10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 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 October 31, 2008, there were 5,893 million common shares outstanding

Financial Data
AT&T Inc.
Consolidated Statements of Income
Dollars in millions except per share amounts
Unaudited	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Operating Revenues
Wireless service	$	11,227		$	9,834		$	32,726		$	28,417
Voice		9,313			10,164			28,525			30,997
Data		6,144			5,880			18,170			17,281
Directory		1,333			1,240			4,114			3,417
Other		3,325			3,014			9,417			8,467
Total Operating Revenues		31,342			30,132			92,952			88,579
Operating Expenses
Cost of services and sales (exclusive of
depreciation and amortization shown separately below)		13,070			11,736			36,972			34,816
Selling, general and administrative		7,676			7,770			22,976			22,497
Depreciation and amortization		4,978			5,322			14,839			16,354
Total Operating Expenses		25,724			24,828			74,787			73,667
Operating Income		5,618			5,304			18,165			14,912
Interest Expense		858			887			2,577			2,639
Equity in Net Income of Affiliates		257			162			712			545
Other Income (Expense) - Net		(81	)		(17	)		(91	)		614
Income Before Income Taxes		4,936			4,562			16,209			13,432
Income Taxes		1,706			1,499			5,746			4,617
Net Income	$	3,230		$	3,063		$	10,463		$	8,815
Basic Earnings Per Share	$	0.55		$	0.50		$	1.76		$	1.43
Diluted Earnings Per Share	$	0.55		$	0.50		$	1.75		$	1.42
Weighted Average Number of Common
Shares Outstanding - Basic (in millions)		5,893			6,088			5,938			6,152
Dividends Declared Per Common Share	$	0.400		$	0.355		$	1.200		$	1.065
See Notes to Consolidated Financial Statements.

2

Financial Data
AT&T Inc.
Consolidated Balance Sheets
Dollars in millions except per share amounts
	September 30, 2008			December 31, 2007
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	1,594		$	1,970
Accounts receivable - net of allowances for
uncollectibles of $1,328 and $1,364		16,395			16,185
Prepaid expenses		1,657			1,524
Deferred income taxes		1,560			2,044
Other current assets		2,239			2,963
Total current assets		23,445			24,686
Property, Plant and Equipment		215,420			210,518
Less: accumulated depreciation and amortization		117,649			114,648
Property, Plant and Equipmant - Net		97,771			95,890
Goodwill		71,537			70,713
Licenses		46,931			37,985
Customer Lists and Relationships - Net		11,495			14,505
Other Intangible Assets - Net		5,816			5,912
Investments in Equity Affiliates		2,839			2,270
Postemployment Benefit		18,164			17,291
Other Assets		6,530			6,392
Total Assets	$	284,528		$	275,644
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year	$	17,419		$	6,860
Accounts payable and accrued liabilities		18,690			21,399
Advanced billing and customer deposits		3,896			3,571
Accrued taxes		2,976			5,027
Dividends payable		2,357			2,417
Total current liabilities		45,338			39,274
Long-Term Debt		59,355			57,255
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		27,776			24,939
Postemployment benefit obligation		25,493			24,011
Other noncurrent liabilities		14,048			14,798
Total deferred credits and other noncurrent liabilities		67,317			63,748
Stockholders' Equity
Common shares issued ($1 par value)		6,495			6,495
Capital in excess of par value		91,684			91,638
Retained earnings		36,613			33,297
Treasury shares (at cost)		(21,412	)		(15,683	)
Accumulated other comprehensive income(loss)		(862	)		(380	)
Total stockholders' equity		112,518			115,367
Total Liabilities and Stockholders' Equity	$	284,528		$	275,644

See Notes to Consolidated Financial Statements.

3

Financial Data
AT&T Inc.
Consolidated Statements of Cash Flows
Dollars in millions increase (decrease) in cash and cash equivalents
Unaudited	Nine Months Ended September 30,
		2008		2007
Operating Activities
Net income	$	10,463		$	8,815
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization		14,839			16,354
Undistributed earnings from investments in equity affiliates		(572	)		(434	)
Provision for uncollectible accounts		1,297			1,142
Deferred income tax expense		4,063			486
Net gain on sales of investments		(2	)		(29	)
Gain on license exchange		-			(409	)
Changes in operating assets and liabilities:
Accounts receivable		(1,597	)		(1,253	)
Other current assets		616			(661	)
Accounts payable and accrued liabilities		(5,958	)		(46	)
Stock-based compensation tax benefit		(15	)		(149	)
Other - net		(361	)		529
Total adjustments		12,310			15,530
Net Cash Provided by Operating Activities		22,773			24,345
Investing Activities
Construction and capital expenditures
Capital expenditures		(14,388	)		(12,124	)
Interest during construction		(455	)		(125	)
Acquisitions, net of cash acquired		(10,086	)		(233	)
Dispositions		1,444			993
Proceeds from sale of securities, net of investments		(103	)		584
Sale of other investments		436			-
Other		33			28
Net Cash Used in Investing Activities		(23,119	)		(10,877	)
Financing Activities
Net change in short-term borrowings with
original maturities of three months or less		5,188			(4,279	)
Issuance of long-term debt		10,924			7,898
Repayment of long-term debt		(3,143	)		(3,008	)
Purchase of treasury shares		(6,077	)		(8,912	)
Issuance of treasury shares		317			1,736
Dividends paid		(7,150	)		(6,584	)
Stock-based compensation tax benefit		15			149
Other		(104	)		(172	)
Net Cash Used in Financing Activities		(30	)		(13,172	)
Net increase (decrease) in cash and cash equivalents		(376	)		296
Cash and cash equivalents beginning of year		1,970			2,418
Cash and Cash Equivalents End of Period	$	1,594		$	2,714
Cash paid during the nine months ended September 30 for:	$	3,068		$	2,518
Interest
Income taxes, net of refunds	$	5,217		$	2,028
See Notes to Consolidated Financial Statements.

4

AT&T INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Dollars and shares in millions, except per share amounts
(Unaudited)
	Nine months ended
	September 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					87
Stock based compensation					(41	)
Balance at end of period				$	91,684
Retained Earnings
Balance at beginning of year				$	33,297
Net income ($1.75 per diluted share)					10,463
Dividends to stockholders ($1.20 per share)					(7,090	)
Other					(57	)
Balance at end of period				$	36,613
Treasury Shares
Balance at beginning of year		(451	)	$	(15,683	)
Purchase of shares		(164	)		(6,077	)
Issuance of shares		13			348
Balance at end of period		(602	)	$	(21,412	)
Accumulated Other Comprehensive Income (Loss), net of tax
Balance at beginning of year				$	(380	)
Other comprehensive income (loss) (see Note 2)					(482	)
Balance at end of period				$	(862	)
See Notes to Consolidated Financial Statements.

5 

AT&T INC.

SEPTEMBER 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. FAS 157 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 $2,196 at September 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 September 30, 2008, we had severance accruals under FAS 112 of $220, of which $23 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.

6

AT&T INC.

SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -  Continued 

Dollars in millions except per share amounts

	12/31/07		Cash					9/30/08
	Balance		Payments			Adjustments		Balance
Severance accruals paid from:
Company funds	$	540	$	(201	)	$	8	$	347
Pension and postemployment benefit plans		129		(24	)		-		105
Lease terminations		425		(78	)		96		443
Equipment removal and other related costs		161		(52	)		4		113
Total	$	1,255	$	(355	)	$	108	$	1,008

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.

FSP 157-3  On October 10, 2008, the FASB issued FASB Staff Position 157-3, “Determining the Fair Value of a Financial Asset When the Market of that Asset is not Active” (FSP 157-3). FSP 157-3 provides an example that clarifies and reiterates certain provisions of the existing fair value standard, including basing fair value on orderly transactions and usage of management and broker inputs. FSP 157-3 is effective immediately but is not expected to have a material impact on our financial position or results of operations.

7 

AT&T INC.

SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. COMPREHENSIVE INCOME

The components of our comprehensive income for the three and nine months ended September 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						Nine months ended
	September 30,							September 30,
	2008			2007				2008			2007
Net income	$	3,230		$	3,063			$	10,463		$	8,815
Other comprehensive income, net of tax:
Foreign currency translation adjustment		(142	)		(14	)			(37	)		4
Net unrealized gains (losses) on securities:
Unrealized gains (losses)		(220	)		(15	)			(284	)		134
Less reclassification adjustment realized in net income		(12	)		3				(28	)		(37	)
Net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses)		44			(15	)			(55	)		(51	)
Reclassification adjustment for losses on cash flow hedges included in net income		4			5				13			13
Defined benefit postretirement plans:
Amortization of net actuarial (gain) loss and prior service    benefit included in net income		(31	)		52				(90	)		156
Other		(1	)		-				(1	)		(1	)
Other comprehensive income (loss)		(358	)		16				(482	)		218
Total Comprehensive Income	$	2,872		$	3,079			$	9,981		$	9,033

8 

AT&T INC.

SEPTEMBER 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 nine months ended September 30, 2008 and 2007 are shown in the table below:

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Numerators
Numerator for basic earnings per share:
Net income	$	3,230	$	3,063	$	10,463	$	8,815
Dilutive potential common shares:
Other stock-based compensation		2		2		7		6
Numerator for diluted earnings per share	$	3,232	$	3,065	$	10,470	$	8,821
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common
shares outstanding		5,893		6,088		5,938		6,152
Dilutive potential common shares:
Stock options		6		26		12		25
Other stock-based compensation		22		15		21		19
Denominator for diluted earnings per share		5,921		6,129		5,971		6,196
Basic earnings per share	$	0.55	$	0.50	$	1.76	$	1.43
Diluted earnings per share	$	0.55	$	0.50	$	1.75	$	1.42

At September 30, 2008, we had issued and outstanding options to purchase approximately 206 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 173 million shares in the third quarter and 131 million for the first nine 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 September 30, 2008, the exercise price of 34 million share options was below market price.

At September 30, 2007, we had issued and outstanding options to purchase 241 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 73 million shares in the third quarter and 100 million for the first nine 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.

 9

AT&T INC.

SEPTEMBER 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 over various technology platforms 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.

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, high-speed broadband and voice 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. 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 $196 in the third quarter and $911 for the first nine months of 2007 and expenses of $64 in the third quarter and $291 for the first nine 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 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 third quarter and for the first nine months of 2007 as noted above.

Segment assets for the nine months ended September 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 $126,563, which increased $20,610, or 19.5%, primarily due to the acquisition of wireless spectrum. Our other segment assets totaled $219,043, which increased $35,968, or 19.7%, primarily due to an increase in value of our investments in our subsidiaries.

10 

AT&T INC.

SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2008
						Advertising &				Consolidation and			Consolidated
	Wireless			Wireline		Publishing		Other		Elimination			Results
Revenues from external customers	$	12,571		$	17,003	$	1,333	$	435	$	-		$	31,342
Intersegment revenues		47			547		17		66		(677	)		-
Total segment operating revenues		12,618			17,550		1,350		501		(677	)		31,342
Operations and support expenses		8,838			11,482		735		369		(678	)		20,746
Depreciation and amortization expenses		1,401			3,331		194		51		1			4,978
Total segment operating expenses		10,239			14,813		929		420		(677	)		25,724
Segment operating income (loss)		2,379			2,737		421		81		-			5,618
Interest expense		-			-		-		-		858			858
Equity in net income of affiliates		-			-		-		257		-			257
Minority interest		(57	)		-		-		-		57			-
Other income (expense) – net		-			-		-		-		(81	)		(81	)
Segment income before income taxes	$	2,322		$	2,737	$	421	$	338	$	(882	)	$	4,936

For the nine months ended September 30, 2008
						Advertising &					Consolidation and			Consolidated
	Wireless			Wireline		Publishing		Other			Elimination			Results
Revenues from externa l customers	$	36,333		$	51,149	$	4,114	$	1,356		$	-		$	92,952
Intersegment revenues		143			1,633		60		201			(2,037	)		-
Total segment operating revenues		36,476			52,782		4,174		1,557			(2,037	)		92,952
Operations and support expenses		23,750			34,213		2,293		1,729			(2,037	)		59,948
Depreciation and amortization expenses		4,327			9,770		609		133			-			14,839
Total segment operating expenses		28,077			43,983		2,902		1,862			(2,037	)		74,787
Segment operating income (loss)		8,399			8,799		1,272		(305	)		-			18,165
Interest expense		-			-		-		-			2,577			2,577
Equity in net income of affiliates		5			-		-		707			-			712
Minority interest		(186	)		-		-		-			186			-
Other income (expense) – net		-			-		-		-			(91	)		(91	)
Segment income before income taxes	$	8,218		$	8,799	$	1,272	$	402		$	(2,482	)	$	16,209

11 

AT&T INC.

SEPTEMBER 30, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

For the three months ended September 30, 2007
						Advertising &				Consolidation and			Consolidated
	Wireless			Wireline		Publishing		Other		Elimination			Results
Revenues from external customers	$	10,911		$	17,472	$	1,436	$	509	$	(196	)	$	30,132
Intersegment revenues		26			469		21		53		(569	)		-
Total segment operating revenues		10,937			17,941		1,457		562		(765	)		30,132
Operations and support expenses		7,262			11,646		755		478		(635	)		19,506
Depreciation and amortization expenses		1,709			3,334		238		40		1			5,322
Total segment operating expenses		8,971			14,980		993		518		(634	)		24,828
Segment operating income (loss)		1,966			2,961		464		44		(131	)		5,304
Interest expense		-			-		-		-		887			887
Equity in net income of affiliates		3			-		-		159		-			162
Minority interest		(43	)		-		-		-		43			-
Other income (expense) – net		-			-		-		-		(17	)		(17	)
Segment income before income taxes	$	1,926		$	2,961	$	464	$	203	$	(992	)	$	4,562

For the nine months ended September 30, 2007
						Advertising &					Consolidation and			Consolidated
	Wireless			Wireline		Publishing		Other			Elimination			Results
Revenues from external customers	$	31,254		$	52,432	$	4,328	$	1,476		$	(911	)	$	88,579
Intersegment revenues		75			1,494		50		182			(1,801	)		-
Total segment operating revenues		31,329			53,926		4,378		1,658			(2,712	)		88,579
Operations and support expenses		20,826			34,750		2,281		1,548			(2,092	)		57,313
Depreciation and amortization expenses		5,410			10,076		743		125			-			16,354
Total segment operating expenses		26,236			44,826		3,024		1,673			(2,092	)		73,667
Segment operating income (loss)		5,093			9,100		1,354		(15	)		(620	)		14,912
Interest expense		-			-		-		-			2,639			2,639
Equity in net income of affiliates		12			-		-		533			-			545
Minority interest		(143	)		-		-		-			143			-
Other income (expense) – net		-			-		-		-			614			614
Segment income before income taxes	$	4,962		$	9,100	$	1,354	$	518		$	(2,502	)	$	13,432

12 

AT&T INC.

SEPTEMBER 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						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Pension (benefit) cost:
Service cost – benefits earned during the period	$	294		$	314		$	880		$	943
Interest cost on projected benefit obligation		830			803			2,489			2,411
Expected return on assets		(1,400	)		(1,367	)		(4,201	)		(4,101	)
Amortization of prior service cost		34			36			100			107
Recognized actuarial loss		1			61			7			181
Net pension benefit	$	(241	)	$	(153	)	$	(725	)	$	(459	)
Postretirement benefit cost:
Service cost – benefits earned during the period	$	108		$	127		$	322		$	381
Interest cost on accumulated postretirement
benefit obligation		637			644			1,912			1,931
Expected return on assets		(331	)		(336	)		(995	)		(1,010	)
Amortization of prior service benefit		(92	)		(90	)		(271	)		(270	)
Recognized actuarial loss		-			72			-			220
Postretirement benefit cost	$	322		$	417		$	968		$	1,252
Combined net pension and postretirement cost	$	81		$	264		$	243		$	793

Our combined net pension and postretirement cost decreased $183 in the third quarter and $550 for the first nine 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 $4 in the third quarter and $11 for the first nine months of 2008 and $3 in the third quarter and $11 for the first nine 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 third quarter and $136 for the first nine months of 2008, of which $35 and $106 was interest cost, respectively. Net supplemental retirement pension benefits cost was $50 in the third quarter and $146 for the first nine months of 2007, of which $37 and $109 was interest cost, respectively.

13

AT&T INC.

SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

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 third quarter and for the first nine months of 2008 and 2007 are summarized as follows:

	Third Quarter							Nine-Month Period
					Percent							Percent
	2008		2007		Change			2008		2007		Change
Operating revenues	$	31,342	$	30,132		4.0	%	$	92,952	$	88,579		4.9	%
Operating expenses		25,724		24,828		3.6			74,787		73,667		1.5
Operating income		5,618		5,304		5.9			18,165		14,912		21.8
Income before income taxes		4,936		4,562		8.2			16,209		13,432		20.7
Net Income		3,230		3,063		5.5			10,463		8,815		18.7

Overview

Operating income Our operating income increased $314, or 5.9%, in the third quarter and $3,253, or 21.8%, for the first nine months of 2008, reflecting continued growth in wireless service and data revenues. Our operating income margin increased from 17.6% to 17.9% in the third quarter and from 16.8% to 19.5% for the first nine 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 $196 in the third quarter and $911 for the first nine months and expenses of $64 in the third quarter and $291 for the first nine 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 $182 in the third quarter and $2,633 for the first nine 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 $1,210, or 4.0%, in the third quarter and $4,373, or 4.9%, for the first nine months primarily due to continuing growth in wireless subscribers. Revenues in the third quarter and for the first nine 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 third quarter and for the first nine 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.

14

AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Operating expenses  Our operating expenses increased $896, or 3.6%, in the third quarter and increased $1,120, or 1.5%, for the first nine months. The increase in the third quarter was primarily due to an increase of $782 in equipment costs related to the successful launch of the iPhone 3G and increased sales of PDA devices. Also increasing expenses were higher commissions and residuals from the growth in wireless, as well as hurricane-related expenses affecting both the Wireless and Wireline segments. Partially offsetting these increases were merger integration costs recognized in 2007 and not in 2008, and lower amortization expense on intangible assets in 2008.

The increase for the first nine 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 increases were merger integration costs recognized in 2007 and not in 2008, and lower amortization expense on intangible assets in 2008.

Interest expense decreased $29, or 3.3%, in the third quarter and $62, or 2.3%, for the first nine months of 2008. Interest expense remained relatively unchanged with 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 related to preparing spectrum purchases for service.

Equity in net income of affiliates increased $95, or 58.6%, in the third quarter and $167, or 30.6%, for the first nine months of 2008. The increase is primarily due to improved results from our investment in América Móvil S.A. de C.V. (América Móvil), Telmex and Telmex Internacional.

Other income (expense) – net  We had other expense of $81 in the third quarter and $91 for the first nine months of 2008, as compared to other expense of $17 in the third quarter and other income of $614 for the first nine months of 2007. Results in the third quarter of 2008 primarily included expenses of $59 related to minority interest expenses, $46 for 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 in the third quarter of 2007 primarily included $43 in minority interest expenses and $24 from the loss on sale of cost investments, partially offset by interest income of $44.

Results for the first nine months of 2008 primarily included expenses of $188 related to minority interest expenses, $89 loss on the sale of land and other non-strategic assets and $75 related to asset impairments, partially offset by $177 of interest, dividend and leveraged lease income and $79 gain on sale of investments. Results for the first nine months of 2007 primarily included gains of $409 related to a wireless spectrum license exchange, $127 for the sale of administrative buildings and other non-strategic assets, $118 of interest income and $29 for the sale of cost investments. These gains were partially offset by $143 in minority interest expenses.

Income taxes increased $207, or 13.8%, in the third quarter and $1,129, or 24.5%, for the first nine months of 2008. The increase in income taxes in the third quarter and for the first nine months was primarily due to higher income before income taxes. Our effective tax rates were 34.6% in the third quarter of 2008 compared to 32.9% in the third quarter of 2007, and 35.4% for the first nine months of 2008 compared to 34.4% for the first nine 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 third quarter of 2007 reflects a benefit related to adjustments to our unrecognized tax benefits partially offset by the impact of a state law change.

15

AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Selected Financial and Operating Data

	September 30,
	2008			2007
Wireless customers (000)		74,871			65,666
Consumer revenue connections (000) 1,2		47,548			49,598
Network access lines in service (000) 2		57,191			62,871
Broadband connections (000) 2,3		14,841			13,760
Video connections (000) 4		2,963			2,112
Debt ratio 5		40.6	%		35.3	%
Ratio of earnings to fixed charges 6		5.15			5.34
Number of AT&T employees		303,530			303,670

1	Consumer revenue connections includes retail access lines, U-verse voice over IP connections, 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 of 781 in 2008 and 126 in 2007.
5	See our “Liquidity and Capital Resources” section for discussion.
6	See Exhibit 12.

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. 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, high-speed broadband and voice 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. See Note 4 for a discussion of FAS 141.

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.

16

AT&T INC.

SEPTEMBER 30, 2008

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - 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 for each segment are discussed in “Liquidity and Capital Resources.”

Wireless

Segment Results

	Third Quarter									Nine-Month Period
							Percent									Percent
	2008			2007			Change			2008			2007			Change
Segment operating revenues
Service revenues	$	11,273		$	9,860			14.3	%	$	32,869		$	28,492			15.4	%
Equipment revenues		1,345			1,077			24.9			3,607			2,837			27.1
Total Segment Operating Revenues		12,618			10,937			15.4			36,476			31,329			16.4
Segment operating expenses
Cost of services and equipment sales		4,989			4,079			22.3			13,261			11,690			13.4
Selling, general and administrative		3,849			3,183			20.9			10,489			9,136			14.8
Depreciation and amortization		1,401			1,709			(18.0	)		4,327			5,410			(20.0	)
Total Segment Operating Expenses		10,239			8,971			14.1			28,077			26,236			7.0
Segment Operating Income		2,379			1,966			21.0			8,399			5,093			64.9
Equity in Net Income of Affiliates		-			3			-			5			12			(58.3	)
Minority Interest 1		(57	)		(43	)		(32.6	)		(186	)		(143	)		(30.1	)
Segment Income	$	2,322		$	1,926			20.6	%	$	8,218		$	4,962			65.6	%

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

Operating Income and Margin Trends

Our wireless segment operating income increased $413, or 21.0%, in the third quarter and $3,306, or 64.9%, for the first nine 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 18.9% in the third quarter and 23.0% for the first nine months of 2008, which improved over margins of 18.0% in the third quarter and 16.3% for the first nine months of 2007. The higher margin in 2008 was primarily due to revenue growth of $1,681, or 15.4%, in the third quarter and $5,147, or 16.4%, for the first nine months of 2008, partially offset by increased operating expenses of $1,268, or 14.1%, in the third quarter and $1,841, or 7.0%, for the first nine months. The majority of the improvement in our results was due to the increase in our customer base of 9.2 million since September 30, 2007. This increase includes 1.7 million customers related to our acquisition of Dobson Communications Corporation (Dobson) in November 2007 and 182,000 related to our acquisition of Edge Wireless, LLC in April 2008. As of September 30, 2008, we served 74.9 million wireless customers. Contributing to our customer base increase was improvement in the postpaid customer turnover (churn) rate. Customer net additions for the first nine 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 from lower amortization expense on intangible assets in 2008. Wireless operating margins were also pressured by higher costs of equipment, selling, general and administrative expenses due in part to strong sales of advanced handsets including the iPhone 3G.

Average service revenue per user/customer (ARPU) in the third quarter of 2008 remained consistent with the third quarter of 2007. Data services ARPU grew 31.7% in the third quarter of 2008, offset by a decline in voice service ARPU of 7.2%. We expect continued growth from data services as more customers purchase advanced handsets, such as the iPhone 3G, and laptop cards and as our third-generation network continues to expand. The decline in voice service ARPU is the result of a decrease in postpaid voice overage charges, increases in our Family Talk, prepaid and reseller customers, which have lower ARPU than traditional postpaid customers, lower roaming revenues due to acquisitions and rate negotiations as part of roaming cost savings initiatives, slowing international growth and lower regulatory cost recovery charges. We expect continued pressure on voice service ARPU.

Our total churn rate remained stable and was 1.7% in the third quarter of 2008 and 2007. Our postpaid churn rate declined to 1.2% compared to 1.3% in the third quarter of 2007.

17

AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Operating Results

Service revenues are comprised of voice, data and other revenue. Service revenues increased $1,413, or 14.3%, in the third quarter and $4,377, or 15.4%, for the first nine months of 2008. The increase in service revenues primarily consisted of:

·   Data revenue increases of $915, or 50.5%, in the third quarter and $2,609, or 53.0%, for the first nine months primarily due to the increased number of data users and an increase in data ARPU of 31.7% in the third quarter and 33.5% for the first nine months. Data revenue growth was primarily driven by strong increases in wireless internet access, messaging, e-mail and data access revenues. This primarily resulted from increased use of more advanced handsets, including the iPhone 3G, which can provide for the data services previously mentioned. Data service revenues represented 24.2% of wireless service revenues in the third quarter and 22.9% for the first nine months of 2008, up from 18.4% in the third quarter and 17.3% for the first nine months of 2007.

·   Voice and other revenue increases of $498, or 6.2%, in the third quarter and $1,768, or 7.5%, for the first nine months, primarily due to an increase in the average number of wireless customers of 14.4%, partially offset by a decline in voice ARPU of 7.2% in the third quarter and 6.3% for the first nine months.

Equipment revenues increased $268, or 24.9%, in the third quarter and $770, or 27.1%, for the first nine months of 2008. The increase was due to higher handset revenues reflecting increased retail customer gross additions of 14.3% in the third quarter and 12.6% for the first nine months with a greater proportion of those gross additions and customer upgrades opting for more advanced handsets than in prior periods.

Cost of services and equipment sales expenses increased $910, or 22.3%, in the third quarter and $1,571, or 13.4%, for the first nine months of 2008 with greater than 85% of the increases attributable to higher 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, including the iPhone 3G, and accessories. Total equipment costs continue to be higher than equipment revenues due to the sale of discounted handsets to customers.

Cost of services increased $128 in the third quarter and $156 for the first nine months. Interconnect, USF, reseller and network systems expenses increased $234 in the third quarter partly offset by declines in roaming, long-distance and property tax expenses of $106. Interconnect, USF, reseller and other service expenses increased $376 for the first nine months partly offset by declines in roaming, long-distance and network systems expenses of $220.

Selling, general and administrative expenses increased $666, or 20.9%, in the third quarter and $1,353, or 14.8%, for the first nine months of 2008 and included the following:

·   Increases in upgrade commissions and residual expenses, customer support costs and other general and administrative costs of $508 in the third quarter and $1,116 for the first nine months primarily due to increases in handset upgrade activity and related commission rates (including those related to the iPhone 3G) and prepaid plan gross addition costs. These increases were partially offset by a decline in billing expenses as a result of cost savings initiatives and to a lesser degree for the quarter, lower bad debt expense.

·   Increases in direct and indirect commissions as well as other selling expenses of $221 in the third quarter and $394 for the first nine months primarily due to increases in sales volume and commission rates, including those associated with the iPhone 3G, as well as limited workforce increases in retail locations. These increases were partially offset by lower branding advertising expenses.

Depreciation and amortization expenses decreased $308, or 18.0%, in the third quarter and $1,083, or 20.0%, for the first nine months of 2008. Amortization expense decreased $162 in the third quarter and $618 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 due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases. These decreases in amortization were slightly offset by the amortization of intangibles related to our acquisition of Dobson.

Depreciation expense decreased $146, or 13.9%, in the third quarter and $465, or 14.5%, for the first nine 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 as well as increase in the depreciable asset base due to the acquisition of Dobson.

18

AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Wireline

Segment Results

	Third Quarter							Nine-Month Period
					Percent							Percent
	2008		2007		Change			2008		2007		Change
Segment operating revenues
Voice	$	9,515	$	10,356		(8.1	)%	$	29,191	$	31,619		(7.7	)%
Data		6,401		6,076		5.3			18,893		17,918		5.4
Other		1,634		1,509		8.3			4,698		4,389		7.0
Total Segment Operating Revenues		17,550		17,941		(2.2	)		52,782		53,926		(2.1	)
Segment operating expenses
Cost of sales		8,128		7,778		4.5			23,908		23,396		2.2
Selling, general and administrative		3,354		3,868		(13.3	)		10,305		11,354		(9.2	)
Depreciation and amortization		3,331		3,334		(0.1	)		9,770		10,076		(3.0	)
Total Segment Operating Expenses		14,813		14,980		(1.1	)		43,983		44,826		(1.9	)
Segment Income	$	2,737	$	2,961		(7.6	)%	$	8,799	$	9,100		(3.3	)%

Operating Income and Margin Trends

Our wireline segment operating income decreased $224, or 7.6%, in the third quarter and $301 or 3.3%, for the first nine months of 2008. Our wireline segment operating income margin decreased in the third quarter from 16.5% in 2007 to 15.6% in 2008 and for the first nine months decreased from 16.9% in 2007 to 16.7% in 2008. Operating income continued to be pressured by access line declines due to increased competition, customers switching to alternative technologies such as wireless and VoIP, and the slowing national economy. Our strategy is to offset these line losses by increasing non-access-line-related revenues from customer connections for data, including VoIP and video. 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 and lower amortization of intangibles related to the AT&T Corp. (ATTC) and BellSouth acquisitions due to the use of accelerated amortization methods, which result in lower expense each year as the remaining useful life of the asset decreases. Operating margins were also pressured by hurricane-related costs of approximately $90 in the third quarter of 2008.

Operating Results

Voice revenues decreased $841, or 8.1%, in the third quarter and $2,428, or 7.7%, for the first nine months of 2008 primarily due to declining demand for traditional voice services. Included in voice revenues are revenues from local voice, long-distance and local wholesale services. Voice revenues do not include VoIP revenues, which are included in data revenues.

·   Local voice revenues decreased $460, or 7.5%, in the third quarter and $1,297, or 7.0%, for the first nine months of 2008. The decrease was driven primarily by a decline in access lines of approximately $340 in the third quarter and $840 for the first nine months of 2008 and by expected declines in revenues from ATTC’s mass-market customers of approximately $75 in the third quarter and $365 for the first nine months of 2008. We expect our local voice revenue to continue to be negatively affected by increased competition from alternative technologies, the disconnection of additional lines and the slowing economy.

·   Long-distance revenues decreased $314, or 8.2%, in the third quarter and $854, or 7.4%, for the first nine months of 2008. The decrease was primarily due to a net decrease in demand for long-distance service, due to expected declines in the number of ATTC’s mass-market customers, which decreased approximately $175 in the third quarter and $535 for the first nine months and decreased demand from global and consumer customer revenues of approximately $155 in the third quarter and $340 for the first nine months of 2008.

·   Local wholesale revenues decreased $67, or 15.2%, in the third quarter and $277, or 19.2%, for the first nine months of 2008. The decrease was primarily due to declining number of competitive providers using Unbundled Network Element-Platform (UNE-P) lines. However, we expect this revenue trend to stabilize since industry consolidation and UNE-P line loss has slowed.

19

AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Data revenues increased $325, or 5.3%, in the third quarter and $975, or 5.4%, for the first nine months of 2008. Data revenues accounted for approximately 36% of wireline operating revenues in the third quarter and for the first nine months of 2008 and 33% of wireline operating revenues in the third quarter and for the first nine months of 2007. Data revenues include transport, IP and packet-switched data services.

IP data revenues increased $393, or 16.2%, in the third quarter and $1,176, or 16.8%, for the first nine months of 2008 primarily due to growth in consumer and business broadband, virtual private networks (VPN) and managed Internet services. Broadband high-speed Internet access increased IP data revenues approximately $105 in the third quarter and $400 for the first nine months of 2008. The increase in broadband revenues was partially offset by the decline in shared revenue due to the renegotiation of our Yahoo! agreement. VPN increased approximately $130 in the third quarter and $385 for the first nine months of 2008, and various other IP data services such as U-verse video and dedicated Internet access services contributed approximately $140 to the increase in the third quarter and $375 for the first nine months of 2008. The increase in IP data revenues reflects continued growth in the customer base and migration from other traditional circuit-based services.

Our transport services, which include DS1s and DS3s (types of dedicated high-capacity lines) and SONET (a dedicated high-speed solution for multisite businesses), increased $47, or 1.6%, in the third quarter and $98, or 1.1%, for the first nine months of 2008. Transport services revenues increased primarily due to continuing high-speed volume growth in Ethernet (types of high capacity switched lines), ISDN and international private lines. These increases were partially offset by pressure from usage-based transport services used by our largest business customers.

Our traditional circuit-based services which include frame relay, asynchronous transfer mode and managed packet services, decreased $115, or 15.1%, in the third quarter and $299, or 13.1%, for the first nine months of 2008. This decrease is primarily due to lower demand as customers continue to shift to IP-based technology such as VPN, DSL and managed Internet services. We expect these traditional services to continue to decline as a percentage of our overall data revenues.

Other operating revenues increased $125, or 8.3%, in the third quarter and $309, or 7.0%, for the first nine months of 2008. Integration services and customer premises equipment, government-related services and managed services account for more than 60% of total other revenue for all periods. Managed services, which includes wholesale revenue from agreements we announced last year, increased $129 in the third quarter and $323 for the first nine months. Government professional services revenue increased $25 in the third quarter and $80 for the first nine months driven by growth across various contracts. Partially offsetting these increases, revenue from equipment sales and related network integration decreased by $33 in the third quarter and $90 for the first nine months primarily due to less emphasis on the sale of lower-margin equipment.

Cost of sales expenses increased $350, or 4.5%, in the third quarter and $512, or 2.2%, for the first nine months of 2008.

Cost of sales increased due to the following:

·   Higher nonemployee-related expenses, such as contract services, materials and supplies costs, of $402 in the third quarter and $690 for the first nine months.

·   Higher employee compensation related to annual merit increases and bonuses of $127 in the third quarter and $149 for the first nine months.

·   Higher cost of equipment sales and related network integration services of $37 in the third quarter and $26 for the first nine months primarily due to increased U-verse customers partially offset by reductions due to less emphasis on sales of lower-margin equipment.

·   Higher employee levels increased expenses (primarily salary and wages) by $36 in the third quarter and $148 for the first nine months.

·   Higher other wireline support charges of $32 in the third quarter.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Offsetting these increases, cost of sales decreased due to:

·   Lower traffic compensation expenses (for access to another carrier’s network) of $188 in the third quarter and $351 for the first nine months primarily due to reduced portal fees from renegotiation of our agreement with Yahoo!, continued migration of long-distance calls onto our network and a lower volume of calls from ATTC’s declining national mass-market customer base.

·   Lower net pension and postretirement cost, which reduced expense $97 in the third quarter and $290 for the first nine months, reflecting the decrease in amortization of unrecognized actuarial losses.

Selling, general and administrative expenses decreased $514, or 13.3%, in the third quarter and $1,049, or 9.2%, for the first nine months of 2008.

Selling, general and administrative expenses decreased due to:

·   Lower other wireline support costs of $199 in the third quarter and $436 for the first nine months primarily due to higher advertising costs incurred in 2007 for brand advertising and re-branding related to the BellSouth acquisition.

·   Lower legal expenses of $185 in the third quarter and for the first nine months.

·   Lower net pension and postretirement cost, which reduced expense $58 in the third quarter and $173 for the first nine months, reflecting the decrease in amortization of unrecognized actuarial losses.

·   Lower nonemployee-related expenses, such as contract services, materials and supplies costs, of $73 in the third quarter and $22 for the first nine months.

·   Lower employee levels decreased expenses (primarily salary and wages) by $69 in the third quarter and $154 for the first nine months.

Partially offsetting these decreases, selling, general and administrative expenses increased due to higher provision for uncollectible accounts, primarily related to our business and wholesale customers, of $32 in the third quarter.

Depreciation and amortization expenses decreased $3 in the third quarter and $306, or 3%, for the first nine months of 2008. The decrease was primarily due to lower amortization of intangibles, which decreased $76 in the third quarter and $430 for the first nine months of 2008. Intangibles related to the 2006 acquisition of BellSouth and the 2005 acquisition of ATTC are amortized using an accelerated method, which means that we record lower expenses as the remaining useful life of the asset decreases. The decrease was slightly offset by amortization of the customer lists acquired from Yahoo!, which began in the second quarter of 2008.

Depreciation expense for property, plant, and equipment increased $73 in the third quarter and $124 for the first nine months of 2008 due to more plant being added to service than the offsetting reduction due to the attrition of the existing plant base.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Supplemental Information

Telephone, Broadband and Video Connections Summary

Our switched access lines and other services provided by our local exchange telephone subsidiaries at September 30, 2008 and 2007 are shown below and trends are addressed throughout this segment discussion.

(in 000s)
	September 30,			September 30,			% Increase
	2008			2007			(Decrease)
Switched Access Lines 1
Retail Consumer		31,751			35,770			(11.2	)%
Retail Business 2		22,159			23,004			(3.7	)
Retail Subtotal 2		53,910			58,774			(8.3	)
Percent of total switched access lines		94.3	%		93.5	%
Sold to ATTC		146			320			(54.4	)
Sold to other CLECs 2,3		2,996			3,507			(14.6	)
Wholesale Subtotal 2		3,142			3,827			(17.9	)
Percent of total switched access lines		5.5	%		6.1	%
Payphone (Retail and Wholesale) 4		139			270			(48.5	)
Percent of total switched access lines		0.2	%		0.4	%
Total Switched Access Lines		57,191			62,871			(9.0	)%
Total Broadband Connections 2,5		14,841			13,760			7.9	%
Satellite service 2,6		2,182			1,986			9.9	%
U-verse video		781			126			-
Total Video Connections		2,963			2,112			40.3	%

1 Represents access lines served by AT&T’s ILECs and affiliates.

2Prior period amounts restated to conform to current period reporting methodology.

3 Competitive local exchange carriers (CLECs).

4 Revenue from retail payphone lines is reported in the Other segment.

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

6 Satellite service includes connections under our agency and resale agreements.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Advertising & Publishing

Segment Results

	Third Quarter							Nine-Month Period
					Percent							Percent
	2008		2007		Change			2008		2007		Change
Total Segment Operating Revenues	$	1,350	$	1,457		(7.3	)%	$	4,174	$	4,378		(4.7	)%
Segment operating expenses
Cost of sales		461		417		10.6			1,321		1,214		8.8
Selling, general and administrative		274		338		(18.9	)		972		1,067		(8.9	)
Depreciation and amortization		194		238		(18.5	)		609		743		(18.0	)
Total Segment Operating Expenses		929		993		(6.4	)		2,902		3,024		(4.0	)
Segment Income	$	421	$	464		(9.3	)%	$	1,272	$	1,354		(6.1	)%

Accounting Impacts from the BellSouth Acquisition

FAS 141 requires that BellSouth deferred revenue and expenses from directories published during the 12-month period ending with the December 29, 2006 acquisition date not be included in our consolidated results. However, for management reporting purposes we continued to amortize these balances over the life of the directory (typically 12 months). Thus, for segment disclosure purposes, our advertising & publishing segment results included revenue of $196 and expenses of $64 in the third quarter of 2007, and revenue of $911 and expenses of $291 for the first nine months of 2007. See Note 4 for a discussion of FAS 141.

Operating Results

Our advertising & publishing operating income margin was 31.2% in the third quarter of 2008, compared to 31.8% in the third quarter of 2007 and 30.5% for the first nine months of 2008 compared to 30.9% for the first nine months of 2007.

Operating revenues decreased $107, or 7.3%, in the third quarter and $204, or 4.7%, for the first nine months of 2008 largely driven by continuing declines in print revenue of $119 in the third quarter and $307 for the first nine months and lower sales agency revenue of approximately $33 in the third quarter and $70 for the first nine months due to the sale of a sales agency business. This decrease was partially offset by increased Internet revenue of $44 in the third quarter and $148 for the first nine months.

Operating expenses decreased $64, or 6.4%, in the third quarter and $122, or 4.0%, for the first nine months of 2008 largely driven by decreased depreciation and amortization of $44 in the third quarter and $134 for the first nine months, resulting from use of an accelerated method of amortization for the customer list acquired as part of the BellSouth acquisition, and employee, professional and contract related expenses. These expense decreases were partially offset by increased YELLOWPAGES.COM expansion costs.

Other

Segment Results

	Third Quarter							Nine-Month Period
					Percent									Percent
	2008		2007		Change			2008			2007			Change
Total Segment Operating Revenues	$	501	$	562		(10.9	)%	$	1,557		$	1,658			(6.1	)%
Total Segment Operating Expenses		420		518		(18.9	)		1,862			1,673			11.3
Segment Operating Income (Loss)		81		44		84.1			(305	)		(15	)		-
Equity in Net Income of Affiliates		257		159		61.6			707			533			32.6
Segment Income	$	338	$	203		66.5	%	$	402		$	518			(22.4	)%

Our other segment operating results consist primarily of Sterling, customer information services (primarily operator services and payphone), corporate and other operations. Sterling provides business-integration software and services.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Segment operating revenues decreased $61, or 10.9%, in the third quarter and $101, or 6.1%, for the first nine months of 2008 primarily due to reduced revenues from our operator services and our retail payphone operations.

Segment operating expenses decreased $98, or 18.9%, in the third quarter and increased $189, or 11.3%, for the first nine months of 2008. The decrease in the third quarter was primarily due to the reduction of employee related accruals and reduced operating expenses from our operator services and retail payphone operations. The increase for the first nine months was primarily due to a charge in the first quarter of $374 associated with our announced workforce reduction, primarily management employees in non-customer facing areas of the business as a result of the restructure of our operations from a collection of regional companies to a single national approach. This was partially offset by a reduction in reserves held at our captive insurance company and by decreased operating expenses from our operator services and retail payphone operations.

Our other segment also includes our equity investments in international companies, the income from which we report as equity in net income of affiliates. Our earnings from foreign affiliates are sensitive to exchange-rate changes in the value of the respective local currencies. Our foreign investments are recorded under GAAP, which include adjustments for the purchase method of accounting and exclude certain adjustments required for local reporting in specific countries.

Equity in net income of affiliates increased $98, or 61.6%, in the third quarter and $174, or 32.6%, for the first nine months of 2008. Equity investments in foreign countries include adjustments not only for initial purchase price accounting, but also ongoing differences in treatment of certain items between US GAAP and local GAAP.  For our investments in Mexico, these ongoing differences include depreciation, minority interest and tax accounting.  Our investment in América Móvil increased $45 in the third quarter and $96 for the first nine months primarily due to improved operating results and tax treatment. Our investments in Telmex and Telmex Internacional increased $53 in the third quarter and $83 for the first nine months, reflecting lower depreciation and minority interest partially offset by lower operating results.

OTHER BUSINESS MATTERS

Market Conditions  During 2008, the securities markets and the banking system in general have experienced significant declines in value and liquidity. The U.S. Congress, the U.S. Treasury Department, the Federal Reserve system and various other regulators have worked together to adopt plans to restore liquidity and stability to the securities markets and to the banking system. Among other actions, the U.S. government will provide capital to financial institutions and will ensure access to short-term borrowings for companies with high credit ratings, such as AT&T. We are not yet able to determine the outcome of these plans.

Included on our consolidated balance sheets are assets held by benefit plans for the payment of future benefits. The losses associated with the securities markets declines during 2008 are not expected to have an impact on the ability of our benefit plans to pay benefits. However, because our pension plans are subject to funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA), a continued weakness in the markets could require us to make contributions to the pension plans in order to maintain minimum funding requirements as established by ERISA. In addition, losses on investments in the pension and other postretirement plans would be reflected in future earnings, potentially to a material amount. To the extent that market volatility also increases interest rates, we will also experience an increase in our discount rate for measuring our retirement liabilities which would decrease future expense. The extent of the impact on future earnings cannot be known until the end of the year when annual returns and rates are measured.

The growing weaknesses in the securities and credit markets are also affecting portions of our customer base although, at this time, we are unable to quantify the effect. We are seeing lower demand for our services from traditional residential wireline customers although business revenues remained relatively stable this past quarter. Our wireless business continues to grow, reflecting both an increased demand for advanced services, as evidenced by our successful launch of the iPhone 3G and increased sales of other advanced handsets, as well as a shift in demand from our traditional wireline services. Should the economy continue to weaken, we may experience pressure on pricing and margins as we compete for both wireline and wireless customers who will have less discretionary income.

U-verse Services We are continuing to expand our deployment of U-verse TV, high-speed broadband and voice services. As of September 30, 2008, we have passed approximately 14 million living units. As we expand our deployment, we expect to continue to use contracted outside labor in addition to our employees as installers; our rate of expansion will be slowed if we cannot hire and train an adequate number of qualified contractors and technicians to keep pace with customer demand or if we cannot obtain all required local building permits in a timely fashion. Our deployment plans also could be delayed if we do not receive required equipment and software on schedule.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

We believe that our U-verse TV service is subject to federal oversight as a “video service” under the Federal Communications Act. However, some cable providers and municipalities have claimed that certain IP video services should be treated as a traditional cable service and therefore subject to the applicable state and local cable regulation. Certain municipalities have refused us permission to use our existing right-of-ways to deploy or activate our U-verse-related services and products, resulting in litigation. Pending negotiations and current or threatened litigation involving municipalities could delay our deployment plans in those areas. In July 2008, the U.S. District Court for Connecticut affirmed its October 2007 ruling that AT&T’s U-verse TV service is a cable service in Connecticut. We have appealed that decision on the basis that state legislation rendered the case moot. If courts having jurisdiction where we have significant deployments of our U-verse services were to decide that federal, state and/or local cable regulation were applicable to our U-verse services, it could have a material adverse effect on the cost, timing and extent of our deployment plans.

NSA Litigation  There are 24 pending lawsuits that allege that we and other telecommunications carriers unlawfully provided assistance to the National Security Agency (NSA) in connection with intelligence activities that were initiated following the events of September 11, 2001. In the first filed case, Hepting et al v. AT&T Corp., AT&T Inc. and Does 1-20, a purported class action filed in U.S. District Court in the Northern District of California, plaintiffs allege that the defendants have disclosed and are currently disclosing to the U.S. Government content and call records concerning communications to which Plaintiffs were a party. Plaintiffs seek damages, a declaratory judgment, and injunctive relief for violations of the First and Fourth Amendments to the United States Constitution, the Foreign Intelligence Surveillance Act, the Electronic Communications Privacy Act, and other federal and California statutes. We filed a motion to dismiss the complaint. The United States asserted the “state secrets privilege” and related statutory privileges and also filed a motion asking the court to dismiss the complaint. The Court denied the Motions to Dismiss of both parties.

We and the U.S. Government filed interlocutory appeals. The case was argued before a panel of the U.S. Court of Appeals for the Ninth Circuit in August 2007. On August 21, 2008, the court remanded the case to the district court without deciding the issue in light of the passage of the FISA Amendments Act discussed below.

In July 2008, the President signed into law, the FISA (Foreign Intelligence Surveillance Act) Amendments Act of 2008 (the Act), a provision of which addresses the allegations in these pending lawsuits (immunity provision). The immunity provision requires the pending lawsuits to be dismissed if the Attorney General certifies to the court either that the alleged assistance was undertaken by court order, certification, directive, or written request or that the telecom entity did not provide the alleged assistance. On September 19, 2008, the Attorney General filed his certification and asked the court to dismiss all of the lawsuits pending against the telecommunications companies. On October 16, 2008, the plaintiffs filed an opposition to the certification and motion to dismiss arguing that the Act is unconstitutional and, alternatively, that the government failed to meet its burden of justifying dismissal. We believe that the immunity provision is constitutional, that the government has met its burden of proof, and that the lawsuits pending against us will eventually be dismissed.

In addition, a lawsuit seeking to enjoin the immunity provision’s application on grounds that it is unconstitutional was filed the day after the Act was signed by the President. That case has been referred to the Joint Panel on Multidistrict Litigation, which has conditionally transferred the case to the Northern District of California, the court referred to above that is considering the Attorney General’s certification and motion to dismiss.

Management believes these actions are without merit and intends to vigorously defend these matters.

Broadcom Patent Dispute  A number of our handsets, as well as those provided by other wireless carriers, have been subject to a patent dispute at the U.S. International Trade Commission (ITC) between Broadcom Corporation and Qualcomm Incorporated (Qualcomm). On October 14, 2008, the Court of Appeals for the Federal Circuit vacated and remanded the ITC's finding that Qualcomm had infringed a Broadcom patent and vacated the ITC’s limited exclusion order applicable to certain handsets containing Qualcomm technology. The Court held that the ITC did not have authority to issue a limited exclusion order affecting handset suppliers and retailers, such as AT&T, unless those parties were also named in the lawsuit. While this ruling would allow us to continue to sell to our customers handsets using the disputed Qualcomm chips, we do not currently offer any such handsets.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

DIRECTV Agreement  On September 26, 2008, we announced an agreement to market and sell DIRECTV's service as a co-branded satellite television service after Jan. 31, 2009. We will offer, market and sell co-branded AT&T | DISH Network services through Jan. 31, 2009. After that date, existing AT&T | DISH Network customers will continue to receive service.

COMPETITIVE AND REGULATORY ENVIRONMENT

AT&T subsidiaries operating within the U.S. are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the U.S. are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided, and regulation is generally limited to operational licensing authority for the provision of services to enterprise customers.

In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing regulation. Since the Telecom Act was passed, however, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained regulatory requirements applicable to our traditional wireline subsidiaries. Where appropriate, we are pursuing additional legislative and regulatory measures to reduce regulatory requirements that inhibit our ability to compete effectively in providing services to our customers. For example, we are supporting regulatory and legislative efforts that would offer a streamlined process for new video service providers to compete with traditional cable television providers. In addition, states representing a majority of our local service access lines have adopted legislation that enables new video entrants to acquire a statewide or state-approved (as opposed to municipal-approved) franchise to offer video services. We also are supporting efforts to update regulatory treatment for retail services. Passage of legislation is uncertain and depends on many factors.

Our wireless operations are likewise subject to certain governmental regulation. Wireless communications providers must be licensed by the FCC to provide communications services at specified spectrum frequencies within specified geographic areas and must comply with the rules and policies governing the use of the spectrum as adopted by the FCC. While wireless communications providers’ prices and service offerings are generally not subject to state regulation, an increasing number of states are attempting to regulate or legislate various aspects of wireless services, such as in the area of consumer protection. We believe that the wireless industry is characterized by innovation, differentiation and competition among handset manufacturers, carriers and applications and that additional regulation is unnecessary given the state of competition and may be appropriate only in the case of market failure.

ACCOUNTING POLICIES AND STANDARDS

FSP 157-3  On October 10, 2008, the FASB issued FASB Staff Position 157-3, “Determining the Fair Value of a Financial Asset When the Market of that Asset is not Active” (FSP 157-3). FSP 157-3 provides an example that clarifies and reiterates certain provisions of the existing fair value standard, including basing fair value on orderly transactions and usage of management and broker inputs. FSP 157-3 is effective immediately but is not expected to have a material impact on our financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

We had $1,594 in cash and cash equivalents available at September 30, 2008. Cash and cash equivalents included cash of $915 and money market funds and other cash equivalents of $679. In the first nine months, cash inflow was primarily provided by cash receipts from operations, the issuance of long-term debt, short-term borrowings and dispositions. These inflows were offset by cash used to meet the needs of the business including, but not limited to, payment of operating expenses, acquisition of wireless spectrum licenses and other assets, funding capital expenditures, repurchase of common shares, dividends to stockholders, tax payments, the repayment of debt and the payment of interest on debt. We discuss many of these factors in detail below.

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AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

Cash Provided by or Used in Operating Activities

In the first nine months of 2008, cash provided by operating activities was $22,773 compared to $24,345 in the first nine months of 2007. Our operating cash flow reflects our increased operating income (including the effects of lower amortization expense), more than offset by declines in our operational liabilities and increased tax payments of approximately $3,200.

Within the next 12 months, we expect the Internal Revenue Service (IRS) will complete its examination of our 2003 through 2005 federal income tax returns and that we will make a deposit in the range of $800 to $1,200 to reduce the accrual of interest while we continue to work with the IRS to resolve any contested issues.

Cash Used in or Provided by Investing Activities

In the first nine months of 2008, cash used in investing activities consisted primarily of $10,086 for the acquisition of wireless spectrum and business acquisitions, $14,388 for capital expenditures, $455 for interest during construction and $103 related to other investing activities. Cash provided by investing activities included $436 from EchoStar for an investment made in 2003 and $1,477 primarily related to the disposition of non-strategic assets.

Our acquisitions activity included the following:

·   $9,325 for the purchase of spectrum licenses related to the 700 MHz Band wireless spectrum auction and the acquisition of licenses from Aloha Partners, L.P.

·   $350 related to a customer list acquisition.

·   $342 related to wireless related acquisitions.

·   $69 related to other acquisitions.

Our capital expenditures are primarily for our wireless and wireline subsidiaries’ networks, our U-verse services, and support systems for our communications services. Capital spending excluding interest during construction in our wireless segment increased 66.2% in the first nine months, primarily for network capacity expansion, integration and upgrades to our Universal Mobile Telecommunications System/High-Speed Packet Access network, as well as for IT and other support systems for our wireless service. Capital expenditures in the wireline segment, which represented 73.3% of our capital expenditures, increased 7.9% in the first nine months, primarily due to the continued deployment of our U-verse services.

We continue to expect that our 2008 capital expenditures, which include wireless network expansion and U-verse services, will be in the midteens as a percentage of consolidated revenue. We continue to expect to fund 2008 capital expenditures for our wireless and wireline segments, including international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations.

In the first nine months, proceeds from dispositions included $1,130 from the sale of buildings and other equipment, $230 from the sale of a unit of one of our publishing subsidiaries and $84 from the sale of other non-strategic assets.

Cash Used in or Provided by Financing Activities

We continue to fund our 2008 financing activities through a combination of short- and long-term borrowings and cash from operations. Our financing activities include the repayment of debt and funding repurchases of our common stock.

At September 30, 2008, we had $17,419 of debt maturing within one year, which included $7,196 of commercial paper borrowings, $10,189 of long-term debt maturities, and $23 of other borrowings. The majority of our commercial paper borrowings are due within 90 days. We continue to examine our mix of short- and long-term debt in light of interest rate trends.

27

AT&T INC.

SEPTEMBER 30, 2008

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

Dollars in millions except per share amounts

In the first nine months of 2008, we received net proceeds of $10,924 from the issuance of long-term debt and $5,188 from the issuance of commercial paper. Our long-term debt issuances were as follows:

·   $2,500 of 5.5% global notes due in 2018.

·   $2,000 of floating rate notes due 2010 in a private offering, which can be redeemed by the holder early (which is classified as debt maturing in one year).

·   €1,250 of 6.125% global notes due 2015 (equivalent to approximately $1,975 when issued).

·   $1,500 of 4.95% global notes due in 2013.

·   $1,250 of 6.40% global notes due 2038.

·   $1,000 of 5.60% global notes due 2018.

·   $750 of 6.3% global notes due in 2038.

In the first nine months, we repaid $3,143 of debt, which primarily consisted of repayments on long-term debt and scheduled principal payments on other debt and borrowings.

On December 10, 2007, our Board of Directors authorized the repurchase of up to 400 million shares of AT&T common stock; this authorization expires at the end of 2009. In the first nine months of 2008, we repurchased 164.2 million shares at a cost of $6,077. Although we will evaluate additional share repurchases during the remainder of 2008 should the economic environment improve, we currently intend to focus on reducing debt.

We paid dividends of $7,150 in the first nine months of 2008 and $6,584 in the first nine months of 2007, primarily reflecting an increase in the quarterly dividend approved by our Board of Directors in December 2007, which was partially offset by a decline in common shares outstanding of approximately 4% due to our share repurchases over the past year. Dividends declared by our Board of Directors totaled $0.40 per share in the third quarter of 2008 and $0.355 per share in the third quarter of 2007. Our dividend policy considers the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.

At September 30, 2008, our debt ratio was 40.6% compared to 35.3% at September 30, 2007 and 35.7% at December 31, 2007. The increased debt ratio at September 30, 2008 reflects an increase in debt of nearly $16,200 since September 30, 2007 and nearly $12,700 since December 31, 2007. The increase was primarily due to the issuance of new debt to pay for the acquisition of wireless spectrum licenses in April 2008 (see “Cash Used in or Provided by Investing Activities”). The increased debt ratio also reflects the impact of our share repurchases in 2007 and 2008. Equity in 2008 reflects our increased income and adjustments to other comprehensive income required under Statement of Financial Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

We have a five-year $10,000 credit agreement with a syndicate of investment and commercial banks, which we have the right to increase up to an additional $2,000 provided no event of default under the credit agreement has occurred. One of the participating banks is Lehman Brothers Bank, Inc., which recently declared bankruptcy. We are unable to determine the status of their stated commitment of $595 at this time. The current agreement will expire in July 2011. We also have the right to terminate, in whole or in part, amounts committed by the lenders under this agreement in excess of any outstanding advances; however, any such terminated commitments may not be reinstated. Advances under this agreement may be used for general corporate purposes, including support of commercial paper borrowings and other short-term borrowings. We must maintain a debt-to-EBITDA (earnings before interest, income taxes, depreciation and amortization, and other modifications described in the agreement) financial ratio covenant of not more than three-to-one as of the last day of each fiscal quarter for the four quarters then ended. We comply with all covenants under the agreement. At September 30, 2008, we had no borrowings outstanding under this agreement.

In April 2008, we entered into a $3,000 revolving credit agreement with certain banks with a scheduled expiration date of December 2008. In August 2008, we exercised our right to terminate this agreement.

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AT&T INC.

SEPTEMBER 30, 2008

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 30, 2008, we had interest rate swaps with a notional value of $5,750 and a fair value of $76. In the third quarter we terminated a swap with Lehman Brothers Special Financing Inc. with a notional value of $250.

We have fixed-to-fixed cross-currency swaps on foreign-currency-denominated debt instruments with a U.S. dollar notional value of $4,774 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(363) at September 30, 2008.

Item 4. Controls and Procedures

The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of September 30, 2008. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were effective as of September 30, 2008.

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AT&T INC.

SEPTEMBER 30, 2008

CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS

Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section of our Form 10-K. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:

·   Adverse economic changes in the markets served by us or in countries in which we have significant investments including the impact on customer demand and our ability to access financial markets.

·   Changes in available technology and the effects of such changes including product substitutions and deployment costs.

·   Increases in our benefit plans’ costs including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends.

·   The final outcome of Federal Communications Commission proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment, unbundled loop and transport elements and wireless services.

·   The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings, and judicial review, if any, of such proceedings, including proceedings relating to interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates, broadband deployment including our U-verse services, performance measurement plans, service standards and traffic compensation.

·   Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments.

·   Our ability to absorb revenue losses caused by increasing competition, including offerings using alternative technologies (e.g., cable, wireless and VoIP), and our ability to maintain capital expenditures.

·   The impact of competition on customer totals and customer acquisition and retention costs and the resulting pressures on wireline and wireless operating margins.

·   Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets.

·   The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP).

·   The timing, extent and cost of deployment of our U-verse services; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to these services; and the availability, cost and/or reliability of the various technologies and/or content required to provide such services.

·   The outcome of pending or threatened litigation including patent infringement claims by or against third parties.

·   The impact on our networks and business of major equipment failures, severe weather conditions, natural disasters or terrorist attacks.

·   The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.

·   The issuance by the Internal Revenue Service and/or other tax authorities of new tax regulations or changes to existing standards; actions by tax agencies and judicial authorities with respect to applying applicable tax laws and regulations; and the resolution of disputes with any taxing jurisdictions.

·   Our ability to adequately fund our wireless operations, including access to additional spectrum, network upgrades and technological advancements.

·   Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, to respond to competition and regulatory, legislative and technological developments.

Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.

30

AT&T INC.

SEPTEMBER 30, 2008

PART II - OTHER INFORMATION

Dollars in millions except per share amounts

Item 1A. Risk Factors

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the third quarter 2008, there were no such material developments.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) During the third quarter of 2008, non-employee directors acquired shares of common stock pursuant to the Non-Employee Director Stock and Deferral Plan. Under the plan, a director may make an annual election to receive all or part of his or her annual retainer or fees in the form of shares or deferred stock units (DSUs) that are convertible into cash or shares. Each director also receives an annual grant of DSUs. The plan provides that DSUs (and dividends earned thereon) acquired during 2007 and thereafter would be convertible in the form of cash only. During the third quarter of 2008, an aggregate of 7,301 shares and DSUs (from pre-2007 accruals) were acquired by non-employee directors at $30.81, the fair market value of the shares on the date of acquisition. The issuances of shares and DSUs were exempt from registration pursuant to Section 4(2) of the Securities Act.

31

AT&T INC.

SEPTEMBER 30, 2008

Item 6. Exhibits

Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. 1-8610.

10-a	AT&T Inc. 2005 Supplemental Employee Retirement Plan amended and restated effective as of June 26, 2008
10-b	BellSouth Corporation Supplemental Executive Retirement Plan, amended and restated effective as of January 1, 2008
12	Computation of Ratios of Earnings to Fixed Charges
31	Rule 13a-14(a)/15d-14(a) Certifications  31.1Certification of Principal Executive Officer  31.2Certification of Principal Financial Officer
32	Section 1350 Certifications

32 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AT&T Inc.

November 5, 2008                                                                               /s/ Richard G. Lindner.

Richard G. Lindner

Senior Executive Vice President

   and Chief Financial Office

33

EX-10.A

2005

SUPPLEMENTAL EMPLOYEE

RETIREMENT PLAN

Adopted:  November 19, 2004

             Effective:  November 18, 2005

Amended:  June 26, 2008

2005 SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN

1   Purpose.

The purpose of the 2005 Supplemental Employee Retirement Plan (the “SERP” or the "Plan") is to provide Participants with retirement benefits to supplement benefits payable pursuant to qualified group pension plans sponsored by AT&T or an affiliate of AT&T.  The Plan is a successor to the AT&T Supplemental Retirement Income Plan (“SRIP”) that was effective January 1, 1984 and which was amended, effective December 31, 2004, to cease accruals so that the benefits payable under the SRIP shall be grandfathered and administered in accordance with the provisions of the SRIP in a manner that does not invoke Section 409A of the Code.

2   Definitions.

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

Administrative Committee. "Administrative Committee" means a Committee, consisting of the SEVP-HR and two or more other members designated by the SEVP-HR, which shall administer the Plan.

Agreement.  "Agreement" means the written agreement entered into between AT&T by its SEVP-HR and a Participant prior to January 1, 2009 to carry out the Plan with respect to such Participant.  No Agreements are necessary for Participants who become eligible to participate in the Plan on or after January 1, 2009.

AT&T.  "AT&T" means AT&T Inc.

Beneficiary.  "Beneficiary" shall mean any beneficiary or beneficiaries designated by the Participant pursuant to the AT&T Rules for Employee Beneficiary Designations as may hereafter be amended from time-to-time ("Rules").  If a Participant fails to execute a Beneficiary designation form with respect to Plan benefits, his or her Beneficiary designation form with respect to his SRIP benefits shall apply with respect to his Plan benefits.  If a Participant fails to execute a Beneficiary designation form with respect to Plan benefits and with respect to SRIP benefits, the default provisions in the Rules shall apply.

CEO or Chief Executive Officer.  “CEO” or “Chief Executive Officer” shall mean the Chief Executive Officer of AT&T.

Disabled or Disability.  “Disabled” or "Disability" means the Participant’s (i) inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident or health plan covering employees of the Participant’s employer.  The Administrative Committee, in its complete and sole discretion, determines whether a Participant is Disabled.  The Administrative Committee may require that the Participant submit to an examination by a competent physician or medical clinic selected by the Administrative Committee.  On the basis of such medical evidence, the determination of the Administrative Committee as to whether or not a Participant is Disabled shall be conclusive.

Earnings.  "Earnings" means for a given calendar year the Participant's: (1) bonus earned as a short term award during the calendar year but not exceeding 200% of the target amount of such bonus (or such other portion of the bonus or target bonus as may be determined by the Human Resources Committee of the Board of AT&T), plus (2) base salary before reduction due to any contribution pursuant to any deferred compensation plan or agreement sponsored by AT&T or an AT&T affiliate, including but not limited to compensation deferred in accordance with Sections 401(k), 125, or 132(f) of the Internal Revenue Code.

Final Average Earnings.  "Final Average Earnings" means the average of the Participant's Monthly Earnings for the thirty-six (36) consecutive months out of the one hundred twenty (120) months next preceding the Participant's Termination of Employment which yields the highest average earnings.  If the Participant has fewer than thirty-six (36) months of employment, the average shall be taken over his or her period of employment.

GAAP Rate.  For a referenced calendar year, "GAAP Rate" means the interest rate used for valuing Plan liabilities on December 31 of the immediately preceding calendar year and for calculating periodic pension expense for the referenced calendar year, both for purposes of AT&T's financial statement reporting requirements.

Immediate Annuity Value of any AT&T or affiliate Qualified Pensions.  “Immediate Annuity Value of any AT&T or affiliate Qualified Pensions” shall have the meaning as provided in Attachment B.

Immediate Annuity Value of SRIP. "Immediate Annuity Value of SRIP" shall have the meaning as provided in Attachment C.

Immediate Annuity Value of any other AT&T or affiliate Non-Qualified Pensions other than SERP. "Immediate Annuity Value of any AT&T or affiliate Non-Qualified Pensions other than SERP" shall have the meaning as provided in Attachment D.

Mid-Career Hire.  “Mid-Career Hire” means an individual whose Service Commencement Date is on or after the individual’s thirty-fifth (35th) birthday.

Monthly Earnings.  "Monthly Earnings" means one-twelfth (1/12) of Earnings.

Mortality Tables.  "Mortality Tables" means the mortality tables as defined by Code Section 417(e) for valuing minimum lump sum benefits payable from qualified pension plans for the referenced period.

Officer. "Officer" shall mean an individual who is designated as an officer level employee for compensation purposes on the records of AT&T.

Participant. "Participant" means:

    (a)   Any person who, as of close of business on December 31, 2004, was employed by an AT&T affiliate and was a participant in the SRIP; or

   (b)   Any person who was a participant in the SRIP, terminated employment in 2004 and receives Earnings in 2005; or

   (c)   An Officer of AT&T or an AT&T affiliate who is designated by the CEO as eligible to participate in the Plan.

Notwithstanding the foregoing definition of Participant, the CEO, may, at any time and from time to time, exclude any person or group of persons from being deemed a “Participant” under this plan.

An individual’s participation in SERP shall commence as of his or her SERP Effective Date.

Retire or Retirement.  "Retire" or "Retirement" shall mean the Termination of Employment of a Participant for reasons other than death, on or after the earlier of the following dates:  (1) the date the Participant is Retirement Eligible or (2) the date the Participant has attained one of the following combinations of age and service at Termination of Employment:

Years of Service	Age
25 years or more	50 or older
30 years or more	Any age

Retirement Eligible.  "Retirement Eligible" or "Retirement Eligibility" means that a Participant has attained age 55 and has at least five (5) Years of Service.

Retirement Percent.  "Retirement Percent" means the percent specified in the Agreement with the Participant (if any) which establishes a Target Retirement Benefit (see Section 3.1) as a percentage of Final Average Earnings. For an individual who becomes a Participant on or after January 1, 2006, "Retirement Percent" means 50 percent unless otherwise provided by the Human Resources Committee of the Board of Directors of AT&T.

SERP Effective Date.  “SERP Effective Date” means the date of the written designation of the Participant’s eligibility to participate in SERP, signed by the CEO.

SEVP-HR.  “SEVP-HR” means AT&T’s Senior Executive Vice President responsible for Human Resources matters.

Supplemental Retirement Income Plan or SRIP.  "Supplemental Retirement Income Plan” or “SRIP" means the AT&T Inc. Supplemental Retirement Income Plan effective January 1, 1984.

Service Commencement Date.  “Service Commencement Date” means the Participant’s employment commencement date with AT&T or any AT&T affiliate, as such date may be adjusted from time-to-time in accordance with rules, policies and procedures generally applied by AT&T to adjust for breaks in service or other periods of time, as reflected in AT&T’s or an AT&T affiliate’s records, all as determined in the discretion of the SEVP-HR.

Service Factor.  "Service Factor" means, unless otherwise agreed in writing by the Participant and AT&T, either (a) a deduction of 1.43 percent, or .715 percent for Mid-Career Hires, multiplied by the number by which (i) thirty-five (or thirty in the case of a Participant who is an Officer) exceeds (ii) the number of Years of Service of the Participant, or (b) a credit of 0.715 percent multiplied by the number by which (i) the number of Years of Service of the Participant exceeds (ii) thirty-five (or thirty in the case of a Participant who is an Officer).  For purposes of the above computation, a deduction shall result in the Service Factor being subtracted from the Retirement Percent whereas a credit shall result in the Service Factor being added to the Retirement Percent.

Termination of Employment.  "Termination of Employment" means the ceasing of the Participant's employment from the AT&T controlled group of companies for any reason whatsoever, whether voluntarily or involuntarily.  A Participant will be deemed to have realized a Termination of Employment at any time that a Participant and the Administrative Committee reasonably anticipate that the bona fide level of services the Participant will perform (whether as an employee or an independent contractor) will be permanently reduced to a level that is less than fifty percent (50%) of the average level of bona fide services the Participant performed during the immediately preceding thirty-six (36) months (or the entire period the Participant has provided services if the Participant has been providing services to the AT&T controlled group of companies less than thirty-six (36) months).

Year.  A "Year" is a period of twelve (12) consecutive calendar months.

Years of Participation.  "Years of Participation" means the number of each complete Years beginning with the Participant’s SERP Effective Date through each annual anniversary of such date.

Years of Service.  "Years of Service" means the number of each complete Years of full-time service as an employee of AT&T or an AT&T affiliate beginning with the Participant’s Service Commencement Date through each annual anniversary of such date, including service prior to the adoption of this Plan. “Years of Service” shall also include a Participant’s Years of service that are recognized for purposes of the BellSouth Corporation Supplemental Employee Retirement Plan, but that are not otherwise included pursuant to the immediately preceding sentence.

3   Plan ("SERP") Benefits.

     3.1   SERP Benefit Formula.

With respect to (1) a Participant who was a participant in the SRIP prior to January 1, 1998, or (2) a Participant who, prior to January 1, 1998, was an officer of a Pacific Telesis Group ("PTG") company and became a participant in the SRIP after January 1, 1998, the amount of such Participant’s SERP Benefit is calculated as follows:

	Final Average Earnings
x	Revised Retirement Percentage
=	Target Retirement Benefit
-	Immediate Annuity Value of any AT&T or affiliate Qualified Pensions
-	Immediate Annuity Value of any other AT&T or affiliate Non-Qualified Pensions other than the SERP
=	Target Benefit
-	Age Discount
=	Annual Value of Life with 10 Year Certain SERP Benefit payable as a result of Termination of Employment Before SIRP Reduction
-	Immediate Annuity Value of SRIP
=	Annual Value of Life with 10 Year Certain SERP Benefit payable as a result of Termination of Employment

With respect to all other Participants, subject to the provisions of Attachment E, the amount of such Participant’s SERP Benefit is calculated as follows:

	Final Average Earnings
x	Revised Retirement Percentage
=	Target Retirement Benefit
-	Age Discount
=	Discounted Target Benefit
-	Immediate Annuity Value of any AT&T or affiliate Qualified Pensions
-	Immediate Annuity Value of SRIP
-	Immediate Annuity Value of any other AT&T or affiliate Non-Qualified Pensions other than SERP
=	Annual Value of Life with 10 Year Certain SERP Benefit payable as a result of Termination of Employment

Where in both of the above cases the following apply:

(a) Revised Retirement Percentage = Retirement Percent + Service Factor

(b) For purposes of determining the Service Factor, the Participant's actual Years of Service as of the date of Termination of Employment, to the day, shall be used.

(c) For purposes of determining the Final Average Earnings, the Participant's Earnings history as of the date of Termination of Employment shall be used.

(d) Age Discount means the Participant's SERP Benefit shall be decreased by five-tenths of one percent (.5%) for each month that the date of the Participant’s Termination of Employment precedes the date on which the Participant will attain age 60.

Notwithstanding the foregoing, if at the time of Termination of Employment the Participant is, or has been within the one year period immediately preceding the Participant's Termination of Employment, an Officer with 30 or more Years of Service such Participant's Age Discount shall be zero.

Except to true up for an actual short term award paid following Termination of Employment, there shall be no recalculation of the value of a Participant's SERP Benefit hereunder following a Participant's Termination of Employment.

               3.2.Vesting.

Notwithstanding any other provision of this Plan, upon any Termination of Employment of the Participant for a reason other than death or Disability, AT&T shall have no obligation to the Participant under this Plan if the Participant has less than five (5) Years of Service or, for Participants who are informed, in writing, of their SERP eligibility on or after September 28, 2006, less than four (4) Years of Participation, at the time of Termination of Employment.

4   Election and Form of Distribution of SERP Benefits.

          4.1   Normal Form.

The normal form of a Participant's benefits hereunder shall be a Life with 10-Year Certain Benefit as described in Section 4.2(a).

          4.2   Election Alternatives.

Notwithstanding the normal form for distribution of a Participant’s SERP Benefits, a Participant may elect one of the following Benefit Payout Alternatives:

         (a) Life with a 10-Year Certain Benefit.  An annuity payable during the longer of (i) the life of the Participant or (ii) the 10-year period commencing on the Participant’s Termination of Employment and ending on the day next preceding the tenth anniversary of such date (the "Life With 10-Year Certain Benefit").  If a Participant who is receiving a Life with 10-Year Certain Benefit dies prior to the expiration of the 10-year period described in this Section 4.2(a), the Participant's Beneficiary shall be entitled to receive the remaining Life With 10-Year Certain Benefit installments which would have been paid to the Participant had the Participant survived for the entire such 10-year period.

         (b) Joint and 100% Survivor Benefit.  A joint and one hundred percent (100%) survivor annuity payable for life to the Participant and at his or her death to his or her Beneficiary, in an amount equal to one hundred percent (100%) of the amount payable during the Participant's life, for life (the "Joint and 100% Survivor Benefit").

         (c) Joint and 50% Survivor Benefit.  A joint and fifty percent (50%) survivor annuity payable for life to the Participant and at his or her death to his or her Beneficiary, in an amount equal to fifty percent (50%) of the amount payable during the Participant's life, for life (the "Joint and 50% Survivor Benefit").

         (d) Lump Sum Benefit.  A lump sum benefit, which shall apply only if the Participant has attained the age of fifty-five (55) years as of his or her Termination of Employment.  If a Participant elects a lump sum benefit but realizes a Termination of Employment prior to attaining age fifty-five (55), the Participant’s SERP Benefit shall be paid as provided in Section 4.2(a), 4.2(b) or 4.2(c), as elected or deemed elected by the Participant.

The Benefit Payout Alternatives described in Section 4.2(b), 4.2(c) and 4.2(d) shall be the actuarially determined equivalent (using the same reasonable actuarial assumptions and methods for valuing each Benefit Payout Alternative as determined by the SEVP-HR in his or her complete and sole discretion) of the Life With 10-Year Certain Benefit that is converted by such election.  The amount of a Participant's lump sum benefit shall be calculated as of the Participant's Termination of Employment by applying the Mortality Tables and the GAAP Rate, both as in effect for the calendar year immediately preceding the calendar year of the Participant’s Termination of Employment, but using the Participant’s age, Years of Service and other factors as of the Participant’s Termination of Employment.

           4.3   Distribution Election.

         (a) Individual Who Is A Participant On or Before December 31, 2008.  An individual who was a Participant on or before December 31, 2008 may make an irrevocable election of a Benefit Payout Alternative before the earlier of December 31 of the year immediately preceding his or her Termination of Employment or December 31, 2008 by delivery of such election, in writing, telecopy, email or in another electronic format, pursuant to or as instructed by the SEVP-HR (as determined by the SEVP-HR in his or her sole and absolute discretion).

         (b) Individual Who Becomes A Participant After December 31, 2008.  An individual who becomes a Participant after December 31, 2008 may make an irrevocable election of a Benefit Payout Alternative no later than the thirtieth (30th) day immediately following the Participant’s SERP Effective Date by delivery of such election in writing, telecopy, email or in another electronic format, pursuant to or as instructed by the SEVP-HR (as determined by the SEVP-HR in his or her sole and absolute discretion).

        (c) Failure to Timely Make a Distribution Election.  If a Participant fails to make a timely election of a Benefit Payout Alternative as provided in Section 4.3(a) or 4.3(b), such Participant shall be deemed to have elected and such Participant's form of benefit shall be the Life With 10-Year Certain Benefit described in Section 4.2(a).

         (d) Death of or Divorce from Annuitant During Participant’s Lifetime.  Notwithstanding any other provision of this Plan to the contrary, in the event of the death of a designated annuitant during the life of the Participant, the Participant's election to have a Benefit Payout Alternative described in Section 4.2(b) or 4.2(c) shall, without any action by the Participant, be revoked, and the Participant’s benefit, or remaining benefit, under the Plan, as the case may be, shall be paid as provided in Section 4.2(a).  Any conversion of benefit from one form to another pursuant to the provisions of this paragraph shall use the same reasonable actuarial assumptions and methods for valuing each annuity form of benefit before and after the death of the designated annuitant and shall be subject to actuarial adjustment (as determined by the SEVP-HR in his or her complete and sole discretion) such that the Participant's new benefit is the actuarial equivalent of the Participant's remaining prior form of benefit.  Payments pursuant to Participant's new form of benefit shall be effective commencing with the first monthly payment for the month following the death of the annuitant.

Notwithstanding any other provision of this Plan to the contrary, in the event of the divorce or legal separation of the Participant, the Participant’s election to have a Benefit Payout Alternative described in Section 4.2(b) or 4.2(c), with a survivor annuity for the benefit of the Participant's former spouse as Beneficiary, shall, without any action by the Participant, be revoked, and the Participant's benefit, or remaining benefit, under the Plan, as the case may be, shall be paid as provided in Section 4.2(a) (using the same reasonable actuarial assumptions and methods for valuing each annuity form of benefit before and after the divorce or legal separation  and shall be subject to actuarial adjustment (as determined by the SEVP-HR in his or her complete and sole discretion).  In such event, the 10-Year period as described in Section 4.2(a) shall be the same 10-year period as if such form of benefit was the form of benefit originally selected and the expiration date of such period shall not be extended beyond its original expiration date.  Payments pursuant to Participant’s new form of benefit shall be effective commencing with the first monthly payment following notice from the Participant to the SEVP-HR after the divorce (or legal separation) becomes final.

         (e) Special Provisions for Lump Sum Benefit Election.  A Participant who elects a lump sum benefit under Section 4.2(d) must, contemporaneous with such Lump Sum Benefit election, elect a specific number of year(s), not to exceed twenty (20) years, following his or her Termination of Employment upon which the lump sum benefit (including any interest accrued thereon) shall be distributed; provided, however,

                (i) the Participant may not receive more than thirty percent (30%) of his or her lump sum benefit (excluding any interest thereon) until the third (3rd) anniversary of his or her Termination of Employment; provided, however, if the Participant is age sixty (60) or older as of his or her Termination of Employment, the Participant, if elected in his or her timely filed election of a Benefit Payout Alternative, may receive one hundred percent (100%) of his or her lump sum benefit upon the day that is six (6) months following his or her Termination of Employment if he or she agrees, in writing, substantially in the form provided in Attachment A, not to compete with an Employer Business within the meaning of Section 8.2 for a period of three (3) years from such Participant’s Termination of Employment and further agrees that if he or she fails to abide by such agreement, the non-compete agreement is challenged, or the non-compete agreement is unenforceable, he or she shall forfeit all benefits hereunder and repay the lump sum benefit to AT&T; and

                 (ii) prior to distribution of the Participant’s lump sum benefit, interest on such lump sum benefit shall accrue and shall be added to the Participant’s lump sum benefit or distributed monthly, as elected by the Participant in his or her election of a Benefit Payout Alternative.

A Participant’s lump sum benefit payment schedule must comply with the rules for payment schedules as adopted by the SEVP-HR (as determined by the SEVP-HR in his or her sole and absolute discretion), which, for example, may require payment of principal to be made no more frequently than once per calendar year.

If the payment schedule elected by a Participant does not comply with the rules for payment schedules, (i) thirty percent (30%) of such Participant’s lump sum benefit shall be paid to the Participant upon the date that is six (6) months following the Participant’s Termination of Employment,and (ii) the remaining seventy percent (70%) shall be paid to the Participant on the third (3rd) anniversary of such Participant’s Termination of Employment.

        (f) Lump Sum Benefit Account Balance.  From and after a Participant’s Termination of Employment, the SEVP-HR shall maintain records of a lump sum benefit account balance for each Participant who elected a lump sum benefit.  During such period of time that all or any portion of a Participant’s lump sum benefit is not paid, interest shall be credited using the same methodology used by AT&T for financial accounting purposes using the GAAP Rate that was used to calculate such Participant’s lump sum benefit.  Payments of principal and interest shall be deducted from the lump sum benefit account balance.

A Participant whose employment has not terminated may change a prior distribution election at any time on or before December 31, 2008, provided, however, if the Participant’s employment terminates for any reason in the calendar year in which the new distribution election is filed, such new election shall be null and void.  In the event the Participant’s new election is null and void, the Participant’s prior election, if any, shall apply.  If there is no prior election, the Plan’s default distribution provisions shall apply.

5   Death or Disability Benefits.                                                                                                

           5.1   Death Following Termination of Employment.

If a Participant who has commenced payment of his or her SERP benefit hereunder dies, his or her Beneficiary shall be entitled to receive the remaining SERP benefit in accordance with the Benefit Payout Alternative elected or deemed elected by the Participant.

           5.2   Death Prior to Termination of Employment.

If a Participant dies prior to his or her Termination of Employment, a pre-retirement death benefit will be calculated and paid as though the Participant had Retired  (determined without regard to the 5 Years of Service or the 4 Years of Participation requirements) on the day prior to the date of death.  The pre-retirement death benefit shall be paid at such time and in such form as timely elected or deemed elected by the Participant; provided, if the Participant elected or is deemed to have elected any form of an annuity, such pre-retirement death benefit shall be paid as a Beneficiary Life Annuity (as such term is hereinafter described) based on the life expectancy of the Beneficiary, and, if the Participant elected or is deemed to have elected a Life with a 10-Year Certain Benefit, such Beneficiary Life Annuity shall continue for the longer of (i) the Beneficiary’s life, or (ii) the 10 year period commencing on the Participant’s death.  If paid as a Beneficiary Life Annuity, such benefit shall be the actuarially determined equivalent using the same reasonable actuarial assumptions and methods (as determined by the SEVP-HR in his or her complete and sole discretion) of the Life With 10-Year Certain Benefit that would have been paid to the Participant had he or she Retired on the day immediately prior to his or her death.  If the Participant had timely elected and qualified to receive a Lump Sum Benefit, it shall be calculated in the same manner as provided in Section 4.2 as if the Participant were alive; e.g., calculated as of the Participant's death applying the Mortality Tables and the GAAP Rate, both as in effect for the calendar year immediately preceding the calendar year of the Participant’s death, but using the Participant’s age, Years of Service and other factors as of the Participant’s date of death.

           5.3   Disability.

Upon a Participant's Termination of Employment and contemporaneous qualification for receipt of long term disability benefits under an AT&T or AT&T affiliate sponsored long term disability benefit plan in which the Participant participates prior to being Retirement Eligible (without regard to the 5 Years of Service or 4 Years of Participation requirements), the Participant will continue to accrue Years of Service during such disability until the earliest of his or her:

         (a) Recovery from Disability,

         (b) Retirement (determined without regard to the 5 Years of Service or 4 Years of Participation requirements), or

         (c) Death.

Upon the occurrence of either (a) Participant's recovery from Disability prior to his or her Retirement Eligibility if Participant does not return to employment, or (b) Participant's Retirement (determined without regard to the 5 Years of Service or 4 Years of Participation requirements), the Participant shall be entitled to receive a SERP Benefit as if he or she realized a Termination of Employment as of the date of such occurrence.

For purposes of calculating the foregoing benefit, the Participant's Final Average Earnings shall be determined using his or her Earnings history as of the date of his or her Disability.

If a Participant who continues to have a Disability dies prior to his or her Retirement Eligibility (without regard to the 5 Years of Service or 4 Years of Participation requirements), the Participant will be treated in the same manner as if he or she had died while in employment (See Section 5.2).

6.             Payment of Benefits.

            6.1   Commencement of Payments.

                  (a) Except as provided in Section 5.3, benefit payments shall commence pursuant to the Benefit Payout Alternative elected by the Participant in his or her Agreement on the date that is six (6) months following his or her Termination of Employment; provided, however, if the Participant dies after Termination of Employment and prior to the lapse of such six (6) month period, benefit payments shall commence upon the Participant’s death.  If a Participant elected (or is deemed to have elected) an annuity form of benefit under Section 4.2(a), 4.2(b) or 4.2(c), the aggregate monthly amount that would be paid between the Participant’s Termination of Employment through the date that benefit payments actually commence, shall be paid in a lump sum on the date that benefit payments actually commence hereunder.  In addition, during the period of time between a Participant’s Termination of Employment and the date that annuity payments hereunder actually commence, interest shall be credited on the withheld annuity amounts for such period of time that each annuity payment is withheld.  The credited interest shall be paid in a lump sum on the date that payments hereunder actually commence.  Interest shall be credited using the GAAP Rate in effect for the calendar year immediately preceding the calendar year of the Participant’s Termination of Employment.

                   (b) Notwithstanding the designation of a specific date for commencement of payment of a distribution hereunder, commencement of payments under this Plan may be delayed for administrative reasons in the discretion of the SEVP-HR, but shall begin not later than sixty (60) days following the date upon which payment(s) would otherwise commence under this Plan. A Participant shall not have the right to designate or participate in the decision as to the taxable year of benefit commencement.

            6.2   Withholding; Unemployment Taxes.

                  (a) A payment may be made from the Plan to reflect the payment of state, local, or foreign tax obligations arising from participation in the Plan that apply to an amount deferred under the Plan before the amount is paid or made available to a Participant (the “State, Local, or Foreign Tax Amount”).  Such payment may not exceed the amount of such taxes due as a result of participation in the Plan.  Such payment may be made by distributions to the Participant in the form of withholding pursuant to provisions of applicable state, local, or foreign law or by distribution directly to the Participant.  Additionally, a payment may be made from the Plan to pay the income tax at source on wages imposed under Code Section 3401 as a result of the payment of the State, Local, or Foreign Tax Amount and to pay the additional income tax at source on wages attributable to such additional Code Section 3401 wages and taxes.  However, the total payment under this Section 6.2(a) shall not exceed the aggregate of the State, Local, or Foreign Tax Amount and the income tax withholding related to such State, Local, or Foreign Tax Amount.

                   (b) A payment may be made from the Plan to pay the Federal Insurance Contributions Act tax imposed by Code Sections 3101, 3121(a), and 3121(v)(2) on compensation deferred under the Plan (the “FICA Amount”).  Additionally, a payment may be made from the Plan to pay the income tax at source on wages imposed under Code Section 3401 or the corresponding withholding provisions of applicable state, local or foreign tax laws as a result of the payment of the FICA Amount and to pay the additional income tax at source on wages attributable to the pyramiding section 3401 wages and taxes.  However, the total payment under this Section 6.2(b) shall not exceed the aggregate of the FICA Amount and the income tax withholding related to such FICA Amount.

            6.3   Recipients of Payments; Designation of Beneficiary.

All payments to be made under the Plan shall be made to the Participant during his or her lifetime, provided that if the Participant dies prior to the completion of such payments, then all subsequent payments under the Plan shall be made to the Participant's Beneficiary or Beneficiaries.

In the event of the death of a Participant, distributions/benefits under this Plan shall pass to the Beneficiary (ies) designated by the Participant in accordance with this Plan and the Rules.

            6.4   No Other Benefits.

No benefits shall be paid hereunder to the Participant or his or her Beneficiary except as specifically provided herein.

            6.5   Small Benefit.

Notwithstanding any election made by the Participant, the SEVP-HR in his or her sole discretion may pay any benefit in the form of a lump sum payment if (A) the lump sum equivalent amount is or would be less than the applicable dollar amount under Code Section 402(g)(1)(B) when payment of such benefit would otherwise commence, and (B) the payment of the lump sum equivalent amount results in the termination and liquidation of the entirety of the Participant’s interest under the Plan and under any other plan that is considered a single nonqualified deferred compensation plan under Treasury Regulations Section 1.409A-1(c)(2).

7.             Conditions Related to Benefits.

            7.1   Administration of Plan.

The Administrative Committee and the SEVP-HR with respect to specific functions identified in the Plan, shall be the sole administrators of the Plan and will, in their discretion, administer, interpret, construe and apply the Plan in accordance with its terms.  The Administrative Committee or the SEVP-HR shall further establish, adopt or revise such rules and regulations as each may deem necessary or advisable for the administration of the Plan.  All decisions of the Administrative Committee or the SEVP-HR shall be final and binding unless the Board of Directors should determine otherwise.

            7.2   No Right to AT&T Assets.

Neither a Participant nor any other person shall acquire by reason of the Plan any right in or title to any assets, funds or property of any AT&T company whatsoever including, without limiting the generality of the foregoing, any specific funds or assets which AT&T, in its sole discretion, may set aside in anticipation of a liability hereunder, nor in or to any policy or policies of insurance on the life of a Participant owned by AT&T.  No trust shall be created in connection with or by the execution or adoption of this Plan or any Agreement, and any benefits which become payable hereunder shall be paid from the general assets of AT&T.  A Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of AT&T.

            7.3   Trust Fund.

AT&T shall be responsible for the payment of all benefits provided under the Plan.  At its discretion, AT&T may establish one or more trusts, for the purpose of providing for the payment of such benefits.  Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of AT&T's creditors.  To the extent any benefits provided under the Plan are actually paid from any such trust, AT&T shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by AT&T.

            7.4   No Employment Rights.

Nothing herein shall constitute a contract of continuing employment or in any manner obligate any AT&T company to continue the service of a Participant, or obligate a Participant to continue in the service of any AT&T company and nothing herein shall be construed as fixing or regulating the compensation paid to a Participant.

            7.5   Modification or Termination of Plan.

This Plan may be modified or terminated at any time in accordance with the provisions of AT&T's Schedule of Authorizations.  A modification may affect present and future Participants.   AT&T also reserves the sole right to terminate at any time any or all Agreements.  In the event of termination of the Plan or of a Participant's Agreement, a Participant shall be entitled to benefits hereunder, if prior to the date of termination of the Plan or of his or her Agreement, such Participant has attained 5 Years of Service and, if applicable, 4 Years of Participation, in which case, regardless of the termination of the Plan/Participant's Agreement, such Participant shall be entitled to benefits at such time as provided in and as otherwise in accordance with the Plan and his or her Agreement, provided, however, a Participant's benefit shall be computed as if the Participant had realized a Termination of Employment as of the date of termination of the Plan or of his or her Agreement; provided further, however, a Participant's service subsequent to Plan/Agreement termination shall be recognized for purposes of reducing or eliminating the Age discount provided for by Section 3.1(d).  No amendment, including an amendment to this Section 7.5, shall be effective, without the written consent of a Participant, to alter, to the detriment of such Participant, the benefits described in this Plan as applicable to such Participant as of the effective date of such amendment.  For purposes of this Section 7.5, an alteration to the detriment of a Participant shall mean a reduction in the amount payable hereunder to a Participant to which such Participant would be entitled if such Participant realized a Termination of Employment at such time, or any change in the form of benefit payable hereunder to a Participant to which such Participant would be entitled if such Participant realized a Termination of Employment at such time.  Any amendment which reduces a Participant's benefit hereunder to adjust for a change in his or her pension benefit resulting from an amendment to any company-sponsored defined benefit pension plan which changes the pension benefits payable to all employees, shall not require the Participant's consent.  Written notice of any amendment shall be given to each Participant.

             7.6   Offset.

If at the time payments or installments of payments are to be made hereunder, a Participant or his or her Beneficiary or both are indebted to AT&T or any AT&T affiliate as a result of debt incurred in the ordinary course of the employment relationship between the Participant and the AT&T company, then, annually, up to $5,000 of the payments remaining to be made to the Participant or his or her Beneficiary or both, may, at the discretion of the SEVP-HR, be reduced by the amount of such indebtedness; provided, however, that the reduction must be made at the same time and in the same amount as the debt otherwise would have been due and collected from the Participant or his or her Beneficiary; provided, further, however, that an election by the Board of Directors not to reduce any such payment or payments shall not constitute a waiver of such AT&T company's claim for such indebtedness.

             7.7   Change in Status.

In the event of a change in the employment status of a Participant to a status in which he is no longer an Participant, the Participant shall immediately cease to be eligible for any benefits under this Plan except such benefits as had previously vested.  Only Participant's Years of Service and Earnings history prior to the change in his employment status shall be taken into account for purposes of determining Participant's vested benefits hereunder.

8.             Miscellaneous.

             8.1   Nonassignability.

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

            8.2   Non-Competition.

Notwithstanding any other provision of this Plan, all benefits provided under the Plan with respect to a Participant shall be forfeited and canceled in their entirety if the Participant, without the consent of AT&T and while employed by AT&T or any subsidiary thereof or within three (3) years after termination of such employment, engages in competition with AT&T or any subsidiary thereof or with any business with which AT&T or a subsidiary or affiliated company has a substantial interest (collectively referred to herein as "Employer business") and fails to cease and desist from engaging in said competitive activity within 120 days following receipt of written notice from AT&T to Participant demanding that Participant cease and desist from engaging in said competitive activity.  For purposes of this Plan, engaging in competition with any Employer business shall mean engaging by the Participant in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business.  Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business. However, engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business.  Accordingly, benefits shall not be provided under this Plan if, within the time period and without the written consent specified, Participant either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties the Participant takes and regardless of whether or not the employing company, or the company that Participant becomes associated with or renders service to, is itself engaged in direct competition with an Employer business.

            8.3   Notice.

Any notice required or permitted to be given to the Administrative Committee or the SEVP-HR under the Plan shall be sufficient if in writing and hand delivered, or sent by certified mail, to the principal office of AT&T, directed to the attention of the SEVP-HR.  Any notice required or permitted to be given to a Participant shall be sufficient if in writing and hand delivered, or sent by certified mail, to Participant at Participant's last known mailing address as reflected on the records of his or her employing company or the company from which the Participant incurred a Termination of Employment, as applicable.  Notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for certification.

            8.4   Validity.

In the event any provision of this Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this plan.

            8.5   Applicable Law.

This Plan shall be governed and construed in accordance with the laws of the State of Texas to the extent not preempted by the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder ("ERISA").

Attachment A

LUMP SUM DISTRIBUTION AGREEMENT

This Lump Sum Distribution Agreement is made as of the ____ day of ______________, ____ by and between AT&T Inc. (“AT&T” or the “Company”) and _______________(“Participant”).  Unless otherwise indicated herein, capitalized words used herein shall have the same meaning ascribed to such words in the 2005 Supplemental Employee Retirement Plan (the “Plan” or “SERP”).

WHEREAS, Participant is a Participant in the Plan, which is sponsored by the Company;

WHEREAS, pursuant to the Plan, Participant executed an Agreement, governing Participant’s benefits in the Plan;

WHEREAS, Participant’s Agreement provides for the distribution of his benefits in the form of a lump sum, payable one hundred percent (100%) upon the six (6) month anniversary of his Termination of Employment provided that Participant is age sixty (60) or older as of the date of his Termination of Employment and Participant agrees not to compete with an Employer Business;

NOW, THEREFORE, the parties hereto, for good and valuable consideration, the sufficiency of which is hereby acknowledged, hereby agree as follows:

1.   If Participant is age sixty (60) or over as of the date of his Termination of Employment, Company shall pay to

Participant hisbenefits under the Plan in the form of a lump sum distribution, one hundred percent (100%) of which shall be paid upon the six (6) month anniversary of Participant’s Termination of Employment.

2.   In exchange for the right to receive the payment described in Paragraph 1, above, Participant acknowledges and agrees that he shall not, without the written consent of Company, within three (3) years after Termination of Employment, engage in competition with AT&T or with any business with which AT&T or a subsidiary of AT&T or an affiliated company has a substantial interest (collectively referred to herein as "Employer business").  For purposes of this Lump Sum Distribution Agreement, engaging in competition with any Employer business shall mean Participant’s engaging in any business or activity in the same geographical market where the same or substantially similar business or activity is being carried on as an Employer business. Such term shall not include owning a nonsubstantial publicly traded interest as a shareholder in a business that competes with an Employer business.  However, it is hereby specifically agreed that engaging in competition with an Employer business shall include representing or providing consulting services to, or being an employee of, any person or entity that is engaged in competition with any Employer business or that takes a position adverse to any Employer business.  Participant hereby specifically agrees not to engage in any such conduct.  Participant also specifically agrees that a breach of this provision would result if, within the time period and without the written consent specified, Participant either engages directly in competitive activity or in any capacity in any location becomes employed by, associated with, or renders service to any company, or parent or affiliate thereof, or any subsidiary of any of them, if any of them is engaged in competition with an Employer business, regardless of the position or duties Participanttakes and regardless of whether or not the employing company, or the company that

Participant becomes associated with or renders service to, is itself engaged in direct competition with an Employer business.

3.   Participant acknowledges and agrees that he shall promptly return to the Company and forfeit all consideration previously received pursuant to this Lump Sum Distribution Agreement, specifically the payment referred to in Paragraph 1, if he engages in competition with an Employer business in violation of the provisions of Paragraph 2.

4.   Participant may submit a description of any proposed activity in writing to AT&T and AT&T shall advise

Participantin writing within fifteen (15) business days whether such proposed activity would constitute engaging in competition with an Employer business, within the meaning of this Lump Sum Distribution Agreement.

5.   It is hereby specifically agreed that the terms of this Lump Sum Distribution Agreement shall be kept strictly confidential and that neither party shall, except as necessary for performance of the terms hereof or as specifically required by law, disclose the existence of this Lump Sum Distribution Agreement or any of its terms to third persons without the express consent of the other party.

6.   Participantagrees that for any breach or threatened breach of any of the provisions of this Lump Sum Distribution Agreement by Participant, the Company shall have no adequate legal remedy, and in addition to any other remedies available, including the repayment and forfeiture remedies described in Paragraph 3, a restraining order and/or an injunction may be issued against Participantto prevent or restrain any such breach.

7.   Any notice required hereunder to be given by either party will be in writing and will be deemed effectively given upon personal delivery to the party to be notified, or five (5) days after deposit with the United States Post Office by certified mail, postage prepaid, to the other party at the address set forth below, or to such other address as either party may from time to time designate by ten (10) days advance written notice pursuant to this Paragraph.

8.   In the event any provision of this Lump Sum Distribution Agreement is held invalid, void, or unenforceable, the same shall not affect in any respect whatsoever the validity of any other provision of this Lump Sum Distribution Agreement, except that should any part of the non-compete provisions of Paragraph 2 of this Agreement be held invalid, void, or unenforceable as applicable to and as asserted by Participant, this Lump Sum Distribution Agreement, at the Company's option, may be declared by the Company null and void.  If this Lump Sum Distribution Agreement is declared null and void by Company pursuant to the provisions of this Paragraph, Participant shall return to Company all consideration previously received pursuant to this Lump Sum Distribution Agreement.

AT&T Inc.

By:	Senior Executive Vice
	President-Human Resources
	175 E. Houston Street
	San Antonio, Texas 78205
Date		Date

Attachment B

“Immediate Annuity Value of any AT&T or affiliate Qualified Pensions” shall mean:

The annual amount of annuity payments that would be paid out of the qualified defined benefit pension plan sponsored by AT&T or an AT&T affiliate in which the Participant participates on a single life, level payment annuity basis assuming payment of such qualified defined benefit pension plan benefit commenced immediately upon the Participant’s Termination of Employment, notwithstanding the form of payment of such qualified defined benefit pension plan’s benefit actually made to the Participant (i.e., joint and survivor annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such qualified defined benefit pension plan benefit.

Attachment C

Immediate Annuity Value of SRIP. "Immediate Annuity Value of SRIP" shall mean

An objectively determined amount as of December 31, 2008 equal to the annual amount of a level payment, single life with 10 year certain annuity benefit that would be paid to the Participant pursuant to the SRIP as it exists on December 31, 2008 assuming the Participant became eligible to receive a distribution of benefit payments under the SRIP on December 31, 2008, applying the Participant’s Final Average Earnings and Years of Service (both as defined in the SRIP) as of December 31, 2004 and the Participant’s age as of December 31, 2008, notwithstanding the form of payment of the SRIP benefit that would actually be made to the Participant (i.e., joint and survivor annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such SRIP benefit.

Attachment D

Immediate Annuity Value of any AT&T or AT&T affiliate Non-Qualified Pensions other than SERP.  "Immediate Annuity Value of any AT&T or AT&T affiliate Non-Qualified Pensions other than SERP" shall mean with respect to a Participant, any one or more of the following, as applicable:

1.           For a Participant who is a participant in (or otherwise has a benefit in) the AT&T Pension Benefit Make Up Plan No. 1 (“PBMU No. 1”), the AT&T Pension Benefit Make Up Plan No. 2 (“PBMU No. 2”), the Cingular Wireless SBC Executive Transition Pension Make Up Plan (the “Cingular Plan”) and/or the Pacific Telesis Group Executive Supplemental Cash Balance Pension Plan (“PTG Plan”) and is a Participant in the Plan on December 31, 2008:

An objectively determined amount as of December 31, 2008 equal to the annual amount of a level payment, single life annuity benefit that would be paid to the Participant pursuant to the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan, as applicable, as they exist on December 31, 2008 assuming the Participant became eligible to receive a distribution of benefit payments under the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan, as applicable, on December 31, 2008, notwithstanding the form of payment of the benefit that would actually be made to the Participant pursuant to the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan, (i.e., 10-year certain annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such PBMU No. 1, PBMU No. 2, the Cingular Plan, and/or PTG Plan benefit.

2.           For a Participant who is a participant in (or otherwise has a benefit in) the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan and has a SERP Effective Date after December 31, 2008:

An objectively determined amount as of the Participant’s SERP Effective Date equal to the annual amount of a level payment, single life annuity benefit that would be paid to the Participant pursuant to the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan, as applicable, as they exist on the Participant’s SERP Effective Date assuming the Participant became eligible to receive a distribution of benefit payments under the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan, on his or her SERP Effective Date, notwithstanding the form of payment of the benefit that would actually be made to the Participant pursuant to the PBMU No. 1, the PBMU No. 2, the Cingular Plan, and/or the PTG Plan (i.e., 10-year certain annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such PBMU No. 1, PBMU No. 2, the Cingular Plan, and/or PTG Plan benefit.

3.           For a Participant who is a participant in (or otherwise has a benefit in) the BellSouth Corporation Supplemental Executive Retirement Plan (the “BellSouth Plan”) and is a Participant in the Plan on December 31, 2008:

An objectively determined amount as of December 31, 2008 equal to the annual amount of a level payment, single life annuity benefit that would be paid to the Participant pursuant to the BellSouth Plan as it exists on December 31, 2008 assuming the Participant became eligible to receive a distribution of benefit payments under the BellSouth Plan on December 31, 2008, but applying the Participant’s age and years of service as if the Participant remained employed through the fourth anniversary of his or her SERP Effective Date and the Participant’s Included Earnings (as defined in the BellSouth Plan) as of December 31, 2008, notwithstanding the form of payment of the BellSouth Plan’s benefit that would actually be made to the Participant (i.e., joint and survivor annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such BellSouth Plan benefit.

4.           For a Participant who is a participant in (or otherwise has a benefit in) the BellSouth Plan and has a SERP Effective Date after December 31, 2008:

An objectively determined amount as of the Participant’s SERP Effective Date equal to the annual amount of a level payment, single life annuity benefit that would be paid to the Participant pursuant to the BellSouth Plan as it exists on the Participant’s SERP Effective Date assuming the Participant became eligible to receive a distribution of benefit payments under the BellSouth Plan on his or her SERP Effective Date (applying the Participant’s age, years of service and Included Earnings (as defined in the BellSouth Plan) as of the Participant’s SERP Effective Date), notwithstanding the form of payment of the BellSouth Plan’s benefit that would actually be made to the Participant (i.e., joint and survivor annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such BellSouth Plan benefit.

5.           For a Participant who is a participant in (or otherwise has a benefit in) the AT&T Corp. Long Term Disability and Survivor Protection Plan (“LTDSPP”) and is entitled to a nonqualified defined benefit from the LTDSPP, the AT&T Corp. Excess Benefit and Compensation Plan, (“Excess Plan”), and/or the AT&T Corp. Non-Qualified Pension Plan (“NQPP”) and is a Participant in the Plan on December 31, 2008 (the Participant’s election as to the time and form of benefits under these plans is identical to such election under this Plan):

The benefit payments paid pursuant to the LTDSPP (nonqualified defined benefit only), Excess Plan, and/or the NQPP, as applicable, commencing at the actual time and pursuant to the actual form such benefit payments are made from the LTDSPP, Excess Plan, and/or the NQPP, as applicable.

6.           For a Participant who is a participant in (or otherwise has a benefit in) the LTDSPP and is entitled to a nonqualified defined benefit from the LTDSPP, the Excess Plan, and/or the NQPP and has a SERP Effective Date after December 31, 2008:

An objectively determined amount as of the Participant’s SERP Effective Date equal to the annual amount of a level payment, single life annuity benefit that would be paid to the Participant pursuant to the LTDSPP (nonqualified defined benefit only), the Excess Plan, and/or the NQPP, as applicable, as they exist on the Participant’s SERP Effective Date assuming the Participant became eligible to receive a distribution of benefit payments under the AT&T Corp. LTDSPP (nonqualified defined benefit only), the Excess Plan, and/or the NQPP, on his or her SERP Effective Date, notwithstanding the form of payment of the benefit that would actually be made to the Participant pursuant to the LTDSPP (nonqualified defined benefit only), the Excess Plan, and/or the NQPP (i.e., 10-year certain annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such the AT&T Corp. LTDSPP (nonqualified defined benefit only), the Excess Plan, and/or the NQPP benefit.

Attachment E

Attachment E applies with respect to any Participant who:

·   Became a Participant in the 2005 AT&T Supplemental Executive Retirement Plan on or before December 31, 2008;

·   Is a participant in the BellSouth Corporation Supplemental Executive Retirement Plan; and

·   Attained the age of fifty-four (54) on or before March 1, 2007; and

·   Realizes a Termination of Employment on or after January 1, 2009.

Upon Termination of Employment, such Participant’s Plan benefit shall equal the greater of his or her benefit determined in accordance with Section 3 of the Plan or this Attachment E.

A.           Definitions.  Solely for purposes of this Attachment E, the following words shall have the meanings as provided in this Attachment E.  Any other capitalized word, not otherwise defined in this Attachment E, shall have the meaning as provided in Section 2 of the Plan.

1. The term "Annual Bonus Award" shall mean the bonus amount paid annually to an Attachment E Participant that is included in the calculation of pension benefits under the Pension Plan.

2. The term “Attachment E Participant” shall mean any Participant to whom Attachment E applies as described in the first paragraph of this Attachment E.

3. The terms "BellSouth Corporation" and "Company" shall mean BellSouth Corporation, a Georgia corporation, or its successors.

4. The term "Included Earnings" shall mean the 12 month average of the sum of (1) the last sixty (60) months of base pay, plus (2) the Annual Bonus Awards payable during or after that sixty (60) month period; provided, however, Included Earnings shall not include base pay or Annual Bonus Awards earned after March 1, 2011.  The amounts of base pay and other payments used to determine Included Earnings as described above include all amounts during the specified period including those amounts previously deferred pursuant to other plans.  If an Attachment E Participant terminates employment while eligible for a benefit under this Attachment E and thereafter receives Included Earnings, these additional Included Earnings shall be deemed to have been paid as of the date of the Attachment E Participant’s Termination of Employment, and the amount of benefit payable under this Attachment E shall be corrected accordingly.

5. The term “Merger” shall mean the merger, pursuant to the Agreement and Plan of Merger dated as of March 4, 2006 (the “Merger Agreement”), by and among BellSouth, AT&T Inc. (“AT&T”), and ABC Consolidation Corp., a Georgia corporation and wholly-owned subsidiary of AT&T (“Merger Sub”), pursuant to which, at the “Effective Time” (as defined in the Merger Agreement), BellSouth was merged with and into the Merger Sub.

6. The term "Pension Plan" shall mean the BellSouth Personal Retirement Account Pension Plan as in effect on the date of the Merger.

7. The term "Standard Annual Bonus" shall mean the Attachment E Participant’s Target Award under the AT&T 2006 Incentive Plan or the AT&T Short Term Incentive Plan and for periods of time prior to the Attachment E Participant’s participation in the AT&T 2006 Incentive Plan or the AT&T Short Term Incentive Plan, Standard Annual Bonus shall mean an amount determined by applying a target percentage of an Attachment E Participant’s base pay rate as determined by the annual compensation plan and the Attachment E Participant’s job or pay grade.

8. The term "Vesting Service Credit", except as expressly limited or otherwise provided in this Attachment E or under an individual Attachment E Participant’s employment-related agreement with the Company, shall have the same meaning as is attributed to such term under the Pension Plan and shall be interpreted in the same manner as that term is interpreted for purposes of the Pension Plan; provided, however, Vesting Service Credit shall not include any period of time on or after March 1, 2011.

B.           Benefit Amount.  An Attachment E Participant’s benefit under this Attachment E shall be determined as follows:

The aggregate annualized benefit of each Attachment E Participant shall be determined by adding the sum of two percent (2%) of Included Earnings for each year of the Attachment E Participant's Vesting Service Credit for the first twenty years, plus one and one-half percent (1.5%) of Included Earnings for each year of the Attachment E Participant's Vesting Service Credit for the next ten years, plus one percent (1%) of Included Earnings for each year of the Attachment E Participant's Vesting Service Credit for each additional year up to the month in which the Attachment E Participant retires less (1) 100% of the Primary Social Security benefit payable at age 65, (2) 100% of the retirement benefit (unreduced for survivor annuity) payable from the Pension Plan (as defined below), and (3) 100% of the benefit payable from the BellSouth Corporation Supplemental Executive Retirement Plan (as defined below).

a.           The benefit reduction to be applied for the benefit payable from the Pension Plan shall be the amount of such benefit that would be payable on the date that benefits are eligible to be paid (or become payable) under the Plan, or, if earlier, March 1, 2011 (regardless of the Attachment E Participant’s actual pension commencement date under the Pension Plan) and determined assuming that the Attachment E Participant elected a single life annuity (regardless of the actual form of benefit elected under the Pension Plan).

The benefit reduction to be applied for the benefit payable from the BellSouth Corporation Supplemental Executive Retirement Plan shall be an objectively determined amount as of December 31, 2008 equal to the annual amount of a level payment, single life annuity benefit that would be paid to the Attachment E Participant pursuant to the BellSouth Supplemental Executive Retirement Plan as it exists on December 31, 2008 assuming the Attachment E Participant became eligible to receive a distribution of benefit payments under the BellSouth Supplemental Executive Retirement Plan on December 31, 2008, but applying the Attachment E Participant’s age and years of service as of March 1, 2011 and the Attachment E Participant’s Included Earnings as of December 31, 2008, notwithstanding the form of payment of the BellSouth Supplemental Executive Retirement Plan’s benefit that would actually be made to the Attachment E Participant (i.e., joint and survivor annuity, lump sum, etc.) and notwithstanding the actual commencement date of the payment of such BellSouth Supplemental Executive Retirement Plan benefit.

b.           The benefit amount determined in accordance with this Attachment E (expressed as an annuity) at the time of the Attachment E Participant’s Termination of Employment shall not be less than the benefit that would have been payable to the Attachment E Participant if the Attachment E Participant had a Termination of Employment on any prior December 31 (using pay, service, offsets and all factors applicable on the previous dates and assuming an immediate benefit commencement).

c.           The benefit amount determined in accordance with this Attachment E shall be reduced (before the offset for benefits under the Pension Plan) by one-quarter percent (0.25%) for each calendar month or part thereof by which the Attachment E Participant’s Termination of Employment precedes his or her 62nd birthday.

EX-10.B

BELLSOUTH CORPORATION

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Amended and Restated effective as of January 1, 2008

BELLSOUTH CORPORATION

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

ARTICLE I.      STATEMENT OF PURPOSE

The purpose of the BellSouth Corporation Supplemental Executive Retirement Plan is to provide supplemental pension benefits to Executives and certain other employees of BellSouth Corporation and certain subsidiaries of BellSouth Corporation, hereinafter referred to as Participants, who retire or terminate from service.  The Plan was originally effective as of January 1, 1984 and was subsequently amended from time to time.  The Plan was amended and restated, effective as of January 1, 2005, and as so amended and restated is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), with respect to all benefits accrued and vested on or after January 1, 2005.  Further, with respect to all benefits of Participants employed on or after January 1, 2007, the Plan is intended to fully comply with the requirements of Code Section 409A.  .  During the period from January 1, 2005, to the date of the adoption of this restated Plan document, the Plan has been operated in good faith compliance with the provisions of Code Section 409A, Internal Revenue Service Notice 2005-1, the proposed Treasury Regulations for Code Section 409A, the Final Treasury Regulations for Code Section 409A, applicable Internal Revenue Services Notices and Announcements and any other generally applicable guidance published in the Internal Revenue Service Bulletin.

Following the merger of AT&T Inc. and BellSouth Corporation, the Plan is now hereby amended and restated, effective January 1, 2008, to reflect the transition of certain participants to other AT&T retirement plans and/or other AT&T companies.  This amendment and restatement shall supersede in all respects the amendment and restatement previously approved on December 21, 2006.

ARTICLE II.      DEFINITIONS

 1. The term "ADEA" shall mean the Age Discrimination in Employment Act of 1967, as amended from time to time.

 2. The term "Affiliate" shall mean any corporation, other than BellSouth Corporation (or a Participating Company), which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as BellSouth Corporation and any trade or business (whether or not incorporated) which is under common control with BellSouth Corporation within the meaning of Code Section 414(c).

 3. The term "Annual Bonus Award" shall mean the bonus amount paid annually to a Participant that is included in the calculation of pension benefits under the Pension Plan.

 4. The term “AT&T SERP Participant” shall mean an officer who is designated as a participant in the AT&T, Inc. 2005 Supplemental Employee Retirement Plan (the “A&T SERP”).  The initial day of participation in such plan is the named officer’s “SERP Effective Date” as defined in the AT&T SERP.

5.   The term “AT&T SERP Vesting Date” shall mean the date that an AT&T SERP Participant becomes 100% vested in the AT&T SERP.

 6. The terms "BellSouth Corporation" and "Company" shall mean BellSouth Corporation, a Georgia corporation, or its successors.

 7. The terms "Chairman of the Board", "President" and "Board of Directors" or "Board" shall mean the Chairman of the Board of Directors, President and Board of Directors, respectively, of the Company.

 8. The term “Claim Review Committee” shall mean the BellSouth Corporation Employees’ Benefit Claim Review Committee appointed by the Committee to be the claims fiduciary or any claims brought under the Pension Plan.

 9. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.

10. The term "Committee" shall mean the Employee Benefit Committee of BellSouth Corporation appointed by the Company to administer the Pension Plan.

11. The term “Disabled” or “Disability” means the following:

(a) the inability of the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; OR

(b) the Participant is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under a short-term disability plan covering employees of a Participating Company.

12. The term "Executive" shall mean an employee on the active payroll of any Participating Company who holds a position that the Board of Directors has designated to be within the Company’s executive compensation group.

13. The term “Executive Severance Agreement” means a BellSouth executive change in control agreement entered into by and between an executive who is a Participant in this Plan and BellSouth, as amended and/or superseded from time to time, providing certain benefits in the event of a change in corporate control of BellSouth Corporation.

14. The term "Former Affiliate" shall have the same meaning as “Interchange Company”.

15. The term "Included Earnings" shall have the meaning ascribed to such term in Section 4(a)(ii) of Article IV of this Plan.

16. The term "Interchange Company" shall have the same meaning as is attributed to such term under the Pension Plan.

17. The term "Mandatory Retirement Age" shall have the same meaning as is attributed to such term under the Pension Plan.

18. The term “Merger” shall mean the planned merger, pursuant to the Agreement and Plan of Merger dated as of March 4, 2006 (the “Merger Agreement”), by and among BellSouth, AT&T Inc. (“AT&T”), and ABC Consolidation Corp., a Georgia corporation and wholly-owned subsidiary of AT&T (“Merger Sub”), pursuant to which, at the “Effective Time” (as defined in the Merger Agreement), BellSouth will be merged with and into the Merger Sub.

19. The term “Merger Severance Plan” means a severance plan (or plans) adopted under the terms of the Company Disclosure Letter to the Merger Agreement (as defined in Section 16 of this Article II).

20. The term "Net Credited Service", except as expressly limited or otherwise provided in this Plan or under an individual Participant’s employment-related agreement with the Company, shall have the same meaning as is attributed to such term under the Pension Plan and shall be interpreted in the same manner as that term is interpreted for purposes of the Pension Plan.

21.   The term "Participants" shall mean all Executives as defined herein, as well as all other management employees (i.e., non-collectively bargained employees) at pay grade E01 (or equivalent) and above and any other employees designated by the Chief Executive Officer of BellSouth Corporation or his or her delegated representative.

No employee shall commence or re-commence participation in the Plan on and after February 8, 2007.

22.   The term "Participating Company" shall mean BellSouth Corporation, and each subsidiary of BellSouth Corporation which shall have determined, with the concurrence of the senior human resources officer of BellSouth Corporation, to participate in the Plan.  Each Participating Company participating in the Plan as of the adoption of this amendment and restatement shall be a Participating Company in the Plan.

In addition, any Participant who transfers employment on or after December 29, 2006 from a Participating Company to an Affiliate shall remain an eligible Participant in this Plan, and the employing Affiliate shall be considered a Participating Company for purposes of that Participant’s service and earnings hereunder.

23. The term "Pension Act" shall mean the Employee Retirement Income Security Act of 1974 (ERISA) as it may be amended from time to time.

24. The term "Pension Commencement Date" shall have the same meaning as is attributed to such term under the Pension Plan.

25. The term "Pension Plan" shall mean the BellSouth Personal Retirement Account Pension Plan as in effect on the date of the Merger.

26. The term "Plan" shall mean this BellSouth Corporation Supplemental Executive Retirement Plan.

27. The term "Post-04 Benefit” shall mean the Participant’s Plan benefit accrued on or after January 1, 2005 determined in accordance with the provisions of Code Section 409A.

28. The term "Pre-05 Benefit” shall mean the Participant’s Plan benefit accrued and vested as of December 31, 2004 determined in accordance with the provisions of Code Section 409A.

29. The term “Rabbi Trust Agreement” shall mean each and all of the following: (i) BellSouth Corporation Trust Under Executive Benefit Plan(s); (ii) BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s); (iii) BellSouth Enterprises, Inc. Trust Under Executive Benefit Plan(s); (iv) BellSouth Corporation Trust Under Executive Benefit Plan(s) for Mobile Systems Executives; (v) BellSouth Corporation Trust Under Executive Benefit Plan(s) for Advertising and Publishing Executives; (vi) Trust Under Executive Benefit Plan(s) for Certain BellSouth Companies; in each case, as amended from time to time.

30. The term “Specified Employee” shall mean, for periods on or after December 29, 2006, any Participant who is a “Key Employee” (as defined in Code Section 416(i) without regard to paragraph (5) thereof), as determined by AT&T in accordance with its uniform policy with respect to all arrangements subject to Code Section 409A, based upon the 12-month period ending on each December 31st (such 12-month period is referred to below as the “identification period”).  All Participants who are determined to be Key Employees under Code Section 416(i) (without regard to paragraph (5) thereof) during the identification period shall be treated as Key Employees for purposes of the Plan during the 12-month period that begins on the first day of the 4th month following the close of such identification period.  For periods prior to December 29, 2006, the term Specified Employee shall mean a “specified employee” under Code Section 409A.

31. The term "Standard Annual Bonus" shall mean an amount determined by (1) a stated dollar amount, or (2) applying a target percentage of a Participant’s base pay rate, as determined by the annual compensation plan and the Participant’s current job or pay grade.

32. The term "Vesting Service Credit", except as expressly limited or otherwise provided in this Plan or under an individual Participant’s employment-related agreement with the Company, shall have the same meaning as is attributed to such term under the Pension Plan and shall be interpreted in the same manner as that term is interpreted for purposes of the Pension Plan.

An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Vesting Service Credit (“VSC”) determined in the same manner that is determined in the Pension Plan; provided however, his VSC shall not increase after his AT&T SERP Vesting Date (i.e., years of VSC earned after that date will not be included for purposes of calculating this Plan’s benefit).

In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his VSC determined in the same manner that is determined in the Pension Plan; provided however, his VSC shall not increase after his SERP Effective Date.

33. The use in this Plan of personal pronouns of the masculine gender is intended to include both the masculine and feminine genders.

ARTICLE III.   ADMINISTRATION

 1. The Company shall be the Plan Administrator and the Plan Sponsor of the Plan as those terms are defined in the Pension Act.  The Company may allocate all or any part of its responsibilities for the operation and administration of the Plan, except to the extent expressly prohibited by the Plan's terms. The Company may designate in writing other persons to carry out its responsibilities under the Plan, and may employ persons to advise it with regard to such responsibilities.  The Company, acting through the Committee, the Claim Review Committee or any other person designated by the Company, as applicable, shall have the exclusive responsibility and complete discretionary authority to interpret the terms of the Plan (including the power to construe ambiguous or uncertain terms), to control the operation and administration of the Plan and to resolve all questions in connection therewith, with all powers necessary to enable it to properly carry out such responsibilities, including without limitation the powers and responsibilities set forth in this Article III, and its determinations shall be final, conclusive and binding on all  persons.

2. The Plan Administrator shall have the power to determine status, coverage, eligibility for and the amount of benefits under the Plan and all questions arising in connection therewith, with respect to employees of each Participating Company, respectively, and shall have the power to authorize disbursements according to this Plan.

3. The review and final determination of claims and appeals for Participants and beneficiaries under the Plan shall be determined by, and in the complete discretion of, the Plan Administrator acting through the Claim Review Committee and in accordance with the claims and appeals procedures set forth in the summary plan description for the Pension Plan and shall be administered and interpreted in accordance with the Pension Act and procedures in effect under the Pension Plan.  All determinations of the Plan Administrator shall be final and binding and not subject to further administrative review.

4. The expenses of administering the Plan shall be borne by the Company and/or the applicable Participating Company.

5. The Company, the Committee and the Claim Review Committee, and each other Plan Administrator described herein, are each a named fiduciary as that term is used in the Pension Act with respect to the particular duties and responsibilities herein provided to be allocated to each of them.

6.   Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan.

7. Notwithstanding the preceding, effective as of the date of the Merger, responsibility for administration of the Plan shall be determined under the terms of the Rabbi Trust Agreements.  As provided in the Rabbi Trust Agreements, claims for benefits, appeals of benefit denials and Plan interpretations shall be made by a “Trust Contractor” or “Independent Fiduciary” (as such terms are defined in the Rabbi Trust Agreements), as the case may be.  At any time during which a Trust Contractor or Independent Fiduciary shall, under the terms of the Rabbi Trust Agreements, have such Plan administrative responsibilities, the term “Plan Administrator” as used in this Plan shall refer to such Trust Contractor or Independent Fiduciary.

ARTICLE IV.  BENEFITS

 1. Participation

All persons included in the definition of the term "Participants" are deemed participants in this Plan.  In addition, each individual who has participated in this Plan but who has ceased to be included in the definition of "Participants", whether due to demotion, termination or otherwise, shall continue to be a Participant in this Plan, except for purposes of accruing additional benefits under Section 4 of this Article IV, and shall be entitled to a benefit under this Plan if, at the time such individual ceased to be included in the definition of "Participants", he or she had satisfied the service requirements for a deferred vested pension under the Pension Plan.  Each such individual shall receive a benefit under the terms of the Plan as in effect immediately prior to the effective date of such demotion, termination or other event, the amount of such benefit to be calculated as if the individual retired (or otherwise terminated employment) on such date, it being the Company's intent that any such demotion, termination or other event removing individuals from the definition of "Participants" shall not adversely affect entitlement to such benefits.

 2. Mandatory Retirement Age

Each Participant, whether or not eligible for benefits under this Plan, shall cease to be eligible for continued employment no later than the last day of the month in which such Participant attains the Mandatory Retirement Age.

 3. Eligibility

(a) Service Benefit

An individual who is both a Participant in this Plan and who is eligible for a service pension pursuant to the terms of the Pension Plan at the time of employment termination or whose age and Net Credited Service recognized under this Plan would satisfy the eligibility requirements of the Pension Plan for a service pension is eligible for a service benefit pursuant to this Plan.  Additionally, each Participant who has attained age 62 or older and whose Net Credited Service is ten years or more at the time of employment termination is eligible for a service benefit under this Plan.  Each Participant whose employment terminates pursuant to and under the terms of the Merger Severance Plan may also be eligible for a service benefit under this Plan, if at the time of employment termination the Participant's age and Net Credited Service meets the requirements established under such severance program to be deemed service pension eligible for purposes of this Plan.  Each Participant whose employment terminates pursuant to and under the terms of an Executive Severance Agreement shall be deemed to be eligible for a service pension for purposes of this Plan.

(b) Deferred Benefit

(i) Any individual not described in Section 3(a) of this Article IV who is a Participant in this Plan at the time of voluntary employment termination is eligible for a deferred vested pension pursuant to this Plan, provided he is eligible for a deferred vested pension pursuant to the Pension Plan.

(ii) In the event that a Participant’s employment is terminated involuntarily prior to his or her becoming eligible for a deferred benefit under this Plan, and the termination is not for cause, such Participant shall nevertheless be entitled to a deferred benefit hereunder, based upon the Participant’s Vesting Service Credit at his or her date of termination.

(c) Disability Pension

An individual who while a Participant in this Plan has become eligible for a disability pension pursuant to the terms of the Pension Plan and who is also determined to be Disabled shall be eligible for a disability pension hereunder, calculated as follows:  the amount is determined in accordance with Section 4 of this Article IV calculated to one year after date of Disability (pro-rata if less than 20 years of service) with no reduction factor but offset by the actual service or deferred benefit determined under Section 4 of this Article IV applying all applicable early retirement reduction factors (determined assuming that the service or deferred benefit is payable as an annuity).  Should the disability pension be discontinued pursuant to the terms of the Pension Plan, the disability pension hereunder shall be discontinued as well.  Regardless of the Participant’s Disabled status, the disability pension hereunder shall be discontinued upon the Participant’s attaining age 65.

4. Benefit Amounts

(a) Computation of Benefit

(i) (A) Benefit Formula

The aggregate annualized benefit of each Participant payable as provided in the Plan shall be determined by adding the sum of two percent (2%) of Included Earnings for each year of the Participant's Vesting Service Credit for the first twenty years, plus one and one-half percent (1.5%) of Included Earnings for each year of the Participant's Vesting Service Credit for the next ten years, plus one percent (1%) of Included Earnings for each year of the Participant's Vesting Service Credit for each additional year up to the month in which the Participant retires less (1) 100% of the retirement benefit (unreduced for survivor annuity) payable from the Pension Plan and (2) 100% of the Primary Social Security benefit payable at age 65.

An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Pension Plan benefit and Primary Social Security benefit calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan’s benefit.

In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Pension Plan benefit and Primary Social Security benefit calculated and frozen as of his AT&T SERP Effective Date.

(B) Special Rules

(1) With respect to service benefits, the benefit reduction to be applied pursuant to Section 4(a)(i)(A)(1) above for the  benefit payable from the Pension Plan shall be the amount of such benefit that would be payable on the date that benefits are eligible to be paid (or become payable) under this Plan (regardless of the Participant’s actual pension commencement date under the Pension Plan) and determined assuming that the Participant elected a single life annuity (regardless of the actual form of benefit elected under the Pension Plan).

(2) With respect to deferred vested benefits, the benefit reduction to be applied pursuant to Section 4(a)(i)(A)(1) above for the benefit payable from the Pension Plan shall be the amount of such benefit that would be payable on the Participant’s 65th birthday (regardless of the Participant’s actual pension commencement date under the Pension Plan) and determined assuming that the Participant elected a single life annuity (regardless of the actual form of benefit elected under the Pension Plan).

(3) In the case of any Executive (i) who has attained the age of sixty-two (62) or more or who is deceased, (ii) who was previously employed by a Former Affiliate, (iii) who serves or has served as an officer (as such term is used in the employment practices and policies of the relevant company) of BellSouth Corporation or an Affiliate, and (iv) whose service with a Former Affiliate is disregarded in determining the Executive's Vesting Service Credit under the Pension Plan, for purposes of this Plan, the Executive’s Vesting Service Credit and Net Credited Service shall be increased by

(x)  the Executive's Vesting Service Credit and Net Credited Service with the Former Affiliate(s) (determined under the rules of the Pension Plan as if the Executive had been employed by BellSouth Corporation during such period and had no other service covered under the Pension Plan), multiplied by

(y) a fraction, the numerator of which is the number of whole years (not to exceed ten (10)) of such Executive's Net Credited Service as an officer of BellSouth Corporation or an Affiliate and the denominator of which is ten (10).

Notwithstanding the foregoing, no Executive's Vesting Service Credit or Net Credited Service, for purposes of this Plan shall be increased for service with a Former Affiliate to the extent that any such service would otherwise be considered, directly or indirectly, in determining such Executive's benefits under this Plan by virtue of the terms of any other agreement, plan or arrangement.

(4)   In the case of any Participant whose Vesting Service Credit or Net Credited Service includes a period of service with an employer with respect to which the Participant is entitled to any retirement benefit payable from defined benefit pension plan(s ) (including qualified plans and nonqualified plans such as excess benefit and supplemental executive retirement plans), including any Executive whose Vesting Service Credit and Net Credited Service under this Plan is increased pursuant to Section 4(a)(i)(B)(3) preceding, the benefit reduction described in Section 4(a)(i)(A)(1) above for the retirement benefit payable from the Pension Plan shall include any such retirement benefit payable by such employer.  The determination of the benefit reduction for any such benefit shall be made using approaches which approximate as nearly as practicable the approaches used in making such determinations with respect to benefits payable under the Pension Plan, as described above in this Section 4(a)(i).  In the case of any Executive whose Vesting Service Credit and Net Credited Service under this Plan is increased pursuant to paragraph (B)(3) of this Section 4(a)(i), the benefit payable by such employer shall first be multiplied  by the fraction described in that paragraph and the product thereof shall be the amount of the benefit reduction.

(5)   A Participant’s service or deferred benefit (the value of which is expressed as an annuity) at the time of termination of employment shall not be less than the service or deferred benefit that would have been payable to the Participant if the Participant had terminated employment on any prior December 31 (using pay, service, offsets and all factors applicable on the previous dates and assuming an immediate benefit commencement).

(6)   In the case of each Participant who terminates employment pursuant to the terms of the Merger Severance Plan, the service benefit or deferred vested benefit calculated hereunder shall be calculated by adding additional months of Vesting Service Credit and an equal amount of months of age with the amount of such months equaling (i) 24, minus (ii) the number of months that have elapsed since the closing of the Merger (but not below zero).

(ii) Included Earnings

Included Earnings shall equal the 12 month average of the sum of (1) the last sixty (60) months of base pay, plus (2) the Annual Bonus Awards payable during or after that sixty (60) month period.  The amounts of base pay and other payments used to determine Included Earnings as described above include all amounts during the specified period including those amounts previously deferred pursuant to other plans.  If a Participant terminates employment while eligible for a benefit under this Plan and thereafter receives compensation of the types described in clause (ii) of this Section 4(a), the additional Included Earnings shall be deemed to have been paid as of the date the Participant terminated employment, and the amount of benefit payable under this Plan shall be corrected accordingly.

An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Included Earnings calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan’s benefit.

In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Included Earnings calculated and frozen as of his SERP Effective Date.

(b) Minimum Benefit

In no event shall a Participant, whose Vesting Service Credit has been five years or more, who terminates employment on or after his or her sixty-second birthday, or who is retired on a service or disability pension under the Pension Plan or is otherwise eligible for a service pension benefit hereunder, receive a total annual retirement benefit (including any benefit under the Pension Plan) from the Company of less than 15% of the employee's annual base salary plus Standard Annual Bonus in effect on the employee's last day on the active payroll.

An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Minimum Benefit calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan’s benefit.

In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Minimum Benefit calculated and frozen as of his SERP Effective Date.

(c) Early Retirement Discount

(i) The service benefit amount, determined in accordance with the provisions of this Section 4, for each Participant who is granted a service benefit, shall be reduced (before the offset for benefits under the Pension Plan) by one-half percent (0.5%) for each calendar month or part thereof by which the commencement of benefits under this Plan precedes the Participant’s 62nd birthday, except that each employee retired with thirty (30) or more years of service (either Net Credited Service or Vesting Service Credit) shall receive a service benefit reduced by one-quarter percent (0.25%) for each calendar month or part thereof by which the commencement of benefits under this Plan precedes the Participant’s 62nd birthday. With respect to Participants who terminate employment and receive benefits under the Merger Severance Plan, the preceding sentence shall be applied by substituting “twenty-eight (28) or more” for the words “thirty (30) or more.”  Further, with respect to a Participant who retires during 2006, in no event shall the amount by which such Participant’s benefit is reduced pursuant to this provision be greater than the amount by which such benefit would have been reduced pursuant to this provision had the Participant retired on December 31, 2005.

(ii) The deferred vested benefit amount, determined in accordance with the provisions of this Section 4, for each Participant who is granted a deferred vested benefit, shall be reduced (after the offset for benefits under the Pension Plan) by an actuarially equivalent amount, using mortality rates and other assumptions then in effect under the Pension Plan, for each calendar month or part thereof by which the commencement of benefits under this Plan precedes the Participant’s 65th birthday.

                      (iii) An AT&T SERP Participant whose SERP Effective Date is prior to January 1, 2009 shall have his Early Retirement Discount calculated and frozen as of his AT&T SERP Vesting Date for purposes of calculating this Plan’s benefit.

In addition, any AT&T SERP Participant whose SERP Effective Date is on or after January 1, 2009 shall have his Early Retirement Discount calculated and frozen as of his SERP Effective Date.

(d)           Survivor/Death Benefits for Participant’s Terminating Employment prior to January 1, 2007

                    (i)   Benefit Payable Before Benefit Commencement

If a Participant who has not made a valid lump sum election with respect to his or her Pre-2005 Benefit dies prior to termination of employment (or commencement of benefits for Participants with a deferred benefit) and leaves a surviving spouse at the time of his death, a pre-retirement survivor benefit is payable to the surviving spouse as an immediate life annuity equal to 100% of the service benefit or deferred benefit that the Participant would have received with respect to his or her Pre-2005 Benefit had he survived and terminated employment on the date of his death and commenced benefit payments.  In addition, with respect to the Participant’s Post-2004 Benefit, such benefit shall be paid to the surviving spouse as soon as administratively feasible following the Participant’s death in a single sum payment calculated in accordance with Section 5 of this Article IV.  If such Participant does not have a surviving spouse at the time of his death, the entire survivor benefit described in this paragraph shall be paid to the Participant’s estate as soon as administratively feasible following the Participant’s death (even if the Participant was a Band BB officer or above) in the form of a single sum payment calculated in accordance with the provisions of Section 5 of this Article IV.

                    (ii)   Benefit Payable After Benefit Commencement

If the Participant was receiving benefits in the form of an annuity with respect to his Pre-2005 Benefit (or was eligible to receive benefits in the form of an annuity because of termination of employment), and leaves a surviving spouse at the time of his/her death, then such surviving spouse shall automatically receive a survivor annuity for life equal to 50% of the net pension benefit that the Participant was receiving (or eligible to receive) just prior to his death.  If the Participant was eligible to receive payment of his Post-2004 Benefit but had not yet received such payment, then his Post-2004 Benefit shall be paid to the spouse, if any, and otherwise to the Participant’s estate in the form of a single lump sum payment calculated in accordance with the provisions of Section 5 of this Article IV.

                     (iii)   Lump Sum Election

In the event of the death of a Participant who has made a valid lump sum election under the Plan with respect to his or her Pre-2005 Benefit, his surviving spouse (or his estate if there is no surviving spouse) shall be entitled to receive 100% of the lump sum payment that would have been payable to the Participant as of the date of his death (including the lump sum payment of the Participant’s Post-2004 Benefit), and such lump sum shall be payable as soon as administratively feasible following the Participant’s death (even if the Participant was an Executive designated as a Band BB officer or above).

                      (iv)   Lump Sum Settlement

If a Participant has already received a lump sum settlement of his entire benefit under the Plan, then no further benefits are payable under this subparagraph (d).

(e)           Survivor/Death Benefits for Participant’s Terminating Employment on or after January 1, 2007

                    (i)   Benefit Payable Before Benefit Commencement

If a Participant dies prior to termination of employment and leaves a surviving spouse at the time of his death, a pre-retirement survivor benefit is payable to the surviving spouse in the same form as elected by the Participant for payment of his benefit (i.e., single lump sum, 10 year installments, or single life annuity) in an amount equal to 100% of the service benefit or deferred benefit that the Participant would have received with respect to his benefit had he survived and terminated employment on the date of his death and commenced benefit payments; provided, if the survivor benefit is payable in a single life annuity, there will be no payment of an additional survivor annuity upon the surviving spouse’s death.  If such Participant does not have a surviving spouse at the time of his death, the entire survivor benefit described in this paragraph shall be paid to the Participant’s estate as soon as administratively feasible following the Participant’s death (even if the Participant was a Specified Employee) in the form of a single sum payment calculated in accordance with the provisions of Section 5 of this Article IV.

                     (ii)   Benefit Payable After Benefit Commencement

(A)   Life Annuity.  If the Participant leaves a surviving spouse and was receiving benefits in the form of an annuity (or was eligible to receive benefits in the form of an annuity because of termination of employment and because the Participant had elected an annuity form of payment in accordance with Section 5 of this Article IV),  then such surviving spouse shall automatically receive a survivor annuity for life equal to 50% of the net pension benefit that the Participant was receiving (or eligible to receive) just prior to his death.  If the Participant does not leave a surviving spouse and was receiving benefits in the form of an annuity (or was eligible to receive benefits in the form of an annuity because of termination of employment and because the Participant had elected an annuity form of payment in accordance with Section 5 of this Article IV), then no further benefits will be payable after the Participant’s death, subject to the provisions of Section 6(b)(iii) of this Article IV.

(B)   10-Year Installments.  If the Participant leaves a surviving spouse and was receiving benefits in the form of 10-year installments, then the remaining installments shall continue to be paid to the surviving spouse.  If the Participant was receiving benefits in the form of 10-year installments and does not leave a surviving spouse, then the remaining installments shall be paid in the form of a single lump sum payable to his estate, subject to the provisions of Section 6(b)(iii) of this Article IV.

(C)   Lump Sum Payment.  If the Participant was eligible to receive a single lump sum payment of his Plan benefit but dies prior to the payment being made, then the single lump sum payment shall be made to his surviving spouse, if applicable, and otherwise to his estate, subject to the provisions of Section 6(b)(iii) of this Article IV.

                      (iii)   Lump Sum Settlement

If a Participant has already received a lump sum settlement of his entire benefit under the Plan, then no further benefits are payable under this subparagraph (e).

(f) Special Increases

Service and disability benefit payments of retired Participants shall be increased by the same percentage and pursuant to the same terms and conditions as are set forth in the Pension Plan.

5. Form of Benefit Payments

                (a) Rules Applicable to Participants who terminate Employment Prior to January 1, 2007

(i) Annuity Payments.  With respect to a Participant who has not made a valid lump sum election in accordance with subparagraph (ii) hereof, such Participant’s Pre-2005 Benefit shall be paid in monthly payments.  Notwithstanding the foregoing, if at the time of the Participant’s termination of employment, the present value of the benefit of a Participant, whether payable as a service benefit, a deferred benefit, or a survivor’s benefit, is less than $20,000, such benefit shall be paid in the form of a single lump sum payment, calculated in accordance with subparagraph (c) of this Section 5.

(ii) Lump Sum Benefit Payment

(1) Pre-2005 Benefit.   A Participant may elect to receive his Pre-2005 Benefit hereunder, whether payable as a service benefit, a deferred benefit or a survivor’s benefit, paid in the form of a single lump sum payment,  calculated in accordance with the provisions of subparagraph (c) of this Section 5; provided, any such election must be made in accordance with procedures established by the Company and must be on file with the Company, or its designee, for at least 12 consecutive calendar months prior to the Participant’s termination of employment or death in order to be valid and in effect.

(2) Post-2004 Benefit.  All Post-2004 Benefits, whether payable as a service benefit or a deferred benefit shall be paid in the form of a single lump sum payment, calculated in accordance with the provisions of subparagraph (c) of this Section 5.

                 (b) Rules Applicable to Participants who terminate Employment on or after January 1, 2007

(i) Lump Sum Benefit Payment.   Absent an election to the contrary in accordance with subparagraph (iv) hereof, a Participant’s entire benefit under the Plan, whether payable as a service benefit or a deferred benefit, shall be paid in the form of a single lump sum payment, calculated in accordance with the provisions of subparagraph (c) of this Section 5.

(ii) 10-Year Installments.  If a Participant made a valid election for 10-year installments under subparagraph (iv) hereof, such Participant’s entire benefit under the Plan, whether payable as a service benefit or a deferred benefit, shall be paid in the form of annual installments payable over a period of 10 years.  The amount of the annual installments shall be determined by calculating the Participant’s benefit under the Plan as a single lump sum in accordance with subparagraph (c) of this Section 5 and then paying 1/10th of the amount each year plus interest annually at the rate then specified under the Pension Plan.

                           (iii)   Life Annuity.  If a Participant made a valid election for a life annuity under subparagraph (iv) hereof, such Participant’s entire benefit under the Plan, whether payable as a service benefit or a deferred benefit, shall be paid in the form of monthly payments payable over the life of the Participant.  The amount of the monthly payments shall equal the Participant’s annualized benefit determined under Section 4(a)(i)(A) of Article IV divided by 12.

If a Participant is Disabled, the disability pension described in Section 3(d) of Article IV shall be paid in the form of monthly payments until the earlier of the Participant’s death or attaining age 65.

(iv) Election Opportunity

(1)   Initial Election.   Participants who are participating in the Plan as of September 30, 2006 (or become newly eligible during October 2006) may elect a single lump sum payment, 10-year installments or a life annuity during the period between October 1, 2006 and November 30, 2006.  Participants who first become Participants in the Plan on or after November 1, 2006 may elect a single lump sum, 10-year installments or a life annuity; provided such election must be made within 30 days of the Participant’s initial participation in the Plan.

(2)   Subsequent Elections.  Participants may elect to change the form of payment (and the timing of payment) during a time other than that specified under subparagraph (1) above; however, such election must comply with the requirements of Code Section 409A and applicable regulations thereunder, which means that the subsequent election will only be effective if made at least one year prior to the time at which the distribution would be made absent the subsequent election AND if the first payment under the form of payment elected is delayed for at least a five year period.

Participants may not make a payment election with regard to any disability benefit that may become payable under the Plan.

(v) De Minimis Cash-Out.  Notwithstanding any election made under subparagraph (iv) of this Section 5(b), if at the time of the Participant’s termination of employment, the present value of the benefit of a Participant, whether payable as a service benefit or a deferred benefit, is less than $20,000, such benefit shall be paid in the form of a single lump sum payment, calculated in accordance with subparagraph (c) of this Section 5.  The preceding paragraph will no longer apply for distributions made after December 31, 2008.

(c)           Lump Sum Calculation

Benefits payable in a single lump sum in accordance with the Plan shall be the amount that is the actuarial present value of the Participant’s benefit, or applicable portion thereof, expressed as a single life annuity and shall be determined using (i) the applicable interest rate then in effect under the Pension Plan, and (ii) the applicable mortality table then in effect under the Pension Plan.

6.           Timing of Payment of Benefits

Except for the reasons specified below, benefits granted under this Plan shall commence on the day following the date of termination of employment from the Company and all Affiliates.

                (a)   For Terminations of Employment Occurring Prior to January 1, 2007

                             (i)   An Executive who is a Band BB officer or above and who has made a valid lump sum election shall receive the lump sum payment (including interest accrued annually at the applicable interest rate in effect under the Pension Plan) as soon as administratively feasible following the date that is 2 years following his date of retirement or other termination of employment.

(ii) Participants eligible for a deferred vested benefit will have their entire benefit commence at such time as the individual otherwise elects to commence payment of benefits under the Pension Plan provided such benefits commence on or before December 31, 2008.  Otherwise, payment of the deferred vested benefit will automatically commence as soon as administratively practicable following July 1, 2009.

(iii) Participants who have a Post-2004 Benefit and who are Specified Employees at the time of his or her termination of employment shall receive the lump sum payment (including interest accrued annually at the applicable interest rate in effect under the Pension Plan) as soon as administratively feasible following the date that is 6 months following his or her date of retirement or other termination of employment.

                (b)   For Terminations of Employment On or After January 1, 2007

(i) Participants electing a single lump sum payment or 10-year installment payments and who are Specified Employees at the time of his or her termination of employment shall receive the single lump sum payment or the first installment under the 10-year installment form of benefit (each including interest accrued annually at the applicable interest rate in effect under the Pension Plan) as soon as administratively feasible following the date that is 6 months following his or her date of retirement or other termination of employment.

(ii) Participants electing a life annuity payment form and who are Specified Employees shall receive the first annuity payment as soon as administratively feasible following the date that is 6 months following his or her retirement date or other termination of employment and this first payment shall equal 7 monthly annuity payments.

(iii) Notwithstanding anything herein to the contrary, if a Participant whose benefit is delayed under subparagraphs (i) or (ii) of this Section 6(b) dies prior to the payment of such delayed amounts, such delayed amounts shall be paid in a single lump sum payment to the Participant’s estate.  The remainder of such Participant’s benefit (if any) shall be paid in accordance with Section 4(e) of this Article IV.

7.             Treatment During Subsequent Employment

Employment with any Participating Company or Affiliate for which a Participant is an eligible employee, subsequent to retirement or termination of employment with entitlement to any type of benefits described heretofore, shall result in the permanent suspension of the benefit for the period of such employment or reemployment.  Upon termination of such subsequent employment, the full benefit payable hereunder shall be recalculated and then offset by any amounts previously paid to the Participant using assumptions set forth under the Pension Plan.  The benefit will commence following the subsequent termination of employment but shall be subject to the provisions set forth in Section 6 of this Article IV regarding the timing of payment of benefits.  Notwithstanding the foregoing provisions, this Section 7 shall not apply after December 31, 2008.

8.             Employment with Cingular

Individuals who were Participants as of December 23, 2001 and who transferred to Cingular Wireless, LLC on or before December 23, 2001 pursuant to the Contribution Agreement by and between BellSouth Corporation and AT&T Inc. (formerly SBC Communications, Inc.) continue to be treated as actively employed by the Company for all purposes of this Plan while they remain actively employed by Cingular Wireless, LLC or an AT&T Affiliate, subject to all conditions and provisions set forth in this plan.

ARTICLE V. DEATH BENEFITS

1. Eligibility and Administration

All individuals who became eligible to participate in the Plan prior to January 1, 2006 shall be eligible for death benefits under this Plan.  With respect to individuals who become eligible to participate in the Plan on or after January 1, 2006, no death benefits shall be payable pursuant to this Article V.  Death benefits described herein are in addition to death benefits payable under the Pension Plan but shall be subject to the same terms and conditions of, and administered in the same manner as, corresponding death benefit provisions of the Pension Plan.

2.           Amount of Death Benefit

For an Executive, the benefit equals the annual base salary plus two times the Standard Annual Bonus.  The above stated amounts of base salary and Standard Annual Bonus are those amounts in effect at the earlier of retirement or death including those amounts previously deferred pursuant to other plans. For all other Participants, the benefit equals the Standard Annual Bonus in effect at the earlier of retirement or death.  In addition, the death benefit for all Participants will include the amount of death benefit, if any, that would otherwise have been payable under the Pension Plan had there been no deferral of compensation under any plan of the Company.  The benefit amount will also include the amount of death benefit, if any, that would otherwise have been payable under the Pension Plan had the restriction on the amount of compensation that may be taken into account under Code Section 401(a)(17) not been applicable.

3.           Death Benefits After 2005

Notwithstanding the provisions of Section 2 of this Article V, with respect to each Participant in the Plan on December 31, 2005, the amount of any death benefit payable pursuant to Section 1 of this Article V shall in no event be based on base salary and/or Standard Award amounts greater than such Participant’s base salary and the Standard Award applicable with respect to such Participant on December 31, 2005.

4. Form and Source of Payments

All death benefits payable pursuant to this Article V of the Plan shall be paid in a single lump sum as soon as administratively feasible following the death of the Participant and shall be paid from Company or Participating Company's operating expenses, or through the purchase of insurance from an insurance company as the Company may determine.

ARTICLE VI.            GENERAL PROVISIONS

1.           Effective Date

   This Plan was originally effective January 1, 1984 and this restatement of the Plan is effective January 1, 2008.

2.           Rights to Benefit

There is no right to any benefit under this Plan except as may be provided by the Company or each Participating Company.  Participants have the status of general, unsecured creditors of the Participating Company and the Plan constitutes a mere promise by the Participating Company to make benefit payments in the future.  A Participant shall have only a contractual right to receive the benefits provided for hereunder if and when he complies with all of the conditions set forth herein.  Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind.  The Plan is intended to be "unfunded" for purposes of the Pension Act and the Code. If any payment is made to a Participant, his or her surviving spouse or other beneficiary with respect to benefits described in this Plan from any source arranged by the Company or a Participating Company including the Rabbi Trust Agreements and also including, without limitation, any other fund, trust, insurance arrangement, bond, security device, or any similar arrangement, such payment shall be deemed to be in full and complete satisfaction of the obligation of the Company or Participating Company under this Plan  to the extent of such payment as if such payment had been made directly by the Company or Participating Company.  If any payment from a source described in the preceding sentence shall be made, in whole or in part, prior to the time payment would be made under the terms of this Plan, such payment shall be deemed to satisfy the obligation of the Company or Participating Company to pay Plan benefits beginning with the benefit which would next become payable under the Plan and continuing in the order in which benefits are so payable, until the payment from such other source is fully recovered. In determining the benefits satisfied by a payment, Plan benefits, as they become payable, shall be discounted to their value as of the date such actual payment was made using an interest rate equal to the valuation interest rate for deferred annuities as last published by the Pension Benefit Guaranty Corporation prior to the date of such actual payment.  If the benefits which actually become payable under this Plan, after applying the discount described in the preceding sentence, are less than the amount of any prepayment described herein, any such shortfall shall not be collected from or enforced against the Participant as a claim by the Company or Participating Company.

3.             Liability for Payment of Benefits

Where a Participant's period of service includes service in more than one Participating Company or in a company that is not a Participating Company, the last Participating Company to employ him or her immediately prior to his or her retirement or termination of employment with entitlement to a benefit hereunder shall be responsible for the full benefit under this Plan.

4.             Governing Law

The Company intends that this Plan be an unfunded deferred compensation plan maintained primarily for a select group of management and highly compensated employees exempt from Parts 2, 3 and 4 of Title I of the Pension Act by reason of the exemptions set forth in Sections 201(a), 301(a) and 401(a) of the Pension Act and from Part 1 of the Pension Act by reason of the exemption set forth in Section 2520.104-23 of applicable United States Department of Labor regulations.  This Plan shall be interpreted and administered accordingly.  This Plan shall be construed in accordance with the laws of the State of Texas to the extent such laws are not preempted by the Pension Act.  Notwithstanding any provision to the contrary in this Plan, each provision of this Plan shall be interpreted to permit the deferral of compensation and the payment of deferred amounts in accordance with Code Section 409A and any provision that would conflict with such requirements shall not be valid or enforceable.

 5.            Assignment or Alienation

Benefits payable, and rights to benefits, under this Plan may not in any manner be anticipated, sold, transferred, assigned (either at law or in equity), alienated, pledged, encumbered or subject to attachment, garnishment, levy, execution or other legal or equitable process.

6.             Employment at Will

Nothing contained in this Plan shall be construed as conferring upon a Participant the right to continue in the employ of the Company.

7.             Savings Clause

In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

8.             Payments to Others

Benefits payable to a former employee or retiree unable to execute a proper receipt may be paid to other person(s) in accordance with the standards and procedures set forth in the Pension Plan.

9.             Plan Termination

Subject to the limitations described below, the Company retains the right to terminate, in whole or in part, and each Participating Company retains the right to withdraw from this Plan, at any time, for any reason, with or without notice.  The Company will continue to make payments, in accordance with the terms and conditions of the Plan, to all Participants who were either retired or terminated prior to Plan termination, and will also continue to recognize its obligation to the surviving spouse of the aforementioned individuals.  Additionally, Participants who have satisfied the service requirements for a deferred vested pension under the Pension Plan on the date of Plan termination shall receive benefits under the terms of the Plan as in effect immediately prior to its termination, the amount of such benefit to be calculated as if the Participant retired (or otherwise terminated employment) on the termination date of the Plan, it being the Company's intent that termination of the Plan shall not adversely affect any entitlement to such benefits and any amendment, modification or termination of this Plan inconsistent with this expression of intent shall be null and void.

ARTICLE VII.           INTERCHANGE OF BENEFIT OBLIGATION

The same transfer of service credit provisions contained in interchange agreements presently in existence under the Pension Plan, or as they may be amended from time to time, by and between the Company, on behalf of all Participating Companies, and any Interchange Company shall apply to the transfer of service credit for purposes of this Plan.

ARTICLE VIII.         PLAN MODIFICATION

The Company may, in its sole discretion, from time to time make any changes in the Plan as it deems appropriate, provided, that no such action shall accelerate or postpone the time or schedule of payment of any Plan benefit except as may be permitted under Code Section 409A and regulations thereunder; and provided further, such modifications shall not result in a reduction of benefits to either: (i) those participants or their surviving spouses already receiving benefits under this Plan, or (ii) those participants who have satisfied the service requirements for a deferred vested pension under the Pension Plan.  Specifically, no Plan modification shall have the effect of reducing a Participant's benefits under the Plan to which he or she would be entitled under the terms of the Plan as in effect immediately prior to its modification, the amount of such benefit to be calculated as if the Participant retired (or otherwise terminated employment) on the date the Plan was modified, it being the Company's intent that any modification of the Plan shall not adversely affect any entitlement to such benefits and any amendment, modification or termination of this Plan inconsistent with this expression of intent shall be null and void.  In addition, the Company may authorize the execution of agreements providing retirement benefits subject generally to the terms and conditions of the Plan and benefits under such agreements shall be deemed provided hereunder, and any such amendments authorized prior to the amendment and restatement of the Plan shall be incorporated herein by reference.

EX-12

Exhibit 12

AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
	Nine Months Ended
		September 30,				Year Ended December 31,
			2008		2007		2007		2006		2005		2004		2003
Earnings:
Income from continuing operations before income taxes*		$	16,209	$	13,432	$	18,204	$	10,881	$	5,718	$	7,165	$	8,716
Equity in net income of affiliates included above			(712)		(545)		(692)		(2,043)		(609)		(873)		(1,253)
Fixed charges			3,658		2,964		4,536		2,209		1,680		1,238		1,390
Distributed income of equity affiliates			140		111		395		97		158		331		288
Interest capitalized			(455)		(125)		(171)		(73)		(36)		(31)		(37)
Earnings, as adjusted		$	18,840	$	15,837	$	22,272	$	11,071	$	6,911	$	7,830	$	9,104
Fixed Charges:
Interest expense		$	2,577	$	2,639	$	3,507	$	1,843	$	1,456	$	1,023	$	1,191
Interest capitalized			455		125		171		73		36		31		37
Dividends on preferred securities			3		2		3		3		31		24		22
Portion of rental expense representative of interest factor			623		198		855		290		157		160		140
Fixed Charges		$	3,658	$	2,964	$	4,536	$	2,209	$	1,680	$	1,238	$	1,390
Ratio of Earnings to Fixed Charges			5.15		5.34		4.91		5.01		4.11		6.32		6.55

* All periods presented exclude "Income From Discounted Operations, net of tax" on our Consolidated Statements of Income, which was from the sale of our interest in the director advertising business in Illinois and northwest Indiana.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Randall Stephenson, certify that:

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

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

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

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2008

/s/ Randall Stephenson

Randall Stephenson

Chairman of the Board,

Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Richard G. Lindner, certify that:

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

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

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

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2008

/s/ Richard G. Lindner

Richard G. Lindner

Senior Executive Vice President

     and Chief Financial Officer

EX-32

Exhibit 32

Certification of Periodic Financial Reports

Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of AT&T Inc. (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 5, 2008                                                                             November 5, 2008

By:     /s/ Randall Stephenson	By:   /s/ Richard G. Lindner
Randall Stephenson	Richard G. Lindner

Chairman of the Board, Chief Executive Officer  Senior Executive Vice President

      and President      and Chief Financial Officer

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

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