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 wireless communications services, local exchange services, long-distance services, data/broadband and Internet services, video services, telecommunications equipment, managed networking and wholesale 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, 2011. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.

Consolidated Results Our financial results in the second quarter and for the first six months of 2012 and 2011 are summarized as follows:

                                                  Second Quarter                        Six-Month Period
                                                                  Percent                                Percent
                                         2012         2011         Change       2012         2011         Change
Operating Revenues                     $ 31,575     $ 31,495          0.3 %   $ 63,397     $ 62,742          1.0 %
Operating expenses
Cost of services and sales               12,369       12,756         (3.0 )     25,282       25,569         (1.1 )
Selling, general and administrative       7,890        7,972         (1.0 )     16,138       16,014          0.8
Depreciation and amortization             4,499        4,602         (2.2 )      9,059        9,186         (1.4 )
Total Operating Expenses                 24,758       25,330         (2.3 )     50,479       50,769         (0.6 )
Operating Income                          6,817        6,165         10.6       12,918       11,973          7.9
 Income Before Income Taxes               6,031        5,551          8.6       11,548       10,821          6.7
Net Income                                3,965        3,658          8.4        7,617        7,126          6.9
Net Income Attributable to AT&T        $  3,902     $  3,591          8.7 %   $  7,486     $  6,999          7.0 %

Overview
Operating income increased $652, or 10.6%, in the second quarter and $945, or 7.9%, for the first six months of 2012. The increase was primarily due to continued growth in wireless service and equipment revenue, driven mostly by subscriber and data revenue growth, along with increased revenues from AT&T U-verse® (U-verse) services and strategic business services. Both operating revenues and expenses for the quarter were affected by the May 2012 sale of our Advertising Solutions segment, as discussed below. Our operating income margin in the second quarter increased from 19.6% in 2011 to 21.6% in 2012 and for the first six months increased from 19.1% in 2011 to 20.4% in 2012.

Operating revenues increased $80, or 0.3%, in the second quarter and $655, or 1.0%, for the first six months of 2012. The increase reflects continued growth in wireless service and equipment revenues, driven by growth in the subscriber base and the increasing percentage of smartphone customers which contribute to higher wireless data revenues. Higher wireline data revenues from U-verse services and strategic business services also contributed to the increase. The increase was mostly offset by the Advertising Solutions segment sale, which decreased revenues by $536 in the second quarter and $660 for the first six months, and continued declines in Wireline voice revenues.

Revenue growth continues to be tempered by declines in our voice revenues. Total switched access lines decreased 12.7% since June 30, 2011. 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 wireline 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.

AT&T INC.

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 and sales expenses decreased $387, or 3.0%, in the second quarter and $287, or 1.1%, for the first six months of 2012. The decrease primarily reflects the sale of our Advertising Solutions segment, which reduced expenses $192 in the second quarter and $222 for the first six months. Expenses also decreased due to lower wireless equipment costs and other non-employee-related expenses partially offset by increased wireline costs attributable to U-verse subscriber growth, higher USF and reseller fees, and wireless network costs.

Selling, general and administrative expenses decreased $82, or 1.0%, in the second quarter and increased $124, or 0.8%, for the six months of 2012. The sale of our Advertising Solutions segment reduced expenses $162 in the second quarter and $159 for the first six months. Also contributing to the second-quarter decrease were lower sales and advertising costs and the T-Mobile USA, Inc. (T-Mobile) related expenses incurred in 2011, which were partially offset by higher selling and administrative fees. The increase in the first six months was primarily due to higher administrative costs, employee-related expenses and increased commissions paid on smartphone upgrades. The increases were partially offset by decreased sales and advertising costs, the sale of our Advertising Solutions Segment, and prior-year T-Mobile expenses.

Depreciation and amortization expense decreased $103, or 2.2%, in the second quarter and $127, or 1.4%, for the first six months of 2012. The sale of our Advertising Solutions segment reduced expenses $72 in the second quarter and $101 for the first six months. Expenses also decreased due to lower amortization of intangibles for customer lists related to acquisitions, partially offset by increased depreciation associated with ongoing capital spending for network upgrades and expansion.

Interest expense increased $93, or 11.0%, in the second quarter and $106, or 6.3%, for the first six months of 2012. Increased interest expense was due to call premiums paid for the early redemption of debt in the second quarter, which were partially offset by net gains on the settlement of interest-rate swaps and an increase in the amount of interest capitalized on wireless spectrum that will be used in the future.

Equity in net income of affiliates decreased $75, or 36.2%, in the second quarter and $101, or 22.1%, for the first six months of 2012. Decreased equity in net income of affiliates was due to decreased earnings at América Móvil, S.A. de C.V. (América Móvil), resulting from foreign exchange losses. Partially offsetting the decreases were earnings from YP Holdings LLC (YP Holdings).

Other income (expense) - net We had other income of $23 in the second quarter and $75 for the first six months of 2012, compared to other income of $27 in the second quarter and $86 for the first six months of 2011. Income in the second quarter and for the first six months of 2012 included interest and dividend income of $19 and $34, leveraged lease income of $8 and $41 and a net loss on the sale of investments of $11 and $1, respectively.

Other income in the second quarter and for the first six months of 2011 included interest and dividend income of $30 and $43 and leveraged lease income of $4 and $11, respectively. Income for the first six months of 2011 also included a net gain of $28 from appreciation and sale of investments.

Income taxes increased $173, or 9.1%, in the second quarter and $236, or 6.4%, for the first six months of 2012 as a result of increased income before income taxes. Our effective tax rate was 34.3% for the second quarter and 34.0% for the first six months of 2012, as compared to 34.1% for both the second quarter and the first six months of 2011.

AT&T INC.

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,
                                               2012          2011
Wireless subscribers (000)                     105,206        98,615
Network access lines in service (000)           34,274        39,275
Total wireline broadband connections (000)      16,434        16,473
Debt ratio1                                       38.4 %        36.8 %
Ratio of earnings to fixed charges2               5.36          5.40
Number of AT&T employees                       242,380       258,870

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

2 See Exhibit 12.

Segment Results

Our segments are strategic business units that offer different products and services over various technology platforms and are managed accordingly. Our operating segment results presented in Note 3 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income before income taxes. We make our capital allocations decisions based on our strategic direction of the business, needs of the network (wireless or wireline) providing services and other assets needed to provide emerging services to our customers. Actuarial gains and losses from pension and other postretirement benefits, 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 Wireless segment results have been reclassified to include the operating results of a subsidiary that provides services for subscribers to wirelessly monitor their homes that was previously reported in the Wireline segment's results.

The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice and data communications services, U-verse TV, high-speed broadband and voice services and managed networking to business customers. Additionally, we receive commissions on sales of satellite television services offered through our agency arrangements. The Wireline segment results have been reclassified to exclude the operating results of the business moved to our Wireless segment and to include the operating results of customer information services, which were previously reported in our Other segment's results.

The Advertising Solutions segment includes our directory operations, which publish Yellow and White Pages directories and sells directory advertising and Internet-based advertising and local search through May 8, 2012 (see Note 1).

The Other segment includes our portion of the results from our international equity investments, our 47 percent equity interest in YP Holdings, and all corporate and other operations. Also included in the Other segment are impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, including interest cost and expected return on plan assets for our pension and postretirement benefit plans. The Other segment results have been reclassified to exclude the operating results of customer information services, which are now reported in our Wireline segment's results.

AT&T INC.

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

Operations and support expenses include bad debt expense; advertising costs; sales and marketing functions, including customer service centers; real estate costs, including maintenance and utilities on all buildings; credit and collection functions; and corporate support costs, such as finance, legal, human resources and external affairs. Pension and postretirement service costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are associated with these employees. Our Wireless and Wireline segments also include certain network planning and engineering expenses, information technology, our repair technicians and repair services, and property taxes as operations and support expenses.

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
                                                2012          2011        Change          2012          2011        Change
Segment operating revenues
Service                                      $ 14,765      $ 14,157          4.3  %    $ 29,331      $ 28,118           4.3 %
Equipment                                       1,588         1,446           9.8         3,158         2,795          13.0
Total Segment Operating Revenues               16,353        15,603           4.8        32,489        30,913           5.1
Segment operating expenses
Operations and support                          9,705         9,786         (0.8)        19,788        19,647           0.7
Depreciation and amortization                   1,696         1,615           5.0         3,362         3,121           7.7
Total Segment Operating Expenses               11,401        11,401             -        23,150        22,768           1.7
Segment Operating Income                        4,952         4,202          17.8         9,339         8,145          14.7
Equity in Net Income (Loss) of Affiliates        (15)           (7)             -          (28)          (11)             -

AT&T INC.

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

The following table highlights other key measures of performance for the
Wireless segment:

                                                            Second Quarter                             Six-Month Period
                                                                             Percent                                       Percent
                                              2012             2011          Change         2012            2011           Change
Wireless Subscribers (000)1                                                                105,206           98,615            6.7 %
   Gross Subscriber Additions (000)2           4,970             5,301         (6.2) %      10,248           11,208          (8.6)
   Net Subscriber Additions (000)2             1,266             1,095          15.6         1,992            3,079         (35.3)
   Total Churn                                  1.18 %            1.43 %        (25)          1.32 %           1.40 %       (8) BP
                                                                                  BP

Postpaid Subscribers (000)                                                                  69,666           68,353            1.9 %
   Net Postpaid Subscriber Additions             320               331         (3.3) %         507              393           29.0
(000)2
    Postpaid Churn                              0.97 %            1.15 %      (18)            1.03 %           1.17 %      (14) BP
                                                                             BP

Prepaid Subscribers (000)                                                                    7,473            6,750           10.7 %
   Net Prepaid Subscriber Additions               92               137        (32.8) %         217              222          (2.3)
(000)2

Reseller Subscribers (000)                                                                  14,382           12,522           14.9 %
   Net Reseller Subscriber Additions             472               248          90.3 %         656              809         (18.9)
(000)2

Connected Device Subscribers (000)3                                                         13,685           10,990           24.5 %
   Net Connected Device                          382               379           0.8 %         612            1,655         (63.0)
Subscriber Additions (000)


1 Represents 100% of AT&T
Mobility customers.
2 Excludes merger and acquisition-related
additions during the period.

Wireless Subscriber Relationships
As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative services and devices and a wireless network that has sufficient spectrum and capacity to support these innovations and make them available to more subscribers. To attract and retain subscribers, we offer a broad handset line and a wide variety of service plans.

Our handsets offerings include at least 16 smartphones (handsets with voice and data capabilities using an advanced operating system to better manage data and Internet access) from nine manufacturers. As technology evolves, rapid changes are occurring in the handset and device industry with the continual introduction of new models (e.g., various Android, Apple, Windows and other smartphones) or significant revisions of existing models. We believe a broad offering of a wide variety of smartphones reduces dependence on any single operating system or manufacturer as these products continue to evolve in terms of technology and subscriber appeal. In the first six months of 2012, we continued to see increasing use of smartphones by our postpaid subscribers. Of our total postpaid subscriber base, 61.9% uses smartphones, up from 49.9% a year earlier. As is common in the industry, most of our subscribers' phones are designed to work only with our wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. From time to time, we offer and have offered attractive handsets on an exclusive basis. As these exclusivity arrangements expire, we expect to continue to offer such handsets (based on historical industry practice), and we believe our service plan offerings will help to retain our subscribers by providing incentives not to move to a new carrier. We do not expect exclusivity terminations to have a material impact on our Wireless segment income, consolidated operating margin or our cash flows from operations.

AT&T INC.

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

Our postpaid subscribers typically sign a two-year contract, which includes discounted handsets and early termination fees. About 88% of our postpaid smartphone subscribers are on FamilyTalk® Plans (family plans) or business discount plans, which provide for service on multiple handsets at discounted rates, and such subscribers tend to have higher retention and lower churn rates. During the first quarter of 2011, we introduced our Mobile to Any Mobile feature, which enables our new and existing subscribers with qualifying messaging plans to make unlimited mobile calls to any mobile number in the United States, subject to certain conditions. We also offer data plans at different price levels (tiered data plans) to attract a wide variety of subscribers and to differentiate us from our competitors. Our postpaid subscribers on data plans increased 12.2% year over year. A growing percentage of our postpaid smartphone subscribers are on tiered data plans, with 61.6% on these plans as of June 30, 2012, up from 44.8% as of June 30, 2011. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers, and minimize subscriber churn. In July 2012, we announced new data plans that would allow subscribers to share data among devices covered by their plan.

As of June 30, 2012, over one-third of our postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or Long Term Evolution (LTE) network). Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any spectrum solution will require that the Federal Communications Commission (FCC) make new or existing spectrum available to the wireless industry to meet the needs of our subscribers. We will continue to attempt to address spectrum and capacity constraints on a market-by-market basis.

Also as part of our ongoing efforts to improve our network performance and help address the need for additional spectrum capacity, we intend to redeploy spectrum currently used for basic 2G services to support more advanced mobile Internet services on our 3G and 4G networks. We will manage this process consistent with previous network upgrades and will transition customers on a market-by-market basis from our Global System for Mobile Communications (GSM) and Enhanced Data rates for GSM Evolution (EDGE) networks (referred to as 2G networks) to our more advanced 3G and 4G networks. We expect to fully discontinue service on our 2G networks by approximately January 1, 2017. Throughout this multi-year upgrade process, we will work proactively with our customers to manage the process of moving to 3G and 4G devices, which will help minimize customer churn. As of June 30, 2012, approximately 12 percent of our postpaid customers were using 2G handsets. We do not expect this transition to have a material impact on our operating results, but will continue to evaluate the financial impact of transitioning customers from 2G devices to 3G or 4G devices.

Wireless Metrics
Subscriber Additions As of June 30, 2012, we served 105.2 million wireless subscribers, an increase of 6.7%. We continue to see a declining rate of growth in the industry's subscriber base compared to prior years, as reflected in a 6.2% decrease in gross subscriber additions (gross additions) in the second quarter and an 8.6% decrease for the first six months of 2012, primarily related to a slower rate of postpaid and connected device additions. Higher net subscriber additions (net additions) in the second quarter were primarily attributable to more reseller additions in 2012 when compared to the prior year. Lower net additions in the first six months were primarily attributable to lower connected device additions, which reflected adjustments for customers not using such devices (zero-revenue customers). Higher net postpaid additions for the first six months reflected an increase in postpaid tablet subscribers.

AT&T INC.

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

Average service revenue per user (ARPU) from postpaid subscribers increased 1.7% in the second quarter and for the first six months of 2012, driven by an increase in postpaid data services ARPU of 14.1% in the second quarter and 14.7% for the first six months, reflecting greater use of smartphones and data-centric devices. The growth in postpaid data services ARPU was partially offset by a 6.1% decrease in postpaid voice and other service ARPU in the second quarter and 6.2% decrease for the first six months. Postpaid voice and other service ARPU declined due to lower access and airtime charges, triggered in part by continued growth in our family plans subscriber base, which generates lower ARPU compared to our traditional postpaid subscribers, and lower roaming revenues. About 88% of our postpaid smartphone subscribers are on family plans or business discount plans.

Total ARPU declined 2.3% in the second quarter and 2.5% for the first six months, reflecting growth in connected device, tablet and reseller subscribers. Connected devices and other data-centric devices, such as tablets, have lower-priced data-only plans compared with our postpaid smartphone plans, which have voice and data features. Accordingly, ARPU for these subscribers is typically lower compared to that generated from our smartphone subscribers on postpaid and other plans. Data services ARPU increased 11.3% in the second quarter and 11.6% for the first six months, reflecting greater smartphone and data-centric device use. We expect continued revenue growth from data services as more subscribers use smartphones and data-centric devices, and as we continue to expand our network. Voice and other service ARPU declined 10.7% in the second quarter and 10.9% for the first six months due to voice access and usage trends and a shift toward a greater percentage of data-centric devices. We expect continued pressure on voice and other service ARPU.

Churn The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Churn rate is calculated by dividing the aggregate number of wireless subscribers who canceled service during a period by the total number of wireless subscribers at the beginning of that period. The churn rate for the period is equal to the average . . .