10-Q

FORM 10-Q

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006

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

175 E. Houston, San Antonio, Texas 78205

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-b2 of the Exchange Act. Large accelerated filer x Accelerated filer  [ ] Non-accelerated filer [ ]

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 April 28, 2006, common shares outstanding were 3,887,944,130.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
		Three months ended
		March 31,
		2006		2005
Operating Revenues
Voice	$	8,722	$	5,852
Data		4,442		2,391
Directory		901		905
Other		1,770		1,100
Total operating revenues		15,835		10,248
Operating Expenses
Cost of sales (exclusive of depreciation and amortization
shown separately below)		7,128		4,388
Selling, general and administrative		4,024		2,479
Depreciation and amortization		2,492		1,825
Total operating expenses		13,644		8,692
Operating Income		2,191		1,556
Other Income (Expense)
Interest expense		(464)		(353)
Interest income		85		109
Equity in net income (loss) of affiliates		334		(58)
Other income (expense) – net		11		47
Total other income (expense)		(34)		(255)
Income Before Income Taxes		2,157		1,301
Income taxes		712		416
Net Income	$	1,445	$	885
Earnings Per Common Share:
Net Income	$	0.37	$	0.27
Earnings Per Common Share - Assuming Dilution:
Net Income	$	0.37	$	0.27
Weighted Average Number of Common
Shares Outstanding – Basic (in millions)		3,882		3,303
Dividends Declared Per Common Share	$	0.3325	$	0.3225

See Notes to Consolidated Financial Statements.

2

AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
		March 31,		December 31,
		2006		2005
Assets		(Unaudited)
Current Assets
Cash and cash equivalents	$	1,057	$	1,224
Accounts receivable – net of allowances for
uncollectibles of $1,131 and $1,176		8,647		9,351
Prepaid expenses		1,215		1,029
Deferred income taxes		1,874		2,011
Other current assets		1,057		1,039
Total current assets		13,850		14,654
Property, plant and equipment		150,516		149,238
Less: accumulated depreciation and amortization		92,149		90,511
Property, Plant and Equipment – Net		58,367		58,727
Goodwill		13,402		14,055
Intangible Assets – Net		8,214		8,503
Investments in Equity Affiliates		2,090		2,031
Investments in and Advances to Cingular Wireless		32,316		31,404
Other Assets		16,198		16,258
Total Assets	$	144,437	$	145,632
Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year	$	5,712	$	4,455
Accounts payable and accrued liabilities		15,510		17,088
Accrued taxes		2,240		2,586
Dividends payable		1,293		1,289
Total current liabilities		24,755		25,418
Long-Term Debt		25,829		26,115
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		14,902		15,713
Postemployment benefit obligation		18,278		18,133
Unamortized investment tax credits		202		209
Other noncurrent liabilities		5,382		5,354
Total deferred credits and other noncurrent liabilities		38,764		39,409
Stockholders’ Equity
Common shares issued ($1 par value)		4,065		4,065
Capital in excess of par value		27,262		27,499
Retained earnings		29,257		29,106
Treasury shares (at cost)		(4,927)		(5,406)
Additional minimum pension liability adjustment		(218)		(218)
Accumulated other comprehensive income		(350)		(356)
Total stockholders’ equity		55,089		54,690
Total Liabilities and Stockholders’ Equity	$	144,437	$	145,632

See Notes to Consolidated Financial Statements.

3

AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions, increase (decrease) in cash and cash equivalents
(Unaudited)
	Three Months Ended
	March 31,
		2006		2005
Operating Activities
Net income	$	1,445	$	885
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		2,492		1,825
Undistributed earnings from investments in equity affiliates		(313)		74
Provision for uncollectible accounts		193		239
Amortization of investment tax credits		(7)		(6)
Deferred income tax expense (benefit)		66		(37)
Net gain on sales of investments		(8)		(66)
Changes in operating assets and liabilities:
Accounts receivable		509		128
Other current assets		(189)		(97)
Accounts payable and accrued liabilities		(2,057)		(1,624)
Stock-based compensation tax benefit		(8)		(3)
Other - net		335		(65)
Total adjustments		1,013		368
Net Cash Provided by Operating Activities		2,458		1,253
Investing Activities
Construction and capital expenditures		(1,821)		(1,050)
Receipts from (investments in) affiliates – net		(699)		596
Maturities of held-to-maturity securities		-		64
Dispositions		27		73
Acquisitions		(62)		(169)
Proceeds from note repayment		-		37
Net Cash Used in Investing Activities		(2,555)		(449)
Financing Activities
Net change in short-term borrowings with original
maturities of three months or less		1,271		761
Repayment of other short-term borrowings		(2)		-
Repayment of long-term debt		(259)		(572)
Issuance of treasury shares		201		47
Dividends paid		(1,289)		(1,066)
Stock-based compensation tax benefit		8		3
Net Cash Used in Financing Activities		(70)		(827)
Net increase (decrease) in cash and cash equivalents from continuing operations		(167)		(23)
Net Cash Used in Operating Activities from Discontinued Operations		-		(310)
Net increase (decrease) in cash and cash equivalents		(167)		(333)
Cash and cash equivalents beginning of year		1,224		760
Cash and Cash Equivalents End of Period	$	1,057	$	427
Cash paid during the three months ended March 31 for:
Interest	$	449	$	413
Income taxes, net of refunds	$	853	$	1,426

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)
		Three months ended
		March 31, 2006
		Shares	Amount
Common Stock
Balance at beginning of year		4,065	$	4,065
Balance at end of period		4,065	$	4,065
Capital in Excess of Par Value
Balance at beginning of year			$	27,499
Issuance of shares				(191)
Stock based compensation				(46)
Balance at end of period			$	27,262
Retained Earnings
Balance at beginning of year			$	29,106
Net income ($0.37 per share)				1,445
Dividends to stockholders ($0.3325 per share)				(1,292)
Other				(2)
Balance at end of period			$	29,257
Treasury Shares
Balance at beginning of year		(188)	$	(5,406)
Issuance of shares		11		479
Balance at end of period		(177)	$	(4,927)
Additional Minimum Pension Liability Adjustment
Balance at beginning of year			$	(218)
Balance at end of period			$	(218)
Accumulated Other Comprehensive Income, net of tax
Balance at beginning of year			$	(356)
Other comprehensive income (loss) (see Note 3)				6
Balance at end of period			$	(350)
	See Notes to Consolidated Financial Statements.

5

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dollars in millions except per share amounts

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 (SEC) 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, 2005.

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 wireline and wireless telecommunications services and equipment as well as directory advertising and publishing services.

All significant intercompany transactions are eliminated in the consolidation process. Investments in partnerships, joint ventures, including Cingular Wireless (Cingular), and less than majority-owned subsidiaries where we have significant influence are accounted for under the equity method. We account for our 60% economic interest in Cingular under the equity method since we share control equally (i.e., 50/50) with our 40% economic partner in the joint venture. We have equal voting rights and representation on the Board of Directors that controls Cingular. Earnings from certain foreign equity investments accounted for using the equity method are included for periods ended within up to three months of the date of our Consolidated Statements of Income.

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.

Reclassifications We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation. In 2006, we revised our segment reporting (see Note 5). In addition, we revised the product categories reported in operating revenue as follows: long-distance voice is now reported in voice revenue; integration services and customer premises equipment revenue, previously reported as voice and data revenue are now reported in other revenue; and directory revenues now reflect our traditional directory segment revenues.

Revenue Recognition Revenues derived from local telephone, long-distance and data services are recognized when services are provided. This is based upon either usage (e.g. minutes of traffic processed), period of time (e.g. monthly service fees) or other established fee schedules. Service revenues also include billings to our customers for various regulatory fees imposed on us by governmental authorities. We record an estimated revenue reduction for future adjustments to customer accounts, other than a provision for doubtful accounts, at the time revenue is recognized based on historical experience. Cash incentives given to customers are recorded as a reduction of revenue. When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and set-up fees are deferred and recognized over the associated service contract period. If no service contract exists, those

6

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

fees are recognized over the average customer relationship period. Associated expenses are deferred only to the extent of such deferred revenue. For contracts that involve the bundling of services, revenue is allocated to the services based on their relative fair value. We record the sale of equipment to customers as gross revenue when we are the primary obligor in the arrangement, when title is passed and the products are accepted by customers. For agreements involving the resale of third party services in which we are not considered the primary obligor of the arrangement, we record the revenue net of the associated costs incurred. For contracts where we provide customers with an indefeasible right to use network capacity, we recognize revenue ratably over the stated life of the agreement.

We recognize revenues and expenses related to publishing directories on the amortization method, which recognizes revenues and expenses ratably over the life of the directory title, typically 12 months.

Traffic Compensation Expense We use various estimates and assumptions to determine the amount of traffic compensation expenses recognized during any reporting period. Switched traffic compensation costs are accrued utilizing estimated rates by product, formulated from historical data and adjusted for known rate changes and volume levels, which are estimated for certain products and known for other products. Such estimates are adjusted monthly to reflect newly available information, such as rate changes and new contractual agreements. Bills reflecting actual incurred information are generally not received until three to nine months subsequent to the end of the reporting period, at which point a final adjustment is made to the accrued switched traffic compensation expense. Dedicated traffic compensation costs are estimated based on the number of circuits and the average projected circuit costs, based on historical data adjusted for rate changes. These costs are adjusted to reflect actual expenses over the three months following the end of the reporting period as bills are received.

Advertising Costs Advertising costs for advertising products and services or promoting our corporate image are expensed as incurred.

Income Taxes Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. To the extent allowed by GAAP, we provide valuation allowances against the deferred tax assets for amounts when the realization is uncertain. Management reviews these items regularly in light of changes in tax laws and court rulings at both federal and state levels.

Our income tax returns are regularly audited and reviewed by the Internal Revenue Service (IRS) and state taxing authorities. The IRS is expected to complete fieldwork for its audit of the 2000-2002 traditional SBC tax returns during 2006. This is not expected to have an adverse impact on the financial statements.

The IRS is also reviewing the tax returns for 2002 – 2004 of our subsidiary, AT&T Corp. (ATTC), as well as the ATTC 2005 short period return. Any adjustments resulting from the review of the 2002 – 2005 ATTC tax returns will be subject to the rules under purchase accounting and therefore are not expected to result in an adverse impact to the financial statements. Additionally, during the first quarter of 2006, we received Joint Committee approval of the IRS audit for ATTC’s 1997 - 2001 federal income tax returns. The closing of this audit resulted in a reduction to goodwill and a corresponding reduction in our net deferred tax liability, as required by the purchase accounting rules, of approximately $385. See Note 2 for additional information about adjustments to ATTC’s deferred tax liability.

7

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

Investment tax credits earned prior to their repeal by the Tax Reform Act of 1986 are amortized as reductions in income tax expense over the lives of the assets, which gave rise to the credits.

Cash Equivalents Cash and cash equivalents include all highly liquid investments with original maturities of three months or less, and the carrying amounts approximate fair value. At March 31, 2006, we held $611 in cash, $335 in money market funds and $111 in other cash equivalents.

Allowance for Uncollectibles We maintain an allowance for uncollectibles for estimated losses that result from the failure or inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability of accounts receivable based on experience, taking into account current collection trends that are expected to continue, as well as general economic factors, including bankruptcy rates. Credit risks are assessed based on historical write-offs, net of recoveries, and future estimated net write-offs as well as an analysis of the aged accounts receivable balances with reserves generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as pending bankruptcy or catastrophes. The analysis of receivables is performed monthly and the allowance for uncollectibles adjusted accordingly.

Investment Securities Investments in securities principally consist of held-to-maturity or available-for-sale instruments. Short-term and long-term investments in money market securities are carried as held-to-maturity securities. Available-for-sale securities consist of various debt and equity securities that are long-term in nature. Unrealized gains and losses, net of tax, are recorded in accumulated other comprehensive income. Our investment securities maturing within one year are recorded in “Other current assets” and instruments with maturities more than one year are recorded in “Other Assets” on the Consolidated Balance Sheets.

Property, Plant and Equipment Property, plant and equipment is stated at cost, except for assets acquired using purchase accounting, which are recorded at fair value at the time of their acquisition (see Note 2). The cost of additions and substantial improvements to property, plant and equipment is capitalized. The cost of maintenance and repairs of property, plant and equipment is charged to operating expenses. Property, plant and equipment are depreciated using the straight-line method over their estimated economic lives. Certain subsidiaries follow composite group depreciation methodology; accordingly, when a portion of their depreciable property, plant and equipment is retired in the ordinary course of business, the gross book value is reclassified to accumulated depreciation; no gain or loss is recognized on the disposition of this plant and equipment.

Property, plant and equipment is reviewed for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.An impairment loss shall be recognized only if the carryingamount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

8

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made. In periods subsequent to initial measurement, period-to-period changes in the liability for an asset retirement obligation resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows are recognized. The increase in the carrying value of the associated long-lived asset is depreciated over the corresponding estimated economic life.

Software Costs It is our policy to capitalize certain costs incurred in connection with developing or obtaining internal-use software. Capitalized software costs are included in “Property, Plant and Equipment” on our consolidated Balance Sheets and are amortized over three years. Software costs that do not meet capitalization criteria are expensed immediately.

Goodwill and Other Intangible Assets Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill and other indefinite-lived intangible assets are not amortized but are tested at least annually for impairment. During 2006, the carrying amount of our goodwill decreased $653 as a result of purchase accounting adjustments related to our acquisition of ATTC (see Note 2).

Intangible assets that have finite useful lives are amortized over their useful lives, which range from 1.5 to 18 years. Customer relationships are amortized using primarily the “sum of the months digits” method of amortization over the expected period in which those relationships are expected to contribute to our future cash flows, including consideration for demand, competition and other economic factors based in such a way as to allocate it as equitably as possible to periods during which we expect to benefit from those relationships.

Foreign Currency Translation Our foreign investments and foreign subsidiaries generally report their earnings in their local currencies. We translate our share of their foreign assets and liabilities at exchange rates in effect at the balance sheet dates. We translate our share of their revenues and expenses using average rates during the year. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income in the accompanying Consolidated Balance Sheets. Gains and losses resulting from exchange rate changes on transactions denominated in a currency other than the local currency are included in earnings as incurred.

We have also entered into foreign currency contracts to minimize our exposure to risk of adverse changes in currency exchange rates. We are subject to foreign exchange risk for foreign currency-denominated transactions, such as debt issued, recognized payables and receivables and forecasted transactions. At March 31, 2006, our foreign currency exposures were principally Euros, British pound sterling, Danish krone and Japanese Yen.

Derivative Financial Instruments We record derivatives on the balance sheet at fair value. We do not invest in derivatives for trading purposes. We use derivatives from time to time as part of our strategy to manage risks associated with our contractual commitments. Some of these derivatives are designated as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge and net investment hedge). Our derivative financial instruments primarily include interest rate swap agreements and foreign currency exchange contracts. We account for our interest rate swaps using mark-to-market accounting and include gains or losses from interest rate swaps when paid or received in interest expense on our Consolidated Statements of Income. Amounts paid or received on interest rate forward contracts (treasury rate locks) are amortized over the period of the related interest payments.

9

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

All other derivatives are not formally designated for accounting purposes (undesignated). These derivatives, although undesignated for accounting purposes, are entered into to hedge economic risks.

On the balance sheet, we record changes in the fair value of fair value hedges, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Gains or losses upon termination of our fair value hedges are amortized as interest expense over the term of the interest payments of the related debt issuances.

We record changes in the fair value of cash flow and net investment hedges, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, in “Accumulated other comprehensive income,” which is a component of Stockholders’ Equity. The settlement gains or costs on our cash flow hedges are amortized as interest expense over the term of the interest payments of the related debt issuances.

Changes in the fair value of undesignated derivatives are recorded in other income (expense) – net, along with the change in fair value of the underlying asset or liability, as applicable.

Cash flows associated with derivative instruments are presented in the same category on the Consolidated Statements of Cash Flows as the item being hedged.

When hedge accounting is discontinued, the derivative is adjusted for changes in fair value through other income (expense) – net. For fair value hedges, the underlying asset or liability will no longer be adjusted for changes in fair value and any asset or liability recorded in connection with the hedging relationship (including firm commitments) will be removed from the balance sheet and recorded in current period earnings. For cash flow hedges, gains and losses that were accumulated in other comprehensive income as a component of Stockholders’ Equity in connection with hedged assets or liabilities or forecasted transactions will be recognized in other income (expense) – net, in the same period the hedged item affects earnings.

Employee Separations In accordance with Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Postemployment Benefits,” we establish obligations for expected termination benefits provided 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 March 31, 2006, we had severance accruals for traditional SBC employees of approximately $383, of which $274 was established as merger-related severance accruals. In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (FAS 141), severance accruals recorded for ATTC employees were included in the purchase price allocation (see Note 2).

Pension and Postretirement Benefits See Note 7 for a comprehensive discussion of our pension and postretirement benefit expense.

10

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 2. ACQUISITIONS AND DISPOSITIONS

AT&T Corp. In November 2005, we acquired ATTC in a transaction accounted for under FAS 141. ATTC was one of the nation’s largest business service communications providers, offering a variety of global communications services, including large domestic and multinational businesses, small and medium-sized businesses and government agencies. ATTC operated one of the largest telecommunications networks in the U.S. ATTC was also a provider of domestic and international long-distance and usage-based-communications services to consumer customers.

Under the merger agreement, each share of ATTC common stock was exchanged for 0.77942 of a share of our common stock. We issued approximately 632 million shares to ATTC shareholders, giving them an approximate 16 percent stake in the combined company, based on common shares outstanding. In addition, immediately prior to the closing of the transaction, ATTC paid each ATTC shareholder a special dividend of $1.30 per share. Based on the $24.17 per share closing price of our common stock on the New York Stock Exchange (NYSE) on November 17, 2005, the last trading day before the closing of the merger, combined with the special dividend, consideration received by ATTC shareholders was approximately $16,300.

Based on the average closing price of our common stock on the NYSE for the two days prior to, including, and two days subsequent to the public announcement of the merger (January 31, 2005) of $23.87 and capitalized merger-transaction costs, the transaction was valued, for accounting purposes, at $15,517. ATTC is now a wholly owned subsidiary of AT&T and the results of ATTC’s operations have been included in our consolidated financial statements after the November 18, 2005 acquisition date.

Under the purchase method of accounting, the assets and liabilities of ATTC were recorded at their respective fair values as of the date of the acquisition. We obtained preliminary third-party valuations of property, plant and equipment, intangible assets (including the AT&T trade name), debt and certain other assets and liabilities. Because of the proximity of this transaction to year-end, the values of certain assets and liabilities were based on preliminary valuations and are subject to adjustment as additional information is obtained. Such additional information includes, but is not limited to: valuations and physical counts of property, plant and equipment, valuation of investments and the involuntary termination of employees. We have 12 months from the closing of the acquisition to finalize our valuations. As these issues are identified, modified or resolved, resulting increases or decreases to the preliminary value of assets and liabilities are offset by a change to goodwill, which may be material. Adjustments to the preliminary valuation will be recorded in the period finalized. Changes to the valuation of property, plant and equipment may result in adjustments to the fair value of certain identifiable intangible assets acquired. Additionally, as part of the final valuation of the acquisition, we will determine to which entities and to what extent the benefit of the acquisition applies, and as required by GAAP, record the appropriate goodwill to each entity.

11

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

The following table summarizes the preliminary estimated fair values of the ATTC assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date and adjustments made thereto during the first quarter of 2006.

		Purchase Price Allocation
		As of				As of
		12/31/05		Adjustments		3/31/06
Assets acquired
Current assets	$	6,295	$	19	$	6,314
Property, plant and equipment		10,921		-		10,921
Intangible assets not subject to amortization
Trade name		4,900		-		4,900
Licenses		40		-		40
Intangible assets subject to amortization
Customer lists and relationships		3,050		-		3,050
Patents		150		-		150
Brand licensing agreements		70		-		70
Investments in unconsolidated subsidiaries		160		-		160
Other assets		4,247		-		4,247
Goodwill		12,343		(653)		11,690
Total assets acquired		42,176		(634)		41,542
Liabilities assumed
Current liabilities, excluding current portion of long-term debt		6,740		39		6,779
Long-term debt		8,293		-		8,293
Deferred income taxes		531		(673)		(142)
Postemployment benefit obligation		8,807		-		8,807
Other noncurrent liabilities		2,288		-		2,288
Total liabilities assumed		26,659		(634)		26,025
Net assets acquired	$	15,517	$	-	$	15,517

Purchase accounting rules require that as certain pre-merger issues are identified, modified or resolved, resulting increases or decreases to tax liabilities are offset by a change in goodwill. During the first quarter of 2006, modifications to various pre-merger tax estimates and the resolution of an ATTC Internal Revenue Service audit (for the years 1997-2001) resulted in a reduction in goodwill of $653 and are reflected in the adjustments column above.

12

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

ATTC maintained change-in-control provisions with its employees that required enhanced severance and benefit payments be paid to employees of ATTC when a change-in-control occurred. Included in the liabilities assumed at acquisition, were employee-related accruals of approximately $1,543. Following is a summary of the accrual to be paid by the Company, from ATTC's pension plans and from ATTC's postemployment benefit plans.

For the Quarter
Ended
3/31/06

    Balance at
    12/31/05
Cash Payments Balance at
3/31/06

Paid out of:
Company funds	$       870	$    (46	)	$       824
Pension plans	636	(4	)	632
Postemployment benefit plans	37	-		37
Total	$    1,543	$    (50	)	$    1,493

The following unaudited pro forma consolidated results of operations assume that the acquisition of ATTC was completed as of January 1, 2005.

		For the Quarter Ended								For the Year Ended
		Mar 31,		Jun 30,		Sep 30,		Dec 31,		2005
Revenues	$	16,670	$	16,602	$	16,468	$	16,279	$	66,019
Net Income		1,319		1,257		1,729		1,862		6,167

13

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 3. COMPREHENSIVE INCOME

The components of our comprehensive income for the three months ended March 31, 2006 and 2005 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustment, net unrealized gain (loss) on available-for-sale securities and net unrealized gain (loss) on cash flow hedges. The foreign currency translation adjustment is due to exchange rate fluctuations in our foreign affiliates’ local currencies. 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
	March 31,
	2006		2005
Net income	$	1,445	$	885
Other comprehensive income, net of tax:
Foreign currency translation adjustment		(20)		(2)
Net unrealized gains (losses) on securities:
Unrealized gains (losses)		27		(16)
Less reclassification adjustment realized in net income		(6)		(27)
Reclassification adjustment for losses on cash flow hedges     included in net income		4		1
Other		1		-
Other comprehensive income (loss)		6		(44)
Total comprehensive income	$	1,451	$	841

14

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 4. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of basic earnings per share and diluted earnings per share for net income for the three months ended March 31, 2006 and 2005 are shown in the table below:

	Three months ended
	March 31,
	2006		2005
Numerators
Numerator for basic earnings per share:
Net income	$	1,445	$	885
Dilutive potential common shares:
Other stock-based compensation		3		2
Numerator for diluted earnings per share	$	1,448	$	887
Denominators (000,000)
Denominator for basic earnings per share:
Weighted-average number of common
shares outstanding		3,882		3,303
Dilutive potential common shares:
Stock options		3		1
Other stock-based compensation		17		11
Denominator for diluted earnings per share		3,902		3,315
Basic earnings per share
Net income	$	0.37	$	0.27
Diluted earnings per share
Net income	$	0.37	$	0.27

At March 31, 2006 and 2005, we had issued and outstanding options to purchase approximately 264 and 209 million shares of AT&T common stock. The exercise prices of options to purchase a weighted average of 231 and 196 million shares exceeded the average market price of AT&T stock for the three months ended March 31, 2006 and 2005. Accordingly, we did not include these amounts in determining the dilutive potential common shares for the respective periods. At March 31, 2006, the exercise price of 35 million share options were below market price. Of these options, 5 million will expire by the end of 2007.

15

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 5. SEGMENT INFORMATION

Our segments are strategic business units that offer different products and services and are managed accordingly. We analyze our various operating segments based on segment income. Interest expense, interest income 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. As a result of our November 18, 2005 acquisition of ATTC we have revised our segment reporting to represent how we now manage our business, restating prior periods to conform to the current segments. We have four reportable segments that reflect the current management of our business: (1) wireline, (2) Cingular, (3) directory and (4) other.

The wireline segment provides both retail and wholesale landline telecommunications services, including local and long-distance voice, switched access, data and messaging services, managed networking to business customers and satellite television services through our agreement with EchoStar Communications Corp.

The Cingular segment reflects 100% of the results reported by Cingular, our wireless joint venture. Although we analyze Cingular’s revenues and expenses under the Cingular segment, we eliminate the Cingular segment in our consolidated financial statements. In our consolidated financial statements, we report our 60% proportionate share of Cingular’s results as equity in net income of affiliates.

The directory segment includes our directory operations, including Yellow and White Pages advertising and electronic publishing. Our portion of the results from YELLOWPAGES.COM (YPC), a joint venture with BellSouth Corporation (BellSouth), is recorded in this segment as equity in net income of affiliates.

The other segment includes results from Sterling Commerce Inc. and all corporate and other operations. This segment also includes our portion of the results from our international equity investments and from Cingular as equity in net income of affiliates, as discussed above.

In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP. The Wireline, Cingular, Directory and Other columns represent the segment results of each such operating segment. The Wireline column includes revenues from services sold to Cingular of $382 in the first quarter of 2006 and $182 in the first quarter of 2005 (see Note 6). Since we account for Cingular using the equity method of accounting, these revenues are not eliminated upon consolidation and as such, remain in consolidated revenue. The Consolidation and Elimination column adds in those line items that we manage on a consolidated basis only: interest expense, interest income and other income (expense) – net. This column also eliminates any intercompany transactions included in each segment’s results. Since our 60% share of the results from Cingular is already included in the Other column, the Cingular Elimination column removes the results of Cingular shown in the Cingular segment.

16

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

At March 31, 2006 or for the three months ended
										Consolidation		Cingular		Consolidated
		Wireline		Cingular		Directory		Other		and Elimination		Elimination		Results
Revenues from external customers	$	14,731	$	8,980	$	901	$	203	$	-	$	(8,980)	$	15,835
Intersegment revenues		8		-		22		-		(30)		-		-
Total segment operating revenues		14,739		8,980		923		203		(30)		(8,980)		15,835
Operations and support expenses		10,557		6,493		447		178		(30)		(6,493)		11,152
Depreciation and amortization expenses		2,430		1,680		1		61		-		(1,680)		2,492
Total segment operating expenses		12,987		8,173		448		239		(30)		(8,173)		13,644
Segment operating income		1,752		807		475		(36)		-		(807)		2,191
Interest expense		-		297		-		-		464		(297)		464
Interest income		-		4		-		-		85		(4)		85
Equity in net income (loss) of affiliates		-		-		(5)		339		-		-		334
Other income (expense) – net		-		(36)		-		-		11		36		11
Segment income before income taxes	$	1,752	$	478	$	470	$	303	$	(368)	$	(478)	$	2,157
Segment Assets	$	104,409	$	79,344	$	3,950	$	130,809	$	(94,731)	$	(79,344)	$	144,437

For the three months ended March 31, 2005
										Consolidation		Cingular		Consolidated
		Wireline		Cingular		Directory		Other		and Elimination		Elimination		Results
Revenues from external customers	$	9,174	$	8,229	$	905	$	169	$	-	$	(8,229)	$	10,248
Intersegment revenues		8		-		24		-		(32)		-		-
Total segment operating revenues		9,182		8,229		929		169		(32)		(8,229)		10,248
Operations and support expenses		6,293		6,440		444		160		(30)		(6,440)		6,867
Depreciation and amortization expenses		1,773		1,675		2		52		(2)		(1,675)		1,825
Total segment operating expenses		8,066		8,115		446		212		(32)		(8,115)		8,692
Segment operating income		1,116		114		483		(43)		-		(114)		1,556
Interest expense		-		338		-		-		353		(338)		353
Interest income		-		18		-		-		109		(18)		109
Equity in net income (loss) of affiliates		-		2		(1)		(58)		1		(2)		(58)
Other income (expense) – net		-		(14)		-		-		47		14		47
Segment income before income taxes	$	1,116	$	(218)	$	482	$	(101)	$	(196)	$	218	$	1,301

17

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 6. TRANSACTIONS WITH CINGULAR

We and BellSouth, the two owners of Cingular, have each made a subordinated loan to Cingular (shareholder loans). Our shareholder loan to Cingular totaled $4,108 at March 31, 2006 and December 31, 2005. This loan bears interest at an annual rate of 6.0% and matures in June 2008. We earned interest income on this loan of $61 in the first quarter of 2006 and $87 in the first quarter of 2005.

We and BellSouth agreed to finance Cingular’s capital and operating cash requirements to the extent Cingular requires funding above the level provided by operations. We and BellSouth also entered into a revolving credit agreement with Cingular to provide short-term financing for operations on a pro rata basis at an interest rate of LIBOR (London Interbank Offered Rate) plus 0.05%, which expires July 31, 2007. This agreement includes a provision for the repayment of our and BellSouth’s shareholder loans made to Cingular in the event there are no outstanding amounts due under the revolving credit agreement and to the extent Cingular has excess cash, as defined by the agreement.

In the first quarter of 2006, our net advances to Cingular totaled $699 under the revolving credit agreement. Our share of advances to Cingular under the revolving credit agreement is reflected in “Investments in and Advances to Cingular Wireless” on our Consolidated Balance Sheets and totaled $1,006 at March 31, 2006 and $307 at December 31, 2005.

We generated revenues of $382 in the first quarter of 2006 and $182 in the first quarter of 2005 for services sold to Cingular. These revenues were primarily from access and long-distance services sold to Cingular on a wholesale basis, and commissions revenue related to customers added through AT&T sales sources. The offsetting expense amounts are recorded by Cingular, and 60% of these expenses are included in our “Equity in net income of affiliates” line on our Consolidated Statements of Income when we report our 60% proportionate share of Cingular’s results.

NOTE 7. 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 retired employees under various plans and accrue actuarially determined postretirement benefit costs as active 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 2006.

18

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

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 Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In the following table, gains are denoted with parentheses and losses are not.

	Three months ended
	March 31,
	2006		2005
Pension cost:
Service cost – benefits earned during the period	$	260	$	196
Interest cost on projected benefit obligation		628		403
Expected return on assets		(991)		(636)
Amortization of prior service cost and transition asset		37		47
Recognized actuarial loss		93		39
Net pension cost	$	27	$	49
Postretirement benefit cost:
Service cost – benefits earned during the period	$	109	$	99
Interest cost on accumulated postretirement
benefit obligation		494		367
Expected return on assets		(234)		(189)
Amortization of prior service benefit		(90)		(80)
Recognized actuarial loss		126		114
Postretirement benefit cost	$	405	$	311
Combined net pension and postretirement cost	$	432	$	360

Our combined net pension and postretirement cost increased $72 in the first quarter of 2006. Net pension and postretirement costs in 2006 reflect the November 2005 acquisition of ATTC, changes in our actuarial assumptions, which included the reduction of our discount rate from 6.00% to 5.75% (an increase to expense) and net losses on plan assets in prior years. In accordance with GAAP, we recognize actual gains and losses on pension and postretirement plan assets equally over a period of not more than five years.

As part of our acquisition of ATTC, we acquired certain non-U.S. operations. Net pension cost for non-U.S. plans was $8 in the first quarter of 2006.

Net supplemental retirement pension benefits cost were $38 in the first quarter of 2006 and $27 in the first quarter of 2005, of which $26 and $17 was interest cost, respectively.

19

AT&T INC.

MARCH 31, 2006

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued

Dollars in millions except per share amounts

NOTE 8. PENDING ACQUISITION OF BELLSOUTH

On March 4, 2006, we agreed to acquire BellSouth in a transaction in which each share of BellSouth common stock will be exchanged for 1.325 shares of AT&T common stock. Based on the average closing price of AT&T shares for the two days prior to, including, and two days subsequent to the public announcement of the merger (March 5, 2006) of $27.32, the total transaction is valued, for purchase accounting purposes, at approximately $65,000.

We and BellSouth jointly own Cingular and the internet directory publisher YPC. In the Cingular joint venture, we hold a 60 percent economic interest and BellSouth holds a 40 percent interest and in the YPC joint venture we hold a 66 percent economic interest and BellSouth holds a 34 percent interest. For each joint venture control is shared equally (i.e., 50/50). We and BellSouth each account for the joint ventures under the equity method of accounting, recording the proportional share of Cingular’s and YPC’s income as equity in net income of affiliates on the respective consolidated statements of income and reporting the ownership percentage of Cingular’s net assets as “Investments in and Advances to Cingular Wireless” and the ownership percentage of YPC’s net assets as “Investments in Equity Affiliates” on the respective consolidated balance sheets. After the BellSouth acquisition, BellSouth, Cingular and YPC will be wholly-owned subsidiaries of AT&T.

The transaction has been approved by the Board of Directors of each company and also must be approved by the stockholders of AT&T and BellSouth. The transaction also is subject to review by the U.S. Department of Justice and approval by the Federal Communications Commission and various other regulatory authorities. We currently expect the transaction to close by the end of 2006.

20

AT&T INC.

MARCH 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS

For ease of reading, AT&T Inc. is referred to as “we,” “AT&T,” or the “Company” throughout this document and the names of the particular subsidiaries and affiliates providing the services have been omitted. AT&T is a holding company; AT&T does not provide communications services, rather, its subsidiaries and affiliates operate in the communications services industry both domestically and internationally providing wireline and wireless 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, 2005. In the tables throughout this section, percentage increases and decreases that equal or exceed 100% are not considered meaningful and are denoted with a dash.

Consolidated Results We completed our acquisition of AT&T Corp. (ATTC) on November 18, 2005. Consolidated results for the three month period ended March 31, 2006 include results from ATTC. In accordance with U.S. generally accepted accounting principles (GAAP), operating results for ATTC prior to our acquisition, including for the three months ended March 31, 2005, are not included in our operating results and are therefore not discussed. Our financial results in the first quarter of 2006 and 2005 are summarized as follows:

		First Quarter
		Percent
		2006		2005	Change
Operating revenues	$	15,835	$	10,248	54.5%
Operating expenses		13,644		8,692	57.0
Operating income		2,191		1,556	40.8
Income before income taxes		2,157		1,301	65.8
Net income		1,445		885	63.3

Overview

Operating income As noted above, our first quarter 2006 revenues and expenses reflect the addition of ATTC’s results while our first quarter 2005 results do not include ATTC. Accordingly, the following discussion of changes in our revenues and expenses will be significantly affected by the ATTC acquisition. Our operating income increased $635, or 40.8%, in the first quarter of 2006 and our operating income margin decreased from 15.2% to 13.8%. The decline in operating income margin reflects additional expense associated with merger and integration costs and additional amortization expense on those intangibles identified at the time of our acquisition of ATTC, as well as the lower margins of the products of the acquired business. Operating income increased primarily due to growth in data revenues, which accounted for approximately 28% of our operating revenues in the first quarter of 2006 and 23% for the quarter ended March 31, 2005, slightly offset by the negative effects of a continued decline in access lines.

Retail access lines continued to decline due to increased competition, as customers disconnected both primary and additional lines and began using wireless and Voice over Internet Protocol (VoIP) technology offered by competitors and cable instead of phone lines for voice and data. This was also a contributing factor in the year-ago period. Retail access lines also declined for both periods due to customers disconnecting their additional

21

AT&T INC.

MARCH 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

lines when purchasing our broadband internet-access (DSL) services. While we lose some revenue when a wireline customer shifts from one of our retail primary lines to a competitor that relies on a resale or wholesale product, we lose all revenue when a wireline customer shifts to a competitor using an alternative technology such as cable, wireless or VoIP or their own network facilities. Increasing shifts to competitors’ alternative technologies and facilities-based competition will continue to pressure our operating margins. Although retail access line losses have continued, the trend has stabilized, reflecting in part our ability to offer retail nationwide long-distance service as well as offerings combining multiple services for one fixed price (bundles).

The decline in access lines and the corresponding voice revenue also reflects decreasing wholesale revenues from lines provided under the former Unbundled Network Element-Platform (UNE-P) rules (which ended in March 2006), as competitors moved to alternate arrangements to serve their customers or their customers chose an alternative technology. Competitors representing a majority of our former UNE-P lines have signed commercial agreements with us and therefore remain as our wholesale customers. However, for the remaining UNE-P lines, we believe, based on marketing research, that customers primarily switched to competitors using alternative technologies or their own networks as opposed to returning as our retail customers.

Operating revenues Our operating revenues increased $5,587, or 54.5%, in the first quarter of 2006 primarily due to our acquisition of ATTC. The increase also reflects growth in data slightly offset by continued pressure in voice, reflecting access line decreases in our traditional SBC 13-state region (“in-region”) and decreased demand for vertical services and wholesale services including UNE-P lines. At March 31, 2006, we had 7.4 million DSL lines in service, an increase of 1.8 million lines from the year-ago period and 511,000 lines from December 31, 2005; and had 48.8 million in-region access lines, a decrease of 3.1 million lines from the year-ago period and 645,000 from December 31, 2005. Operating revenue changes are discussed in greater detail in our “Segment Results” sections.

Operating expenses Our operating expenses increased $4,952, or 57.0%, in the first quarter of 2006 primarily due to our acquisition of ATTC, and also included merger integration costs of $266 and amortization expense on intangible assets of $266. Our first quarter 2006 expenses also include decreases related to workforce reductions, reflecting a decline of 3,390 employees from December 31, 2005. As of March 31, 2006 we were ahead of our scheduled workforce reductions associated with the ATTC acquisition. Our significant expense changes are discussed in greater detail in our “Segment Results” sections.

Interest expense increased $111, or 31.4%, in the first quarter of 2006. The increase in 2006 was primarily due to interest expense on ATTC’s outstanding debt. We expect continued increases in interest expense during 2006 as a result of including ATTC’s outstanding debt in our consolidated financial statements.

22

AT&T INC.

MARCH 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Interest income decreased $24, or 22%, in the first quarter of 2006. The decrease in interest income was primarily due to the pay-down by Cingular of our shareholder loan to them; this decrease was partially offset by our benefiting from the reduced interest expense at Cingular due to our 60% ownership in Cingular, which is reflected in equity in net income of affiliates.

Equity in net income of affiliates increased $392 in the first quarter of 2006. The increase was primarily due to an increase of approximately $357 in our proportionate share of Cingular’s results and an increase of $51 in results from our international holdings.

We account for our 60% economic interest in Cingular under the equity method of accounting and therefore include our proportionate share of Cingular’s results in our “Equity in net income (loss) of affiliates” line item on our Consolidated Statements of Income. Cingular’s operating results are discussed in detail in the “Cingular Segment Results” section. Our accounting for Cingular is described in more detail in Note 5.

The increase from international holdings in the first quarter was largely attributable to an increase in results from Teléfonos de México, S.A. de C.V. (Telmex) and América Móvil S.A. de C.V. (América Móvil). Our international equity holdings are discussed in detail in our “Other Segment Results” section.

Other income (expense) – net We had other income of $11 in the first quarter of 2006 and $47 in the first quarter of 2005. Results in the first quarter of 2005 primarily consisted of gains of $68 on the sale of shares of Amdocs Limited (Amdocs) and SpectraSite, Inc. (SpectraSite), partially offset by a charge of $21 related to the other-than-temporary decline in the value of various cost investments.

Income taxes increased $296, or 71.2%, in the first quarter of 2006. The increase was due to higher income before income taxes in 2006, which was primarily the result of increased operating income and an increase in equity in net income of affiliates (see previous discussion). Our effective tax rate was 33.0% in the first quarter of 2006 and 32.0% in the same period in 2005.

Selected Financial and Operating Data

	March 31,
	2006	2005
Debt ratio1	36.4%	40.2%
In-region network access lines in service (000) 2	48,768	51,868
In-region wholesale lines (000)2	4,667	6,503
DSL lines in service (000)	7,432	5,608
Number of AT&T employees3	186,560	160,880
Cingular Wireless customers (000)4	55,810	50,350

¹ See our “Liquidity and Capital Resources” section for discussion.

² In-region represents access lines served by AT&T’s incumbent local exchange companies (ILECs).

³ Number of employees at December 31, 2005 was 189,950.

⁴ Amounts represent 100% of the cellular/PCS customers of Cingular.

23

AT&T INC.

MARCH 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Segment Results

Our segments represent strategic business units that offer different products and services and are managed accordingly. Our operating segment results presented in Note 5 and discussed below for each segment follow our internal management reporting. We analyze our various operating segments based on segment income. Interest expense, interest income 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 total segment income. As a result of our November 18, 2005 acquisition of ATTC, we have revised our segment reporting to represent how we now manage our business, restating prior periods to conform to the current segments. We have four reportable segments that reflect the current management of our business: (1) wireline; (2) Cingular; (3) directory; and (4) other.

The wireline segment provides both retail and wholesale landline telecommunications services, including local and long-distance voice, switched access, data and messaging services, managed networking to business customers and satellite television services through our agreement with EchoStar Communications Corp.
(“AT&T | DISH Network” offering).

The Cingular segment reflects 100% of the results reported by Cingular, our wireless joint venture. In our consolidated financial statements, we report our 60% proportionate share of Cingular’s results as equity in net income of affiliates.

The directory segment includes all directory operations, including Yellow and White Pages advertising and electronic publishing. Our portion of the results from YELLOWPAGES.COM (YPC) is recorded in this segment as equity in net income of affiliates.

The other segment includes results from Sterling Commerce Inc. (Sterling) and all corporate and other operations. The other segment also includes our portion of the results from our international equity investments and from Cingular as equity in net income of affiliates, as discussed above. Although we analyze Cingular’s revenues and expenses under the Cingular segment, we record our portion of Cingular’s results as equity in net income of affiliates in the other segment.

The following tables show components of results of operations by segment. A discussion of significant segment results is also presented following each table. Capital expenditures for each segment are discussed in “Liquidity and Capital Resources.”

24

AT&T INC.

MARCH 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Wireline

Segment Results

	First Quarter
					Percent
	2006		2005		Change
Segment operating revenues
Voice	$	8,722	$	5,852	49.0%
Data		4,442		2,391	85.8
Other		1,575		939	67.7
Total Segment Operating Revenues		14,739		9,182	60.5
Segment operating expenses
Cost of sales		6,856		4,123	66.3
Selling, general and administrative		3,701		2,170	70.6
Depreciation and amortization		2,430		1,773	37.1
Total Segment Operating Expenses		12,987		8,066	61.0
Segment Income	$	1,752	$	1,116	57.0%

Operating Margin Trends

Our wireline segment operating income increased $636, or 57.0%, in the first quarter of 2006 reflecting incremental revenue and expenses from our acquisition of ATTC, while our operating income margin decreased from 12.2% in the first quarter of 2005 to 11.9% in the first quarter of 2006. Exclusive of the results attributable to the acquisition of ATTC, operating income increased primarily due to growth in data revenue. The decrease in operating income margin reflects additional expense associated with merger and integration costs and additional amortization expense on those intangibles identified at the time of our acquisition of ATTC.

While voice revenue increased due to the acquisition of ATTC, in-region retail access lines continued to decline due to customers continuing to disconnect primary and additional lines and switching to competitors’ alternative technologies, such as wireless, and to a lesser extent VoIP and cable for voice and data. Retail access lines also declined for both periods due to customers disconnecting their additional lines when purchasing our broadband internet-access (DSL) services. While we lose some revenue when a wireline customer shifts from one of our retail primary lines to a competitor that relies on a resale or wholesale product, we lose all revenue when a wireline customer shifts to a competitor’s alternative technology such as cable, wireless or VoIP or a facilities-based competitor. Increasing use of competitor's alternative technologies and facilities-based competition will continue to pressure our operating margins. However, although retail access line losses have continued, the trend has slowed, reflecting in part our ability to offer retail nationwide long-distance service as well as offerings combining multiple services for one fixed price (bundles).

25

AT&T INC.

MARCH 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Wireline Operating Results

All variances other than those specifically stated as being due to the ATTC acquisition are related to the operations of traditional SBC.

Voice revenues increased $2,870, or 49.0%, in the first quarter of 2006 primarily due to the acquisition of ATTC. Included in voice revenues are revenues from long-distance, local voice and local wholesale services. Voice revenues do not include any of our VoIP revenues, which are included in data revenues. In the first quarter of 2006, revenue increased $2,852 in long-distance and $194 in local voice, partially offset by revenue declines of $176 in local wholesale. On a sequential basis, revenues in our traditional SBC regions increased in line with the fourth quarter of 2005 but were partially offset by a continuing decline in pro forma revenues from ATTC’s traditional mass-market customer category, which include revenues from the traditional ATTC standalone long-distance and bundled local services for consumers and small business.

The increase in long-distance revenues were almost entirely driven by the increase in long-distance customers due to the acquisition of ATTC. Additionally, in-region retail long-distance revenues increased $99 in the first quarter of 2006, reflecting our higher long-distance penetration levels. Sales of combined long-distance and local calling fixed-fee offerings (referred to as “bundling”) also contributed to the increased long-distance revenues and customers. Long-distance revenues continued to increase in our traditional SBC Midwest, West and Southwest regions.

The increase in local voice revenues of $194 in the first quarter primarily reflects our acquisition of ATTC. Our local voice revenue growth will continue to be negatively impacted due to increased competition, including customers shifting to competitors’ wireless, VoIP technology and cable offerings for voice, and the disconnection of additional lines for DSL service and other reasons.

Local voice revenues were negatively impacted by declines in customer demand, calling features, inside wire and retail payphone revenues. The decline in customer demand decreased revenues $88. A decline in demand for calling features (e.g., Caller ID and voice mail), due primarily to the access line declines, decreased revenues approximately $47 in the first quarter of 2006. Lower demand for inside wire and retail payphone services decreased revenues approximately $38 in the first quarter of 2006. We expect payphone access lines and revenue to continue to decline in future periods. Voice revenue was also lower due to receiving a settlement of $32 from another carrier in the first quarter of 2005. We also expect mass-market consumer-based revenues acquired with ATTC to continue to decline on a sequential basis, but will positively contribute to results on a year-over-year basis. Partially offsetting these demand-related declines were revenue increases of $54 related to pricing increases for calling features in the first quarter of 2006.

Lower demand for wholesale services, primarily due to the decline in UNE-P lines provided to competitors, decreased revenue approximately $176 in the first quarter of 2006. Lines provided under the former UNE-P rules (which ended in March 2006) declined, as competitors moved to alternate arrangements to serve their customers or their customers chose an alternative technology. Competitors representing a majority of our UNE-P lines have signed commercial agreements with us and therefore remain our wholesale customers.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

For the remaining UNE-P lines, we believe, based on marketing research, that customers primarily switched to competitors using alternative technologies or their own networks as opposed to returning as our retail customers.

Data revenues increased $2,051, or 85.8%, in the first quarter of 2006, with increases of $779 in Internet Protocol (IP) data, $666 in transport and $606 in packet switched services, which were almost entirely due to the acquisition of ATTC. Revenues from our traditional SBC regions increased approximately 9.0% compared to the first quarter of 2005 and 2.0% sequentially, while pro forma revenues from ATTC’s traditional enterprise categories declined slightly compared to the first quarter of 2005 and sequentially.

Included in IP data revenues are services for dedicated internet access, virtual private network and other hosting services. Contributing to the increase in IP data services was continued growth in DSL, our broadband internet-access service. DSL internet service increased data revenues approximately $103 in the first quarter reflecting an increase in DSL lines in service, which was partially driven by lower-priced promotional offerings and pricing responses to competitors. The number of DSL lines in service grew to approximately 7.4 million, a 32.5% increase from March 31, 2005.

Our transport services, which include DS1s and DS3s (types of dedicated high-capacity lines), and SONET (a dedicated high-speed solution for multi-site businesses), represented about 50% of total data revenues in the first quarter of 2006 and 65% of total data revenues in the first quarter of 2005.

Our packet switched services includes frame relay, asynchronous transfer mode (ATM) and managed packet services. As customers continue to shift from this traditional technology to IP-based technology, we expect these services to decline as a percentage of our overall data revenues.

Other operating revenues increased $636 in the first quarter of 2006, primarily due to incremental revenue of $601 from our acquisition of ATTC. The major items included in other operating revenues are integration services and customer premises equipment, outsourcing, directory and operator assistance services and government-related services. Our co-branded AT&T | DISH Network satellite TV service increased revenue $15 in 2006. Partially offsetting these revenue increases were reduced demand for directory and operator assistance, billing and collection services provided to other carriers, wholesale and other miscellaneous products and services, which decreased revenue $42 in 2006.

Cost of sales expenses increased $2,733 in the first quarter of 2006, primarily related to the acquisition of ATTC, which increased expenses approximately $2,800. Cost of sales consists of costs we incur to provide our products and services, including costs of operating and maintaining our networks. Costs in this category include our repair technicians and repair services, certain network planning and engineering expenses, operator services, information technology, property taxes related to elements of our network, and payphone operations. Pension and postretirement costs, net of amounts capitalized as part of construction labor, are also included to the extent that they are allocated to our network labor force and other employees who perform the functions listed in this paragraph.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Traffic compensation expense (for access to another carrier’s network) increased $113 in 2006, due primarily to growth in Yahoo! Inc. and long-distance service and as a result of decreased costs recorded in the first quarter of 2005 related to a carrier settlement. Benefit expenses, consisting primarily of our combined net pension and postretirement cost, increased $35 in 2006, primarily due to changes in our actuarial assumptions, which included the reduction of our discount rate from 6.00% to 5.75%, and net losses on plan assets in prior years. Salary and wage merit increases and other bonus accrual adjustments increased expense $31 in 2006.

Partially offsetting these increases were lower nonemployee-related expenses such as contract services, agent commissions and materials and supplies costs, which decreased $60 in the first quarter of 2006. Lower employee levels decreased expenses, primarily salary and wages, $39 in 2006.

Costs associated with equipment sales and related network integration services decreased $34 in 2006 primarily as a result of the September 2005 amendment of our agreement for our co-branded AT&T | DISH Network satellite TV service. Prior to restructuring our relationship with EchoStar in September 2005, our co-branded AT&T | DISH Network satellite TV service had relatively high initial acquisition costs. Costs associated with equipment for large-business customers (as well as DSL and, previously, video) typically are greater than costs associated with services that are provided over multiple years.

Expenses also decreased in 2006 resulting from repair costs of approximately $100 incurred in the first quarter of 2005 related to severe weather in our traditional SBC regions.

Selling, general and administrative expenses increased $1,531 in the first quarter of 2006, primarily due to the ATTC acquisition, which increased expenses approximately $1,250. Selling, general and administrative expenses consist of our provision for uncollectible accounts; advertising costs; sales and marketing functions, including our retail and wholesale customer service centers; centrally managed real estate costs, including maintenance and utilities on all owned and leased buildings; credit and collection functions, and; corporate overhead costs, such as finance, legal, human resources and external affairs. Pension and postretirement costs are also included to the extent they relate to employees who perform the functions listed in this paragraph.

Other wireline segment costs increased $274 in 2006, most of which was advertising related to promotion of the new AT&T name. In addition, advertising expense increased $25 in 2006 primarily driven by our promotion of the Home Turf campaign and sponsorship of the Winter Olympics. Salary and wage merit increases and other bonus accrual adjustments increased expenses $22 in 2006. Benefit expenses, consisting primarily of our combined net pension and postretirement cost, increased $19 in 2006 primarily due to changes in our actuarial assumptions, which included the reduction of our discount rate from 6.00% to 5.75% and net losses on plan assets in prior years. Nonemployee related expenses, such as contract services, agent commissions and materials and supplies costs, increased $30 in 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Partially offsetting these increases were lower employee levels, which decreased expenses, primarily salary and wages, $69 in the first quarter of 2006. Our provision for uncollectible accounts decreased $28 in 2006 as we experienced fewer losses from our retail customers and a decrease in bankruptcy filings by our wholesale customers.

Depreciation and amortization expenses increased $657 in 2006. Expenses increased $734 due to the acquisition of ATTC, of which $266 related to amortization of intangible assets, primarily customer lists and relationships, identified at the time of the merger. Expenses related to traditional SBC decreased $77 in the first quarter of 2006, due primarily to significantly lower capital expenditures since 2001.

Supplemental Information

Access Line Trends

Following is a summary of our in-region switched access lines at March 31, 2006 and 2005:

In-Region 1
Switched Access Lines	March 31,
			Increase
(in 000’s)	2006	2005	(Decrease)
Retail Consumer
Primary	22,630	23,222	(592)
Additional	3,786	4,218	(432)
Retail Consumer Subtotal	26,416	27,440	(1,024)
Retail Business	17,377	17,507	(130)
Retail Subtotal	43,793	44,947	(1,154)
Percent of total switched access lines	89.8%	86.7%
Sold to ATTC	1,517	2,144	(627)
Sold to other CLECs2	3,150	4,359	(1,209)
Wholesale Subtotal	4,667	6,503	(1,836)
Percent of total switched access lines	9.6%	12.5%
Payphone (Retail and Wholesale)	308	418	(110)
Percent of total switched access lines	0.6%	0.8%
Total Switched Access Lines	48,768	51,868	(3,100)
DSL Lines in Service	7,432	5,608	1,824

¹ In-region represents access lines served by AT&T’s ILECs.

² Competitive local exchange carriers (CLECs)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Total in-region switched access lines in service at March 31, 2006 declined 3,100, or 6.0%, from March 31, 2005 levels. Retail access lines, while declining 2.6% from 2005 levels, represent 89.8% of total in-region switched access lines at March 31, 2006, compared to 86.7% a year earlier. During this same period, wholesale lines decreased 28.2% and at March 31, 2006 represented 9.6% of total access lines, down from 12.5% a year earlier.

The decline in total access lines reflects many factors, including the disconnection of additional lines as our existing customers purchase our DSL broadband services and for other reasons, and the continued growth in alternative communication technologies such as wireless, cable and other internet-based systems. However, recently, declines in our retail business access lines have been partially offset by sales of our business internet-based systems (which are reported as data revenues). We do not currently offer a residential internet-based service except in limited areas served by ATTC prior to the acquisition. The decline in our wholesale lines reflects the end of the UNE-P rules in March 2006.

Cingular

Segment Results

	First Quarter
					Percent
	2006		2005		Change
Segment operating revenues
Service revenues	$	8,005	$	7,419	7.9%
Equipment revenues		975		810	20.4
Total Segment Operating Revenues		8,980		8,229	9.1
Segment operating expenses
Cost of services and equipment sales		3,647		3,439	6.0
Selling, general and administrative		2,846		3,001	(5.2)
Depreciation and amortization		1,680		1,675	0.3
Total Segment Operating Expenses		8,173		8,115	0.7
Segment Operating Income		807		114	-
Interest Expense		297		338	(12.1)
Equity in Net Income of Affiliates		-		2	-
Other – net		(32)		4	-
Segment Income (Loss)	$	478	$	(218)	-

Accounting for Cingular

We account for our 60% economic interest in Cingular under the equity method of accounting in our consolidated financial statements since we share control equally (i.e., 50/50) with our 40% economic partner BellSouth Corporation (BellSouth) in the joint venture. We have equal voting rights and representation on the Board of Directors that controls Cingular. This means that our consolidated results include Cingular’s results in the “Equity in net income of affiliates” line. However, when analyzing our segment results, we evaluate Cingular’s results on a stand-alone basis using information provided by Cingular during the year. Accordingly, in our segment presentation, we present 100% of Cingular’s revenues and expenses under “Segment operating revenues” and “Segment operating expenses.” Including 100% of Cingular’s results in our segment operations (rather than 60% in equity in net income of affiliates) affects the presentation of this segment’s revenues, expenses, operating income, nonoperating items and segment income but does not affect our consolidated net income. We discuss Cingular’s liquidity and capital expenditures under the heading “Cingular” within “Liquidity and Capital Resources.”

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Cingular’s Customer and Operating Trends

As of March 31, 2006, Cingular served approximately 55.8 million cellular/PCS (wireless) customers, compared to 54.1 million at December 31, 2005 and 50.4 million at March 31, 2005. Cingular’s increase in customer gross additions in the first quarter of 2006 compared to the first quarter of 2005 was primarily driven by an increase in reseller and prepaid customer growth, combined with its larger distribution network, broad range of service offerings and advertising over the past year. Cingular’s recent customer activity is listed below:

Wireless Customer Activity

	Three-Month Period Ended
(in 000s)	Mar 31, 2006	Dec 31, 2005	Sep 30, 2005	Jun 30, 2005	Mar 31, 2005
Gross additions	4,737	5,136	4,386	4,292	4,672
Net additions	1,679	1,820	867	952	1,367
Other adjustments 1	(13)	32	(17)	140	(149)
Net additions including other adjustments 1	1,666	1,852	850	1,092	1,218

¹ Other adjustments include customers gained or lost through property divestitures related to the AT&T Wireless Services Inc. (AT&T Wireless) acquisition and other adjustments.

Competition and the slowing rate of new wireless users as the wireless market matures will continue to impact Cingular’s gross additions and revenue growth, expenses and put pressure on margins. Cingular expects that future revenue growth will become increasingly dependent on minimizing customer turnover (customer churn) and increasing average revenue per user/customer (ARPU).

Cingular’s ARPU has weakened over the past several years as it has offered a broader array of plans to expand its customer base and responded to increasing competition, resulting in pricing reductions. While Cingular’s ARPU has somewhat stabilized recently, Cingular expects continued pressure on ARPU notwithstanding increasing revenue from data services.

Cingular expects its cost of services to continue increasing due to higher network system usage, which includes the costs Cingular is now paying T-Mobile USA (T-Mobile) for the use of its network in California and Nevada, higher costs associated with integrating AT&T Wireless’ network and operations, and, to a lesser extent, increased expenses related to operating, maintaining and decommissioning Time Division Multiple Access (TDMA) networks that duplicated Global System for Mobile Communication (GSM) networks while integrating the networks acquired from AT&T Wireless. Cingular’s remaining purchase commitment to T-Mobile was approximately $409 at March 31, 2006. Operating costs will substantially increase in the event that Cingular’s network expansion in California and Nevada is not completed prior to fulfilling the purchase commitment with T-Mobile. However, this network expansion is proceeding on schedule and Cingular currently expects this network expansion to be completed on time, and as of March 31, 2006, approximately 70% of Cingular’s customers in California and Nevada are now on the Cingular network.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

ARPU declined 2.3% in the first quarter of 2006. The decline in ARPU was due to a decrease in local service, net roaming revenue and other revenue per customer partially offset by an increase in average data revenue per customer, which increased 41.1%. Local service revenue per customer declined primarily due to an increase in reseller customers which provide significantly lower ARPU than non-reseller customers, and customer shifts to all-inclusive rate plans that offer lower monthly charges, as well as Cingular’s free mobile-to-mobile plans, which allow Cingular customers to call other Cingular customers at no charge and to a lesser extent “rollover” minutes (which allow customers to carry over unused minutes from month to month for up to one year). An increase in customers on rollover plans tends to lower average monthly revenue per customer since unused minutes (and associated revenue) are deferred until subsequent months for up to one year.

The effective management of wireless customer churn is critical to Cingular’s ability to maximize revenue growth and maintain and improve margins. Cingular’s wireless customer churn rate is calculated by dividing the aggregate number of wireless customers (prepaid and postpaid) who cancel service during each month in a period by the total number of wireless customers at the beginning of each month in that period. Cingular’s churn rate was 1.9% in the first quarter of 2006, down from 2.2% in the first quarter of 2005.

The churn rate for Cingular’s postpaid customers was 1.6% in the first quarter of 2006, down from 1.9% in the first quarter of 2005. The decline in postpaid churn reflects benefits from the acquisition of AT&T Wireless, including more affordable rate plans, broader network coverage, higher network quality, exclusive devices and free mobile-to-mobile calling among Cingular’s 55.8 million customers.

Cingular’s Operating Results

Our Cingular segment operating income margin was 9.0% in the first quarter of 2006, which improved over margins of 6.2% in the fourth quarter of 2005 and 1.4% in the first quarter of 2005. The higher margin in the first quarter of 2006 compared to the first quarter of 2005 was primarily due to revenue growth of $751.

Service revenues are comprised of local voice and data services, roaming, long-distance and other revenue. Service revenues increased $586, or 7.9%, in the first quarter of 2006 and consisted of:

• Local voice revenues increased $339, or 5.5%, in the first quarter primarily due to a 10.5% increase in Cingular’s average number of wireless customers, partially offset by a decline in local service ARPU of 4.5%.

• Data service revenues increased $303, or 53.2%, due to a 41.1% increase in average data revenue per customer and increased use of text messaging and internet access services. Data service revenues represented 9.7% of Cingular’s total revenues in the first quarter.

• Roaming revenues from Cingular customers and other wireless carriers for use of Cingular’s network decreased $32, or 6.9%, in the first quarter.

• Long-distance and other revenue decreased $24, or 11.8%, in the first quarter primarily as a result of a decline in property management revenues, which were partially offset by increased domestic long-distance revenue.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Equipment revenues increased $165, or 20.4%, in the first quarter of 2006 due to increased handset revenues primarily as a result of higher priced handsets, partially offset by a decline in gross prepaid customer additions.

Cost of services and equipment sales expenses increased $208, or 6.0%, in the first quarter of 2006 primarily due to increases in network usage and associated network system expansion.

Cost of services increased $176, or 8.2%, in the first quarter of 2006 primarily due to the following:

• Increases in network usage with an increase in minutes of use of 22.8% in the first quarter of 2006.

• Higher roaming and long-distance cost, partially offset by declines in Universal Service Fund, regulatory fees and reseller expenses. The reseller decrease resulted from a 43% decrease in minutes of use on the T-Mobile network.

Equipment sales expense increased slightly in the first quarter of 2006 by $32, or 2.5%, due to handset unit sales associated an increase in the average cost per unit sold of 13.3% due to sales of higher quality handsets for gross customer additions, including exclusive devices, partially offset by a decline in gross prepaid customer additions. Total equipment costs continue to be higher than equipment revenues due to Cingular’s sales of handsets below cost, through direct sales sources, to customers who committed to one-year or two-year contracts or in connection with other promotions, though this difference narrowed compared to the first quarter of 2005.

Selling, general and administrative expenses decreased $155, or 5.2%, in the first quarter of 2006 due to decreases in general and administrative expenses of $123, or 7.1%, and selling expenses of $32, or 2.5%. Selling, general and administrative expenses included integration costs of approximately $46 in the first quarter of 2006 and $102 in the first quarter of 2005, which included employee termination costs, re-branding and advertising of the Cingular and AT&T Wireless combination and customer service and systems integration costs.

Decreases in selling, general and administrative expenses were primarily due to the following:

• Other administrative expenses decreased $50 in the first quarter of 2006 primarily due to a decline in employee costs and employee-related benefits due to a decrease in headcount.

• Customer service expenses decreased $46 in the first quarter of 2006 due to a decline in the number of call center outsourced professional services.

• Selling expense decreased $32 mainly from declines of $28 in marketing and advertising and $13 in commissions expense, partially offset by an increase of $9 in sales expense.

• Billing, bad debt and other customer maintenance expense decreased $27 in the first quarter primarily due to fewer account write-offs, cost savings related to transitioning to one billing system, partially offset by an increase in equipment maintenance expenses.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Depreciation and amortization expenses increased $5, or 0.3%, in the first quarter of 2006. Depreciation expense increased $146 in the first quarter of 2006 primarily due to depreciation associated with the property, plant and equipment related to Cingular’s ongoing capital spending associated with its GSM network. Additionally, depreciation expense increased due to accelerated depreciation on certain TDMA network assets based on Cingular’s projected transition of network traffic to GSM technology and accelerated depreciation on certain other network assets. Substantially all of Cingular’s TDMA assets are anticipated to be fully depreciated by the end of 2007.

Amortization expense decreased $141 in the first quarter of 2006 primarily due to the declining amortization of the AT&T Wireless customer contracts and other intangible assets acquired, which are amortized using the sum of the months digits method of amortization.

Directory

Segment Results

	First Quarter
					Percent
	2006		2005		Change
Total Segment Operating Revenues	$	923	$	929	(0.6)%
Segment operating expenses
Cost of sales		288		280	2.9
Selling, general and administrative		159		164	(3.0)
Depreciation and amortization		1		2	(50.0)
Total Segment Operating Expenses		448		446	0.4
Segment Operating Income		475		483	(1.7)
Equity in Net Income (Loss) of Affiliates		(5)		(1)	-
Segment Income	$	470	$	482	(2.5)%

Our directory operating income margin was 51.5% in the first quarter of 2006, compared to 52.0% in the first quarter of 2005. See further discussion of the details of our directory segment revenue and expense fluctuations below.

Operating revenues decreased $6, or 0.6%, in the first quarter of 2006. Revenues in 2006 decreased primarily as a result of decreased demand for local Yellow Pages advertising which was partially offset by increased internet advertising revenues. These results reflect the impact of competition from other publishers, other advertising media and continuing economic pressures on advertising customers.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Cost of sales increased $8, or 2.9%, in the first quarter of 2006. The increase was driven by higher costs for internet traffic, publishing and commissions.

Selling, general and administrative expenses decreased $5, or 3%, in the first quarter of 2006 primarily due to lower bad debt expense, partially offset by increased other directory segment costs, including benefits.

Other

Segment Results

	First Quarter
					Percent
	2006		2005		Change
Total Segment Operating Revenues	$	203	$	169		20.1%
Total Segment Operating Expenses		239		212		12.7
Segment Operating Income (Loss)		(36)		(43)		16.3
Equity in Net Income (Loss) of Affiliates		339		(58)		-
Segment Income (Loss)	$	303	$	(101)		-

Our other segment operating results in the first quarter of 2006 and 2005 consist primarily of Sterling, corporate and other operations. Sterling provides business integration software and services.

Operating revenues increased $34 in the first quarter of 2006 primarily due to increased operating revenue at Sterling.

Operating expenses increased $27 in the first quarter of 2006 primarily due to increased corporate expenses (including) advertising costs and incremental ATTC corporate expenses) and increased operating expenses at Sterling, partially offset by management fees paid in 2005 that did not recur in 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

RESULTS OF OPERATIONS - Continued

Our other segment 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. Our other segment also includes our 60% proportionate share of Cingular’s results as equity in net income of affiliates. Our equity in net income of affiliates by major investment is listed below:

		First Quarter
		2006		2005
Cingular	$	213	$	(144)
Telmex		61		51
América Móvil		55		27
Other		10		8
Other Segment Equity in Net Income (Loss) of Affiliates	$	339	$	(58)

Equity in net income of affiliates increased $397 in the first quarter of 2006. The increase was primarily due to an increase of $357 in our proportionate share of Cingular’s results. Also contributing to the increase was increased equity income of $38 from Telmex and América Móvil reflecting higher revenue levels at both companies including significant increases in wireless subscribers at América Móvil.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

COMPETITIVE AND REGULATORY ENVIRONMENT

Overview AT&T subsidiaries operating outside the U.S. are subject to the jurisdiction of national regulatory authorities in the market where service is provided, and regulation is generally limited to operational licensing authority for the provision of enterprise (i.e., large business) services. Subsidiaries operating within the U.S. are subject to federal and, to a lesser extent, state regulatory authorities. In the Telecommunications Act of 1996 (Telecom Act), Congress established a pro-competitive, deregulatory national policy framework 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 or eliminating burdensome regulation. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained many of the extensive regulatory requirements applicable to our traditional wireline subsidiaries.

We are actively pursuing additional legislative and regulatory measures to reduce or eliminate regulatory requirements that inhibit our ability to provide the full range of services increasingly demanded by our customers. For example, we are supporting legislative efforts at both the state and federal levels, as well as proposed rules at the FCC, that would offer a streamlined process for new video service providers to compete with traditional cable television providers. During 2006, Indiana and Kansas passed legislation that enables new video entrants to acquire a state-wide franchise to offer video services, see “Video Legislation” below. In addition, we are supporting efforts to update regulatory treatment for retail services. Several bills are also pending before Congress that would both reform the Telecom Act and promote additional video competition. Passage of legislation is uncertain and depends on many factors, but we believe that the increasing pace of technological change and competition in our industry will encourage lawmakers to remove artificial barriers to competition.

Triennial Review Remand Order Effective March 11, 2005, the Triennial Review Remand Order (TRRO) eliminated our obligation to provide local switching and hence the UNE-P, for mass-market customers, subject to a 12-month transition period. Since this transition period started, our wholesale customers representing a majority of our UNE-P lines have signed commercial agreements with us. For the remaining UNE-P lines, we believe, based on marketing research, that customers primarily converted to competitors using alternative technologies or their own networks as opposed to returning as our retail customers. At the March 11, 2006 transition deadline we re-priced to market-based or resale-like rates any UNE-P lines that had not been converted, except in the state of Illinois where competitive local exchange carriers have the right under state law to retain the lines that are in service at UNE-P equivalent rates. We had less than 100,000 UNE-P lines in Illinois as of March 11, 2006.

Video Legislation In March 2006, Indiana passed a state telecommunications deregulation bill that will make it easier for telecommunications companies to offer television service. The law prohibits the regulation of advanced services, broadband services, information services and retail IP enabled service, commercial mobile service and new services (any service not commercially available on March 28, 2006), and deregulates prices for basic telecommunications service after a three-year transition period. It also creates statewide video franchising to replace individual local agreements.

In April 2006, Kansas passed a state video franchise bill that will allow video providers to be granted statewide authorization and to avoid city-by-city franchise negotiations. The bill specifically lists wireline,

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in Millions except per share amounts

COMPETITIVE AND REGULATORY ENVIRONMENT – Continued

wireless, satellite or any other alternative technology as acceptable mediums for providing service to customers, and states that video providers will not be required to comply with mandatory facility build-out provisions nor provide video service to any customer using a specific technology.

Number Portability  Since 1999, customers have been able to retain their numbers when switching their local service between wireline companies. The FCC allowed incumbent local exchange companies including SBC’s traditional wireline subsidiaries, to recover their carrier-specific costs of implementing wireline number portability through customer charges over a five-year term based on an estimated number of customers over that term. Because of the downturn in the telecommunications market since 1999, which led to fewer access lines, many companies, including the SBC subsidiaries, had fewer customers than were estimated and were therefore unable to fully recover their number portability implementation costs. Accordingly, in February 2005, we asked the FCC to waive the five-year limitation on recovery of number portability costs and, in March 2006, we asked the Commission, in the alternative, to allow us to include our remaining, unrecovered number portability costs through the existing End User Common Line charge. If our request is granted, we will be able to recover approximately $190 of those costs.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

OTHER BUSINESS MATTERS

Pending Acquisition of BellSouth On March 4, 2006, we agreed to acquire BellSouth in a transaction in which each share of BellSouth common stock will be exchanged for 1.325 shares of AT&T common stock. Based on the average closing price of AT&T shares for the two days prior to, including, and two days subsequent to the public announcement of the merger (March 5, 2006) of $27.32, the total transaction is valued, for purchase accounting purposes, at approximately $65,000. The transaction has been approved by the Board of Directors of each company and also must be approved by the stockholders of AT&T and BellSouth. The transaction is also subject to review by the U.S. Department of Justice (DOJ) and approval by the FCC and various other regulatory authorities. We currently expect the transaction to close by the end of 2006.

Project Lightspeed In June 2004, we announced key advances in developing a network capable of delivering a new generation of integrated digital television, high-speed broadband and VoIP services to our residential and small-business customers, referred to as Project Lightspeed. We have been building out this network in numerous locations and began providing services, including IP video, in one limited market, in late 2005. Our goal in this controlled market entry is to fully apply our new operating and back-office systems, gain information on customer preferences and, if needed, to fine-tune the service. To that end, we have restricted the number of customers and services offered to the necessary minimum. Subject to successful results from this controlled market entry and successful testing of our additional IP video services, we plan to enter 15 to 20 additional markets by the end of 2006. During that expansion, we expect to add additional features to our IP video service offering. We expect to have the capability to offer service to approximately 18 million households by the end of 2008, as part of our initial deployment, and expect to spend approximately $4,400 in network-related deployment costs and capital expenditures beginning in 2006 through 2008, as well as additional success-based customer activation capital expenditures.

With respect to our IP video service, we continue to work with our vendors to develop, in a timely manner, the requisite hardware and software technology. Our deployment plans could be delayed if we do not receive required equipment and software on schedule. We also continue to negotiate with programming owners (e.g., movie studios and cable networks) for permission to offer existing television programs and movies and, if applicable, other new interactive services that we could offer in the future using advances in the IP technology. Our ability to provide an attractive and profitable video offering will depend in large part on the results of these efforts. Also, as discussed in the “Competitive and Regulatory Environment” section, we are supporting legislation at both the federal and state levels that would streamline the regulatory process for new video competitors to enter the market.

We believe that Project Lightspeed 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 services should be treated as a traditional cable service and therefore subject to the applicable state and local regulation, which could include the requirement to pay fees to obtain local franchises for our IP video service. If the courts were to decide that state and local regulation were applicable to our Project Lightspeed services, it could have a material adverse effect on the cost, timing and extent of our deployment plans.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

OTHER BUSINESS MATTERS - Continued

Antitrust Litigation In 2002, two consumer class-action antitrust cases were filed in the United States District Court for the Southern District of New York (District Court) against SBC, Verizon Communications Inc., BellSouth and Qwest Communications International Inc. alleging that they have violated federal and state antitrust laws by agreeing not to compete with one another and acting together to impede competition for local telephone services (Twombly v. Bell Atlantic Corp., et al.). In October 2003, the District Court granted the joint defendants’ motion to dismiss and the plaintiffs appealed. In October 2005, the United States Court of Appeals for the Second Circuit Court (Second Circuit) reversed the District Court, thereby allowing the cases to proceed. The Second Circuit noted in its decision that its ruling was procedural in nature and did not address the merits of the cases. Motions for rehearing and rehearing en banc were denied on January 3, 2006, and the case has now been remanded to the District Court for further proceedings.On remand, we have moved for partial dismissal on alternative grounds. In addition, Defendants filed a Petition for Writ of Certiorari with the Supreme Court of the United States on March 6, 2006. We continue to believe that an adverse outcome having a material effect on our financial statements in these cases is unlikely but will continue to evaluate the potential impact of these suits on our financial results as they progress.

AT&T Wireless Litigation Several class-action lawsuits have been filed in the District Court against ATTC asserting claims under the federal securities laws in connection with the offering of AT&T Wireless tracking stock in April 2000 (In re AT&T Corp. Securities Litigation). The plaintiffs have demanded damages in excess of $2,100 related to the offering of AT&T Wireless tracking stock. In April 2006, the parties agreed to settle the litigation for $150, pending approval by the trial court. In connection with the split-off of AT&T Wireless, certain provisions of the separation agreement between AT&T Wireless and ATTC result in Cingular, due to its acquisition of AT&T Wireless, being allocated 70% of any liabilities arising out of these actions to the extent they relate to AT&T Wireless tracking stock, with the remaining liability being allocated equally between ATTC and Comcast Cable Communications, Inc. Accordingly, the settlement, if approved by the court, would not result in any additional expenses being accrued by Cingular or ATTC.

Retiree Phone Concession Litigation In May 2005, we were served with a purported class action in U.S. District Court, Western District of Texas (Stoffels v. SBC Communications Inc.), in which the plaintiffs, who are retirees of Pacific Bell Telephone Company, Southwestern Bell, and Ameritech, contend that the telephone concession provided by the company is, in essence, a “defined benefit plan” within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA). Plaintiffs seek to certify a class of persons that are either (1) retirees of an SBC company who were receiving a telephone concession after they retired from January 1, 2002 to the present and who lived outside the SBC service area; or (2) current or former employees of any SBC participating company with more than five years of service with an SBC participating company as of June 1, 2005 who were eligible or who might become eligible to receive an out-of-franchise telephone concession after they retired; or (3) members of the immediate family of any person in Group 1 or Group 2, including surviving spouses and the retiree dependents (and including registered domestic partners of Pacific Telesis employees and retirees) during the time that SBC had a policy to provide employees of such participating companies with a telephone concession after retirement. Plaintiffs seek reformation of the out-of-region phone concession offered under the postemployment benefits plan (the Plan) and the documents

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

OTHER BUSINESS MATTERS - Continued

governing it to comply with ERISA, an order requiring us to fund the Plan as reformed, the appointment of an independent fiduciary to administer the Plan, an order requiring the Plan to pay benefits to plaintiffs and other class members consistent with the terms of the plan, civil penalties and attorneys’ fees and costs pursuant to ERISA. We filed a Motion to Dismiss for failure to state a claim, which was denied by the U.S. District Court, Western District of Texas on February 3, 2006. The case has been set for trial on September 25, 2006. We believe that an adverse outcome having a material effect on our financial statements in this case is unlikely, but will continue to evaluate the potential impact of this suit on our financial results as it progresses.

Hepting Litigation Plaintiffs filed this purported class action in U.S. District Court in the Northern District of California on behalf of “all individuals in the United States that are current residential subscribers or customers of defendants’ telephone services or internet services, or that were residential telephone or internet subscribers or customers at any time after September 2001,” (Hepting, et al v. AT&T Corp., AT&T Inc. and Does 1-20). They allege that the defendants have provided and continue to provide the U.S. Government with direct access to databases containing its stored telephone and internet records, and have disclosed and are currently disclosing to the U.S. Government records concerning communications to which Plaintiffs and class members 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. In April 2006, we filed a Motion to Dismiss the complaint.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

ACCOUNTING POLICIES AND STANDARDS

Pension and Other Postemployment Benefit Plans On March 31, 2006, the Financial Accounting Standards Board (FASB) issued the exposure draft “Employers’ Accounting for Defined Benefit Pension and Other Postemployment Benefit Plans, an amendment of FASB Statements 87, 88, 106, and 132(R).” The exposure draft is phase one of the FASB’s stated intent to reform the pension and other postretirement accounting and reporting standards and, if adopted in its current form, would (1) require companies to recognize the current economic status on the balance sheet (whether over funded or under funded for GAAP purposes but not for ERISA purposes), (2) require plan obligations to be measured as of the date of the employer’s statement of financial position (which we currently do) and (3) require adoption for fiscal years ending after December 15, 2006, which would affect our year-end 2006 reporting. This exposure draft is subject to a public comment period ending May 31, 2006 and further review and amendment by the FASB; it is uncertain what the requirements of a final statement would be, when issued. However, had this exposure draft been in effect at December 31, 2005, we would have reduced our pension assets approximately $8,700 and increased our postretirement benefit obligation approximately $7,300. The after tax reduction to our stockholders’ equity would have been approximately $10,000.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

LIQUIDITY AND CAPITAL RESOURCES

We had $1,057 in cash and cash equivalents available at March 31, 2006. Cash and cash equivalents included cash of $611, money market funds of $335 and other cash equivalents of $111. Cash was used to meet the financing needs of the business including, but not limited to, payment of operating expenses, funding capital expenditures, dividends to stockholders, funding of Cingular’s capital and operating requirements in accordance with the terms of our agreement with Cingular and BellSouth, tax-related payments and debt repayments. We discuss many of these factors in detail below.

Cash Provided by Operating Activities

During the first quarter of 2006, our primary source of funds was cash from operating activities of $2,458 compared to $1,253 in the first quarter of 2005. Operating cash flows increased in the first quarter of 2006 compared to 2005 primarily due to lower tax payments in the first quarter of 2006 of approximately $573 and the additional cash from operations related to our acquisition of ATTC. Included in the lower tax payment amount is a refund received from the completion of the ATTC federal income tax audit covering 1997 – 2001. The 2005 and 2006 tax payments include amounts related to prior year accrued liabilities. The timing of cash payments for income taxes, which is governed by the Internal Revenue Service and other taxing jurisdictions, will differ from the timing of recording tax expense and deferred income taxes, which are reported in accordance with GAAP. We also made advance tax payments in 2005, which we consider to be a refundable deposit, to a certain state jurisdiction. These payments were made in order to avoid potentially onerous interest and penalties. The issues involved are in dispute and we intend to pursue all procedural options available to us in order to obtain refunds of the amounts deposited. We do not anticipate 2006 cash payments for income taxes to exceed reported income tax expense.

Cash Used in Investing Activities

In the first quarter of 2006, cash used for investing activities consisted of:

• $1,821 in construction and capital expenditures.

• $699 of funding of Cingular’s capital and operating requirements in accordance with the terms of our agreement with Cingular and BellSouth. See our “Cingular” section below for details.

• $62 related to an investment in 2Wire Inc., a privately held company that provides services related to Project Lightspeed.

In the first quarter of 2006, cash provided by our investing activities of $27 was related to the sale of Covad shares and other assets.

To provide high-quality communications services to our customers, we must make significant investments in property, plant and equipment. The amount of capital investment is influenced by demand for services and products, continued growth and regulatory considerations. Our capital expenditures totaled $1,821 in the first quarter of 2006 and $1,050 in the first quarter of 2005. Capital expenditures in the wireline segment, which represented substantially all of our capital expenditures, increased 72.0% in the first quarter of 2006 compared to the first quarter of 2005 and was impacted by the acquisition of ATTC. Our first quarter capital expenditures were used primarily for our wireline subsidiaries’ networks (including ATTC), Project Lightspeed and support systems for our long-distance service.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

LIQUIDITY AND CAPITAL RESOURCES – Continued

Because of opportunities made available by the continued changing regulatory environment and our acquisition of ATTC, we expect that our capital expenditures in 2006, which includes Project Lightspeed and excludes Cingular, will be in the target range of between $8,000 and $8,500. We expect to spend approximately $4,400 on our Project Lightspeed initiative for network related deployment costs and capital expenditures through 2008, as well as additional success-based customer activation capital expenditures. We expect that the business opportunities made available, specifically in the data/broadband area, will allow us to expand our products and services (see “Project Lightspeed” discussed in “Other Business Matters”).

We expect to fund 2006 capital expenditures for our wireline segment, which includes international operations, using cash from operations and incremental borrowings, depending on interest rate levels and overall market conditions. Substantially all of our capital spending in 2006 will relate to our wireline segment and will be used primarily for our subsidiaries’ networks, Project Lightspeed and merger-integration projects. The other segment capital expenditures were less than 2.0% of total capital expenditures in the first quarter of 2006. Included in the other segment are equity investments, which should be self-funding as they are not direct AT&T operations, as well as corporate and Sterling operations. We expect to fund any directory segment capital expenditures using cash from operations. We discuss our Cingular segment below.

Cash Used in Financing Activities

We plan to fund our 2006 financing activities primarily through cash from operations. We will continue to examine opportunities to fund our activities with cash from the disposition of certain assets and other investments as well as issuing debt at favorable rates in order to refinance some of our debt maturities in 2006.

We paid dividends of $1,289 in the first quarter of 2006 compared to $1,066 in the first quarter of 2005, reflecting the issuance of additional shares for the ATTC acquisition and a dividend increase. Dividends declared by our Board of Directors totaled $0.3325 per share in the first quarter of 2006 and $0.3225 per share in the first quarter of 2005. In December 2005, our Board of Directors approved a 3.1% increase in the regular quarterly dividend to $0.3325 per share. Our dividend policy considers both 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 the opportunity to continue our historical approach to dividend growth. All dividends remain subject to approval by our Board of Directors.

Our Board of Directors authorized the repurchase of up to 400 million shares of our common stock; this authorization expires at the end of 2008. Under this repurchase program we expect to purchase approximately $2,000 of additional shares under our repurchase program in the remainder of 2006 and $8,000 during 2007. We did not repurchase any shares in the first quarter of 2006.

At March 31, 2006 we had $5,712 of debt maturing within one year, which includes $4,015 of long-term debt maturities during 2006, $1,627 of commercial paper borrowings and $70 of bank borrowings relating to foreign subsidiaries of ATTC. Included in our long-term debt maturities was the purchase accounting

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

LIQUIDITY AND CAPITAL RESOURCES – Continued

fair value debt adjustment applicable to the acquisition of ATTC. All of our commercial paper borrowings are due within 90 days. The bank borrowings availability is contingent on the level of cash held by some of our foreign subsidiaries. We continue to examine our mix of short- and long-term debt in light of interest rate trends.

During the first quarter of 2006, debt repayments totaled $261 and consisted of:

• $254 related to debt maturities with interest rates ranging from 5.875% to 6.96%.

• $7 related to scheduled principal payments on other debt and short-term borrowings.

At March 31, 2006, our debt ratio was 36.4% compared to our debt ratio of 40.2% at March 31, 2005. The decrease was primarily due to our acquisition of ATTC in the fourth quarter of 2005, which increased stockholders’ equity by more than $14,500 compared to the first quarter of 2005, partially offset by ATTC debt we now reflect on our balance sheet following the acquisition. Our debt ratio at December 31, 2005 was 35.9%. The increase in the debt ratio from year-end is due to a net increase in debt of more than $900 in the first quarter of 2006, including net advances to Cingular and refinancing of debt, which was partially offset by an increase in stockholders’ equity.

We have a 3-year credit agreement totaling $6,000 with a syndicate of banks, which expires on October 18, 2007. Advances under this agreement may be used for general corporate purposes, including support of commercial paper borrowings and other short-term borrowings. There is no material adverse change provision governing the drawdown of advances under this credit agreement. We are in compliance with all covenants under the agreement. We had no borrowings outstanding under committed lines of credit as of March 31, 2006.

Pending Acquisition of BellSouth

On March 4, 2006, we agreed to acquire BellSouth in a transaction in which each share of BellSouth common stock will be exchanged for 1.325 shares of AT&T common stock. Based on the average closing price of AT&T shares for the two days prior to, including, and two days subsequent to the public announcement of the merger (March 5, 2006) of $27.32, the total transaction is valued, for purchase accounting purposes, at approximately $65,000.

Cingular

The upgrade, integration and expansion of the Cingular and AT&T Wireless networks and the networks acquired in a transaction with Triton PCS Holdings, Inc. will continue to require substantial amounts of capital over the next several years. As of March 31, 2006, Cingular has spent $1,441 primarily for GSM/GPRS/EDGE network upgrades with cash from operations, dispositions and, as needed, advances under the revolving credit agreement mentioned below. Cingular expects to fund its capital requirements in 2006 from existing cash balances, cash generated from operations and, if necessary, drawing under the revolving credit agreement. In 2006, Cingular expects to spend within a target range of between $7,000 and $7,500 primarily for the upgrade, integration and expansion of its networks, the installation of UMTS/HSDPA technology in a number of markets and the construction and upgrade of network facilities in California and Nevada following the sale of duplicate facilities to T-Mobile upon the termination of Cingular’s GSMF network infrastructure joint venture.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dollars in millions except per share amounts

LIQUIDITY AND CAPITAL RESOURCES – Continued

Cingular’s cash requirements may increase if they participate in the upcoming FCC spectrum auction and are successful in bidding.

We and BellSouth agreed to finance Cingular’s capital and operating cash requirements to the extent Cingular requires funding above the level provided by operations. We and BellSouth also entered into a revolving credit agreement with Cingular to provide short-term financing for operations on a pro rata basis at an interest rate of LIBOR (London Interbank Offered Rate) plus 0.05%, which expires July 31, 2007. This agreement includes a provision for the repayment of our and BellSouth’s shareholder loans made to Cingular in the event there are no outstanding amounts due under the revolving credit agreement and to the extent Cingular has excess cash, as defined by the agreement. During the first quarter of 2006 we made net advances to Cingular of $699 under the revolving credit agreement. These amounts increased the outstanding amount of advances made to Cingular to a total of $1,006 at March 31, 2006 from $307 at December 31, 2005 and are reflected in “Investments in and Advances to Cingular Wireless” on our Consolidated Balance Sheets.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Dollars in millions

At March 31, 2006, we had interest rate swaps with a notional value of $4,250 and a fair value liability of approximately $70.

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 March 31, 2006. 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 March 31, 2006.

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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 the factors listed here are discussed in more detail in the “Risk Factors” section in our Annual Report on Form 10-K and updated in the “Risk Factors” section below. 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.

• 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. 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, availability and pricing of unbundled network elements and platforms (UNE-Ps) and unbundled loop and transport elements.

• 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, UNE-Ps and resale and wholesale rates, broadband deployment including Project Lightspeed, 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 extent of competition and the resulting pressure on access line totals and wireline and wireless operating margins.

• Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireline and wireless 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 UNE-Ps and nonregulation of comparable alternative technologies (e.g., VoIP).

• The timing, extent and cost of deployment of our Project Lightspeed initiative; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative, and; the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.

• 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 state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities

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CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS - Continued

with respect to applying applicable tax laws and regulations; and the resolution of disputes with any taxing jurisdictions.

• The impact of the wireless joint venture with BellSouth, known as Cingular, including: marketing and product-development efforts; customer acquisition and retention costs; access to additional spectrum; network upgrades; technological advancements; industry consolidation, including the acquisition of AT&T Wireless, and; availability and cost of capital.

• Cingular’s failure to achieve, in the amounts and within the time frame expected, the capital and expense synergies and other benefits expected from its acquisition of AT&T Wireless.

• The impact of our pending acquisition of BellSouth, including our ability to obtain shareholder and governmental approvals of the acquisition on the proposed terms and schedule; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may take longer to realize than expected or may not be fully realized; and the disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers.

• The impact of our acquisition of ATTC, including the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; disruption from the integration process making it more difficult to maintain relationships with customers, employees or suppliers; and competition and its effect on pricing, spending, third-party relationships and revenues.

• 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 listed here, also could materially affect our future earnings.

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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.

The impact of our pending acquisition of BellSouth, including our ability to obtain shareholder and governmental approvals of the acquisition on the proposed terms and schedule; the risk that the businesses will not be integrated successfully; the risk that the cost savings and any other synergies from the acquisition may take longer to realize than expected or may not be fully realized; and disruption from the acquisition making it more difficult to maintain relationships with customers, employees or suppliers.

We agreed to acquire BellSouth in order to streamline the ownership and operations of Cingular and combine the Cingular, BellSouth and AT&T IP networks into a single IP network; to speed the deployment, and at lower cost, of next-generation IP video and other services; to provide business customers with the benefits of combining AT&T’s national and international networks and services with BellSouth’s local exchange and broadband services; and to create potential cost savings, technological development and other benefits. Achieving these results will depend in part on successfully integrating three large corporations, which could involve significant management attention and create uncertainties for employees; additionally, we and Cingular are already in the process of integrating previous acquisitions. Uncertainty among employees could adversely affect the ability of AT&T, BellSouth and Cingular to attract and retain key employees. Diversion of attention from ongoing operations on the part of management and employees could adversely affect our customers, suppliers and other parties with whom we have relationships. While the merger is pending, customers and strategic partners may delay or defer decisions to use services of each of the three companies, which could adversely affect the revenues and earnings of each company as well as the market prices of AT&T and BellSouth common shares. We also expect to incur substantial expenses related to the integration of these companies. We must integrate a large number of systems, both operational and administrative. These integration expenses may result in our taking significant charges against earnings, both cash and non-cash, primarily from the amortization of intangibles. Delays in this process could have a material adverse effect on our revenues, expenses, operating results and financial condition. In addition, events outside of our control, including changes in state and federal regulation and laws as well as economic trends, also could adversely affect our ability to realize the expected benefits from this acquisition.

Item 2. Unregistered Sales of Securities and Use of Proceeds

(a) During the first quarter of 2006, non-employee directors acquired from AT&T shares of common stock pursuant to AT&T’s 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: (1) annual retainer in the form of AT&T shares or deferred stock units (DSUs) and (2) fees in the form of DSUs. DSUs are convertible into AT&T shares. Also under the plan, each Director will receive an annual grant of DSUs during the second quarter. In the first quarter an aggregate of 13,551 AT&T shares and DSUs were acquired by non-employee directors at prices ranging from $25.95 to $27.59, in each case 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.

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Item 6. Exhibits

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

2	Agreement and Plan of Merger, dated as of March 4, 2006, among BellSouth Corporation, AT&T Inc. and ABC Consolidation Corp. (Exhibit 2.1 to Form 8-K dated March 4, 2006.)
3-a	Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on November 18, 2005. (Exhibit 3-a to Form 8-K dated November 18, 2005.)
3-b	Certificate of Amendment to the Restated Certificate of Incorporation, filed with the state of Delaware on May 3, 2006. (Exhibit 3-b to Form 8-K dated April 28, 2006.)
3-c	Bylaws amended May 3, 2006. (Exhibit 3-c to Form 8-K dated April 28, 2006.)
10-cc	Stock Purchase and Deferral Plan.
10-dd	Cash Deferral Plan.
12	Computation of Ratios of Earnings to Fixed Charges
31	Rule 13a-14(a)/15d-14(a) Certifications 31.1          Certification of Principal Executive Officer 31.2          Certification of Principal Financial Officer
32	Section 1350 Certifications

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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.

May 5, 2006	/s/Richard G. Lindner
	Richard G. Lindner
	Senior Executive Vice President

and Chief Financial Officer

EX-10

Exhibit 10-cc

AT&T INC.

STOCK PURCHASE AND DEFERRAL PLAN

Adopted November 19, 2004

As amended through March 30, 2006

Article 1 - Statement of Purpose

The purpose of the Stock Purchase and Deferral Plan (“Plan”) is to increase stock ownership by, and to provide savings opportunities to, a select group of management employees consisting of Eligible Employees of AT&T Inc. (“AT&T”) and its Subsidiaries.

Article 2 - Definitions

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

Base Compensation. The following types of cash-based compensation paid by an Employer (but not including payments made by a non-Employer, such as state disability payments), before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of an Employer, including but not limited to a plan that includes a qualified cash or deferral arrangement under Section 401(k) of the Code:

(a) annual base salary;

(b) lump sum payments in lieu of a salary increase; and

(c) Team Award.

Payments by an Employer under a disability plan made in lieu of any compensation described above, shall be deemed to be a part of the respective form of compensation it replaces for purposes of this definition. Base Compensation does not include zone allowances or any other geographical differential and shall not include payments made in lieu of unused vacation or other paid days off, and such payments shall not be contributed to this Plan.

Determinations by AT&T (the Committee with respect to Officer Level Employees) of the items that make up Base Compensation shall be final. The Committee may, from time to time, add or subtract types of compensation to or from the definition of “Base Compensation” provided, however, any addition to the definition of Base Compensation shall only be effective with respect to the next period in which a Participant may make an election to establish a Share Deferral Account.

Business Day. Any day during regular business hours that AT&T is open for business.

Chief Executive Officer. The Chief Executive Officer of AT&T Inc.

Page 1

Cingular. Cingular Wireless LLC, the successor thereto, or a direct or indirect majority owned subsidiary thereof.

Code. References to the Code shall be to provisions of the Internal Revenue Code, as amended, including regulations promulgated thereunder and successor provisions.

Committee. The Human Resources Committee of the Board of Directors of AT&T Inc.

Disability. Absence of an Employee from work with an Employer under the relevant Employer's disability plan.

Disabled. Where a person either (a) is unable 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 for not less than 12 months or (b) 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 an accident and health plan covering Employees of the Participant's Employer. It is intended that “Disabled” have the same meaning in this Plan as in Section 409A of the Code.

Eligible Employee. An Employee who:

(a) is a full or part time, salaried Employee of AT&T or an Employer in which AT&T has a direct or indirect 100% ownership interest and who is on active duty, Disability (but only while such Employee is deemed by the Employer to be an Employee of such Employer) or Leave of Absence;

(b) is, as determined by AT&T, a member of Employer's “select group of management or highly compensated employees” within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder (“ERISA”), which is deemed to include each Officer Level Employee; and

(c) has an employment status which has been approved by AT&T to be eligible to participate in this Plan or is an Officer Level Employee.

Notwithstanding the foregoing, AT&T (the Committee with respect to Officer Level Employees) may, from time to time, exclude any Employee or group of Employees from being deemed an “Eligible Employee” under this Plan.

In the event a court or other governmental authority determines that an individual was improperly excluded from the class of persons who would be considered Eligible Employees during a particular time for any reason, that individual shall not be an Eligible Employee for purposes of the Plan for the period of time prior to such determination.

Employee. Any person employed by an Employer and paid on an Employer’s payroll system, excluding persons hired for a fixed maximum term and excluding persons who are neither citizens nor permanent residents of the United States, all as determined by AT&T.For purposes of this Plan, a person on Leave of Absence who otherwise would be an Employee shall be deemed to be an Employee.

Employer. AT&T Inc. or any of its Subsidiaries.

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Exercise Price. The price per share of Stock purchasable under an Option.

Fair Market Value or FMV. In valuing Stock or any other item subject to valuation under this Plan, the Committee may use such index or measurement as the Committee may reasonably determine from time to time, and such index or measurement shall be the FMV of such Stock or other item. In the absence of such action by the Committee, FMV means, with respect to Stock, the closing price on the New York Stock Exchange (“NYSE”) of the Stock on the relevant date, or if on such date the Stock is not traded on the NYSE, then the closing price on the immediately preceding date such Stock is so traded.

Leave of Absence. Where a person is absent from employment with an Employer on a formally granted leave of absence (i.e., the absence is with formal permission in order to prevent a break in the continuity of term of employment, which permission is granted (and not revoked) in conformity with the rules of the Employer that employs the individual, as adopted from time to time). For purposes of this Plan, a Leave of Absence shall be deemed to also include a transfer by an Employer of a person to, and continuous employment by, an entity for a rotational work assignment. In the event a transfer to such an entity lasts more than 5 years or the rotational work assignment status is canceled by AT&T, it shall be deemed a Termination of Employment with the Employer at that time for purposes of this Plan. To be a rotational work assignment, the Employer must have indicated in writing to the person that the person was to be rehired by the Employer upon termination of the rotational work assignment.

Officer Level Employee. Any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934, as amended, and any Employee that is an “officer level” Employee for compensation purposes as shown on the records of AT&T.

Options or Stock Options. Options to purchase Stock issued pursuant to this Plan.

Participant. An Eligible Employee or former Eligible Employee who participates in this Plan.

Plan Year. Each of the following shall be a Plan Year: the period January 1, 2005, through January 15, 2006; the period January 16, 2006, through December 31, 2006; and, for all later Plan Years, the period from January 1 through December 31.

Retirement or Retire. Termination of Employment on or after the earlier of the following dates, unless otherwise provided by the Committee: (a) for Officer Level Employees, the date the Participant is at least age 55 and has five (5) years of Net Credited Service; or (b) the date the Participant has attained one of the following combinations of age and Net Credited Service:

Net Credited Service	Age
10 years or more	65 or older
20 years or more	55 or older
25 years or more	50 or older
30 years or more	Any age

For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as “Pension Eligibility Service” under the AT&T Pension Benefit Plan – Nonbargained Program (“Pension Plan”), as that may be amended from time to time, except that service with an Employer shall be counted as though the Employer were a “Participating Company” under the Pension Plan and the Employee was a participant in the Pension Plan.

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Shares or Share Units. An accounting entry representing the right to receive an equivalent number of shares of Stock.

Share Deferral Account or Account. The Account established annually by an election by a Participant to make Employee Contributions to the Plan over the Plan Year relating to such election. One Share Deferral Account is created by each yearly election, and all Share Units credited pursuant to such election, including through Employee Contributions, AT&T Matching Contributions, conversions of right to receive Stock, earnings on Share Units, or otherwise, shall be part of the same Share Deferral Account. Each annual Account is a separate Share Deferral Account; only one Share Deferral Account will relate to a Plan Year.

Short Term Incentive Award. A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan; an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including, but not limited to, Performance Units granted under the 2001 Incentive Plan or any successor plan; or any other award that the Committee designates as a Short Term Incentive Award specifically for purposes of this Plan (regardless of the purpose of the award).

Stock. The common stock of AT&T Inc.

Subsidiary. Any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest. The Committee may, at its sole discretion, designate any other corporation, partnership, limited liability company, venture or other entity a Subsidiary for the purpose of participating in this Plan. Unless otherwise provided by the Committee, Cingular shall be deemed a Subsidiary so long as AT&T holds a direct or indirect 25% interest in Cingular Wireless LLC or its successor.

Team Award. The annual award determined to be the “Team Award” by AT&T, together with any individual award determined by AT&T to be the Individual Discretionary Award made in connection therewith or comparable awards, if any, determined by AT&T to be used in lieu of these awards.

Termination of Employment. References herein to “Termination of Employment," “Terminate Employment” or a similar reference, shall mean the event where the Employee ceases to be an Employee of any Employer, including but not limited to where the employing company ceases to be an Employer.

Article 3 - Administration of the Plan

3.1 The Committee.

The Committee shall be the administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions and determine entitlement to benefits, all in its discretion. The Committee may further establish, adopt or revise such rules and regulations and such additional terms and conditions regarding participation in the Plan as it may deem necessary or advisable for the administration of the Plan. References to

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determinations or other actions by AT&T, herein, shall mean actions authorized by the Committee, the Chief Executive Officer, the Senior Executive Vice President of AT&T in charge of Human Resources, or their respective successors or duly authorized delegates, in each case in the discretion of such person. All decisions by AT&T shall be final and binding.

3.2 Authorized Shares of Stock.

(a) Except as provided below, the number of shares of Stock which may be distributed pursuant to the Plan, exclusive of Article 8, is 21,000,000. The number of shares of Stock which may be issued pursuant to the exercise of Stock Options is 34,000,000 (together with an equal number of Stock Options). Only the actual number of shares of Stock that are issued (shares issued would not include, for example, any reduction in shares to be issued as a result of tax withholding in connection with a distribution of Stock, exercise of options, or otherwise) shall be counted against the authorized number of shares of Stock. To the extent an Option issued under this Plan is canceled, terminates, expires, or lapses for any reason, such Option shall again be available for issuance under the Plan. Conversions of Stock awards into Share Units and their eventual distribution (excluding the effects of any dividends on such Share Units) shall count only against the limits of the plans from which they originated and shall not be applied against the limits in this Plan. To the extent Share Units are credited through deferrals of Stock or Employee Contributions where the distribution of which would be deductible by AT&T under Section 162(m) of the Code without regard to the size of the distribution, and such deductible Share Units are available for distribution, such Share Units shall be distributed first.

(b) In the event the Committee determines that continuing the purchase of Share Units under the Plan may cause the number of shares of Stock that are to be distributed under this Plan (which may take into account, among other things, the number of Share Units acquired and the number of Stock Options issued or required to be issued, reduced by the number of shares of Stock that would be withheld for income tax purposes) to exceed the number of authorized shares of Stock, then the Committee may cancel further purchases of Share Units and require that any further dividend equivalents on Share Units be paid in cash to the Participants.

(c) In the event of a merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, share combination, or other change in the corporate structure of AT&T affecting the shares of Stock (including a conversion of Stock into cash or other property), such adjustment shall be made to the number and class of the shares of Stock which may be delivered under the Plan (including but not limited to individual limits), and in the number and class of and/or price of shares of Stock subject to outstanding Options granted under the Plan, and/or in the number of outstanding Options and Share Units, or such other adjustment determined by the Committee, in each case as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights.

3.3 Claims Procedure.

Subject to the authority of the Committee over the Plan, AT&T shall appoint a Claims Board to adjudicate claims brought by or in respect to Participants and their beneficiaries relating to benefits under the Plan. A Participant may apply in writing to the Claims Board to make a claim under this Plan. The Claims Board shall provide written notice within 90 days to a Participant whose claim hereunder has been denied, setting forth reasons for such denial or explaining that an extension of the time for processing the claim is necessary, written in a manner calculated to be understood by such person. After receipt of such notice, or expiration of 90 days without any response from the

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Claims Board, the Participant may appeal the decision in writing to the Senior Executive Vice President of AT&T in charge of Human Resources, or to the person’s successor, within 90 days, except that if the Participant is an Insider, as that term is used in the 2001 Incentive Plan, then the Participant's appeal shall be to the Committee. The Participant shall receive a full and fair review of the decision denying the claim in accordance with the requirements of ERISA.

Article 4 - Contributions

4.1 Election to Make Contributions.

(a) The Committee shall establish dates and other conditions for participation in the Plan and making contributions as it deems appropriate. Except as otherwise provided by the Committee, each year:

(1) an Employee who is an Eligible Employee as of April 30 may thereafter make an election on or prior to the last Business Day of the immediately following June to establish a Share Deferral Account in order to elect any combination of the following:

(A) to make contributions to the Plan (“Employee Contributions”), through payroll deductions, during the immediately following Plan Year (which shall be the Plan Year of such Account), to acquire Share Units in such Account with any combination of the following:

(i) from 6% to 30% (in whole percentage increments) of the Participant’s monthly Base Compensation, as the same may change from time to time (Participants who, at the time of the determination of their eligibility to participate in an Account, are paid through a “sales plan” involving the use of commissions) may contribute up to 40% of Base Compensation, provided that upon removal of a Participant from such “sales plan,” the deferral election shall not exceed 30% for the rest of the Plan Year, beginning with the Employee Contributions relating to the first pay period following such change in status; or

(ii) up to 100% (in whole percentage increments or in dollars) of a Short Term Incentive Award (with any contribution of a discretionary award related thereto determined separately). If a Participant did not have a target Short Term Incentive Award on June 30, but was subsequently granted such an award before the end of such Plan Year, the Participant will be deemed to have made the same percentage contribution election for the Short Term Incentive Award as the Participant made for Base Compensation.

(B) to convert up to 100% (in whole percentage increments) of Stock that would be distributed under the 2001 Incentive Plan or any successor Plan (other than through the exercise of stock options or the removal of restrictions on restricted Stock) during such Plan Year into an equal number of Share Units in such Account; provided such election would not cause the recognition of income for Federal income tax purposes in respect of the Stock prior to payment under this Plan and so long as the Participant is an Employee or has Retired as of the conversion date.

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(2) an Employee who was not an Eligible Employee as of April 30 but who is an Eligible Employee the immediately following September 30 may thereafter make an election on or prior to the last Business Day of the immediately following November to establish a Share Deferral Account in order to contribute Base Compensation, other than Team Award, in the same manner as if the Employee was an Eligible Employee as of such April 30.

(b) The Committee may permit an Eligible Employee to purchase Share Units under this Plan with amounts other than Base Compensation or Short Term Incentive Awards on such terms and conditions as such Committee may permit from time to time. In no event shall an acquisition of Share Units pursuant to this paragraph (b) or pursuant to the conversion of a right to receive Stock into Share Units (such as through a distribution of Stock under the 2001 Incentive Plan) result in the crediting of an AT&T Matching Contribution or Options.

(c) Except for (i) compensation payable after December 31 (in accordance with the Employer's normal payroll practices) solely for services performed during the Employer's final payroll period (as described in Section 3401(b) of the Code) that includes December 31 and (ii)performance-based compensation (as that term is defined under Section 409A of the Code), no contribution of compensation shall be made to the Plan out of compensation for services where such services are performed during or before the taxable year of the election to make such Employee Contributions. In the case of the above referenced performance-based compensation (based on services performed over a period of at least 12 months), such election may be made no later than 6 months before the end of the period.

(d) Notwithstanding anything to the contrary in this Plan, no election shall be effective to the extent it would permit an Employee Contribution or distribution to be made that is not in compliance with Section 409A of the Code. To the extent such election related to Employee Contributions that complied with such statute and regulations, that portion of the election shall remain valid, except as otherwise provided under this Plan.

(e) AT&T may refuse or terminate, in whole or in part, any election to purchase Share Units in the Plan at any time; provided, however, only the Committee may take such action with respect to persons who are Officer Level Employees.

(f) In the event the Participant takes a hardship withdrawal from a benefit plan qualified under the Code and sponsored by an Employer, any election to make Employee Contributions by such Participant shall be cancelled on a prospective basis, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

4.2 Purchase of Share Units.

(a) Employee Contributions (as well as any corresponding AT&T Matching Contributions) shall be made solely pursuant to a proper election and only during the Employee's lifetime and while the Employee remains an Eligible Employee (if the Employee ceases to be an Eligible Employee, his or her election to make Employee Contributions shall be cancelled on a prospective basis); provided, however, Termination of Employment of an Eligible Employee shall not constitute loss of eligibility solely with respect to contribution of annual base salary earned prior to termination but paid within 60 days thereafter or with respect to a Short Term Incentive Award paid after Retirement (and such person shall be deemed an Eligible Employee for such contributions).

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(b) The number of Share Units purchased by a Participant during a calendar month shall be found by dividing the Participant's Employee Contributions during the month by the FMV on the last day of such month.

(c) A contribution to the Plan shall be made when the compensation – from which the contribution is to be deducted – is paid (“paid,” as used in this Plan, includes amounts contributed to the Plan that would have been paid were it not for an election under this Plan) using the "check date" shown on the related pay record (sometimes referred to as the "paycheck stub") as the contribution date (if no "check date" is shown, then the date of the pay record). When a payment is made to correct an underpayment, or as a delayed payment, of gross compensation for any reason, the related Employee Contribution to the Plan shall be made when such correcting or delayed payment is made, again using the date on the pay record. No correcting or delayed payment may be contributed to the Plan if it is made after the period for making contributions in Article 4 for the Share Deferral Account covering the payment to be corrected. For example, if an underpayment is made in June 2005, but not corrected until May 2006, regardless of the cause of such events, no part of the correcting payment may be contributed to the Plan. Where there has been an overpayment of gross compensation, the amount of the overpayment will not be considered in determining the contribution amount. In no event shall the Participant have any recourse against an Employer under this Plan for any underpayment, overpayment or delayed or correcting payment of compensation. In the event a pay period (the period over which services are rendered for the relevant compensation) relates to services rendered during or before the taxable year of the relevant election, then only the compensation relating to services performed in the calendar year following the calendar year of the election may be contributed to this Plan. The Committee may modify or change this paragraph (c) from time to time.

4.3 Reinvestment of Dividends.

In the month containing a record date for a cash dividend on Stock, each Share Deferral Account shall be credited with that number of Share Units equal to the declared dividend per share of Stock, multiplied by the number of Share Units held in such Share Deferral Account as of such record date, and dividing the product by the FMV on the last day of such month.

Article 5 - AT&T Matching Contributions

5.1 AT&T Match.

(a) AT&T shall credit the Participant's relevant Share Deferral Account with the number of Matching Share Units (defined below) found by taking eighty percent (80%) (the "Match Rate") of the Participant's Employee Contributions (but only with respect to Employee Contributions from no more than six percent (6%) of the Participant's monthly Base Compensation) (the "Match Compensation Percentage") made during the month with respect to such Share Deferral Account and dividing the resulting figure by the FMV of the Stock on the last day of such month (the result is the "AT&T Matching Contribution"). For example, if a Participant contributes 10% of his/her monthly Base Compensation, only 6% of his/her monthly Base Compensation is eligible for the match. The match will equal 80% of 6% of the Participant's Base Compensation, or 4.8%. However, if during any month the Participant is concurrently participating in this Plan and (1) the match eligible portion of the AT&T Savings Plan (which may be referred to as “Basic Allotments”) or (2) the match eligible portion of any other tax qualified or nonqualified plan of an Employer, then the monthly Match Compensation Percentage shall be reduced by the Participant's match eligible percentage determined under such other plan.

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In no event shall matching contributions under this Plan and all other plans of AT&T and all Employers combined (including but not limited to the AT&T Savings Plan) be paid with respect to more than six percent (6%) of Participant's monthly Base Compensation, except as provided below. AT&T Matching Contributions shall only be paid on Base Compensation contributed to the Plan. The Committee, in its discretion, may reduce or eliminate the AT&T Matching Contributions with respect to those Employee Contributions that have not been the subject of a contribution election by the Participant.

Notwithstanding the foregoing, in the event that the tax-qualified plan applicable to a Participant provides for a greater match rate and/or applies to a larger percentage of compensation than this Plan provides, the Committee may, to the extent it deems appropriate, raise the percentage of the Match Rate (set at 80%, above) and/or the Match Compensation Percentage (set at 6%, above) to approximate the matching benefit provided in such tax qualified plan for applicable Participants.

(b) In the sole discretion of the Committee, in the event the Committee reduces the number of Options that AT&T issues for each Share Unit purchased, the Committee may provide for the contribution of a Bonus Matching Contribution on such terms as the Committee determines. Such Bonus Matching Contribution may not exceed 20% of the Participant’s Employee Contributions for the month. The Bonus Matching Contribution shall be subject to such terms and conditions as required by the Committee and, unless otherwise provided by the Committee, to the same vesting and distribution requirements as AT&T Matching Contributions.

5.2 Vesting and Distribution of Share Units Acquired with Matching Contributions.

A Participant's interest in Share Units purchased with AT&T Matching Contributions, as well as earnings thereon, (collectively, "Matching Share Units") shall vest when a Participant shall have three (3) years of Net Credited Service (regardless of any subsequent break in service after achieving vesting) as reflected on the records of AT&T. Matching Share Units shall be distributed in a lump sum, in accordance with the Plan's distribution provisions only upon becoming vested, in the earlier of: (a) the calendar year following the calendar year of the Termination of Employment of the Participant, or (b) the calendar year in which the Participant reaches age 55.

Matching Share Units acquired as part of a Share Deferral Account that commences in or after the calendar year the Participant reaches age 55 will be distributed in the same manner and time as other Share Units in such Share Deferral Account.

Upon the Participant's Termination of Employment, all the Participant's unvested Share Units shall be forfeited and shall not be reinstated if Participant is re-Employed.

Article 6 - Distributions

6.1 Distributions of Share Units.

(a) Initial Election with Respect to a Share Deferral Account. At the time the Participant makes an election to make Employee Contributions with respect to a Share Deferral Account, the Participant shall also elect the calendar year the Share Deferral Account shall be distributed, which may be from one through five years after the calendar year the Account commenced. For example, if an Account commenced in 2005, the Participant may elect to commence the distribution in any calendar year from and including 2006 to and including 2010. If no timely distribution election is made by the Participant, then the Participant will be deemed to have

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made an election to have the Share Deferral Account distributed in a single installment in the first calendar year after the calendar year the Account commenced. However, for purposes of the Initial Election only, in the event the Participant Terminates Employment, the distribution of the Share Deferral Unit shall occur in the calendar year following the calendar year of the Participant’s Termination of Employment. If the Participant Terminates Employment but has a Share Deferral Account that commenced in the same year the Share Deferral Account would be distributed, then that Account would instead distribute in the calendar year following the year of the contribution. For example, if a Retirement eligible Employee Terminated Employment in 2005 after making an election with regard to an Incentive Award to be paid in 2006, the Share Deferral Account relating to that award would be distributed in 2007.

(b) Election to Delay a Scheduled Distribution. While an Employee, a Participant may elect to defer a scheduled distribution of a Share Deferral Account for five (5) additional calendar years beyond that previously elected. Unless otherwise provided by the Committee, the election to defer the distribution must be made on or after the September 1, and on or before the last Business Day of the December, of the calendar year that is the second calendar year preceding the calendar year of the relevant scheduled distribution. For example, an election to defer a scheduled distribution in 2010 must be made from September 1, 2008 through the last business day of December 2008. An election to defer the distribution of a Share Deferral Account may not be made in the same calendar year that the election to establish the Share Deferral Account is made. Notwithstanding anything to the contrary in this Plan, (1) an election to defer the distribution of a Share Deferral Account must be made at least 12 months prior to the date of the first scheduled payment under the prior distribution election and (2) the election shall not take effect until at least 12 months after the date on which the election is made.

(c) A Participant’s Share Deferral Account shall be distributed to the Participant on March 10 (or as soon thereafter as administratively practicable as determined by AT&T) of the calendar year elected by the Participant. In the event the distribution is to be made to an Officer Level Employee or a “key employee” (as defined in Section 416(i) of the Code, without regard to paragraph (5) thereof) as a result of the Participant’s Termination of Employment, the distribution shall not occur until the later of such March 10 or six (6) months after the Termination of Employment, except it shall be distributed promptly upon the Participant’s earlier death.

6.2 Death of the Participant or if the Participant Becomes Disabled.

In the event of the death of a Participant, all undistributed Share Deferral Accounts shall be distributed to the Participant's beneficiary in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time. In the event a Participant becomes Disabled and Terminates Employment, all undistributed Share Deferral Accounts shall be promptly distributed to the Participant.

6.3 Unforeseeable Emergency Distribution.

In the event that AT&T (the Committee in the case of Officer Level Employees), upon written petition of the Participant, determines in its sole discretion that the Participant has suffered an unforeseeable emergency, AT&T shall make such distributions to the Participant from the Participant’s Share Deferral Accounts (other than Matching Share Units), on a pro-rata basis, as it deems necessary, as soon as practicable following such determination, subject to the following. For purposes of this Plan, an unforeseeable emergency is a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's spouse, or a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant's

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of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The amounts distributed with respect to an emergency may not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). It is the intent of this Plan that this provision comply with the Unforeseeable Emergency provisions of Section 409A of the Code. Upon such distribution, any election to make Employee Contributions by such Participant shall be immediately cancelled, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

6.4 Ineligible Participant.

Notwithstanding any other provisions of this Plan to the contrary, if AT&T receives an opinion from counsel selected by AT&T, or a final determination is made by a Federal, state or local government or agency, acting within its scope of authority, to the effect that an individual is not, or was not at the time of his or her making Employee Contributions to this Plan, a member of Employer's “select group of management or highly compensated employees” within the meaning of ERISA, then such person will not be eligible to make further contributions to the Plan.

6.5 Distribution Process.

A Share Deferral Account shall be distributed under this Plan by taking the number of Share Units comprising the Account to be distributed and converting them into an equal number of shares of Stock. (Once distributed, a Share Unit shall be canceled.)

Article 7 - Transition Provisions

7.1 Stockholder Approval

All acquisitions of Share Units under this Plan are subject to Stockholder approval of the Plan at the 2005 Annual Meeting of Stockholders. If the Stockholders fail to approve the Plan, further contributions will be terminated and all funds and Stock distributions contributed to the Plan by Participants and all funds contributed as AT&T Matching Contributions will be promptly paid to the Participants, without interest, and, upon payment of such amounts to a Participant, the Participant shall have no further rights under the Plan.

7.2 2005 Share Deferral Accounts.

Notwithstanding Article 4 to the contrary, if an Employee is an Eligible Employee on September 30, 2004, the Employee may make an election under Article 4 on or prior to December 15, 2004, with respect to the establishment of a Stock Deferral Account for the (i) contribution of Base Compensation and/or Short Term Incentive Awards paid during the period from January 1, 2005, through January 15, 2006, which shall be the Plan Year for such Stock Deferral Account; and/or (ii) the conversion of a distribution of Stock that would be made during the same Plan Year pursuant to the 2001 Incentive Plan into an equal number of Share Units, so long as such conversion would not cause the recognition of income for Federal income tax purposes in respect of such distribution of Stock prior to distribution of Share Units under this Plan.

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Article 8 - Options

8.1 Grants.

Options may be issued in definitive form or recorded on the books and records of AT&T for the account of the Participant, at the discretion of AT&T. If AT&T elects not to issue the Options in definitive form, they shall be deemed issued, and the Participants shall have all rights incident thereto as if they were issued on the dates provided herein, without further action on the part of AT&T or the Participant. In addition to the terms herein, all Options shall be subject to such additional provisions and limitations as provided in any Administrative Procedures adopted by the Committee prior to the issuance of such Options. The number of Options issued to a Participant shall be reflected on the Participant's annual statement of account.

8.2 Term of Options.

The Options may only be exercised: (a) after the earlier of (i) the expiration of one (1) year from date of issue or (ii) the Participant's Termination of Employment, and (b) no later than the tenth (10^th) anniversary of their issue; and Options shall be subject to earlier termination as provided herein.

8.3 Exercise Price.

The Exercise Price of an Option shall be the FMV of the Stock on the date of issuance of the Options and Options may not be repriced.

8.4 Issuance of Options.

(a) For each Share Deferral Account established by a Participant:

(1) on June 15 of the Plan Year for the Share Deferral Account, the Participant shall receive two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding January through May period with Employee Contributions of Base Compensation and/or Short Term Incentive Award. A fractional number of Options shall be rounded up to the next whole number.

(2) on the February 15 immediately following the Plan Year for the Share Deferral Account, a Participant shall receive:

(i)two (2) Options for each Share Unit acquired by the Participant as part of such Share Deferral Account during the immediately preceding June through the remainder of the relevant Plan Year with Employee Contributions of Base Compensation and/or Short Term Incentive Award; and

(ii)two (2) Options for each Share Unit acquired prior to such date by the Participant with dividend equivalents that were derived, directly or indirectly (such as dividend equivalents paid on Share Units acquired with dividend equivalents), from Share Units acquired with Employee Contributions as part of such Share Deferral Account..

(b) A fractional number of Options shall be rounded up to the next whole number.

(c) If Stock is not traded on the NYSE on any of the foregoing Option issuance dates, then the

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Options shall not be issued until the next such day on which Stock is so traded.

(d) If a Participant Terminates Employment other than (i) while Retirement eligible or (ii) because of death or Disability, no further Options shall be issued to or with respect to such Participant. In the event of re-Employment following a Termination of Employment, the preceding sentence shall not apply to those Options resulting from participation in the Plan after such re-Employment until a subsequent Termination of Employment.

(e) No more than 400,000 Options shall be issued to any individual under this Plan during a calendar year. No Share Unit may be counted more than once for the issuance of Options.

(f) The Committee may, in its sole discretion, at any time, increase or lower the number of Options that are to be issued for each Share Unit acquired, not to exceed two (2) Options per Share Unit purchased. However, if the Committee lowers the number of Options, then such change shall only be effective with respect to the next Share Deferral Account a Participant may elect to establish.

(g) The Committee may also, at any time and in any manner, limit the number of Options which may be acquired as a result of the Short Term Incentive Award being contributed to the Plan. Further, except as otherwise provided by the Committee, in determining the number of Options to be issued to a Participant with respect to a Participant's contribution of a Short Term Incentive Award to the Plan and subsequent crediting of Share Units, Options may be issued only with respect to an amount which does not exceed the target amount of such award (or such other portion of the award as may be determined by the Committee).

(h) No options shall be issued to or in respect of a Participant for a particular issuance, unless at least ten (10) Options will be issued to that Participant.

8.5 Exercise and Payment of Options.

Options shall be exercised by providing notice to the designated agent selected by AT&T (if no such agent has been designated, then to AT&T), in the manner and form determined by AT&T, which notice shall be irrevocable, setting forth the exact number of shares of Stock with respect to which the Option is being exercised and including with such notice payment of the Exercise Price. When Options have been transferred, AT&T or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a share of Stock.

Exercises of Options may be effected only on days and during the hours that the New York Stock Exchange is open for regular trading or as otherwise provided or limited by AT&T. If an Option expires on a day or at a time when exercises are not permitted, then the Options may be exercised no later than the immediately preceding date and time that the Options were exercisable.

The Exercise Price shall be paid in full at the time of exercise. No Stock shall be issued or transferred until full payment has been received therefore.

Payment may be made:

(a) in cash, or

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(b) unless otherwise provided by the Committee at any time, and subject to such additional terms and conditions and/or modifications as AT&T may impose from time to time, and further subject to suspension or termination of this provision by AT&T at any time, by:

(i) delivery of Stock owned by the Participant in partial (if in partial payment, then together with cash) or full payment; provided, however, as a condition to paying any part of the Exercise Price in Stock, at the time of exercise of the Option, the Participant must establish to the satisfaction of AT&T that the Stock tendered to AT&T must have been held by the Participant for a minimum of six (6) months preceding the tender; or

(ii) if AT&T has designated a stockbroker to act as AT&T's agent to process Option exercises, issuance of an exercise notice to such stockbroker together with instructions irrevocably instructing the stockbroker: (A) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a sell order) a sufficient portion of the Stock to pay the Exercise Price of the Options being exercised and the required tax withholding, and (B) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to AT&T. In the event the stockbroker sells any Stock on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and AT&T disclaims any responsibility for the actions of the stockbroker in making any such sales. No Stock shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to AT&T.

If payment is made by the delivery of Stock, the value of the Stock delivered shall be equal to the FMV of the Stock on the day preceding the date of exercise of the Option.

Restricted Stock may not be used to pay the Option exercise price.

8.6 Restrictions on Exercise and Transfer.

No Option shall be transferable except: (a) upon the death of a Participant in accordance with AT&T's Rules for Employee Beneficiary Designations, as the same may be amended from time to time; and (b) in the case of any holder after the Participant's death, only by will or by the laws of descent and distribution. During the Participant's lifetime, the Participant's Options shall be exercisable only by the Participant or by the Participant's guardian or legal representative. After the death of the Participant, an Option shall only be exercised by the holder thereof (including but not limited to an executor or administrator of a decedent's estate) or his or her guardian or legal representative.

8.7 Termination of Employment.

(a) Not Retirement Eligible. Unless otherwise provided by the Committee, if a Participant Terminates Employment while not Retirement eligible, a Participant's Options may be exercised, to the extent then exercisable:

(i) if such Termination of Employment is by reason of death or Disability, then for a period of three (3) years from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter; or

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(ii) if such Termination of Employment is for any other reason, then for a period of one (1) year from the date of such Termination of Employment or until the expiration of the stated term of such Option, whichever period is shorter.

(b) Retirement Eligible. Unless otherwise provided by the Committee, if a Participant Terminates Employment while Retirement eligible, a Participant's Option may be exercised, to the extent then exercisable: (i) for a period of five (5) years from the date of Retirement or (ii) until the expiration of the stated term of such Option, whichever period is shorter.

(c) Re-Employment of a Participant after a Termination of Employment shall have no effect on the periods during which Options resulting from the prior Employment may be exercised. For example, if the Option exercise period has been shortened because of the prior Termination of Employment, it shall not be extended because of the re-Employment.

Article 9 - Discontinuation, Termination, Amendment.

9.1 AT&T's Right to Discontinue Offering Share Units.

The Committee may at any time discontinue offerings of Share Units under the Plan. Any such discontinuance shall have no effect upon existing Share Units or the terms or provisions of this Plan as applicable to such Share Units.

9.2 AT&T's Right to Terminate Plan.

The Committee may terminate the Plan at any time. Upon termination of the Plan, contributions shall no longer be made under the Plan.

After termination of the Plan, Participants shall continue to earn dividend equivalents in the form of Share Units on undistributed Share Units and shall continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of Participant's elections and this Plan.

9.3 Amendment.

The Committee may at any time amend the Plan in whole or in part including but not limited to changing the formulas for determining the amount of AT&T Matching Contributions under Article 5 or decreasing the number of Options to be issued under Article 8; provided, however, that no amendment, including but not limited to an amendment to this section, shall be effective, without the consent of a Participant, to alter, to the material detriment of such Participant, a Share Deferral Account of the Participant. For purposes of this section, an alteration to the material detriment of a Participant shall include, but not be limited to, a material reduction in the period of time over which Stock may be distributed to a Participant, any reduction in the Participant's number of vested Share Units or Options, or an increase in the Exercise Price or decrease in the term of an Option. Any such consent may be in a writing, telecopy, or e-mail or in another electronic format. An election to acquire Share Units with Employee Contributions shall be conclusively deemed to be the consent of the Participant to any and all amendments to the Plan prior to such election, and such consent shall be a condition to making any election with respect to Employee Contributions.

Notwithstanding anything to the contrary contained in this section of the Plan, the Committee may modify this Plan with respect to any person subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to place additional restrictions on the exercise of any Option or the transfer of any Stock not yet issued under the Plan.

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Article 10 – Miscellaneous.

10.1 Tax Withholding.

Upon distribution of Stock, including but not limited to, shares of Stock issued upon the exercise of an Option, AT&T shall withhold shares of Stock sufficient in value, using the FMV on the date determined by AT&T to be used to value the Stock for tax purposes, to satisfy the minimum amount of Federal, state, and local taxes required by law to be withheld as a result of such distribution.

Any fractional share of Stock payable to a Participant shall be withheld as additional Federal withholding, or, at the option of AT&T, paid in cash to the Participant.

Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 8.5, hereof, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds. For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the FMV of the Stock.

10.2 Elections and Notices.

Notwithstanding anything to the contrary contained in this Plan, all elections and notices of every kind under this Plan shall be made on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including through electronic means, over the Internet or otherwise. An election shall be deemed made when received by AT&T (or its designated agent, but only in cases where the designated agent has been appointed for the purpose of receiving such election), which may waive any defects in form. Unless made irrevocable by the electing person, each election with regard to making Employee Contributions or distributions of Share Deferral Accounts shall become irrevocable at the close of business on the last day to make such election. AT&T may limit the time an election may be made in advance of any deadline.

If not otherwise specified by this Plan or AT&T, any notice or filing required or permitted to be given to AT&T under the Plan shall be delivered to the principal office of AT&T, directed to the attention of the Senior Executive Vice President in charge of Human Resources for AT&T or his or her successor. Such notice shall be deemed given on the date of delivery.

Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to the Participant's work or home address as shown on the records of AT&T or, at the option of AT&T, to the Participant's e-mail address as shown on the records of AT&T. It is the Participant's responsibility to ensure that the Participant's addresses are kept up to date on the records of AT&T. In the case of notices affecting multiple Participants, the notices may be given by general distribution at the Participants' work locations.

By participating in the Plan, each Participant agrees that AT&T may provide any documents required or permitted under the Federal or state securities laws, including but not limited to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by e-mail, by e-mail attachment, or by notice by e-mail of electronic delivery through AT&T's Internet Web site or by other electronic means.

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10.3 Unsecured General Creditor.

Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of any Employer. No assets of any Employer shall be held under any trust for the benefit of Participants, their beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of any Employer under this Plan. Any and all of each Employer's assets shall be, and remain, the general, unpledged, unrestricted assets of such Employer. The only obligation of an Employer under the Plan shall be merely that of an unfunded and unsecured promise of AT&T to distribute shares of Stock corresponding to Share Units and Options, under the Plan.

10.4 Offset.

AT&T may offset against the amount of Stock otherwise distributable to a Participant, any amounts due an Employer by a Participant, including but not limited to overpayments under any compensation or benefit plans. In addition, AT&T may also cancel a Stock Option to satisfy such an obligation to an Employer. For this purpose, each Stock Option shall be valued by subtracting the Exercise Price of the Stock Option from the FMV of the Stock on such date.

10.5 Non-Assignability.

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, shares of Stock corresponding to Share Units under the Plan, if any, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the Stock distributable shall, prior to actual distribution, 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.

10.6 Employment Not Guaranteed.

Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of an Employer or to serve as a director.

10.7 Errors.

At any time AT&T or an Employer may correct any error made under the Plan without prejudice to AT&T or any Employer. Such corrections may include, among other things, changing or revoking a Stock Option issuance, canceling Share Units and refunding contributions to a Participant with respect to any period he or she made Employee Contributions while not an Eligible Employee, or canceling the enrollment of a non-Eligible Employee. Neither AT&T nor any Employer shall be liable for any damages resulting from failure to timely allow any contribution to be made to the Plan or for any damages resulting from the correction of, or a delay in correcting, any error made under the Plan. In no event shall AT&T or any Employer be liable for consequential or incidental damages arising out of a failure to comply with the terms of the Plan.

10.8 Captions.

The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control nor affect the meaning or construction of any of its provisions.

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10.9 Governing Law.

To the extent not preempted by Federal law, the Plan, and all benefits and agreements hereunder, and any and all disputes in connection therewith, shall be governed by and construed in accordance with the substantive laws of the State of Texas, without regard to conflict or choice of law principles which might otherwise refer the construction, interpretation or enforceability of this Plan to the substantive law of another jurisdiction.

Because benefits under the Plan are granted in Texas, records relating to the Plan and benefits thereunder are located in Texas, and the Plan and benefits thereunder are administered in Texas, AT&T and the Participant under this Plan, for themselves and their successors and assigns, irrevocably submit to the exclusive and sole jurisdiction and venue of the state or Federal courts of Texas with respect to any and all disputes arising out of or relating to this Plan, the subject matter of this Plan or any benefits under this Plan, including but not limited to any disputes arising out of or relating to the interpretation and enforceability of any benefits or the terms and conditions of this Plan. To achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Plan, and to ensure consistency in application and interpretation of the Governing Law to the Plan, the parties agree that (a) sole and exclusive appropriate venue for any such action shall be an appropriate Federal or state court in Bexar County, Texas, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Texas court, and no other, (c) such Texas court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto and (d) that the parties waive any and all objections and defenses to bringing any such action before such Texas court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens.

10.10 Plan to Comply with Section 409A.

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. Notwithstanding any provision to the contrary in this Plan, each provision in this Plan shall be interpreted to permit the deferral of compensation in accordance with Section 409A of the Code and any provision that would conflict with such requirements shall not be valid or enforceable.

10.11 Successors and Assigns.

This Plan shall be binding upon AT&T and its successors and assigns.

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EX-10

Exhibit 10-dd

AT&T INC.

CASH DEFERRAL PLAN

Adopted November 19, 2004

As amended through March 30, 2006

Article 1 - Statement of Purpose

The purpose of the Cash Deferral Plan (“Plan”) is to provide savings opportunities to a select group of management employees consisting of Eligible Employees of AT&T Inc. (“AT&T”) and its Subsidiaries.

Article 2 - Definitions

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

Base Compensation. The following types of cash-based compensation paid by an Employer (but not including payments made by a non-Employer, such as state disability payments), before reduction due to any contribution pursuant to this Plan or reduction pursuant to any deferral plan of an Employer, including but not limited to a plan that includes a qualified cash or deferral arrangement under Section 401(k) of the Code:

(a) annual base salary;

(b) lump sum payments in lieu of a salary increase; and

(c) Team Award.

Payments by an Employer under a disability plan made in lieu of any compensation described above, shall be deemed to be a part of the respective form of compensation it replaces for purposes of this definition. Base Compensation does not include zone allowances or any other geographical differential and shall not include payments made in lieu of unused vacation or other paid days off, and such payments shall not be contributed to this Plan.

Determinations by AT&T (the Committee with respect to Officer Level Employees) of the items that make up Base Compensation shall be final. The Committee may, from time to time, add or subtract types of compensation to or from the definition of “Base Compensation” provided, however, any addition to the definition of Base Compensation shall only be effective with respect to the next period in which a Participant may make an election to establish a Cash Deferral Account.

Business Day. Any day during regular business hours that AT&T is open for business.

Cash Deferral Account or Account. The Account established annually by an election by a Participant to make Employee Contributions over the Plan Year relating to such election. One Cash Deferral Account is created by each yearly election, and all contributions pursuant to such election, including through Employee Contributions, earnings on contributions, or otherwise shall be part of the same Cash Deferral Account. Each annual Account is a separate Cash Deferral Account; only one Cash Deferral Account will relate to a Plan Year.

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Chief Executive Officer. The Chief Executive Officer of AT&T Inc.

Cingular. Cingular Wireless LLC, the successor thereto, or a direct or indirect majority owned subsidiary thereof.

Code. References to the Code shall be to provisions of the Internal Revenue Code, as amended, including regulations promulgated thereunder and successor provisions.

Committee. The Human Resources Committee of the Board of Directors of AT&T Inc.

Disability. Absence of an Employee from work with an Employer under the relevant Employer's disability plan.

Disabled. Where a person either (a) is unable 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 for not less than 12 months or (b) 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 an accident and health plan covering Employees of the Participant's Employer. It is intended that “Disabled” have the same meaning in this Plan as in Section 409A of the Code.

Eligible Employee. An Employee who:

(a) is a full or part time, salaried Employee of AT&T or an Employer in which AT&T has a direct or indirect 100% ownership interest and who is on active duty, Disability (but only while such Employee is deemed by the Employer to be an Employee of such Employer) or Leave of Absence;

(b) is, as determined by AT&T, a member of Employer's “select group of management or highly compensated employees” within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and regulations thereunder (“ERISA”), which is deemed to include each Officer Level Employee; and

(c) has an employment status which has been approved by AT&T to be eligible to participate in this Plan or is an Officer Level Employee.

Notwithstanding the foregoing, AT&T (the Committee with respect to Officer Level Employees) may, from time to time, exclude any Employee or group of Employees from being deemed an “Eligible Employee” under this Plan.

In the event a court or other governmental authority determines that an individual was improperly excluded from the class of persons who would be considered Eligible Employees during a particular time for any reason, that individual shall not be an Eligible Employee for purposes of the Plan for the period of time prior to such determination.

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Employee. Any person employed by an Employer and paid on an Employer’s payroll system, excluding persons hired for a fixed maximum term and excluding persons who are neither citizens nor permanent residents of the United States, all as determined by AT&T.For purposes of this Plan, a person on Leave of Absence who otherwise would be an Employee shall be deemed to be an Employee.

Employer. AT&T Inc. or any of its Subsidiaries.

Incentive Award. A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan or any successor plan, the 2001 Incentive Plan or any successor plan, or any other award that the Committee specifically permits to be contributed to a Cash Deferral Account under this Plan (regardless of the purpose of the award).

Leave of Absence. Where a person is absent from employment with an Employer on a formally granted leave of absence (i.e., the absence is with formal permission in order to prevent a break in the continuity of term of employment, which permission is granted (and not revoked) in conformity with the rules of the Employer that employs the individual, as adopted from time to time). For purposes of this Plan, a Leave of Absence shall be deemed to also include a transfer by an Employer of a person to, and continuous employment by, an entity for a rotational work assignment. In the event a transfer to such an entity lasts more than 5 years or the rotational work assignment status is canceled by AT&T, it shall be deemed a Termination of Employment with the Employer at that time for purposes of this Plan. To be a rotational work assignment, the Employer must have indicated in writing to the person that the person was to be rehired by the Employer upon termination of the rotational work assignment.

Officer Level Employee. Any executive officer of AT&T, as that term is used under the Securities Exchange Act of 1934, as amended, and any Employee that is an “officer level” Employee for compensation purposes as shown on the records of AT&T.

Participant. An Eligible Employee or former Eligible Employee who participates in this Plan.

Plan Interest Rate. An annual rate of interest equal to Moody’s Long-Term

Corporate Bond Yield Average for the September preceding the calendar year during which the interest rate will apply. The Committee may choose another method of calculating the Plan Interest Rate, but such other method may only apply to Cash Deferral Units that Participants have not yet elected to establish.

Plan Year. Each of the following shall be a Plan year: the period from January 1, 2005 through January 15, 2006; the period January 16, 2006 through December 31, 2006; and, for all later Plan Years, the period from January 1 through December 31.

Retirement or Retire. Termination of Employment on or after the earlier of the following dates, unless otherwise provided by the Committee: (a) for Officer Level Employees, the date the Participant is at least age 55 and has five (5) years of Net Credited Service; or (b) the date the Participant has attained one of the following combinations of age and Net Credited Service:

Net Credited Service Age

10 years or more	65 or older
20 years or more	55 or older
25 years or more	50 or older
30 years or more	Any age

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For purposes of this Plan only, Net Credited Service shall be calculated in the same manner as “Pension Eligibility Service” under the AT&T Pension Benefit Plan – Nonbargained Program (“Pension Plan”), as that may be amended from time to time, except that service with an Employer shall be counted as though the Employer were a “Participating Company” under the Pension Plan and the Employee was a participant in the Pension Plan.

Short Term Incentive Award. A cash award paid by an Employer (and not by a non-Employer, such as state disability payments) under the Short Term Incentive Plan; an award under a similar plan intended by the Committee to be in lieu of an award under such Short Term Incentive Plan, including, but not limited to, Performance Units granted under the 2001 Incentive Plan or any successor plan; or any other award that the Committee designates as a Short Term Incentive Award specifically for purposes of this Plan (regardless of the purpose of the award).

Subsidiary. Any corporation, partnership, venture or other entity in which AT&T holds, directly or indirectly, a 50% or greater ownership interest. The Committee may, at its sole discretion, designate any other corporation, partnership, limited liability company, venture or other entity a Subsidiary for the purpose of participating in this Plan. Unless otherwise provided by the Committee, Cingular shall be deemed a Subsidiary so long as AT&T holds a direct or indirect 25% interest in Cingular Wireless LLC or its successor.

Team Award. The annual award determined to be the “Team Award” by AT&T, together with any individual award determined by AT&T to be the Individual Discretionary Award made in connection therewith or comparable awards, if any, determined by AT&T to be used in lieu of these awards.

Termination of Employment. References herein to “Termination of Employment," “Terminate Employment” or a similar reference, shall mean the event where the Employee ceases to be an Employee of any Employer, including but not limited to, where the employing company ceases to be an Employer.

Article 3 - Administration of the Plan

3.1 The Committee.

The Committee shall be the administrator of the Plan and will administer the Plan, interpret, construe and apply its provisions and determine entitlement to benefits, all in its discretion. The Committee may further establish, adopt or revise such rules and regulations and such additional terms and conditions regarding participation in the Plan as it may deem necessary or advisable for the administration of the Plan. References to determinations or other actions by AT&T, herein, shall mean actions authorized by the Committee, the Chief Executive Officer, the Senior Executive Vice President of AT&T in charge of Human Resources, or their respective successors or duly authorized delegates, in each case in the discretion of such person. All decisions by AT&T shall be final and binding.

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3.2 Claims Procedure.

Subject to the authority of the Committee over the Plan, AT&T shall appoint a Claims Board to adjudicate claims brought by or in respect to Participants and their beneficiaries relating to benefits under the Plan. A Participant may apply in writing to the Claims Board to make a claim under this Plan. The Claims Board shall provide written notice within 90 days to a Participant whose claim hereunder has been denied, setting forth reasons for such denial or explaining that an extension of the time for processing the claim is necessary, written in a manner calculated to be understood by such person. After receipt of such notice, or expiration of 90 days without any response from the Claims Board, the Participant may appeal the decision in writing to the Senior Executive Vice President of AT&T in charge of Human Resources, or to the person’s successor, within 90 days, except that if the Participant is an Insider, as that term is used in the 2001 Incentive Plan, then the Participant's appeal shall be to the Committee. The Participant shall receive a full and fair review of the decision denying the claim in accordance with the requirements of ERISA.

Article 4 - Contributions

4.1 Election to Make Contributions.

(a) The Committee shall establish dates and other conditions for participation in the Plan and making contributions as it deems appropriate. Except as otherwise provided by the Committee, each year:

(1) an Employee who is an Eligible Employee as of April 30 may thereafter make an election on or prior to the last Business Day of the immediately following June to establish a Cash Deferral Account in order to make contributions to the Plan (“Employee Contributions”), through payroll deductions, during the immediately following Plan Year (which shall be the Plan Year of such Cash Deferral Account) through any combination of the following:

(A) from 1% to 50% (in whole percentage increments) of the Participant’s monthly Base Compensation, as the same may change from time to time. Employees who are below the level of Senior Manager, as shown on the records of AT&T at the time of the election, may contribute no more than 25% or such other amount as determined by AT&T.

(B) up to 100% (in whole percentage increments or in dollars) of one or more Incentive Awards, with the contribution of each Incentive Award (a discretionary award being a separate Incentive Award) determined individually. If a Participant did not have a target Short Term Incentive Award on June 30 but was subsequently granted such an award before the end of such Plan Year, the Participant will be deemed to have made the same percentage contribution election for the Short Term Incentive Award as the Participant made for Base Compensation.

(2) an Employee who was not an Eligible Employee as of April 30 but who is an Eligible Employee the immediately following September 30 may thereafter make an election on or prior to the last Business Day of the immediately following November with respect to the establishment of a Cash Deferral Account for the contribution of Base Compensation, other than Team Award, in the same manner as if the Employee was an Eligible Employee as of such April 30.

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(b) The Committee may permit an Eligible Employee to make other contributions on such terms and conditions as such Committee may permit from time to time.

(c) Except for (i) compensation payable after December 31 (in accordance with the Employer's normal payroll practices) solely for services performed during the Employer's final payroll period (as described in Section 3401(b) of the Code) that includes December 31 and (ii)performance-based compensation (as that term is defined under Section 409A of the Code), no contribution of compensation shall be made to the Plan out of compensation for services where such services are performed during or before the taxable year of the election to make such Employee Contributions. In the case of the above referenced performance-based compensation (based on services performed over a period of at least 12 months), such election may be made no later than 6 months before the end of the period.

(d) Notwithstanding anything to the contrary in this Plan, no election shall be effective to the extent it would permit an Employee Contribution or distribution to be made that is not in compliance with Section 409A of the Code. To the extent such election related to Employee Contributions that complied with such statute and regulations, that portion of the election shall remain valid, except as otherwise provided under this Plan.

(e) AT&T may refuse or terminate, in whole or in part, any election to make contributions to the Plan at any time; provided, however, only the Committee may take such action with respect to persons who are Officer Level Employees.

(f) In the event the Participant takes a hardship withdrawal from a benefit plan qualified under the Code and sponsored by an Employer, any election to make Employee Contributions by such Participant shall be cancelled on a prospective basis, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

(g) To the extent a Participant makes contributions to the Plan where the payment of which would be deductible by AT&T under Section 162(m) of the Code without regard to the size of the distribution, such contributions and earnings thereon shall be distributed first.

(h) An Employee may elect to make contributions of Base Compensation to this Plan with respect to a Cash Deferral Account only if the Employee has previously or simultaneously made an election to establish a Stock Deferral Account under the Stock Purchase and Deferral Plan relating to substantially the same period for making Employee Contributions and has elected to contribute at least 15% of the Employee’s Base Compensation during that period.

4.2 Contributions to a Cash Deferral Account.

(a) Employee Contributions shall be made solely pursuant to a proper election and only during the Employee's lifetime and while the Employee remains an Eligible Employee (if the Employee ceases to be an Eligible Employee, his or her election to make Employee Contributions shall be cancelled on a prospective basis); provided, however, Termination of Employment of an Eligible Employee shall not constitute loss of eligibility solely with respect to contribution of annual base salary earned prior to termination but paid within 60 days thereafter or with respect to Incentive Awards paid after Retirement (and such person shall be deemed an Eligible Employee for such contributions).

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(b) A Participant’s contributions shall be credited to the Participant’s Cash Deferral Account on the day the compensation – from which the contribution is to be deducted – is paid (“paid,” as used in this Plan, includes amounts contributed to the Plan that would have been paid were it not for an election under this Plan) using the "check date" shown on the related pay record (sometimes referred to as the "paycheck stub") as the contribution date (if no "check date" is shown, then the date of the pay record). Earnings on each Cash Deferral Account shall be recorded on Participant’s statements quarterly. When a payment is made to correct an underpayment, or as a delayed payment, of gross compensation for any reason, the related Employee Contribution shall be made when such correcting or delayed payment is made, again using the date on the pay record. No correcting or delayed payment may be contributed to the Plan if it is made after the period for making contributions in Article 4 for the Cash Deferral Account covering the payment to be corrected. For example, if an underpayment is made in June 2005, but not corrected until May 2006, regardless of the cause of such events, no part of the correcting payment may be contributed to the Plan. Where there has been an overpayment of gross compensation, the amount of the overpayment will not be considered in determining the contribution amount. In no event shall the Participant have any recourse against an Employer under this Plan for any underpayment, overpayment or delayed or correcting payment of compensation. In the event a pay period (the period over which services are rendered for the relevant compensation) relates to services rendered during or before the taxable year of the relevant election, then only the compensation relating to services performed in the calendar year following the calendar year of the election may be contributed to this Plan. The Committee may modify or change this paragraph (b) from time to time.

4.3 Earnings on Cash Deferral Accounts.

During a calendar year, the Participant’s Cash Deferral Account shall accrue interest on amounts held by such Account at the Plan Interest Rate for such year, compounded quarterly on the last day of each quarter. Interest will accrue on unpaid amounts in the Cash Deferral Account from the date credited to such Account.

Article 5 - Distributions

5.1 Distributions of Cash Deferral Accounts.

(a) At the time the Participant makes an election to make Employee Contributions with respect to a Cash Deferral Account, the Participant shall also elect the calendar year of the distribution of the Cash Deferral Account and the number of installments. The Participant may elect either of the following:

(1) Specified Date Distribution. That the distribution of the Cash Deferral Account commence in the calendar year specified by the Participant in up to five (5) installments. In the event the Participant Terminates Employment prior to the calendar year of the distribution, the Cash Deferral Account must commence distribution the calendar year following the calendar year of the Termination of Employment, with the same number of installments. For example, if the Participant elected a 2010 distribution with five (5) installments, but Terminated Employment in 2007, the Cash Deferral Account would commence distribution in 2008.

(2) Retirement Distribution. That the distribution of the Cash Deferral Account commence the calendar year following the calendar year of Retirement in up to (10) installments. If the Participant Terminates Employment while not Retirement eligible, the distribution shall commence the calendar year following the calendar year of Termination of Employment, but shall be limited to five (5) installments.

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If no timely distribution election is made by the Participant, then the Participant will be deemed to have made an election to have the Cash Deferral Account distributed in a single installment in the first calendar year after the calendar year Employee Contributions were first made.

Regardless of the distribution election made, if the Participant Terminates Employment but has a Cash Deferral Account that commenced in the same year the Cash Deferral Account would commence distribution, then that Account would instead commence distribution in the calendar year following the year the Account commenced. For example, if a Retirement eligible Employee Terminated Employment in 2005 after making an election with regard to an Incentive Award to be paid in 2006, the Cash Deferral Account relating to that award would commence distribution in 2007.

(b) If an Employee elected a Specified Date Distribution for a Cash Deferral Account, the Employee may elect a new Specified Date Distribution commencement date and a new number of installments; provided, however, Termination of Employment will not accelerate the distribution, unlike the initial deferral election. Unless otherwise provided by the Committee, the Employee must elect the new distribution and new number of installments, if any, on or after the September 1, and on or before the last Business Day of the December, of the calendar year that is the second calendar year preceding the calendar year of the relevant scheduled distribution. For example, an election to defer a scheduled distribution in 2010 must be made from September 1, 2008 through the last business day of December 2008. The new distribution election must delay commencement of the distribution by five (5) years. An election to create a new Specified Date Distribution and defer the commencement of the distribution of a Cash Deferral Account may not be made in the same calendar year the election to establish the Cash Deferral Account is made. Notwithstanding anything to the contrary in this Plan, (1) such election to create a new Specified Date Distribution must be made at least 12 months prior to the date of the first scheduled payment under the prior distribution election and (2) the election shall not take effect until at least 12 months after the date on which the election is made.

(c) A Participant’s Cash Deferral Account shall be distributed to the Participant on March 10 (or as soon thereafter as administratively practicable, as determined by AT&T) of the calendar year elected by the Participant. In the event the distribution is to be made to an Officer Level Employee or a “key employee” (as defined in Section 416(i) of the Code, without regard to paragraph (5) thereof) as a result of the Participant’s Termination of Employment, the distribution shall not occur until the later of such March 10 or six (6) months after the Termination of Employment, except it shall be distributed promptly upon the Participant’s earlier death. The distributions shall continue annually on each successive March 10 (or such other date as determined by AT&T) until the number of installments elected by the Participant is reached. In each installment, AT&T shall distribute to the Participant that portion of the Participant's Cash Deferral Account that is equal to the total dollar amount of the Participant's Account divided by the number of remaining installments.

(d) The Committee may establish other distribution alternatives from time to time, but such alternatives may be offered no earlier than the next period in which a Participant may make an election to establish a Cash Deferral Account.

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5.2 Death of the Participant or if the Participant Becomes Disabled.

In the event of the death of a Participant, all undistributed Cash Deferral Accounts shall be distributed to the Participant's beneficiary in accordance with the AT&T Rules for Employee Beneficiary Designations, as the same may be amended from time to time. In the event a Participant becomes Disabled and Terminates Employment, all undistributed Cash Deferral Accounts shall be promptly distributed to the Participant.

5.3 Unforeseeable Emergency Distribution.

In the event that AT&T (the Committee in the case of Officer Level Employees), upon written petition of the Participant, determines in its sole discretion that the Participant has suffered an unforeseeable emergency, AT&T shall make such distributions to the Participant from the Participant’s Cash Deferral Accounts, on a pro-rata basis, as it deems necessary, as soon as practicable following such determination, subject to the following. For purposes of this Plan, an unforeseeable emergency is a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's spouse, or a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The amounts distributed with respect to an emergency may not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). It is the intent of this Plan that this provision comply with the Unforeseeable Emergency provisions of Section 409A of the Code. Upon such distribution, any election to make Employee Contributions by such Participant shall be immediately cancelled, and the Participant shall not be permitted to make a new election with respect to Employee Contributions that would be contributed during the then current and immediately following calendar year.

5.4 Ineligible Participant.

Notwithstanding any other provisions of this Plan to the contrary, if AT&T receives an opinion from counsel selected by AT&T, or a final determination is made by a Federal, state or local government or agency, acting within its scope of authority, to the effect that an individual is not, or was not at the time of his or her making Employee Contributions to this Plan, a member of Employer's “select group of management or highly compensated employees” within the meaning of ERISA, then such person will not be eligible to make further contributions to the Plan.

Article 6 - Transition Provisions

6.1 2005 Cash Deferral Accounts.

Notwithstanding Article 4 to the contrary, if an Employee is an Eligible Employee on September 30, 2004, the Employee may make an election under Article 4 on or prior to December 15, 2004, with respect to the establishment of a Cash Deferral Account for the contribution of Base Compensation and/or Incentive Awards that would otherwise be paid during the period from January 1, 2005, through January 15, 2006, which shall be the Plan Year for such Cash Deferral Account.

Article 7 - Discontinuation, Termination, Amendment.

7.1 AT&T's Right to Discontinue Offering Cash Deferral Accounts.

The Committee may at any time discontinue offerings of Cash Deferral Accounts or contributions under the Plan. Any such discontinuance shall have no effect upon existing Cash Deferral Accounts or the terms or provisions of this Plan as applicable to such Accounts.

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7.2 AT&T's Right to Terminate Plan.

The Committee may terminate the Plan at any time. Upon termination of the Plan, contributions shall no longer be made under the Plan.

After termination of the Plan, Participants shall continue to earn interest on undistributed amounts and shall continue to receive all distributions under this Plan at such time as provided in and pursuant to the terms and conditions of Participant's elections and this Plan.

7.3 Amendment.

The Committee may at any time amend the Plan in whole or in part; provided, however, that no amendment, including but not limited to an amendment to this section, shall be effective, without the consent of a Participant, to alter, to the material detriment of such Participant, any of the Cash Deferral Accounts of the Participant. For purposes of this section, an alteration to the material detriment of a Participant shall include, but not be limited to, a material reduction in the period of time over which the Participant’s Cash Deferral Account may be distributed to a Participant, any reduction in the amounts credited to the Participant's Cash Deferral Accounts, or any reduction in the Plan Interest Rate (other than as it may fluctuate in accordance with its terms) for Cash Deferral Accounts previously elected by the Participant. Any such consent may be in a writing, telecopy, or e-mail or in another electronic format. An election to make Employee Contributions shall be conclusively deemed to be the consent of the Participant to any and all amendments to the Plan prior to such election, and such consent shall be a condition to making any election with respect to Employee Contributions.

Article 8 - Miscellaneous

8.1 Tax Withholding.

Upon a distribution from a Participant’s Cash Deferral Account, AT&T shall withhold sufficient amounts to satisfy the minimum amount of Federal, state, and local taxes required by law to be withheld as a result of such distribution.

8.2 Elections and Notices.

Notwithstanding anything to the contrary contained in this Plan, all elections and notices of every kind under this Plan shall be made on forms prepared by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates or shall be made in such other manner as permitted or required by AT&T or the General Counsel, Secretary or Assistant Secretary, or their respective delegates, including through electronic means, over the Internet or otherwise. An election shall be deemed made when received by AT&T (or its designated agent, but only in cases where the designated agent has been appointed for the purpose of receiving such election), which may waive any defects in form. Unless made irrevocable by the electing person, each election with regard to making Employee Contributions or distributions of Cash Deferral Accounts shall become irrevocable at the close of business on the last day to make such election. AT&T may limit the time an election may be made in advance of any deadline.

If not otherwise specified by this Plan or AT&T, any notice or filing required or permitted to be given to AT&T under the Plan shall be delivered to the principal office of AT&T, directed to the attention of the Senior Executive Vice President in charge of Human Resources for AT&T or his or her successor. Such notice shall be deemed given on the date of delivery.

Page 10

Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to the Participant's work or home address as shown on the records of AT&T or, at the option of AT&T, to the Participant's e-mail address as shown on the records of AT&T. It is the Participant's responsibility to ensure that the Participant's addresses are kept up to date on the records of AT&T.

In the case of notices affecting multiple Participants, the notices may be given by general distribution at the Participants' work locations.

By participating in the Plan, each Participant agrees that AT&T may provide any documents required or permitted under the Federal or state securities laws, including but not limited to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by e-mail, by e-mail attachment, or by notice by e-mail of electronic delivery through AT&T's Internet Web site or by other electronic means.

8.3 Unsecured General Creditor.

Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, interest, or claims in any property or assets of any Employer. No assets of any Employer shall be held under any trust for the benefit of Participants, their beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of any Employer under this Plan. Any and all of each Employer's assets shall be, and remain, the general, unpledged, unrestricted assets of such Employer. The only obligation of an Employer under the Plan shall be merely that of an unfunded and unsecured promise of AT&T to make distributions under and in accordance with the terms of the Plan.

8.4 Offset.

AT&T may offset against the amount otherwise distributable to a Participant, any amounts due an Employer by a Participant, including but not limited to overpayments under any compensation or benefit plans.

8.5 Non-Assignability.

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, any Cash Deferral Account under the Plan, if any, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of a distributable Cash Deferral Account shall, prior to actual distribution, 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.

8.6 Employment Not Guaranteed.

Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of an Employer or to serve as a director.

8.7 Errors.

At any time AT&T or an Employer may correct any error made under the Plan without prejudice to AT&T or any Employer. Such corrections may include, among other things, refunding contributions to a Participant with respect to any period he or she made Employee Contributions while not an Eligible Employee, or canceling the enrollment of a non-Eligible Employee. Neither AT&T nor any Employer shall be liable for any damages resulting from failure to timely allow any contribution to be made to the Plan or for any damages resulting from the correction of, or a delay in correcting, any error made under the Plan. In no event shall AT&T or any Employer be liable for consequential or incidental damages arising out of a failure to comply with the terms of the Plan.

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8.8 Captions.

The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control nor affect the meaning or construction of any of its provisions.

8.9 Governing Law.

To the extent not preempted by Federal law, the Plan, and all benefits and agreements hereunder, and any and all disputes in connection therewith, shall be governed by and construed in accordance with the substantive laws of the State of Texas, without regard to conflict or choice of law principles which might otherwise refer the construction, interpretation or enforceability of this Plan to the substantive law of another jurisdiction.

Because benefits under the Plan are granted in Texas, records relating to the Plan and benefits thereunder are located in Texas, and the Plan and benefits thereunder are administered in Texas, AT&T and the Participant under this Plan, for themselves and their successors and assigns, irrevocably submit to the exclusive and sole jurisdiction and venue of the state or Federal courts of Texas with respect to any and all disputes arising out of or relating to this Plan, the subject matter of this Plan or any benefits under this Plan, including but not limited to any disputes arising out of or relating to the interpretation and enforceability of any benefits or the terms and conditions of this Plan. To achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Plan, and to ensure consistency in application and interpretation of the Governing Law to the Plan, the parties agree that (a) sole and exclusive appropriate venue for any such action shall be an appropriate Federal or state court in Bexar County, Texas, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Texas court, and no other, (c) such Texas court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto and (d) that the parties waive any and all objections and defenses to bringing any such action before such Texas court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens.

8.10 Plan to Comply with Section 409A.

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. Notwithstanding any provision to the contrary in this Plan, each provision in this Plan shall be interpreted to permit the deferral of compensation in accordance with Section 409A of the Code and any provision that would conflict with such requirements shall not be valid or enforceable.

8.11 Successors and Assigns.

This Plan shall be binding upon AT&T and its successors and assigns.

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EX-12

EXHIBIT 12

AT&T INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
	Three Months Ended
		March 31,				Year Ended December 31,
			2006		2005		2005	2004		2003		2002		2001
Income Before Income Taxes, Extraordinary Items
and Cumulative Effect of Accounting Changes*		$	1,844	$	1,375	$	5,267	6,623	$	7,751	$	8,685	$	9,984
Add:      Interest Expense			464		353		1,456	1,023		1,191		1,382		1,599
Dividends on Preferred Securities			1		8		31	24		22		24		57
1/3 Rental Expense			74		40		157	160		140		195		266
Adjusted Earnings		$	2,383	$	1,776	$	6,911	7,830	$	9,104	$	10,286	$	11,906
Total Interest Charges		$	478	$	360	$	1,492	1,054	$	1,228	$	1,440	$	1,718
Dividends on Preferred Securities			1		8		31	24		22		24		57
1/3 Rental Expense			74		40		157	160		140		195		266
Adjusted Fixed Charges		$	553	$	408	$	1,680	1,238	$	1,390	$	1,659	$	2,041
Ratio of Earnings to Fixed Charges			4.31		4.35		4.11	6.32		6.55		6.20		5.83

*All periods presented exclude undistributed earnings on investments accounted for under the equity method as well as “Income From Discontinued Operations, net of tax” in our Consolidated Statements of Income, which was from the sale of our interest in the directory advertising business in Illinois and northwest Indiana.

EX-31

Exhibit 31.1

CERTIFICATION

I, Edward E. Whitacre Jr., 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: May 5, 2006

/s/ Edward E. Whitacre Jr.

Edward E. Whitacre Jr.

Chairman and Chief Executive Officer

EX-31

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: May 5, 2006

/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 March 31, 2006 (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.

May 5, 2006 May 5, 2006

By:	/s/ Edward E. Whitacre Jr.	By:	/s/ Richard G. Lindner
	Edward E. Whitacre Jr.		Richard G. Lindner
	Chairman and Chief Executive Officer		Senior Executive Vice 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 and furnished to the Securities and Exchange Commission or its staff upon request.