Edgar Filing: AT&T INC.

att2q08.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the quarterly period ended June 30, 2008

		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 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 July 31, 2008, there were 5,893 million common shares outstanding.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
Operating Revenues
Wireless service	$	10,894		$	9,513		$	21,499		$	18,583
Voice		9,519			10,378			19,212			20,833
Data		6,054			5,746			12,026			11,401
Directory		1,383			1,155			2,781			2,177
Other		3,016			2,686			6,092			5,453
Total operating revenues		30,866			29,478			61,610			58,447
Operating Expenses
Cost of services and sales (exclusive of depreciation and
amortization shown separately below)		11,900			11,658			23,902			23,080
Selling, general and administrative		7,441			7,460			15,300			14,727
Depreciation and amortization		4,958			5,416			9,861			11,032
Total operating expenses		24,299			24,534			49,063			48,839
Operating Income		6,567			4,944			12,547			9,608
Other Income (Expense)
Interest expense		(854	)		(879	)		(1,719	)		(1,752	)
Equity in net income of affiliates		212			210			455			383
Other income (expense) – net		(43	)		127			(10	)		631
Total other income (expense)		(685	)		(542	)		(1,274	)		(738	)
Income Before Income Taxes		5,882			4,402			11,273			8,870
Income taxes		2,110			1,498			4,040			3,118
Net Income	$	3,772		$	2,904		$	7,233		$	5,752

Basic Earnings Per Share	$	0.64		$	0.47		$	1.21		$	0.93
Diluted Earnings Per Share	$	0.63		$	0.47		$	1.21		$	0.92
Weighted Average Number of Common
Shares Outstanding – Basic (in millions)		5,926			6,145			5,962			6,184
Dividends Declared Per Common Share	$	0.400		$	0.355		$	0.800		$	0.710

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
	June 30,			December 31,
	2008			2007
Assets	(Unaudited)
Current Assets
Cash and cash equivalents	$	1,631		$	1,970
Accounts receivable – net of allowances for
uncollectibles of $1,303 and $1,364		15,971			16,185
Prepaid expenses		1,671			1,524
Deferred income taxes		1,407			2,044
Other current assets		2,545			2,963
Total current assets		23,225			24,686
Property, plant and equipment		212,549			210,518
Less: accumulated depreciation and amortization		115,181			114,628
Property, Plant and Equipment – Net		97,368			95,890
Goodwill		71,528			70,713
Licenses		46,771			37,985
Customer Lists and Relationships - Net		12,568			14,505
Other Intangible Assets - Net		5,844			5,912
Investments in Equity Affiliates		2,838			2,270
Postemployment Benefit		17,898			17,291
Other Assets		6,468			6,392
Total Assets	$	284,508		$	275,644

Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	16,472		$	6,860
Accounts payable and accrued liabilities		18,927			21,399
Advanced billing and customer deposits		3,573			3,571
Accrued taxes		3,782			5,027
Dividends payable		2,357			2,417
Total current liabilities		45,111			39,274
Long-Term Debt		63,675			57,255
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		25,136			24,939
Postemployment benefit obligation		24,832			24,011
Other noncurrent liabilities		13,817			14,798
Total deferred credits and other noncurrent liabilities		63,785			63,748

Stockholders’ Equity
Common shares issued ($1 par value)		6,495			6,495
Capital in excess of par value		91,647			91,638
Retained earnings		35,719			33,297
Treasury shares (at cost)		(21,420	)		(15,683	)
Accumulated other comprehensive income (loss)		(504	)		(380	)
Total stockholders’ equity		111,937			115,367
Total Liabilities and Stockholders’ Equity	$	284,508		$	275,644

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
	Six months ended
	June 30,
	2008			2007
Operating Activities
Net income	$	7,233		$	5,752
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		9,861			11,032
Undistributed earnings from investments in equity affiliates		(415	)		(344	)
Provision for uncollectible accounts		860			738
Deferred income tax expense (benefit)		1,384			(546	)
Net gain on sales of investments		(27	)		(64	)
Gain on license exchange		-			(409	)
Changes in operating assets and liabilities:
Accounts receivable		(776	)		87
Other current assets		274			(665	)
Accounts payable, accrued and other liabilities		(5,117	)		(287	)
Stock-based compensation tax benefit		(14	)		(107	)
Other - net		242			(108	)
Total adjustments		6,272			9,327
Net Cash Provided by Operating Activities		13,505			15,079

Investing Activities
Construction and capital expenditures
Capital expenditures		(9,320	)		(7,460	)
Interest during construction		(257	)		(78	)
Acquisitions, net of cash acquired		(10,087	)		(221	)
Dispositions		623			520
Proceeds from sale of securities, net of investments		(73	)		509
Other		41			17
Net Cash Used in Investing Activities		(19,073	)		(6,713	)

Financing Activities
Net change in short-term borrowings with original
maturities of three months or less		6,590			(1,993	)
Issuance of long-term debt		10,924			5,924
Repayment of long-term debt		(1,605	)		(2,065	)
Purchase of treasury shares		(6,077	)		(6,904	)
Issuance of treasury shares		310			1,252
Dividends paid		(4,802	)		(4,414	)
Stock-based compensation tax benefit		14			107
Other		(125	)		(121	)
Net Cash Provided by (Used in) Financing Activities		5,229			(8,214	)
Net increase (decrease) in cash and cash equivalents		(339	)		152
Cash and cash equivalents beginning of year		1,970			2,418
Cash and Cash Equivalents End of Period	$	1,631		$	2,570

Cash paid during the six months ended June 30 for:
Interest	$	1,863		$	1,765
Income taxes, net of refunds	$	4,730		$	1,484

See Notes to Consolidated Financial Statements.

AT&T INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Dollars and shares in millions, except per share amounts
(Unaudited)
	Six months ended
	June 30, 2008
	Shares			Amount
Common Stock
Balance at beginning of year		6,495		$	6,495
Balance at end of period		6,495		$	6,495

Capital in Excess of Par Value
Balance at beginning of year				$	91,638
Issuance of shares					88
Stock based compensation					(79	)
Balance at end of period				$	91,647

Retained Earnings
Balance at beginning of year				$	33,297
Net income ($1.21 per diluted share)					7,233
Dividends to stockholders ($0.80 per share)					(4,742	)
Other					(69	)
Balance at end of period				$	35,719

Treasury Shares
Balance at beginning of year		(451	)	$	(15,683	)
Purchase of shares		(164	)		(6,077	)
Issuance of shares		13			340
Balance at end of period		(602	)	$	(21,420	)

Accumulated Other Comprehensive Income (Loss), net of tax
Balance at beginning of year				$	(380	)
Other comprehensive income (loss) (see Note 2)					(124	)
Balance at end of period				$	(504	)
See Notes to Consolidated Financial Statements.

AT&T INC.

JUNE 30, 2008

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.” The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. We believe that these consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the results for the interim periods shown. The results for the interim periods are not necessarily indicative of results 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, 2007.

The consolidated financial statements include the accounts of the Company and our majority-owned subsidiaries and affiliates. Our subsidiaries and affiliates operate in the communications services industry both domestically and internationally, providing wireless and wireline communications services and equipment, managed networking, wholesale services and directory advertising and publishing services.

All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. Earnings from certain foreign equity investments accounted for using the equity method are included for periods ended within up to one month of our year end.

Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157) requires disclosures for financial assets and liabilities that are remeasured at fair value at least annually. FAS157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Substantially all of our available-for-sale securities are valued using quoted market prices (referred to as Level 1). Adjustments to fair value are recorded in other comprehensive income until the investment is sold (see Note 2). The fair market value of these securities was $2,570 at June 30, 2008.

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. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.

Valuation and Other Adjustments In accordance with Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” (FAS 112) we establish obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. These benefits include severance payments, workers’ compensation, disability, medical continuation coverage and other benefits. At June 30, 2008, we had severance accruals under FAS 112 of $369, of which $42 were established as merger-related severance accruals. At December 31, 2007, we had severance accruals of $127.

Included in the current liabilities reported on our consolidated balance sheet are accruals established under Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination” (EITF 95-3). The liabilities include accruals for severance, lease terminations and equipment removal costs associated with our acquisitions of AT&T Corp., BellSouth Corporation (BellSouth) and Dobson Communications Corporation. Following is a summary of the accruals recorded under EITF 95-3 at December 31, 2007, cash payments made during 2008 and the adjustments thereto.

	12/31/07		Cash					6/30/08
	Balance		Payments			Adjustments		Balance
Severance accruals paid from:
Company funds	$	540	$	(177	)	$	6	$	369
Pension and postemployment benefit plans		129		(21	)		-		108
Lease terminations		425		(56	)		91		460
Equipment removal and other related costs		161		(18	)		17		160
Total	$	1,255	$	(272	)	$	114	$	1,097

AT&T INC.

JUNE 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

New Accounting Standards

Split Dollar Life Insurance In 2007, the EITF ratified the consensus on EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4) and EITF 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). EITF 06-4 and EITF 06-10 cover split-dollar life insurance arrangements (where the company owns and controls the policy) and provides that an employer should recognize a liability for future benefits in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (FAS 106). These are effective for fiscal years beginning after December 15, 2007. We adopted EITF 06-4 and EITF 06-10 on January 1, 2008, recording additional postretirement liabilities of $101 and a decrease to retained earnings of $63.

NOTE 2. COMPREHENSIVE INCOME

The components of our comprehensive income for the three and six months ended June 30, 2008 and 2007 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustment, net unrealized gain (loss) on available-for-sale securities, net unrealized gain (loss) on cash flow hedges and defined benefit postretirement plans. The foreign currency translation adjustment was due to exchange rate fluctuations in our foreign affiliates’ local currencies and the reclassification adjustment on cash flow hedges was due to the amortization of losses from our interest rate forward contracts.

Following is our comprehensive income:

	Three months ended						Six months ended
	June 30,							June 30,
	2008			2007				2008			2007
Net income	$	3,772		$	2,904			$	7,233		$	5,752
Other comprehensive income, net of tax:
Foreign currency translation adjustment		39			44				105			18
Net unrealized gains (losses) on securities:
Unrealized gains (losses)		26			68				(64	)		149
Less reclassification adjustment realized in net income		34			(40	)			(16	)		(40	)
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses)		(21	)		(13	)			(99	)		(36	)
Reclassification adjustment for losses on cash flow hedges included in net income		5			4				9			8
Defined benefit postretirement plans:
Amortization of net actuarial (gain) loss and prior service benefit included in net income		(31	)		56				(59	)		104
Other		-			1				-			(1	)
Other comprehensive income (loss)		52			120				(124	)		202
Total Comprehensive Income	$	3,824		$	3,024			$	7,109		$	5,954

AT&T INC.

JUNE 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. EARNINGS PER SHARE

Reconciliations of the numerators and denominators of basic and diluted earnings per share for net income for the three and six months ended June 30, 2008 and 2007 are shown in the table below:

	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008		2007
Numerators
Numerator for basic earnings per share:
Net income	$	3,772	$	2,904	$	7,233	$	5,752
Dilutive potential common shares:
Other stock-based compensation		2		2		4		4
Numerator for diluted earnings per share	$	3,774	$	2,906	$	7,237	$	5,756
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common
shares outstanding		5,926		6,145		5,962		6,184
Dilutive potential common shares:
Stock options		15		26		15		24
Other stock-based compensation		21		24		20		22
Denominator for diluted earnings per share		5,962		6,195		5,997		6,230
Basic earnings per share	$	0.64	$	0.47	$	1.21	$	0.93
Diluted earnings per share	$	0.63	$	0.47	$	1.21	$	0.92

At June 30, 2008, we had issued and outstanding options to purchase approximately 209 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 104 million shares in the second quarter and 110 million for the first six months exceeded the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective period. At June 30, 2008, the exercise price of 105 million share options was below market price.

At June 30, 2007, we had issued and outstanding options to purchase 261 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 95 million shares in the second quarter and 113 million for the first six months exceeded the average market price of AT&T stock. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective period.

AT&T INC.

JUNE 30, 2008

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 different products and services and are managed accordingly. We analyze our various operating segments based on segment income before income taxes. 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 not included in the calculation of each segment’s percentage of our consolidated results. We have four reportable segments: (1) wireless, (2) wireline, (3) advertising & publishing and (4) other.

As part of our internal business unit realignment in the second quarter 2008, expenses were moved between line items (cost of sales and selling, general and administrative) and between segments (primarily wireline and other).

The wireless segment provides wireless voice and advanced data communications services.

The wireline segment provides landline voice and data communications services, managed networking to business customers, AT&T U-verseSM TV service (U-verse) and satellite television services through our agency arrangements.

The advertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and Internet-based advertising. Results for this segment are shown under the amortization method, which means that revenues and direct expenses are recognized ratably over the life of the directory title, typically 12 months. However, consolidated results for 2007 directory operations acquired in our BellSouth acquisition are treated differently in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141).

Under FAS 141, BellSouth deferred revenue and expenses from directories published during the twelve-month period ending with the December 29, 2006 acquisition date were not recognized in 2007 consolidated results. Accordingly, our consolidated revenue and expenses in 2007 related to directory operations were lower. Because management assesses the performance of the segment including the revenue and expenses associated with those directories, for segment reporting purposes, our 2007 advertising & publishing segment results include revenue of $306 in the second quarter and $715 for the first six months of 2007 and expenses of $119 in the second quarter and $227 for the first six months of 2007. These amounts are eliminated in the consolidation and elimination column in the reconciliation below.

The other segment includes results from Sterling Commerce Inc., customer information services and all corporate and other operations. This segment includes our portion of the results from our international equity investments. Also included in the other segment are impacts of management decisions affecting the entire company for which management does not evaluate the individual operating segments.

In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP. The Wireless, Wireline, Advertising & Publishing and Other columns represent the segment results of each such operating segment. The Consolidation and Elimination column adds in those line items that we manage on a consolidated basis only: interest expense and other income (expense) – net. This column also eliminates any intercompany transactions included in each segment’s results as well as the advertising & publishing revenue and expenses in the second quarter and for the first six months of 2007 as noted above.

Segment assets for the six months ended June 30, 2008 are materially unchanged from the year ended December 31, 2007 with the exception of the wireless and other segment assets. Our wireless segment assets totaled $123,620, which increased $17,667, or 16.7%, primarily due to the acquisition of wireless spectrum. Our other segment assets totaled $206,436, which increased $23,361, or 12.8%, primarily due to an increase in value of our investments in our subsidiaries.

AT&T INC.

JUNE 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended June 30, 2008
						Advertising &					Consolidation			Consolidated
	Wireless			Wireline		Publishing		Other			and Elimination			Results
Revenues from external customers	$	11,977		$	17,059	$	1,383	$	447		$	-		$	30,866
Intersegment revenues		56			549		24		65			(694	)		-
Total segment operating revenues		12,033			17,608		1,407		512			(694	)		30,866
Operations and support expenses		7,523			11,227		771		512			(692	)		19,341
Depreciation and amortization expenses		1,446			3,269		203		42			(2	)		4,958
Total segment operating expenses		8,969			14,496		974		554			(694	)		24,299
Segment operating income (loss)		3,064			3,112		433		(42	)		-			6,567
Interest expense		-			-		-		-			854			854
Equity in net income of affiliates		3			-		-		209			-			212
Minority interest		(69	)		-		-		-			69			-
Other income (expense) – net		-			-		-		-			(43	)		(43	)
Segment income before income taxes	$	2,998		$	3,112	$	433	$	167		$	(828	)	$	5,882

At June 30, 2008 or for the six months ended
						Advertising &					Consolidation			Consolidated
	Wireless			Wireline		Publishing		Other			and Elimination			Results
Revenues from external customers	$	23,762		$	34,146	$	2,781	$	921		$	-		$	61,610
Intersegment revenues		96			1,086		43		135			(1,360	)		-
Total segment operating revenues		23,858			35,232		2,824		1,056			(1,360	)		61,610
Operations and support expenses		14,912			22,731		1,558		1,360			(1,359	)		39,202
Depreciation and amortization expenses		2,926			6,439		415		82			(1	)		9,861
Total segment operating expenses		17,838			29,170		1,973		1,442			(1,360	)		49,063
Segment operating income (loss)		6,020			6,062		851		(386	)		-			12,547
Interest expense		-			-		-		-			1,719			1,719
Equity in net income of affiliates		5			-		-		450			-			455
Minority interest		(129	)		-		-		-			129			-
Other income (expense) – net		-			-		-		-			(10	)		(10	)
Segment income before income taxes	$	5,896		$	6,062	$	851	$	64		$	(1,600	)	$	11,273

AT&T INC.

JUNE 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended June 30, 2007
						Advertising &					Consolidation			Consolidated
	Wireless			Wireline		Publishing		Other			and Elimination			Results
Revenues from external customers	$	10,368		$	17,478	$	1,461	$	477		$	(306	)	$	29,478
Intersegment revenues		27			515		17		81			(640	)		-
Total segment operating revenues		10,395			17,993		1,478		558			(946	)		29,478
Operations and support expenses		6,981			11,502		792		600			(757	)		19,118
Depreciation and amortization expenses		1,810			3,301		263		43			(1	)		5,416
Total segment operating expenses		8,791			14,803		1,055		643			(758	)		24,534
Segment operating income (loss)		1,604			3,190		423		(85	)		(188	)		4,944
Interest expense		-			-		-		-			879			879
Equity in net income of affiliates		17			-		-		202			(9	)		210
Minority interest		(67	)		-		-		-			67			-
Other income (expense) – net		-			-		-		-			127			127
Segment income before income taxes	$	1,554		$	3,190	$	423	$	117		$	(882	)	$	4,402

At June 30, 2007 or for the six months ended
						Advertising &					Consolidation			Consolidated
	Wireless			Wireline		Publishing		Other			and Elimination			Results
Revenues from external customers	$	20,343		$	34,960	$	2,892	$	967		$	(715	)	$	58,447
Intersegment revenues		49			1,025		29		129			(1,232	)		-
Total segment operating revenues		20,392			35,985		2,921		1,096			(1,947	)		58,447
Operations and support expenses		13,564			23,104		1,526		1,070			(1,457	)		37,807
Depreciation and amortization expenses		3,701			6,742		505		85			(1	)		11,032
Total segment operating expenses		17,265			29,846		2,031		1,155			(1,458	)		48,839
Segment operating income (loss)		3,127			6,139		890		(59	)		(489	)		9,608
Interest expense		-			-		-		-			1,752			1,752
Equity in net income of affiliates		24			-		-		374			(15	)		383
Minority interest		(115	)		-		-		-			115			-
Other income (expense) – net		-			-		-		-			631			631
Segment income before income taxes	$	3,036		$	6,139	$	890	$	315		$	(1,510	)	$	8,870

AT&T INC.

JUNE 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 5. PENSION AND POSTRETIREMENT BENEFITS

Substantially all of our employees are covered by one of various noncontributory pension and death benefit plans. We also provide certain medical, dental and life insurance benefits to substantially all retirees under various plans and accrue actuarially determined postretirement benefit costs as employees earn these benefits. 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 meet the plans’ obligations to provide benefits to employees upon their retirement. No significant cash contributions are required under ERISA regulations during 2008.

The following details pension and postretirement benefit costs included in operating expenses (in cost of sales and selling, general and administrative expenses) in the accompanying Consolidated Statements of Income. We account for these costs in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and FAS 106. In the following table, gains are denoted with parentheses and losses are not.

	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
Pension (benefit) cost:
Service cost – benefits earned during the period	$	293		$	313		$	586		$	629
Interest cost on projected benefit obligation		829			807			1,659			1,608
Expected return on assets		(1,401	)		(1,367	)		(2,801	)		(2,734	)
Amortization of prior service cost		33			39			66			71
Recognized actuarial loss		4			60			6			120
Net pension benefit	$	(242	)	$	(148	)	$	(484	)	$	(306	)

Postretirement benefit cost:
Service cost – benefits earned during the period	$	107		$	127		$	214		$	254
Interest cost on accumulated postretirement
benefit obligation		639			644			1,275			1,287
Expected return on assets		(332	)		(337	)		(664	)		(674	)
Amortization of prior service benefit		(89	)		(91	)		(179	)		(180	)
Recognized actuarial loss		-			74			-			148
Postretirement benefit cost	$	325		$	417		$	646		$	835

Combined net pension and postretirement cost	$	83		$	269		$	162		$	529

Our combined net pension and postretirement cost decreased $186 in the second quarter and $367 for the first six months of 2008. This decline was primarily due to the decrease in amortization of the unrecognized actuarial losses recorded under Statement of Financial Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” in Other Comprehensive Income. As allowed under GAAP, we amortize gains and losses only when the net gains or losses exceed 10 percent of the greater of the projected benefit obligation or the market-related value of assets.

We have varying types of pension programs providing benefits for certain non-U.S. operations. In addition to the pension and postretirement costs above, we recorded net pension cost for non-U.S. plans of $3 in the second quarter and $7 for the first six months of 2008 and $4 in the second quarter and $8 for the first six months of 2007.

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 $45 in the second quarter and $91 for the first six months of 2008, of which $36 and $71 was interest cost, respectively. Net supplemental retirement pension benefits cost was $49 in the second quarter and $96 for the first six months of 2007, of which $36 and $72 was interest cost, respectively.

AT&T INC.

JUNE 30, 2008

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 services industry in both the United States and internationally providing telecommunications services and equipment as well as directory advertising and publishing services. 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, 2007. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Consolidated Results Our financial results in the second quarter and for the first six months of 2008 and 2007 are summarized as follows:

	Second Quarter							Six-Month Period
					Percent							Percent
	2008		2007		Change			2008		2007		Change
Operating revenues	$	30,866	$	29,478		4.7	%	$	61,610	$	58,447		5.4	%
Operating expenses		24,299		24,534		(1.0	)		49,063		48,839		0.5
Operating income		6,567		4,944		32.8			12,547		9,608		30.6
Income before income taxes		5,882		4,402		33.6			11,273		8,870		27.1
Net Income		3,772		2,904		29.9			7,233		5,752		25.7

Overview

Operating income Our operating income increased $1,623, or 32.8%, in the second quarter and $2,939, or 30.6%, for the first six months of 2008, reflecting continued growth in wireless service and data revenues. Our operating income margin increased from 16.8% to 21.3% in the second quarter and from 16.4% to 20.4% for the first six months. Reported results in 2008 include directory revenue and expenses from directories published by BellSouth Corporation (BellSouth) subsidiaries. In accordance with U.S. generally accepted accounting principles (GAAP), our reported results in 2007 did not include deferred revenue of $306 in the second quarter and $715 for the first six months and expenses of $119 in the second quarter and $227 for the first six months from BellSouth directories published during the 12-month period ending with the December 29, 2006 date we acquired BellSouth. Had our 2007 directory results included this deferred revenue and expenses, operating income would have increased $1,436 in the second quarter and $2,451 for the first six months of 2008, as compared to 2007. See our “Advertising & Publishing Segment Results” section for discussion of this purchase accounting treatment.

Operating revenues Our operating revenues increased $1,388, or 4.7%, in the second quarter and $3,163, or 5.4%, for the first six months primarily due to continuing growth in wireless subscribers. Revenues in the second quarter and for the first six months also reflect an increase in data revenues, primarily related to Internet Protocol (IP) data, partially offset by the continued decline in voice revenues. As discussed above, purchase accounting treatment for directories published 12 months prior to the BellSouth acquisition also increased revenues in the second quarter and for the first six months of 2008 when compared to 2007.

Our operating revenues also reflect the continued decline in our retail access lines due to increased competition, as customers disconnected both primary and additional lines and switched to competitors’ wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data. The slower national economy also adversely affected the ability of our consumer wireline customers to purchase our services. While we lose the voice revenues, we have the opportunity to increase wireless service revenues should the customer choose us as their wireless provider.

Operating expenses Our operating expenses decreased $235, or 1.0%, in the second quarter and increased $224, or 0.5%, for the first six months. The decrease in the second quarter was primarily due to merger integration costs incurred in 2007 and not in 2008, lower amortization expense on intangible assets, and lower employee related accruals. These decreases were partially offset by an increase in subsidized wireless equipment sales and the inclusion of BellSouth-related directory expenses in 2008 and not in 2007, as noted above.

AT&T INC.

JUNE 30, 2008

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

Dollars in millions except per share amounts

The increase for the first six months was primarily due to increased wireless equipment sales, a $374 charge taken in the first quarter of 2008 for workforce reductions and the purchase accounting treatment of the BellSouth deferred directory expenses discussed above. Partially offsetting these second quarter increases were merger integration costs recognized in 2007 and not in 2008, and lower amortization expense on intangible assets in 2008.

Interest expense decreased $25, or 2.8%, in the second quarter and $33, or 1.9%, for the first six months of 2008. Interest expense remained relatively unchanged due to a decrease in our weighted average interest rate and changes in interest charged during construction offset by an increase in our average debt balances. Future interest expense will continue to reflect increased interest during construction due to our spectrum purchases.

Equity in net income of affiliates increased $2, or 1.0%, in the second quarter and $72, or 18.8%, for the first six months of 2008. The increase is primarily due to improved results from our investment in América Móvil S.A. de C.V. (América Móvil).

Other income (expense) – net We had other expense of $43 in the second quarter and $10 for the first six months of 2008, as compared to other income of $127 in the second quarter and $631 for the first six months of 2007. Results in the second quarter of 2008 primarily included expenses of $90 related to minority interest expenses and the loss on sale of investments partially offset by $45 of interest, dividend and leveraged lease income. Results in the second quarter of 2007 primarily included gains of $80 related to the sale of administrative buildings and other non-strategic assets, $64 on the sale of investments and $39 of interest income. These gains were partially offset by $59 in minority interest expenses.

Results for the first six months of 2008 primarily included expenses of $129 related to minority interest expenses partially offset by $117 of interest, dividend and leveraged lease income. Results for the first six months of 2007 primarily included gains of $409 related to a wireless spectrum license exchange, $165 for the sale of administrative buildings and other non-strategic assets, $74 of interest income and $64 on the sale of investments. These gains were partially offset by $100 in minority interest expenses.

Income taxes increased $612, or 40.9%, in the second quarter and $922, or 29.6%, for the first six months of 2008. The increase in income taxes in the second quarter and for the first six months was primarily due to higher income before income taxes. Our effective tax rates were 35.9% in the second quarter of 2008 compared to 34.0% in the second quarter of 2007, and 35.8% for the first six months of 2008 compared to 35.2% for the first six months of 2007. The increase in our effective tax rates in 2008 was primarily due to an increase in income before income taxes. The effective tax rate for the second quarter of 2007 reflects a benefit related primarily to the enactment of state income tax legislation and the favorable resolution of a contested interest assessment.

Selected Financial and Operating Data

	June 30,
	2008		2007
Wireless customers (000)	72,882		63,673
Consumer revenue connections (000) 1,2	48,417		49,513
Network access lines in service (000) 2	58,860		64,078
Broadband connections (000) 2,3	14,693		13,261
Video connections (000) 2,4	2,784		1,897
Debt ratio 5	41.7	%	35.6	%
Ratio of earnings to fixed charges 6	5.5		5.3
Number of AT&T employees	307,550		301,840

1 Consumer revenue connections includes retail access lines, VoIP customers, broadband and video.

2 Represents services by AT&T’s local exchange companies (ILECs) and affiliates.

3 Broadband connections include DSL, U-verse high-speed Internet access and satellite broadband.

4 Video connections include customers that have satellite service under our agency arrangements and U-verse video connections

5 See our “Liquidity and Capital Resources” section for discussion.

6 See Exhibit 12.

AT&T INC.

JUNE 30, 2008

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 represent strategic business units that offer different products and services and 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 various operating segments based on segment income before income taxes. Interest expense and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have four reportable segments: (1) wireless, (2) wireline, (3) advertising & publishing, and (4) other.

The wireless segment provides wireless voice and advanced data communications services.

The wireline segment provides landline voice and data communications services, managed networking to business customers, AT&T U-verseSM TV services (U-verse) and satellite television services through our agency arrangements.

The advertising & publishing segment includes our directory operations, which publish Yellow and White Pages directories and sell directory and Internet-based advertising.

The other segment includes results from Sterling Commerce Inc. (Sterling), customer information services and all corporate and other operations. The other segment includes our portion of the results from our international equity investments. Also included in the other segment are impacts of management decisions affecting the entire company for which management does not evaluate the individual operating segments.

The following tables show components of results of operations by segment. Significant segment results are discussed following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

Wireless

Segment Results

	Second Quarter									Six-Month Period
							Percent									Percent
	2008			2007			Change			2008			2007			Change
Segment operating revenues
Service revenues	$	10,951		$	9,540			14.8	%	$	21,596		$	18,632			15.9	%
Equipment revenues		1,082			855			26.5			2,262			1,760			28.5
Total Segment Operating Revenues		12,033			10,395			15.8			23,858			20,392			17.0
Segment operating expenses
Cost of services and equipment sales		4,162			3,941			5.6			8,272			7,611			8.7
Selling, general and administrative		3,361			3,040			10.6			6,640			5,953			11.5
Depreciation and amortization		1,446			1,810			(20.1	)		2,926			3,701			(20.9	)
Total Segment Operating Expenses		8,969			8,791			2.0			17,838			17,265			3.3
Segment Operating Income		3,064			1,604			91.0			6,020			3,127			92.5
Equity in Net Income (Loss) of Affiliates		3			17			(82.4	)		5			24			(79.2	)
Minority Interest 1		(69	)		(67	)		(3.0	)		(129	)		(115	)		(12.2	)
Segment Income	$	2,998		$	1,554			92.9	%	$	5,896		$	3,036			94.2	%

1 Minority interest is reported as “Other Income (Expense) – Net” in the consolidated statements of income.

AT&T INC.

JUNE 30, 2008

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

Dollars in millions except per share amounts

Operating Income and Margin Trends

Our wireless segment operating income increased $1,460, or 91.0%, in the second quarter and $2,893, or 92.5%, for the first six months of 2008, reflecting an increase in our customer base and a decline in merger-related expenses as our wireless operations now have been largely integrated. Our wireless segment operating income margin was 25.5% in the second quarter and 25.2% for the first six months of 2008, which improved over margins of 15.4% in the second quarter and 15.3% for the first six months of 2007. The higher margin in 2008 was primarily due to revenue growth of $1,638, or 15.8%, in the second quarter and $3,466, or 17.0%, for the first six months of 2008, partially offset by increased operating expenses of $178, or 2.0%, in the second quarter and $573, or 3.3%, for the first six months. The majority of the improvement in our results was due to the increase in our customer base of 9.2 million since June 30, 2007. This increase includes 1.7 million customers related to our acquisition of Dobson Communications Corporation (Dobson) in November 2007. As of June 30, 2008, we served 72.9 million wireless customers. Contributing to our customer base increase was improvement in the postpaid customer turnover (churn) rate. Customer net additions for the first six months of 2008 were adversely affected by approximately 330,000 disconnections related to the shut down of our Time Division Multiple Access (TDMA) wireless network operations, which was completed in February 2008. Results also benefited from merger integration costs recognized in 2007 and not reoccurring in 2008, and lower amortization expense on intangible assets in 2008.

Average service revenue per user/customer (ARPU) in the second quarter of 2008 remained consistent with the second quarter of 2007. Data services ARPU grew 32.2% in the second quarter of 2008, partially offset by a decline in voice service ARPU of 6.8%. We expect continued growth from data services as more customers purchase advanced handsets and as our third-generation network continues to expand. The decline in voice service ARPU is primarily the result of a higher percentage of prepaid and reseller customers, which provide lower ARPU than postpaid customers, lower growth in outcollect roaming due to acquisitions and rate negotiations as part of roaming cost savings initiatives, lower Universal Service Fund (USF) rates when compared to 2007 and other decreases in voice service. We expect continued pressure on voice service ARPU.

Our total churn rate remained stable and was 1.6% in the second quarter of 2008 and 2007. Our postpaid churn rate declined to 1.1% compared to 1.2% in the second quarter of 2007.

Operating Results

Service revenues are comprised of voice, data and other revenue. Service revenues increased $1,411, or 14.8%, in the second quarter and $2,964, or 15.9%, for the first six months of 2008. The increase in service revenues primarily consisted of:

Data revenue increases of $859, or 52.0%, in the second quarter and $1,694, or 54.5%, for the first six months primarily due to the increased number of data users and an increase in data ARPU of 32.2% in the second quarter and 34.6% for the first six months. Data revenue growth was driven by increases of more than 100% in wireless internet access revenues and more than 50% increase in messaging, e-mail and data access revenues. This primarily resulted from increased use of more advanced handsets, which can provide for the data services previously mentioned. Data service revenues represented 22.9% of wireless service revenues in the second quarter and 22.2% for the first six months of 2008, up from 17.3% in the second quarter and 16.7% for the first six months of 2007.

Voice and other revenue increases of $552, or 7.0%, in the second quarter and $1,270, or 8.2%, for the first six months, primarily due to an increase in the average number of wireless customers of 14.8%, partially offset by a decline in voice ARPU of 6.8% in the second quarter and 5.8% for the first six months. Included in voice revenues were increases in long-distance and net roaming revenue due to increased international usage and a positive impact from the acquisition of Dobson.

Equipment revenues increased $227, or 26.5%, in the second quarter and $502, or 28.5%, for the first six months of 2008. The increase was due to higher handset revenues reflecting increased retail customer gross additions of 8.7% in the second quarter and 11.6% for the first six months, and customer upgrades to more advanced handsets.

Cost of services and equipment sales expenses increased $221, or 5.6%, in the second quarter and $661, or 8.7%, for the first six months of 2008 almost entirely due to increased equipment sales expense. This equipment cost increase was due to the overall increase in sales as well as an increase in sales of higher-cost, advanced handsets and accessories. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers.

AT&T INC.

JUNE 30, 2008

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

Dollars in millions except per share amounts

Cost of services increased $13 in the second quarter and $28 for the first six months due to increased USF, reseller, interconnect and other expenses of $112 in the second quarter and $215 for the first six months. These increases were largely offset by a decline in expenses of $99 in the second quarter and $187 for the first six months primarily related to lower network costs, roaming and long-distance expenses related to cost savings initiatives, including vendor maintenance agreements revisions and efficiencies from the Dobson acquisition.

Selling, general and administrative expenses increased $321, or 10.6%, in the second quarter and $687, and 11.5%, for the first six months of 2008 and included the following:

·	Increases in customer service and other expenses of $181 in the second quarter and $393 for the first six months primarily due to increased customer support costs, other general and administrative and bad-debt expense.

Increases in selling, upgrade commissions and residual expenses of $140 in the second quarter and $294 for the first six months due to increases in sales, prepaid plan gross addition costs and handset upgrade activity, which was consistent with our increase in customer gross and net additions. These increases were partially offset by a decline in advertising expenses.

Depreciation and amortization expenses decreased $364, or 20.1%, in the second quarter and $775, or 20.9%, for the first six months of 2008. Amortization expense decreased $210 in the second quarter and $456 for the first six months primarily due to lower amortization of intangibles related to our acquisition of BellSouth’s 40% ownership interest in AT&T Mobility due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases.

Depreciation expense decreased $154 in the second quarter and $319 for the first six months primarily due to certain network assets becoming fully depreciated (including TDMA assets), partially offset by increased expense related to ongoing capital spending for network upgrades and expansion.

Wireline

Segment Results

Second Quarter			Six-Month Period
		Percent			Percent
2008	2007	Change	2008	2007