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 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 third quarter and for the first nine months of 2009 and 2008 are summarized as follows:

                                        Third Quarter                          Nine-Month Period
                                                            Percent                                  Percent
                                   2009          2008        Change        2009          2008         Change
Operating Revenues            $  30,855     $  31,342       (1.6 )%   $  92,160     $  92,952        (0.9 )%
Operating expenses
Cost of sales                    12,885        13,022       (1.1 )       37,605        36,914         1.9
Selling, general and
administrative                    7,672         7,724       (0.7 )       23,225        23,034         0.8
Depreciation and
amortization                      4,910         4,978       (1.4 )       14,699        14,839        (0.9 )
Total Operating Expenses         25,467        25,724       (1.0 )       75,529        74,787         1.0
Operating income                  5,388         5,618       (4.1 )       16,631        18,165        (8.4 )
Income before income taxes        4,743         4,994       (5.0 )       14,642        16,397       (10.7 )
Net Income Attributable to
AT&T                          $   3,192     $   3,230       (1.2 )%   $   9,516     $  10,463        (9.1 )%

Overview
Operating income Our operating income decreased $230, or 4.1%, in the third quarter and $1,534, or 8.4%, for the first nine 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 revenue and wireline data revenue and decreases in wireline expenses. Operating income also decreased in part due to higher cost of equipment sales in our wireless segment mainly attributed to the continued success of the Apple iPhone. These factors were the primary causes of our operating income margin decreasing from 17.9% to 17.5% in the third quarter and from 19.5% to 18.0% for the first nine months of 2009.

Operating revenues Our operating revenues decreased $487, or 1.6%, in the third quarter and $792, or 0.9%, for the first nine months primarily due to the continuing decline in voice revenues and a decline in directory revenue driven by lower print revenue. These declines were partially offset by continued growth in wireless service revenue due to an increase in average customers of 9.1%, driven in part by the continued success of the Apple iPhone, and an increase in wireline data revenue largely due to Internet Protocol (IP) data growth, including U-verse and broadband growth. Consistent with our quarterly and year to date results, we expect our 2009 revenues to be slightly lower than our 2008 revenues.

The declines in our voice and advertising revenues reflect continuing economic pressures on our customers as well as increasing competition. Total retail consumer voice connections decreased 11.8%. Business customers also disconnected switched access lines, reduced usage-based services and reduced print advertising. Customers disconnecting access lines switched to wireless, Voice over Internet Protocol (VoIP) and cable offerings for voice and data or terminated service permanently as businesses closed or consumers left residences. While we lose the voice revenues, we have the opportunity to increase wireless service or wireline data revenues should the customer choose us as their wireless or VoIP provider. We also continue to expand our VoIP service for customers who have access to our U-verse video service.

Cost of sales expenses decreased $137, or 1.1%, in the third quarter and increased $691, or 1.9%, for the first nine months. The decrease in the third quarter was primarily due to reductions in wireline expenses partially offset by increases in pension/OPEB expenses as well as higher upgrade equipment costs driven by higher Apple iPhone sales. The increase in the first nine months was primarily due to higher upgrade costs and higher equipment costs related to the continued success of the Apple iPhone and other smartphones along with an increase in pension/OPEB expenses. Pension/OPEB expense increased due to lower expected return on assets and an increase in amortization of actuarial losses, both primarily from investment losses in 2008. Partially offsetting these nine-month increases were decreases in wireline expenses primarily driven by employee-related costs (excluding pension/OPEB) due to workforce reductions.

AT&T INC.
SEPTEMBER 30, 2009

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

Selling, general and administrative expenses decreased $52, or 0.7%, in the third quarter and increased $191, or 0.8%, for the first nine months. The decrease in the third quarter was primarily due to lower advertising & promotions and indirect commissions expenses along with a decrease in employee-related costs due to workforce reductions. These decreases were partially offset by an increase in pension/OPEB expense and severance. The increase in the first nine months was primarily due to higher commissions expenses associated with the Apple iPhone and traditional upgrade sales and an increase in pension/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 (excluding pension/OPEB) due to workforce reductions along with decreases in advertising & promotions expense.

Depreciation and amortization expenses decreased $68, or 1.4%, in the third quarter and $140, or 0.9%, for the first nine months. Depreciation and amortization remained relatively stable in the third quarter, and for the first nine months, as the declining amortization of identifiable intangible assets, primarily customer relationships, was offset by increased depreciation resulting from capital additions.

Interest expense decreased $5, or 0.6%, in the third quarter and increased $4, or 0.2%, for the first nine months of 2009. Interest expense remained relatively stable in the third quarter, and for the first nine months. During the third quarter, interest expense decreased slightly due to a decrease in our average debt balance mostly offset by an increase in our weighted average interest rate, related to a change in our mix of debt, along with lower interest charged during construction. For the nine months, interest expense increased slightly due to an increase in our average debt balance mostly offset by 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 decreased $76, or 29.6%, in the third quarter and decreased $163, or 22.9%, for the first nine months of 2009. The declines were primarily due to decreased operating results at Telefonos de Mexico, S.A. de C.V. (Telmex) and foreign currency translation losses at América Móvil S.A. de C.V. (América Móvil) and Telmex Internacional, S.A.B. de C.V. (Telmex Internacional) partially offset by increased operating results at América Móvil.

Other income (expense) - net We had other income of $27 in the third quarter and $43 for the first nine months of 2009, compared to other expense of $23 in the third quarter and income of $97 for the first nine months of 2008. Results in the third quarter of 2009 included a $20 gain on spectrum sale, and $23 of interest and leveraged lease income partially offset by a $17 reserve for net investments losses. Results in the third quarter of 2008 included $46 loss on the sale of administrative buildings and other non-strategic assets and $44 related to asset impairments, partially offset by $54 of interest and dividend income.

Results for the first nine months of 2009 included $86 of interest, dividend and leveraged lease income, $42 of gains on the sales of securities and a professional services business, and a $16 gain on the sale of investments partially offset by $102 related to asset impairment. Results for the first nine months of 2008 primarily included $177 of interest, dividend and leveraged lease income and a $79 gain on sale of investments, partially offset by $89 loss on the sale of land and other non-strategic assets and $75 related to asset impairment.

Income taxes decreased $237, or 13.9%, in the third quarter and $856, or 14.9%, for the first nine months of 2009. The decrease in income taxes in the third quarter was primarily due to a reduction in income before income taxes and to a benefit related to the resolution of federal and state audit issues. The decrease in income taxes for the first nine months was primarily due to lower income before income taxes. The resolution of tax issues also had a positive impact on our effective tax rates, which were 31.0% in the third quarter of 2009 compared to 34.1% in the third quarter of 2008, and 33.4% for the first nine months of 2009 compared to 35.0% for the first nine 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.
SEPTEMBER 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
                                                September 30,
                                               2009          2008
Wireless customers (000)                     81,596        74,871
Postpaid wireless customers (000)            63,434        58,735
Consumer revenue connections (000) 1,2       45,659        47,547
Network access lines in service (000) 2      50,833        57,191
Broadband connections (000) 2,3,7            17,083        15,965
Video connections (000) 4                     4,012         2,963
Debt ratio 5,7,8                               42.1 %        40.5 %
Ratio of earnings to fixed charges 6           4.55          5.20
Number of AT&T employees                    284,970       303,530

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 include DSL, U-verse High-Speed Internet access, satellite broadband and 3G LaptopConnect cards 4 Video connections include customers that have satellite service under our agency arrangements and U-verse video connections (of 1,817 in 2009 and 781 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 $6,167 as of September 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.

AT&T INC.
SEPTEMBER 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 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."

Wireless
Segment Results
                                         Third Quarter                         Nine-Month Period
                                                            Percent                                 Percent
                                   2009          2008        Change        2009          2008        Change
Segment operating revenues
Service                       $  12,399     $  11,273        10.0 %   $  36,050     $  32,869         9.7 %
Equipment                         1,255         1,345        (6.7 )       3,709         3,607         2.8
Total Segment Operating
Revenues                         13,654        12,618         8.2        39,759        36,476         9.0
Segment operating expenses
Operations and support            8,877         8,838         0.4        25,620        23,750         7.9
Depreciation and
amortization                      1,418         1,401         1.2         4,288         4,327        (0.9 )
Total Segment Operating
Expenses                         10,295        10,239         0.5        29,908        28,077         6.5
Segment Operating Income          3,359         2,379        41.2         9,851         8,399        17.3
Equity in Net Income of
Affiliates                            -             -           -             -             5           -
Segment Income                $   3,359     $   2,379        41.2 %   $   9,851     $   8,404        17.2 %

Operating Income and Margin Trends
Our wireless segment operating income increased $980, or 41.2%, in the third quarter and $1,452, or 17.3%, for the first nine months of 2009, reflecting an increase in our customer base. Our wireless segment operating income margin was 24.6% in the third quarter of 2009 and 24.8% for the first nine months of 2009, compared to margins of 18.9% in the third quarter of 2008 and 23.0% for the first nine months of 2008. The higher margins in 2009 were primarily due to service revenue growth of $1,126, or 10.0%, in the third quarter and $3,181, or 9.7%, for the first nine months of 2009, as well as benefits from churn improvements and further growth in the company's base of integrated device and Apple iPhone subscribers. These factors offset increased acquisition costs associated with Apple iPhone activations.

The majority of the improvement in our revenue results was due to the increase in our customer base of 6.7 million since September 30, 2008. As of September 30, 2009, we served 81.6 million wireless customers. Contributing to our customer base increase was improvement in the postpaid and overall customer turnover (churn) rate for the third quarter of 2009 as well as strong Apple iPhone sales. Our total churn rate improved in the third quarter of 2009 to 1.43% from 1.69% in the third quarter of 2008. Our postpaid churn rate improved to 1.17% compared to 1.22% in the third quarter of 2008.

Average service revenue per user (ARPU) in the third quarter of 2009 grew to $51.21 from $50.80 in the third quarter of 2008. Data services ARPU grew 22.4% in the third quarter of 2009, partially offset by a decline in voice and other service ARPU of 6.1%. 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.

AT&T INC.
SEPTEMBER 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 $1,126, or 10.0%, in the third quarter of 2009 and $3,181, or 9.7%, for the first nine months of 2009. The increase in service revenues primarily consisted of:
ˇ Data revenue increases of $916, or 33.6%, in the third quarter of 2009 and $2,734, or 36.3%, for the first nine months primarily due to the increased number of data users and an increase in data ARPU of 22.4% in the third quarter of 2009 and 24.6% for the first nine months of 2009. 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 29.4% of wireless service revenues in the third quarter of 2009 and 28.5% for the first nine months of 2009, up from 24.2% in the third quarter of 2008 and 22.9% for the first nine months of 2008.

ˇ Voice and other revenue increases of $210, or 2.5%, in the third quarter of 2009 and $447, or 1.8%, for the first nine months of 2009, primarily due to an increase in the average number of wireless customers of 9.1% and 9.4% for the three and nine-month periods, respectively. The subscriber growth impacts on voice and other revenue were partially offset by a decline in voice and other service ARPU of 6.1% and 6.9% for the third quarter and the first nine months of 2009, respectively.

Equipment revenues decreased $90, or 6.7%, in the third quarter of 2009 and increased $102, or 2.8%, for the first nine months of 2009. The quarterly decrease was due to lower traditional handset sales, partially offset for the quarter and more than offset for the first nine months, by sales of more advanced integrated devices, such as the Apple iPhone, than in prior periods.

Operations and support expenses increased $39, or 0.4%, in the third quarter and $1,870, or 7.9%, for the first nine months of 2009. The quarterly increase was primarily due to Interconnect, USF and reseller expense increases of $140, equipment cost increases of $104, reflecting in part Apple iPhone sales, customer service cost increases of $58, and other administrative cost increases of $73. These increases were substantially offset by selling-related expense decreases of $210, network system cost decreases of $86, and roaming expense decreases of $42.

The nine-month increase was primarily due to equipment cost increases of $1,054, reflecting the higher acquisition cost of more advanced, integrated devices, such as the Apple iPhone, compared to prior periods, customer service cost increases of $652, Interconnect, USF and reseller expense increases of $321, and other administrative cost increases of $144. These increases were partially offset by selling related expense decreases of $120, roaming expense decreases of $119, and network system cost decreases of $29. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers.

Depreciation and amortization expenses increased $17, or 1.2%, in the third quarter of 2009 and decreased $39, or 0.9%, for the first nine months of 2009. Amortization expense decreased $111, or 22.3%, in the third quarter of 2009 and $348, or 21.8%, for the first nine months primarily due to lower amortization of intangibles related to our acquisition of BellSouth's 40% ownership interest in AT&T Mobility. We apply accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases.

Depreciation expense increased $129, or 14.2%, in the third quarter of 2009 and $309, or 11.3%, for the first nine months of 2009 primarily due to increased expense related to ongoing capital spending for network upgrades and expansion, partially offset by certain network assets becoming fully depreciated.

AT&T INC.
SEPTEMBER 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 Supplementary Operating and Financial Data
                                         Third Quarter                          Nine-Month Period
                                                             Percent                                  Percent
                                   2009          2008         Change        2009          2008         Change
Wireless Customers (000)                                                  81,596        74,871          9.0 %
Net Customer Additions
(000)                             2,026         1,976         2.5 %        4,617         4,604          0.3 %
Total Churn                        1.43 %        1.69 %       -26 BP        1.49 %        1.69 %       -20 BP

Postpaid Customers (000)                                                  63,434        58,735          8.0 %
Net Postpaid Customer
Additions (000)                   1,385         1,693       (18.2 )%       3,413         3,292          3.7 %
Postpaid Churn                     1.17 %        1.22 %        -5 BP        1.15 %        1.19 %        -4 BP

AT&T INC.
SEPTEMBER 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
                                         Third Quarter                          Nine-Month Period
                                                             Percent                                  Percent
                                   2009          2008         Change        2009          2008         Change
Segment operating revenues
Voice                         $   8,132     $   9,515       (14.5 )%   $  25,289     $  29,191       (13.4 )%
Data                              6,747         6,401         5.4         19,900        18,893         5.3
Other                             1,425         1,634       (12.8 )        4,319         4,698        (8.1 )
Total Segment Operating
Revenues                         16,304        17,550        (7.1 )       49,508        52,782        (6.2 )
Segment operating expenses
Operations and support           11,097        11,456        (3.1 )       33,659        34,141        (1.4 )
Depreciation and
amortization                      3,289         3,352        (1.9 )        9,787         9,814        (0.3 )
Total Segment Operating
Expenses                         14,386        14,808        (2.8 )       43,446        43,955        (1.2 )
Segment Operating Income          1,918         2,742       (30.1 )        6,062         8,827       (31.3 )
Equity in Net Income of
Affiliates                            9             9           -             17            18        (5.6 )
Segment Income                $   1,927     $   2,751       (30.0 )%   $   6,079     $   8,845       (31.3 )%

Operating Income and Margin Trends
Our wireline segment operating income decreased $824, or 30.1%, in the third quarter of 2009 and $2,765, or 31.3%, for the first nine months of 2009. For the third quarter of 2009 and 2008, our wireline segment operating income margin decreased from 15.6% to 11.8%, and for the first nine months decreased from 16.7% in 2008 to 12.2% 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 $1,383, or 14.5%, in the third quarter and $3,902, or 13.4%, for the first nine 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 . . .