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 advertising 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, 2008. 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 2009 and 2008 are summarized as follows:

                                   Second Quarter                            Six-Month Period
                                                      Percent                                    Percent
                             2009          2008        Change           2009          2008        Change
Operating Revenues      $  30,734     $  30,866          (0.4 )%   $  61,305     $  61,610          (0.5 )%
Operating expenses
Cost of sales              12,478        11,897           4.9         24,720        23,892           3.5
Selling, general and
administrative              7,847         7,444           5.4         15,553        15,310           1.6
Depreciation and
amortization                4,903         4,958          (1.1 )        9,789         9,861          (0.7 )
Total Operating
Expenses                   25,228        24,299           3.8         50,062        49,063           2.0
Operating income            5,506         6,567         (16.2 )       11,243        12,547         (10.4 )
Income before income
taxes                       4,889         5,954         (17.9 )        9,899        11,403         (13.2 )
Net Income
Attributable to AT&T    $   3,198     $   3,772         (15.2 )%   $   6,324     $   7,233         (12.6 )%

Overview
Operating income Our operating income decreased $1,061, or 16.2%, in the second quarter and $1,304, or 10.4%, for the first six months of 2009, primarily due to the decline in voice revenues along with an increase in pension and other postemployment benefits (OPEB) expense, partially offset by continued growth in wireless service revenues. Operating income also decreased in part due to higher cost of sales in our wireless segment mainly attributed to the continued success of the Apple iPhone 3G and the successful launch on June 19th of the Apple iPhone 3GS (collectively, the Apple iPhone). These factors were the primary causes of our operating income margin decreasing from 21.3% to 17.9% in the second quarter and from 20.4% to 18.3% for the first six months.

Operating revenues Our operating revenues decreased $132, or 0.4%, in the second quarter and $305, or 0.5%, for the first six months primarily due to the continuing decline in voice revenues, resulting from an 12.1% decrease in total retail consumer voice connections, and a decline in directory revenue driven by lower print revenue. These were partially offset by continued growth in wireless service revenue due to an increase in average customers of 9.2%, driven in part by the continued success of the Apple iPhone 3G and other advanced integrated devices and the successful launch of the Apple iPhone 3GS, and an increase in wireline data revenue largely due to U-verse and broadband growth.

The decline in our voice revenues reflects continuing economic pressures on our consumer and business wireline customers as well as increasing competition. Consumers and businesses disconnected landlines and usage-based services also declined. Customers disconnecting landlines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data. While we lose the voice revenues, we have the opportunity to increase wireless service revenues should the customer choose us as their wireless provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

Cost of sales expenses increased $581, or 4.9%, in the second quarter and increased $828, or 3.5%, for the first six months. The increase in the second quarter and first six months was primarily due to higher equipment costs related to the continued success of the Apple iPhone 3G and other smartphones and the successful launch of the Apple iPhone 3GS along with an increase in pension and OPEB expense. The increase in pension and OPEB expense is due to lower expected return on assets and an increase in amortization of unrecognized actuarial losses, both primarily from investment losses in 2008. Partially offsetting these increases were decreases in employee-related costs due to workforce reductions as well as lower traffic compensation expense as usage-based services declined.

AT&T INC.
JUNE 30, 2009

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

The first six months also reflect lower equipment sales costs for traditional equipment sales as well as a decrease in expenses due to the renegotiation of our agreement with Yahoo! and lower volumes for usage-based services.

Selling, general and administrative expenses increased $403, or 5.4%, in the second quarter and increased $243, or 1.6%, for the first six months. The increase in the second quarter and first six months was primarily due to higher commissions expenses associated with the Apple iPhone and traditional upgrade sales and an increase in pension and OPEB expense. Selling, general and administrative expenses also increased due to higher customer service costs resulting from wireless subscriber growth along with increased support for data services and integrated devices. These increases were partially offset by decreases in employee-related costs due to workforce reductions.

Depreciation and amortization expense decreased $55, or 1.1%, in the second quarter and decreased $72, or 0.7%, for the first six months. Depreciation and amortization remained relatively stable in the second quarter, and for the first six months, as the declining amortization of identifiable intangible assets, primarily customer relationships, was offset by increased depreciation resulting from capital additions.

Interest expense increased $25, or 2.9%, in the second quarter and $9, or 0.5%, for the first six months of 2009. Interest expense was higher in the second quarter resulting from an increase in our weighted average interest rate, related to a change in our mix of debt, partially offset by a decrease in our average debt balances. For the six months, the increase in the second quarter was offset by first quarter's decrease resulting in interest expense remaining relatively unchanged with an increase in our average debt balances being offset by a decrease in our weighted average interest rate and higher interest charged during construction. Interest during construction is primarily related to preparing wireless spectrum for advanced services and is higher in 2009 due to acquisition of significant amounts of spectrum for advanced services late in the first quarter of 2008.

Equity in net income of affiliates increased $19, or 9.0%, in the second quarter and decreased $87, or 19.1%, for the first six months of 2009. The second quarter increase is primarily due to improved results at América Móvil, S.A. de C.V. (América Móvil). The year to date decrease is primarily due to foreign exchange translation losses at América Móvil, Telefonos de Mexico, S.A. de C.V. (Telmex) and Telmex Internacional, S.A.B. de C.V. (Telmex Internacional).

Other income (expense) - net We had other income of $31 in the second quarter and $16 for the first six months of 2009, compared to other income of $29 in the second quarter and $120 for the first six months of 2008. Results in the second quarter of 2009 included $50 in interest and lease gains partially offset by $14 of foreign exchange losses. Results in the second quarter of 2008 included income of $45 related to interest, dividend and leveraged lease income partially offset by $19 of losses on sale of investments.

Results for the first six months of 2009 included $119 gains on sale of securities and professional services business, dividend, interest, and leveraged lease income partially offset by $102 related to asset impairment. Results for the first six months of 2008 primarily included income of $117 of interest, dividend and leveraged lease income.

Income taxes decreased $498, or 23.6%, in the second quarter and $619, or 15.3%, for the first six months of 2009. The decrease in income taxes in the second quarter and for the first six months was primarily due to lower income before income taxes. In addition, during the second quarter, the Internal Revenue Service (IRS) completed the examination phase of several audits. As a result, we recorded a net favorable adjustment. This has a positive effect on our effective tax rates, which were 33.0% in the second quarter of 2009 compared to 35.5% in the second quarter of 2008, and 34.6% for the first six months of 2009 compared to 35.4% for the first six months of 2008. In July 2009, in the case regarding the tax treatment of Universal Service Fund receipts on our 1998 and 1999 tax returns, the U.S. District Court granted the Government's motion for summary judgment and entered final judgment for the Government. We appealed the final judgment to the United States Court of Appeals for the Fifth Circuit.

AT&T INC.
JUNE 30, 2009

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

Selected Financial and Operating Data
                                                      June 30,
                                               2009          2008
Wireless customers (000)                     79,600        72,882
Postpaid wireless customers (000)            62,096        57,043
Consumer revenue connections (000) 1,2       46,289        48,416
Network access lines in service (000) 2      52,379        58,860
Broadband connections (000) 2,3,7            16,945        15,631
Video connections (000) 4                     3,787         2,784
Debt ratio 5,7,8                               43.7 %        41.6 %
Ratio of earnings to fixed charges 6            4.6           5.5
Number of AT&T employees                    288,660       307,550

Consumer revenue connections includes retail access lines, U-verse 1 voice over IP connections, broadband and video.
Represents services by AT&T's local exchange companies (ILECs) and 2 affiliates.
3 Broadband connections
4 Video connections include customers that have satellite service under our agency arrangements and U-verse video connections (of 1,577 in 2009 and 549 in 2008).
5 See our "Liquidity and Capital Resources" section for discussion. 6 See Exhibit 12.
Prior year amounts restated to conform to current period reporting 7 methodology.
8 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 does not consider cash on hand available to pay down debt. Cash on hand was $7,348 as of June 30, 2009, and $1,792 as of December 31, 2008.

Segment Results

Our segments represent strategic business units that offer different products and services over various technology platforms 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, reviewing operating revenues, expenses (depreciation and non-depreciation) and equity income for each segment. We make our capital allocations decisions primarily based on the network (wireless or wireline) providing services. 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 solutions and
(4) other.

The wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services.

The wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, AT&T U-verseSM TV, high-speed broadband and voice services (U-verse) and managed networking to business customers. Additionally, we offer satellite television services through our agency arrangements.

The advertising solutions segment publishes Yellow and White Pages directories and sells advertising in various media, including directory and Internet-based advertising, and local search.

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 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 are discussed in "Liquidity and Capital Resources."

AT&T INC.
JUNE 30, 2009

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


Wireless
Segment Results
                                          Second Quarter                           Six-Month Period
                                                                Percent                                 Percent
                                   2009          2008            Change        2009          2008        Change
Segment operating revenues
Service                       $  11,983     $  10,951             9.4 %   $  23,651     $  21,596         9.5 %
Equipment                         1,262         1,082            16.6         2,454         2,262         8.5
Total Segment Operating
Revenues                         13,245        12,033            10.1        26,105        23,858         9.4
Segment operating expenses
Operations and support            8,658         7,523            15.1        16,743        14,912        12.3
Depreciation and
amortization                      1,436         1,446            (0.7 )       2,870         2,926        (1.9 )
Total Segment Operating
Expenses                         10,094         8,969            12.5        19,613        17,838        10.0
Segment Operating Income          3,151         3,064             2.8         6,492         6,020         7.8
Equity in Net Income of
Affiliates                            -             3               -             -             5           -
Segment Income                $   3,151     $   3,067             2.7 %   $   6,492     $   6,025         7.8 %

Operating Income and Margin Trends
Our wireless segment operating income increased $87, or 2.8%, in the second quarter and $472, or 7.8%, for the first six months of 2009, reflecting an increase in our customer base. Our wireless segment operating income margin was 23.8% in the second quarter and 24.9% for the first six months of 2009, compared to margins of 25.5% in the second quarter and 25.2% for the first six months of 2008. The lower margin in 2009 was primarily due to higher costs associated with strong Apple iPhone sales partly offset by revenue growth of $1,212, or 10.1%, in the second quarter and $2,247, or 9.4%, for the first six months of 2009. The majority of the improvement in our revenue results was due to the increase in our customer base of 6.7 million since June 30, 2008. As of June 30, 2009, we served 79.6 million wireless customers. Contributing to our customer base increase was improvement in the postpaid customer turnover (churn) rate to 1.09% as well as strong Apple iPhone sales.

Average service revenue per user/customer (ARPU) in the second quarter of 2009 grew to $50.70 from $50.60 in the second quarter of 2008. Data services ARPU grew 25.7% in the second quarter of 2009, partially offset by a decline in voice service ARPU of 7.4%. We expect continued growth from data services as more customers purchase advanced integrated handsets including the Apple iPhone, broadband laptop cards and as our third-generation network continues to expand. Voice service ARPU declined due to lower postpaid overage charges, access charges, roaming revenues and long-distance usage. Voice service ARPU decline was also driven by increases in our reseller customer base which have lower ARPU than traditional postpaid customers. We expect continued pressure on voice service ARPU.

Our total churn rate improved in the second quarter 2009 to 1.49% from 1.64% in 2008. Our postpaid churn rate improved to 1.09% compared to 1.10% in the second quarter of 2008.

AT&T INC.
JUNE 30, 2009

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

Operating Results
Service revenues are comprised of voice, data and other revenue. Service revenues increased $1,032, or 9.4%, in the second quarter and $2,055, or 9.5%, for the first six months of 2009. The increase in service revenues primarily consisted of:
ˇ Data revenue increases of $934, or 37.2%, in the second quarter and $1,818, or 37.9%, for the first six months primarily due to the increased number of data users and an increase in data ARPU of 25.7% in the second quarter and 25.9% for the first six months. Data revenue growth was primarily driven by strong increases in wireless internet access, messaging and data access revenues. This primarily resulted from increased use of more advanced integrated devices, including the Apple iPhone, which can provide for the data services previously mentioned. Data service revenues represented 28.7% of wireless service revenues in the second quarter and 28.0% for the first six months of 2009, up from 22.9% in the second quarter and 22.2% for the first six months of 2008.

ˇ Voice and other revenue increases of $98, or 1.2%, in the second quarter and $237, or 1.4%, for the first six months, primarily due to an increase in the average number of wireless customers of 9.2% and 9.5% for the three and six-month periods, respectively. The subscriber growth impacts on voice and other revenue were partially offset by a decline in voice ARPU of 7.4% for both the second quarter and the first six months of 2009.

Equipment revenues increased $180, or 16.6%, in the second quarter and $192, or 8.5%, for the first six months of 2009. The increase was due to higher handset revenues reflecting a greater proportion of customer gross additions and upgrades to more advanced integrated devices than in prior periods.

Operations and support expenses increased $1,135, or 15.1%, in the second quarter and $1,831, or 12.3%, for the first six months of 2009. The $1,135 quarterly increase is primarily due to higher equipment costs of $700 reflecting in part the launch of the iPhone 3GS, higher commission expense of $182 due to higher handset upgrade activity, customer service costs of $148; Interconnect, USF and reseller expenses of $93 and selling related expenses of $37; partially offset by lower roaming and long-distance expenses of $62.

The six-month increase is primarily due to higher equipment costs of $950, interconnect, USF, reseller and network systems expenses of $238, higher commission expense of $366, customer service costs of $279 and selling related expenses of $39; partially offset by lower roaming and long-distance expenses of $107. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers.

Depreciation and amortization expenses decreased $10, or 0.7%, in the second quarter and $56, or 1.9%, for the first six months of 2009. Amortization expense decreased $114, or 21.6%, in the second quarter and $238, or 21.7%, 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 increased $103, or 11.2%, in the second quarter and $181, or 9.9%, for the first six months primarily due to increased expense related to ongoing capital spending for network upgrades and expansion, partially offset by certain network assets becoming fully depreciated.

Wireless Supplementary Operating and Financial Data
                                            Three Months Ended                                 Six Months Ended
                                                                     Percent                                            Percent
                                 6/30/09        6/30/08               Change     6/30/09       6/30/08                   Change
Wireless Customers (000)                                                          79,600        72,882                9.2 %
Net Customer Additions
(000)                              1,368          1,333                2.6 %       2,591         2,628               (1.4 )%
Total Churn                         1.49 %         1.64 %             -15 BP        1.53 %        1.69 %                 -16 BP

Postpaid Customers (000)                                                          62,096        57,043                8.9 %
Net Postpaid Customer
Additions (000)                    1,153            894               29.0 %       2,028         1,599               26.8 %
Postpaid Churn                      1.09 %         1.10 %              -1 BP        1.14 %        1.17 %                  -3 BP

AT&T INC.
JUNE 30, 2009

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

Wireline
Segment Results
                                               Second Quarter                                 Six-Month Period
                                                                Percent                                        Percent
                                 2009          2008              Change          2009          2008             Change
Segment operating
revenues
Voice                       $   8,449     $   9,757            (13.4 )%     $  17,157     $  19,676            (12.8 )%
Data                            6,617         6,287              5.2           13,153        12,492              5.3
Other                           1,460         1,564             (6.6 )          2,894         3,064             (5.5 )
Total Segment Operating
Revenues                       16,526        17,608             (6.1 )         33,204        35,232             (5.8 )
Segment operating
expenses
Operations and support         11,265        11,192              0.7           22,562        22,685             (0.5 )
Depreciation and
amortization                    3,258         3,281             (0.7 )          6,498         6,462              0.6
Total Segment Operating
Expenses                       14,523        14,473              0.3           29,060        29,147             (0.3 )
Segment Operating Income        2,003         3,135            (36.1 )          4,144         6,085            (31.9 )
Equity in Net Income of
Affiliates                          4             3             33.3                8             9            (11.1 )
Segment Income              $   2,007     $   3,138            (36.0 )%     $   4,152     $   6,094            (31.9 )%

Operating Income and Margin Trends
Our wireline segment operating income decreased $1,132, or 36.1%, in the second quarter of 2009 and $1,941, or 31.9%, for the first six months of 2009. For the second quarter of 2009 and 2008, our wireline segment operating income margin decreased from 17.8% to 12.1%, and for the first six months decreased from 17.3% in 2008 to 12.5% in 2009. Operating income continued to be pressured by access line declines due to economic pressures on our consumer and business wireline customers and increased competition, as customers either reduced usage or disconnected traditional landline services and switched to alternative technologies such as wireless and VoIP. Our strategy is to offset these line losses by increasing revenues from customer connections for data, including video, broadband and VoIP. Additionally, we have the opportunity to increase wireless segment revenues if customers choose AT&T Mobility as an alternative provider. The decline in segment voice revenue was partially offset by continued growth in data revenue. Also contributing to pressure on our operating margins was increased Pension/OPEB expense in 2009.

Operating Results
Voice revenues decreased $1,308, or 13.4%, in the second quarter and $2,519, or 12.8%, for the first six months of 2009 primarily due to the continuing decline in demand for traditional voice services by our consumer and business customers. Included in voice revenues are revenues from local voice, long-distance (including international) and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.
ˇ Local voice revenues decreased $712, or 12.3%, in the second quarter and $1,344, or 11.5%, for the first six months of 2009. The decrease was driven primarily by an 11% decline in switched access lines and a decrease in average local voice revenue per user. Additionally, there was a decline in revenues from our national mass-market customers of approximately $41 in the second quarter and $81 for the first six months of 2009. We expect our local voice revenue to continue to be negatively affected by the continuing economic recession and increased competition from alternative technologies.

ˇ Long-distance revenues decreased $530, or 14.9%, in the second quarter and $1,047, or 14.5%, for the first six months of 2009. The decrease was primarily due to lower demand for long-distance service from global businesses and consumer customers which decreased $388 in the second quarter and $758 for the first six months of 2009, and declines in the number of our national mass-market customers, which decreased $142 in the second quarter and $289 for the first six months of 2009.

ˇ Local wholesale revenues decreased $66, or 17.0%, in the second quarter and $128, or 16.2%, for the first six months of 2009. The decrease was primarily due to the declining number of Unbundled Network Element-Platform (UNE-P) lines sold to competitive providers.

AT&T INC.
JUNE 30, 2009

. . .