its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies.
(d)              Uniform Enforcement.  In recognition of AT&T's need for nationally uniform standards for the Plan administration, it is an absolute condition in consideration of any Participant's ability to make Employee Contribution elections under Section 4.1 of this Plan after September 1, 2009, that each and all of the following conditions apply to all such electing Participants:
(i)
ERISA shall control all issues and controversies hereunder, and the Committee shall serve for purposes hereof as a "fiduciary" of the Plan and its "named fiduciary" within the meaning of ERISA.
(ii)
All litigation between the parties relating to this section shall occur in federal court, which shall have exclusive jurisdiction; any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA.
8.3              Elections and Notices.
Notwithstanding anything to the contrary contained in this Plan, all elections and notices of every kind under this Plan shall be made on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including through electronic means, over the Internet or otherwise.  An election shall be deemed made when received by AT&T (or its designated agent, but only in cases where the designated agent has been appointed for the purpose of receiving such election), which may waive any defects in form.  Unless made irrevocable by the electing person, each election with regard to making Employee Contributions or distributions of Cash Deferral Accounts shall become irrevocable at the close of business on the last day to make such election.  AT&T may limit the time an election may be made in advance of any deadline.
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If not otherwise specified by this Plan or AT&T, any notice or filing required or permitted to be given to AT&T under the Plan shall be delivered to the principal office of AT&T, directed to the attention of the Senior Executive Vice President in charge of Human Resources for AT&T or his or her successor.  Such notice shall be deemed given on the date of delivery.
Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to the Participant's work or home address as shown on the records of AT&T or, at the option of AT&T, to the Participant's e-mail address as shown on the records of AT&T.  It is the Participant's responsibility to ensure that the Participant's addresses are kept up to date on the records of AT&T.  In the case of notices affecting multiple Participants, the notices may be given by general distribution at the Participants' work locations.
By participating in the Plan, each Participant agrees that AT&T may provide any documents required or permitted under the Federal or state securities laws, including but not limited to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by e-mail, by e-mail attachment, or by notice by e-mail of electronic delivery through AT&T's Internet Web site or by other electronic means.
8.4              Unsecured General Creditor.
Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of any Employer.  No assets of any Employer shall be held under any trust for the benefit of Participants, their beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of any Employer under this Plan.  Any and all of each Employer's assets shall be, and remain, the general, unpledged, unrestricted assets of such Employer.  The only obligation of an Employer under the Plan shall be merely that of an unfunded and unsecured promise of AT&T to make distributions under and in accordance with the terms of the Plan.
8.5              Non-Assignability.
Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, any Cash Deferral Account under the Plan, if any, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable.  No part of  a distributable Cash Deferral Account shall, prior to actual distribution, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency.
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8.6              Employment Not Guaranteed.
Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of an Employer or to serve as a director.
8.7              Errors.
At any time AT&T or an Employer may correct any error made under the Plan without prejudice to AT&T or any Employer.  Neither AT&T nor any Employer shall be liable for any damages resulting from failure to timely allow any contribution to be made to the Plan or for any damages resulting from the correction of, or a delay in correcting, any error made under the Plan.  In no event shall AT&T or any Employer be liable for consequential or incidental damages arising out of a failure to comply with the terms of the Plan.
8.8              Captions.
The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control nor affect the meaning or construction of any of its provisions.
8.9              Governing Law.
To the extent not preempted by Federal law, the Plan, and all benefits and agreements hereunder, and any and all disputes in connection therewith, shall be governed by and construed in accordance with the substantive laws of the State of Texas, without regard to conflict or choice of law principles which might otherwise refer the construction, interpretation or enforceability of this Plan to the substantive law of another jurisdiction.
Because benefits under the Plan are granted in Texas, records relating to the Plan and benefits thereunder are located in Texas, and the Plan and benefits thereunder are administered in Texas, AT&T and the Participant under this Plan, for themselves and their successors and assigns, irrevocably submit to the exclusive and sole jurisdiction and venue of the state or Federal courts of Texas with respect to any and all disputes arising out of or relating to this Plan, the subject matter of this Plan or any benefits under this Plan, including but not limited to any disputes arising out of or relating to the interpretation and enforceability of any benefits or the terms and conditions of this Plan.  To achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Plan, and to ensure consistency in application and interpretation of the Governing Law to the Plan, the parties agree that (a) sole and exclusive appropriate venue for any such action shall be an appropriate Federal or state court in Dallas County, Texas, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Texas court, and no other, (c) such Texas court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto and (d) that the parties waive any and all objections and defenses to bringing any such action before such Texas court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens.
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8.10              Plan to Comply with Section 409A.
In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan.  Notwithstanding any provision to the contrary in this Plan, each provision in this Plan shall be interpreted to permit the deferral of compensation in accordance with Section 409A of the Code and any provision that would conflict with such requirements shall not be valid or enforceable.
8.11              Successors and Assigns.
This Plan shall be binding upon AT&T and its successors and assigns.
 
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AT&T INC.

STOCK PURCHASE AND DEFERRAL PLAN

Adopted November 19, 2004
As amended through September 24, 2015

Article 1 - Statement of Purpose

The purpose of the Stock Purchase and Deferral Plan ("Plan") is to increase stock ownership by, and to provide savings opportunities to, a select group of management employees of AT&T Inc. ("AT&T") and its Subsidiaries.

Article 2 - Definitions

For the purpose of this Plan, the following words and phrases shall have the meanings indicated, unless the context indicates otherwise:

Annual Bonus .  The award designated the "Annual Bonus" by AT&T (including but not limited to an award that may be paid in more frequent installments than annually), together with any individual discretionary award made in connection therewith, or comparable awards, if any, determined by AT&T to be used in lieu of these awards.

             Base Compensation.   The following types of cash-based compensation paid by an Employer (but not including payments made by a non-Employer, such as state disability payments), before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of an Employer, including but not limited to a plan that includes a qualified cash or deferral arrangement under Section 401(k) of the Code:

(a)
base salary;

(b)  lump sum payments in lieu of a base salary increase; and

(c) Annual Bonus.

Payments by an Employer under a disability plan made in lieu of any compensation described above shall be deemed to be a part of the respective form of compensation it replaces for purposes of this definition.  Base Compensation does not include zone allowances or any other geographical differential and shall not include payments made in lieu of unused vacation or other paid days off, and such payments shall not be contributed to this Plan.

Determinations by AT&T (the Committee with respect to Officer Level Employees) of the items that make up Base Compensation shall be final.  The Committee may, from time to time, add or subtract types of compensation to or from the definition of "Base Compensation" provided, however, any such addition or subtraction shall be effective only with respect to the next period in which a Participant may make an election to establish a Share Deferral Account.  Base Compensation that was payable in a prior Plan Year but paid in a later Plan Year shall not be used to determine Employee Contributions or Matching Contributions in such later Plan Year.
 
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Business Day.   Any day during regular business hours that AT&T is open for business.

Change in Control.   With respect to AT&T's direct and indirect ownership of an Employer, a "Change in the effective control of a Corporation," as defined in Treasury Regulation Section 1.409A-3(i)(5)(vi)(A)(1), regardless of whether the Employer is a corporation or non corporate entity as permitted by the regulation, and using "50 percent" in lieu of "30 percent" in such regulation.  A Change in Control will not apply to AT&T itself.

Chief Executive Officer.   The Chief Executive Officer of AT&T Inc.

Code.  References to the Code shall be to provisions of the Internal Revenue Code of 1986, as amended, including regulations promulgated thereunder and successor provisions.  Similarly, references to regulations shall include amendments and successor provisions.

Committee.   The Human Resources Committee of the Board of Directors of AT&T Inc.

Disability. Absence of an Employee from work with an Employer under the relevant Employer's disability plan.

Eligible Employee.  An Employee who:
(a) is a full or part time, salaried Employee of AT&T or an Employer in which AT&T has a direct or indirect 100% ownership interest and who is on active duty or Leave of Absence (but only while such Employee is deemed by the Employer to be an Employee of such Employer);

(b) is, as determined by AT&T, a member of Employer's "select group of management or highly compensated employees" within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA"), which is deemed to include each Officer Level Employee; and

(c) has an employment status which has been approved by AT&T to be eligible to participate in this Plan or is an Officer Level Employee.

Notwithstanding the foregoing, AT&T (the Committee with respect to Officer Level Employees) may, from time to time, exclude any Employee or group of Employees from being deemed an "Eligible Employee" under this Plan.

In the event a court or other governmental authority determines that an individual was improperly excluded from the class of persons who would be permitted to make Employee Contributions during a particular time for any reason, that individual shall not be permitted to make such contributions for purposes of the Plan for the period of time prior to such determination.

             Employee.   Any person employed by an Employer and paid on an Employer's payroll system, excluding persons hired for a fixed maximum term and excluding persons who are neither citizens nor permanent residents of the United States, all as determined by AT&T.   For purposes of this Plan, a person on Leave of Absence who otherwise would be an Employee shall be deemed to be an Employee.

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Employee Contributions.   Amounts credited to a Share Deferral Account pursuant to Section 4.1 (Election to Make Contributions) of the Plan.

Employer.   AT&T Inc. or any of its Subsidiaries.

Exercise Price.   The price per share of Stock purchasable under an Option.

                  Fair Market Value or FMV.   In valuing Stock or any other item subject to valuation under this Plan, the Committee may use such index or measurement as the Committee may reasonably determine from time to time, and such index or measurement shall be the FMV of such Stock or other item, provided that for purposes of determining the Exercise Price of Stock Options, the Committee shall use a value consistent with the requirements of Section 409A.  In the absence of such action by the Committee, FMV means, with respect to Stock, the closing price on the New York Stock Exchange ("NYSE") of the Stock on the relevant date, or if on such date the Stock is not traded on the NYSE, then the closing price on the immediately preceding date such Stock is so traded.

Leave of Absence.   Where a person is absent from employment with an Employer on a leave of absence, military leave, sick leave, or Disability where the leave is given in order to prevent a break in the continuity of term of employment, and permission for such leave is granted (and not revoked) in conformity with the rules of the Employer that employs the individual, as adopted from time to time, and the Employee is reasonably expected to return to service.  Except as set forth below, the leave shall not exceed six (6) months for purposes of this Plan, and the Employee shall Terminate Employment upon termination of such leave if the Employee does not return to work prior to or upon expiration of such six (6) month period, unless the individual retains a right to reemployment under law or by contract.  A twenty-nine (29) month limitation shall apply in lieu of such six (6) month limitation if the leave is due to the Employee being "disabled" (within the meaning of Treasury Regulation §1.409A-3(i)(4)).  A Leave of Absence shall not commence or shall be deemed to cease under the Plan where the Employee has incurred a Termination of Employment.

Officer Level Employee.   Any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934, as amended, and any Employee that is an "officer level" Employee for compensation purposes as shown on the records of AT&T.

Options or Stock Options.   Options to purchase Stock issued pursuant to this Plan.

Participant.   An Employee or former Employee who participates in this Plan.

Plan Year.   Each of the following shall be a Plan Year:  the period January 1, 2005, through January 15, 2006; the period January 16, 2006, through December 31, 2006; and, for all later Plan Years, it is defined as the period from January 1 through December 31.

Retirement or Retire.   Termination of Employment on or after the earlier of the following dates, unless otherwise provided by the Committee:  (a) for Officer Level Employees, the date the Participant is at least age 55 and has five (5) years of Net Credited Service; or (b) the date the Participant has attained one of the following combinations of age and Net Credited Service:

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             Net Credited Service                                                     Age
                           10 years or more                                                        65 or older
                           20 years or more                                                        55 or older
                           25 years or more                                                        50 or older
                           30 years or more                                                        Any age

For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as "Pension Eligibility Service" under the AT&T Pension Benefit Plan – Nonbargained Program ("Pension Plan"), as amended from time to time, except that service with an Employer shall be counted as though the Employer were a "Participating Company" under the Pension Plan and the Employee was a participant in the Pension Plan.

Senior Manager.   Any Employee who is a "senior manager" for compensation purposes as shown on the records of AT&T.

Shares or Share Units.   An accounting entry representing the right to receive an equivalent number of shares of Stock.

Share Deferral Account or Account.   The Account or Accounts established annually by an election by a Participant to make Employee Contributions to the Plan, with each Account relating to a Plan Year.  For each Plan Year after 2008, there shall be (1) a separate Share Deferral Account for Share Units purchased with Employee Contributions of Base Compensation (excluding Annual Bonus) and related Matching Share Units and (2) a separate Share Deferral Account for Share Units purchased with Employee Contributions of Short Term Incentive Award and/or Annual Bonus and any related Matching Share Units.  Earnings on Share Units and Matching Share Units shall accrue to the respective Share Deferral Accounts where they are earned.

Short Term Incentive Award.   A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan, together with any individual discretionary award made in connection therewith; an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including, but not limited to, Performance Units granted under the 2006 Incentive Plan or any successor plan.  It shall also include any other award that the Committee designates as a Short Term Incentive Award specifically for purposes of this Plan (regardless of the purpose of the award) provided the deferral election is made in accordance with Section 409A.

Specified Employee .  Any Participant who is a "Key Employee" (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the 12-month period ending on each December 31st (such 12-month period is referred to below as the "identification period").  All Participants who are determined to be Key Employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4th month following the close of such identification period.

Stock.   The common stock of AT&T Inc.
 
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Subsidiary.   Any corporation, partnership, venture or other entity or business with which AT&T would be considered a single employer under Sections 414(a) and (c) of the Code, using 50% as the ownership threshold as provided under Section 409A of the Code.

Termination of Employment. References herein to "Termination of Employment," "Terminate Employment" or a similar reference, shall mean the event where the Employee has a "separation from service," as defined under Section 409A, with all Employers. For purposes of this Plan, a Termination of Employment with respect to an Employer shall be deemed to also occur when such Employer incurs a Change in Control.


Article 3 - Administration of the Plan

3.1              The Committee .
Except as delegated by this Plan or by the Committee, the Committee shall be the administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions and determine all questions of administration, interpretation and application of the Plan, including, without limitation, questions and determinations of eligibility, entitlement to benefits and payment of benefits, all in its sole and absolute discretion.  The Committee may further establish, adopt or revise such rules and regulations and such additional terms and conditions regarding participation in the Plan as it may deem necessary or advisable for the administration of the Plan.  References in this Plan to determinations or other actions by AT&T, herein, shall mean actions authorized by the Committee, the Chief Executive Officer, the Senior Executive Vice President of AT&T in charge of Human Resources, or their respective successors or duly authorized delegates, in each case in the discretion of such person.  All decisions by the Committee, its delegate or AT&T, as applicable, shall be final and binding.

3.2              Authorized Shares of Stock.
(a) Except as provided below, the number of shares of Stock which may be distributed pursuant to the Plan, exclusive of Article 8 - Options, is 46,000,000.  The number of shares of Stock which may be issued pursuant to the exercise of Stock Options is 34,000,000 (together with an equal number of Stock Options).  In determining the number of authorized shares remaining available for issuance, shares withheld for taxes in a distribution shall not be considered issued and shall not reduce the number of authorized shares.  When an Option is exercised, the authorized shares of Stock that may be issued pursuant to an Option exercise shall be reduced by the number of Options so exercised.  To the extent an Option issued under this Plan is canceled, terminates, expires, or lapses for any reason, such Option shall again be available for issuance under the Plan.  Conversions of Stock awards into Share Units and their eventual distribution (excluding the effects of any dividends on such Share Units) shall count only against the limits of the plans from which they originated and shall not be applied against the limits in this Plan.  To the extent Share Units are credited through deferrals of Stock or Employee Contributions where the distribution of which would be deductible by AT&T under Section 162(m) of the Code without regard to the size of the distribution, and such deductible Share Units are available for distribution, such Share Units shall be distributed first.
 
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(b)  In the event the Committee determines that continuing the issuance of Share Units under the Plan or Stock Options under the Plan may cause the number of shares of Stock that are to be distributed under this Plan or the number of Stock Options (as determined pursuant to subsection (a), above) to exceed the number of authorized shares of Stock, then in lieu of distributing Stock, the Committee may provide after such determination and only with respect to Share Units that have not theretofore been credited to a Share Deferral Account, that such Share Units may be settled in cash equal to the value of the Stock that would otherwise be distributed based on the FMV of the Stock on the date of the distribution of such Share Unit.  The Committee may also provide after such determination and only with respect to Stock Options that have not theretofore been issued that such Stock Options may only be settled on a Net-Settled basis in cash equal to the value of the Stock that would otherwise be distributed based on the FMV of the Stock on the day of exercise.

(c) In the event of a merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, share combination, or other change in the corporate structure of AT&T affecting the shares of Stock (including a conversion of Stock into cash or other property), such adjustment shall be made to the number and class of the shares of Stock which may be delivered under the Plan (including but not limited to individual limits), and in the number and class of and/or price of shares of Stock subject to outstanding Options granted under the Plan, and/or in the number of outstanding Options and Share Units, or such other adjustment determined by the Committee, in each case as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights.

3.3              Claims and Appeals .
 (a)              Claims.  A person who believes that he or she is being denied a benefit to which he or she is entitled under this Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Executive Compensation Administration Department, setting forth his or her claim. The request must be addressed to the AT&T Executive Compensation Administration Department at its then principal place of business.
(b)              Claim Decision.  Upon receipt of a claim, the AT&T Executive Compensation Administration Department shall review the claim and provide the Claimant with a written notice of its decision within a reasonable period of time, not to exceed ninety (90) days, after the claim is received. If the AT&T Executive Compensation Administration Department determines that special circumstances require an extension of time beyond the initial ninety (90)- day claim review period, the AT&T Executive Compensation Administration Department shall notify the Claimant in writing within the initial ninety (90)-day period and explain the special circumstances that require the extension and state the date by which the AT&T Executive Compensation Administration Department expects to render its decision on the claim. If this notice is provided, the AT&T Executive Compensation Administration Department may take up to an additional ninety (90) days (for a total of one hundred eighty (180) days after receipt of the claim) to render its decision on the claim.
If the claim is denied by the AT&T Executive Compensation Administration Department, in whole or in part, the AT&T Executive Compensation Administration Department shall provide a written decision using language calculated to be understood by the Claimant and setting forth:  (i) the specific reason or reasons for such denial; (ii) specific references to pertinent provisions of this Plan on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (iv) a description of the Plan's procedures for review of denied claims and the steps to be taken if the Claimant wishes to submit the claim for review; (v) the time limits for requesting a review of a denied claim under this section and for conducting the review under this section; and (vi)  a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review under this section.
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(c)              Request for Review. Within sixty (60) days after the receipt by the Claimant of the written decision on the claim provided for in this section, the Claimant may request in writing that the Committee review the determination of the AT&T Executive Compensation Administration Department.  Such request must be addressed to the Committee at the address for giving notice in this Plan.  To assist the Claimant in deciding whether to request a review of a denied claim or in preparing a request for review of a denied claim, a Claimant shall be provided, upon written request to the Committee and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim.  The Claimant or his or her duly authorized representative may, but need not, submit a statement of the issues and comments in writing, as well as other documents, records or other information relating to the claim for consideration by the Committee.  If the Claimant does not request a review by the Committee of the AT&T Executive Compensation Administration Department's decision within such sixty (60)-day period, the Claimant shall be barred and stopped from challenging the determination of the AT&T Executive Compensation Administration Department.
(d)              Review of Decision.  Within sixty (60) days after the Committee's receipt of a request for review, the Administrator will review the decision of the AT&T Executive Compensation Administration Department.  If the Committee determines that special circumstances require an extension of time beyond the initial sixty (60)-day review period, the Committee shall notify the Claimant in writing within the initial sixty (60)-day period and explain the special circumstances that require the extension and state the date by which the Committee expects to render its decision on the review of the claim.  If this notice is provided, the Committee may take up to an additional sixty (60) days (for a total of one hundred twenty (120) days after receipt of the request for review) to render its decision on the review of the claim.
During its review of the claim, the Committee shall:
(1)              Take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial review of the claim conducted pursuant to this section;
(2)              Follow reasonable procedures to verify that its benefit determination is made in accordance with the applicable Plan documents; and
(3)              Follow reasonable procedures to ensure that the applicable Plan provisions are applied to the Participant to whom the claim relates in a manner consistent with how such provisions have been applied to other similarly-situated Participants.
After considering all materials presented by the Claimant, the Committee will render a decision, written in a manner designed to be understood by the Claimant.  If the Committee denies the claim on review, the written decision will include (i) the specific reasons for the decision; (ii) specific references to the pertinent provisions of this Plan on which the decision is based; (iii) a statement that the Claimant is entitled to receive, upon request to the Committee and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA.
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The Committee shall serve as the final review committee under the Plan and shall have sole and complete discretionary authority to administer, interpret, construe and apply the Plan provisions, and determine all questions of administration, interpretation, construction, and application of the Plan, including questions and determinations of eligibility, entitlement to benefits and the type, form and amount of any payment of benefits, all in its sole and absolute discretion.  The Committee shall further have the authority to determine all relevant facts and related issues, and all documents, records and other information relevant to a claim conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Plan.  Decisions by the Committee shall be conclusive and binding on all parties and not subject to further review.
In any case, a Participant or Beneficiary may have further rights under ERISA. The Plan provisions require that Participants or Beneficiary pursue all claim and appeal rights described in this section before they seek any other legal recourse regarding claims for benefits.

Article 4 - Contributions

4.1              Election to Make Contributions.
(a)      The Committee shall establish dates and other conditions for participation in the Plan and making contributions as it deems appropriate.  Except as otherwise provided by the Committee, each year an Employee who is an Eligible Employee as of September 30 may thereafter make an election on or prior to the last Business Day of the immediately following November (such election shall be cancelled if the Employee is not an Eligible Employee on the last day such an election may be made) to contribute on a pre-tax basis, through payroll deductions, any combination of the following:

(1)  From 6% to 30% (in whole percentage increments) of the Participant's monthly Base Compensation, other than Annual Bonus, during the calendar year (the Plan Year for such contributions) following the calendar year of such election.  The Employee Contributions shall be used to acquire Share Units to be credited to the Share Deferral Account for that Plan Year.

(2)  Up to 95% (in whole percentage increments or limited to the target amount) of a Short Term Incentive Award, or from 6% to 30% (in whole percentage increments) of Annual Bonus, in each case such contributions shall be made during the second calendar year (which is the Plan Year for such contributions) following the year of such election, except that in 2008 a separate election may be made with respect to contributions to be made in 2009. An Employee may make such an election with respect to the type of Award (Short Term Incentive Award or Annual Bonus) that the Employee is under as of the time the Employee's eligibility to make such election is determined.  If because of a promotion or otherwise, the Employee receives a different type of Award instead of, or in partial or full replacement for, the type of Award subject to the Employee's election for the relevant Plan Year, the election will apply to the other Award as well, including but not limited to any individual discretionary award related thereto.

(b)  The Committee may permit an Eligible Employee to make an election to purchase Share Units under this Plan with compensation other than Base Compensation or Short Term Incentive Awards on such terms and conditions as such Committee may permit from time to time, provided that any such election is made in accordance with Section 409A of the Code.  In no event shall an acquisition of Share Units pursuant to this paragraph (b) or pursuant to the conversion of a right to receive Stock into Share Units (such as through a distribution of Stock under the 2001 Incentive Plan) result in the crediting of an AT&T Matching Contribution or Options.
 
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(c) Notwithstanding anything to the contrary in this Plan, no election shall be effective to the extent it would permit an Employee Contribution or distribution to be made that is not in compliance with Section 409A of the Code.  To the extent such election related to Employee Contributions that complied with such statute and regulations thereunder, that portion of the election shall remain valid, except as otherwise provided under this Plan.

(d)  To the extent permitted by Section 409A of the Code, AT&T may refuse or terminate, in whole or in part, any election to purchase Share Units in the Plan at any time; provided, however, that only the Committee may take such action with respect to persons who are Officer Level Employees.

(e)  In the event the Participant takes a hardship withdrawal pursuant to Treasury Regulation §1.401(k)-1 from a benefit plan qualified under the Code and sponsored by an Employer, any election to make Employee Contributions by such Participant shall be cancelled on a prospective basis, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

4.2              Purchase of Share Units.
(a) Employee Contributions (as well as any corresponding AT&T Matching Contributions) shall be made pursuant to a proper election, only during the Participant's lifetime; provided, however, with respect to Employee Contribution elections made prior to 2007, the Employee must remain an Eligible Employee while making any such contributions.  In the event of a Change in Control of an Employer, subsequent compensation from the Employer may not be contributed to the Plan.  The Employer may continue the then current elections of the participants under a subsequent plan in order to comply with applicable tax laws.

(b)  The number of Share Units purchased by a Participant during a calendar month shall be found by dividing the Participant's Employee Contributions during the month by the FMV of a share of Stock on the last day of such month.

(c)  A contribution to the Plan shall be made when the compensation – from which the contribution is to be deducted – is to be paid ("paid," as used in this Plan, includes amounts contributed to the Plan that would have been paid were it not for an election under this Plan), as determined by the relevant Employer.   The Committee may modify or change this paragraph (c) from time to time.

4.3              Reinvestment of Dividends.
In the month containing a record date for a cash dividend on Stock, each Share Deferral Account shall be credited with that number of Share Units equal to the declared dividend per share of Stock, multiplied by the number of Share Units held in such Share Deferral Account as of such record date, and dividing the product by the FMV of a share of Stock on the last day of such month.

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Article 5 - AT&T Matching Contributions

5.1              AT&T Match.
(a) Each month AT&T shall credit the Participant's relevant Share Deferral Account with  the number of "Matching Share Units" found by taking eighty percent (80%) of the Participant's Employee Contributions from Base Compensation made to this Plan and to the Cash Deferral Plan during the month with respect to the first six percent (6%) of the Participant's monthly Match Eligible Compensation (as defined below) and dividing the resulting figure by the FMV of the Stock on the last day of such month (such resulting amount shall be the "Matching Contribution").  The monthly "Match Eligible Compensation" shall be the sum of:

(1) the monthly Employee Contributions from Base Compensation to this Plan and the Cash Deferral Plan (in the aggregate, "Deferred BC"), plus

(2) the amount of the Participant's monthly Base Compensation in excess of the Deferred BC ("Non-Deferred BC") but only to the extent such monthly Non-Deferred BC, when aggregated with the Participant's total Non-Deferred BC for prior months in such Plan Year, as determined by the relevant Employer, exceeds the limit in effect under Section 401(a)(17) of the Code applicable with respect to such Plan Year.

The foregoing formula shall apply regardless of whether or not the Participant makes contributions to a 401(k) plan.

A Participant may receive Matching Share Units in a Share Deferral Account for a particular form of compensation only if the Participant is then making contributions to the same Share Deferral Account; provided, however, this condition shall not apply for purposes of determining under Section 5.1(a)(2) whether the limit described therein has been reached.

As provided in the definition of Share Deferral Account, Matching Share Units shall be credited to the respective Share Deferral Account that is related to the same form of Employee Contributions (either (1) Base Compensation excluding Annual Bonus or (2) Annual Bonus).

(b) In the event the Participant is not eligible to earn pension accruals under a pension plan offered by AT&T or a Subsidiary and either (1) first becomes an Employee on or after January 1, 2015, or (2) the Participant Terminates Employment on or after January 1, 2015, and the Participant is subsequently rehired as an Employee, then the "eighty percent (80%)" reference in section 5.1(a) shall be replaced with "one hundred percent (100%)" for purposes of determining the number of Matching Share Units to which the Participant would be entitled pursuant to contribution elections made after such hiring or rehiring.

(c) In the sole discretion of the Committee, in the event the Committee reduces the number of Options that AT&T issues for each Share Unit purchased, the Committee may provide for the contribution of a Bonus Matching Contribution on such terms as the Committee determines.  Such Bonus Matching Contribution may not exceed 20% of the Participant's Employee Contributions for the month.  The Bonus Matching Contribution shall be subject to such terms and conditions as required by the Committee and, unless otherwise provided by the Committee, to the same distribution requirements as Matching Contributions.  Pursuant to the foregoing authority and until otherwise provided by the Committee, effective for Share Accounts created pursuant to Employee Contribution elections where such elections are made after January 1, 2010,  AT&T shall make Bonus Matching Contributions equal to 20% of the Participant's monthly Employee Contributions from each of Base Compensation and Short Term Incentive Award (not to exceed the target amount of such award, which limit shall be pro rated for any partial year award).  Such Bonus Matching Contribution shall be used to purchase that number of Matching Share Units found by dividing the relevant Bonus Matching Contribution for the month by the FMV of the Stock on the last day of such month.
 
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5.2              Distribution of Share Units Acquired with Matching Contributions .
A Participant's Matching Share Units shall be distributed in a lump sum, in accordance with the Plan's distribution provisions, in the earlier of: (a) the calendar year following the calendar year of the Termination of Employment of the Participant, or (b) the calendar year in which the Participant reaches age 55, in each case only with respect to Matching Share Units relating to Share Deferral Accounts for Plan Years before such distribution calendar year.

Matching Share Units acquired as part of a Share Deferral Account that commences in or after the calendar year the Employee reaches age 55 or after the calendar year in which the Employee Terminates Employment will be distributed in the same manner and time as other Share Units in such Share Deferral Account.

Notwithstanding anything to the contrary in this section, Matching Share Units acquired in 2008 and later shall be distributed at the same time as other Share Units (including those acquired with Employee Contributions) in the same Share Deferral Account.


Article 6 - Distributions

6.1 Distributions of Share Units.
(a)  Initial Election with Respect to a Share Deferral Account.  At the time the Participant makes an election to make Employee Contributions with respect to a Share Deferral Account, the Participant shall also elect the calendar year the Share Deferral Account shall be distributed, which may be from the first through fifth calendar years after the Plan Year the Account commenced (except as otherwise provided in this Plan with respect to Matching Share Units).  For example, if an Account commenced in 2005, the Participant may elect to commence the distribution in any calendar year from and including 2006 to and including 2010.  If no timely distribution election is made by the Participant, then the Participant will be deemed to have made an election to have the Share Deferral Account distributed in a single installment in the first calendar year after the calendar year the Account commenced.

(b)  Election to Delay a Scheduled Distribution.  A Participant may elect to defer a scheduled distribution of a Share Deferral Account for five (5) additional calendar years beyond that previously elected (except as otherwise provided in this Plan with respect to Matching Share Units).  Unless otherwise provided by the Committee, the election to defer the distribution must be made on or after October 1, and on or before the last Business Day of the next following December, of the calendar year that is the second calendar year preceding the calendar year of the relevant scheduled distribution.  To make this election, the Participant must be an Eligible Employee both on the September 30 immediately preceding such election and on the last day such an election may be made.  For example, an election to defer a scheduled distribution in 2010 must be made during the period from October 1, 2008, through the last business day of December 2008, and the Participant must be an Eligible Employee both on September 30, 2008, and the last business day of December 2008.  An election to defer the distribution of a Share Deferral Account may not be made in the same calendar year that the election to establish the Share Deferral Account is made.  Notwithstanding anything to the contrary in this Plan, (1) an election to defer the distribution of a Share Deferral Account must be made at least 12 months prior to the date of the first scheduled payment under the prior distribution election and (2) the election shall not take effect until at least 12 months after the date on which the election is made.
 
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(c)  A Participant's Share Deferral Account shall be distributed to the Participant on March 10 (or as soon thereafter as administratively practicable as determined by AT&T) of the calendar year elected by the Participant for that Account.  In the event the distribution is to be made to a "Specified Employee" as a result of the Participant's Termination of Employment (other than as a result of a Change in Control), the distribution shall not occur until the later of such March 10 or six (6) months after the Termination of Employment, except it shall be distributed upon the Participant's earlier death in accordance with this Plan.

6.2              Death of the Participant.
In the event of the death of a Participant, notwithstanding anything to the contrary in this Plan, all undistributed Share Deferral Accounts shall be distributed to the Participant's beneficiary in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time, within the later of 90 days following such determination or the end of the calendar year in which determination was made.

6.3              Unforeseeable Emergency Distribution .
If a Participant experiences an "Unforeseeable Emergency," the Participant may submit a written petition to AT&T (the Committee in the case of Officer Level Employees), to receive a partial or full distribution of his Share Deferral Account(s).  In the event that AT&T (the Committee in the case of Officer Level Employees), upon review of the written petition of the Participant, determines in its sole discretion that the Participant has suffered an "Unforeseeable Emergency," AT&T shall make a distribution to the Participant from the Participant's Share Deferral Accounts (other than Matching Share Units), on a pro-rata basis, within the later of 90 days following such determination or the end of the calendar year in which determination was made, subject to the following:

(a)        "Unforeseeable Emergency" shall mean a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's legal spouse, the Participant's beneficiary, or the Participant's dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant's property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.  Whether a Participant is faced with an Unforeseeable Emergency permitting a distribution is to be determined based on the relevant facts and circumstances of each case, but, in any case, a distribution on account of Unforeseeable Emergency shall not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant's assets, to the extent the liquidation of such assets would not cause severe financial hardship, or by cessation of deferrals under the Plan.

(b)        The amount of a distribution to be made because of an Unforeseeable Emergency shall not exceed the lesser of (i) the FMV of the Participant's vested Share Deferral Account, calculated as the date on which the amount becomes payable, as determined by AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, and (ii) the amount reasonably necessary, as determined by the AT&T (the Committee in the case of Officer Level Employees) in its sole discretion, to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution).  Determinations of the amount reasonably necessary to satisfy the emergency need shall take into account any additional compensation that is available if the plan provides for cancellation of a deferral election upon a payment due to an Unforeseeable Emergency.  The determination of amounts reasonably necessary to satisfy the Unforeseeable Emergency need is not required to, but may, take into account any additional compensation that, due to the Unforeseeable Emergency, is available under another nonqualified deferred compensation plan but has not actually been paid, or that is available due to the Unforeseeable Emergency under another plan that would provide for deferred compensation except due to the application of the effective date provisions under Treasury Regulation §1.409A-6.
 
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(c)        Upon such distribution on account of an Unforeseeable Emergency under this Plan, any election to make Employee Contributions by such Participant shall be immediately cancelled, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

6.4              Ineligible Participant.
Notwithstanding any other provisions of this Plan to the contrary, if AT&T receives an opinion from counsel selected by AT&T, or a final determination is made by a Federal, state or local government or agency, acting within its scope of authority, to the effect that an individual's continued participation in the Plan would violate applicable law, then such person shall not make further contributions to the Plan to the extent permitted by Section 409A of the Code.

6.5 Distribution Process.
A Share Deferral Account shall be distributed under this Plan by taking the number of Share Units comprising the Account to be distributed and converting them into an equal number of shares of Stock.  (Once distributed, a Share Unit shall be canceled.)


Article 7 - Transition Provisions

7.1 Stockholder Approval
The Plan was approved by Stockholders at the 2005 Annual Meeting of Stockholders.

7.2              2005 Share Deferral Accounts.
Notwithstanding Article 4 to the contrary, if an Employee is an Eligible Employee on September 30, 2004, the Employee may make an election under Article 4 on or prior to December 15, 2004, with respect to the establishment of a Share Deferral Account for the (i) contribution of Base Compensation and/or Short Term Incentive Awards paid during the period from January 1, 2005, through January 15, 2006, which shall be the Plan Year for such Share Deferral Account; and/or (ii) the conversion of a distribution of Stock that would be made during the same Plan Year pursuant to the 2001 Incentive Plan into an equal number of Share Units, so long as such conversion would not cause the recognition of income for Federal income tax purposes in respect of such distribution of Stock prior to distribution of Share Units under this Plan.
 
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7.3              2007 Amendments.
(a) Amendments made to the Plan on November 15, 2007, shall be effective January 1, 2008. except for amendments to this Article 7, which shall be effective upon adoption.  Any Participants electing prior to November 15, 2007, to make Employee Contributions in 2008 shall have their elections canceled if they do not consent by December 14, 2007, to all prior amendments to this Plan and to the Cash Deferral Plan.  Subject to the foregoing consent requirements, all Employee Contribution elections made prior to 2008, including but not limited to elections to contribute Stock that would be distributed under the 2001 Incentive Plan or a successor plan, shall remain in force, subject to all other terms of the amended Plan. In addition, all unvested but not forfeited Matching Share Units shall vest on November 15, 2007.  Matching Shares that have been forfeited shall not be reinstated, and no amendment to this Plan shall be interpreted as reinstating such forfeitures.

 (b)  Not withstanding anything to the contrary in this Plan, a Participant who as of December 29, 2006, was eligible for an additional payment pursuant to Section 4A of the BellSouth Corporation Executive Incentive Award Deferral Plan shall not, with respect to the 2008 Plan Year, receive Matching Share Units on Base Compensation that exceeds $230,000.

7.4              2008 Amendments.
For Plan Years prior to 2009, Participants who, at the time of the determination of their eligibility to participate in an Account, are paid through a "sales plan" involving the use of commissions may elect to contribute up to 40% of Base Compensation.  For the 2008 Plan Year, only Salary and Short Term Incentive Awards paid after Termination of Employment may be contributed to the Plan.


Article 8 - Options

8.1              Grants.
Options may be issued in definitive form or recorded on the books and records of AT&T for the account of the Participant, at the discretion of AT&T.  If AT&T elects not to issue the Options in definitive form, they shall be deemed issued, and the Participants shall have all rights incident thereto as if they were issued on the dates provided herein, without further action on the part of AT&T or the Participant.  In addition to the terms herein, all Options shall be subject to such additional provisions and limitations as provided in any Administrative Procedures adopted by the Committee prior to the issuance of such Options.  The number of Options issued to a Participant shall be reflected on the Participant's annual statement of account.

8.2              Term of Options.
The Options may only be exercised:  (a) after the earlier of (i) the expiration of one (1) year from date of issue or (ii) the Participant's Termination of Employment, and (b) no later than the tenth (10 th ) anniversary of their issue; and Options shall be subject to earlier termination as provided herein.

8.3              Exercise Price.
The Exercise Price of an Option shall be the FMV of the Stock on the date of issuance of the Option, and an Option may not be repriced.
 
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8.4              Issuance of Options .

(a)  For each Share Deferral Account established by a Participant pursuant to an Employee Contribution election where such election was made prior to January 1, 2010:

(1)  on June 15 of the Plan Year for the Share Deferral Account, the Participant shall receive two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding January through May period with Employee Contributions of Base Compensation and/or Short Term Incentive Award.  A fractional number of Options shall be rounded up to the next whole number.

(2)  on the February 15 immediately following the Plan Year for the Share Deferral Account, a Participant shall receive:

(i)
two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding June through the remainder of the relevant Plan Year with Employee Contributions of Base Compensation and/or Short Term Incentive Award; and

(ii)      two (2) Options for each Share Unit acquired prior to such date by the Participant with dividend equivalents that were derived, directly or indirectly (such as dividend equivalents paid on Share Units acquired with dividend equivalents), from Share Units acquired with Employee Contributions as part of such Share Deferral Account.

(b) A fractional number of Options shall be rounded up to the next whole number.

(c) If Stock is not traded on the NYSE on any of the foregoing Option issuance dates, then the Options shall not be issued until the next such day on which Stock is so traded.

(d) If a Participant Terminates Employment other than (i) while Retirement eligible or (ii) because of death or Disability, no further Options shall be issued to or with respect to such Participant.  In the event of re-Employment following a Termination of Employment, the preceding sentence shall not apply to those Options resulting from participation in the Plan after such re-Employment until a subsequent Termination of Employment.

(e) No more than 400,000 Options shall be issued to any individual under this Plan during a calendar year.  No Share Unit may be counted more than once for the issuance of Options.

(f) The Committee may, in its sole discretion, at any time, increase or lower the number of Options that are to be issued for each Share Unit acquired, not to exceed two (2) Options per Share Unit purchased.  However, if the Committee lowers the number of Options, then such change shall only be effective with respect to the next Share Deferral Account a Participant may elect to establish.

(g) The Committee may also, at any time and in any manner, limit the number of Options which may be acquired as a result of the Short Term Incentive Award being contributed to the Plan.  Further, except as otherwise provided by the Committee, in determining the number of Options to be issued to a Participant with respect to a Participant's contribution of a Short Term Incentive Award to the Plan and subsequent crediting of Share Units, Options may be issued only with respect to an amount which does not exceed the target amount of such award (or such other portion of the award as may be determined by the Committee).  Where a Participant's election to contribute a Short Term Incentive Award to the Plan becomes applicable to Annual Bonus, the above limitation on options shall apply to the contribution of Annual Bonus as though it were a Short Term Incentive Award.
 
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(h) No options shall be issued to or in respect of a Participant for a particular issuance, unless at least ten (10) Options will be issued to that Participant.

8.5              Exercise and Payment of Options .
Options shall be exercised by providing notice to the designated agent selected by AT&T (if no such agent has been designated, then to AT&T), in the manner and form determined by AT&T, which notice shall be irrevocable, setting forth the exact number of shares of Stock with respect to which the Option is being exercised and including with such notice payment of the Exercise Price.  When Options have been transferred, AT&T or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option.  No Option may be exercised with respect to a fraction of a share of Stock.

Exercises of Options may be effected only on days and during the hours that the New York Stock Exchange is open for regular trading or as otherwise provided or limited by AT&T.  If an Option expires on a day or at a time when exercises are not permitted, then the Options may be exercised no later than the immediately preceding date and time that the Options were exercisable.

The Exercise Price shall be paid in full at the time of exercise.  No Stock shall be issued or transferred until full payment has been received therefore.

Payment may be made:

(a) in cash, or

(b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as AT&T may impose from time to time, and further subject to suspension or termination of this provision by AT&T at any time, by:

(i) electing a Stock-Settled Exercise on or after February 1, 2013.  Upon exercise of Options through a Stock-Settled Exercise, the Participant shall receive that number of shares of Stock found by (1) subtracting the Exercise Price of an Option being exercised (on a per share basis) from the FMV of the Stock as of the immediately preceding day that the Stock was traded on the NYSE, (2) multiplying the difference by the number of Options being exercised, and (3) dividing the result by the same FMV.  For example, a Participant exercises 1,000 Options with an Exercise Price of $30 (exercises may only occur on a day when the NYSE is open for regular trading) and the FMV for the immediately preceding trading day was $40.  In that case, the Participant would receive his $10,000 profit in the form of 250 shares of Stock, subject to tax withholding and any other costs provided under this Plan.
 
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or;

(ii) if AT&T has designated a stockbroker to act as AT&T's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker:  (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a sell order) a sufficient portion of the Stock to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to AT&T.  In the event the stockbroker sells any Stock on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and AT&T disclaims any responsibility for the actions of the stockbroker in making any such sales.  No Stock shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to AT&T.
 
 
8.6              Restrictions on Exercise and Transfer.
No Option shall be transferable except: (a) upon the death of a Participant in accordance with AT&T's Rules for Employee Beneficiary Designations, as the same may be amended from time to time; and (b) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution.  During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative.  After the death of the Participant, an Option shall only be exercised by the holder thereof (including but not limited to an executor or administrator of a decedent's estate) or his or her guardian or legal representative.  In each such case the Option holder shall be considered a Participant for the limited purpose of exercising such Options.

8.7              Termination of Employment .
(a)  Not Retirement Eligible.  Unless otherwise provided by the Committee, if a Participant Terminates Employment while not Retirement eligible, a Participant's Options may be exercised, to the extent then exercisable:

(i) if such Termination of Employment is by reason of death or Disability, then for a period of three (3) years from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter; or

(ii) if such Termination of Employment is for any other reason, then for a period of one (1) year from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter.

(b)  Retirement Eligible.  Unless otherwise provided by the Committee, if a Participant Terminates Employment while Retirement eligible, the Participant's Option may be exercised, to the extent then exercisable:  (i) for a period of five (5) years from the date of Retirement or (ii) until the expiration of the stated term of such Option, whichever period is shorter.

(c) Re-Employment of a Participant after a Termination of Employment shall have no effect on the periods during which Options resulting from the prior Employment may be exercised.  For example, if the Option exercise period has been shortened because of the prior Termination of Employment, it shall not be extended because of the re-Employment.
 
Page 17 

(d)  Notwithstanding any other definition of Termination of Employment under this Plan, for purposes of this Article 8 – Options only, a Termination of Employment shall mean the cessation of the Employee being employed by any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest, including but not limited to where AT&T ceases to hold such interest in the employing company.  In addition, the definition of Retirement for purposes of this Article 8 shall use the immediately foregoing definition of Termination of Employment in  lieu of any other definition.


Article 9 - Discontinuation, Termination, Amendment .

9.1              AT&T's Right to Discontinue Offering Share Units.
The Committee may at any time discontinue offerings of Share Units under the Plan.  Any such discontinuance shall have no effect upon existing Share Units or the terms or provisions of this Plan as applicable to such Share Units.

9.2              AT&T's Right to Terminate Plan.
The Committee may terminate the Plan at any time.  Upon termination of the Plan, contributions shall no longer be made under the Plan.

After termination of the Plan, Participants shall continue to earn dividend equivalents in the form of Share Units on undistributed Share Units and shall continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of Participant's elections and this Plan.  Notwithstanding the foregoing, the termination of the Plan shall be made solely in accordance with Section 409A of the Code and in no event shall cause the accelerated distribution of any Account unless such termination is effected in accordance with Section 409A of the Code.

9.3 Amendment .
The Committee may at any time amend the Plan in whole or in part including but not limited to changing the formulas for determining the amount of AT&T Matching Contributions under Article 5 or decreasing the number of Options to be issued under Article 8; provided, however, that no amendment, including but not limited to an amendment to this section, shall be effective, without the consent of a Participant, to alter, to the material detriment of such Participant, a Share Deferral Account of the Participant, other than as provided elsewhere in this section.   For purposes of this section, an alteration to the material detriment of a Participant shall include, but not be limited to, a material reduction in the period of time over which Stock may be distributed to a Participant, any reduction in the Participant's number of vested Share Units or Options, or an increase in the Exercise Price or decrease in the term of an Option.   Any such consent may be in a writing, telecopy, or e-mail or in another electronic format. An election to acquire Share Units with Employee Contributions shall be conclusively deemed to be the consent of the Participant to any and all amendments to the Plan prior to such election, and such consent shall be a condition to making any election with respect to Employee Contributions.

Notwithstanding anything to the contrary contained in this section of the Plan, the Committee may modify this Plan with respect to any person subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended ("Exchange Act") to place additional restrictions on the exercise of any Option or the transfer of any Stock not yet issued under the Plan.
 
Page 18 

The Plan is established in order to provide deferred compensation to a select group of management and highly compensated employees with in the meaning of Sections 201(2) and 301(a)(3) of ERISA. To the extent legally required, the Code and ERISA shall govern the Plan, and if any provision hereof is in violation of an applicable requirement thereof, the Company reserves the right to retroactively amend the Plan to comply therewith to the extent permitted under the Code and ERISA.  The Company also reserves the right to make such other changes as may facilitate implementation of Section 409A of the Code.  Provided, however, that in no event shall any such amendments be made in violation of the requirements of Section 409A of the Code.

Article 10 – Miscellaneous.

10.1              Tax Withholding .
Upon distribution of Stock, including but not limited to, shares of Stock issued upon the exercise of an Option, AT&T shall withhold shares of Stock sufficient in value, using the FMV on the date determined by AT&T to be used to value the Stock for tax purposes, to satisfy the minimum amount of Federal, state, and local taxes required by law to be withheld as a result of such distribution. Employment taxes incurred by a Participant on Employee Contributions and on Matching Contributions shall be withheld from the Participant's regular wages or paid in cash by the Participant as they become due.

Any fractional share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of AT&T, paid in cash to the Participant.

Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 8.5, hereof, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds.  For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the FMV of the Stock.

10.2              Elections and Notices.
Notwithstanding anything to the contrary contained in this Plan, all elections and notices of every kind under this Plan shall be made on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including through electronic means, over the Internet or otherwise.  An election shall be deemed made when received by AT&T (or its designated agent, but only in cases where the designated agent has been appointed for the purpose of receiving such election), which may waive any defects in form.  Unless made irrevocable by the electing person, each election with regard to making Employee Contributions or distributions of Share Deferral Accounts shall become irrevocable at the close of business on the last day to make such election. AT&T may limit the time an election may be made in advance of any deadline.

If not otherwise specified by this Plan or AT&T, any notice or filing required or permitted to be given to AT&T under the Plan shall be delivered to the principal office of AT&T, directed to the attention of the Senior Executive Vice President in charge of Human Resources for AT&T or his or her successor.  Such notice shall be deemed given on the date of delivery.
 
Page 19 

Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to the Participant's work or home address as shown on the records of AT&T or, at the option of AT&T, to the Participant's e-mail address as shown on the records of AT&T.  It is the Participant's responsibility to ensure that the Participant's addresses are kept up to date on the records of AT&T.  In the case of notices affecting multiple Participants, the notices may be given by general distribution at the Participants' work locations.

By participating in the Plan, each Participant agrees that AT&T may provide any documents required or permitted under the Federal or state securities laws, including but not limited to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by e-mail, by e-mail attachment, or by notice by e-mail of electronic delivery through AT&T's Internet Web site or by other electronic means.

10.3              Unsecured General Creditor .
Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of any Employer.  No assets of any Employer shall be held under any trust for the benefit of Participants, their beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of any Employer under this Plan.  Any and all of each Employer's assets shall be, and remain, the general, unpledged, unrestricted assets of such Employer.  The only obligation of an Employer under the Plan shall be merely that of an unfunded and unsecured promise of AT&T to distribute shares of Stock corresponding to Share Units and Options, under the Plan.

10.4              Non-Assignability .
Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage, or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, shares of Stock corresponding to Share Units under the Plan, if any, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable.  No part of the Stock distributable shall, prior to actual distribution, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency.

10.5              Employment Not Guaranteed .
Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of an Employer or to serve as a director.

10.6              Errors.
At any time AT&T or an Employer may correct any error made under the Plan without prejudice to AT&T or any Employer.  Neither AT&T nor any Employer shall be liable for any damages resulting from failure to timely allow any contribution to be made to the Plan or for any damages resulting from the correction of, or a delay in correcting, any error made under the Plan.  In no event shall AT&T or any Employer be liable for consequential or incidental damages arising out of a failure to comply with the terms of the Plan.

10.7 Captions .
The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control nor affect the meaning or construction of any of its provisions.
 
Page 20 

10.8              Governing Law .
To the extent not preempted by Federal law, the Plan, and all benefits and agreements hereunder, and any and all disputes in connection therewith, shall be governed by and construed in accordance with the substantive laws of the State of Texas, without regard to conflict or choice of law principles which might otherwise refer the construction, interpretation or enforceability of this Plan to the substantive law of another jurisdiction.

Because benefits under the Plan are granted in Texas, records relating to the Plan and benefits thereunder are located in Texas, and the Plan and benefits thereunder are administered in Texas, AT&T and the Participant under this Plan, for themselves and their successors and assigns, irrevocably submit to the exclusive and sole jurisdiction and venue of the state or Federal courts of Texas with respect to any and all disputes arising out of or relating to this Plan, the subject matter of this Plan or any benefits under this Plan, including but not limited to any disputes arising out of or relating to the interpretation and enforceability of any benefits or the terms and conditions of this Plan.  To achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Plan, and to ensure consistency in application and interpretation of the Governing Law to the Plan, the parties agree that (a) sole and exclusive appropriate venue for any such action shall be an appropriate Federal or state court in Dallas County, Texas, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Texas court, and no other, (c) such Texas court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto and (d) that the parties waive any and all objections and defenses to bringing any such action before such Texas court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens .

10.9              Plan to Comply with Section 409A.
In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan.  Notwithstanding any provision to the contrary in this Plan, each provision in this Plan shall be interpreted to permit the deferral of compensation in accordance with Section 409A of the Code and any provision that would conflict with such requirements shall not be valid or enforceable.

10.10              Successors and Assigns .
This Plan shall be binding upon AT&T and its successors and assigns.

10.11  Loyalty Conditions for Officer Level Employees and Senior Managers

Each Officer Level Employee or a Senior Manager who elects to make Employee Contributions under Section 4.1 of this Plan shall be subject to the agreements and conditions of this section.

(a)              By making an Employee Contribution election under Section 4.1 of this Plan after September 1, 2009, a Participant acknowledges that AT&T would be unwilling to provide for such an election but for the loyalty conditions and covenants set forth in this section, and that the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan benefits for the Participants.  Accordingly, as a condition to making an Employee Contribution election under Section 4.1 of this Plan after September 1, 2009, each such electing Participant is deemed to agree that he shall not, without obtaining the written consent of the Committee in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in this section.
(b)              Definitions .  For purposes of this section and of the Plan generally:
(i)
an "Employer Business" shall mean AT&T Inc. and any of its Subsidiaries, or any business in which they or any affiliate of theirs has a substantial ownership or joint venture interest;
(ii)
"engaging in competition with AT&T" shall mean, while employed by AT&T or any of its Subsidiaries, or within two (2) years after Participant's Termination of Employment, engaging by the Participant in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business.  "Engaging in competition with AT&T" shall not include owning a non-substantial publicly traded interest as a shareholder in a business that competes with an Employer Business.  "Engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.
Page 22 
 
(iii)
"engaging in conduct disloyal to AT&T" means, while employed by AT&T or any of its Subsidiaries, or within two (2) years after Participant's Termination of Employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by AT&T or any of its Subsidiaries during the one (1) year prior to the Participant's Termination of Employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T or any of its Subsidiaries; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Participant had business contact on behalf of any Employer Business during the two (2) years prior to the Participant's Termination of Employment (regardless of the reason for that termination) to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or any of its Subsidiaries; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom Participant had business contact, whether in person or by other media ("Customer"), on behalf of any Employer Business during the two (2) years prior to the Participant's Termination of Employment (regardless of the reason for that termination), to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business.  "Engaging in conduct disloyal to AT&T" shall also mean, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.
 
(iv)
"Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to Participant, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure.  Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by Participant.  For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business.  Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by Participant from a third party; (iii) was known to Participant prior to receipt from the Employer Business; or (iv) was independently developed by Participant or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by Participant or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.
(c)              Equitable Relief.  The parties recognize that any Participant's breach of any of the covenants in this section will cause irreparable injury to the AT&T, will represent a failure of the consideration under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to provide the Participant with the opportunity to receive Plan benefits, and that monetary damages would not provide AT&T with an adequate or complete remedy that would warrant AT&T's continued sponsorship of the Plan (including the accrual or granting of Share Units, Matching Share Units and Options) for all Participants.  Accordingly, in the event of a Participant's actual or threatened breach of the covenants in this section, the Committee, in addition to all other rights and acting as a fiduciary under ERISA on behalf of all Participants, shall have a fiduciary duty (in order to assure that AT&T receives fair and promised consideration for its continued Plan sponsorship and funding) to seek an injunction restraining the Participant from breaching the covenants in this Section.  AT&T shall pay for any Plan expenses that the Committee incurs hereunder, and shall be entitled to recover from the Participant its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies.
(d)              Uniform Enforcement.  In recognition of AT&T's need for nationally uniform standards for the Plan administration, it is an absolute condition in consideration of any Participant's ability to make Employee Contribution elections under Section 4.1 of this Plan after September 1, 2009, that each and all of the following conditions apply to all such electing Participants:
Page 23 
(i)
ERISA shall control all issues and controversies hereunder, and the Committee shall serve for purposes hereof as a "fiduciary" of the Plan and its "named fiduciary" within the meaning of ERISA.
(ii)
All litigation between the parties relating to this section shall occur in federal court, which shall have exclusive jurisdiction; any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA.
Page 24 










SUPPLEMENTAL LIFE INSURANCE PLAN










Effective: January 1, 1986
Revisions Effective:  September 24, 2015
SUPPLEMENTAL LIFE INSURANCE PLAN
1.              Purpose.   The purpose of the Supplemental Life Insurance Plan ("Plan") is to allow for provision of additional survivor benefits for Eligible Employees.
2.              Definitions.   For purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise:
Annual Base Salary or Annual Salary or Salary .
"Annual Base Salary" or "Annual Salary" or "Salary" shall mean an Eligible Employee's annual base salary rate determined by AT&T, excluding (1) all differentials regarded as temporary or extra payments and (2) all payments and incentive awards and distributions made either as a long-term award or as a short-term award; and such Salary shall be as before reduction due to any contribution pursuant to any deferred compensation plan or agreement provided by AT&T, including but not limited to compensation deferred in accordance with Section 401(k) of the Internal Revenue Code.  Annual Salary or Salary shall mean an annualized amount determined from an Eligible Employee's Annual Base Salary rate.
Beneficiary.   "Beneficiary" shall mean any beneficiary or beneficiaries designated by the Eligible Employee pursuant to the AT&T Rules for Employee Beneficiary Designations as may hereafter be amended from time to time ("Rules").
BSLIP Offset.   "BSLIP Offset" shall equal the sum of the amounts (1) and (2) described below:  an amount of level death benefit that would be paid under the participant's BellSouth Supplemental Life Insurance Plan ("BSLIP") policy(ies) as if the participant had restructured such policy(ies) based on the December 31, 2008 cash value to provide a level death benefit assuming no additional premium payments to the policy(ies), as calculated by the BSLIP administrator during 2008 and communicated to each active officer; or, an amount of level death benefit that would be paid under the participant's Cingular Wireless BLS Executive Transition Supplemental Life Insurance Plan policy(ies) as if the participant had restructured such policy(ies) based on the December 31, 2007 cash value to provide a level death benefit assuming no additional premium payments to the policy(ies), as calculated by the BSLIP administrator during 2008 and communicated to each active officer; and an amount equal to the death benefit provided under the participant's BellSouth Split Dollar Life Insurance Plan policy(ies) as of December 31, 2008 and Cingular Wireless BLS Executive Transition Split Dollar Life Insurance Plan policy(ies) as of December 31, 2007.
This sum is applied as an offset to this Plan as described in Section 4, regardless of whether or not the participant actually restructured his policy or made other decisions regarding such BellSouth and Cingular policy(ies).
BSLIP Retiree Offset.   "BSLIP Retiree Offset" shall equal the sum of the amounts (1) and (2) described below:  (1) an amount equal to the death benefit provided under the participant's BellSouth Supplemental Life Insurance Plan policy(ies) as if the participant died on December 31, 2008; and (2) an amount equal to the death benefit that was provided under the participant's BellSouth Split Dollar Life Insurance policy(ies) as if the participant died on his BSLIP retirement date.  This amount is applied as an offset to this Plan as described in Section 4.
2
Chairman.   "Chairman" shall mean the Chairman of the Board of AT&T Inc.
Committee.   "Committee" shall mean the Human Resources Committee of the Board of AT&T Inc.
Eligible Employee.   "Eligible Employee" shall mean an Officer and any other individual who is participating in the Plan as of September 1, 2005.  An employee of a company acquired by AT&T shall not be considered an Eligible Employee unless designated as eligible by the CEO of AT&T Inc. ("CEO").  Notwithstanding the foregoing, the CEO may, from time to time, exclude any Officer or group of Officers from being an "Eligible Employee" under this Plan; provided however, only the Committee shall have the authority to exclude from participation or take any other action with respect to Executive Officers.

ELIP Offset.   "ELIP Offset" shall equal an amount of level death benefit that would be paid under the participant's AT&T Supplemental Life Insurance Program ("ELIP") policy as if the participant had restructured his ELIP policy based on the December 31, 2007 cash value to provide a level death benefit assuming no additional premium payments to the policy, as calculated by the ELIP administrator during 2007 and communicated to each active officer participating in ELIP.  This amount is applied as an offset to this Plan as described in Section 4, regardless of whether or not the participant actually restructured his policy or made other decisions regarding such ELIP policy.
Executive Officer.   "Executive Officer" shall mean any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934.
Insurance Contract.   "Insurance Contract" shall mean a contract(s) of life insurance insuring the life of the Eligible Employee entered into by AT&T.
Officer.   "Officer" shall mean an individual who is designated as an officer of AT&T or of any AT&T subsidiary for compensation purposes on AT&T's records.
Plan Administrator.   "Plan Administrator" shall mean any person or persons whom the Committee may appoint to administer the Plan; provided that the Committee may act as the Plan Administrator at any time.
Retirement.   "Retirement" shall mean the termination of an Eligible Employee's employment with AT&T and any of its subsidiaries, for reasons other than death, on or after the earlier of the following dates:
(1)
the date a participant has attained age 55, and,
3
(a)
for an individual who becomes a participant on or after January 1, 2002, has a five (5) year Term of Employment, and
(b)
for an individual who is designated as an Officer on or after October 1, 2015, has a ten (10) year Term of Employment, or

(2) the date the Eligible Employee has attained one of the following combinations of (i) age, and (ii) Term of Employment, upon his or her termination of employment on or after April 1, 1997, except as otherwise indicated below:
     Term of Employment
Age
25 years or more
50 or older
30 years or more
            Any age

With respect to an Eligible Employee who is granted an EMP Service Pension under and pursuant to the provisions of the AT&T Pension Benefit Plan - Nonbargained Program ("ATTPBP") upon termination of Employment, the term "Retirement" shall include such Eligible Employee's termination of employment.
Termination Under EPR.   In determining whether an Eligible Employee's termination of employment under the Enhanced Pension and Retirement Program ("EPR") is a Retirement for purposes of this Plan, five years shall be added to each of age and net credited service ("NCS").  If with such additional age and years of service, (1) an Eligible Employee upon such termination of employment under EPR is Retirement Eligible according to the AT&T Supplemental Retirement Income Plan ("SRIP") or (2) the Eligible Employee upon such termination of employment under EPR has attained one of the following combinations of age and service,
Actual NCS + 5 Years
Actual Age + 5 Years
10 years or more
65 or older
20 years or more
55 or older
25 years or more
50 or older
30 years or more
Any age

then such termination of employment shall be a Retirement for all purposes under this Plan and the Eligible Employee shall be entitled to the treatment under this Plan afforded in the case of a termination of employment which is a Retirement.
AT&T.   "AT&T" shall mean AT&T Inc.
3.              Eligibility.   Each Eligible Employee shall be eligible to participate in the Plan.
4.              Pre-Retirement Benefits and Post-Retirement Benefits.
4
Basic Death Benefit
While this plan is in effect, the Beneficiary who is designated by the Eligible Employee shall be entitled to receive as a Basic Death Benefit from the proceeds of the Insurance Contract an amount equal to the result of multiplying the Eligible Employee's Annual Salary rounded to the next higher $1,000 by the following amounts:
Chief Executive Officer                                                        2
Other Eligible Employees                                              1

This amount shall be reduced (but not below zero) by any amount payable under any group term life insurance covering the Eligible Employee which is maintained by AT&T, which amount of group term life insurance will be limited to a maximum of $50,000.
In addition, the Basic Death Benefit will be reduced (but not below zero) by the ELIP Offset amount, BSLIP Offset amount or BSLIP Retiree Offset amount.
Furthermore, any officer who becomes eligible to participate in this Plan on or after the date that an ELIP Offset, BSLIP Offset or BSLIP Retiree Offset has been determined by the ELIP or BSLIP plan administrator, as applicable, will have his Basic Death Benefit reduced accordingly by such offset amount.
The amount of Basic Death Benefit payable hereunder will automatically increase if pay increases.
At Retirement, the pre-retirement benefit converts to a post-retirement benefit.  This benefit is equal to one times Salary rounded to the next higher $1,000 (at the time of retirement) and shall be reduced (but not below zero) by any amount payable under any group term life insurance covering the Eligible Employee which is maintained by AT&T, which amount of group term life insurance will be limited to a maximum of $50,000; provided, however, for an executive who first becomes a Plan participant on or after January 1, 1998, this post-retirement death benefit shall be reduced by 10% of its original post-retirement amount each year for five years beginning at the later of the date the Eligible Employee attains age 66 or Retirement.
Optional Supplementary Benefit
Subject to the limitations in the remaining paragraphs in this section describing optional supplementary benefits, each Eligible Employee may also purchase optional supplementary pre-retirement life insurance coverage from AT&T in an amount equal to one times the Eligible Employee's Annual Salary rounded to the next higher $1,000, and an additional amount of such insurance in an amount equal to another one times such amount (for a total of two times the Annual Salary rounded to the next higher $1,000), which insurance shall be payable from the proceeds of the Insurance Contract.  Each such amount of insurance ("one times salary") continued until such employee reaches age 65, by continuing to contribute for it, shall entitle the beneficiary under the Insurance Contract to receive an amount from the proceeds of such Insurance Contract equal to one times the Eligible Employee's final Annual Salary rounded to the next higher $1,000, when such Eligible Employee dies after Retirement.
5
No ELIP Offset, BSLIP Offset, nor BSLIP Retiree Offset will reduce the amount of Optional Supplementary Benefit for any participant.
To elect this optional supplementary coverage, the Eligible Employee must complete an enrollment form on which he or she specifies the amount of coverage he or she wishes to purchase and authorizes his or her employing company to deduct his or her contributions for coverage from his or her salary.
An Eligible Employee may not elect this coverage while receiving disability benefits under any Company disability benefit plan.
An Eligible Employee must make his or her election to purchase optional supplementary coverage within three calendar months of being declared eligible to participate in the Plan; except any Eligible Employee who was declared an Eligible Employee before October 1, 1997, shall have until December 31, 1997 to enroll for such optional supplementary coverage or to increase such coverage.
The optional supplementary life insurance is effective upon AT&T's binding of life insurance coverage for the Eligible Employee pursuant to an Insurance Contract.
Effective January 1, 1998, once an Eligible Employee enrolls for optional supplementary coverage, he or she can later decrease or terminate such coverage but never increase or reinstate such coverage.
Regardless of the amount of coverage elected, the amount in force will automatically increase if Salary increases.  The cost for this coverage will increase accordingly.
This optional supplementary life insurance is paid for on a contributory basis by those Eligible Employees who enroll in the coverage.  The cost of coverage, and therefore, how much an Eligible Employee contributes, depends on age and the amount of coverage and shall be as determined by AT&T.  There will be no periodic waiver of premium payments.
In the event of death, the Eligible Employee's optional supplementary life insurance benefit will be paid to the Eligible Employee's Beneficiary or Beneficiaries in a lump sum, unless the Salary Continuation Death Benefit form of payment was elected on the Eligible Employee's enrollment form.  The option to elect other than a lump sum payment is limited to an Eligible Employee who became an Eligible Employee on or before January 1, 1998.  If the Eligible Employee has no surviving beneficiaries, the benefit will be paid in a lump sum in accordance with the Rules.
The optional supplementary life insurance coverage hereunder will automatically continue while an Eligible Employee is receiving disability benefits under any AT&T disability benefit plan, provided the Eligible Employee continues his or her contributions.
If an Eligible Employee terminates employment with AT&T or any of its subsidiaries for any reason other than Retirement, this coverage will stop at the end of the month of termination; provided, however, Eligible Employees who are 65 at the time of their termination will continue to have non-contributory unreduced coverage after age 65.
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Alternate Death Benefit
Alternate death benefit coverage shall only be available to an Eligible Employee who became an Eligible Employee before January 1, 1998.  Such Eligible Employees shall be entitled to elect to receive alternate death benefit life insurance coverage; provided such election is made before January 1, 1998.
Under such coverage, an Eligible Employee's Beneficiary or Beneficiaries will be entitled to receive from the proceeds of the Insurance Contract a payment equal to the Eligible Employee's final Annual Salary upon his or her death.  This benefit will not be rounded to the next higher $1,000.  The amount of insurance in force will automatically increase if salary increases.  Coverage applies to death from any cause, except with respect to an on-the-job accident for which an Eligible Employee is protected while an active employee by any Accident Death Benefit feature of the ATTPBP.
By enrolling in this coverage, an Eligible Employee automatically waives his or her eligibility for any Sickness Death Benefit and Pensioner Death Benefits otherwise payable under the ATTPBP.
The coverage provided by the alternate death benefit life insurance coverage will continue after Retirement .
To elect this coverage, an Eligible Employee must complete an irrevocable enrollment and waiver form.
AT&T pays the full cost of the alternate death benefit life insurance coverage.
The insurance benefit provided under this alternate death benefit life insurance will be paid in a lump sum, unless otherwise elected on the Eligible Employee's enrollment form.
Alternate death benefit coverage ceases upon an Eligible Employee's Termination of Employment other than a Retirement.  This alternate death benefit life insurance may not be converted to an individual policy.
Salary Continuation Death Benefit.
The salary continuation death benefit shall only be available under the conditions specified hereunder, to an Eligible Employee who became an Eligible Employee before January 1, 1998.
By a written election filed with AT&T before January 1, 1998, an Eligible Employee may terminate his or her rights to a Basic Death Benefit and/or to Optional Supplementary Coverage (if any) and/or to an Alternate Death Benefit (if any).
If such an election is filed, and the Eligible Employee dies on or after the first day of the calendar year following the year in which such election is filed and prior to the termination of coverage pursuant to Section 7, the Eligible Employee's Beneficiary or Beneficiaries theretofore named shall be paid by AT&T an amount per annum for ten (10) years which amounts, in the aggregate, have a net present value, using an eleven percent (11%) discount rate, equal to one hundred eight-five percent (185%) of the (i) Basic Death Benefit amount and/or (ii) the amount elected as Optional Supplementary coverage (if any) and/or (iii) the amount elected as an Alternate Death Benefit (if any) which would be payable to his or her Beneficiary or Beneficiaries as of the date of the Eligible Employee's death, and no other benefit shall be payable hereunder as either a Basic Death Benefit, Optional Supplementary Coverage or Alternate Death Benefit.  Such payment(s) shall commence no later than sixty (60) days following the date of the Eligible Employee's death.
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On or after January 1, 1998, an Eligible Employee who has elected death benefits in the form of salary continuation pursuant to this Section may cancel such election and have his or her Beneficiaries receive death benefits as insurance in a lump-sum but, an Eligible Employee who cancels his or her salary continuation election may not thereafter re-elect such option.
Survivor Annuity Equivalent
Additionally, each Eligible Employee who is not eligible for the Immediate Automatic Pre-retirement Survivor Annuity of the ATTPBP (or equivalent thereof) shall be eligible hereunder for a Survivor Annuity Equivalent benefit of one times salary payable to the surviving spouse of such Eligible Employee.  Such benefit shall be paid as follows:  an amount per annum for ten (10) years shall be paid to the Eligible Employee's surviving spouse which amounts, in the aggregate, shall have a net present value, using an eleven percent (11%) discount rate, equal to one hundred eighty-five percent (185%) of one times the Eligible Employee's salary at the time of his or her death; provided, however, no such Survivor Annuity Equivalent payments will be made on or after the date of death of the surviving spouse.  Such payments shall commence no later than sixty (60) days following the date of the Eligible Employee's death.
For the purposes of the Survivor Annuity Equivalent, the Eligible Employee's surviving spouse means a spouse legally married to the Eligible Employee at the time of the Eligible Employee's death.
Eligibility for the Survivor Annuity Equivalent shall automatically cease on the date of termination of the Eligible Employee's employment.  If the Eligible Employee becomes totally disabled prior to Retirement, the Eligible Employee shall continue to be eligible for the Survivor Annuity Equivalent until the expiration of disability benefits.  If the Eligible Employee is granted a leave of absence, other than for military service of more than four weeks, the Eligible Employee shall continue to be eligible for the Survivor Annuity Equivalent during such leave of absence.
The Eligible Employee shall cease to be eligible for the Survivor Annuity Equivalent at the conclusion of the day immediately preceding the date the Eligible Employee becomes eligible for the Immediate Automatic Pre-retirement Survivor Annuity of the ATTPBP.
5.              Incidents of Ownership.   AT&T will be the owner and hold all the incidents of ownership in the Insurance Contract, including the right to dividends, if paid.  The Eligible Employee may specify in writing to AT&T, the Beneficiary or Beneficiaries and the mode of payment for any death proceeds not in excess of the amounts payable under this Plan.  Upon receipt of a written request from the Eligible Employee, AT&T will immediately take such action as shall be necessary to implement such Beneficiary appointment.  Any balance of proceeds from the Insurance Contract not paid as either a Basic Death Benefit or otherwise pursuant to the Plan shall be paid to AT&T.
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6.              Premiums.   All premiums due on the Insurance Contract shall be paid by AT&T.  However, the Eligible Employee agrees to reimburse AT&T by January 31 following the date of each premium payment in an amount such that, for Federal Income Tax purposes the reimbursement for each year is equal to the amount which would be required to be included in the Eligible Employee's income for Federal Income Tax purposes by reasons of the "economic benefit" of the Insurance Contract provided by AT&T; provided, however, that AT&T, in its sole discretion, may decline to accept any such reimbursement and require the inclusion of such "economic benefit" in the Eligible Employee's income.  In its discretion AT&T may deduct the Eligible Employee's portion of the premiums from the Eligible Employee's pay.  For purposes of this Plan, the value of the "economic benefit" shall be determined based on the insurers published premium rates available to all standard risks for initial issue one-year term insurance in compliance with Revenue Rulings 66-110 and 67-154 issued by the Internal Revenue Service.
7.              Termination of Coverage.   An Eligible Employee's coverage under this Plan shall terminate immediately when the Eligible Employee realizes an "Event of Termination" which shall mean any of the following:
(a)              Termination of an Eligible Employee's employment with his or her employing company for any reason other than (i) death, (ii) Disability as such term is defined in the SRIP or, for an Eligible Employee whose termination of employment is after December 31, 2004, the 2005 Supplemental Employee Retirement Plan ("SERP"), or (iii) Retirement.
(b)              In the case of an Eligible Employee who terminates employment by reason of a disability but who does not realize an Event of Termination because of Section 7a(ii) above, a termination of the Eligible Employee's total Disability that is not accompanied by either a return to employment with his or her employing company or the Eligible Employee's death or Retirement.
(c)              Except in the case of an Eligible Employee who has theretofore terminated employment for a reason described in Section 7a(ii) or (iii) above, AT&T elects to terminate the Eligible Employee's coverage under the Plan by a written notice to that effect given to the Eligible Employee.  AT&T shall have no right to amend the Plan or terminate the Eligible Employee's coverage under the Plan with respect to an Eligible Employee who has theretofore terminated employment for a reason described in Section 7a(ii) or (iii) above without the written consent of the Eligible Employee.
8.              Non-Competition.   Eligible Employee acknowledges that AT&T would be unwilling to provide Plan benefits but for the loyalty conditions and covenants set forth in this Section, and that the conditions and covenants herein are a material inducement to AT&T's willingness to sponsor the Plan and to offer Plan benefits to Eligible Employees.  Accordingly, as a condition of receiving coverage and any Plan benefits, each Eligible Employee is deemed to agree that he shall not, without obtaining the written consent of the Plan Administrator in advance, participate in activities that constitute engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as those terms are defined in this Section.  Further, notwithstanding any other provision of this Plan, all Basic Death Benefits, Alternate Death Benefits, and the premiums paid by the Company therefore, provided under the Plan with respect to an Eligible Employee shall be subject in their entirety to the enforcement provisions of this Section if the Eligible Employee, without the consent of AT&T, participates in an activity that constitutes engaging in competition with AT&T or engaging in conduct disloyal to AT&T, as defined below.  The provisions of this Section 8 as in effect immediately before such date shall be applicable to Eligible Employee who retire before January 1, 2010.
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(a)              Definitions .  For purposes of this Section 8 and of the Plan generally:
(i)
an "Employer Business" shall mean AT&T, any subsidiary of AT&T, or any business in which AT&T or a subsidiary or an affiliated company of AT&T has a substantial ownership or joint venture interest;
(ii)
"engaging in competition with AT&T" shall mean, while employed by an Employer Business or within two  (2) years after the Eligible Employee's termination of employment, engaging by the Eligible Employee in any business or activity in all or any portion of the same geographical market where the same or substantially similar business or activity is being carried on by an Employer Business.  "Engaging in competition with AT&T" shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer Business.  "Engaging in competition with AT&T" shall include representing or providing consulting services to, or being an employee or director of, any person or entity that is engaged in competition with any Employer Business or that takes a position adverse to any Employer Business.
(iii)
"engaging in conduct disloyal to AT&T" means, while employed by an Employer Business or within two  (2) years after the Eligible Employee's termination of employment, (i) soliciting for employment or hire, whether as an employee or as an independent contractor, for any business in competition with an Employer Business, any person employed by AT&T or its affiliates during the one (1) year prior to the Eligible Employee's termination of employment, whether or not acceptance of such position would constitute a breach of such person's contractual obligations to AT&T and its affiliates; (ii) soliciting, encouraging, or inducing any vendor or supplier with which Eligible Employee had business contact on behalf of any Employer Business during the two (2) years prior to the Eligible Employee's termination of employment, to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with AT&T or its affiliate; or (iii) soliciting, encouraging, or inducing any customer or active prospective customer with whom  had business contact, whether in person or by other media, on behalf of any Employer Business during the two (2) years prior to the Eligible Employee's termination of employment ("Customer"), to terminate, discontinue, renegotiate, reduce, or otherwise cease or modify its relationship with any Employer Business, or to purchase competing goods or services from a business competing with any Employer Business, or accepting or servicing business from such Customer on behalf of himself or any other business.  "Engaging in conduct disloyal to AT&T" also means, disclosing Confidential Information to any third party or using Confidential Information, other than for an Employer Business, or failing to return any Confidential Information to the Employer Business following termination of employment.
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(iv)
"Confidential Information" shall mean all information belonging to, or otherwise relating to, an Employer Business, which is not generally known, regardless of the manner in which it is stored or conveyed to the Eligible Employee, and which the Employer Business has taken reasonable measures under the circumstances to protect from unauthorized use or disclosure.  Confidential Information includes trade secrets as well as other proprietary knowledge, information, know-how, and non-public intellectual property rights, including unpublished or pending patent applications and all related patent rights, formulae, processes, discoveries, improvements, ideas, conceptions, compilations of data, and data, whether or not patentable or copyrightable and whether or not it has been conceived, originated, discovered, or developed in whole or in part by the Eligible Employee.  For example, Confidential Information includes, but is not limited to, information concerning the Employer Business' business plans, budgets, operations, products, strategies, marketing, sales, inventions, designs, costs, legal strategies, finances, employees, customers, prospective customers, licensees, or licensors; information received from third parties under confidential conditions; or other valuable financial, commercial, business, technical or marketing information concerning the Employer Business, or any of the products or services made, developed or sold by the Employer Business.  Confidential Information does not include information that (i) was generally known to the public at the time of disclosure; (ii) was lawfully received by the Eligible Employee from a third party; (iii) was known to the Eligible Employee prior to receipt from the Employer Business; or (iv) was independently developed by the Eligible Employee or independent third parties; in each of the foregoing circumstances, this exception applies only if such public knowledge or possession by an independent third party was without breach by the Eligible Employee or any third party of any obligation of confidentiality or non-use, including but not limited to the obligations and restrictions set forth in this Plan.
 
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(b)              Forfeiture of Benefits .  Basic Death Benefits, Alternate Death Benefits, and all Company paid premiums therefore, shall be forfeited and shall not be provided under this Plan if the Committee determines that, within the time period and without the written consent specified, Eligible Employee has been either engaging in competition with AT&T or engaging in conduct disloyal to AT&T.
(c)              Equitable Relief.     The parties recognize (i) that any Eligible Employee's breach of any of the covenants in this Section 8 will cause irreparable injury to the Company, and will represent a failure of the consideration under which AT&T (in its capacity as creator and sponsor of the Plan) agreed to provide the Eligible Employee with the opportunity to receive Basic Death Benefits and/or Alternate Death Benefits   under the Plan, and (ii) that monetary damages would not provide AT&T with an adequate or complete remedy that would warrant AT&T's continued sponsorship of the Plan and provision of Basic Death Benefits and/or Alternate Death Benefits for all Eligible Employees.  Accordingly, in the event of an Eligible Employee's actual or threatened breach of covenants in this Section 8, the Committee, in addition to all other rights and acting as a fiduciary under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") on behalf of all Eligible Employees, shall have a fiduciary duty (in order to assure that AT&T receives fair and promised consideration for its continued Plan sponsorship and funding of Basic Death Benefits) to seek an injunction restraining the Eligible Employee from breaching the covenants in this Section 8.  In addition, AT&T shall pay for any Plan expenses that the Committee incurs hereunder, and shall be entitled to recover from the Eligible Employee its reasonable attorneys' fees and costs incurred in obtaining such injunctive remedies.  To enforce its repayment rights with respect to an Eligible Employee, the Plan shall have a first priority, equitable lien on all Basic Death Benefits, Alternate Death Benefits and/or any Company paid premiums therefore paid pursuant to the Plan (and the value of any coverage for such death benefits) provided pursuant to the Plan with respect to the Eligible Employee.  In the event the Committee succeeds in enforcing the terms of this Section through a written settlement with the Eligible Employee or a court order granting  an injunction hereunder, the Eligible Employee shall be entitled to collect Basic Death Benefits, Alternate Death Benefits, and/or Company paid premiums therefore, and to receive coverage for such Basic Death Benefits and/or Alternate Death Benefits following the date of the settlement or injunction prospectively, if the Eligible Employee is otherwise entitled to such benefits, net of any fees and costs assessed pursuant hereto (which fees and costs shall be paid to AT&T as a repayment on behalf of the Eligible Employee), provided that the Eligible Employee complies with said settlement or injunction.
(d)              Uniform Enforcement .  In recognition of AT&T's need for nationally uniform standards for the Plan administration, it is an absolute condition in consideration of any Eligible Employee's coverage for or receipt of payments of Basic Death Benefits under the Plan after January 1, 2010 that each and all of the following conditions apply to all Eligible Employees and to any benefits that are paid or are payable under the Plan:
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(i)
ERISA shall control all issues and controversies hereunder, and the Committee shall serve for purposes hereof as a "fiduciary" of the Plan and as its "named fiduciary" within the meaning of ERISA.
(ii)
All litigation between the parties relating to this Section shall occur in federal court, which shall have exclusive jurisdiction, any such litigation shall be held in the United States District Court for the Northern District of Texas, and the only remedies available with respect to the Plan shall be those provided under ERISA.
(iii)
If the Committee determines in its sole discretion either (I) that AT&T or its affiliate that employed the Eligible Employee terminated the Eligible Employee's employment for cause, or (II) that equitable relief enforcing the Eligible Employee's covenants under this Section 8 is either not reasonably available, not ordered by a court of competent jurisdiction, or circumvented because the Eligible Employee has sued in state court, or has otherwise sought remedies not available under ERISA, then in any and all of such instances the Eligible Employee shall not be entitled to collect any Basic Death Benefits, and if any such benefits have been paid to the Eligible Employee, the Eligible Employee or his or her Beneficiaries shall immediately repay to the Plan (which shall be used to pay Plan administrative expenses or Plan benefits) the value of the coverage for all Basic Death Benefits, and any such benefits actually paid, upon written demand from the Committee.  Furthermore, the Eligible Employee shall hold AT&T and its affiliates harmless from any loss, expense, or damage that may arise from any of the conduct described in clauses (I) and (II) hereof.
9.              Restriction on Assignment .  The Eligible Employee may assign all or any part of his or her right, title, claim, interest, benefits and all other incidents of ownership which he or she may have in the Insurance Contract to any other individual or trustee, provided that any such assignment shall be subject to the terms of this Plan; except neither the Eligible Employee nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable as a Salary Continuation Death Benefit hereunder, which are, and all rights to which are, expressly declared to be unassignable and non-transferable.  No part of the amounts payable as a Salary Continuation Death Benefit hereunder shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Eligible Employee or any other person, nor be transferable by operation of law in the event of the Eligible Employee's or any other person's bankruptcy or insolvency.  Except as provided in this Section 8, no assignment or alienation of any benefits under the Plan will be permitted or recognized.
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10.              Unsecured General Creditor.   Except to the extent of rights with respect to the Insurance Contract in the absence of an election to receive benefits in Salary Continuation Death Benefit form, the Eligible Employee and his or her Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of AT&T, nor shall they be beneficiaries, or have any rights, claims or interests in, any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by AT&T ("Policies"); such Policies or other assets of AT&T shall not be held under any trust for the benefit of the Eligible Employee, his or her designated beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of AT&T under this Agreement; any and all of AT&T's assets and Policies shall be, and remain, the general, unpledged, unrestricted assets of AT&T; AT&T shall have no obligation to acquire any Policies or any other assets; and AT&T's obligations under this Agreement shall be merely that of an unfunded and unsecured promise of AT&T to pay money in the future.
11.              Employment Not Guaranteed.   Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving the Eligible Employee any right to be retained in the employ of any AT&T company.
12.              Protective Provisions.   The Eligible Employee will cooperate with AT&T by furnishing any and all information requested by AT&T, in order to facilitate the payment of benefits hereunder, taking such physical examinations as AT&T may deem necessary and taking such other relevant action as may be requested by AT&T, in order to facilitate the payment of benefits hereunder.  If the Eligible Employee refuses so to cooperate, the Eligible Employee's participation in the Plan shall terminate and AT&T shall have no further obligation to the Eligible Employee or his or her designated Beneficiary hereunder.  If the Eligible Employee commits suicide during the two-year period beginning on the date of eligibility under the Plan, or if the Eligible Employee makes any material misstatement of information or nondisclosure of medical history, then no benefits will be payable by reason of this Plan to the Eligible Employee or his or her designated Beneficiary, or in AT&T's sole discretion, benefits may be payable in a reduced amount.
13.              Change in Status.   In the event of a change in the employment status of an Eligible Employee to a status in which he or she is no longer an Eligible Employee under the Plan, such Eligible Employee shall immediately cease to be eligible for any benefits under this Plan; provided, however, such survivor benefits as would be available to such employee by reason of his or her new status but which do not automatically become effective upon attainment of such new status shall continue to be provided under this Plan until such benefits become effective or until such employee has had reasonable opportunity to effectuate such benefits but has failed to take any requisite action necessary for such benefits to become effective.
14.              Named Fiduciary.   If this Plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA), AT&T is the "named fiduciary" of the Plan.
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15.              Applicable Law.   This Plan and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Texas to the extent such law is not preempted by ERISA.
16.              Administration of the Plan.   The Committee shall be the sole administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions in accordance with its terms.  The Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan.  All decisions of the Committee shall be binding.
17.              Relation to Prior Plans.   This Plan supersedes and replaces prior Senior Management Survivor Benefit, Senior Management Supplementary Life Insurance, and Senior Management Alternate Death Benefit Life Insurance Plans as in effect prior to January 1, 1986, except such plans shall continue to apply to Eligible Employees who retired before January 1, 1986; provided, however, that with respect to those Eligible Employees who retired during calendar year 1986 by reason of the fact of attaining age 65, the Post-Retirement Benefit provided pursuant to the Senior Management Survivor Benefit Plan as in effect prior to January 1, 1986, shall continue to apply and the post-retirement benefit provided under the Basic Death Benefit portion hereof shall not apply.
Effective January 1, 2008, this Plan supersedes and replaces the Cingular Wireless SBC Executive Transition Life Insurance Plan (the "Cingular Plan"), and all policies issued under the Cingular Plan shall be transferred to and governed by the Plan.
18.              Amendments and Termination.   This Plan may be modified or terminated at any time in accordance with the provisions of AT&T's Schedule of Authorizations.  A modification or Plan termination may affect present and future Eligible Employees; provided, however, that no modification shall be made to this Plan with respect to an Eligible Employee who terminates employment for reason of disability or Retirement), nor shall a termination of the Plan operate so as to be applicable to such an individual, without the written consent of the Eligible Employee.
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DIRECTV


DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
1.      Name and Purpose
        The name of this plan is the DIRECTV Deferred Compensation Plan for Non-Employee Directors (the "Plan"). Its purpose is to provide Non-Employee Directors ("Directors") of DIRECTV (the "Corporation" or "DIRECTV") with an opportunity to defer compensation earned as a Director while providing Directors a means to increase their stock ownership. The Plan's purpose will be accomplished by using restricted stock units (RSUs) and will ensure that the compensation of the Directors is closely aligned with stockholder interests and the performance of the Corporation. Any provisions to the contrary notwithstanding, this Plan shall be interpreted and administered in accordance with the provisions of Internal Review Code §409A and applicable regulations.
2.      Effective Date
        The Plan was originally effective as of March 29, 1995 and was previously amended on October 1, 1999, June 30, 2000, May 22, 2001, December 4, 2001, July 15, 2002, January 1, 2003, January 28, 2003, and December 22, 2003. The Plan was amended and restated effective as of January 1, 2005 and as of November 19, 2009, and amended as of November 2, 2010. The Plan is now amended and restated effective as of December 31, 2011.
3.      Administration
        The Corporation's Board of Directors ("Board") will administer the Plan. The decisions of the Board with respect to any questions arising as to the interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be final, conclusive and binding on all parties.
        The Board is authorized, subject to the provisions of the Plan, from time to time to establish such rules and regulations, and to delegate ministerial, day-to-day administrative details and non-discretionary duties and/or functions, to officers and employees of DIRECTV as it deems appropriate for the proper administration of the Plan.
4.      Eligibility
        Eligibility to participate in the Plan will be limited to Directors who are not current or former officers of the Corporation or of a subsidiary of the Corporation.
5.      Election of Deferral
        On or before December 31 of any year, each Director, or nominee for election as a Director, may make an irrevocable election to defer receipt of all or a specified portion of the cash and equity compensation (exclusive of expense reimbursement) otherwise payable during the following year for serving on the Board of the Corporation and its Committees and for attending meetings of the Board. The Plan will establish and maintain for each Director an unfunded deferred compensation account. The Director's deferred cash and equity compensation will be credited to such Director's deferred compensation account on the dates the cash and equity compensation would have been paid to the Director but for the election to defer.
        For a newly-elected Director, the election under the Plan for the remainder of the calendar year in which the Director joins the Board must be made no later than thirty (30) days following the date the Director joined the Board and is effective only for compensation earned beginning on the first day of the month following the date of election to defer.
        Each annual election will include the method by which the value of amounts deferred will be measured and distributed in accordance with Sections 7 and 8 below, respectively.
6.      Manner of Electing Deferral
        A Director may elect to defer all or a portion of his or her cash compensation and/or equity compensation by giving written notice to the Corporation before January 1 of the year in which the compensation is to be earned. Such notice will include:
        (a)   Either (i) the election of a voluntary deferral of all or a portion of the Director's cash compensation or (ii) the election of a voluntary deferral of all or a portion of the Director's equity compensation as such compensation is paid or vested, or (iii) both; and
        (b)   The election of a lump sum payment or a number of annual installments (not to exceed ten) for distribution of each year's deferred cash or equity compensation.
        In subsequent annual elections, a Director may make deferral and/or distribution elections that differ from previous elections, but only as they apply to deferrals for that year and not to previously deferred monies.
7.      Value of Compensation Accounts
        Deferred compensation is 100% vested and nonforfeitable.
        Deferred compensation will be held in the Director's account and will be credited, pursuant to the Director's instructions, as follows:
        (a)   Cash Compensation Deferral Alternatives—Cash deferrals may be credited to an interest bearing account or converted to RSUs as set forth below:
          (i)  Cash-Based Deferral Alternative—Cash compensation deferred under this alternative will earn interest at a rate equal to 100% of the average U.S. Treasury 10-year bond yield calculated for the month of October that immediately precedes the plan year for which the rate is to be used. Distribution from this alternative shall be made only in cash.
         (ii)  Stock-Based Deferral Alternative—Cash compensation deferred under this alternative will be converted into RSUs representing DIRECTV common stock at the closing market price of such stock on the date of contribution. The use of units is for recordkeeping purposes; only cash and not shares shall be paid from this alternative.
        (b)   Equity Compensation Deferrals—Deferred equity compensation shall be converted into RSUs representing DIRECTV common stock. The use of units is for recordkeeping purposes. Deferred equity compensation shall not be diversified into other hypothetical investments and only shares of DIRECTV stock shall be paid from the deferred equity compensation.
        On any dividend payment date, dividend equivalents in the form of additional investment units will be an amount equal to the per share cash dividend multiplied by the number of RSUs in the Director's account in the stock-based or equity compensation deferral alternatives on the record date for such dividend; the dividend equivalent amount will be divided by the closing market price of such stock for the dividend payment date and the additional RSUs so determined shall be recorded to the Director's account. In the event of any change in the number or kind of any outstanding shares of DIRECTV common stock by DIRECTV, appropriate adjustments will be made in the number of RSUs credited to a Director's account.
        RSUs held as the Director's cash deferrals converted to RSUs or as deferred equity compensation will continue to accumulate dividend equivalents until distributed in accordance with provisions of the Plan. The market price on any valuation date under the Plan is defined as the closing sales price of DIRECTV common stock as reported in a publicly available stock price source.
        A Director will not have any interest in the deferred compensation held in his or her account nor voting rights to RSUs in the stock-based deferral alternative or the equity compensation deferral alternative until it is distributed in accordance with the Plan.
8.      Method of Distribution of Deferred Compensation
        No distribution will be permitted from a Director's deferred compensation account except as provided in this Section 8.
        The value of a Director's deferred compensation account is payable upon leaving the Board in accordance with the Director's deferral election, in a lump sum or in up to ten annual installments as provided in Section 6. If no distribution election is made at the time the deferral is elected, the distribution shall be in a lump sum.
        If annual installments are elected, the amount of the first payment will be a fraction of the value of the Director's deferred compensation account as of December 31 of the year preceding payment, the numerator of which is one and the denominator of which is the total number of installments elected. The amount of each subsequent payment will be a fraction of the value as of December 31 of the year preceding each subsequent payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid.
        Only whole shares shall be distributed from the equity compensation deferral alternative. Fractional shares payable in any installment from the equity compensation deferral alternative shall not be distributed and shall be accumulated until the final installment payment; if fractional shares remain in the final installment or in a lump sum distribution, they shall be converted and paid in cash at the then closing market price of DIRECTV stock.
        The distribution of the deferred compensation will be made as soon as practicable in January of the year following a Director's ceasing to be a Director.
        If a Director leaves the Board with deferred compensation total account value of $10,000 or less, the compensation earned will be paid to such Director in a lump sum.
        As provided under IRC Section 409A and related regulations, an immediate lump sum distribution is permitted for payment (i) to an individual other than the Director as may be necessary to fulfill a domestic relations order, (ii) as may be necessary to comply with a certificate of divestiture and (iii) for a distribution of that portion of the Director's account that has become FICA taxable, including the amount which may become subject to income tax withholding related to such FICA amount.
9.      Distribution Upon Death
        A Director may designate a beneficiary or beneficiaries to receive amounts credited under the Plan in the event of the Director's death. A designation of beneficiary or beneficiaries shall be on a form prescribed by and filed with the Corporate Secretary. In the event of death, the unpaid amount in such Director's Plan account will be paid to his or her beneficiary, but if none has been designated, to his or her estate. Such payment will be made in one lump sum, payable as soon as practicable following notice to the Company of the Director's death. The value of the Plan account on the date of payment will be determined in accordance with the provisions of Section 7 hereof.
10.    Participant's Rights Unsecured
        The right of any Director to receive the compensation deferred under the provisions of the Plan will be an unsecured claim against the general assets of the Corporation.
11.    Non-Assignability
        The right of a Director to the payment of deferred compensation as provided in this Plan shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation, except as provided in Section 9.
12.    Statement of Account
        Statements will be sent to Directors as soon as practicable each year as to the value of their deferred compensation accounts as of the end of the previous year.
13.    Business Days
        If any date specified herein falls on a Saturday, Sunday or legal holiday, such date shall be deemed to refer to the next business day after that date.
14.    Adjustments to Stock Units and/or RSUs
        Outstanding compensation in the stock-based deferral alternative and in the equity deferral alternative will be subject to appropriate adjustment in the event of future stock splits, stock dividends, spin-offs, split-offs or other changes in capitalization of DIRECTV to prevent the dilution or enlargement of the Director's rights under the Plan. Such adjustments will be made in the same manner as adjustments to stock issued pursuant to the 2009 Stock Plan or its successor.
15.    Amendment and Termination
        This Plan may at any time be amended, modified or terminated by the Corporation's Board to comply with changes in the Internal Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act of 1974, as amended, or the rules or regulations promulgated thereunder. In addition the Corporation's Board may, in its sole discretion, modify the terms and conditions of the Plan in response to, and consistent with, any changes in other applicable law, rule or regulation. The Corporation's Board also reserves the right to modify the Plan from time to time, or to suspend or terminate the Plan entirely, provided, however, that no modification of the Plan, except for such modifications as may be required by law, rule or regulation, will operate to annul an election already in effect for the current calendar year or any preceding calendar year.
        It is the Corporation's intent that the Plan comply in all respects with Rule 16b-3 of the Securities Exchange Act of 1934 (the "Exchange Act"), or its successor, and any regulations promulgated thereunder. If any provision of the Plan is found not to be in compliance with such Rule and such regulations, the provision will be deemed null and void, and the remaining provisions of the Plan will continue in full force and effect. All transactions under this Plan will be executed in accordance with the requirements of Section 16 of the Exchange Act and regulations promulgated thereunder.
 
                           
EXHIBIT 12
 
AT&T INC.
 
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
 
Dollars in Millions
 
 
   
Nine Months Ended
     
   
September 30,
   
Year Ended December 31,
 
 
(Unaudited)
 
   
2015
   
2014
   
2014
   
2013
   
2012
   
2011
   
2010
 
  Earnings:
                           
Income from continuing operations before income taxes
 
$
14,385
   
$
16,568
   
$
10,355
   
$
28,050
   
$
10,496
   
$
6,998
   
$
22,661
 
Equity in net income of affiliates included above
   
(48
)
   
(188
)
   
(175
)
   
(642
)
   
(752
)
   
(784
)
   
(762
)
Fixed charges
   
4,834
     
4,004
     
5,295
     
5,452
     
4,876
     
4,835
     
4,723
 
Distributed income of equity affiliates
   
12
     
143
     
148
     
318
     
137
     
161
     
161
 
Interest capitalized
   
(566
)
   
(178
)
   
(234
)
   
(284
)
   
(263
)
   
(162
)
   
(772
)
                                                         
Earnings, as adjusted
 
$
18,617
   
$
20,349
   
$
15,389
   
$
32,894
   
$
14,494
   
$
11,048
   
$
26,011
 
                                                         
  Fixed Charges:
                                                       
Interest expense
 
$
2,977
   
$
2,757
   
$
3,613
   
$
3,940
   
$
3,444
   
$
3,535
   
$
2,994
 
Interest capitalized
   
566
     
178
     
234
     
284
     
263
     
162
     
772
 
Portion of rental expense representative of interest factor
   
1,291
     
1,069
     
1,448
     
1,228
     
1,169
     
1,138
     
957
 
                                                         
Fixed Charges
 
$
4,834
   
$
4,004
   
$
5,295
   
$
5,452
   
$
4,876
   
$
4,835
   
$
4,723
 
                                                         
Ratio of Earnings to Fixed Charges
   
3.85
     
5.08
     
2.91
     
6.03
     
2.97
     
2.29
     
5.51
 
                                                         
The Board of Directors
AT&T Inc.

Ladies and Gentlemen:

Note 1 of Notes to Consolidated Financial Statements of AT&T Inc. (the Company) included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 describes a change in the accounting for customer set-up and installation costs. This change in accounting principle to defer customer set-up and installation costs for the Company's video, broadband Internet and wireline voice services and amortize them over the expected economic life of the customer relationship is a change from the previous policy of deferring such costs only to the extent of deferred revenues recorded for upfront fees (e.g., activation charges), and to expense any costs that exceed deferred revenues. There are no authoritative criteria for determining a 'preferable' method of accounting for customer set-up and installation costs. However, we conclude that such change is to an acceptable method which, based on your business judgment to make this change and for the stated reasons, is preferable in your circumstances. We have not conducted an audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) of any financial statements of the Company as of any date or for any period subsequent to December 31, 2014, and therefore we do not express any opinion on any financial statements of AT&T Inc. subsequent to that date.

Very truly yours,


/s/ Ernst & Young LLP
 
Dallas, Texas
November 5, 2015

CERTIFICATION

I, Randall Stephenson, certify that:

1.
I have reviewed this report on Form 10-Q of AT&T Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2015



/s/ Randall Stephenson ..
Randall Stephenson
Chairman of the Board,
  Chief Executive Officer and President

CERTIFICATION

I, John J. Stephens, certify that:

1.
I have reviewed this report on Form 10-Q of AT&T Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2015



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


Certification of Periodic Financial Reports

 
 
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the "Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2015 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
November 5, 2015          November 5, 2015        
                                                                                                                                                                                          
                          
                                                                                 .
By:     /s/ Randall Stephenson
           Randall Stephenson
           Chairman of the Board, Chief Executive Officer
                 and President
By:     /s/ John J. Stephens
           John J. Stephens
           Senior Executive Vice President
                and Chief Financial Officer
 
 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Exchange Act") or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AT&T Inc. and will be retained by AT&T Inc. and furnished to the Securities and Exchange Commission or its staff upon request.