AT&T CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR
[ ] 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 1-1105

AT&T CORP.

A NEW YORK CORPORATION I.R.S. EMPLOYER NO. 13-4924710

ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921

TELEPHONE NUMBER 908-221-2000

INTERNET ADDRESS: www.att.com/ir

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SEE ATTACHED SCHEDULE A.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of voting common stock held by non-affiliates
was approximately $15.3 billion (based on closing price of those shares as of
June 30, 2003). At February 29, 2004, 793,522,585 shares of AT&T common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to the
2004 Annual Meeting of Shareowners (Part III).

SCHEDULE A

Securities registered pursuant to Section 12(b) of the Act:

PART I

ITEM 1. BUSINESS.

WHO ARE WE?

AT&T Corp. was incorporated in 1885 under the laws of the State of New
York. Our principal executive offices are at One AT&T Way, Bedminster, New
Jersey 07921. Our telephone number at that address is 908-221-2000 and our
internet address is www.att.com/ir.

For more than 125 years, we have been known for quality and reliability in
communications. Backed by the research and development capabilities of AT&T
Labs, we are a global leader in local, long distance, internet and
transaction-based voice and data services. Our primary business segments are
AT&T Business Services and AT&T Consumer Services.

We are one of the nation's largest business services communications
providers, offering a variety of global communications services to approximately
3 million customers, including large domestic and multinational businesses,
small and medium-sized businesses and government agencies. We operate one of the
largest telecommunications networks in the United States and, through our Global
Network Services, provide an array of services and customized solutions in 60
countries and 850 cities worldwide.

We provide a broad range of communications services and customized
solutions, including:

- domestic and international long distance and toll-free voice services;

- local services, including switched and private line voice, local data and
special access services;

- domestic and international data and internet protocol (IP) services for a
variety of network standards, including frame relay and asynchronous
transfer mode (ATM);

- managed networking services and outsourcing solutions; and

- domestic and international wholesale transport services.

We are also the leading provider of domestic and international long
distance and transaction based communications services to approximately 35
million residential consumers in the U.S. We provide a broad range of
communications services to consumers individually and in combination with other
services, including:

- domestic and international long distance;

- transaction-based communications services, such as operator-assisted
calling services and prepaid phone cards;

- local calling offers; and

- internet service through AT&T Worldnet(R) service and AT&T digital
subscriber line (DSL) service.

WHAT FACTORS HAVE BEEN SHAPING OUR INDUSTRY?

We compete in the communications services industry. The communications
services industry continues to evolve, both domestically and internationally,
providing significant opportunities and risks to the participants in these
markets. Factors that have been driving this change include:

- entry of new competitors and investment of substantial capital in
existing and new services, resulting in significant price competition;

- technological advances resulting in a proliferation of new services and
products and rapid increases in network capacity;

- the Telecommunications Act of 1996 (Telecommunications Act); and

- growing deregulation of communications services markets in the United
States and in selected countries around the world.

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One factor affecting the communications services industry is the rapid
development of data and IP services. The development of frame relay, ATM and IP
networks as modes of transmitting information electronically has dramatically
transformed the array and breadth of services offered by telecommunications
carriers.

In the U.S., the Telecommunications Act has had a significant impact on our
business by establishing a statutory framework for opening the local service
markets to competition and by allowing regional phone companies to provide
in-region long distance services bundled with their existing local offers
franchise. In addition, prices for long distance minutes and other basic
communications services have declined as a result of competitive pressures,
excess network capacity, the introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. For example,
consumer long distance voice usage is declining as a result of substitution to
wireless services, internet access and e-mail/instant messaging services,
particularly in the "dial one" long distance, card and operator services
segments.

The long distance market is characterized by rapid deregulation and intense
competition among long distance providers, and, more recently, incumbent local
exchange carriers. Under the Telecommunications Act, a regional phone company
may offer long distance services in a state within its region if the Federal
Communications Commission (FCC) finds, first, that the regional phone company's
service territory within the state has been sufficiently opened to local
competition, and second, that allowing the regional phone company to provide
these services is in the public interest. As of December 2003, regional phone
companies had received approval to offer long distance in all states. The
incumbent local exchange carriers presently have numerous competitive advantages
as a result of their historic monopoly control over local exchanges. While these
dynamics are creating downward pressure on stand-alone long distance services,
new opportunities are being created in the business and consumer markets,
including local, data, IP and bundled offers.

The local voice market is currently dominated by the incumbent local
exchange carriers. The Telecommunications Act has established a statutory
framework for opening the local service markets to competition. We had entered
the local voice business for residential customers in 24 states by the end of
2003 and expanded our presence to an additional 11 states in January 2004. We
had entered the local voice business for large business customers in 49 states
and the District of Columbia, and for small to medium sized customers in 30
states and the District of Columbia, by the end of 2003. Our ability to remain
in our current local voice markets and to enter and offer local voice services
in new markets is dependent upon the continuation, or in some cases the
implementation, of fair regulatory rules and prices for us to purchase certain
network capabilities from incumbent local exchange carriers. Additionally, our
ability to remain in our current local voice markets may be dependent on the
outcomes of the FCC's Triennial Review Order impairment cases that are currently
before each of the state commissions and on the validity of the Triennial Review
Order itself, which was recently partially vacated by a U.S. Court of Appeals
(see more detailed discussion under the topic "What legislative and regulatory
developments are important to us?" below). If this decision is not reversed, or
unless the FCC issues new valid rules which assure us fair resale prices, our
current local business could be materially affected.

HOW HAS OUR BUSINESS DEVELOPED AND WHAT IS OUR STRATEGY?

For the past four years, our traditional long distance services have
experienced an industry-wide trend of lower revenue from lower prices, e-mail
and wireless substitution and increased competition, which has led to a decline
in operating income. In addition, economic conditions have been generally
adverse for significant new telecommunications spending by our customers. We
have evolved several strategies to combat this challenging environment. We have
sought to reduce costs and increase operating efficiency. We have emphasized our
other service offerings such as consumer and business local services and have
bundled them with our long distance services. We have tried to add value to our
services by investing in innovation, expertise, customer care and network
integration. We have sought to capitalize on new technology, most recently with
our development of voice over internet protocol (VoIP) services. And we have
prudently limited our capital expenditures while reducing our debt. Going
forward, we aspire to be a provider of choice for high value consumers and
businesses of all sizes, to be in a position to benefit from any improvement in
industry and economic conditions, and to be recognized by our customers as "The
World's Networking Company(SM)".

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AT&T BUSINESS SERVICES SEGMENT

WHAT SERVICES DO WE OFFER?

WE OFFER VOICE SERVICES.

Long distance voice services. Our business long distance voice
communication offerings include the traditional "one plus" dialing of domestic
and international long distance for customers that select us as their primary
long distance carrier.

We offer domestic and international toll-free (for example, 800) inbound
services, where the receiving party pays for the call. These services are used
in a wide variety of applications, including sales, reservation centers or
customer service centers. We also offer a variety of value-added features to
enhance customers' toll-free services, including call routing by origination
point and time-of-day routing. In addition, we provide virtual private network
applications, including dedicated outbound facilities.

We offer audio and video teleconferencing services, as well as web-based
video conferencing. These services offer customers the ability to establish
automated teleconference lines, as well as teleconferences moderated by one of
our representatives. Customers can also establish a dedicated audio conference
number that can be used at any time without the necessity of a reservation.

We also offer a variety of calling cards that allow the user to place calls
from virtually anywhere in the world. Additional features include prepaid phone
cards, conference calling, international origination, information service access
(such as weather or stock quotes), speed dialing and voice messaging.

Business local services. Our local services provide a wide range of local
voice and data telecommunications services in major metropolitan markets
throughout the United States. Services include basic local exchange service,
exchange access, private line, and high speed data and pay phone. We typically
offer local service as part of a package of services that can include
combinations of our other offerings.

Integrated voice, data and IP offers. We provide a variety of integrated
service offers targeted at business customers. For small businesses, our All in
One(R) service offering provides both local and long distance services through a
single bill, offering discounts based on volume and term commitments. Our
business network service offers a wide range of voice and data services through
a single service package. Among the features of the integrated services offering
is the ability to enable customers to electronically order new services, perform
maintenance and manage administrative functions.

We also have a number of integrated voice and data services, such as
integrated network connections, that provide customers the ability to integrate
access for their voice and data services and qualify for lower prices.

WE OFFER DATA SERVICES

Private Line Services. Our data services include private line and special
access services that use high capacity digital circuits to carry voice, data and
video or multimedia transmission from point-to-point in multiple configurations.
These services provide high volume customers with a direct connection to one of
our switches instead of switched access shared by many users. These services
permit customers to create internal computer networks and to access external
computer networks and the internet, thereby reducing originating access costs.

Packet Services. Packet services consist of data networks utilizing packet
switching and transmission technologies. Packet services include frame relay,
ATM and IP connectivity services. Packet services enable customers to transmit
large volumes of data economically and securely. Packet services are utilized
for local area network interconnection, remote site, point of sale and branch
office communications solutions. While frame relay and ATM Services are widely
deployed as private data networks, we offer customers the ability to connect
these networks to the internet through services such as IP-enabled frame relay.
High speed packet services, including IP-enabled frame relay service, are
utilized extensively by enterprise customers for an expanding range of
applications.

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WE OFFER MANAGED SERVICES, INTERNET SERVICES AND OUTSOURCING SOLUTIONS

We provide clients with IP connectivity, managed IP services, messaging,
electronic commerce services and an array of managed networking services,
professional services and outsourcing solutions. These services are intended to
satisfy clients' complete networking technology needs, ranging from managing
individual network components such as routers and frame relay networks to
managing entire complex global networks. We also work selectively with qualified
vendors to offer enhanced services to customers.

Internet services. With points of presence in over 50 countries around the
world, our business class dial-up internet service is designed to meet the needs
of all types of commercial and governmental enterprises, including small and
medium sized businesses. Our managed internet services provide customers with
dedicated high speed access to the internet managed by us. These services can be
used to support a wide range of applications.

Enterprise networking services. With a presence in 60 countries and 850
different cities, our enterprise networking services provide comprehensive
support from network design, implementation and installation to ongoing network
operations and lifecycle management of solutions for networks of varying scales,
including local area networks, wide area networks, and virtual private networks.
These managed enterprise networking services include applications such as
e-mail, VoIP, order entry systems, employee directories, human resource
transactions and other database applications.

Web services. Our managed web hosting services consist of a family of
hosting and transactional services and platforms serving the needs of
businesses. These services support clients' hosted infrastructure needs from the
network layer to managing the performance of their business applications. With
21 internet data centers located on four continents (13 of which are located in
the U.S. with a capacity of 420 thousand square feet of web hosting space), our
hosting services provide a flexible, managed environment of network, server and
security infrastructure as well as built-in data storage. Our suite of managed
hosting services includes application performance management, database
management, hardware and operating system management, intelligent content
distribution services, high availability data and computing services, storage
services, managed security and firewall services. Our web hosting services also
include a range of business tools, including client portal services that provide
managed hosting customers with personalized, secure access to detailed reporting
information about their infrastructure and applications.

High availability and security services. Our high availability and
security services deliver integrated solutions to enable the continuous
operations of clients' critical business processes and availability of critical
data and includes business continuity and disaster recovery services.

Outsourcing solutions. We provide customers consulting, outsourcing and
management services for their highly complex global data networks, including
networking-based electronic commerce applications.

WE OFFER TRANSPORT SERVICES TO OTHER CARRIERS

We provide local, domestic interstate and international wholesale
networking capacity and switched services to other carriers. We offer a
combination of high volume transmission capacity, conventional dedicated line
services and dedicated switched services on a regional, national and
international basis to internet service providers (ISPs) and facility-based and
switchless resellers. Our wholesale customers are primarily large tier-one ISPs,
wireless carriers, competitive local exchange carriers, regional phone
companies, interexchange carriers, cable companies and systems integrators. Our
clients are located both in the U.S. and internationally. We focus on ensuring
optimal network utilization through the sale of off-peak capacity. We also have
sold dedicated network capacity through indefeasible rights-of-use agreements
under which capacity is furnished for contract terms as long as 25 years.

HOW DO WE MARKET OUR SERVICES?

We market our business voice and data communications services through our
global sales and marketing organization of approximately 6,800 sales
representatives. The sales and marketing group also uses several

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outside telemarketing firms as well as a number of other marketing agents. In
addition, our solution center provides a centralized resource for complex
customer requirements.

HOW DO WE CARE FOR OUR CUSTOMERS?

Our customer care handles contracting, collections, ordering, provisioning
and maintenance processes worldwide. In the U.S. there are over 12,000 customer
care associates at 47 customer care centers, of which 41 are company owned and 6
are operated by outside customer care firms. For larger and multinational
customers and government agencies, we provide customer care services and support
through dedicated account teams. Through a dedicated customer care website
customers may submit questions or initiate service requests, including ordering
new services or submitting maintenance requests.

HOW DO WE CHARGE FOR OUR SERVICES?

We provide the majority of our services through long term contracts.
General descriptions of our services, applicable rates, warranties, limitations
on liability, user requirements and other material service provisioning
information are outlined in service guides that are provided directly to
prospective clients or are available on our website. Customers enter into
contracts, based on the service guides, detailing customer specific terms and
information, including volume discounts, service bundling, extended warranties
and other customized terms. Through combined offerings, we also provide
customers with such features as single billing, unified services for
multi-location companies and customized calling plans. Most intrastate regulated
services are provided in accordance with applicable tariffs filed with the
states.

WHAT IS OUR NETWORK?

Our U.S. network is comprised of approximately 55,000 route miles of
long-haul backbone fiber optic cable, plus over 21,000 additional route miles of
local metropolitan fiber, capable of carrying high speed (10 billion bits or 10
gigabits per second) traffic. AT&T Business Services upgraded this fiber
network, recently completing the installation of over 14,000 new route miles of
the latest generation fiber optic cable capable of carrying 40 gigabits per
second when that technology is commercially available. This new fiber capacity
provides substantial capacity for potential future growth of network traffic
with low incremental capital expenditure requirements. In addition, we also have
approximately 750 points-of-presence in the continental U.S. with the majority
served by high speed fiber-based technology offering high speed data
connectivity to the majority of U.S. business centers.

On an average business day, our business network, which also supports
Consumer Services, handles a total of more than 400 million voice calls, as well
as over 3,800 trillion bytes (terabytes) of data. On the voice network, we
employ our patented Real Time Network Routing to automatically complete domestic
voice calls through more than 100 possible routes. The reliability of certain
portions of the network is maximized by using synchronous optical network
(SONET) rings that can restore service following a network failure within 50 to
60 milliseconds by reversing the flow of traffic on the ring. On other routes,
we use our patented FASTAR(R) technology to route traffic around a fiber optic
cable cut using spare transport capacity elsewhere on the network. Most
recently, we have deployed intelligent optical switches across the network to
expand our ability to rapidly and automatically restore network traffic that
might be otherwise affected by a cable cut or equipment failure.

We have been deploying dense wavelength division multiplexing (DWDM)
technology that divides the signal carried by an optical fiber into multiple
wavelengths, each now carrying up to 10 gigabits per second of information. When
DWDM was introduced in 1996, the technology could transmit only eight different
wavelengths on a fiber strand. We are currently deploying 64- and 80-wavelength
DWDM systems, as well as systems capable of carrying 160 wavelengths per strand.

Since digital switching was introduced in the late 1970s, the basic element
of the AT&T long distance voice network has been a circuit switch which was
specifically designed for long-haul use. Currently we employ 140 of these
switches in our network. We have recently installed 68 of the latest high
performance

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carrier-grade voice switches that allow us to accommodate the transition from
circuit-switched to packet networks. We will continue to have both circuit and
packet switching technologies for some time.

In addition to our long distance network, we have an extensive local
network serving business customers in 91 U.S. cities. Our local network now
includes 158 local switches and reaches more than 6,400 buildings with over
8,200 metropolitan SONET rings. This network provides voice service and high
speed data connections to business users. In order to maximize asset
utilization, our local network also handles consumer traffic, providing most of
the dial-in numbers for our AT&T Worldnet service.

We also operate one of the largest IP networks in the U.S. As a tier-one
provider, we have direct peering relationships with other tier-one providers,
providing service to carriers that route through public peering sites. We offer
multiple access choices to the IP network, including dial-up, dedicated private
line, and DSL, as well as IP-enabled access through ATM and frame relay
networks.

WHAT IS OUR STRATEGY FOR OUR NETWORKS AND SYSTEMS?

Our business is complex and we currently employ many systems, processes,
networks and platforms in conducting it. We are striving through targeted
investments to consolidate and simplify these many elements. Ideally we would
seek to employ only one integrated set of processes. We call this our "Concept
of One"(SM) goal. We also are striving to improve and automate our systems and
processes with a long term goal of delivering our services with as near to zero
cycle time and zero defects as possible. We call this our "Concept of Zero"(SM)
goal.

HOW DO WE OPERATE INTERNATIONALLY?

We have entered into a number of agreements with international
communications companies in order to provide customers end-to-end network
management capabilities and highly customized solutions. We have investments in
several foreign communications companies as summarized below. In addition, we
have built out our new Multi Protocol Label Switching/Asynchronous Transfer
Mode, or MPLS/ATM, global network to 129 cities in 47 countries, with further
investments planned for 2004 to supplement, and eventually replace, our other
extensive global data networks.

Alestra. S. de R.L. de C.V. We own a 49% economic interest in Alestra S.
de R.L. de C.V., a competitive telecommunications company in Mexico. Alestra
offers domestic and international voice, data and internet services throughout
Mexico to business and residential customers. Alestra's network comprises 3,625
route miles, with four interconnection points to our network at the U.S.-Mexico
border.

In November 2003, Alestra consummated a voluntary debt restructuring
pursuant to which $200 million principal amount of debt was tendered by
Alestra's bondholders to Alestra in exchange for $110 million in cash.
Additionally, Alestra's interest payments on its remaining outstanding
indebtedness were lowered. The restructuring was primarily financed by a cash
capital contribution from Alestra's shareholders in the amount of $100 million,
with our pro rata share being approximately $49 million.

AT&T Latin America Corp. On August 28, 2000, we established AT&T Latin
America in connection with the consolidation of several Latin American companies
to provide voice, data and internet access services in five countries. In April
2003, a secured creditor of AT&T Latin America commenced a Chapter 11 proceeding
against it. By way of the Chapter 11 proceeding, on February 24, 2004, Telefonos
de Mexico S.A. de C.V. or Telmex, completed its purchase of substantially all of
AT&T Latin America's assets. On February 25, 2004, AT&T Latin America's Chapter
11 plan of liquidation became effective, and pursuant to the plan our ownership
interest in AT&T Latin America (69% economic interest and approximately 95%
voting interest) was extinguished. Except for certain trade receivables, under
the plan of liquidation, we will not receive any of the proceeds of the sale of
assets to Telmex or any other distributions from the bankruptcy estate in
respect of either our equity ownership in AT&T Latin America or other amounts
owned to us by AT&T Latin America for borrowed money or otherwise.

AGNS Japan LLC. On March 31, 2000, Nippon Telephone & Telegraph purchased
a 15% interest in AT&T Global Network Services Japan LLC. We own the remaining
85% of this business.

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WHAT IS AT&T LABS?

AT&T Labs conducts research and development for us. AT&T Labs' scientists
and engineers conduct research in a variety of areas, including IP; advanced
network design and architecture; network operations support systems; data mining
technologies and advanced speech technologies. AT&T Labs works with our business
units to create new services and invent tools and systems to manage secure and
reliable networks for us and our customers. With a heritage that extends from
fundamental advances such as the development of the transistor, AT&T Labs has
made numerous recent advances in the areas of IP communications infrastructure,
data mining and wireless networks.

WHAT IS OUR STRATEGY CONCERNING PATENTS, TRADEMARKS AND SERVICE MARKS?

We actively pursue patents, trademarks and service marks to protect our
intellectual property within the U.S. and abroad. We received over 300 patents
throughout the world in 2003 and maintain a global portfolio of over 5,000
trademark and service mark registrations.

AT&T CONSUMER SERVICES SEGMENT

WHAT SERVICES DO WE OFFER?

WE OFFER LONG DISTANCE SERVICES

We provide interstate and intrastate long distance telecommunications
services throughout the continental U.S. and provide, or join in providing with
other carriers, telecommunications services to and from Alaska, Hawaii, Puerto
Rico and the Virgin Islands and international telecommunications services to and
from virtually all nations and territories around the world. Consumers can use
our domestic and international long distance services through traditional "one
plus" dialing of the desired call destination, through dial-up access or through
use of our calling cards.

In the continental U.S., we provide long distance telecommunications
services over our backbone network. As of December 31, 2003, we had 30.3 million
stand-alone long distance customers.

WE OFFER BUNDLED LOCAL AND LONG DISTANCE SERVICES

At the end of 2003, we offered customers combined local and long distance
services in portions of 24 states. We handle all aspects of the phone service
for the customer, including ordering, customer service, billing, repair and
maintenance. We also offer many of the same local calling features as the
incumbent local exchange carriers, such as call waiting and caller ID. As of
December 31, 2003, we had 3.9 million bundled local and long distance customers.

WE OFFER CALLING CARD SERVICES

Our calling card can be used to place domestic and international calls in
the U.S. and Canada and to place calls from other countries to the U.S. via AT&T
Direct(R) services and country to country via AT&T Direct services. Features
include purchase limits, geographic restrictions, native language preference,
voice messaging and sequence dialing. Customers can also place calls over our
network by using regional phone company cards and commercial credit cards.

WE OFFER TRANSACTION-BASED SERVICES

We offer a variety of transaction-based services that are designed to
provide customers with an alternative to access long distance services as well
as to provide assistance in completing long distance communications.

Prepaid cards. We are the leading provider of domestic prepaid card
services. Our prepaid cards provide local, long distance and international calls
charged to a prepaid card account maintained on our prepaid platform. Our
prepaid cards are available in over 60,000 retail locations. The majority of
AT&T Consumer's prepaid card sales in 2003 were to Wal-Mart Stores, Inc. under
an agreement with a one-year term, and the

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sales to that customer comprised approximately 6% of our consumer revenue and
over 60% of our prepaid card revenue. The agreement is currently scheduled to
expire in January 2005 but could be subject to early termination if certain
events occur. During 2003, we sold or recharged more than 75 million prepaid
cards.

Operator services. Operator-assisted calling services include traditional
collect calls, third party billing, person-to-person and long distance pay phone
service.

1-800CALLATT(R) (Collect). 1-800CALLATT for collect calls is our lead
discounted collect calling offer.

Directory assistance. Directory assistance is provided to customers both
domestically and internationally, with an option to complete the call for an
extra charge.

Direct services. We provide customers with the ability to reach our
network from outside the U.S. By dialing the access code associated with the
country of origin, customers can receive all the benefits of our calling card
and operator-assisted calling services.

Easy Reach 800(R) service. We offer a personal 800 number that lets people
call home from virtually any phone, anytime, anywhere in the U.S. as an
alternative to collect calling.

Accessible communication service. We provide telecommunications relay
service for the deaf and hearing-impaired and speech impaired customers to help
them communicate with anyone in the world on the phone.

10-10-345(SM) service. 10-10-345 is a non-AT&T-branded dial-around service
that allows customers an alternative way to make a long distance call. The
service is targeted at price sensitive dial-around and other common carriers'
users completing domestic and/or international calls from home. Charges made for
calls using 10-10-345 are billed through the local exchange carrier.

WE OFFER INTERNET SERVICES

We offer dial-up and DSL internet access to consumers with our AT&T
Worldnet service, a leading provider of internet access services in the U.S.
AT&T Worldnet service offers internet-based communications services such as
e-mail, content, and personal web pages. As of December 31, 2003, we had
approximately 1.4 million AT&T Worldnet, dial-up or DSL customers.

Our AT&T Worldnet service seeks to build brand recognition and customer
loyalty. In addition to direct marketing through mass advertising, direct mail
and bundling offers, AT&T Worldnet service maintains an indirect channel
marketing effort through which AT&T Worldnet service software is bundled in new
computers produced by major manufacturers.

On January 6, 2003, we announced an extension of an existing agreement with
data services provider Covad Communications Group, Inc. to broaden availability
of the AT&T DSL service. Under this arrangement, we are pursuing DSL resale
service relationships with residential customers throughout the U.S., using
Covad's nationwide network. Covad's network covers more than 40 million homes
and businesses in 96 of the largest metropolitan statistical areas (MSAs)
throughout the U.S. In 2003, we were also the first to launch "linesplit"
capabilities to allow customers to receive both local service and DSL service
from us. By end of year 2003, we offered this combined local service and DSL
capability in 11 states.

WE INTEND TO OFFER RESIDENTIAL VOIP SERVICES

We announced in December 2003 that we intend to roll out a residential
broadband VoIP offering in major cities across the U.S. in 2004, beginning in
select MSAs in the first quarter of 2004. We have been conducting a trial of
residential VoIP services since October 2003 in three states offering trial
participants unlimited nationwide calling and the opportunity to test our array
of new, enhanced information services, including advanced call management
capabilities and special web-based features. The success of the trial has
resulted in our decision to launch our new consumer VoIP offering in key markets
across the U.S. in 2004.

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HOW DO WE MARKET OUR SERVICES AND CARE FOR OUR CUSTOMERS?

We market our products and services to a broad spectrum of customers. We
market under the AT&T brand, with the exception of our 10-10-345 service and
certain prepaid card offerings. We extensively utilize direct marketing channels
to communicate with our existing customer base as well as to market to
prospective customers. These efforts involve the selling of stand-alone
services, such as domestic and international long distance, local AT&T Worldnet
service and AT&T DSL service, as well as bundled service offerings, including
long distance/AT&T Worldnet service, long distance/local, and long
distance/calling card.

We rely on an integrated sales and service team to solicit and handle
customer contact opportunities. Our customer care centers consist of a network
of 22 service centers, of which 9 are operated by AT&T and 13 are outsourced to
outside vendors. The breadth of support provided by the centers ranges from
universal service to specialized services based on functional area or customer
needs. In addition, over 10 languages are supported within our customer care and
service functions and access to over 120 languages is available through
outsourced vendors.

We are continuing to implement various initiatives aimed at improving the
overall quality of our sales channels as well as lowering our costs of adding
new subscribers, including the expansion of our on-line capacity and
capabilities, including billing, sales and service, and the increased use of
interactive voice response technology. We are also pursuing the use of e-mail to
create a more convenient, interactive relationship with the consumer, while
streamlining our existing processes and reducing the costs of providing
services. Our global website provides services in seven languages.

WHAT SPECIAL OFFERS DO WE USE TO MARKET OUR SERVICES?

We offer long distance customers a family of calling plans. Currently,
there are two leading domestic long distance offers. The first is the AT&T One
Rate(R) 7c plan. For a monthly plan fee of $4.95, customers pay 7c per minute
for direct dialed long distance calls nationwide from home, at all times. The
second is the AT&T Unlimited(R) plus plan, which offers our residential long
distance subscribers unlimited intralata and interlata long distance calls for
$24.95 per month.

For international intensive customers, we offer Unlimited Country(R)
service, which allows customers to make unlimited calls from home to select
countries at a fixed price per month. The fixed price charged varies by country,
ranging from $39.95 to $49.95 per month. For customers with different calling
needs, international city specific rates may be found with our AnyHour
Advantage(R) plan starting as low as $3.95 per month.

In addition to our stand-alone long distance offers, we offer a range of
local calling plans which offers consumers unlimited local and their choice of
various calling feature options. The prices of these plans vary by state and by
package. The AT&T OneRate(R) USA plan offers consumers unlimited local and
unlimited long distance from home at a fixed price per month. The fixed price
varies by state, ranging from $41.95 to $59.95 per state.

We also offer various reward and partnership programs for higher spending
local and long distance customers. For example, customers enrolled in our
rewards program receive redemption options every six months based on their
qualified spending. Our relationships with third parties enable us to provide
customers with options ranging from airline miles to hotel nights to retail gift
cards.

HOW DO WE CHARGE FOR OUR SERVICES?

We generally continue to charge long distance customers for
jurisdictionally intrastate services based on applicable tariffs filed with
various individual states. Rates for state-to-state and international calls are
now generally set by contract rather than by FCC tariffs as a result of an FCC
de-tariffing order. Customers select different services and various rate plans,
which determine the monthly or per minute price that customers pay on their long
distance calls. Per minute rates typically vary based on a variety of factors,
particularly the volume of usage and the day and time that calls are made.

9

Our long distance charges may include fees per minute for transporting a
call, per call or per minute surcharges, monthly recurring charges, minimums and
price structures that offer a fixed number of minutes each month for a specific
price and price structure that offer unlimited calling to certain numbers for
particular time periods, or for the entire month for a monthly fee. The fees per
minute for transporting a call may vary by time of day or length of call and by
whether the call is domestic or international. Within the U.S., in-state rates
may vary from interstate rates. These rate structures apply to customer dialed
calls, calling card calls, directory assistance calls, operator-assisted calls
and certain miscellaneous services. Customers also may be assessed a percentage
of revenue, or a fixed monthly fee, to satisfy our obligations to recover U.S.
federal- and state-mandated assessments and access surcharges. Additional fees
may also be assessed to help recover specific costs of providing service to
consumers. Examples of these fees include the AT&T Regulatory Assessment Fee,
which recovers costs associated with state-to-state access charges, property
taxes, and the expenses associated with regulatory proceedings and compliance;
and the In-State Connection Fee, which recovers costs charged by local telephone
companies to carry our in-state long distance calls over their lines.

Customers for combined long distance and local services are usually charged
a flat rate per month for local service and a separate monthly rate for each
additional feature not included in the local service option selected by the
customer. Usage fees and/or monthly charges are charged for long distance. AT&T
Worldnet service offers a variety of pricing plan options. Generally, customers
are charged a flat rate for a certain number of hours with charges for each
additional hour of usage. AT&T Worldnet service also offers a plan without a
usage restriction.

We generally provide billing via traditional paper copy or on-line billing.

OTHER MATTERS

WHAT LEGISLATIVE AND REGULATORY DEVELOPMENTS ARE IMPORTANT TO US?

Telecommunications Act of 1996. The Telecommunications Act of 1996 became
law on February 8, 1996. Among other things, the Telecommunications Act was
designed to foster local exchange competition by establishing a regulatory
framework to govern new competitive entry in local and long distance
telecommunications services.

In August 1996, the FCC adopted rules and regulations, including pricing
rules, to implement the local competition provisions of the Telecommunications
Act. These rules and regulations rely on state public utility commissions (PUCs)
to develop the specific rates and procedures applicable to particular states
within the framework prescribed by the FCC. During the ensuing seven years, the
interpretation of the Telecommunications Act's provisions and the validity of
the FCC's implementing regulations have been the subject of significant
litigation.

On August 21, 2003, the FCC issued its decision in the proceeding it had
initiated to review the availability of unbundled network elements based on
current market conditions (Triennial Review) and adopted a new unbundling
framework. Under the new framework, each state commission was authorized to
conduct a granular analysis of local market conditions, using criteria provided
by the FCC, to make final unbundling determinations. In the same order, the FCC
also granted the incumbent local exchange companies significant broadband
deregulation, concluding that the incumbent LECs were no longer required to
unbundle fiber-to-the-home loops or bandwidth in hybrid copper fiber loops for
the provision of mass market competitive broadband services. The FCC also
eliminated all line-sharing obligations. Aspects of the FCC's order were
appealed to the U.S. Court of Appeals for the District of Columbia Circuit. On
March 4, 2004, the court vacated a number of the FCC rulings, including the
FCC's delegation to state commissions of decisions over impairment as applied to
mass market switching and certain transport elements, and the FCC's finding that
the need for so called "hot cuts" created a nationwide impairment justifying
access to mass market switching. The majority of the FCC commissioners adopting
the Triennial Review rulings relating to mass market services have announced
that they will seek a stay of the Court's decision and seek review by the U.S.
Supreme Court.

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On September 15, 2003, the FCC established a proceeding to determine
whether any changes are necessary to the pricing methodology (commonly known as
the TELRIC methodology) that the state PUCs must use in setting rates that we
and other carriers must pay for leasing unbundled network elements or facilities
from the incumbent local exchange carriers.

The FCC and various states have begun to consider whether and to what
extent VoIP communications should be subject to regulation like traditional
telecommunications services, including whether VoIP services should be subject
to access charges, 911 obligations, and universal service funding obligations.
The FCC currently has pending before it petitions requesting guidance on VoIP
services, including petitions from us, Vonage Holdings Corporation, and Level 3
Communications LLC. The FCC has initiated a rulemaking proceeding to address
VoIP issues.

In 2004, Congress is expected to closely review the state of
telecommunications competition with special emphasis on examining the regulatory
treatment of emerging VoIP services, reforms to the universal service and
inter-carrier compensation regimes and the regulatory framework for promoting
the deployment of broadband services. It is highly uncertain whether any
consensus will be reached on any legislative proposals related to these topics
prior to Congressional adjournment.

The FCC also opened proceedings in December 2001 and in February 2002 that
could further reduce the level of federal oversight of the regional phone
companies' broadband offerings.

Congress may enact a moratorium on the taxation of internet access in 2004.
While the length of the moratorium and whether broadband access will be covered
are unsettled, enactment of a moratorium will promote the continued growth of
the internet by reducing taxes on internet access providers.

In view of the proceedings pending before the courts, the FCC and state
PUCs, and possible legislation, there can be no assurance that the prices and
other conditions established by the FCC and in the various states will provide
for effective local service competition or will not adversely affect our ability
to continue to serve existing markets or enter new markets.

Regulation of Rates. We are subject to the jurisdiction of the FCC with
respect to interstate and international rates, lines and services, and other
matters. From July 1989 to October 1995, the FCC regulated us under a system
known as "price caps" whereby our prices, rather than our earnings, were
limited. On October 12, 1995, recognizing a decade of enormous change in the
long distance market and finding that we lacked market power in the interstate
long distance market, the FCC reclassified us as a "non-dominant" carrier for
its domestic interstate services. Subsequently, the FCC determined that our
international services were also non-dominant. As a result, we became subject to
the same regulations as its long distance competitors for these services.

In subsequent orders, the FCC decided to exercise its authority to forbear
from requiring non-dominant carriers to file tariffs for their services; first
for domestic interstate services and then for international services.

We remain subject to the statutory requirements of Title II of the
Communications Act of 1934 (Communications Act), as amended. We must offer
telecommunications services under rates, terms and conditions that are just,
reasonable and not unreasonably discriminatory. We also are subject to the FCC's
complaint process, and we must give notice to the FCC and affected customers
prior to discontinuance, reduction or impairment of our service.

In addition, state public utility commissions or similar authorities having
regulatory power over intrastate rates, lines and services and other matters
regulate our local and intrastate communications services. The system of
regulation applied to our intrastate and local communications services varies
from state to state and generally includes various forms of pricing flexibility
rules. Our services are not regulated in the states through rate of return
regulation.

Access charges are subject to the regulatory jurisdiction of the FCC and
state commissions. In May 2000, the FCC adopted the CALLS order for the price
cap local exchange carriers, which made significant access and price cap
changes. The CALLS order reduced, by $3.2 billion during 2000, the interstate
access charges that we and other long distance carriers paid to these local
exchange carriers for access to their networks, and

11

established target access rates, which in subsequent years resulted in further
reductions, albeit of a much smaller magnitude. As part of the CALLS order, AT&T
agreed to pass through to customers access charge reductions over the five-year
life of the CALLS order and made certain other commitments regarding the rate
structure of certain residential long distance offerings. One aspect of the
CALLS order relating to higher end user charges imposed by local exchange
carriers is pending on appeal in the U.S. Court of Appeals for the District of
Columbia Circuit, where oral argument was held November 24, 2003.

In November 2001, the FCC adopted various measures that reduced per-minute
interstate access charges that we pay to the remaining local exchange carriers
that operate under rate of return regulation and provide about 8% of the
nation's phone lines. By July 2003, once these changes were fully implemented,
long distance carriers started paying about $900 million (or roughly 50%) per
year less in access charges to these generally small, rural local exchange
carriers. The FCC did not require long distance carriers, like us, to pass on
our savings to end users, but expected competition to force them to do so. As
part of this ongoing proceeding, the FCC is considering further measures that
would give these carriers additional pricing flexibility and possibly the option
to operate under some form of price cap regulation.

Under its August 1999 local exchange carrier pricing flexibility order,
which was affirmed by the U.S. Court of Appeals for the District of Columbia
Circuit in February 2001, the FCC established certain triggers that enable the
price cap local exchange carriers to obtain pricing flexibility for their
interstate access services, including Phase II relief that permits them to
remove these services from price cap regulation. Although these triggers
purportedly indicate a competitive presence, they allow for premature
deregulation that in many cases has resulted in access rates that exceed those
that are still under price caps.

Sprint PCS, a wireless carrier, sued us for access charges for our long
distance calls terminated on Sprint PCS' network and for toll-free calls that
Sprint PCS customers originated and which were terminated on our network. We
refused to pay Sprint PCS based on the longstanding industry practice between
wireless and long distance carriers that the carrier that bills for a service
keeps the payment. In July 2002, the FCC ruled that wireless carriers such as
Sprint PCS are not prohibited from charging us access charges, but that we were
not required to pay such charges absent a contractual obligation to do so. The
FCC further held that the question whether the parties entered into a contract
concerning an access payment obligation is not a matter of federal
communications law but rather should to be determined by the district court that
had referred the issue to the FCC. Because there was no express contract between
us and Sprint PCS, if the appeal is unsuccessful, the district court will need
to determine whether an implied-in-fact contract can be inferred from the
parties' conduct and their tacit understanding. We contend that the court cannot
find an implied contract, because it would require the court to establish a
wireless access rate, a matter that is preempted by the Communications Act, and
because the facts confirm that no such contract was formed. An adverse decision
in this litigation may result in additional wireless carriers seeking similar
compensation from us. We believe the case is without merit and intend to defend
vigorously, but cannot predict the outcome of any such proceeding.

Finally, in the May 1997 universal service order, the FCC adopted a new
mechanism for funding universal service, which includes programs that defray the
costs of telephone service in high cost areas, for low income consumers, and for
schools, libraries and rural health care providers, and provides subsidies for
internet access and inside wiring to schools and libraries. Specifically, the
FCC expanded the set of carriers that must contribute to support universal
service from solely long distance carriers to all carriers, including local
exchange carriers, that provide interstate telecommunications services.
Similarly, the set of carriers eligible for the universal service support has
been expanded from only local exchange carriers to any eligible carrier
providing local service to a customer, including us as a new entrant in local
markets. The mechanism used to collect universal service contributions relied on
historical revenues, which disproportionately shifted the burden of these
programs from carriers that are growing market share to carriers that are losing
market share, like us, in the long distance market. In December 2002, the FCC
reformed the universal service assessment mechanism so that, effective April
2003, it is based on projected revenues, which eliminates the disadvantage that
we previously experienced. The December 2002 order also limited how carriers
would be able to reflect universal service fees on their end user customers'
bills and permitted alternative recovery mechanisms for administrative costs.

12

HOW AND WITH WHOM DO WE COMPETE?

Competition in communications services is based on price and pricing plans,
types of services offered, customer service, access to customer premises and
communications quality, reliability and availability. We face significant
competition in all these areas. Our principal competitors include MCI, Sprint
and regional phone companies. In addition, we face a number of international
competitors including Equant, British Telecom and SingTel. We also experience
significant competition in long distance from newer entrants as well as
dial-around resellers. In addition, long distance telecommunications providers
have been facing competition from non-traditional sources, including as a result
of technological substitutions, such as VoIP, high speed cable internet service,
e-mail and wireless services. Providers of competitive high-speed data offerings
include cable television companies, direct broadcast satellite companies and DSL
resellers.

Incumbent local exchange carriers own the only universal telephone
connection to the home, have very substantial capital and other resources, long
standing customer relationships and extensive existing facilities and network
rights-of-way, and are our primary competitors in the local services market. We
also compete in the local services market with a number of competitive local
exchange carriers, a few of which have existing local networks and significant
financial resources.

We currently face significant competition and expect that the level of
competition will continue to increase. As competitive, regulatory and
technological changes occur, including those occasioned by the
Telecommunications Act, we anticipate that new and different competitors will
enter and expand their position in the communications services markets. These
will include regional phone company competitors plus entrants from other
segments of the communications and information services industry. Many of these
new competitors are likely to enter with a strong market presence, well
recognized names and pre-existing direct customer relationships.

For example, the Telecommunications Act permits regional phone companies to
provide in-region interLATA interexchange services after demonstrating to the
FCC that providing these services is in the public interest and satisfying the
conditions for developing local competition established by the
Telecommunications Act. The regional phone companies had successfully obtained
FCC approval to offer long distance in all of the states by the end of 2003.
Because substantial numbers of long distance customers seek to purchase local,
interexchange and other services from a single carrier as part of a combined or
full service package, any competitive disadvantage, inability to profitably
provide local service at competitive rates or delays or limitations in providing
local service or combined service packages could materially adversely affect our
future revenue and earnings.

In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services, local conditions and obstacles,
and changes in regulations or orders that grant to us access to regional phone
companies' infrastructure, could materially adversely affect our ability to
succeed in the local exchange services market and our ability to offer combined
service packages that include local service.

WHO ARE OUR EMPLOYEES?

On December 31, 2003, we employed approximately 61,600 persons in our
operations, approximately 92% of whom are located domestically. Unions represent
about 36% of the domestically located employees. Of those so represented, about
95% are represented by the Communications Workers of America, which is
affiliated with the AFL-CIO; about 4% by the International Brotherhood of
Electrical Workers, which is also affiliated with the AFL-CIO. In addition,
there is a very small remainder of domestic employees represented by other
unions. Labor agreements covering most of these employees extend through
December 2005.

On December 31, 2003, AT&T Business Services employed approximately 45,500
individuals in its operations. Of those employees, approximately 41,300 are
located domestically. Unions represent about 25% of the domestically located
employees of AT&T Business Services.

13

On December 31, 2003, AT&T Consumer Services employed approximately 11,300
individuals in its operations, virtually all of whom are located in the U.S.
Unions represent about 78% of the domestically located employees of AT&T
Consumer Services.

SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION

For information about our research and development expense, see Note 4 to
the Consolidated Financial Statements included in Item 8 to this Annual Report.
For information about the consolidated operating revenue contributed by our
major classes of products and services, see the revenue tables and descriptions
following the caption "Segment Results" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7.

WHAT INFORMATION IS AVAILABLE ABOUT OUR COMPANY?

Shareowners may access and download free of charge via a hyperlink on our
website at www.att.com/ir copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports. These documents are generally available on the same day they are
electronically filed with or furnished to the Securities and Exchange
Commission. Shareowners may also access and download free of charge our
corporate governance documents, including our Code of Conduct, our Code of
Ethics for Chief Executive Officer and Senior Financial Officers, our Corporate
Governance Guidelines, and the charters of our Audit Committee, Compensation and
Employee Benefits Committee and Governance and Nominating Committee. In
addition, any shareowner who wishes to obtain a print copy of any of these
documents should write to: AT&T Corp., Investor Relations Department, One AT&T
Way, Bedminster, New Jersey 07921.

WHAT ARE THE CONTINUING IMPLICATIONS OF THE SPLIT-OFFS AND SPIN-OFFS WE HAVE
EFFECTED?

Since 1996 we have split-off or spun-off a number of operating units
including Lucent Technologies Inc., NCR Corp., AT&T Wireless Services, Inc.,
Liberty Media Corporation and AT&T Broadband Corp. In connection with these
transactions, we have retained various potential obligations and liabilities
relating to these former units; for example, we have entered into various
agreements which contain allocations or sharing of certain potential costs or
liabilities or otherwise contain continuing potential burdens or restrictions on
us. These potential obligations and liabilities include potential tax
liabilities and restrictions, potential litigation liabilities and the potential
for liability in connection with our guarantees to third parties of obligations
of our former units.

Tax Considerations. If AT&T or AT&T Broadband/Comcast Corporation were to
engage in certain issuances of shares or change of control transactions
occurring generally within the two-year period following the date of the
spin-off, we could incur material federal income tax liabilities with respect to
the spin-off. AT&T Broadband/Comcast has generally agreed not to undertake such
actions without a counsel's opinion or a ruling from the Internal Revenue
Service (IRS), in each case in form and substance reasonably satisfactory to us.
Moreover, under an agreement between us and AT&T Broadband/Comcast, we generally
will be entitled to indemnification for any tax liability that results from the
spin-off failing to qualify as a tax-free transaction, unless, the tax liability
was caused by post or spin-off transactions of AT&T. AT&T Broadband/ Comcast's
indemnification obligation is generally limited to 50% of any tax liability that
results from the spin-off failing to qualify as tax free, unless such liability
was caused by a post spin-off transaction of AT&T Broadband/Comcast. To the
extent we were entitled to an indemnity with respect to such tax liability, we
would be required to collect the claim on an unsecured basis.

Because of restrictions imposed by Section 355(e) of the Internal Revenue
Code, our ability to enter into certain transactions involving the issuance of
significant amounts of its stock may be limited. Under agreements between us and
AT&T Broadband/Comcast, we generally have agreed not to engage in such
transactions for a period of 25 months following the spin-off of AT&T Broadband
without a counsel's opinion or ruling from the IRS, in each case in form and
substance reasonably satisfactory to AT&T Broadband/

14

Comcast. We believe that the practical impact of these restrictions has
diminished significantly with the passage of time.

Litigation. Pursuant to agreements entered into with its former units, we
share in the cost of certain litigation (relating to matters arising while the
units were affiliated with AT&T) if the settlement exceeds certain thresholds.
For example, in connection with a settlement in 2002 of Sparks v. AT&T, a class
action against AT&T, Lucent Technologies and other defendants filed in 1996,
pursuant to agreements between us and Lucent Technologies, we are responsible
for our proportionate share of the settlement and estimated legal costs. We
anticipate that this amount may total as much as $33 million, net of tax.
Similarly, pursuant to agreements between AT&T and NCR Corp., we are potentially
responsible for a portion of any award or settlement relating to the
environmental proceedings brought by certain federal and state governmental
agencies arising out of the presence of polychlorinated biphenyls (PCBs) in
sediments in the lower Fox River and in the Bay of Green Bay, in Wisconsin (Fox
River). NCR was identified as a potentially responsible party because PCBs were
purportedly discharged from two carbonless copy paper manufacturing facilities
it previously owned, which are located along the Fox River. With the exception
of the Sparks and the Fox River matters, as of December 31, 2003, we have made
the assessment that none of the potential litigation liabilities relating to
matters arising while the units were affiliated with AT&T were probable of
incurring costs in excess of the threshold above which we would be required to
share in the costs. However, in the event these former units were unable to meet
their obligations with respect to these liabilities due to financial
difficulties, we could be held responsible for all or a portion of the costs,
irrespective of the sharing agreements.

Guarantees. From time to time we have guaranteed to third parties the debt
or other obligations of our former units, and in some cases may remain
secondarily liable with respect to such obligations. In addition, in connection
with the split-off or spin-off of our former units, we have issued guarantees to
third parties for certain debt or other obligations of our former units. For
example, in connection with the split-off of AT&T Wireless, we issued a
guarantee in the amount of $3.65 billion plus interest of a put right held by a
third party in the event that AT&T Wireless failed to achieve certain technical
milestones by June 30, 2004. In the event our former units are unable to meet
obligations which we have guaranteed, the third parties could look to us for
payment.

WHAT SPECIAL CONSIDERATIONS SHOULD INVESTORS CONSIDER?

Investors should carefully consider the following factors regarding their
investment in our securities.

We Expect There to be a Continued Decline in the Voice Long Distance
Industry. Historically, prices for voice communications have fallen because of
competition, the introduction of more efficient networks and advanced
technology, product substitution, excess capacity and deregulation. We expect
these trends to continue, and we may need to continue to reduce prices in the
future. In addition, we do not expect that we will be able to achieve increased
traffic volumes in the near future to sustain current revenue levels. The extent
to which each of our businesses, financial condition, results of operations and
cash flow could be materially adversely affected will depend on the pace at
which these industry-wide changes continue.

We Face Substantial Competition that May Materially Adversely Impact Both
Market Share and Margins. We currently face significant competition, and we
expect the level of competition to continue to increase. Some of the potential
materially adverse consequences of this competition include the following:

- market share loss and loss of key customers;

- possibility that customers shift to less profitable, lower margin
services;

- need to initiate or respond to price cuts in order to retain market
share;

- difficulties in AT&T Business Services' and AT&T Consumer Services'
ability to grow new businesses, introduce new services successfully or
execute on their business plan; and

- inability to purchase fairly priced access services or fairly priced
elements of local carriers' networks.

15

We Face Competition from a Variety of Sources.

- We traditionally have competed with other long distance carriers. In
recent years, we have begun to compete with regional phone companies,
which own their own access facilities and historically have dominated
local telecommunications, and with other competitive local exchange
carriers for the provision of local and long distance services. Regional
phone companies now have received permission to offer long distance
services in all of the states within their regions. The regional phone
companies presently have numerous advantages as a result of their
historic monopoly control over local exchanges and facilities. Some of
the regional phone companies have financial, personnel and other
resources significantly greater than ours. In addition, the regional
phone companies are able to offer bundled products and services in
certain states that we are unable to match . To the extent consumers
prefer bundled offers (such as those offers that include local, long
distance and wireless services), we will be at a disadvantage to certain
of our competitors, including the regional phone companies.

- Competition as a result of technological change. We are also subject to
additional competitive pressures from the development of new technologies
and the increased availability of domestic and international transmission
capacity. The telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of new product and
service offerings and increasing satellite, wireless, fiber optic and
coaxial cable transmission capacity for services similar to those
provided by us. We cannot predict which of many possible future product
and service offerings will be important to maintain our competitive
position, or what expenditures will be required to develop and provide
these products and services.

- Competition as a result of excess capacity. We face competition as a
result of excess capacity resulting from substantial network build out by
competitors.

- Competition from restructured competitors. We face competition from
competitors which have been restructured, in some cases through
bankruptcy proceedings, to improve their financial condition.

The Regulatory and Legislative Environment Creates Challenges for Us. We
face risks relating to regulations and legislation. These risks include:

- difficulty of effective competition in local markets due to
noncompetitive pricing and to regional phone company operational issues
that do not permit rapid large scale customer changes from regional phone
companies to new service providers;

- new head-on competition as regional phone companies enter and expand
their presence in the long distance business;

- emergence of few facilities-based competitors to regional phone
companies, and the absence of any significant alternate source of supply
for most access and local services; and

- threats to the viability of our local voice business resulting from the
partial vacating of the FCC's Triennial Review Order by a U.S. Court of
Appeals.

This dependency on supply materially adversely impacts our cost structure,
and ability to create and market desirable and competitive end-to-end products
for customers.

In addition, regional phone companies have entered the long distance
business throughout the U.S. while they still control substantially all the
access facilities in their regions. This has resulted in an increased level of
competition for long distance or end-to-end services as the services offered by
regional phone companies expand.

In the Consumer Business Substantially All of the Telephone Calls Made by
Our Customers are Connected Using Other Companies' Networks, Including Those of
Competitors, which Makes Competition More Difficult for Us. We provide long
distance and, to a limited extent, local telecommunications over our own
transmission facilities. Because our network does not extend to homes, we route
calls through a local telephone company to reach our transmission facilities
and, ultimately, to reach their final destinations.

16

In the U.S., the providers of local telephone service generally are the
incumbent local exchange carriers, including the regional phone companies. The
permitted pricing of local transmission facilities that we lease in the U.S. is
subject to legal uncertainties. In view of the proceedings pending before the
courts and regulatory authorities, there can be no assurance that the prices and
other conditions established in each state will provide for effective local
service entry and competition, or provide us with new market opportunities.

Our Financial Condition and Prospects May be Materially Adversely Affected
by Further Ratings Downgrades. In July 2003, our long-term credit ratings were
lowered by both Standard & Poor's (S&P) and Fitch to BBB from BBB+. S&P removed
the ratings from CreditWatch. Our commercial paper ratings were affirmed by S&P
and Fitch at A-2 and F-2, respectively. On July 24, 2003, Moody's affirmed our
current ratings at Baa2 for long term and P-2 for short term. Moody's continues
to hold our outlook at negative. In January 2004, S&P and Fitch lowered our
commercial paper rating to A-3 and F-3, respectively. Both S&P and Fitch view
our outlook as negative. Additionally, in January, Fitch downgraded the
long-term rating to BBB-. None of our ratings are currently under review or on
CreditWatch for further downgrade. Further debt rating downgrades could require
us to pay higher rates on certain existing debt and post cash collateral for
certain interest rate and equity swaps if we are in a net payable position.
Further ratings actions could occur at any time. If our debt ratings are further
downgraded, our access to the capital markets may be restricted or such
replacement financing may be more costly or have additional covenants than we
had in connection with our debt in December 2003. In addition, the market
environment for financing in general, and within the telecommunications sector,
in particular, has been adversely affected by economic conditions and
bankruptcies of other telecommunications providers. If the financial markets
become more cautious regarding the industry/ratings category we operate in, our
ability to obtain financing would be further reduced and the cost of any new
financings may be higher.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to:

- financial condition,

- results of operations,

- cash flows,

- dividends,

- financing plans,

- business strategies,

- operating efficiencies,

- capital and other expenditures,

- competitive positions,

- availability of capital,

- growth opportunities for new and existing products,

- benefits from new technologies,

- availability and deployment of new technologies,

- plans and objectives of management, and

- other matters.

Statements in this Form 10-K that are not historical facts are hereby identified
as "forward looking statements" for the purpose of the safe harbor provided by
Section 27A of the Securities Act of 1933 and

17

Section 21E of the Securities Exchange Act of 1934. The words "estimate,"
"project," "intend," "expect," "believe," "plan" and similar expressions are
intended to identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this document. Any Form 10-K, Annual Report to Shareholders, Form
10-Q or Form 8-K of AT&T may include forward looking statements. In addition,
other written or oral statements which constitute forward looking statements
have been made and may in the future be made by or on behalf of AT&T, including
with respect to the matters referred to above. These forward looking statements
are necessarily estimates reflecting the best judgment of senior management that
rely on a number of assumptions concerning future events, many of which are
outside of our control, and involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. These forward-looking statements should, therefore,
be considered in light of various important factors, including those set forth
in this Form 10-K. Important factors that could cause actual results to differ
materially from estimates or projections contained in the forward-looking
statements include, without limitation:

- the impact of existing, new and restructured competitors in the markets
in which we compete, including competitors that may offer less expensive
products and services, desirable or innovative products or bundles of
products, technological substitutes, or have extensive resources or
better financing,

- the impact of oversupply of capacity resulting from excessive deployment
of network capacity,

- the ongoing global and domestic trend towards consolidation in the
telecommunications industry, which may have the effect of making the
competitors of these entities larger and better financed and afford these
competitors with extensive resources and greater geographic reach,
allowing them to compete more effectively,

- the effects of vigorous competition in the markets in which we operate,
which may decrease prices charged and change customer mix and
profitability,

- the ability to establish a significant market presence in new geographic
and service markets,

- the availability and cost of capital,

- the impact of any unusual items resulting from ongoing evaluations of our
business strategies,

- the requirements imposed on us or latitude allowed to competitors by the
FCC or state regulatory commissions under the Telecommunications Act or
other applicable laws and regulations,

- the possible invalidity of portions of the FCC's Triennial Review Order,

- the risks associated with technological requirements; wireless, internet,
VoIP or other technology substitution and changes, and other
technological developments,

- the risks associated with the repurchase by us of debt or equity
securities, which may adversely affect our liquidity or creditworthiness,

- the results of litigation filed or to be filed against us, and

- the possibility of one or more of the markets in which we compete being
impacted by changes in political, economic or other factors, such as
monetary policy, legal and regulatory changes, war or other external
factors over which we have no control.

ITEM 2. PROPERTIES

WHAT DO WE OWN?

Our properties consist primarily of plant and equipment used to provide
long distance and local telecommunications services. Our properties also include
administrative office buildings. We own and lease properties to support our
offices, facilities and equipment.

18

Telecommunications plant and equipment consists of: central office
equipment, including switching and transmission equipment; connecting lines
(cables, wires, poles, conduits, etc.); land and buildings; and miscellaneous
properties (work equipment, furniture, plant under construction, etc.). The
majority of the connecting lines are on or under public roads, highways and
streets and international and territorial waters. The remainder are on or under
private property. We also operate a number of sales offices, customer care
centers, and other facilities, such as research and development laboratories.

We continue to manage the deployment and utilization of our assets in order
to meet our global growth objectives while at the same time ensuring that these
assets are generating value for the shareholder. We will continue to manage our
asset base consistent with marketplace forces, productivity growth and
technological change.

ITEM 3. LEGAL PROCEEDINGS

HOW MIGHT PENDING LEGAL PROCEEDINGS AFFECT US?

In the normal course of business, we are subject to proceedings, lawsuits
and other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties and outcomes are not predictable with assurance. Consequently, we
are unable to ascertain the ultimate aggregate amount of monetary liability or
financial impact with respect to these matters on December 31, 2003. While these
matters could affect operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to us beyond that provided for at
year-end would not be material to our annual consolidated financial position or
results of operations.

We have been named as a defendant in a consolidated group of purported
securities class action lawsuits filed in the United States District Courts for
the District of New Jersey filed on behalf of persons who purchased our common
stock from October 25, 1999 through May 1, 2000. These lawsuits assert claims
under Section 10(b) and Rule 10b-5 and Section 20(a) of the Securities Exchange
Act of 1934, as amended, and allege, among other things, that during the period
referenced above, we made materially false and misleading statements and omitted
to state material facts concerning our future business prospects. The
consolidated complaint seeks unspecified damages. Similar claims have been
asserted by plaintiffs against us in two derivative actions, which were
dismissed by the New Jersey federal court on January 7, 2004. We believe that we
have meritorious defenses against these actions, and we intend to defend them
vigorously.

We have also been named as a defendant in another consolidated group of
securities class actions filed in the United States District Court for the
Southern District of New York, filed on behalf of investors who purchased shares
in the AT&T Wireless initial public offering from April 26, 2000 through May 1,
2000. This consolidated action asserts claims under Sections 11, 12 and 15 of
the Securities Act of 1933, as amended, and Section 10(b) and Rule 10b-5 and
Section 20(a) of the Securities Exchange Act of 1934, as amended, and allege
that we made materially false and misleading statements and omitted to state
material facts in the initial public offering prospectus about our future
business prospects. The plaintiffs seek unspecified damages. We believe that the
lawsuit is without merit and intend to defend it vigorously.

On December 22, 2003, two participants in our Long Term Savings Plan for
Management Employees (the Plan) filed purported class actions in New Jersey
federal court on behalf of all Plan participants who purchased or held shares of
AT&T Stock Fund, AT&T stock, AT&T Wireless Stock Fund or AT&T Wireless stock
between September 30, 1999 and May 1, 2000. The complaint asserts claims similar
to those made in the securities class action lawsuit described above, alleging
that we made materially false and misleading statements and omitted to state
material facts concerning our future business prospects. As a result of this
purported conduct, we are alleged to have breached our fiduciary duties to the
Plan and the Plan's participants. The plaintiffs seek unspecified damages. We
believe that the lawsuits are without merit and intend to defend them
vigorously.

Through a former subsidiary, we owned approximately 23% of the outstanding
common stock and 74% of the voting power of the outstanding common stock of At
Home Corporation (At Home), which filed for

19

bankruptcy protection on September 28, 2001. Until October 1, 2001, AT&T
appointed a majority of At Home's directors and thereafter we appointed none. On
November 7, 2002, the trustee for the bondholders' liquidating trust of At Home
(the Bondholders) filed a lawsuit in California state court asserting claims for
breach of fiduciary duty relating to the conduct of AT&T and its designees on
the At Home board of directors in connection with At Home's declaration of
bankruptcy and subsequent efforts to dispose of some of its businesses or
assets, as well as in connection with other aspects of our relationship with At
Home. On November 15, 2002, the bondholders filed a lawsuit in California
federal court asserting a claim for patent infringement relating to AT&T's
broadband distribution and high-speed internet backbone networks and equipment.
The bondholders seek unspecified damages in these lawsuits. We believe that
these lawsuits are without merit and intend to defend them vigorously.

In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, and the
directors of At Home, Cox and Comcast. The lawsuits claim that the defendants
breached fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the Board of
Directors of At Home was reorganized, and we agreed to give Cox and Comcast
rights to sell their At Home shares to us. These actions have been consolidated
by the court and are subject to a stay. AT&T's liability for any such suits
would be shared equally between us and Comcast. In March 2002 a purported class
action was filed in the United States District Court for the Southern District
of New York against, inter alia, AT&T and certain of its senior officers
alleging violations of the federal securities law in connection with the
disclosures made by At Home in the period from April 17 through August 28, 2001
(the 2002 Lawsuit). A second purported class action was filed in the United
States District Court for the Southern District of New York in the summer of
2003 (the 2003 Lawsuit) by the same attorneys who had filed the 2002 Lawsuit.
The complaint in the 2003 Lawsuit asserts allegations similar to those asserted
in the complaint of the 2002 Lawsuit. The 2003 Lawsuit adds At Home as a
defendant. We believe that these lawsuits are without merit and intend to defend
them vigorously.

The creditors of At Home recently filed a preference action against AT&T in
the At Home bankruptcy proceeding pending in California federal court. The
complaint alleges that we should be viewed as an insider of At Home. On this
theory, At Home seeks to avoid one year's worth of payments to us as opposed to
the non-insider ninety-day period prior to the fling of the bankruptcy petition.
The plaintiffs seek damages of approximately $89.6 million from AT&T and
Comcast. The Company believes that this action is without merit and intends to
defend it vigorously.

Two putative class actions have been filed in Delaware state court on
behalf of shareholders of AT&T Latin America (ATTLA). The complaints allege that
AT&T and its designees to the ATTLA board of directors violated their fiduciary
duties to ATTLA as a result of purported changes in our relationship with ATTLA,
including our decision to discontinue funding to ATTLA and an alleged change in
our plan to enter into a tax sharing agreement with ATTLA. The plaintiffs seek
unspecified damages. We believe that these lawsuits are without merit and intend
to defend them vigorously. On March 12, 2004, the Delaware Chancery Court
granted AT&T's motion to dismiss these claims. Plaintiffs may appeal the
judgment.

Thirty putative class actions have been filed in various jurisdictions
around the country challenging the manner in which we disclose FCC-imposed
universal service fund charges to our customers and recoup those charges from
our customers. The plaintiffs in each lawsuit seek unspecified damages. We
believe that these lawsuits are without merit and intend to defend them
vigorously.

More than thirty class actions have been brought against us throughout the
country in which the plaintiffs have asserted superior property rights with
respect to railroad right-of-way corridors on which we have installed fiber
optic cable under agreements with the various railroads. Although we deny any
liability, we have engaged in settlement negotiations concerning the so called
"active line" claims that have been consolidated and are pending in Indiana
federal court. We have settled claims on a state-by-state basis and obtained
final approval for separate settlements of such claims in Ohio, Connecticut,
Wisconsin, Maryland and Virginia. In addition, in second quarter 2004, we
anticipate that the parties will request preliminary approval of similar "active
line" settlements in Delaware, Massachusetts, Michigan, West Virginia and Idaho.
We also anticipate

20

using these settlements as a template for settling "active line" claims in other
states. However, these settlements do not involve "active line" claims along
railroad right-of-way obtained under federal land grant statutes nor do they
address claims that are based upon the installation of fiber optic cable in
pipeline or other utility right-of-way.

There is one environmental proceeding known to be contemplated by a
government authority that is required to be reported pursuant to Instruction
5.C. of Item 103 of Regulation S-K. The U.S. Department of Justice has notified
us that it intends to seek a civil penalty, in an amount not yet determined but
which would exceed the $100,000 threshold in Instruction 5.C., in connection
with the construction in 1999 of a breakwater in St. Thomas, U.S. Virgin
Islands, without a federal permit.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREOWNER MATTERS AND
ISSUER PURCHASERS OF EQUITY SECURITIES

Our common stock (ticker symbol "T") is listed on the New York Stock
Exchange, as well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia
exchanges in the U.S., and on the Euronext-Paris and the IDR (International
Depository Receipt) in Brussels as well as the London and Geneva stock
exchanges. As of December 31, 2003, we had approximately 792 million shares
outstanding, held by approximately 2.7 million shareowners.

For additional information about the market price and dividends related to
our common stock, see Note 17 to the Consolidated Financial Statements included
in Item 8 to this Annual Report.

21

ITEM 6. SELECTED FINANCIAL DATA

AT&T CORP. AND SUBSIDIARIES

SUMMARY OF SELECTED FINANCIAL DATA(1)

- ---------------

(1) Certain prior year amounts have been reclassified to conform to the 2003
presentation.

(2) In connection with the March 9, 1999, merger with Tele-Communications, Inc.,
AT&T issued separate tracking stock for Liberty Media Group (LMG). LMG was
accounted for as an equity investment prior to its split-off from AT&T on
August 10, 2001. There were no dividends declared for LMG tracking stock.
AT&T Common Stock Group results exclude LMG.

(3) Debt ratio reflects debt from continuing operations as a percentage of total
capital, excluding discontinued operations and LMG, (debt plus equity,
excluding LMG and discontinued operations).

(4) Data provided excludes LMG.

22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

AT&T CORP. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to:

- financial condition,

- results of operations,

- cash flows,

- dividends,

- financing plans,

- business strategies,

- operating efficiencies,

- capital and other expenditures,

- competitive positions,

- availability of capital,

- growth opportunities for new and existing products,

- benefits from new technologies,

- availability and deployment of new technologies,

- plans and objectives of management, and

- other matters.

Statements in this document that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe harbor
provided by Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The words "estimate," "project," "intend,"
"expect," "believe," "plan" and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
document. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of
AT&T may include forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements have been made and may in
the future be made by or on behalf of AT&T, including with respect to the
matters referred to above. These forward-looking statements are necessarily
estimates reflecting the best judgment of senior management that rely on a
number of assumptions concerning future events, many of which are outside of our
control, and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth in this document.
Important factors that could cause actual results to differ materially from
estimates or projections contained in the forward-looking statements include,
without limitation:

- the impact of existing, new and restructured competitors in the markets
in which we compete, including competitors that may offer less expensive
products and services, desirable or innovative products, technological
substitutes, or have extensive resources or better financing,

- the impact of oversupply of capacity resulting from excessive deployment
of network capacity,

23

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

- the ongoing global and domestic trend toward consolidation in the
telecommunications industry, which may have the effect of making the
competitors of these entities larger and better financed and afford these
competitors with extensive resources and greater geographic reach,
allowing them to compete more effectively,

- the effects of vigorous competition in the markets in which we operate,
which may decrease prices charged and change customer mix and
profitability,

- the ability to establish a significant market presence in new geographic
and service markets,

- the availability and cost of capital,

- the impact of any unusual items resulting from ongoing evaluations of our
business strategies,

- the requirements imposed on us or latitude allowed to competitors by the
Federal Communications Commission (FCC) or state regulatory commissions
under the Telecommunications Act or other applicable laws and
regulations,

- the possible invalidity of portions of the FCC's Triennial Review Order,

- the risks associated with technological requirements; wireless, Internet,
VoIP or other technology substitution and changes; and other
technological developments,

- the risks associated with the repurchase by us of debt or equity
securities, which may adversely affect our liquidity or creditworthiness,

- the results of litigation filed or to be filed against us, and

- the possibility of one or more of the markets in which we compete being
impacted by changes in political, economic or other factors, such as
monetary policy, legal and regulatory changes, war or other external
factors over which we have no control.

The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations for the years ended December 31, 2003, 2002 and 2001, and
financial condition as of December 31, 2003 and 2002.

OVERVIEW

AT&T Corp. (AT&T) has undertaken significant changes to its business in
recent years. In 2002, we spun off our broadband business and in 2001 we spun
off our wireless business. Today, we are in the midst of transforming our
business from a predominantly voice-services business to a more diversified
telecommunications and networking provider.

However, the communications industry we operate in continues to be fraught
with economic and competitive challenges, reflecting significant changes the
industry is undergoing. Industry dynamics that have impacted us include years of
excess investment that has led to overcapacity and lower prices.

Our 2003 results reflect the impacts of this challenging environment. We
continue to see declines in long distance voice revenue, which has long been the
mainstay of our business. For 2003, stand-alone long distance voice services
accounted for approximately one-half of our total revenue compared with nearly
two-thirds in 2001.

We offer a growing list of services to businesses of all sizes, government
agencies and residential customers. Our product set includes stand-alone long
distance voice services, local voice services, data services, Internet Protocol
(IP) and enhanced services, as well as a variety of bundled offerings that
package long-distance voice, local voice, wireless and Internet services. In
addition, we believe our balance sheet
24

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

provides us with a competitive advantage. During 2003, we increased our
quarterly dividend by 27% and reduced our total debt by $8.2 billion. At the
same time, we ended 2003 with $4.4 billion in cash. We believe the strength of
our balance sheet provides us with the flexibility to continue to make
investments in our business that will drive further process enhancements and
operating improvements.

Within AT&T Business Services, we provide long distance voice services to
retail customers and wholesale customers. The retail business has experienced
declines in long distance voice revenue as a result of lower volumes reflecting
a competitive market and wireless and email substitution. Lower volumes can also
be attributed to a weak economy that has affected many of the sectors in which
our customers operate, such as financial services and travel. Although retail
long distance voice volumes have declined, overall long distance voice volumes
have increased due to demand for wholesale long distance voice services created
largely by wireless industry growth. As a result, our wholesale business has
grown, and in 2003 accounted for approximately 50% of AT&T Business Services
total long distance voice volumes compared with approximately 37% in 2002. Our
wholesale business represents sales of long distance voice services to resellers
such as other long distance companies, local phone services providers, wireless
carriers and cable companies, which are typically at a much lower rate per
minute than retail. Although it costs us less to service a wholesale customer
than a retail customer, the wholesale business generally has a lower operating
income margin than the retail business due to lower pricing.

AT&T Consumer Services long distance voice business has experienced similar
trends as those of AT&T Business Services. Stand-alone long distance voice
services revenue has continued to decline due to competition and technology
substitution (customers using wireless or Internet services in lieu of a
wireline call). We have introduced lower-priced calling plans to which many of
our customers have migrated. In addition, customers are migrating to bundled
calling plans that, while negatively impact stand-alone long distance revenue,
positively contribute to growth in bundled revenue, although generally to a
lesser degree, as bundled long distance pricing is lower.

Due to the intense competition in long distance voice services, it is
evident we must continue to diversify and grow our non-long distance voice
products and persist in our cost reduction efforts. We continue to identify
services customers want and stand ready to provide them. We recently rolled out
products such as Wi-Fi (Wireless Fidelity), Switched Ethernet Service and
VoiceTone. All of these products demonstrate our intention to lead the industry
in the next generation of technology. They also demonstrate how we are
leveraging technological innovation to transform the way networking is done,
allowing customers to focus on their core competencies. We continue to roll out
bundled offers to consumers and small businesses, with our unlimited local and
long distance plans of AT&T One Rate USA(SM) for consumers and AT&T All in One
Advantage(SM) Plan for small businesses. During 2003, we experienced revenue
growth in advanced services of Internet Protocol (IP) and enhanced services and
business local voice. We also saw continued success in our consumer bundled
offer. For the fourth quarter of 2003, bundled revenue represented nearly 27% of
total AT&T Consumer Services revenue compared with approximately 13% for the
fourth quarter of 2002. Since these new product offerings are lower priced, and
in some instances have not generated volumes necessary for economies of scale,
they are significantly lower margin products. As a result of this, coupled with
the industry dynamics, we expect an operating income margin in 2004 of six to
eight percent compared with 10.6% in 2003. In addition, in light of the
potential acquisition of AT&T Wireless, we are evaluating opportunities to offer
an AT&T branded wireless product. These opportunities include reselling another
company's wireless service under the AT&T Wireless name. We believe this will
enhance the bundled offers we currently have.

We also have concentrated on, and will continue to concentrate on cost
reductions, particularly within costs of services and products, and selling,
general and administrative (SG&A) expenses. The ratio of total costs of services
and products and SG&A to revenue was essentially flat from 2002 to 2003
reflecting this focus. Contributing to this trend was a total headcount
reduction of 13%, which partially benefited 2003, but

25

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

will more significantly benefit 2004. Much of this headcount reduction was
facilitated by the investments we made to streamline our processes that allowed
us to cut costs, while also enhancing the customer experience. During 2003, we
made improvements in cycle times (complete time to install a customer's service)
and on-time measures (the percentage of time we meet the customer's installation
date), both of which contribute to customer satisfaction.

One of the other ways we manage our costs is to continue to improve the
efficiency of our network. We are in the midst of a multi-year plan to develop a
network technology based in IP called Multiprotocol Label Switching, or MPLS. In
the next few years, we plan to have a fully MPLS-enabled backbone network in all
locations worldwide. Instead of operating separate networks for different types
of data and voice traffic, all traffic types will travel over a single core
network. A network based on IP supports faster provisioning times, thus enabling
customers to be brought online more quickly. We expect that an MPLS-based
network will require less capital expenditures to expand its capabilities and
incur less costs to develop and operate than today's network.

Other costs such as access and other connection expenses, which represent
the costs we pay to other services providers to connect calls using their
facilities, are not as much within our control given they are based on rates
generally set by governmental agencies. Many of these costs are volume driven
and as volumes of lower-priced services increase, these costs as a percentage of
revenue increase, generating a negative impact to profit margins. In order to
control these costs, we continually search for alternate ways of connecting to
our customers. Such initiatives include directly connecting more buildings to
our network, thereby allowing us to avoid paying access charges. We are also
rolling out Voice over Internet Protocol, or VoIP, as an alternative to paying
terminating access fees to local exchange carriers as Internet traffic is not
currently regulated as a telephone service and is therefore not presently
subject to access charges. However, VoIP is an area that is receiving scrutiny
by the FCC and could become regulated, which would eliminate some or all of the
access cost savings we expect to receive. However, VoIP is still a more
efficient use of the network than the traditional circuit switched transport and
is expected to reduce network costs. In 2004, we intend to aggressively market a
full suite of VoIP-enabled services to business customers worldwide via our MPLS
network. For consumers, we intend to launch a VoIP offer in key markets in the
second quarter of 2004.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, as well as the disclosure of contingent assets and liabilities.
Management bases its estimates and judgments on historical experience and other
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.

We have identified the critical accounting estimates that we believe
require significant judgment in the preparation of our consolidated financial
statements. We consider these accounting estimates to be critical because
changes in the assumptions or estimates we have selected have the potential of
materially impacting our financial statements.

ESTIMATED USEFUL LIVES OF PLANT AND EQUIPMENT -- We estimate the useful
lives of plant and equipment in order to determine the amount of depreciation
and amortization expense to be recorded during any reporting period. The
majority of our telecommunications plant and equipment is depreciated using the
group method, which develops a depreciation rate (annually) based on the average
useful life of a specific group of assets, rather than for each individual asset
as would be utilized under the unit method. The estimated life of the group
changes as the composition of the group of assets changes and their related
lives. Such estimated life of the group is based on historical experience with
similar assets, as well as taking into account anticipated technological or
other changes. If technological changes were to occur more rapidly than
anticipated or in a
26

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

different form than anticipated, the useful lives assigned to these assets may
need to be shortened, resulting in the recognition of increased depreciation and
amortization expense in future periods. Likewise, if the anticipated
technological or other changes occur more slowly than expected, the life of the
group could be extended based on the life assigned to new assets added to the
group. This could result in a reduction of depreciation and amortization expense
in future periods. A one-year decrease or increase in the useful life of these
assets would increase or decrease depreciation and amortization expense by
approximately $0.6 billion and $0.4 billion, respectively. We review these types
of assets for impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable over the remaining lives of the assets.
In assessing impairments, we follow the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets."

ACCESS AND LOCAL CONNECTIVITY COSTS -- We use various estimates and
assumptions to determine the amount of access and local connectivity costs
recognized during any reporting period. Switched access 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 months subsequent to the end of the reporting
period, at which point a final adjustment is made to the accrued switched access
expense. Dedicated access 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. As of
December 31, 2003, approximately $0.7 billion was accrued relating to our
estimated switched and dedicated access costs.

RECOVERY OF GOODWILL -- In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," we review goodwill for impairment annually, or more
frequently if an event occurs or circumstances change that would more likely
than not reduce the fair value of our business enterprise below its carrying
value. The impairment test requires us to estimate the fair value of our overall
business enterprise down to the reporting unit level. We estimate fair value
using both a discounted cash flows model, as well as an approach using market
comparables, both of which are weighted equally to determine fair value. Under
the discounted cash flows method, we utilize estimated long-term revenue and
cash flows forecasts developed as part of our planning process, as well as
assumptions of terminal value, together with an applicable discount rate, to
determine fair value. Under the market approach, fair value is determined by
comparing us to similar businesses (or guideline companies). Selection of
guideline companies and market ratios require management's judgment. The use of
different assumptions within our discounted cash flows model or within our
market approach model when determining fair value could result in different
valuations for goodwill. As a result of our annual testing for this year, no
impairment of goodwill was indicated.

PENSION AND POSTRETIREMENT BENEFITS -- The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis utilizing several different assumptions. A
significant assumption used in determining our net pension credit (income) and
postretirement benefit expense is the expected long-term rate of return on plan
assets. In 2003, we used an expected long-term rate of return of 8.5%; this rate
remains unchanged for 2004. In determining this rate, we considered the current
and projected investment portfolio mix and estimated long-term investment
returns for each asset class. The projected portfolio mix of the plan assets is
developed in consideration of the expected duration of related plan obligations
and as such is more heavily weighted toward equity investments, including public
and private equity positions. The actual average return on pension plan assets
over the last 10 and 15 years has been 11.2% and 11.4% per annum, respectively.
The expected return on plan assets is determined by applying the expected
long-term rate of return to the market-related value of plan assets. Asset gains
and losses resulting from actual returns that differ from our expected returns
are recognized in the market-related value
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RESULTS OF OPERATIONS -- (CONTINUED)

of assets evenly over a five-year period. The combined market-related value of
plan assets of the pension and postretirement benefit plans as of December 31,
2003, was approximately $19.5 billion, about $0.1 billion lower than the related
fair value of plan assets. The expected return on assets of the pension and
postretirement benefit plans included in 2003 operating income was income of
$1.6 billion. Holding all other factors constant, a 50 basis point decrease or
increase in the expected long-term rate of return on plan assets would have
decreased or increased 2003 operating income by approximately $0.1 billion.

Another significant estimate is the discount rate used in the annual
actuarial valuation of pension and postretirement benefit plan obligations. In
determining the appropriate discount rate at year end, we considered the current
yields on high quality corporate fixed-income investments with maturities
corresponding to the expected duration of the benefit obligations. As of
December 31, 2003, we reduced the discount rate 50 basis points to 6.0%. Changes
to the discount rate do not have a material impact on our results of operations,
however, the discount rate does impact the benefit obligations. Holding all
other factors constant, a 50 basis point decrease or increase in the discount
rate would increase or decrease the projected benefit obligation by
approximately $0.8 billion.

INCOME TAXES -- Assessment of the appropriate amount and classification of
income taxes is dependent on several factors, including estimates of the timing
and probability of realization of deferred income taxes and the timing of income
tax payments. Deferred income taxes are provided for the effect of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for income tax purposes.
We measure deferred tax assets and liabilities using enacted tax rates that, if
changed, would result in either an increase or decrease in the provision for
income taxes in the period of change. A one-percentage point increase in the
enacted federal income tax rate as of December 31, 2003, would decrease net
income by approximately $0.1 billion. A valuation allowance is recorded when it
is more likely than not that a deferred tax asset will not be realized. In
assessing the likelihood of realization, management considers estimates of
future taxable income, the character of income needed to realize future tax
benefits, and all available evidence. Actual income taxes could vary from
estimated amounts due to the future impacts of various items, including changes
in income tax laws, our financial condition and results of operations in future
periods, as well as final review of our tax returns by taxing authorities,
which, as a matter of course, are regularly audited by federal, state and
foreign tax authorities.

LEGAL CONTINGENCIES -- We are currently involved in certain legal
proceedings and have accrued amounts as appropriate that represent our estimate
of the probable outcome of these matters. The judgments we make with regard to
whether to establish a reserve are based on an evaluation of all relevant
factors by internal and external legal counsel, as well as subject matter
experts. The relevant factors analyzed include an analysis of the complaint,
documents, testimony and other materials as applicable. The damages claimed in
most legal proceedings are not a meaningful predictor of actual potential
liability because the amounts claimed generally have little or no relationship
to the actual damages suffered or sustained. In certain cases, the plaintiff may
not have asserted a specified amount of damages. Claims are continually
monitored and reevaluated as new information is obtained. We may not establish a
liability for a particular matter until long after the litigation is filed, once
a liability becomes probable and estimable. The actual settlement of such
matters could differ from the judgments made in determining how much, if any, to
accrue. In addition, we may be responsible for a portion of certain legal
proceedings associated with former affiliates pursuant to separation and
distribution agreements. Such agreements require us to share in the cost of
certain litigation (relating to matters while affiliated with AT&T) if a
judgment or settlement exceeds certain thresholds. However, in the event these
former subsidiaries are unable to meet their obligations with respect to these
liabilities due to financial difficulties, we could be held responsible for all
or a portion of these costs, irrespective of the sharing agreements.

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RESULTS OF OPERATIONS -- (CONTINUED)

Other significant accounting policies not involving the same degree of
judgment and uncertainty as those discussed above are nevertheless important to
an understanding of the financial statements. See note 1 to the consolidated
financial statements for a discussion of accounting policies that we have
selected from acceptable alternatives.

CONSOLIDATED RESULTS OF OPERATIONS

The comparison of 2003 results with 2002 results was impacted by the April
1, 2002 unwind of Concert, our joint venture with British Telecommunications plc
(BT). The venture's assets and customer accounts were distributed back to the
parent companies. As a result, revenue and expenses associated with these
customers and businesses are included in our results of operations for the full
year of 2003, as compared with nine months in 2002, from April 1, 2002 through
December 31, 2002. For the first quarter of 2002, our proportionate share of
Concert's earnings and related charges are included in net losses related to
other equity investments.

For the period August 28, 2000, through December 31, 2002, our interest in
AT&T Latin America was fully consolidated in our results. In December 2002, we
signed a non-binding term-sheet for the sale of our 69% economic interest (95%
voting interest) in AT&T Latin America and began accounting for AT&T Latin
America as an asset held for sale (the operations of AT&T Latin America did not
qualify for treatment as a discontinued operation). As a result, we recorded an
impairment charge of $1.0 billion to write down AT&T Latin America's assets and
liabilities to fair value, and reclassified these assets and liabilities to
other current assets and other current liabilities at December 31, 2002. The
operating losses of AT&T Latin America for 2003 are reflected in net
restructuring and other charges. On April 21, 2003, AT&T Latin America filed for
Chapter 11 bankruptcy and on June 30, 2003, the AT&T appointed members of the
AT&T Latin America Board of Directors resigned. They were replaced with three
new independent directors. This action resulted in the deconsolidation of AT&T
Latin America as of June 30, 2003.

Our consolidated financial statements reflect AT&T Broadband and AT&T
Wireless as discontinued operations. AT&T Broadband was spun-off on November 18,
2002, and AT&T Wireless was split-off on July 9, 2001. Accordingly, the revenue,
expenses and cash flows of AT&T Broadband and AT&T Wireless have been excluded
from the respective captions in the Consolidated Statements of Operations and
Consolidated Statements of Cash Flows, and have been reported through their
respective dates of separation as net (loss) from discontinued operations and as
net cash (used in) provided by discontinued operations.

REVENUE

Total REVENUE decreased 8.7%, or $3.3 billion, in 2003 compared with 2002,
and decreased 10.4%, or $4.4 billion, in 2002 compared with 2001. The decrease
in both years was largely driven by continued declines in stand-alone long
distance voice revenue of $4.0 billion in 2003 and $5.3 billion in 2002,
reflecting competition, which has led to lower prices and loss of market share,
as well as the impact of substitution by consumers, partially offset by strength
in business wholesale volumes. Total long distance voice volumes (including long
distance volumes sold as part of a bundled offer) increased approximately 4% for
2003 as

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

growth in lower-priced business wholesale more than offset the declines in
business retail and consumer long distance volumes. Total long distance volumes
decreased approximately 3% in 2002 due to declines in consumer long distance
coupled with slight growth in business volumes, as growth in wholesale was
largely offset by a decline in retail volumes. Also contributing to the decline
in total revenue for 2003 was lower outsourcing and professional services of
$0.5 billion and lower data services revenue of $0.4 billion in AT&T Business
Services.

Partially offsetting the decline in total revenue was an increase in
bundled services revenue (primarily local and long distance voice) in AT&T
Consumer Services of approximately $0.9 billion in 2003 and $0.2 billion in
2002. Also positively contributing to total revenue was AT&T Business Services
local revenue, which increased $0.3 billion in 2003 and $0.1 billion in 2002 and
IP & enhanced services revenue, which increased $0.2 billion in 2003 and $0.3
billion in 2002. The 2002 variances include a positive impact attributable to
the reintegration of customers and assets from the unwind of Concert.

In 2004, we expect total revenue to decline 7 to 10% resulting from
continued declines in stand-alone long distance voice revenue due to ongoing
competition and product substitution, partially offset by growth in our local
voice services revenue.

Revenue by segment is discussed in greater detail in the segment results
section.

OPERATING EXPENSES

Included within ACCESS AND OTHER CONNECTION EXPENSES are costs we pay to
connect calls using the facilities of other service providers, as well as the
Universal Service Fund contributions and per-line charges mandated by the FCC.
We pay domestic access charges to local exchange carriers to complete long
distance calls carried across the AT&T network and terminated on a local
exchange carrier's network. We also pay local connectivity charges for leasing
components of local exchange carrier networks in order to provide local service
to our customers. International connection charges paid to telephone companies
outside of the United States to connect international calls are also included
within access and other connection expenses. Universal Service Fund
Contributions are charged to all telecommunications carriers by the FCC based on
a percentage of state-to-state and international services revenue to provide
affordable services to eligible customers. In addition, the FCC assesses charges
on a per-line basis. Since most of the Universal Service Fund contributions and
per-line charges are passed through to the customer, a reduction in these
expenses generally results in a corresponding reduction in revenue.

Access and other connection expenses increased 0.1%, or $7 million, in 2003
compared with 2002. Access charges for 2003 included a $0.1 billion access
expense adjustment to reflect the proper estimate of the liability relating to
access costs incurred in 2001 and 2002. See note 17 to the consolidated
financial statements
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RESULTS OF OPERATIONS -- (CONTINUED)

for additional information. Excluding this adjustment, access and other
connection expenses declined $0.1 billion driven by a decline in domestic access
charges of $0.5 billion in 2003, primarily due to more efficient network usage
and product mix aggregating $0.4 billion. In addition, the decline was due to
lower Universal Service Fund contributions of $0.2 billion resulting from the
decline in long-distance voice revenue and lower per-line charges of $0.1
billion due to a decline in customer levels. These declines in domestic access
charges were partially offset by higher costs of $0.2 billion as a result of
overall long distance volume growth. Also contributing to the decline in access
and other connection expenses were lower international connection charges of
$0.1 billion, primarily as a result of lower rates. These declines were
partially offset by an increase in local connectivity costs of $0.5 billion,
primarily due to local subscriber increases resulting from new state entries and
growth in existing markets.

In 2004, we expect domestic access expense and international connection
costs to be lower than in 2003 due to our ongoing efforts to more efficiently
manage our network and negotiate lower rates, as well as from continued changes
in product mix, partially offset by increased local connectivity costs as we
continue to grow our local voice business.

Access and other connection expenses decreased 10.7%, or $1.3 billion, in
2002 compared with 2001. Domestic access charges declined $1.0 billion driven by
lower Universal Service Fund contributions and per-line charges of $0.5 billion,
which were primarily driven by the decline in long distance voice revenue and
lower customer levels. In addition, domestic access charges decreased $0.5
billion primarily due to product mix and FCC mandated access rate reductions.
International connection charges decreased approximately $0.4 billion driven
primarily by lower rates and the reintegration of customers and assets from the
unwind of Concert. These reductions were partially offset by an increase in
local connectivity costs of $0.1 billion.

COSTS OF SERVICES AND PRODUCTS include the costs of operating and
maintaining our networks, the provision for uncollectible receivables and other
service-related costs, including the cost of equipment sold.

Costs of services and products decreased $0.7 billion, or 8.8%, in 2003
compared with 2002. Approximately $0.6 billion of the decline was attributable
to the overall impact of lower revenue and related costs, including cost cutting
initiatives. Also contributing to the decline was a lower provision for
uncollectible receivables of $0.4 billion resulting from lower revenue and
improved collections as well as lower expenses of $0.1 billion resulting from
the deconsolidation of our AT&T Latin America subsidiary. These declines were
partially offset by $0.2 billion due to the impact of a weak U.S. dollar and
$0.1 billion of increased postretirement and pension costs resulting from a
lower expected long-term rate of return on plan assets and the effects of lower
actual plan assets.

We expect that costs of services and products will continue to decline in
2004 driven both by lower expected revenue and our ongoing cost control efforts.

In 2002, these costs decreased $0.3 billion, or 3.0%, compared with 2001.
Approximately $0.5 billion of the decrease was due to the overall impact of
lower revenue and related costs. In addition, costs decreased approximately $0.2
billion due to losses on certain long-term contracts recorded in 2001 by AT&T
Business Services. These decreases were partially offset by an increase of $0.1
billion in AT&T Business Services' provision for uncollectible receivables
primarily attributable to the weak economy. Costs of services and products also
increased as a result of the reintegration of customers and assets from the
unwind of Concert.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES decreased $0.6 billion,
or 7.6%, in 2003 compared with 2002. The decline was primarily attributable to
cost control efforts throughout AT&T, as well as reduced customer care volumes
at AT&T Consumer Services resulting from a reduction in the number of
residential customers, totaling $0.6 billion. Cost control efforts included
headcount reductions, lower long distance and brand advertising and promotional
spending, and other process improvements. In addition, expenses decreased $0.1
billion in connection with the deconsolidation of AT&T Latin America. Such
declines were partially
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RESULTS OF OPERATIONS -- (CONTINUED)

offset by $0.1 billion of increased pension and postretirement costs primarily
resulting from a lower expected long-term rate of return on plan assets in 2003
and the effects of lower actual plan assets, as well as approximately $0.1
billion of increased marketing, customer care and sales expenses associated with
new local service offerings by AT&T Consumer Services.

We expect that our SG&A expenses will continue to decline in 2004, as we
continue to focus on further cost reduction efforts.

SG&A expenses decreased $0.1 billion, or 0.9%, in 2002 compared with 2001.
This decrease was driven by a reduction in the number of residential customers
as well as cost control efforts of $0.7 billion, and lower transaction costs of
$0.2 billion associated with the AT&T restructuring. Partially offsetting these
decreases was $0.3 billion of lower pension credits (income) primarily due to a
lower expected long-term rate of return on plan assets and the effects of lower
actual plan assets, and $0.3 billion associated with increased marketing and
sales expenses for new local consumer service offerings and increased investment
for business sales and customer care development. SG&A expenses also increased
as a result of the reintegration of customers and assets from the unwind of
Concert.

DEPRECIATION AND AMORTIZATION EXPENSES decreased $18 million, or 0.4%, in
2003 compared with 2002. The decreases were primarily due to the adoption of
SFAS No. 143, "Accounting for Asset Retirement Obligations," lower depreciation
associated with our AT&T Latin America subsidiary which was classified as an
asset held for sale in December 2002 and lower asset impairments in 2003. These
declines were largely offset by an increase in the asset base.

In 2004, we expect depreciation and amortization expenses to remain
relatively flat compared with 2003 as lower expenses resulting from reduced
levels of capital expenditures in recent years will essentially be offset by
increased expenses associated with the shortening of lives of certain network
assets in connection with our development of an IP-based network.

Depreciation and amortization expenses increased $0.3 billion, or 7.2%, in
2002 compared with 2001. The increase was primarily due to a larger asset base
resulting from continued infrastructure investment supporting our advanced
services. The increase was partially offset by the adoption of SFAS No. 142 as
of January 1, 2002, which eliminated the amortization of goodwill. In 2001, we
recorded $0.2 billion of amortization expense on goodwill.

Total capital expenditures were $3.4 billion, $3.9 billion and $5.6 billion
for 2003, 2002 and 2001, respectively. The 2003 amount includes $0.4 billion
recorded in connection with the adoption of Financial Accounting Standards Board
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities -- an
Interpretation of Accounting Research Bulletin No. 51." The decreases in
expenditures were primarily due to less spending on infrastructure related
projects, as many projects were completed in 2002, partially offset by increased
spending on capitalized software related to process improvements and initiatives
to improve the customer experience. During 2003, approximately one-quarter of
our spending related to capitalized software. We continue to focus the majority
of our capital spending on our advanced services offerings of IP&E services and
data services, both of which included managed services, as well as local voice
services. We expect capital expenditures to be approximately $2.5 billion in
2004.

In 2003, NET RESTRUCTURING AND OTHER CHARGES of $0.2 billion primarily
consisted of separation costs associated with our management realignment
efforts. The net charge included $0.1 billion related to AT&T Business Services,
$26 million related to AT&T Consumer Services and $38 million related to the
Corporate and Other group. The separations were involuntary and impacted
approximately 2,000 managers, more than 90% of which have exited the business as
of December 31, 2003. These activities were partially offset by the reversal of
$17 million of excess vintage employee separation liabilities. These exit plans
did not yield cash savings (net of severance benefit payouts) or a benefit to
operating income (net of the restructuring charge
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

recorded) in 2003, however, we expect to realize approximately $0.3 billion of
cash savings and benefit to operating income in subsequent years, when the exit
plan is completed.

As we continue to evaluate our cost structure and improve processes,
further workforce reductions are anticipated to occur during 2004, and are
expected to result in the recognition of additional charges.

In 2002, net restructuring and other charges were $1.4 billion. The net
charge included $1.2 billion related to AT&T Business Services, $0.2 billion
related to AT&T Consumer Services and $23 million related to the Corporate and
Other group.

In December 2002, our Board of Directors approved a plan for AT&T to sell
its approximate 95% voting stake in AT&T Latin America in its current condition.
On December 31, 2002, we signed a non-binding term sheet for the sale of our
shares within one year for a nominal amount. As a result of this action, we
recorded a $1.0 billion asset impairment charge to write down AT&T Latin
America's assets to fair value. This charge was recorded within our AT&T
Business Services segment.

An impairment charge of $0.2 billion was also recorded in 2002 relating to
certain Digital Subscriber Line (DSL) assets (including internal-use software,
licenses, and property, plant & equipment) that would not be utilized by AT&T as
a result of changes to our "DSL build" strategy. Instead of building DSL
capabilities in all geographic areas initially targeted, we have signed an
agreement with Covad Communications to offer DSL services over its network. As a
result, the assets in these areas were impaired. This charge was recorded within
our AT&T Consumer Services segment.

Net business restructuring charges of $0.2 billion recorded in 2002
consisted of new exit plans totaling $0.4 billion and reversals of liabilities
associated with prior years' exit plans of $0.2 billion. The new plans primarily
consisted of $0.3 billion for employee separation costs ($28 million of which
was recorded as a pension liability associated with management employees to be
separated in 2002, which was funded from the pension trust) and $39 million of
facility closing reserves. These exit plans separated slightly more than 4,800
employees, approximately one-half of whom were management employees and one-half
were non-management employees. The majority of these employee separations were
involuntary and were largely the result of improved processes and automation in
provisioning and maintenance of services for business customers.

The $0.2 billion reversal primarily consisted of $0.1 billion of employee
separation costs (approximately $48 million of which was reversed from the
pension liability) and $26 million related to prior plan facility closings that
were deemed to be no longer necessary. The reversals were primarily due to
management's determination that the restructuring plan established in the fourth
quarter of 2001 for certain areas of AT&T Business Services, including network
services, needed to be modified given industry conditions at that time, as well
as the redeployment of certain employees to different functions.

During 2001, net restructuring and other charges of $1.0 billion were
primarily comprised of $0.9 billion for employee separations, of which $0.4
billion related to benefits to be paid from pension assets as well as pension
and postretirement curtailment losses, and $0.2 billion for facility closings.
The restructuring and exit plans supported our cost reduction efforts through
headcount reductions across all segments of the business, primarily network
support and customer care functions in AT&T Business Services. These charges
were slightly offset by the reversal of $33 million related to business
restructuring plans announced in the fourth quarter of 1999 and the first
quarter of 2000 (of which $15 million related to employee separations and $18
million related to contract terminations). The net charge consisted of $0.6
billion related to AT&T Business Services, $31 million related to AT&T Consumer
Services and $0.4 billion related to the Corporate and Other group. The charge
covered separation costs for approximately 10,000 employees, approximately
one-half of whom were management and one-half were non-management employees.
More than 9,000 employee separations related to involuntary terminations and the
remaining 1,000 were voluntary.
33

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

OTHER INCOME (EXPENSE), NET, in 2003 was income of $0.2 billion compared
with expense of $0.1 billion in 2002. The favorable variance of $0.3 billion can
primarily be attributed to $0.3 billion of lower impairment charges recorded in
2003 compared with 2002. In 2002, due to the occurrence of several airline
bankruptcies, write downs were recorded on certain aircraft leases that are
accounted for as leveraged leases. In 2003, ongoing difficulties in the airline
industry resulted in the write downs of the residual values of certain aircraft.
The lower impairment charges related to these leases and aircraft in 2003
compared with 2002 favorably impacted other income by $0.2 billion in 2003.
Also, in 2003, investment-related impairment charges declined $0.1 billion,
primarily driven by the impairment of Time Warner Telecom in 2002. Our
investment in Time Warner Telecom was subsequently sold in 2003. Further
contributing to the favorable other income variance was higher
investment-related income of $0.1 billion, largely reflecting improved market
returns on certain holdings. Partially offsetting these favorable variances were
losses of $0.1 billion on the early call and repurchase of long-term debt in
2003. This loss was comprised of $0.3 billion associated with the early call and
repurchase of long-term debt instruments, partially offset by a $0.2 billion
gain on the early retirement of exchangeable notes that were indexed to AT&T
Wireless common stock. Also offsetting the favorable variance was a decline in
settlements associated with disposed businesses, primarily reflecting
reimbursements from Comcast Corporation (Comcast) in 2002 in connection with the
debt exchange completed in conjunction with the spin-off of AT&T Broadband.

We continue to hold investments in leveraged leases of commercial aircraft,
which we lease to domestic airlines as well as aircraft related companies.
Should the financial difficulties in the U.S. airline industry lead to further
bankruptcies or lease restructurings, we could record additional losses
associated with our aircraft lease portfolio. In addition, in the event of
bankruptcy or renegotiation of lease terms, if any portion of the non-recourse
debt is canceled, such amounts would result in taxable income to AT&T and
accordingly a cash tax expense.

Other income (expense), net, in 2002 was expense of $0.1 billion compared
with income of $1.3 billion in 2001. The unfavorable variance of $1.4 billion
was primarily due to $1.2 billion of higher net gains on sales of businesses and
investments in 2001, including gains on the sale of AT&T's retained interest in
AT&T Wireless and Japan Telecom. The unfavorable variance was also due to
impairments of $0.2 billion recorded in 2002 related to certain leases of
aircraft that are accounted for as leveraged leases, $0.2 billion of lower
income related to mark-to-market adjustments on derivative instruments and lower
investment-related income of $0.2 billion, reflecting the declines in the stock
market. Favorably impacting other income (expense), net, were lower investment
impairment charges of $0.4 billion in 2002, primarily driven by lower impairment
charges for Time Warner Telecom. In 2001 and 2002, as a result of significant
changes in the general business climate as evidenced by the severe downward
movement in the U.S. stock market, including the decline in the value of
publicly-traded industry stocks, we recorded an other-than-temporary investment
impairment on our investment in Time Warner Telecom.

INTEREST EXPENSE decreased $0.3 billion, or 20.0%, in 2003 compared with
2002 and decreased $45 million, or 3.0%, in 2002 compared with 2001. The
declines in both periods are reflective of our deleveraging activities, which
included significant early debt redemptions during 2003 and virtually no net
debt issuances during both

34

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

2003 and 2002. Interest expense in 2002 compared with 2001 was adversely
affected by the $10 billion bond offering completed in November 2001. Further,
interest expense in 2003 was impacted by an interest rate step-up on such bonds
as a result of a long-term debt rating downgrade in 2002.

We plan to complete additional early retirements of up to $3 billion in
debt during 2004. This, combined with the redemptions completed in 2003, will
result in the continued decline in interest expense during 2004.

The EFFECTIVE TAX RATE is the PROVISION FOR INCOME TAXES as a percentage of
income from continuing operations before income taxes.

The 2003 effective tax rate was positively impacted by approximately 5.3
percentage points due to the recognition of approximately $0.1 billion of tax
benefits associated with refund claims related to research and experimentation
tax credits generated in prior years. In addition, the 2003 effective tax rate
was positively impacted by the recognition of tax benefits in connection with
the exchange and sale of AT&T's remaining interest in AT&T Wireless common
stock.

The 2002 rate was adversely impacted by approximately 14.9 percentage
points due to the $1.0 billion impairment charge recorded in 2002 relating to
our interest in AT&T Latin America for which no tax benefit was recorded. Also
negatively impacting the 2002 rate was the impact of AT&T Latin America's losses
from operations for which no tax benefit was recorded because realization of a
tax benefit was not likely to occur and the losses were not includable in AT&T's
consolidated income tax return.

In 2001, the effective tax rate was positively impacted by tax benefits
associated with the tax-free gain from the disposal of a portion of our retained
interest in AT&T Wireless in a debt-for-equity exchange, partially offset by the
consolidation of AT&T Latin America's pretax losses for which no tax benefit was
provided.

In 2002, we recorded a valuation allowance against the deferred tax asset
attributable to the book and tax basis difference for our investment in AT&T
Latin America. During February 2004, the subsidiaries of AT&T Latin America were
sold to Telefonos de Mexico S.A. de C.V., or Telmex, and the plan of liquidation
of AT&T Latin America became effective. As a result, we will reevaluate the need
for this valuation allowance and could record an income tax benefit of
approximately $0.3 billion in the first quarter of 2004.

MINORITY INTEREST INCOME represents the net losses attributable to the
equity that minority holders have in less than 100% owned consolidated
subsidiaries of AT&T. In December 2002, the losses attributable to the minority
holders of AT&T Latin America exceeded the remaining equity of those minority
holders; therefore in 2003, losses of AT&T Latin America were no longer
allocated to the minority holders. Also in 2003, AT&T Latin America filed for
Chapter 11 bankruptcy and the AT&T appointed members of the AT&T Latin America
Board of Directors resigned. This resulted in the deconsolidation of AT&T Latin
America.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

EQUITY (LOSSES) FROM LMG, which are recorded net of income taxes, reflect
the results of LMG through July 31, 2001, the deemed effective date of the LMG
split-off into an independent, publicly-traded company. We redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. We did not have a controlling financial interest in LMG for
financial accounting purposes; therefore, our ownership in LMG was reflected as
an investment accounted for under the equity method.

NET (LOSSES) RELATED TO OTHER EQUITY INVESTMENTS, which are recorded net of
income taxes, declined $0.4 billion in 2003. The favorable variance was driven
primarily by after-tax charges of $0.4 billion ($0.5 billion pretax) recorded in
2002 related to the estimated loss on our commitment to purchase the shares of
AT&T Canada we did not own. The charges reflected further deterioration in the
underlying value of AT&T Canada as well as accretion of the floor price of our
obligation to purchase AT&T Canada shares. We satisfied this purchase obligation
in 2003. See note 7 to the consolidated financial statements for additional
information.

Net (losses) related to other equity investments declined $4.4 billion in
2002 compared with 2001 due to lower net losses of $2.1 billion for Concert,
$1.5 billion for AT&T Canada and $0.8 billion for Net2Phone, Inc., primarily
resulting from impairment charges recorded in 2001.

NET (LOSS) FROM DISCONTINUED OPERATIONS for 2003 reflects an estimated cost
related to potential legal liabilities for certain environmental clean-up
matters associated with NCR Corp. (NCR), which was spun-off from AT&T in 1996
and accounted for as a discontinued operation. NCR has been formally notified by
federal and state agencies that it is a potentially responsible party (PRP) for
environmental claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA) and other statutes arising out
of the presence of polychlorinated biphenyls (PCBs) in sediments in the lower
Fox River and in the Bay of Green Bay in Wisconsin. NCR was identified as a PRP
because of alleged PCB discharges from two carbonless copy paper manufacturing
facilities it previously owned, which were located along the Fox River. In July
2003, the government clarified its planned approach for remediation of the
contaminated sediments, which caused NCR to increase its estimated liability.
Under the separation and distribution agreement between AT&T and NCR, we are
required to pay a portion of such costs that NCR incurs above a certain
threshold. Therefore, in 2003, we recorded our estimated proportionate share of
certain costs associated with the Fox River matter, which totaled $13 million on
both a pretax and after-tax basis. The extent of NCR's potential liability is
subject to numerous variables that are uncertain at this time, including the
actual remediation costs and the percentage NCR may ultimately be responsible
for. As a result, our actual liability may be different than the estimated
amount. Pursuant to the separation and distribution agreement, NCR is liable for
the first $100 million of costs in connection with this liability. We are liable
for

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RESULTS OF OPERATIONS -- (CONTINUED)

37% of costs incurred by NCR beyond such $100 million threshold. All such
amounts are determined after reduction of any monies collected by NCR from other
parties.

Net (loss) from discontinued operations in 2002 includes a loss of $14.5
billion from the discontinued operations of AT&T Broadband (which was primarily
comprised of the AT&T Broadband segment), which was spun-off to AT&T shareowners
on November 18, 2002. Simultaneously, AT&T Broadband combined with Comcast. The
combination was accomplished through a distribution of stock to AT&T
shareowners, who received 1.6175 shares of Comcast Class A common stock for each
share of AT&T they owned at market close on November 15, 2002, the record date.
Approximately 1.2 billion Comcast shares were issued to AT&T shareowners at a
value of approximately $31.1 billion, based on the Comcast stock price on
November 18, 2002. AT&T shareowners received a 56% economic stake and a 66%
voting interest in Comcast.

Net (loss) from discontinued operations in 2002 also included an estimated
loss on the litigation settlement associated with the business of Lucent
Technologies Inc. (Lucent), which was spun-off from AT&T in 1996 and accounted
for as a discontinued operation. Sparks, et al. v. AT&T and Lucent et al., was a
class action lawsuit filed in 1996 in Illinois state court. On August 9, 2002, a
settlement proposal was submitted to and accepted by the court. In accordance
with the separation and distribution agreement between AT&T and Lucent, our
estimated proportionate share of the settlement and legal costs recorded in 2002
totaled $33 million after taxes ($45 million pretax). Depending upon the number
of claims submitted and accepted, the actual cost of the settlement may be
different than the amounts accrued. While similar consumer class actions are
pending in various state courts, the Illinois state court has held that the
class it certified covers claims in the other state court class actions.

In 2001, net (loss) from discontinued operations included a loss of $4.2
billion from the discontinued operations of AT&T Broadband, and income of $0.2
billion from the discontinued operations of AT&T Wireless, which was split-off
from AT&T on July 9, 2001, as a separate, independently-traded company. All AT&T
Wireless Group tracking stock was converted into AT&T Wireless common stock on a
one-for-one basis and 1,136 million shares of AT&T Wireless common stock held by
AT&T were distributed to AT&T common shareowners on a basis of 1.609 shares of
AT&T Wireless for each AT&T share outstanding. We issued the AT&T Wireless
tracking stock in April 2000, to track the financial performance of AT&T
Wireless Group.

In 2002, we realized a noncash GAIN ON THE DISPOSITION of AT&T Broadband of
$1.3 billion, which represented the difference between the fair value of the
AT&T Broadband business at the date of the spin-off and our book value of AT&T
Broadband, net of certain charges triggered by the spin-off of $0.2 billion, and
the related income tax effect of $0.1 billion. These charges included
compensation expense due to the accelerated vesting of stock options as well as
the enhancement of certain incentive plans.

In 2001, we realized a tax-free noncash gain on the disposition of
discontinued operations of $13.5 billion, representing the difference between
the fair value of the AT&T Wireless tracking stock at the date of the split-off
and our book value of AT&T Wireless.

When we adopt new accounting standards issued by the Financial Accounting
Standards Board, the impact of changing from the previous accounting principle
to the new accounting principle is recorded as the CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE.

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Effective July 1, 2003, we early adopted FIN No. 46, "Consolidation of
Variable Interest Entities -- an Interpretation of Accounting Research Bulletin
(ARB) No. 51," resulting in a charge of $27 million, net of income taxes of $17
million, recognized as the cumulative effect of accounting change in the third
quarter of 2003. This interpretation requires the primary beneficiary to
consolidate a variable interest entity (VIE) if it has a variable interest that
will absorb a majority of the entity's expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur, or both. Based
on this standard, two entities that we leased buildings from qualified as VIEs
and, therefore, were consolidated as of July 1, 2003. Later in 2003, we
exercised our purchase option on these buildings and, therefore, no longer have
an interest in these VIEs.

Effective January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," resulting in $42 million of income, net of income taxes
of $26 million, as the cumulative effect of this accounting principle. This
standard requires that obligations that are legally enforceable and unavoidable,
and are associated with the retirement of tangible long-lived assets, be
recorded as liabilities when those obligations are incurred, with the amount of
the liability initially measured at fair value. Historically we included in our
group depreciation rates an amount related to the cost of removal for certain
assets. However, such amounts are not legally enforceable or unavoidable;
therefore, the cumulative effect impact primarily reflects the reversal of such
amounts accrued in accumulated depreciation.

Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS No. 142, franchise costs were tested
for impairment as of January 1, 2002, by comparing the fair value to the
carrying value (at the market level). As a result of this test, an impairment
loss (related to discontinued operations) of $0.9 billion, net of income taxes
of $0.5 billion, was recorded in 2002.

Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The cumulative effect of this
accounting change, net of applicable income taxes, was comprised of $0.4 billion
for AT&T excluding LMG (of which $0.2 billion related to discontinued
operations) and $0.5 billion for LMG. The $0.4 billion was attributable
primarily to fair value adjustments of equity derivative instruments embedded in
indexed debt instruments and warrants held in public and private companies. The
$0.5 billion recorded by LMG represented the impact of separately recording the
embedded call option obligations associated with LMG's senior exchangeable
debentures.

DIVIDEND REQUIREMENTS OF PREFERRED STOCK in 2001 represented interest in
connection with convertible preferred stock issued to NTT DoCoMo in January of
2001, as well as accretion of the beneficial conversion feature associated with
this preferred stock. The beneficial conversion feature was computed upon the
issuance of the preferred stock to NTT DoCoMo and represented the excess of the
fair value of the preferred shares issued over the proceeds received. This
beneficial feature was being accreted over the time period NTT DoCoMo was
required to hold the shares. On July 9, 2001, in conjunction with the split-off
of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless
common stock. As a result, the beneficial conversion feature was fully accreted.

In May 2001, we completed an exchange offer of AT&T common stock for AT&T
Wireless tracking stock. The PREMIUM ON THE EXCHANGE, which represented the
excess of the fair value of the AT&T Wireless tracking stock issued over the
fair value of the AT&T common stock exchanged, reduced net income available to
common shareowners.

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RESULTS OF OPERATIONS -- (CONTINUED)

SEGMENT RESULTS

Our results are segmented according to the customers we service: AT&T
Business Services and AT&T Consumer Services. The balance of our continuing
operations are included in a Corporate and Other group. This group primarily
reflects corporate staff functions and the elimination of transactions between
segments. The discussion of segment results includes revenue, operating income,
capital additions and total assets.

Operating income is the primary measure used by our chief operating
decision makers to measure our operating results and to measure segment
profitability and performance. See note 15 to our consolidated financial
statements for a reconciliation of segment results to consolidated results.

Total assets for each segment include all assets, except intercompany
receivables. Nearly all prepaid pension assets, taxes and corporate-owned or
leased real estate are held at the corporate level, and therefore are included
in the Corporate and Other group. A substantial majority of our property, plant
and equipment (including network assets) is included in the AT&T Business
Services segment. The net (loss) from discontinued operations is not reflected
in the Corporate and Other group. Capital additions for each segment include
capital expenditures for property, plant and equipment, additions to
nonconsolidated investments and additions to internal-use software.

Our existing segments reflect certain managerial changes that were
implemented during 2003. The changes primarily include a redistribution of
property, plant and equipment from the Corporate and Other group to AT&T
Business Services and a transfer of deferred taxes from AT&T Consumer Services
to the Corporate and Other group.

Based on a review of our management model in 2004, we plan to transfer our
remaining payphone business from the AT&T Consumer Services segment to the AT&T
Business Services segment, which will require the restatement of our segments.
Additionally, we will continue to review our management model and structure,
which may result in additional adjustments to our operating segments in the
future.

AT&T BUSINESS SERVICES

AT&T Business Services provides a variety of global communications services
to small and medium-sized businesses, large domestic and multinational
businesses and government agencies. These services include long distance,
international, toll-free and local voice, including wholesale transport services
(sales of services to service resellers, including other long distance
companies, local service providers, wireless carriers and cable companies), as
well as data services and Internet protocol and enhanced (IP&E) services, which
includes the management of network servers and applications. Data services and
IP&E services are broad categories of services in which data (e.g., e-mail,
video or computer file) is transported from one location to another. Data
services includes bandwidth services (dedicated private line services through
high-capacity optical transport), packet services and managed data services. In
packet services, data is divided into efficiently sized components and
transported between packet switches until it reaches its final destination,
where it is reassembled. Packet services include frame relay and Asynchronous
Transfer Mode (ATM). IP&E services include all services that ride on the IP
common backbone or that use IP technology, including managed IP services, as
well as application services (e.g., hosting or security). Managed services
deliver end-to-end enterprise networking solutions by managing networks, servers
and applications. AT&T Business Services also provides outsourcing solutions and
other professional services.

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RESULTS OF OPERATIONS -- (CONTINUED)

- ---------------

(1) Revenue in 2002 and 2001 includes internal revenue of $323 million and $441
million, respectively, which represented sales to AT&T Broadband and AT&T
Wireless through their dates of disposition. AT&T Broadband and AT&T
Wireless were disposed of on November 18, 2002 and July 9, 2001,
respectively. Subsequent to their dispositions, sales to AT&T Broadband, now
Comcast, and AT&T Wireless are recorded as external revenue.

(2) Revenue includes equipment and product sales of $301 million, $379 million
and $317 million in 2003, 2002 and 2001, respectively.

REVENUE

AT&T Business Services revenue decreased $1.6 billion, or 5.9%, in 2003
compared with 2002. The decline was primarily driven by a decline in long
distance voice services, decreased data services and lower outsourcing contract
revenue relating to contract terminations and renegotiations, partially offset
by growth in local voice services and IP&E services, which includes equipment
and product sales. Revenue growth in 2003 was negatively impacted by AT&T Latin
America, which was fully consolidated in 2002, but not in 2003. Total revenue in
2002 decreased $1.1 billion, or 4.1%, compared with 2001, also primarily
reflecting declines in long distance voice services, partially offset by growth
in IP&E services, data services and local voice services. Revenue growth in
2002, and to a lesser extent in 2003, was favorably impacted by the
reintegration of customers and assets from the unwind of Concert on April 1,
2002.

Long distance voice revenue declined $1.1 billion, or 9.3%, in 2003
compared with 2002, and declined $1.7 billion, or 12.0%, in 2002 compared with
2001. The decline in both periods was driven by decreases in the average price
per minute in both the retail and wholesale businesses combined with a decline
in retail volumes, reflecting the impacts of competition and a weak economy.
Partially offsetting these declines was an increase, in both years, in
lower-priced wholesale minutes. Total long distance calling volumes grew
approximately 11% and 2%, in 2003 and 2002, respectively. The volume growth
differential in 2003 compared with 2002 is reflective of the acceleration in
2003 of wholesale minute growth.

Data services revenue declined $0.4 billion, or 4.6%, in 2003 compared with
2002. The decline was primarily driven by competitive pricing pressure and weak
demand, primarily in data bandwidth services. The

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RESULTS OF OPERATIONS -- (CONTINUED)

decrease in data bandwidth is reflective of a rise in cancellation of private
line services, as customers continue to evaluate the overall efficiency and
effectiveness of their networks (network grooming), combined with the migration
to more cost-effective and technologically-advanced packet services and IP&E
services. Data services revenue increased $0.1 billion, or 1.6%, in 2002
compared with 2001, primarily reflecting increased sales in packet services,
partially offset by declining data bandwidth, primarily private line services.
Excluding equipment and product sales, data services revenue declined 4.4% in
2003 and increased 1.1% in 2002.

IP&E services revenue increased $0.2 billion, or 9.7%, in 2003 compared
with 2002, and grew $0.3 billion, or 24.3%, in 2002 compared with 2001. The
increase in 2003 was primarily attributable to growth in our customer base
associated with web hosting, other advanced products such as IP-enabled frame
and E-VPN (Enhanced Virtual Private Network) and managed Internet services.
Increased equipment and product sales also contributed favorably to revenue
growth in 2003. The increase in 2002 was primarily driven by managed Internet
services. Excluding equipment and product sales, IP&E services revenue grew 8.1%
and 23.0%, in 2003 and 2002, respectively.

Local voice services revenue grew $0.3 billion, or 28.4%, in 2003 compared
with 2002 and grew $0.1 billion, or 13.3%, in 2002 compared with 2001. The
growth in both periods reflects our continued focus on increasing the
utilization of our existing footprint. There were approximately 4.5 million, 3.6
million and 2.9 million access lines in service at the end of 2003, 2002 and
2001, respectively.

In 2004, we expect AT&T Business Services revenue will decline 4 to 7% as
competitive pressures in long distance voice and data services continue,
combined with the ongoing shift in the retail/wholesale mix in long distance
voice services, which will be partially offset by growth in local voice and IP&E
services revenue.

OPERATING INCOME

Operating income declined $0.1 billion, or 3.9%, in 2003 compared with
2002, primarily due to the decrease in the long distance voice business
resulting from the impact of continued decline in the average price per minute
and declining retail volumes tied to the weak economy and substitution. The
decline in operating income was also impacted by a $0.1 billion access expense
adjustment recorded in the third quarter of 2003. Largely offsetting these
declines were lower net restructuring and other charges due to the $1.0 billion
2002 AT&T Latin America impairment charge and ongoing cost control efforts.

In 2002, operating income decreased $1.6 billion, or 45.0%, compared with
2001, primarily due to the decrease in the long distance voice business
resulting from the impact of pricing pressures and a $1.0 billion impairment
charge recorded in 2002 for AT&T Latin America. These decreases were partially
offset by $0.4 billion in lower net business restructuring charges recorded in
2002 compared with 2001.

Operating margin was 7.6%, 7.4% and 12.9% in 2003, 2002 and 2001,
respectively. The 2002 margin was negatively impacted by approximately 3.9
percentage points relating to the $1.0 billion AT&T Latin America asset
impairment charge. Adjusting 2002 for this item, the downward margin trend is
primarily reflective of the declining higher-margin long distance retail voice
business, coupled with growth of lower-margin advanced services and wholesale
services.

OTHER ITEMS

Capital additions were $3.2 billion, $3.7 billion and $5.5 billion for
2003, 2002 and 2001, respectively. The 2003 amount includes $0.2 billion
recorded in connection with the adoption of FIN No. 46. The declines in spending
were primarily due to less spending on infrastructure related projects, as many
projects were completed during 2002, partially offset by increased spending on
capitalized software related to process improvements and initiatives to improve
customer experience. During 2003, approximately one quarter of our spending
related to capitalized software. We continue to focus the majority of our
capital spending on our
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RESULTS OF OPERATIONS -- (CONTINUED)

advanced services offerings of IP&E services and data services, both of which
included managed services, as well as local voice services.

Total assets decreased $2.2 billion, or 6.0%, at December 31, 2003,
compared with December 31, 2002. The decrease was primarily driven by lower net
property, plant and equipment as a result of depreciation during the period,
partially offset by capital expenditures. Also contributing to the decline was
lower accounts receivable resulting from lower revenue and improved cash
collections, and a decrease in other current assets as a result of the
deconsolidation of AT&T Latin America in the second quarter of 2003.

AT&T CONSUMER SERVICES

AT&T Consumer Services provides a variety of communication services to
residential customers. These services include traditional long distance voice
services such as domestic and international dial services (long distance or
local toll calls where the number "1" is dialed before the call) and calling
card services. Transaction services, such as prepaid card and operator-assisted
calls, are also offered. Collectively, these services represent stand-alone long
distance and are not offered in conjunction with any other service. In addition,
AT&T Consumer Services provides dial-up Internet services and all distance
services, which bundle long distance, local and local toll.

REVENUE

AT&T Consumer Services revenue declined $2.0 billion, or 17.7%, in 2003
compared with 2002, and declined $3.3 billion, or 22.3%, in 2002 compared with
2001. The decline in both periods was primarily due to stand-alone long distance
voice services, which decreased $2.9 billion in 2003 and declined $3.6 billion
in 2002, largely due to the impact of ongoing competition, which has led to a
loss of market share, and substitution. In addition, stand-alone long distance
voice services have been negatively impacted by the continued migration of
customers to lower priced optional calling plans and other products offered by
AT&T, such as bundled services. Partially offsetting the declines in stand-alone
long distance voice services were pricing actions taken, including a monthly fee
that we began billing in 2003 to recover costs, including certain access charges
and property taxes. Partially offsetting the overall decline was an increase in
bundled revenue, which increased $0.9 billion and $0.2 billion in 2003 and 2002,
respectively, reflecting an increase in subscribers primarily due to penetration
in existing markets, as well as the entry into new markets. We provided local
service to more than 3.9 million customers as of December 31, 2003, compared
with more than 2.4 million customers as of December 31, 2002. As of December 31,
2003, bundled local and long distance service was being offered in 24 states to
60.7 million households, compared with eight states and 32.2 million

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RESULTS OF OPERATIONS -- (CONTINUED)

households as of December 31, 2002. The increase in bundled revenue includes
amounts previously incorporated in stand-alone long distance voice revenue for
existing customers that migrated to bundled offers.

Total long distance calling volumes (including long distance volumes sold
as part of a bundle) declined approximately 17% and 13% in 2003 and 2002,
respectively, as a result of competition and wireless and Internet substitution.
The 2002 volume decline was partially offset by an increase in prepaid card
usage.

In 2003, approximately 6% of AT&T Consumer Services total revenue and more
than 60% of prepaid card revenue was related to a contract with Wal-Mart, Inc.,
which was renewed at the end of 2003. If this contract is not further renewed at
the next renewal date, January 31, 2005 (subject to early termination if certain
events occur), AT&T Consumer Services revenue would be adversely affected if we
are unsuccessful in selling the cards through a different channel. We expect
AT&T Consumer Services revenue to decline 15-17% in 2004 due to the ongoing
negative impacts of competition (including the continued penetration of Regional
Bell Operating Companies into the long distance market), substitution and
customer migration to lower-priced calling plans and products.

OPERATING INCOME

Operating income declined $0.5 billion, or 20.4%, in 2003 compared with
2002 and declined $2.1 billion, or 44.8%, in 2002 compared with 2001. Operating
margin declined to 21.7% in 2003 from 22.5% in 2002 and 31.6% in 2001. While
margins within our stand-alone long distance voice business have remained
relatively flat as a result of pricing actions and cost reduction initiatives,
stand-alone long distance has declined as a percentage of our total business.
Conversely, bundled services, which has a negative margin due to initial costs
incurred to enter new markets, has grown as a percentage of our total business.
The combination of these factors has resulted in total lower margins. The 2002
margin was also negatively impacted by an asset impairment charge related to
certain Digital Subscriber Line assets.

OTHER ITEMS

Total assets declined $0.3 billion to $1.1 billion at December 31, 2003,
primarily due to lower accounts receivable, reflecting lower revenue and
improved cash collections.

CORPORATE AND OTHER

This group primarily reflects the results of corporate staff functions,
brand licensing fee revenue and the elimination of transactions between
segments.

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RESULTS OF OPERATIONS -- (CONTINUED)

REVENUE

In 2003, Corporate and Other revenue was $0.1 billion compared with
negative $0.3 billion in 2002. The year-over-year change was primarily due to
lower eliminations of internal revenue in 2003 as a result of the spin-off of
AT&T Broadband in November 2002.

In 2002, Corporate and Other revenue was negative $0.3 billion, compared
with negative $0.4 billion in 2001. The year-over-year change was primarily due
to lower internal revenue with AT&T Wireless due to its split-off on July 9,
2001, partially offset by an increase in internal revenue with AT&T Broadband.

OPERATING (LOSS)

In 2003, operating (loss) was $0.3 billion, compared with $0.2 billion in
2002. This increase was primarily due to higher compensation and benefit costs
reflecting higher postretirement and pension expense driven in part by a lower
expected rate of return on plan assets, the effects of lower actual plan assets
and a lower discount rate. These increases were partially offset by transaction
costs associated with AT&T's restructuring recorded in 2002 and an asset
impairment charge recorded in 2002.

Operating (loss) improved $0.2 billion to a deficit of $0.2 billion in 2002
compared with 2001. The improvement was largely due to lower business
restructuring charges, as well as lower transaction costs associated with AT&T's
restructuring announced in October of 2000, totaling $0.6 billion. These
operating (loss) improvements were partially offset by lower pension credit
(income) of $0.3 billion primarily driven by a lower long-term expected rate of
return on plan assets and the effects of lower actual plan assets.

OTHER ITEMS

Capital additions increased $0.2 billion in 2003 primarily due to property,
plant and equipment recorded in connection with the adoption of FIN No. 46.
Capital additions decreased $0.1 billion in 2002, primarily due to a decline in
the purchase of investments.

Total assets decreased $4.9 billion, to $12.7 billion in 2003. The decrease
was primarily driven by a lower cash balance of $3.8 billion at December 31,
2003, primarily resulting from debt repayments during the year.

FINANCIAL CONDITION

TOTAL ASSETS decreased $7.4 billion, or 13.4%, to $48.0 billion at December
31, 2003, compared with December 31, 2002. The decrease was largely driven by a
$3.7 billion decrease in cash and cash equivalents. The decrease was also
attributable to lower accounts receivable of $1.3 billion, primarily driven by
lower revenue and improved collections. Property, plant and equipment declined
$1.2 billion as a result of depreciation during the period, partially offset by
capital expenditures, including assets added as a result of the adoption of FIN
No. 46. In addition, other current assets declined $0.9 billion, primarily due
to the collection of income tax receivables principally as a result of losses on
our investment in AT&T Canada, the settlement of a foreign currency swap
associated with maturing debt as well as the deconsolidation of AT&T Latin
America. Other assets declined by $0.4 billion, primarily due to the disposal of
our interest in AT&T Wireless common stock, which had a carrying amount of $0.5
billion at December 31, 2002, a portion of which was used to redeem exchangeable
notes that were indexed to AT&T Wireless common stock and the remaining interest
was sold. In addition, other assets declined due to a reduction of the
intangible pension asset

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RESULTS OF OPERATIONS -- (CONTINUED)

associated with a revaluation of the minimum pension liability. These declines
in other assets were partially offset by increased mark-to-market adjustments on
foreign currency swaps, net of cash received.

TOTAL LIABILITIES decreased $9.1 billion, or 21.1%, to $34.0 billion at
December 31, 2003, from $43.1 billion at December 31, 2002. The decrease was
primarily the result of $8.2 billion of lower debt, reflecting early retirements
of $5.9 billion in long-term debt, including exchangeable notes indexed to AT&T
Wireless common stock we owned, and $3.1 billion of scheduled repayments of
bonds, one-year notes and commercial paper. These reductions in debt were
partially offset by $0.8 billion of mark-to-market adjustments. Also
contributing to the decline in total liabilities was lower short-term and
long-term compensation and benefit-related liabilities of $0.8 billion due to a
revaluation of the minimum pension liability, as well as lower restructuring and
bonus accruals. Partially offsetting these decreases in total liabilities was an
increase in deferred taxes of $1.4 billion, primarily as a result of greater tax
deductions related to property, plant and equipment.

TOTAL SHAREOWNERS' EQUITY increased $1.6 billion, or 13.3%, to $14.0
billion at December 31, 2003, from $12.3 billion at December 31, 2002. This
increase was primarily due to $1.9 billion of net income, partially offset by
dividends declared.

LIQUIDITY

CASH FLOW OVERVIEW

Cash and cash equivalents decreased $3.7 billion during 2003, to $4.4
billion, primarily reflecting over $9 billion in debt repayments, including
nearly $6 billion in early redemptions. Capital expenditures of $3.2 billion
also contributed to the cash decline. Cash generated by operating activities of
$8.5 billion partially offset this cash utilization.

Net cash provided by OPERATING ACTIVITIES of continuing operations of $8.5
billion for the year ended December 31, 2003, declined $2.0 billion, from $10.5
billion in 2002. This is reflective of the decline in our stand-alone long
distance voice and data businesses. This decline was partially offset by a $0.4
billion increase in income tax receipts and a $0.3 billion decline in interest
payments resulting from our ongoing deleveraging efforts. Our continued focus on
streamlining our processes and controlling costs also offset this decline.

Net cash provided by operating activities of continuing operations
increased $0.5 billion during 2002 compared with 2001. Favorably impacting cash
flow in 2002 were income tax receipts of $0.8 billion compared with income tax
payments of $1.4 billion in 2001. The increase in cash generated by operating
activities was partially offset by a decrease in operating income reflective of
a declining stand-alone long distance voice business and an increase of
approximately $0.2 billion in severance and other payments associated with
separations.

AT&T's INVESTING ACTIVITIES resulted in a net use of cash of $3.1 billion
in 2003, compared with $1.4 billion in 2002 and $4.3 billion in 2001. During
2003, we spent $3.2 billion on capital expenditures, made

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RESULTS OF OPERATIONS -- (CONTINUED)

payments of $0.2 billion to BT primarily associated with assets we assumed that
BT originally contributed to the Concert joint venture, and received $0.1
billion of proceeds from the sale of our remaining AT&T Wireless shares. During
2002, we spent $3.9 billion on capital expenditures, paid $3.4 billion to settle
the AT&T Canada obligation and received a $5.8 billion cash distribution from
AT&T Broadband in conjunction with its spin-off. In 2001, we spent $5.8 billion
on capital expenditures and received approximately $1.6 billion from the sales
of investments.

During 2003, net cash used in FINANCING ACTIVITIES was $9.1 billion,
compared with $6.0 billion in 2002 and $2.8 billion in 2001. During 2003, we
made net payments of $9.2 billion to reduce debt, including early termination of
debt and paid dividends of $0.6 billion. Reflected as an other financing item
was the receipt of approximately $0.2 billion cash collateral related to
favorable positions of certain combined interest rate foreign currency swap
agreements, as well as $0.5 billion for the settlement of a combined interest
rate foreign currency swap agreement in conjunction with the scheduled repayment
of Euro debt in November 2003 (such repayment is included as retirement of
long-term debt).

In 2002, we made net payments of $8.2 billion to reduce debt, paid
dividends of $0.6 billion, and received $2.7 billion from the issuance of AT&T
common stock, primarily due to the sale of 46 million shares in the second
quarter of 2002, the proceeds of which were used in October 2002 to settle a
portion of our obligation to the AT&T Canada shareholders. During 2001, we made
net debt payments of $6.5 billion, paid AT&T Wireless $5.8 billion to settle an
intercompany loan in conjunction with its split-off from AT&T, and paid
dividends of $0.5 billion. Partially offsetting these outflows in 2001 was the
receipt of $9.8 billion from the issuance of convertible preferred stock to NTT
DoCoMo.

WORKING CAPITAL AND OTHER SOURCES OF LIQUIDITY

At December 31, 2003, our working capital ratio (current assets divided by
current liabilities) was 1.11.

At December 31, 2003, we had a $2.0 billion syndicated 364-day credit
facility available to us that was entered into on October 8, 2003. This credit
facility provides the option to extend the term of the agreement for an
additional 364-day period beyond October 7, 2004. Up to $0.3 billion of the
facility can be utilized for letters of credit, which reduces the amount
available. As of December 31, 2003, approximately $0.1 billion of letters of
credit were issued under the facility. Additionally, the credit facility
contains a financial covenant that requires AT&T to meet a debt-to-EBITDA ratio
(as defined in the credit agreement) not exceeding 2.25 to 1 and an
EBITDA-to-net interest expense ratio (as defined in the credit agreement) of at
least 3.50 to 1 for four consecutive quarters ending on the last day of each
fiscal quarter. At December 31, 2003, we were in compliance with these
covenants. Pursuant to the definitions in the facility, business restructuring
and asset impairment charges have no impact on the EBITDA financial covenants in
the credit facility.

In July 2003, we renewed our AT&T Consumer Services 364-day customer
accounts receivable securitization facility and entered into a new AT&T Business
Services 364-day customer accounts receivable securitization facility. At
December 31, 2003, together the programs provided $1.65 billion of available
financing, limited by the eligible receivables balance, which varies from month
to month. In early March 2004, AT&T reduced the combined facility size to $1.45
billion, limited by the eligible receivables balance. Proceeds from the
securitizations are recorded as borrowings and included in short-term debt. At
December 31, 2003, approximately $0.2 billion was outstanding. The facilities
require AT&T to meet a debt-to-EBITDA ratio (as defined in the agreements) not
exceeding 2.25 to 1, which we were in compliance with at December 31, 2003. The
new facilities do not include a provision contained in the previous facilities
that required the outstanding balances to be paid by the collection of the
receivables in the event AT&T's ratings were downgraded below investment grade.

46

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

We anticipate continuing to fund our operations in 2004 primarily with cash
and cash equivalents on hand, as well as cash from operations. If economic
conditions worsen or do not improve and/or competition and product substitution
accelerate beyond current expectations, our cash flows from operations would
decrease, negatively impacting our liquidity. However, we believe our access to
the capital markets is adequate to provide the flexibility we desire in funding
our operations. Sources of liquidity include the commercial paper market, $2.4
billion remaining under a universal shelf registration, a $1.45 billion
securitization program (limited by eligible receivables) and a $2.0 billion
credit facility. The maximum amount of commercial paper outstanding during 2003
was approximately $1.1 billion. We cannot provide any assurances that any or all
of these sources of funding will be available at the time they are needed or in
the amounts required.

CREDIT RATINGS AND RELATED DEBT IMPLICATIONS

During 2003, AT&T's long-term credit ratings were lowered by both Standard
& Poor's (S&P) and Fitch. As of December 31, 2003, our credit ratings were as
follows:

Subsequent to 2003, S&P and Fitch lowered the short-term credit and
commercial paper rating to A-3 and F-3, respectively, Fitch lowered AT&T's
long-term credit rating to BBB-, and S&P changed the outlook to Negative.
Currently, none of AT&T's ratings are under review or on CreditWatch for further
downgrade.

Our access to capital markets as well as the cost of our borrowings are
affected by our debt ratings. The rating action by S&P in July 2003, triggered a
25 basis point interest rate step-up on approximately $10 billion in notional
amount of debt ($1.3 billion of which matured in November 2003). This step-up
was effective for interest payment periods that began after November 2003,
resulting in an expected increase in interest expense of approximately $15
million in 2004. Further debt rating downgrades could require AT&T to pay higher
rates on certain existing debt and post cash collateral for certain
interest-rate and equity swaps if we are in a net payable position.

If AT&T's debt ratings are further downgraded, AT&T's access to the capital
markets may be restricted and/or such replacement financing may be more costly
or have additional covenants than we had in connection with our debt at December
31, 2003. In addition, the market environment for financing in general, and
within the telecommunications sector in particular, has been adversely affected
by economic conditions and bankruptcies of other telecommunications providers.
If the financial markets become more cautious regarding the industry/ratings
category we operate in, our ability to obtain financing would be further reduced
and the cost of any new financings may be higher.

The holders of certain private debt with an outstanding balance of $1.0
billion at December 31, 2003, have an annual put right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the debt holders
agreeing not to exercise their put right, in 2004, AT&T renewed a
cash-collateralized letter of credit totaling $0.5 billion now expiring in March
2005. The holders could accelerate repayment of the debt based on certain events
such as the occurrence of unfavorable local law or regulation changes in its
country of operation. AT&T also has the right to call this debt at anytime.

AT&T Corp. is generally the obligor for debt issuances. However, we have
some instances where AT&T Corp. is not the obligor, for example, the
securitization facilities and certain capital leases. The total debt of these
entities, which are fully consolidated, is approximately $0.3 billion at
December 31, 2003, and is included within short-term and long-term debt.

47

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

CASH REQUIREMENTS

Our cash needs for 2004 will be primarily related to capital expenditures,
repayment of debt and payment of dividends. We expect our capital expenditures
for 2004 to be approximately $2.5 billion. Effective with the 2003 third quarter
dividend (paid in November 2003), AT&T's quarterly dividend was increased to
$0.2375 per share, an increase of $0.05 per share.

In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. In connection with
the debt redemption, we unwound $250 million notional amount of
fixed-to-floating interest rate swaps. Also, AT&T offered to repurchase for cash
up to E 1 billion of its outstanding E 2 billion 6.0% Notes due November 2006,
which now carry an interest rate of 6.75%. This repurchase is expected to close
by the end of March 2004. These redemptions are part of AT&T's plan, as
announced in January 2004, to repurchase up to $3.0 billion of debt, which may
take the form of calls, tender offers or open market transactions and will be
completed subject to market conditions throughout 2004.

AT&T anticipates contributing approximately $0.6 billion to the U.S.
postretirement benefit plans in 2004. We expect to contribute approximately $30
million to our U.S. nonqualified pension plan in 2004. No contribution is
expected for our U.S. qualified pension plans in 2004.

CONTRACTUAL CASH OBLIGATIONS

The following summarizes AT&T's contractual cash obligations and commercial
commitments at December 31, 2003, and the effect such obligations are expected
to have on liquidity and cash flows in future periods. Included in the table
below are purchase obligations under which we have legal obligations for
payments in specific years. The minimum commitment for certain obligations is
based on termination penalties that could be paid to exit the contract. Since
termination penalties would not be paid in every year, such penalties are
excluded from the table. (See note 4 to the table.) Other long-term liabilities
were included in the table based on the year of required payment or an estimate
of the year of payment. Such estimate of payment is based on a review of past
trends for these items, as well as a forecast of future activities. Certain
items, were excluded from the table below as the year of payment is unknown and
could not be reliably estimated since past trends were not deemed an indicator
of future payment. (See note 5 to the table).

- ---------------

(1) In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006. The offer to
early redeem these securities expired on March 3, 2004, with $1.2 billion of
notes redeemed. These notes are included in the above table based on their
original maturity date of 2006. Additionally, the impact of discounts and
derivative instruments are excluded from long-term debt in the above table.
48

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

(2) Under certain real estate operating leases, we could be required to make
payments to the lessors of up to $20 million at the end of the lease term in
2007. Such amounts are excluded from the above table.

(3) AT&T has contractual obligations to utilize network facilities from local
exchange carriers with terms greater than one year. Since the contracts have
no minimum volume requirements, and are based on an interrelationship of
volumes and discounted rates, we assessed our minimum commitment based on
penalties to exit the contracts, assuming we exited the contracts on
December 31, 2003. At December 31, 2003, the penalties AT&T would have
incurred to exit all of these contracts would have been $2.0 billion. Such
termination penalties decline throughout the lives of the contracts, and
could be $1.1 billion in 2004, $0.7 billion in 2005, $0.5 billion in 2006,
$0.2 billion in 2007 or $0.2 billion in 2008, assuming all contracts are
exited. These termination fees are excluded from the above table as the fees
would not be paid in every year and the timing of such payments, if any, is
uncertain.

(4) We calculated the minimum obligation for certain agreements to purchase
goods or services based on termination fees that can be paid to exit the
contract. If we elect to exit these contracts, termination fees for all such
contracts in the year of termination could be approximately $546 million in
2004, $619 million in aggregate for 2005 and 2006, $133 million in aggregate
for 2007 and 2008, or $34 million, in the aggregate, thereafter. These
termination fees are excluded from the above table as the fees would not be
paid in every year and the timing of such payments, if any, is uncertain.

(5) Other long-term liabilities of $1.5 billion and deferred income taxes of
$5.4 billion have been excluded from the above table due to the uncertainty
of the timing of payments, combined with the absence of historical trending
to be used as a predictor for such payments. Also, long-term liabilities
totaling $0.8 billion have been excluded from the above table as settlement
of such liabilities will not require the use of cash.

(6) Certain long-term benefit-related liabilities, including pensions,
postretirement health and welfare benefits and postemployment benefit
obligations are appropriately recorded on the balance sheet at present
value. The accrued liability, which is impacted by various actuarial
assumptions, will differ from the sum of future value of estimated payments.
Estimated payments are $1.4 billion in 2005-2006; $1.0 billion in 2007-2008
and $5.6 billion, thereafter, and differs from the obligation recognized on
the balance sheet by $4.6 billion. Although we provide various employee
benefit plans, programs and arrangements to our employees, we reserve the
right to amend, modify or terminate these plans, programs or arrangements at
any time, subject to the terms and conditions of such plans, programs or
arrangements and applicable law. Accordingly, these amounts have been
excluded from the above table, as we are not legally obligated for such cash
outflows. See notes 11 and 12 to the consolidated financial statements for
additional information.

OTHER COMMERCIAL COMMITMENTS

In certain circumstances we guarantee the debt of our subsidiaries, and, in
connection with the separation of certain subsidiaries, these guarantees
remained outstanding, and we issued guarantees for certain debt and other
obligations. These guarantees relate to our former subsidiaries AT&T Wireless,
AT&T Broadband and NCR.

We currently hold no collateral for such guarantees, and have not recorded
corresponding obligations. We have been provided with cross-guarantees or
indemnifications by third parties for certain of these guarantees. In the event
that the financial condition of the parties to the various agreements
deteriorates to the point at which they declare bankruptcy, other third parties
to the agreements could look to us for payment.

AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT
DoCoMo. In connection with an investment NTT DoCoMo made in AT&T Wireless, AT&T
and AT&T Wireless agreed that, under certain circumstances, including if AT&T
Wireless fails to meet specific technological milestones by June 30, 2004, NTT
DoCoMo would have the right to require AT&T Wireless to repurchase its AT&T
Wireless common stock for $9.8 billion plus interest. On December 31, 2002, AT&T
Wireless and NTT DoCoMo entered into an amendment to the original agreement,
which, among other things, extended the deadline for compliance with the
technological milestones to December 31, 2004. AT&T's guarantee expires on June
30, 2004, in accordance with the terms of the original agreement. In the event
AT&T Wireless is unable to satisfy its entire obligation, AT&T is secondarily
liable for up to $3.65 billion, plus interest, or approximately $4.5 billion.

Prior to the spin-off of AT&T Broadband, we had guaranteed various
obligations of AT&T Broadband, including operating leases for real estate,
surety bonds, and equity hedges, which we continue to provide. Comcast has
provided indemnifications for the full amount of these guarantees. Such
commitments total

49

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

$224 million and are expected to expire as follows: $69 million in 2004; $130
million in 2005-2006; and $25 million in 2007-2008.

The total amount of guaranteed debt at December 31, 2003 was $6 million.
Such debt guarantees relate to NCR, with the substantial portion of the debt
maturing subsequent to 2009.

OFF-BALANCE SHEET ARRANGEMENTS

In addition to the purchase obligations and guarantees discussed above, see
note 9 to the consolidated financial statements for a discussion of letters of
credit.

RISK MANAGEMENT

We are exposed to market risk from changes in interest and foreign exchange
rates, as well as changes in equity prices associated with previously affiliated
companies. In addition, we were exposed to market risk from fluctuations in the
prices of securities, some of which we had monetized through the issuance of
debt in prior years. On a limited basis, we use certain derivative financial
instruments, including interest rate swaps, foreign exchange contracts, combined
interest rate foreign currency contracts, options, forwards, equity hedges and
other derivative contracts, to manage these risks. We do not use financial
instruments for trading or speculative purposes. All financial instruments are
used in accordance with board-approved policies.

We enter 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
December 31, 2003, our foreign currency exposures were principally Euros,
British pound sterling, Danish krone and Swiss francs.

The fair value of foreign exchange contracts is subject to the changes in
foreign currency exchange rates. For the purpose of assessing specific risks, we
use a sensitivity analysis to determine the effects that market risk exposures
may have on the fair value of our financial instruments and results of
operations. To perform the sensitivity analysis, we assess the risk of loss in
fair values from the effect of a hypothetical 10% adverse change in the value of
foreign currencies (positive change in the value of U.S. dollar), assuming no
change in interest rates.

For foreign exchange contracts outstanding at December 31, 2003 and 2002,
assuming a hypothetical 10% appreciation of the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the foreign exchange contracts (net asset) would have decreased $77 million
and $66 million, respectively. Because our foreign exchange contracts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying transactions.

We have also entered into combined interest rate foreign currency contracts
to hedge foreign-currency-denominated debt. At December 31, 2003 and 2002,
assuming a hypothetical 10% appreciation in the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the combined interest rate foreign currency contracts (net asset) would have
decreased $0.4 billion and $0.5 billion, respectively. Because our foreign
exchange contracts are entered into for hedging purposes, we believe that these
losses would be largely offset by gains on the underlying
foreign-currency-denominated debt.

The model to determine sensitivity assumes a parallel shift in all foreign
currency exchange rates, although exchange rates rarely move in the same
direction. Additionally, the amounts above do not necessarily represent the
actual changes in fair value we would incur under normal market conditions
because all variables, other than the exchange rates, are held constant in the
calculations.

We use interest rate swaps to manage the impact of interest rate changes on
earnings and cash flows. We perform a sensitivity analysis on our interest rate
swaps to assess the risk of changes in fair value. The model to determine
sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At
December 31, 2003 and 2002, assuming a hypothetical 10% decrease in interest
rates, the fair value of interest rate swaps (net liability) would have
decreased by $8 million and $1 million, respectively.

50

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

As discussed above, we have also entered into combined interest rate
foreign currency contracts to hedge foreign-currency-denominated debt. Assuming
a hypothetical 10% decrease in interest rates, the fair value of the contracts
(net asset) would have decreased by $34 million at December 31, 2003. Assuming a
hypothetical 10% increase in interest rates, the fair value of the contracts
(net asset) would have decreased by $3 million at December 31, 2002.

The fair value of our fixed-rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains or losses in the
market value of the debt due to differences between the market interest rates
and rates at the inception of the obligation. Assuming a 10% downward shift in
interest rates at December 31, 2003 and 2002, the fair value of unhedged debt
would have increased by $0.5 billion and $0.7 billion, respectively.

At December 31, 2002, we had certain notes, with embedded derivatives,
which were indexed to the market price of equity securities we owned. Changes in
the market prices of these securities resulted in changes in the fair value of
the derivatives. Assuming a hypothetical 10% increase in the market price of
these equity securities (asset), the fair value of the collars would have
decreased $46 million at December 31, 2002. Because these collars hedged the
underlying equity securities monetized, we believed that the decrease in the
fair value of the collars would have been largely offset by increases in the
fair value of the underlying equity securities. The changes in fair values
referenced above do not represent the actual changes in fair value we would
incur under normal market conditions because all variables other than the equity
prices were held constant in the calculations.

We use equity hedges to manage our exposure to changes in equity prices
associated with various equity awards of previously affiliated companies.
Assuming a hypothetical 10% decrease in equity prices of these companies, the
fair value of the equity hedges (net liability) would have increased by $8
million at December 31, 2003 and $9 million at December 31, 2002. Because these
contracts are entered into for hedging purposes, we believe that the increase in
fair value would be largely offset by decreases in the underlying liabilities.

The risk of loss in fair values of all other financial instruments
resulting from a hypothetical 10% adverse change in market prices was not
significant as of December 31, 2003 and 2002.

In order to determine the changes in fair value of our various financial
instruments, including options, equity collars and other equity awards, we use
certain financial modeling techniques. We apply rate sensitivity changes
directly to our interest rate swap transactions and forward rate sensitivity to
our foreign currency forward contracts.

The changes in fair value, as discussed above, assume the occurrence of
certain market conditions, which could have an adverse financial impact on AT&T.
They do not consider the potential effect of changes in market factors that
would result in favorable impacts to us, and do not represent projected losses
in fair value that we expect to incur. Future impacts would be based on actual
developments in global financial markets. We do not foresee any significant
changes in the strategies used to manage interest rate risk, foreign currency
rate risk or equity price risk in the near future.

SUBSEQUENT EVENTS

In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. In connection with
the debt redemption, we unwound $250 million notional amount of
fixed-to-floating interest rate swaps. Also, AT&T offered to repurchase for

51

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

cash up to E1 billion of its outstanding E2 billion 6.0% Notes due November
2006, which now carry an interest rate of 6.75%. This repurchase is expected to
close by the end of March 2004.

In March 2004, a U.S. Court of Appeals vacated a number of recent FCC
rulings made in connection with the Triennial Review, including the FCC's
delegation to state commissions of decisions over impairment as applied to mass
market switching and certain transport elements. If this decision is not
reversed, or unless the FCC issues new valid rules, which assure us of fair
resale prices, our current local business could be materially affected.

52

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is contained in the section entitled
"Risk Management" in Item 7.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

Management is responsible for the preparation, integrity and objectivity of
the consolidated financial statements and all other financial information
included in this report. Management is also responsible for maintaining a system
of internal controls as a fundamental requirement for the operational and
financial integrity of results. The financial statements, which reflect the
consolidated accounts of AT&T Corp. and subsidiaries (AT&T) and other financial
information shown, were prepared in conformity with generally accepted
accounting principles. Estimates included in the financial statements were based
on judgments of qualified personnel. To maintain its system of internal
controls, management carefully selects key personnel and establishes the
organizational structure to provide an appropriate division of responsibility.
We believe it is essential to conduct business affairs in accordance with the
highest ethical standards as set forth in the AT&T Code of Conduct. These
guidelines and other informational programs are designed and used to ensure that
policies, standards and managerial authorities are understood throughout the
organization. Our internal auditors monitor compliance with the system of
internal controls by means of an annual plan of internal audits. On an ongoing
basis, the system of internal controls is reviewed, evaluated and revised as
necessary in light of the results of constant management oversight, internal and
independent audits, changes in AT&T's business and other conditions. Management
believes that the system of internal controls, taken as a whole, provides
reasonable assurance that (1) financial records are adequate and can be relied
upon to permit the preparation of financial statements in conformity with
generally accepted accounting principles, and (2) access to assets occurs only
in accordance with management's authorizations.

The Audit Committee of the Board of Directors, which is composed of
directors who are not employees, meets periodically with management, the
internal auditors and the independent auditors to review the manner in which
these groups of individuals are performing their responsibilities and to carry
out the Audit Committee's oversight role with respect to auditing, internal
controls and financial reporting matters. Periodically, both the internal
auditors and the independent auditors meet privately with the Audit Committee
and have access to its individual members at any time.

The consolidated financial statements in this annual report have been
audited by PricewaterhouseCoopers LLP, Independent Auditors. Their audits were
conducted in accordance with generally accepted auditing standards which
includes consideration of the internal controls over financial reporting to
determine the extent of auditing procedures required. Their report follows.

DAVID W. DORMAN THOMAS W. HORTON
Chairman of the Board, Senior Executive Vice President,
Chief Executive Officer Chief Financial Officer

53

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareowners of AT&T Corp:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in shareowners' equity
and cash flows, present fairly, in all material respects, the financial position
of AT&T Corp. and its subsidiaries (AT&T) at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the financial statements, AT&T changed the manner
in which it accounts for variable interest entities as of July 1, 2003, the
manner in which it accounts for asset retirement costs as of January 1, 2003,
the manner in which it accounts for goodwill and other intangible assets as of
January 1, 2002, and the manner in which it accounts for derivative instruments
as of January 1, 2001.

PricewaterhouseCoopers LLP

Florham Park, New Jersey
March 5, 2004

54

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The notes are an integral part of the consolidated financial statements.
55

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The notes are an integral part of the consolidated financial statements.
56

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

(continued on next page)
57

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY -- (CONTINUED)

- ---------------

AT&T accounts for treasury stock as retired stock. The amounts attributable to
treasury stock at December 31, 2003 and 2002, were $(17,026) million and
$(17,037) million, respectively.

We have 100 million authorized shares of preferred stock at $1 par value.

* Other activity in 2001 represents AT&T common stock received in exchange for
entities owning certain cable systems.

The notes are an integral part of the consolidated financial statements.
58

AT&T CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The notes are an integral part of the consolidated financial statements.
59

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include all controlled subsidiaries.
In addition, AT&T reviews our relationships with other entities to assess if we
are the primary beneficiary of a variable interest entity. If the determination
is made that we are the primary beneficiary, then that entity is consolidated.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Investments in majority-owned subsidiaries where control does not
exist and investments in which we exercise significant influence but do not
control (generally a 20% to 50% ownership interest) are accounted for under the
equity method of accounting. Investments in which there is no significant
influence (generally less than a 20% ownership interest) are accounted for under
the cost method of accounting.

FOREIGN CURRENCY TRANSLATION

For operations outside the United States that prepare financial statements
in currencies other than the U.S. dollar, we translate income statement amounts
at average exchange rates for the year, and we translate assets and liabilities
at year-end exchange rates. We present these translation adjustments as a
component of accumulated other comprehensive income (loss) within shareowners'
equity. Gains and losses from foreign currency transactions are included in
results of operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items, such as allowances for doubtful accounts, access and local
connectivity costs, depreciation and amortization, employee benefit plans,
income taxes, restructuring reserves, recoverability of goodwill and
contingencies.

REVENUE RECOGNITION

We recognize long distance, local voice and data services revenue based
upon minutes of traffic processed or contracted fee schedules. In addition, we
record an estimated revenue reduction for adjustments to customer accounts. This
estimate is based on a detailed analysis that compares accounts receivable aging
at different points in time to determine the appropriate level of adjustments.
Cash incentives given to customers are recorded as a reduction of revenue. We
recognize other products and services revenue when the products are delivered
and accepted by customers and when services are provided in accordance with
contract terms. When installation and set-up fees are billed, the revenue is
deferred and recognized over the associated service contract period. For
contracts that involve the bundling of services, revenue is allocated to the
services based on their relative fair value. AT&T records the sale of equipment
to customers gross when the equipment will be used in conjunction with the
provisioning of our services and we are the primary obligor in the arrangement.
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. For agreements involving the resale of third party services in which
AT&T is not considered the primary obligor of the arrangement, AT&T records the
revenue net of the associated costs incurred.

ADVERTISING AND PROMOTIONAL COSTS

We expense costs of advertising and promotions as incurred.

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The provision for income taxes is based on reported income before income
taxes. Deferred income taxes are provided for the effect of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for income tax purposes.
Deferred tax assets and liabilities are measured using currently enacted tax
laws and the effects of any changes in income tax laws are included in the
provision for income taxes in the period of enactment. Valuation allowances are
recognized to reduce deferred tax assets when it is more likely than not that
the asset will not be realized. In assessing the likelihood of realization, we
consider estimates of future taxable income, the character of income needed to
realize future benefits and all available evidence. Investment tax credits are
amortized as a reduction to the provision for income taxes over the useful lives
of the assets that produced the credits.

CASH EQUIVALENTS

We consider all highly liquid investments with original maturities of three
months or less to be cash equivalents.

PROPERTY, PLANT AND EQUIPMENT

We state property, plant and equipment at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized. Costs of additions and substantial improvements to
property, plant and equipment are capitalized. The costs of maintenance and
repairs of property, plant and equipment are charged to operating expense. The
useful lives of communications and network equipment range from three to 15
years. The useful lives of other equipment ranges from three to seven years. The
useful lives of buildings and improvements range from 10 to 40 years.
Depreciation is determined based upon the assets' estimated useful lives using
either the group or unit method. The group method is used for most depreciable
assets, including the majority of communications and network equipment. The unit
method is primarily used for large computer systems, buildings and support
assets. Under the group method, a specific asset group has an average life. A
depreciation rate is developed based on the average useful life for the specific
asset group. This method requires the periodic revision of depreciation rates.
Under the unit method, assets are depreciated on a straight-line basis over the
estimated useful life of the individual asset. When we sell or retire assets
depreciated using the group method, the difference between the proceeds, if any,
and the cost of the asset is charged or credited to accumulated depreciation,
without recognition of a gain or loss. When we sell assets that were depreciated
using the unit method, we include the related gains or losses in other income
(expense), net.

Property, plant and equipment are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. If the total of the expected future undiscounted cash flows is less
than the carrying value of the asset, a loss is recognized for the difference
between the fair value and the carrying value of the asset.

SOFTWARE CAPITALIZATION

Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. These costs
are included within other assets and are amortized over a period not to exceed
three years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. AT&T also capitalizes initial
operating-system software costs and amortizes them over the life of the
associated hardware.

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. Beginning January 1, 2002, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
goodwill and indefinite-lived intangible assets are no longer amortized, but
instead are tested for impairment at least annually. Intangible assets that have
finite useful lives are amortized over their useful lives, which range from five
to 15 years.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We use derivative financial instruments to mitigate market risk from
changes in interest rates, foreign currency exchange rates and equity prices.
Derivative financial instruments may be exchange-traded or contracted in the
over-the-counter market and include swaps, options, warrants and forward
contracts. We do not use derivative financial instruments for speculative
purposes.

All derivatives are recognized on the balance sheet at fair value. Certain
derivatives, at inception, are designated as hedges and evaluated for
effectiveness at least quarterly throughout the hedge period. These derivatives
are designated as either (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), or (2) 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).
All other derivatives are not formally designated for accounting purposes
(undesignated). These derivatives, except for warrants, although undesignated
for accounting purposes, are entered into to hedge economic risks.

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 (including losses or gains on firm commitments), in other
income (expense), net.

We record changes in the fair value of cash-flow hedges in other
comprehensive income (loss), net of income taxes, as a component of shareowners'
equity, until earnings are affected by the variability of cash flows of the
hedged transaction.

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.

We currently do not have any net investment hedges in a foreign operation.

Cash flows associated with derivative instruments are presented in the same
category as the cash flows of the item being hedged.

We assess embedded derivatives to determine whether (1) the economic
characteristics of the embedded instruments are not clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument (the host instrument) and (2) whether the embedded instrument meets
the definition of a derivative instrument. When it is determined that both
conditions exist, we designate the derivatives as described above, and recognize
the derivative at fair value.

We formally document all relationships between hedging instruments and
hedged items, as well as the risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value or cash flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions.

We discontinue hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item, (2) the derivative or hedged item expires
or is sold, terminated, or exercised, (3) it is determined that the forecasted
hedged transaction will no longer occur, (4) a hedged firm commitment no longer
meets the definition of a firm commitment, or
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) management determines that the designation of the derivative as a hedge
instrument is no longer appropriate.

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 (loss) as a component of
shareowners' 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.

STOCK-BASED COMPENSATION

AT&T has a Long-Term Incentive Program under which AT&T grants stock
options, performance shares, restricted stock and other awards in AT&T common
stock, and an Employee Stock Purchase Plan, which are described more fully in
note 12. Effective January 1, 2003, we adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and we
began to record stock-based compensation expense for all employee awards
(including stock options) granted or modified after January 1, 2003. For awards
issued prior to January 1, 2003, we apply Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for our plans. Under APB Opinion No. 25, no
compensation expense has been recognized other than for our performance-based
and restricted stock awards, stock appreciation rights (SARs), and certain
occasions when we have modified the terms of the stock option vesting schedule.

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If AT&T had elected to recognize compensation costs based on the fair value
at the date of grant of all awards granted prior to January 1, 2003, consistent
with the provisions of SFAS No. 123, net income (loss) and earnings (loss) per
share amounts would have been as follows:

- ---------------

(1) AT&T Common Stock Group's results exclude amounts attributable to Liberty
Media Group and AT&T Wireless Group tracking stocks.

Pro forma stock-based compensation expense reflected above may not be
indicative of future compensation expense that may be recorded. Future
compensation expense may differ due to various factors, such as the number of
awards granted and the market value of such awards at the time of grant.

Pro forma earnings (loss) for AT&T Common Stock Group from continuing
operations was $1,713 million, $730 million and $(1,152) million for 2003, 2002
and 2001, respectively, and from discontinued operations was $(13) million,
$(14,582) million and $(4,213) million for 2003, 2002 and 2001, respectively.

Pro forma earnings (loss) for AT&T Common Stock Group per basic share from
continuing operations was $2.18, $0.98 and $(1.58) for 2003, 2002 and 2001,
respectively, and from discontinued operations was $(0.02), $(19.53) and $(5.78)
for 2003, 2002 and 2001, respectively.

Pro forma earnings (loss) for AT&T Common Stock Group per diluted share
from continuing operations was $2.17, $0.96 and $(1.58) for 2003, 2002 and 2001,
respectively, and from discontinued operations was $(0.02), $(19.04) and $(5.78)
for 2003, 2002 and 2001, respectively.

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The pro forma effect on net loss from discontinued operations for AT&T
Common Stock Group for 2002 includes expense of $28 million due to the
accelerated vesting of AT&T stock options held by AT&T Broadband employees at
the date of spin-off. The pro forma effect on net loss from discontinued
operations for AT&T Common Stock Group for 2001 includes expense of $10 million
due to the conversion of AT&T common stock options in connection with the
split-off of AT&T Wireless, and also includes expense of $12 million due to the
accelerated vesting of AT&T Wireless stock options held by AT&T employees at the
date of the split-off.

The pro forma effect on net loss from continuing operations for AT&T Common
Stock Group available to common shareowners for 2001 includes expense of $40
million due to the conversion of AT&T common stock options in connection with
the split-off of AT&T Wireless, and also includes expense of $163 million due to
the accelerated vesting of AT&T Wireless stock options held by AT&T employees at
the date of split-off.

EMPLOYEE SEPARATIONS

In accordance with SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," AT&T establishes postemployment benefit obligations for expected
terminations provided to former or inactive employees after employment but
before retirement. These benefits include severance payments, medical coverage,
and other benefits.

ISSUANCE OF COMMON STOCK BY AFFILIATES

Changes in our proportionate share of the underlying equity of a subsidiary
or equity method investee, which result from the issuance of additional equity
securities by such entity, are recognized as increases or decreases to
additional paid-in capital as a component of shareowners' equity.

CONCENTRATIONS

As of December 31, 2003, other than the guarantee issued in connection with
the split-off of AT&T Wireless (see note 9), we do not have any significant
concentration of business transacted with a particular customer, supplier,
lender or former affiliate that could, if suddenly adversely impacted, severely
impact our operations. We also do not have a concentration of available sources
of labor, services or other rights that could, if suddenly eliminated, severely
impact our operations. We invest our cash with many high-quality credit
institutions.

RECLASSIFICATIONS AND RESTATEMENTS

We reclassified certain amounts for previous years to conform to the 2003
presentation.

2. AT&T RESTRUCTURING AND DISCONTINUED OPERATIONS

In connection with the restructuring of AT&T announced on October 25, 2000,
AT&T Broadband, AT&T Wireless, and Liberty Media Group have all been separated
from AT&T.

AT&T Broadband, which was spun-off from AT&T on November 18, 2002, was
accounted for as a discontinued operation pursuant to SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." AT&T Wireless, which was
split-off from AT&T on July 9, 2001, was accounted for as a discontinued
operation pursuant to APB Opinion No. 30, "Reporting Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." As
discontinued operations, the revenue, expenses and cash flows of AT&T Broadband
and AT&T Wireless are excluded from the respective captions in the Consolidated
Statements of Operations and Consolidated Statements of Cash Flows, and are
reported through their respective dates of

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

separation as net (loss) from discontinued operations and as net cash (used in)
provided by discontinued operations.

AT&T BROADBAND

On November 18, 2002, AT&T spun-off AT&T Broadband, which was comprised
primarily of the AT&T Broadband segment, to AT&T shareowners. Simultaneously,
AT&T Broadband combined with Comcast Corporation (Comcast). The combination was
accomplished through a distribution of stock to AT&T shareowners, who received
1.6175 shares of Comcast Class A common stock for each share of AT&T they owned
at market close on November 15, 2002, the record date. The Internal Revenue
Service (IRS) ruled that the transaction qualified as tax-free for AT&T and our
shareowners for U.S. federal income tax purposes, with the exception of cash
received for fractional shares. Approximately 1.2 billion Comcast shares were
issued to AT&T shareowners at a value of approximately $31.1 billion, based on
the Comcast stock price on November 18, 2002. AT&T shareowners received a 56%
economic stake and a 66% voting interest in Comcast.

In connection with the non-pro rata spin-off of AT&T Broadband, AT&T wrote
up the net assets of AT&T Broadband to fair value. This resulted in a noncash
gain on disposition of $1.3 billion, which represented the difference between
the fair value of the AT&T Broadband business at the date of the spin-off and
AT&T's book value of AT&T Broadband, net of certain charges triggered by the
spin-off and their related income tax effect. These charges included
compensation expense due to accelerated vesting of stock options, as well as the
enhancement of certain incentive plans.

Revenue for AT&T's Broadband business (which included At Home Corporation
through September 2001) was $8.9 billion and $10.1 billion for 2002 and 2001,
respectively. Net (loss) from discontinued operations before income taxes was
$(20.5) billion and $(8.1) billion for 2002 and 2001, respectively, for the AT&T
Broadband business. The loss for 2002 included pretax impairment charges of
$16.5 billion ($11.8 billion after taxes) relating to goodwill and franchise
costs which were recorded in the second quarter of 2002.

Interest expense of $359 million and $333 million was allocated to AT&T
Broadband in 2002 and 2001, respectively, based on the balance of intercompany
debt between AT&T Broadband and AT&T. At the time of the spin-off of AT&T
Broadband, this intercompany debt was settled via a $5.8 billion cash
distribution from AT&T Broadband and the exchange of $3.5 billion of AT&T notes
for notes of AT&T Broadband which are unconditionally guaranteed by Comcast and
certain of its subsidiaries.

The noncash impacts of the spin-off of AT&T Broadband include a reduction
to assets of approximately $84.3 billion, a reduction to liabilities of
approximately $48.8 billion, the reduction of minority interest of $1.2 billion,
the reduction of company-obligated convertible quarterly income preferred
securities of subsidiary trust of $4.7 billion, and a reduction to shareowners'
equity of approximately $29.6 billion, including the $1.3 billion noncash gain
on spin-off.

AT&T WIRELESS

AT&T issued AT&T Wireless tracking stock in April 2000, which was intended
to track the financial performance and economic value of AT&T Wireless Group.
The shares initially tracked approximately 16% of the financial performance of
AT&T Wireless Group. On May 25, 2001, AT&T completed an exchange offer of AT&T
common stock for AT&T Wireless stock. Under the terms of the exchange offer,
AT&T issued 5.88 shares of AT&T Wireless Group tracking stock in exchange for
each share of AT&T common stock validly tendered. A total of 74.4 million shares
of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T
Wireless Group tracking stock. In conjunction with the exchange offer, AT&T
recorded an $80 million premium as a reduction to net income available to common
shareowners. The premium

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

represented the excess of the fair value of the AT&T Wireless Group tracking
stock issued over the fair value of the AT&T common stock exchanged.

On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis, and 1,136
million shares of AT&T Wireless common stock held by AT&T were distributed to
AT&T common shareowners on a basis of 1.609 shares of AT&T Wireless for each
AT&T share outstanding. AT&T common shareowners received whole shares of AT&T
Wireless common stock and cash payments for fractional shares. The IRS ruled
that the transaction qualified as tax-free for AT&T and its shareowners for U.S.
federal income tax purposes, with the exception of cash received for fractional
shares. The split-off of AT&T Wireless resulted in a tax-free noncash gain on
disposition of discontinued operations of $13.5 billion, which represented the
difference between the fair value of the AT&T Wireless tracking stock at the
date of the split-off and AT&T's book value of AT&T Wireless.

Revenue for AT&T Wireless was $6.6 billion for 2001. Income from
discontinued operations before income taxes for AT&T Wireless was $308 million
for 2001. Interest expense of $153 million was allocated to AT&T Wireless in
2001, based on the debt of AT&T that was attributable to AT&T Wireless.

The noncash impacts of the split-off of AT&T Wireless reflect the split-off
of approximately $39.7 billion of net assets which included the $13.5 billion
noncash gain on disposition.

NCR CORP.

Net (loss) from discontinued operations for 2003 represents an estimated
cost related to potential legal liabilities for certain environmental clean-up
matters associated with NCR Corp. (NCR), which was spun-off from AT&T in 1996.
NCR has been formally notified by federal and state agencies that it is a
potentially responsible party (PRP) for environmental claims under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) and other statutes arising out of the presence of polychlorinated
biphenyls (PCBs) in sediments in the lower Fox River and in the Bay of Green Bay
in Wisconsin. NCR was identified as a PRP because of alleged PCB discharges from
two carbonless copy paper manufacturing facilities it previously owned, which
were located along the Fox River. In July 2003, the government clarified its
planned approach for remediation of the contaminated sediments, which caused NCR
to increase its estimated liability. Under the separation and distribution
agreement between AT&T and NCR, AT&T is required to pay a portion of such costs
that NCR incurs above a certain threshold. Therefore, in 2003, we recorded our
estimated proportionate share of certain costs associated with the Fox River
matter, which totaled $13 million on both a pretax and after-tax basis. The
extent of NCR's potential liability is subject to numerous variables that are
uncertain at this time, including the actual remediation costs and the
percentage NCR may ultimately be responsible for. As a result, AT&T's actual
liability may be different than the estimated amount. Pursuant to the separation
and distribution agreement, NCR is liable for the first $100 million of costs in
connection with this liability. AT&T is liable for 37% of costs incurred by NCR
beyond such $100 million threshold. All such amounts are determined after
reduction of any monies collected by NCR from other parties.

LUCENT TECHNOLOGIES INC.

Net (loss) from discontinued operations for 2002 included an estimated loss
on a litigation settlement associated with the business of Lucent Technologies
Inc. (Lucent), which was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and
Lucent et al., was a class action lawsuit filed in 1996 in Illinois state court.
The complaint sought damages on behalf of present and former customers based on
a claim that the AT&T Consumer Products business (which became part of Lucent in
1996) and Lucent had defrauded and misled customers who leased telephones,
resulting in payments in excess of the cost to purchase the telephones. On
August 9, 2002, a settlement proposal was submitted to and accepted by the
court. In accordance with the
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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

separation and distribution agreement between AT&T and Lucent, AT&T's estimated
proportionate share of the settlement and legal costs totaled $45 million pretax
($33 million after taxes). Depending upon the number of claims submitted and
accepted, the actual cost of the settlement to AT&T may be different than the
amounts accrued. While similar consumer class actions are pending in various
state courts, the Illinois state court has held that the class it certified
covers claims in the other state court class actions.

SUMMARY

Following is a summary of net (loss) from discontinued operations, net of
income taxes:

LIBERTY MEDIA GROUP

As a result of our merger with Tele-Communications, Inc. (TCI) in 1999, we
acquired Liberty Media Group (LMG). Although LMG was wholly owned, we accounted
for it as an equity method investment since we did not have a controlling
financial interest. On August 10, 2001, AT&T completed the split-off of Liberty
Media Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B LMG tracking stock for one share of
Liberty Media Corporation's Series A and Series B common stock, respectively.
The IRS ruled that the split-off of Liberty Media Corporation qualified as a
tax-free transaction for AT&T, Liberty Media and their shareowners. The
operating results of LMG through July 31, 2001, the deemed effective split-off
date for accounting purposes, are reflected as equity (losses) from Liberty
Media Group. At the time of disposition, AT&T did not exit the line of business
that Liberty Media Group operated in; therefore, at the time of its separation,
Liberty Media Group was not accounted for as a discontinued operation.

Upon split-off, AT&T paid LMG $803 million pursuant to a tax-sharing
agreement related to TCI net operating losses generated prior to AT&T's merger
with TCI. In addition, in 2002, AT&T received approximately $114 million from
LMG related to taxes pursuant to a tax-sharing agreement between LMG and AT&T
Broadband, which existed prior to the TCI merger.

Summarized results of operations for LMG were as follows:

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. IMPACTS OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION (FIN) NO. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES -- AN INTERPRETATION OF
ACCOUNTING RESEARCH BULLETIN NO. 51"

Effective July 1, 2003, AT&T early adopted FIN No. 46, "Consolidation of
Variable Interest Entities -- an Interpretation of Accounting Research Bulletin
No. 51." This interpretation requires the primary beneficiary to consolidate a
variable interest entity (VIE) if it has a variable interest that will absorb a
majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur, or both. Based on the new
standard, two entities that AT&T leased buildings from qualified as VIEs and,
therefore, became subject to consolidation as of July 1, 2003. AT&T had no
ownership interest in either entity, but provided guarantees of the residual
values for the leased facilities with a maximum exposure of $427 million. Upon
adoption, FIN No. 46 added approximately $433 million of assets (included in
property, plant and equipment of AT&T Business Services and Corporate and Other
group) and $477 million of liabilities (included in short-term debt) to our
consolidated balance sheet, which resulted in a charge of $27 million after
taxes ($44 million pretax) as the cumulative effect of an accounting change in
the third quarter of 2003. In November 2003, AT&T exercised its purchase option
on these leased buildings and thus repaid the associated debt. The noncash
impact of the adoption of this interpretation on the balance sheet at December
31, 2003, includes a $433 million increase in property, plant and equipment.

SFAS NO. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS"

Effective January 1, 2003, AT&T adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations that are
legally enforceable and unavoidable, and are associated with the retirement of
tangible long-lived assets, be recorded as liabilities when those obligations
are incurred, with the amount of the liability initially measured at fair value.
The offset to the initial asset retirement obligation is an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its future value, and the asset is depreciated over its useful life.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement.

AT&T historically included in its group depreciation rates an amount
related to the cost of removal for certain assets. However, such amounts are not
legally enforceable or unavoidable; therefore, upon adoption of SFAS No. 143,
AT&T reversed the amount previously accrued in accumulated depreciation. As of
January 1, 2003, AT&T recorded income of $42 million as the cumulative effect of
a change in accounting principle, primarily related to this reversal. The impact
of no longer including the cost of removal in the group depreciation rates,
partially offset by the cumulative effect impact on accumulated depreciation,
has resulted in a decrease to depreciation expense in 2003. However, the costs
incurred to remove these assets will be reflected in the period incurred within
costs of services and products.

SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"

Effective January 1, 2002, AT&T adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Upon adoption, goodwill was tested for impairment by
comparing the fair value of our reporting units to their carrying values. As of
January 1, 2002, the fair value of the reporting units' goodwill exceeded their
carrying value, and therefore, no impairment loss was recognized. Franchise
costs were tested for impairment as of January 1, 2002, by comparing the fair
value to the carrying value (at the market level). An impairment loss of $856
million, net of taxes of $530 million, was recorded relating to the discontinued
operation of AT&T Broadband in the first quarter of 2002. At December 31, 2002,
this amount is included in the cumulative effect of accounting changes.

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The table below presents the impact of SFAS No. 142 on net (loss) income
and (loss) earnings per share, had the standard been in effect on January 1,
2001:

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AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADOPTION OF SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES"

Effective January 1, 2001, AT&T adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and its corresponding amendments
under SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. The adoption of SFAS No. 133 on January 1, 2001, resulted
in a pretax cumulative-effect increase to income of $1,482 million ($904 million
after taxes); $581 million ($359 million after taxes) was attributable to AT&T,
excluding LMG, and $901 million ($545 million after taxes) was attributable to
LMG.

AT&T's cumulative-effect increase to net income of $359 million, excluding
LMG, was comprised of $130 million related to continuing operations primarily
attributable to warrants held in both public and private companies, and $229
million related to discontinued operations primarily attributable to embedded
and non-embedded net purchase options related to indexed debt instruments.

Upon adoption, AT&T, as permitted by SFAS No. 133, reclassified certain
securities from available-for-sale to trading. This reclassification resulted in
the recognition, in earnings, of losses previously recorded within accumulated
other comprehensive loss. A portion of the loss ($1.6 billion pretax; $1.0
billion after taxes) was recorded as part of the cumulative effect of adoption.
This loss completely offset a gain on the indexed debt obligation that had been
considered a hedge of Comcast, Microsoft Corporation (Microsoft) and Vodafone
plc available-for-sale securities. The reclassification of securities also
resulted in a pretax charge of $1.2 billion ($0.7 billion after taxes) recorded
in net (loss) from discontinued operations.

LMG's cumulative-effect increase to income of $545 million was primarily
attributable to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

included in the cumulative effect was $87 million previously included in
accumulated other comprehensive loss primarily related to changes in the fair
value of LMG's warrants and options to purchase certain available-for-sale
securities.

4. SUPPLEMENTARY FINANCIAL INFORMATION

SUPPLEMENTARY INCOME STATEMENT INFORMATION

SUPPLEMENTARY BALANCE SHEET INFORMATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortization expense associated with purchased intangible assets for
the years ended December 31, 2003 and 2002, was $71 million and $83 million,
respectively. Amortization expense for purchased intangible assets is estimated
to be approximately $110 million for the years ending December 31, 2004, 2005
and 2006, and $80 million for each of the years ending December 31, 2007 and
2008.

Leveraged Leases:

We lease airplanes, energy-producing facilities and transportation
equipment to third parties under leveraged leases having original terms of 10 to
30 years, expiring in various years from 2006 through 2020. The following is a
summary of our investment in leveraged leases, which is primarily included in
other assets:

- ---------------

(1) Rental receivables are net of nonrecourse debt of $1.3 billion and $1.4
billion at December 31, 2003 and 2002, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION

- ---------------

(1) Includes LMG's foreign currency translation adjustments, net of taxes of
$149 million from January 1, 2001 through July 31, 2001.

(2) Includes LMG's unrealized gains (losses) on available-for-sale securities,
net of taxes of $(1,286) million from January 1, 2001 through July 31, 2001.

(3) See below for a summary of recognition of previously unrealized (gains)
losses on available-for-sale securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(1) See note 3 for a detailed discussion.

SUPPLEMENTARY CASH FLOWS INFORMATION

5. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE

During 2001, in addition to AT&T common stock, the AT&T Wireless Group and
Liberty Media Group tracking stocks were outstanding. The tracking stocks
represented an interest in the economic performance of the net assets of each of
the respective groups. The earnings attributable to AT&T Wireless Group and
Liberty Media Group were excluded from the earnings attributable to the AT&T
Common Stock Group. On July 9 and August 10, 2001, AT&T Wireless and Liberty
Media Group, respectively, were separated from AT&T and the tracking stocks were
redeemed (see note 2).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income (loss) attributable to the different classes of AT&T common stock
for the year ended December 31, 2001, is as follows:

AT&T COMMON STOCK GROUP

Basic earnings per common share (EPS) is computed by dividing income
attributable to common shareowners by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
(considering the combined income and share impact) that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The potential issuance of common stock is assumed to occur at
the beginning of the year (or at the time of issuance if later), and the
incremental shares are included using the treasury stock method. The proceeds
utilized in applying the treasury stock method consist of the amount, if any, to
be paid upon exercise, the amount of compensation cost attributed to future
service not yet recognized, and any tax benefits credited to paid-in-capital
related to the exercise. These proceeds are then assumed to be used by AT&T to
purchase common stock at the average market price during the period. The
incremental shares (difference between the shares assumed to be issued and the
shares assumed to be purchased), to the extent they would have been dilutive,
are included in the denominator of the diluted EPS calculation.

A reconciliation of the share components for AT&T Common Stock Group basic
to diluted EPS calculations is as follows:

- ---------------

(1) No adjustments were made to income for the computation of diluted EPS.

(2) As AT&T reported a loss from continuing operations for 2001, the effects of
including incremental shares are antidilutive; therefore, both basic and
diluted EPS reflect the same calculation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock of Subsidiary

Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was
required to redeem the outstanding TCI Pacific Communications, Inc. Class A
Senior Cumulative Exchangeable Preferred Stock (TCI Pacific preferred stock) for
AT&T common stock. All outstanding shares of TCI Pacific preferred stock were
either exchanged or redeemed for AT&T common stock during 2001 and 2002 (see
note 10). Dividends were included in net (loss) from discontinued operations for
2002 and 2001.

Convertible Quarterly Income Preferred Securities (Quarterly Preferred
Securities)

On June 16, 1999, AT&T Finance Trust I, a wholly owned subsidiary of AT&T,
completed the private sale of 100 million shares of 5.0% cumulative quarterly
income preferred securities (quarterly preferred securities) to Microsoft. Such
securities were convertible into AT&T common stock. However, in connection with
the AT&T Broadband spin-off (see note 2), Comcast assumed the quarterly
preferred securities and Microsoft agreed to convert these preferred securities
into shares of Comcast common stock. Dividends were included in net (loss) from
discontinued operations for 2002 and 2001.

AT&T WIRELESS GROUP

Basic EPS from discontinued operations for AT&T Wireless Group for 2001
through June 30, 2001, the deemed effective split-off date for accounting
purposes, was computed by dividing income attributable to AT&T Wireless Group by
the weighted-average number of shares outstanding of AT&T Wireless Group of 438
million.

LIBERTY MEDIA GROUP

Basic loss earnings per share for LMG through July 31, 2001, the deemed
effective split-off date for accounting purposes, was computed by dividing
losses attributable to LMG by the weighted-average number of LMG shares
outstanding of 2,582 million. Potentially dilutive securities, including fixed
and nonvested performance awards and stock options, have not been factored into
the dilutive calculations because past history indicated that these contracts
were generally settled in cash.

6. NET RESTRUCTURING AND OTHER CHARGES

Net restructuring and other charges of $201 million for the year ended
December 31, 2003, primarily consisted of separation costs associated with our
management realignment efforts (which included approximately $9 million of
pension curtailment losses). The separations were involuntary and impacted
approximately 2,000 managers, more than 90% of whom have exited the business as
of December 31, 2003. These activities were partially offset by the net reversal
of $17 million of excess vintage employee separation liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table displays the activity and balances of the restructuring
reserve account:

In addition to the new exit plans recorded during 2002, total additions for
2002 in the table above also includes $39 million facility closing reserves
recorded by Concert in 2001 and transferred to AT&T as part of the unwind of
that joint venture.

Deductions in 2003, 2002 and 2001, primarily reflect total cash payments of
$455 million, $410 million and $249 million, respectively. These cash payments
include cash termination benefits of $377 million, $328 million and $202
million, respectively, which were primarily funded through cash from operations.
Deductions also included reversals of excess vintage reserves of $17 million,
$109 million and $33 million in 2003, 2002 and 2001, respectively. Additionally,
in 2003, 2002 and 2001, there were reserve transfers of $38 million, $9 million
and $13 million, respectively, out of the restructuring liability to long-term
liability accounts primarily as a result of exiting managers deferring severance
payments and accelerated vesting of equity awards (mostly related to
executives). Substantially all of the employee headcount reductions associated
with the 2002 and 2003 business restructuring plans have occurred as of December
31, 2003.

In 2002, net restructuring and other charges were $1,437 million, which
included a $1,029 million charge for the impairment of the net assets of our
consolidated subsidiary, AT&T Latin America, a $204 million impairment charge
related to certain Digital Subscriber Line (DSL) assets and net business
restructuring charges of $204 million.

In December 2002, the AT&T Board of Directors approved a plan for AT&T to
sell its approximate 95% voting stake in AT&T Latin America in its current
condition. On December 31, 2002, we signed a non-binding term sheet for the sale
of our shares within one year for a nominal amount. As a result of this action,
we classified AT&T Latin America as an asset held for sale at fair market value
in accordance with SFAS No. 144, and accordingly, recorded a $1,029 million
asset impairment charge to write down AT&T Latin America's assets. Our
investment in AT&T Latin America was not recorded as a discontinued operation as
we did not eliminate the cash flows generated from providing telecommunications
services in the respective countries of Latin America. This charge was recorded
within our AT&T Business Services segment.

An impairment charge of $204 million was recorded relating to certain DSL
assets (including internal-use software, licenses, and property, plant and
equipment) that would not be utilized by AT&T as a result of changes to our "DSL
build" strategy. Instead of building DSL capabilities in all geographic areas
initially targeted, we signed an agreement with Covad Communications to offer
DSL services over its network. As a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

result, the assets in these areas were impaired. This charge was recorded within
our AT&T Consumer Services segment.

Net business restructuring charges of $204 million recorded in 2002
consisted of new exit plans totaling $377 million and reversals of liabilities
associated with prior years' exit plans of $173 million. The new plans primarily
consisted of $334 million for employee separation costs ($28 million of which
was recorded as a pension liability associated with management employees to be
separated in 2002 which was funded from the pension trust) and $39 million of
facility closing reserves. These exit plans separated slightly more than 4,800
employees, approximately one-half of whom were management employees and one-half
were non-management employees. The majority of these employee separations were
involuntary.

The $173 million reversal primarily consisted of $124 million of employee
separation costs (approximately $48 million of which was reversed from the
pension liability) and $26 million related to prior plan facility closings that
were deemed to be no longer necessary. The reversals were primarily due to
management's determination that the restructuring plan established in the fourth
quarter of 2001 for certain areas of AT&T Business Services, including network
services, needed to be modified given industry conditions at that time, as well
as the redeployment of certain employees to different functions.

During 2001, net restructuring and other charges of $1,036 million were
primarily comprised of $862 million for employee separations, of which $388
million related to benefits to be paid from pension assets, as well as pension
and postretirement curtailment losses, and $166 million for facility closings.
These charges were slightly offset by the reversal of $33 million related to
business restructuring plans announced in the fourth quarter of 1999 and the
first quarter of 2000 (of which $15 million related to employee separations and
$18 million related to contract terminations).

The charge covered separation costs for approximately 10,000 employees,
approximately one-half of whom were management employees and one-half were
non-management employees. More than 9,000 employee separations related to
involuntary terminations and the remaining 1,000 were voluntary.

7. INVESTMENTS

EQUITY METHOD INVESTMENTS

We have investments in various companies and partnerships that are
accounted for under the equity method of accounting and included within other
assets. Under the equity method, investments are stated at initial cost, and are
adjusted for subsequent contributions and our share of earnings, losses and
distributions as well as declines in value that are "other than temporary." At
December 31, 2003 and 2002, we had equity investments included within other
assets of $128 million and $135 million, respectively. Distributions from equity
investments totaled $14 million, $5 million and $25 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized combined financial information for investments accounted for
under the equity method that were significant to AT&T's financial results in
2001 is as follows:

- ---------------

(1) The remaining interest in AT&T Canada was disposed of in February 2003;
therefore, financial information for 2003 is not applicable.

(2) The Concert joint venture was unwound in April 2002; therefore, financial
information for 2002 and 2003 is not applicable.

(3) In 2002 and 2003, equity investments were not significant to our financial
results either individually or on a combined basis.

Concert

On April 1, 2002, Concert, our 50% owned joint venture with British
Telecommunications plc (BT), was officially unwound and the venture's assets and
customer accounts were distributed back to the parent companies, as agreed to in
2001. Under the partnership termination agreement, each of the partners
generally reclaimed the customer contracts and assets that were initially
contributed to the joint venture, including international transport facilities
and gateway assets. In addition, AT&T assumed certain other assets that BT
originally contributed to the joint venture.

In 2001, the agreement to dissolve the Concert venture impacted our intent
and ability to hold our investment in Concert; therefore, we recorded a $1.8
billion after-tax impairment charge ($2.9 billion pretax) included in net
(losses) related to other equity investments. The charge related to the
difference between the fair market value of the net assets AT&T was to receive
in the transaction and the carrying value of AT&T's investment in Concert.
Certain items reserved for in 2001 were favorably settled, resulting in
after-tax reversals of $59 million and $60 million in 2003 and 2002,
respectively, which were recorded within net (losses) related to other equity
investments.

AT&T Canada

AT&T had an approximate 31% ownership interest in AT&T Canada. Pursuant to
a 1999 merger agreement, AT&T had a commitment to purchase, or arrange for
another entity to purchase, the publicly owned shares of AT&T Canada for the
greater of a contractual floor price or the fair market value (the Back-end
Price). The floor price accreted 4% each quarter, commencing on June 30, 2000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2002 and 2001, AT&T recorded charges reflecting the estimated loss on
this commitment. The charges represented the difference between the fair value
of the underlying publicly owned shares of AT&T Canada and the price AT&T had
committed to pay for them, including the 4% accretion of the floor price.
After-tax charges of $0.3 billion ($0.5 billion pretax) and $1.8 billion ($3.0
billion pretax) were recorded within net (losses) related to other equity
investments for 2002 and 2001, respectively.

During 2002, AT&T arranged for third parties (Tricap Investment Corporation
and CIBC Capital Partners) to purchase the remaining 69% equity in AT&T Canada.
As part of this agreement, AT&T agreed to fund the purchase price on behalf of
the third parties. Tricap and CIBC Partners made a nominal payment to AT&T upon
completion of the purchase in October 2002. Although AT&T held an equity
interest in AT&T Canada throughout 2002, we did not record equity earnings or
losses since our investment balance was written down to zero largely through
losses generated by AT&T Canada. In February 2003, we disposed of all of our
AT&T Canada shares.

Alestra S. de R.L. de C.V.

We own a 49% economic interest in Alestra S. de R.L. de C.V. (Alestra), a
telecommunications company in Mexico. During 2001, we stopped recording equity
losses in Alestra due to the fact that we had no commitment to fund Alestra or
to provide any other financial support. During 2002, Alestra experienced
financial difficulties and sought to restructure its existing indebtedness to
reduce the outstanding aggregate amount of the notes, to lower interest payments
and extend the maturity on the notes. In 2003, Alestra completed the debt
restructuring and AT&T and the other shareholders agreed to provide additional
funding to Alestra. As a result, we funded $49 million to Alestra. In accordance
with Emerging Issues Task Force issue 02-18, "Accounting for Subsequent
Investments in an Investee after Suspension of Equity Method Loss Recognition,"
we recognized suspended losses in Alestra of $29 million during 2003.

Impairments -- Equity Investments

Declines in value of equity method investments judged to be other than
temporary are recorded in net (losses) related to other equity investments. In
2002 and 2001, we recorded impairment charges on equity method investments of
$0.3 billion after taxes ($0.5 billion pretax), and $4.3 billion after taxes
($7.0 billion pretax), respectively. There were no material impairment charges
recorded on equity method investments in 2003.

The 2002 charges primarily related to AT&T Canada and the 2001 charges
primarily related to AT&T Canada and Concert, as discussed above. In addition,
in 2001, we recorded an impairment charge on our investment in Net2Phone, Inc.
(Net2Phone) of $0.7 billion after taxes ($1.1 billion pretax). This charge
resulted from the deterioration of market valuations of Internet-related
companies. In October 2001, we contributed our investment in Net2Phone to NTOP
Holdings, LLC (NTOP), and received a 10% ownership interest in NTOP, which was
subsequently sold in December 2002.

COST METHOD INVESTMENTS

At December 31, 2003 and 2002, we had cost method investments included in
other assets of $57 million and $581 million, respectively. Approximately $0.5
billion of these investments at December 31, 2002, were indexed to certain
long-term debt instruments, which were subsequently redeemed in February 2003
(see note 8). Under the cost method, earnings are recognized only to the extent
distributions are received from the accumulated earnings of the investee.
Distributions received in excess of accumulated earnings are recognized as a
reduction of our investment balance. Cost investments are classified as
available-for-sale and are reported at fair value, with unrealized gains and
losses, net of taxes, recorded as a separate component of other comprehensive
income (loss) in shareowners' equity. As of December 31, 2003, there were no
unrealized holding losses recorded.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Impairments -- Cost Method Investments

Declines in value of available-for-sale securities, judged to be
other-than-temporary, are recorded in other income (expense), net. During 2002
and 2001, we believed that we would not recover our cost basis on certain
investments in the foreseeable future given the significant decline in stock
prices, the length of time these investments had been below market, and industry
specific issues. Accordingly, we believed the declines in value were
other-than-temporary and, as a result, recorded investment impairment charges on
such securities of $0.1 billion after taxes ($0.1 billion pretax) and $0.3
billion after taxes ($0.5 billion pretax) for 2002 and 2001, respectively. The
2002 and 2001 impairments primarily consisted of charges related to Time Warner
Telecom, which was the result of significant changes in the general business
climate, as evidenced by the severe downward movement in the U.S. stock market,
including the decline in the value of publicly-traded industry stocks. Our
investment in Time Warner Telecom was subsequently sold in 2003. In addition,
during 2002, we recorded a pretax impairment charge of $0.6 billion related to
our holdings in AT&T Wireless, which was monetized by debt indexed to the value
of the AT&T Wireless shares (see note 8). The debt contained an embedded
derivative that was designated as a cash flow hedge. At the time, we recognized
the other-than-temporary decline in the value of AT&T Wireless as an expense,
and, as permitted by SFAS No. 133, we also recognized, in earnings, the
previously unrecognized gain on the embedded derivative of $0.6 billion pretax,
resulting in no net income impact. There were no material impairment charges
recorded on cost method investments in 2003.

AT&T Wireless Group

On July 9, 2001, AT&T completed the split-off of AT&T Wireless (see note
2). At that time, AT&T retained an approximate 7.3% interest in AT&T Wireless
common stock. In 2001, we recorded a $0.5 billion tax-free gain associated with
the disposal of a portion of this ownership interest in a debt-for-equity
exchange in other income (expense), net.

In February 2003, AT&T redeemed exchangeable notes that were indexed to
AT&T Wireless common stock. The notes were settled with 78.6 million shares of
AT&T Wireless common stock and $152 million in cash (see note 8). Also in
February, AT&T sold its remaining investment in AT&T Wireless (approximately
12.2 million shares) for $72 million, resulting in a gain of $22 million
recorded in other income (expense), net.

Japan Telecom Co. Ltd.

On April 27, 2001, AT&T completed the sale of its 10% stake in Japan
Telecom Co. Ltd. to Vodafone for $1.35 billion in cash. The proceeds from the
transaction were split evenly between AT&T and AT&T Wireless Group since AT&T
Wireless Group held approximately one-half of AT&T's investment. The transaction
resulted in a pretax gain of approximately $0.5 billion recorded in other income
(expense), net and a pretax gain of approximately $0.5 billion recorded in net
(loss) from discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. DEBT OBLIGATIONS

DEBT MATURING WITHIN ONE YEAR

- ---------------

(1) Excludes currently maturing long-term debt.

SECURITIZATIONS

During 2003, we renewed our AT&T Consumer Services customer accounts
receivable securitization facility and entered into a new AT&T Business Services
customer accounts receivable securitization facility, both of which extend
through July 2004. Under the program, accounts receivable are sold on a
discounted, revolving basis, to special-purpose, wholly-owned and fully
consolidated subsidiaries of AT&T, which assign interests in such receivables to
unrelated third-party financing entities. Together, the programs provided $1.65
billion of available financing at December 31, 2003, limited by the eligible
receivables balance, which varies from month to month. In March 2004, AT&T
reduced the combined facility size to $1.45 billion, limited by the eligible
receivables balance. The facilities require AT&T to meet a debt-to-EBITDA ratio
(as defined in the agreements) not exceeding 2.25 to 1. At December 31, 2003, we
were in compliance with this covenant. At December 31, 2003, the available
financing was collateralized by $3.0 billion of accounts receivable.
Approximately $150 million was outstanding at December 31, 2003 and 2002, and
was included in short-term notes in the table above.

CREDIT FACILITY

At December 31, 2003, we had a $2.0 billion syndicated 364-day credit
facility available to us that was entered into October 8, 2003. The credit
facility contains an option to extend the term of the agreement for an
additional 364-day period beyond October 7, 2004. Up to $300 million of the
facility can be utilized for letters of credit, which reduces the amount
available. At December 31, 2003, approximately $118 million of letters of credit
were outstanding under the facility. Additionally, the credit facility contains
a financial covenant that requires AT&T to meet a debt-to-EBITDA ratio (as
defined in the credit agreement) not exceeding 2.25 to 1 and an EBITDA-to-net
interest expense ratio (as defined in the credit agreement) of at least 3.50 to
1. for four consecutive quarters ending on the last day of each fiscal quarter.
At December 31, 2003, we were in compliance with these covenants.

Pursuant to the definitions in the credit facility and securitization
facilities, business restructuring and asset impairment charges have no impact
on the EBITDA financial covenants.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LONG-TERM DEBT

- ---------------

(1) Debt amounts are included within the range of interest rates that are
applied at each respective balance sheet date. See below for a discussion of
interest rate changes that occurred during 2003.

(2) The actual interest paid on our debt obligations may have differed from the
stated amount due to our entering into interest rate swap contracts to
manage our exposure to interest rate risk and our strategy to reduce finance
costs (see note 9).

The following table shows maturities at December 31, 2003, of the $13.5
billion in total long-term obligations:

On January 31, 2003, AT&T completed the early retirement of $1,152 million
and $2,590 million long-term notes, with interest rates of 6.375% and 6.50%, due
in March 2004 and March 2013, respectively. The notes were repurchased with cash
and resulted in a loss of $178 million recorded in other income (expense), net.

On September 15, 2003, AT&T completed the early retirement of $322 million
and $184 million long-term notes, both with interest rates of 8.125%, due in
January 2022 and July 2024, respectively. The notes were repurchased with cash
and resulted in a loss of $23 million recorded in other income (expense), net.

On October 22, 2003, AT&T completed the early retirement of three long-term
notes totaling approximately $1.1 billion. The first note of $236 million, had
an interest rate of 8.625%, and was due in December 2031. The other two notes,
with $410 million and $439 million of principal amounts outstanding, bore
interest rates of 5.625% and 6.375%, respectively, and were each due in March
2004. The notes were repurchased with cash and resulted in a loss of $32 million
recorded in other income (expense), net.

Also in 2003, we exercised our purchase option on buildings we had leased,
which were consolidated in July along with debt of approximately $477 million,
as a result of our adoption of FIN No. 46 (see note 3). A $28 million loss on
the early extinguishment of debt was recorded in other income (expense), net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of a long-term credit rating downgrade by Standard & Poor's in
July 2003, the interest rate on approximately $10 billion in notional amount of
debt, $1.3 billion of which matured in November 2003, increased by 25 basis
points.

The holders of certain private debt with an outstanding balance of $1.0
billion at December 31, 2003, have an annual put right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the debt holders
agreeing to not exercise their put right, in 2004, AT&T renewed a
cash-collateralized letter of credit, totaling $0.5 billion now expiring in
March 2005. The $0.5 billion is considered restricted cash and is included in
other assets at December 31, 2003. The debt holders could accelerate repayment
of the debt based on certain events such as the occurrence of unfavorable local
law or regulation changes in its country of operation.

In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. Also, we offered to
repurchase for cash up to E 1 billion of our outstanding E 2 billion 6.0% Notes
due November 2006, which now carry an interest rate of 6.75%. This repurchase is
expected to close by the end of March 2004.

EXCHANGEABLE NOTES

At December 31, 2002, we had long-term debt (exchangeable notes) with a
carrying value of $519 million that was indexed to 90.8 million shares of AT&T
Wireless common stock and, at AT&T's option, was mandatorily redeemable with a
number of shares of AT&T Wireless common stock that was equal to the underlying
shares multiplied by an exchange ratio, or its cash equivalent. The notes were
accounted for as indexed debt instruments, because the carrying value of the
debt was dependent upon the fair market value of the underlying securities. In
addition, the notes contained embedded derivatives, which were designated as
cash flow hedges that required separate accounting. The options hedged the
market risk of a decline in value of AT&T Wireless securities. These designated
options were carried at fair value with changes in fair value recorded, net of
income taxes, within accumulated other comprehensive income (loss), as a
component of shareowners' equity.

In February 2003, AT&T redeemed these exchangeable notes with 78.6 million
shares of AT&T Wireless common stock and $152 million in cash. The settlement
resulted in a pretax gain of approximately $176 million recorded in other income
(expense), net. Also in February 2003, the 12.2 million remaining AT&T Wireless
shares were subsequently sold (see note 7).

9. FINANCIAL INSTRUMENTS

In the normal course of business, we use various financial instruments,
including derivative financial instruments, to manage our market risk from
changes in interest rates, foreign exchange rates and equity prices associated
with previously affiliated companies, as well as to manage our risk resulting
from fluctuations in prices of securities. We do not use financial instruments
for trading or speculative purposes. Our financial instruments include letters
of credit, guarantees of debt and certain obligations of former affiliates,
interest rate swap agreements, foreign currency exchange contracts, option
contracts, equity contracts and warrants. AT&T is generally not required to post
collateral for these types of instruments, except for certain letters of credit.
However, as the requirements for collateral are generally dependent upon debt
ratings and market conditions, AT&T may be required to post collateral for
interest rate and equity swaps, as well as letters of credit in the future.

By their nature, all such instruments involve exposure to credit risk and
market risk. Credit risk is the risk of nonperformance by counter-parties under
the terms of the contract. We control our exposure to credit risk

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

through credit approvals, credit limits and monitoring procedures. Our maximum
potential loss may exceed the amount recognized in our balance sheet. However,
at December 31, 2003 and 2002, in management's opinion, there was no significant
risk of loss in the event of nonperformance of the counter-parties to these
financial instruments. Market risk is the risk that the value of the instrument
may be adversely affected by changes in interest rates, currency exchange rates,
or equity prices. We continually manage this risk through monitoring procedures,
which limit the type and amount of exposure to these risks. Other than the
guarantee issued in connection with the split-off of AT&T Wireless, we do not
have any significant exposure to any individual customer or counter-party, nor
do we have any major concentration of credit risk related to any financial
instruments.

LETTERS OF CREDIT

Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions.
Management has determined that our letters of credit do not create additional
risk to AT&T.

The notional amounts outstanding at December 31, 2003 and 2002, were $1.1
billion and $0.9 billion, respectively. The letters of credit in effect at
December 31, 2003, were collateralized by restricted cash of $499 million, which
was recorded within other assets. The letters of credit in effect as of December
31, 2002 were collateralized by restricted cash of $496 million, of which $442
million was recorded in other assets and $54 million was recorded in other
current assets. The fair values of the letters of credit, based on the fees paid
to obtain the obligations, were immaterial at December 31, 2003 and 2002.

GUARANTEES

In connection with the separation of certain subsidiaries, we issued
guarantees for certain debt and other obligations of our former subsidiaries
NCR, AT&T Wireless and AT&T Broadband.

Total notional amounts of guaranteed debt at December 31, 2003 and 2002,
were $6 million and $506 million, respectively. Prior to the spin-off of AT&T
Broadband, we had guaranteed certain debt of AT&T Broadband that matured in
2038, which remained outstanding after the spin-off of AT&T Broadband. In the
fourth quarter of 2003, Comcast called this debt, which relieved AT&T of a $500
million commitment. The remaining guarantees for debt, which relate to NCR, have
expiration dates ranging from 2004 to 2020. Should the financial condition of
NCR deteriorate to the point at which it is unable to meet its obligations,
third party creditors could look to us for payment. We currently hold no
collateral for this guarantee, and have not recorded a corresponding obligation.
At December 31, 2003 and 2002, there were no quoted market prices for similar
agreements.

AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT
DoCoMo. The amounts of the guarantee at December 31, 2003 and 2002, were $4.4
billion and $4.1 billion, respectively. On January 21, 2001, NTT DoCoMo invested
approximately $9.8 billion for shares of AT&T preferred stock that were
converted into AT&T Wireless common stock in connection with the split-off of
AT&T Wireless. Of the initial investment, AT&T retained approximately $3.6
billion, with the remainder of the proceeds allocated to AT&T Wireless. In
connection with that investment, AT&T and AT&T Wireless agreed that, under
certain circumstances, including if AT&T Wireless fails to meet specific
technological milestones by June 30, 2004, NTT DoCoMo would have the right to
require AT&T Wireless to repurchase its AT&T Wireless common stock for $9.8
billion, plus interest. In the event AT&T Wireless is unable to satisfy the
entire obligation, AT&T is secondarily liable for up to $3.65 billion, plus
accrued interest. On December 26, 2002, AT&T Wireless and NTT DoCoMo entered
into an amendment to the original agreement, which, among other things, extended
the deadline for compliance with the technological milestones to December 31,
2004. AT&T's guarantee expires on June 30, 2004, in accordance with the terms of
the original agreement. We

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

currently hold no collateral for this guarantee, and have not recorded a
corresponding obligation. At December 31, 2003 and 2002, there were no quoted
market prices for similar agreements.

The total notional amount of other guaranteed obligations at December 31,
2003 and 2002 was $224 million and $458 million, respectively. Prior to the
spin-off of AT&T Broadband, we guaranteed various obligations of AT&T Broadband.
In connection with the spin-off of AT&T Broadband, we continue to provide
guarantees of these obligations, including operating leases for real estate,
surety bonds, and equity hedges. These guarantees have expiration dates ranging
from 2004 through 2007. Comcast has provided full indemnification for these
guarantees as of December 31, 2003. Should the financial condition of Comcast
deteriorate to the point at which they are unable to meet their obligations,
third party creditors could look to us for payment. We currently hold no
collateral for these guarantees, and have not recorded corresponding
obligations. At December 31, 2003, there were no quoted market prices for
similar agreements.

INTEREST RATE SWAP AGREEMENTS

We enter into interest rate swaps to manage our exposure to changes in
interest rates. We enter into swap agreements to manage the fixed/floating mix
of our debt portfolio in order to reduce aggregate risk of interest rate
movements. Interest rate swaps allow us to raise funds at floating rates and
effectively swap them into fixed rates that are generally lower than those
available to us if fixed rate borrowings were made directly, or to swap
fixed-rate borrowings to floating rates when interest rates are expected to stay
low. These agreements involve the exchange of floating-rate for fixed-rate
payments or the exchange of fixed-rate for floating-rate payments without the
exchange of the underlying notional amount. Floating-rate payments and receipts
are primarily tied to the LIBOR (London Inter-Bank Offered Rate). In 2003, we
entered into $1.0 billion notional amount of fixed-to-floating interest rate
swaps, which we designated as fair value hedges in accordance with SFAS No. 133,
as amended. The floating-rate to fixed-rate swaps were designated as cash flow
hedges as of December 31, 2003. There was no ineffectiveness recognized in
earnings for our fair value or cash flow hedges during 2003 and 2002.

The following table indicates the types of swaps in use at December 31,
2003 and 2002, the respective notional amounts and their weighted-average
interest rates. Average floating rates are those in effect at the reporting
date, and may change significantly over the lives of the contracts.

In connection with debt redeemed in the first quarter of 2004 (see note 8),
we unwound $250 million notional amount of fixed-to-floating interest rate
swaps.

In addition, we have combined interest rate foreign currency swap
agreements for foreign-currency-denominated debt, which hedge our risk to both
interest rate and currency movements, $1.8 billion of which are designated as
cash flow hedges for accounting purposes in 2003 and 2002. There was no
ineffectiveness recognized in earnings for these hedges during 2003 and 2002. At
December 31, 2003 and 2002, the notional amounts related to these contracts were
$2.5 billion and $3.8 billion, respectively. The decrease in the notional
amounts primarily related to the $1.3 billion Euro bonds contract, which matured
in the fourth quarter of 2003.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the combined interest rate swap agreements, as of
December 31, 2003, we had received $232 million of cash collateral (included in
cash).

The table below summarizes the fair and carrying values of the agreements.
These swaps are valued using current market quotes, which were obtained from
dealers.

FOREIGN EXCHANGE

We enter into foreign currency forward contracts to manage our exposure to
changes in currency exchange rates related to foreign-currency-denominated
transactions. Although we do not designate most of our foreign exchange
contracts as accounting hedges, we have certain contracts that are designated as
foreign currency cash flow hedges in accordance with SFAS No. 133. At December
31, 2003, our foreign exchange contracts consisted principally of Euros, British
pound sterling, Danish krone and Swiss francs. At December 31, 2002, our foreign
exchange contracts consisted principally of Euros, Japanese yen, and Swiss
francs. In addition, we are subject to foreign exchange risk related to other
foreign-currency-denominated transactions. The notional amounts under contract
at December 31, 2003 and 2002, were $1.1 billion and $742 million, respectively,
$45 million and $44 million of which were designated as cash flow hedges,
respectively. There was no ineffectiveness recognized in earnings for these
hedges during 2003 and 2002. The following table summarizes the carrying and
fair values of the foreign exchange contracts at December 31, 2003 and 2002.
These foreign exchange contracts are valued using current market quotes which
were obtained from independent sources.

EQUITY OPTION AND EQUITY SWAP CONTRACTS

We enter into equity option and equity swap contracts, which are
undesignated, to manage our exposure to changes in equity prices associated with
various equity awards of previously affiliated companies (see note 12). The
notional amounts outstanding on these contracts at December 31, 2003 and 2002
were $91 million and $112 million, respectively. The following table summarizes
the carrying and fair values of these instruments at December 31, 2003 and 2002.
Fair values are based on market quotes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTS

We may obtain warrants to purchase equity securities in private and public
companies as a result of certain transactions. Private warrants and public
warrants that provide for net share settlement (i.e. allow for cashless
exercise) are considered to be derivative instruments and recognized on our
balance sheet at fair value (in accordance with SFAS No. 133, as amended).
Warrants are not eligible to be designated as hedging instruments because there
is no underlying exposure. Instead, these are effectively investments in private
and public companies. The carrying and fair value of these warrants was not
material at December 31, 2003 and 2002.

DEBT SECURITIES

The carrying value of debt with an original maturity of less than one year
approximates market value. The table below summarizes the carrying and fair
values of long-term debt (including currently maturing long-term debt),
excluding capital leases, at December 31, 2003 and 2002. The fair values of
long-term debt were obtained based on quotes or rates available to us for debt
with similar terms and maturities.

DERIVATIVE IMPACTS

The following table summarizes the activity in accumulated other
comprehensive income (loss) in shareowners' equity related to derivatives
designated as cash flow hedges during the periods January 1, 2002 through
December 31, 2003.

Included within the balance at December 31, 2002, were unrealized gains of
$131 million pretax ($81 million after taxes) on embedded derivatives related to
exchangeable notes that were indexed to AT&T Wireless common stock, which were
settled in February 2003.

In connection with the planned redemption of a portion of our Euro Bonds
maturing in 2006, and the unwind of related cash flow hedges, we expect to
recognize, in the first quarter of 2004, unrealized gains currently recorded in
accumulated other comprehensive income (loss) (see note 18). The impact of this
transaction will vary based on the market and other conditions at the time of
redemption and cannot be currently estimated.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. EQUITY TRANSACTIONS

In June 2002, AT&T completed a public equity offering of 46 million shares
of AT&T common stock for net proceeds of $2.5 billion. We utilized the proceeds
from the offering to satisfy a portion of our obligation to AT&T Canada common
shareholders (see note 7).

Pursuant to the AT&T Broadband and Comcast merger agreement (see note 2),
AT&T was required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common stock.
Each share of TCI Pacific preferred stock was exchangeable, at the option of the
holder, for 1.673 shares of AT&T common stock. During 2002, all outstanding
shares (approximately 6.2 million) of TCI Pacific preferred stock were either
exchanged or redeemed for approximately 10.4 million shares of AT&T common
stock. No gain or loss was recorded on the exchange/redemption of the TCI
Pacific preferred stock.

During 2002, AT&T issued 2.9 million shares of AT&T common stock to certain
current and former senior managers in settlement of their deferred compensation
accounts. Pursuant to AT&T's deferred compensation plan, senior managers may
defer short- and long-term incentive compensation awards. The issuance of these
shares resulted in an increase to total shareowners' equity of $196 million.

On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,512 shares of a new class of AT&T preferred stock with a par value of $1 per
share. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group
(see note 2), these preferred shares were converted into AT&T Wireless common
stock. During 2001, we recorded dividend requirements on this preferred stock of
$652 million. The preferred stock dividend represented interest in connection
with the NTT DoCoMo preferred stock, as well as accretion of the beneficial
conversion feature associated with this preferred stock. The beneficial
conversion feature was recorded upon the issuance of the preferred stock and
represented the excess of the fair value of the preferred shares issued over the
proceeds received.

11. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS

We sponsor noncontributory defined benefit pension plans covering the
majority of our U.S. employees. Pension benefits for management employees are
principally based on career-average pay. Pension benefits for occupational
employees are not directly related to pay. Pension trust contributions are made
to trust funds held for the sole benefit of plan participants. Our benefit plans
for current and certain future retirees include health-care benefits, life
insurance coverage and telephone concessions. We use a December 31 measurement
date for the majority of our plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

U.S. PLANS

The following table shows the components of net periodic benefit (credit)
costs for continuing operations:

- ---------------

(*) Primarily included in net restructuring and other charges.

In connection with our restructuring plan implemented during 2003, we
recorded a $9 million pension curtailment loss associated with our management
realignment efforts, as well as a $14 million charge related to expanded
eligibility for postretirement benefits for certain employees that exited under
the plan.

In connection with our restructuring plan announced in the fourth quarter
of 2001, we recorded a $188 million charge related to management employee
separation benefits that were funded by assets of the AT&T Management Pension
Plan, as well as a $28 million charge related to expanded eligibility for
postretirement benefits for certain employees that exited under the plan. We
also recorded pension and postretirement benefit curtailment charges of $172
million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of the funded
status:

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. We are impacted by
the Act since we sponsor a postretirement health care plan that provides
prescription drug benefits. We have elected to defer recognition of the Act in
accordance with Financial Accounting Standards Board Staff Position No. FAS
106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." As a result, any
measures of the accumulated postretirement benefit obligation or net periodic
postretirement benefit cost do not reflect the effects of the Act on the plan.
Specific

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

authoritative guidance on accounting for the federal subsidy is pending and that
guidance, when issued, could require us to change previously reported
information.

The weighted-average asset allocation of the pension and postretirement
plans by asset category and target range are as follows:

- ---------------

(1) At December 31, 2003, and 2002, our pension plan assets included $7 million
and $13 million of AT&T common stock, respectively.

(2) Other postretirement plan assets primarily consisted of cash and cash
equivalents at December 31, 2003 and 2002. The target range is determined
based on anticipated cash requirements to partially fund benefit payments.
The year-end cash level was higher than the target range due to year-end
cash contributions made to the postretirement welfare benefit plan.
Prospectively, company contributions to the trust are expected to be made
periodically throughout the year.

The assets of the pension and postretirement welfare benefit plans are
managed with the objective of maximizing returns subject to prudent risk taking.
We complete an asset-liability study at least once every two years (or more
frequently, if necessary) for the pension plans and on an as necessary basis for
postretirement welfare benefit plans, to ensure that the optimal asset
allocation is maintained in order to meet future benefit obligations. We use
derivative financial instruments including futures contracts, forward contracts,
and options to enhance returns on the pension plan asset investments and to
limit exposure to market fluctuations. The use of options is permitted for debt
investments but is prohibited for public equity investments. It is not our
policy to use these derivative financial instruments for speculative purposes.

The following table provides the amounts recorded in our consolidated
balance sheets:

Included in other comprehensive income was a pretax (decrease) increase in
the minimum pension liability of $(285) million, $289 million, and $(6) million,
for the years ended 2003, 2002 and 2001, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The accumulated benefit obligation for all defined benefit pension plans
was $15.5 billion and $14.7 billion at December 31, 2003, and 2002,
respectively. The following table provides information for pension plans with an
accumulated benefit obligation in excess of plan assets:

The following table reflects the weighted-average assumptions used to
determine the benefit obligations and net periodic benefit cost for the pension
and postretirement plans:

The assumptions in the above table were reassessed as of December 31, 2003.
The discount rate was reduced to 6% based on current yields on high quality
corporate fixed-income investments with maturities corresponding to the expected
duration of the benefit obligations. Additionally, the rate of projected
compensation increase was reduced to 4% reflecting expected inflation levels,
our actual recent experience and future outlook. We conducted an expected
long-term rate of return study on pension and postretirement benefit plan
assets. This study consisted of forward-looking projections for a risk-free rate
of return, inflation rate, and risk premiums for particular asset classes.
Historical returns were not used. The results of this study were applied to the
target asset allocation in accordance with our plan investment strategies. The
expected long-term rate of return on plan assets was determined based on the
weighted-average of projected returns on each asset class. As a result, the
expected rate of return on plan assets will remain unchanged for 2004.

The following table provides the assumed health care cost trend rates for
postretirement benefit plans:

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point increase or
decrease in the assumed health care cost trend rates would have the following
effects:

We expect to contribute approximately $30 million to the nonqualified
pension plan in 2004. No contribution is expected for the qualified pension
plans in 2004 or 2005. We also expect to contribute approximately $0.6 billion
to the postretirement benefit plans in 2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

We also sponsor savings plans for the majority of our U.S. employees. The
plans allow employees to contribute a portion of their pretax and/or after-tax
income in accordance with specified guidelines. We match a percentage of the
employee contributions up to certain limits. Contributions to such U.S. saving
plans relating to continuing operations amounted to $136 million in 2003, $135
million in 2002, and $131 million in 2001.

NON-U.S. PLANS

Certain non-U.S. operations have varying types of retirement programs
providing benefits for substantially all of their employees. The projected
benefit obligations of the defined benefit pension plans was $634 million and
$523 million at December 31, 2003 and 2002, respectively. The fair value of plan
assets was $442 million and $324 million as of December 31, 2003 and 2002,
respectively. The benefit obligations were determined using a weighted average
discount rate of 5.40% at December 31, 2003 and December 31, 2002, and a
weighted average rate of compensation increase of 3.90% and 3.95% as of December
31, 2003 and 2002, respectively.

Certain of these defined benefit plans had accumulated benefit obligations
of $512 million at December 31, 2003, which were in excess of the fair value of
plan assets of $386 million, resulting in total unfunded accumulated benefit
obligations of $126 million as of December 31, 2003. As a result of the
under-funded status of these plans, we recorded an additional minimum pension
liability of $103 million as a charge to other comprehensive income (loss).

12. STOCK-BASED COMPENSATION PLANS

Under the 1997 Long-term Incentive Program (Program), which was effective
June 1, 1997, and amended on May 19, 1999, and March 14, 2000, we grant stock
options, performance shares, restricted stock and other awards in AT&T common
stock, and also granted stock options on AT&T Wireless Group tracking stock
prior to the split-off of AT&T Wireless. The Program expires on May 31, 2004.

Under the initial terms of the Program, there were 30 million shares of
AT&T common stock available for grant with a maximum of 4.5 million common
shares that could be used for awards other than stock options. Subsequent to the
1999 modification, beginning with January 1, 2000, the remaining shares
available for grant at December 31 of the prior year, plus 1.75% of the shares
of AT&T common stock outstanding on January 1 of each year, become available for
grant. Under the amended terms, a maximum of 7.5 million shares may be used for
awards other than stock options. As a result of the AT&T Wireless split-off in
2001, the number of shares available for grant increased by 3.5 million, which
includes 0.6 million for awards other than stock options. In 2002, AT&T
restructured stock options and other stock-based awards in conjunction with the
AT&T Broadband spin-off. The number of shares available for grant increased by
44.5 million, which includes 0.8 million for awards other than stock options.
The exercise price of any stock option is equal to the stock price when the
option is granted. Generally, the options vest over three or four years and are
exercisable up to 10 years from the date of grant.

Under the Program, performance share units (equivalent to one common share)
are awarded to key employees in the form of either common stock or cash at the
end of a three-year period, based on certain financial-performance targets.

On April 27, 2000, AT&T created a new class of stock and completed an
offering of AT&T Wireless Group tracking stock. Under the Program, AT&T issued
AT&T Wireless Group stock options to employees. The exercise price of any stock
option was equal to the stock price when the option was granted. When granted,
the options had a two to three and one-half year vesting period, and were
exercisable up to 10 years from the date of grant. On April 27, 2000,
substantially all employees were granted AT&T Wireless Group tracking stock
options.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the July 9, 2001, split-off of AT&T Wireless Group, all
outstanding AT&T Wireless Group tracking stock options and all AT&T common stock
options granted prior to January 1, 2001, were converted in the same manner as
common shares (see note 2). AT&T modified the terms and conditions of all
outstanding stock option grants to allow the AT&T Wireless common stock options
held by AT&T employees to immediately vest and become exercisable for their
remaining contractual term and to also allow the AT&T common stock options held
by AT&T Wireless employees to immediately vest and become exercisable for their
remaining contractual term. In 2001, AT&T recognized $3 million of compensation
expense related to these modifications.

In connection with the spin-off of AT&T Broadband, all outstanding AT&T
stock options held by active AT&T employees were restructured into an adjusted
number of AT&T options. All outstanding AT&T stock options held by active AT&T
Broadband employees were restructured into an adjusted number of AT&T Broadband
options and subsequently replaced with new Comcast stock options, and all AT&T
stock options held by inactive employees at the time of the spin-off were
converted into adjusted AT&T stock options and new Comcast stock options. In
January 2002, AT&T modified the terms and conditions of outstanding AT&T stock
options and other equity awards granted under plans other than the Program and
held by AT&T Broadband employees. This modification provided that upon the
change in control of AT&T Broadband, their stock options and other equity awards
granted prior to December 19, 2001, would be immediately vested and exercisable
through their remaining contractual term. In 2002, $48 million of pretax
compensation expense related to this modification was recognized by AT&T
Broadband and is included within gain on disposition of discontinued operations.

Under the AT&T 1996 Employee Stock Purchase Plan (ESPP), which was
effective July 1, 1996, and amended on May 23, 2001, we are authorized to sell
up to 21 million shares of AT&T common stock to our eligible employees through
June 30, 2006. Under the terms of the ESPP, employees may have up to 10% of
their earnings withheld to purchase AT&T's common stock. The purchase price of
the stock on the date of exercise is 85% of the average high and low sale prices
of shares on the New York Stock Exchange for that day. Under the ESPP, we sold
approximately 1.3 million, 1.3 million and 1.2 million shares to employees in
2003, 2002 and 2001, respectively. Effective May 31, 2003, we suspended employee
purchases of company stock under the ESPP.

Effective January 1, 2003, AT&T began recording compensation expense
pursuant to SFAS No. 123 for all stock options issued subsequent to January 1,
2003. The fair value of all stock options issued subsequent to January 1, 2003
is measured on the grant date using the Black-Scholes option pricing model and
recognized in the income statement over the vesting period (see note 1).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the AT&T common stock option transactions is as follows:

- ---------------

(1) The weighted-average exercise prices for the period prior to the AT&T
Wireless split-off in 2001 have not been adjusted to reflect the impact of
the split-off. The weighted-average exercise prices for the period prior to
the AT&T Broadband spin-off in 2002 and for the year ended December 31,
2001, have not been adjusted to reflect the impact of the spin-off.

(2) 2,090 shares are available for grants other than stock options.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2003:

A summary of the AT&T Wireless Group tracking stock option transactions is
as follows:

In 2003 and 2001, AT&T granted 2.4 million and 0.7 million restricted stock
units, respectively, to key employees. These awards generally vest after three
years. In addition, in 2002, AT&T offered employees the option to cancel certain
outstanding stock options and replace them with restricted stock units.
Approximately 15 million stock options were canceled as a result of this offer,
and 2.5 million restricted stock units were granted, which vest over a
three-year period. The 2.5 million restricted stock units were restructured into
6.5 million units as a result of the spin-off of AT&T Broadband. Those options
that were eligible for cancellation but retained by the employee became variable
awards under APB Opinion No. 25, with

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation expense adjusted for current stock price until the options are
exercised, forfeited, or expired unexercised. The cancellation of stock options
had an immaterial impact on 2003 and 2002 results of operations.

In 2002 and 2001, AT&T granted performance share units to key employees.
These awards are based on the attainment of certain performance measures over a
three-year period. Approximately 0.9 million and 0.5 million units were granted
in 2002 and 2001, respectively.

The weighted-average fair values at date of grant for AT&T common stock
options granted during 2003, 2002 and 2001 were $5.49, $24.49 and $39.50,
respectively, and were estimated using the Black-Scholes option-pricing model.
The 2002 and 2001 weighted-average grant-date fair values exclude the effects of
equity restructuring relating to the spin-off of AT&T Broadband and the
split-off of AT&T Wireless. The weighted-average fair values at date of grant
for AT&T Wireless Group tracking stock options granted during 2001 were $11.58
and were estimated using the Black-Scholes option-pricing model. The following
weighted average assumptions were used for stock options granted during 2003,
2002 and 2001:

13. INCOME TAXES

The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The U.S. and foreign components of income from continuing operations before
income taxes and the (provision) for income taxes are presented in the following
table:

We also recorded current and deferred income tax (provision) benefits that
resulted from earnings (losses) related to other equity investments in the
amounts of $(31) million in 2003, $112 million in 2002 and $2.9 billion in 2001.

Deferred income tax liabilities are taxes we expect to pay in future
periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax basis of certain assets and
liabilities.

100

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income tax liabilities and assets consist of the following:

In 2003, the valuation allowance increased $168 million, primarily
attributable to an increase in net operating and capital loss carryforwards for
state income tax purposes. In 2002, we established a valuation allowance for the
book and tax basis difference relating to our investment in AT&T Latin America.
During February 2004, the subsidiaries of AT&T Latin America were sold to
Telefonos de Mexico S.A. de C.V., or Telmex, and the plan of bankruptcy
liquidation of AT&T Latin America became effective. As a result, we will
reevaluate the need for this valuation allowance and could record an income tax
benefit of approximately $0.3 billion in the first quarter of 2004.

At December 31, 2003, we had net operating and capital loss carryforwards
(tax effected) for federal, state and foreign income tax purposes of $5 million,
$289 million, and $3 million, respectively, expiring through 2023. In addition,
at December 31, 2003, we had state tax credit carryforwards (after federal tax
effects) of $128 million expiring through 2017.

14. COMMITMENTS AND CONTINGENCIES

In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2003. However, we believe
that after final disposition, any monetary liability or financial impact to us
beyond that provided for at December 31, 2003, would not be material to our
annual consolidated financial statements.

101

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

We have been named as a defendant in a consolidated group of purported
securities class action lawsuits filed in the United States District Courts for
the District of New Jersey on behalf of persons who purchased shares of AT&T
common stock from October 25, 1999 through May 1, 2000. These lawsuits allege,
among other things, that during the period referenced above, we made materially
false and misleading statements and omitted to state material facts concerning
our future business prospects. The consolidated complaint seeks unspecified
damages. Similar claims have been asserted by plaintiffs against us in two
derivative actions, which were dismissed by the New Jersey federal court on
January 7, 2004. We believe that the lawsuits are without merit and intend to
defend them vigorously.

We have also been named as a defendant in another consolidated group of
securities class actions filed in the United States District Court for the
Southern District of New York, filed on behalf of investors who purchased shares
in the AT&T Wireless tracking stock initial public offering (IPO) from April 26,
2000 through May 1, 2000. These lawsuits allege that we made materially false
and misleading statements and omitted to state material facts in the IPO
prospectus about AT&T's future business prospectus. The plaintiffs seek
unspecified damages. We believe that the lawsuit is without merit and intend to
defend it vigorously.

Recently, two participants in our Long Term Savings Plan for Management
Employees (the Plan) filed purported class actions in New Jersey federal court
on behalf of all Plan participants who purchased or held shares of AT&T Stock
Fund, AT&T stock, AT&T Wireless Stock Fund or AT&T Wireless stock between
September 30, 1999 and May 1, 2000. The complaint asserts claims similar to
those made in the securities class action lawsuit described above, alleging that
we made materially false and misleading statements and omitted to state material
facts concerning our future business prospectus. As a result of this purported
conduct, we are alleged to have breached our fiduciary duties to the Plan and
the Plan's participants. The plaintiffs seek unspecified damages. We believe
that the lawsuits are without merit and intend to defend them vigorously.

Through a former subsidiary, we owned approximately 23% of the outstanding
common stock and 74% of the voting power of the outstanding common stock of At
Home Corporation (At Home), which filed for bankruptcy protection on September
28, 2001. Until October 1, 2001, AT&T appointed a majority of At Home's
directors and thereafter we appointed none. On November 7, 2002, the trustee for
the bondholders' liquidating trust of At Home (the Bondholders) filed a lawsuit
in California state court asserting claims for breach of fiduciary duty relating
to the conduct of AT&T and its designees on the At Home board of directors in
connection with At Home's declaration of bankruptcy and subsequent efforts to
dispose of some of its businesses or assets, as well as in connection with other
aspects of our relationship with At Home. On November 15, 2002, the Bondholders
filed a lawsuit in California federal court asserting a claim for patent
infringement relating to AT&T's broadband distribution and high-speed Internet
backbone networks and equipment. The Bondholders seek unspecified damages in
these lawsuits. We believe that these lawsuits are without merit and intend to
defend them vigorously.

In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, and the
directors of At Home, Cox and Comcast. The lawsuits claim that the defendants
breached fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the Board of
Directors of At Home was reorganized, and we agreed to give Cox and Comcast
rights to sell their At Home shares to us. These actions have been consolidated
by the court and are subject to a stay. AT&T's liability for any such suits
would be shared equally between AT&T and Comcast. In March 2002 and the summer
of 2003 purported class actions were filed in the United States District Court
for the Southern District of New York against, inter alia, AT&T and certain of
its senior officers alleging violations of the federal securities law in
connection with the disclosures made by At Home in the period from April 17
through August 28, 2001. The 2003 lawsuit adds At Home as a defendant. We
believe that these lawsuits are without merit and intend to defend them
vigorously.

102

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The creditors of At Home recently filed a preference action against AT&T in
the At Home bankruptcy proceeding pending in California federal court. The
complaint alleges that we should be viewed as an insider of At Home. On this
theory, At Home seeks to avoid one year's worth of payments to us as opposed to
the non-insider ninety-day period prior to the filing of the bankruptcy
petition. The plaintiffs seek damages of approximately $89.6 million from AT&T
and Comcast. We believe that this action is without merit and intends to defend
it vigorously.

Two putative class actions have been filed in Delaware state court on
behalf of shareholders of AT&T Latin America (ATTLA). The complaints allege that
AT&T and its designees to the ATTLA board of directors violated their fiduciary
duties to ATTLA as a result of purported changes in our relationship with ATTLA,
including our decision to discontinue funding to ATTLA and an alleged change in
our plan to enter into a tax sharing agreement with ATTLA. The plaintiffs seek
unspecified damages. We believe that these lawsuits are without merit and intend
to defend them vigorously. In March 2004, the Delaware Chancery Court granted
AT&T's motion to dismiss these claims. Plaintiffs may appeal the judgment.

Thirty putative class actions have been filed in various jurisdictions
around the country challenging the manner in which we disclose Federal
Communications Commission (FCC) imposed universal service fund charges to our
customers and how we recoup those charges from our customers. The plaintiffs in
each lawsuit seek unspecified damages. We believe that these lawsuits are
without merit and intend to defend them vigorously.

More than thirty class actions have been brought against us throughout the
country in which the plaintiffs have asserted superior property rights with
respect to railroad right of way corridors on which we have installed fiber
optic cable under agreements with the various railroads. Although we deny any
liability, we have engaged in settlement negotiations concerning the so-called
"active line" claims that have been consolidated and are pending in Indiana
federal court. We have settled claims on a state-by-state basis and obtained
final approval of such claims in Ohio, Connecticut, Wisconsin, Maryland and
Virginia. In addition, in the second quarter of 2004, we anticipate that the
parties will request preliminary approval of similar "active line" settlements
in Deleware, Massachusetts, Michigan, West Virginia and Idaho. We also
anticipate using these settlements as a template for settling "active line"
claims in other states. However, these settlements do not involve "active line"
claims along railroad right of way obtained under federal land grant statutes
nor do they address claims that are based upon the installation of fiber optic
cable in pipeline or other utility right of way.

In connection with the separation of our former subsidiaries, we have
entered into a number of separation and distribution agreements that provide,
among other things, for the allocation and/or sharing of certain costs
associated with potential litigation liabilities. For example, pursuant to these
agreements, AT&T shares in the cost of certain litigation (relating to matters
while affiliated with AT&T) if the settlement exceeds certain thresholds. With
the exception of two matters already reserved for (Sparks, et al. v. AT&T and
Lucent Technologies and NCR's Fox River environmental clean-up matter, see note
2), we have assessed, as of December 31, 2003, that none of the litigation
liabilities allocated to former subsidiaries were probable of incurring costs in
excess of the threshold above which we would be required to share in the costs.
However, in the event these former subsidiaries were unable to meet their
obligations with respect to these liabilities due to financial difficulties, we
could be held responsible for all or a portion of the costs, irrespective of the
sharing agreements.

In October 2003, the FCC found that we violated Section 203 of the
Communications Act of 1934 (Act) for refusing to transfer the customers of one
reseller to the service plans of another reseller. The actions that gave rise to
this finding were the subject of a lawsuit filed in March 1995 in the United
States District Court for the District of New Jersey by Combined Companies, Inc,
Winback & Conserve, One Stop Financial, 800 Discounts and Group Discounts, Inc.
against us. We appealed this decision, as we believe our actions were consistent
with our obligations under the Act. In addition, our liability in this matter is
subject to the plaintiff proving it sustained damages and demonstrating the
amount to which it claims to be entitled. Thus, the extent
103

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of liability cannot be estimated at this time. In the original lawsuit,
plaintiff had sought an injunction requiring us to transfer customers from one
reseller to another. Plaintiff has not filed an amended complaint asserting
damages.

LEASES AND OTHER COMMITMENTS

From time to time, we provide guarantees of debt or other obligations
relating to former subsidiaries. (Guarantees are occasionally provided for
subsidiaries when owned by AT&T or in connection with its separation from AT&T.
See note 9 for a detailed discussion of these guarantees.)

We lease land, buildings and equipment through contracts that expire in
various years through 2051. Our rental expense, net of sublease rental income,
under operating leases was $473 million in 2003, $529 million in 2002 and $552
million in 2001. The total of minimum rentals to be received in the future under
non-cancelable operating subleases as of December 31, 2003, was $278 million. In
addition, we have liabilities recorded on the balance sheet of approximately
$0.2 billion relating to facilities that have been closed, under which we still
have operating lease commitments. These commitments are included in the table
below.

The following table shows our future minimum commitments due under
non-cancelable operating and capital leases at December 31, 2003:

We have contractual obligations to purchase certain goods or services from
various other parties. Such unconditional purchase obligations totaled
approximately $994 million as of December 31, 2003. Cash outflows associated
with these obligations are expected to be approximately $350 million in 2004;
$241 million in total for 2005 and 2006; $109 million in total for 2007 and
2008; and $294 million in total for years thereafter.

Under certain real estate operating leases we could be required to make
payments to the lessors of up to $20 million at the end of the lease term in
2007.

15. SEGMENT REPORTING

AT&T's results are segmented according to the customers we service: AT&T
Business Services and AT&T Consumer Services.

Our existing segments reflect certain managerial changes that were
implemented during 2003. The changes primarily include a redistribution of
property, plant and equipment from the Corporate and Other group to AT&T
Business Services and a transfer of deferred taxes from AT&T Consumer Services
to the Corporate and Other group.

104

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AT&T Business Services provides a variety of communication services to
various sized businesses and government agencies including long distance,
international, toll-free and local voice, including wholesale transport
services, as well as data services and Internet protocol and enhanced (IP&E)
services, which includes the management of network servers and applications.
AT&T Business Services also provides outsourcing solutions and other
professional services.

AT&T Consumer Services provides a variety of communication services to
residential customers. These services include traditional long distance voice
services, such as domestic and international dial services (long distance or
local toll calls where the number "1" is dialed before the call) and calling
card services. Transaction services, such as prepaid card and operator-assisted
calls, are also offered. Collectively, these services represent stand-alone long
distance and are not offered in conjunction with any other service. AT&T
Consumer Services also provides dial-up Internet services and all distance
services, which bundle long distance, local and local toll.

The balance of AT&T's continuing operations (excluding LMG) is included in
a "Corporate and Other" group. This group primarily reflects corporate staff
functions and the elimination of transactions between segments.

LMG was not an operating segment of AT&T prior to its split-off from AT&T
because AT&T did not have a controlling financial interest in LMG for financial
accounting purposes. Therefore, we accounted for this investment under the
equity method. Additionally, LMG's results were not reviewed by the chief
operating decision-makers for purposes of determining resources to be allocated.

Total assets for our reportable segments include all assets, except
intercompany receivables. Nearly all prepaid pension assets, taxes and
corporate-owned or leased real estate are held at the corporate level and
therefore are included in the Corporate and Other group. Capital additions for
each segment include capital expenditures for property, plant and equipment,
additions to nonconsolidated investments, and additions to internal-use software
(which are included in other assets).

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see note 1). AT&T evaluates
performance based on several factors, of which the primary financial measure is
operating income.

Generally, AT&T accounts for inter-segment transactions at market prices.
AT&T Business Services sells services to AT&T Consumer Services at cost-based
prices, which approximate average market prices. These sales are recorded by
AT&T Business Services as contra-expense.

105

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE

- ---------------

(1) Revenue in 2002 and 2001 included internal revenue of $323 million and $441
million, respectively, which represented sales to AT&T Broadband and AT&T
Wireless through their dates of disposition. AT&T Broadband and AT&T
Wireless were disposed of on November 18, 2002 and July 9, 2001,
respectively. Subsequent to their disposition, sales to AT&T Broadband, now
Comcast, and AT&T Wireless are recorded as external revenue.

DEPRECIATION AND AMORTIZATION

106

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NET (LOSSES) RELATED TO OTHER EQUITY INVESTMENTS

RECONCILIATION OF OPERATING INCOME TO INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES, MINORITY INTEREST INCOME AND NET (LOSSES) RELATED TO EQUITY
INVESTMENTS

ASSETS

- ---------------

(1) Includes cash of $4.0 billion for 2003 and $7.8 billion for 2002

107

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CAPITAL ADDITIONS

GEOGRAPHIC INFORMATION

Revenue(1)

Long-Lived Assets(3)

- ---------------

(1) Revenue is reported in the geographic area in which it originates.

(2) Includes amounts attributable to operations in Puerto Rico and the Virgin
Islands.

(3) Long-lived assets include property, plant and equipment, net, goodwill and
other purchased intangibles, net.

Based on a review of our management model, we plan to transfer our
remaining payphone business from the AT&T Consumer Services segment to the AT&T
Business Services segment, which will require the restatement of our segments in
2004. Additionally, we will continue to review our management model and
structure, which may result in additional adjustments to our operating segments
in the future.

16. RELATED PARTY TRANSACTIONS

AT&T had various related party transactions with Concert until the joint
venture was officially unwound on April 1, 2002.

Included in revenue was $268 million and $1.1 billion for services provided
to Concert for the years ended December 31, 2002 and 2001, respectively.

Included in access and other connection expenses are charges from Concert
representing costs incurred on our behalf to connect calls made to foreign
countries (international settlements) and costs paid by AT&T

108

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to Concert for distributing Concert products totaling $491 million and $2.1
billion for the years ended December 31, 2002 and 2001, respectively.

We had various related party transactions with LMG. Included in costs of
services and products were programming expenses related to services from LMG.
These expenses amounted to $199 million for the seven months ended July 31,
2001, the effective split-off date of LMG for accounting purposes.

17. QUARTERLY INFORMATION (UNAUDITED)

2003

109

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2002

- ---------------

(1) Earnings per share (EPS) in each quarter is computed using the
weighted-average number of shares outstanding during the quarter while EPS
for the full year is computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the four quarters' EPS does
not always equal the full-year EPS.

(2) Stock prices obtained from the New York Stock Exchange Composite Tape.

(3) The loss from discontinued operations in the second quarter of 2002 included
$16.5 billion ($11.8 billion after taxes) of goodwill and franchise costs
impairment charges.

(4) Fourth quarter 2002 net income included $1.5 billion of net restructuring
and other charges.

In September 2003, in conjunction with our review of accounting and
internal control systems, we determined that the liability on the balance sheet
(included in accounts payable and accrued expenses)

110

AT&T CORP. AND SUBSIDIARIES (AT&T)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

relating to costs incurred in 2001 and 2002 pertaining to access and other
connection expenses was understated by $125 million. Since the impact to prior
years' annual financial statements was not material, we recorded an additional
expense of $125 million ($77 million after taxes) in the third quarter of 2003
to reflect the proper estimate of the liability.

A review was conducted by outside legal counsel, under the direction of the
Audit Committee. This review found that two employees, one lower-level and one
mid-level management employee, circumvented the internal controls process,
resulting in the financial impacts noted below. We made the appropriate
personnel changes and enhanced our internal controls accordingly. The principal
focus of these enhancements included higher skill levels of those performing the
function (mid-level manager must be a Certified Public Accountant), changes in
the approval process for accruing access expense, as well as additional reviews
of such expenses and related reconciliations by higher levels of management
(Business Unit Controller and AT&T Controller). In addition, actual access
payments are reviewed quarterly to further substantiate the recorded liability.

The expense, properly recorded in the respective periods, would have
impacted quarterly and annual income from continuing operations as follows:

18. SUBSEQUENT EVENTS

In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. In connection with
the debt redemption, we unwound $250 million notional amount of
fixed-to-floating interest rate swaps. Also, we offered to repurchase for cash
up to E1 billion of our outstanding E2 billion 6.0% Notes due November 2006,
which now carry an interest rate of 6.75%. This repurchase is expected to close
by the end of March 2004.

In March 2004, a U.S. Court of Appeals vacated a number of recent FCC
rulings made in connection with the Triennial Review, including the FCC's
delegation to state commissions of decisions over impairment as applied to mass
market switching and certain transport elements. If this decision is not
reversed, or unless the FCC issues new valid rules, which assure us of fair
resale prices, our current local business could be materially affected.

111

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we completed an
evaluation, under the supervision and with the participation of our management
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15 or 15d-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them timely to material information required to be included in our Exchange Act
filings. Other than as described below, there have not been any changes in our
internal controls over financial reporting identified in connection with the
evaluation required by Exchange Act Rules 13a-15 or 15d-15 or otherwise that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.

In September 2003, in conjunction with our review of accounting and
internal control systems, the Company determined that the liability on the
balance sheet (included in accounts payable and accrued expenses) relating to
costs incurred in 2001 and 2002 pertaining to access and other connection
expenses was understated by $125 million. Since the impact to prior years'
annual financial statements was not material, the Company recorded an additional
expense of $125 million ($77 million after-tax) in the third quarter of 2003 to
reflect the proper estimate of the liability.

A review was conducted by outside legal counsel, under the direction of the
Audit Committee. This review found that two employees, one lower-level and one
mid-level management employee, circumvented the internal controls process
resulting in the financial impacts noted above. The Company made the appropriate
personnel changes and enhanced its internal controls accordingly. The principal
focus of these enhancements included higher skill levels of those performing the
function (CPA required for mid-level manager), changes in the approval process
for accruing access expense, as well as additional reviews of such expense and
related reconciliations by higher levels of management (Business Unit Controller
and AT&T Controller). In addition, actual access payments are reviewed quarterly
to further substantiate the recorded liability.

112

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our executive officers and our Code of Ethics is set
forth below. The other information required by Item 10 is incorporated by
reference to our definitive proxy statement for the 2004 annual meeting of
shareowners, including information under the captions "Information About the
Meeting and Voting", "Information About Our Board and Corporate Governance" and
"Section 16(a) Beneficial Ownership Reporting Compliance". See also "What
information is available about our company?" in Item 2 above.

EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF MARCH 1, 2004)

All of the above executive officers have held high level managerial
positions with AT&T or its affiliates for more than the past five years, except
Messrs. Dorman, Hannigan, Horton and Polumbo. Prior to joining AT&T in December
2000, Mr. Dorman was Chief Executive Officer of Concert, a global venture
created by AT&T and British Telecom, from 1999 to 2000; and Chairman, President
and Chief Executive Officer of PointCast, an internet-based news and information
service company, from 1998 to 1999. Prior to joining AT&T in 2003, Mr. Hannigan
was President and Chief Executive Officer of Sabre Holdings, Inc. from 1999 to
2003; and President -- Global Marketing of SBC Communications Inc. from 1998 to
1999. Prior to joining AT&T in 2002, Mr. Horton served in various high level
management positions of AMR Corporation, the parent company of American
Airlines; he was Senior Vice President and Chief Financial Officer from 2000 to
2002, and Vice President-Europe Division from 1998 to 2000. Prior to becoming an
Executive Officer of AT&T in 2002, Mr. Polumbo served as Senior Vice President
of AT&T Business Global Ventures from September 2001; as President of the Global
Services Unit of Concert from from June 1999 to September 2001 and from August
1998 to May 1999 he was President and Chief Operating Officer of Excite, Inc.

We have adopted a Code of Ethics for the Chief Executive Officer and Senior
Financial Officers which applies to our principal executive officer, principal
accounting officer and controller, principal financial officer and persons
performing similar functions. The Code is posted at our website www.att.com/ir.
Our Board did not grant a waiver of any ethics policy for any director or
executive officer in 2003.

113

ITEM 11. EXECUTIVE COMPENSATION

There is incorporated by reference in this Item 11 that portion of our
definitive proxy statement for the 2004 annual meeting of shareowners under the
captions "Five-Year Performance Comparison" and "Executive Compensation".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREOWNER MATTERS

There is incorporated by reference in this Item 12 that portion of our
definitive proxy statement for the 2004 annual meeting of shareowners under the
captions "Stock Ownership of Management and Directors" and "Beneficial Ownership
of More than Five Percent". Information regarding our equity compensation plans,
including both stockholder approved plans and non-stockholder approved plans, is
set forth in the section entitled "Equity Compensation Plan Information" and is
also incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There is incorporated by reference in this Item 13 that portion of our
definitive proxy statement for the 2004 annual meeting of shareowners under the
caption "Certain Relationships and Related Transactions".

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

There is incorporated by reference in this Item 14 that portion of our
definitive proxy statement for the 2004 annual meeting of shareholders under the
captions "Our Independent Public Accountants" and "Report of the Audit Committee
of the Board of Directors".

114

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.

(a) Documents filed as a part of the report:

(1) The following consolidated financial statements are included in Part
II, Item 8:

(2) Financial Statement Schedule:

Report of Independent Auditors............................ 123
Schedule:
II -- Valuation and Qualifying Accounts................... 124

All other schedules are omitted because they are not applicable, not
required or the required information is included in the consolidated financial
statements or notes thereto.

(3) Exhibits:

Exhibits identified in parentheses below as on file with the Securities and
Exchange Commission ("SEC") are incorporated herein by reference as exhibits
hereto.

(3)a Restated Certificate of Incorporation of the registrant
filed July 17, 2003 (incorporated by reference to Form 10-Q
for second quarter 2003, File No. 1-1105).
(3)b By-Laws of the registrant, as amended March 20, 2003
(incorporated by reference to Form 10-K for 2002, File No.
1-1105).
(4) No instrument which defines the rights of holders of long
term debt, of the registrant and all of its consolidated
subsidiaries, is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A), except for the instruments referred
to in 4(i)(1) and 4(i)(2) below. Pursuant to this
regulation, the registrant hereby agrees to furnish a copy
of any such instrument not filed herewith to the SEC upon
request.
4(i)(1) Indenture between American Telephone and Telegraph Company
and The Bank of New York, as trustee, dated as of September
7, 1990 (incorporated by reference to Exhibit 4A to Form SE
filed September 10, 1990, file no. 33-36756), as
supplemented by First Supplemental Indenture dated October
30, 1992 (incorporated by reference to Exhibit 4.AA to
Current Report on Form 8-K filed December 1, 1992) and by
Second Supplemental Indenture dated November 14, 2002
(incorporated by reference to Exhibit 4.10 to Amendment No.
1 to Form S-4 filed September 26, 2002, File No. 333-97953).
4(i)(2) Indenture between AT&T Corp. and The Bank of New York, as
trustee, dated as of November 1, 2001 (incorporated by
reference to Exhibit 4 to Form S-4 filed May 12, 2002, File
No. 333-87960).
(10)(i)1 Separation and Distribution Agreement by and among AT&T
Corp., Lucent Technologies Inc. and NCR Corporation, dated
as of February 1, 1996 and amended and restated as of March
29, 1996 (incorporated by reference to Exhibit (10)(i)1 to
Form 10-K for 1996, File No. 1-1105).

115

(10)(i)2 Distribution Agreement, dated as of November 20, 1996, by
and between AT&T Corp. and NCR Corporation (incorporated by
reference to Exhibit (10)(i)2 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent
Technologies Inc. and NCR Corporation, dated as of February
1, 1996 and amended and restated as of March 29, 1996
(incorporated by reference to Exhibit (10)(i)3 to Form 10-K
for 1996, File No. 1-1105).
(10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and
Lucent Technologies Inc., dated as of February 1, 1996 and
amended and restated as of March 29, 1996 (incorporated by
reference to Exhibit (10)(i)4 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)5 Employee Benefits Agreement, dated as of November 20, 1996,
between AT&T Corp. and NCR Corporation (incorporated by
reference to Exhibit (10)(i)5 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)6 Separation and Distribution Agreement by and between AT&T
Corp. and AT&T Wireless Services, Inc., dated as of June 4,
2001 (incorporated by reference to Exhibit 10.1 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7 Amended and Restated Tax Sharing Agreement by and between
AT&T Corp. and AT&T Wireless Services, Inc., dated as of
June 4, 2001 (incorporated by reference to Exhibit 10.2 to
the AT&T Wireless Services, Inc. Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001).
(10)(i)8 Employee Benefits Agreement by and between AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 7, 2001
(incorporated by reference to Exhibit 10.3 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9 Brand License Agreement by and between AT&T Corp. and AT&T
Wireless Services, Inc., dated as of June 4, 2001
(incorporated by reference to Exhibit 10.4 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10 Intellectual Property Agreement by and between AT&T Corp.
and AT&T Wireless Services, Inc., effective as of July 9,
2001 (incorporated by reference to Exhibit 10.6 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11 Inter-Group Agreement dated as of March 9, 1999, between
AT&T Corp. and Liberty Media Corporation, Liberty Media
Group LLC and each Covered Entity listed on the signature
pages thereof (incorporated by reference to Exhibit 10.2 to
the Registration Statement on Form S-4 of Liberty Media
Corporation (File No. 333-86491) as filed on September 3,
1999).
(10)(i)12 Intercompany Agreement dated as of March 9, 1999, between
Liberty and AT&T Corp. (incorporated by reference to Exhibit
10.3 to the Registration Statement on Form S-4 of Liberty
Media Corporation (File No. 333-86491) as filed on September
3, 1999).
(10)(i)13 Tax Sharing Agreement dated as of March 9, 1999, by and
among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 of Liberty Media
Corporation (File No. 333-86491) as filed on September 3,
1999).
(10)(i)14 First Amendment to Tax Sharing Agreement dated as of May 28,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.5 to the
Registration Statement on Form S-4 of Liberty Media
Corporation (File No. 333-86491) as filed on September 3,
1999).

116

(10)(i)15 Second Amendment to Tax Sharing Agreement dated as of
September 24, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc., and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)16 Third Amendment to Tax Sharing Agreement dated as of October
20, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.7 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)17 Fourth Amendment to Tax Sharing Agreement dated as of
October 28, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.8 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)18 Fifth Amendment to Tax Sharing Agreement dated as of
December 6, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.9 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)19 Sixth Amendment to Tax Sharing Agreement dated as of
December 10, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)20 Seventh Amendment to Tax Sharing Agreement dated as of
December 30, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)21 Eighth Amendment to Tax Sharing Agreement dated as of July
25, 2000, by and among AT&T Corp., Liberty Media
Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Liberty Media
Corporation (File No. 333-55998) as filed on February 21,
2001).
(10)(i)22 Instrument dated January 14, 2000, adding The Associated
Group, Inc. as a party to the Tax Sharing Agreement dated as
of March 9, 1999, as amended, among The Associated Group,
Inc., AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1/A of Liberty Media
Corporation (File No. 333-93917) as filed on February 9,
2000).
(10)(i)23 First Supplement to Inter-Group Agreement dated as of May
28, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.14 to
the Registration Statement on Form S-1/A of Liberty Media
Corporation (File No. 333-93917) as filed on February 9,
2000).

117

(10)(i)24 Second Supplement to Inter-Group Agreement dated as of
September 24, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.15 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)25 Third Supplement to Inter-Group Agreement dated as of
October 20, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)26 Fourth Supplement to Inter-Group Agreement dated as of
December 6, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.17 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)27 Fifth Supplement to Inter-Group Agreement dated as of
December 10, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.18 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)28 Sixth Supplement to Inter-Group Agreement dated as of
December 30, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.19 to the Registration Statement on Form S-1 of
Liberty Media Corporation (File No. 333-93917) as filed on
December 30, 1999).
(10)(i)29 Seventh Supplement to Inter-Group Agreement dated as of July
25, 2000, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.21 to
the Registration Statement on Form S-1 of Liberty Media
Corporation (File No. 333-55998) as filed on February 21,
2001).
(10)(i)30 Instrument dated January 14, 2000, adding The Associated
Group, Inc. as a party to the Inter-Group Agreement dated as
of March 9, 1999, as supplemented, between and among AT&T
Corp., on the one hand, and Liberty Media Corporation,
Liberty Media Group LLC and each Covered Entity listed on
the signature pages thereof, on the other hand (incorporated
by reference to Exhibit 10.20 to the Registration Statement
on Form S-1/A of Liberty Media Corporation (File No.
333-93917) as filed on February 9, 2000).
(10)(i)31 Eighth Supplement to Inter-Group Agreement dated as of
November 20, 2000, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.24 to the Registration Statement on Form S-1 of
Liberty Media Corporation (File No. 333-66034) as filed on
July 27, 2001).
(10)(i)32 Ninth Supplement to Inter-Group Agreement dated as of June
14, 2001, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI,
Inc., on the other hand (incorporated by reference to
Exhibit 10.25 to the Registration Statement on Form S-1 of
Liberty Media Corporation (File No. 333-66034) as filed on
July 27, 2001).

118

(10)(i)33 Agreement and Plan of Merger dated as of December 19, 2001 among AT&T Corp., AT&T Broadband
Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T
Comcast Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on
Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)34 Separation and Distribution Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T
Broadband Corp. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form
S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)35 Tax Sharing Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp.
(incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 of AT&T
Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)36 Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband
Corp. (incorporated by reference to Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105).
(10)(i)37 Amended and Restated 364-Day Revolving Credit Facility Agreement, dated as of October 8, 2003,
among AT&T Corp., the Lenders party hereto, JPMorgan Chase Bank and Citibank, N.A. as
Administrative Agents, Abn Amro Bank N.V., Bank of America, N.A. and Royal Bank of Scotland, as
Co-Syndication Agents, and Credit Suisse First Boston, Cayman Islands Branch, Deutsch Bank AG
New York Branch and Morgan Stanley Bank, as Co-Documentation Agents, with J.P. Morgan Securities
Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners.
(incorporated by reference to Form 8-K filed October 9, 2003, File No. 1-1105).
(10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (incorporated by reference to Exhibit
(10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (incorporated by reference to
Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (incorporated
by reference to Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and
restated effective January 1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4 to Form
10-K for 1996, File No. 1-1105).
(10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (incorporated by
reference to Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993
(incorporated by reference to Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (incorporated by
reference to Exhibit (10)(iii)(A)7 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (incorporated by reference to
Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996
(incorporated by reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105)
including Form of Amendment to AT&T Excess Benefit and Compensation Plan dated as of July 28,
2003 (incorporated by reference to Exhibit 10(iii)(A)1 to Form 10-Q for third quarter 2003, File
No. 1-1105).

119

(10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated
January 1, 1995 (incorporated by reference to Exhibit
(10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105)
including Form of Amendment to AT&T Non-Qualified Pension
Plan dated as of July 28, 2003 (incorporated by reference to
Exhibit 10(iii)(A)2 to Form 10-Q for third quarter 2003,
File No. 1-1105).
(10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as
amended January 21, 1998 (incorporated by reference to
Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No.
1-1105) including Form of Amendment to AT&T Senior
Management Incentive Award Deferral Plan dated as of July
28, 2003 (incorporated by reference to Exhibit 10(iii)(A)3
to Form 10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1,
1988 (incorporated by reference to Exhibit (10)(iii)(A)4 to
Form SE, dated March 25, 1988, File No. 1-1105) including
AT&T Mid-Career Pension Plan, as amended and restated July
1, 1999 (incorporated by reference to Exhibit (10)(iii)(A)12
to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through
March 14, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14 Indemnification Agreement for Officers and Directors.
(10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised
February 20, 1989 (incorporated by reference to Exhibit
(10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16 AT&T Corp. Senior Management Universal Life Insurance
Program effective October 1, 1999 (incorporated by reference
to Exhibit (10)(iii)(A)16 to Form 10-K for 2000, File No.
1-1105) including Form of Amendment to AT&T Corp. Senior
Management Universal Life Insurance Program dated as of July
28, 2003 (incorporated by reference to Exhibit 10(iii)(A)4
to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T
Corp. Executive Life Insurance Program as amended and
restated on January 1, 2004.
(10)(iii)(A)17 AT&T Benefits Protection Trust Agreement as amended and
restated as of November 1993, including the first amendment
thereto dated December 23, 1997 (incorporated by reference
to Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No.
1-1105).
(10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9,
1997, as amended October 30, 1997 (incorporated by reference
to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
1-1105), and as amended, restated and renamed AT&T Senior
Officer Separation Plan as of January 1, 2003 including Form
of Amendment of Appendix A of AT&T Senior Officer Severance
Plan dated as of July 28, 2003 (incorporated by reference to
Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003,
File No. 1-1105).
(10)(iii)(A)19 Special Incentive Agreement between AT&T Corp. and Hossein
Eslambolchi dated June 2, 2003 (incorporated by reference to
Exhibit (10)(iii)(A)1 to Form 10-Q for second quarter 2003,
File No. 1-1105).
(10)(iii)(A)20 Employment Agreement between AT&T Corp. and Thomas W. Horton
dated as of June 10, 2002.
(10)(iii)(A)21 Pension Agreement between AT&T Corp. and Thomas W. Horton
dated as of July 29, 2003.
(10)(iii)(A)22 Modification to Employment Agreement dated September 16,
2002 to Employment Agreement between AT&T Corp. and Thomas
W. Horton dated as of June 10, 2002.
(10)(iii)(A)23 Financial Services Agreement between AT&T Corp. and Thomas
W. Horton dated as of July 24, 2002.
(10)(iii)(A)24 AT&T Corp. Executive Disability Plan dated February 2004
(10)(iii)(A)25 AT&T Corp. Directors' Universal Life Insurance Program
effective June 1, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).

120

(10)(iii)(A)26 AT&T Corp. Senior Management Universal Life Insurance
Program for Former Executives effective October 1, 1999
(incorporated by reference to Exhibit (10)(iii)(A)26 to Form
10-K for 2000, File No. 1-1105).
(10)(iii)(A)27 Special Temporary Allowance Agreement between AT&T Corp. and
Dave Dorman dated December 15, 2003.
(10)(iii)(A)28 Agreement between AT&T Corp. and Hossein Eslambolchi dated
January 4, 2001 including amendment dated March 9, 2001
(incorporated by reference to Exhibit (10)(iii)(A)28 to Form
10-K for 2002, File No. 1-1105).
(10)(iii)(A)29 Board of Directors resolution adopted July 15, 2003 amending
various executive and management plans as of January 1,
2004.
(10)(iii)(A)30 Loan Agreement between AT&T Corp. and David Dorman dated
December 21, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)31 Loan Agreement between AT&T Corp. and David Dorman dated
December 21, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control
provision to various plans effective October 23, 2000
(incorporated by reference to Exhibit (10)(iii)(A)32 to Form
10-K for 2000, File No. 1-1105).
(10)(iii)(A)33 Loan Agreement between AT&T Corp. and David Dorman dated
April 13, 2001 (incorporated by reference to Exhibit
(10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34 Employment Agreement between AT&T Corp. and David Dorman
dated May 18, 2001 (incorporated by reference to Exhibit
(10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105)
including amendment dated December 31, 2002 (incorporated by
reference to Form 10-K for 2002, File No. 1-1105) including
amendment dated July 25, 2003 (incorporated by reference to
Exhibit 10(iii)(A)7 to Form 10-Q for third quarter 2003,
File No. 1-1105).
(10)(iii)(A)35 Special Equity Agreement between AT&T Corp. and Hossein
Eslambolchi dated January 31, 2001 (incorporated by
reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2002,
File No. 1-1105).
(10)(iii)(A)36 Employment Agreement between AT&T Corp. and Hossein
Eslambolchi dated December 28, 1999 including amendment
dated January 6, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)36 to Form10-K for 2002, File No. 1-1105).
(10)(iii)(A)37 Agreement between AT&T Corp. and James W. Cicconi dated July
29, 1998 (incorporated by reference to Exhibit
(10)(iii)(A)37 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)38 Special Deferral Agreement between AT&T Corp. and James W.
Cicconi dated April 2, 2001 (incorporated by reference to
Exhibit (10)(iii)(A)38 to Form 10-K for 2002, File No.
1-1105).
(10)(iii)(A)39 Employment Agreement between AT&T Corp. and John Polumbo
dated September 7, 2001.
(10)(iii)(A)40 Special Temporary Allowance Agreement between AT&T Corp. and
John Polumbo dated December 1, 2003.
(10)(iii)(A)41 Amendment dated July 29, 2003 to Employment Agreement
between AT&T Corp. and John Polumbo dated September 7, 2001.
(10)(iii)(A)42 Amendment dated October 2002 to Exhibit A of Employment
Agreement between AT&T Corp. and John Polumbo dated
September 7, 2001.
(12) Computation of Ratio of Earnings to Fixed Charges.
(14) Code of Ethics for Chief Executive Officer and Senior
Financial Officers
(21) List of subsidiaries of AT&T.
(23a) Consent of PricewaterhouseCoopers LLP.
(23b) Consent of KPMG LLP.

121

(23c) Consent of PricewaterhouseCoopers LLP.
(23d) Consent of KPMG LLP.
(24) Powers of Attorney executed by officers and directors who
signed this report.
(31.1) Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification by CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(32.2) Certification by CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(99.1) AT&T Canada Inc. March 2003 and 2002 Financial Statements
(99.2) AT&T Canada Inc. December 31, 2002, 2001 and 2000 Financial
Statements
(99.3) Concert B. V. December 31, 2001 and 2000 Financial
Statements
(99.4) Liberty Media Corporation December 2001, 2000 and 1999
Financial Statements

Shareowners may access and download without charge on AT&T's website at
www.att.com/ir copies of the proxy statement, portions of which are incorporated
herein by reference, and certain Exhibits that have been filed electronically
with the Securities and Exchange Commission. AT&T will furnish a copy of any
other exhibit at cost.

(b) Reports on Form 8-K:

During the fourth quarter 2003, the following Forms 8-K were filed and/or
furnished: Form 8-K dated October 1, 2003 was filed pursuant to Item 12 (Results
of Operations and Financial Condition) on October 6, 2003, Form 8-K dated
October 8, 2003 was filed pursuant to Item 5 (Other Events) on October 9, 2003,
Form 8-K dated October 21, 2003 was filed pursuant to Item 5 (Other Events),
Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and
Item 12 (Results of Operations and Financial Condition) on October 24, 2003,
Form 8-K dated December 2, 2003 was filed pursuant to Item 5 (Other Events) and
Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) on
December 2, 2003, Form 8-K dated December 11, 2003 was filed pursuant to Item 5
(Other Events), Item 12 (Results of Operations and Financial Condition) and Item
7 (Financial Statements, Pro Forma Financial Information and Exhibits) on
December 11, 2003 and Form 8-K dated December 11, 2003 was filed pursuant to
Item 5 (Other Events) on December 17, 2003.

122

REPORT OF INDEPENDENT AUDITORS ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of AT&T Corp.

Our audits of the consolidated financial statements referred to in our
report dated March 5, 2004 appearing in the 2003 Annual Report to Shareowners of
AT&T Corp. (which report and consolidated financial statements are included in
this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

Florham Park, New Jersey
March 5, 2004

123

SCHEDULE II

AT&T CORP.
AND ITS CONSOLIDATED SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

- ---------------

(a) For allowances for doubtful accounts, this column includes amounts written
off as uncollectible, net of recoveries.

(b) Includes allowances for doubtful accounts on long-term receivables of $58
million, $51 million, and $55 million at December 31, 2003, 2002, and 2001,
respectively (included in other assets in the Consolidated Balance Sheets).

(c) Amount charged to costs and expenses for 2003 included $7 million related to
long-term receivables.

(d) The increase in the deferred tax asset valuation allowance in 2002 was
primarily due to the asset impairment charge recorded for AT&T's investment
in AT&T Latin America.

124

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 CORP.

By: /s/ R.S. FEIT
------------------------------------
R.S. Feit
Vice President -- Law and Secretary

March 12, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

Directors:
William F. Aldinger*
Kenneth T. Derr*
M. Kathryn Eickhoff*
Herbert L. Henkel*
Frank C. Herringer*
Shirley Ann Jackson*
Jon C. Madonna*
Donald F. McHenry*
Tony L. White*

By: /s/ R.S. FEIT March 12, 2004
------------------------------------------------
R.S. Feit
(Attorney-in-Fact)*

125

EXHIBIT INDEX

(3)a Restated Certificate of Incorporation of the registrant
filed July 17, 2003 (incorporated by reference to Form 10-Q
for second quarter 2003, File No. 1-1105).
(3)b By-Laws of the registrant, as amended March 20, 2003
(incorporated by reference to Form 10-K for 2002, File No.
1-1105).
(4) No instrument which defines the rights of holders of long
term debt, of the registrant and all of its consolidated
subsidiaries, is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A), except for the instruments referred
to in 4(i)(1) and 4(i)(2) below. Pursuant to this
regulation, the registrant hereby agrees to furnish a copy
of any such instrument not filed herewith to the SEC upon
request.
4(i)(1) Indenture between American Telephone and Telegraph Company
and The Bank of New York, as trustee, dated as of September
7, 1990 (incorporated by reference to Exhibit 4A to Form SE
filed September 10, 1990, file no. 33-36756), as
supplemented by First Supplemental Indenture dated October
30, 1992 (incorporated by reference to Exhibit 4.AA to
Current Report on Form 8-K filed December 1, 1992) and by
Second Supplemental Indenture dated November 14, 2002
(incorporated by reference to Exhibit 4.10 to Amendment No.
1 to Form S-4 filed September 26, 2002, File No. 333-97953).
4(i)(2) Indenture between AT&T Corp. and The Bank of New York, as
trustee, dated as of November 1, 2001 (incorporated by
reference to Exhibit 4 to Form S-4 filed May 12, 2002, File
No. 333-87960).
(10)(i)1 Separation and Distribution Agreement by and among AT&T
Corp., Lucent Technologies Inc. and NCR Corporation, dated
as of February 1, 1996 and amended and restated as of March
29, 1996 (incorporated by reference to Exhibit (10)(i)1 to
Form 10-K for 1996, File No. 1-1105).
(10)(i)2 Distribution Agreement, dated as of November 20, 1996, by
and between AT&T Corp. and NCR Corporation (incorporated by
reference to Exhibit (10)(i)2 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent
Technologies Inc. and NCR Corporation, dated as of February
1, 1996 and amended and restated as of March 29, 1996
(incorporated by reference to Exhibit (10)(i)3 to Form 10-K
for 1996, File No. 1-1105).
(10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and
Lucent Technologies Inc., dated as of February 1, 1996 and
amended and restated as of March 29, 1996 (incorporated by
reference to Exhibit (10)(i)4 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)5 Employee Benefits Agreement, dated as of November 20, 1996,
between AT&T Corp. and NCR Corporation (incorporated by
reference to Exhibit (10)(i)5 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)6 Separation and Distribution Agreement by and between AT&T
Corp. and AT&T Wireless Services, Inc., dated as of June 4,
2001 (incorporated by reference to Exhibit 10.1 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7 Amended and Restated Tax Sharing Agreement by and between
AT&T Corp. and AT&T Wireless Services, Inc., dated as of
June 4, 2001 (incorporated by reference to Exhibit 10.2 to
the AT&T Wireless Services, Inc. Registration Statement on
Form S-1/A (Commission file No. 333-59174), filed June 21,
2001).
(10)(i)8 Employee Benefits Agreement by and between AT&T Corp. and
AT&T Wireless Services, Inc., dated as of June 7, 2001
(incorporated by reference to Exhibit 10.3 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9 Brand License Agreement by and between AT&T Corp. and AT&T
Wireless Services, Inc., dated as of June 4, 2001
(incorporated by reference to Exhibit 10.4 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001).

(10)(i)10 Intellectual Property Agreement by and between AT&T Corp.
and AT&T Wireless Services, Inc., effective as of July 9,
2001 (incorporated by reference to Exhibit 10.6 to the AT&T
Wireless Services, Inc. Registration Statement on Form S-1/A
(Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11 Inter-Group Agreement dated as of March 9, 1999, between
AT&T Corp. and Liberty Media Corporation, Liberty Media
Group LLC and each Covered Entity listed on the signature
pages thereof (incorporated by reference to Exhibit 10.2 to
the Registration Statement on Form S-4 of Liberty Media
Corporation (File No. 333-86491) as filed on September 3,
1999).
(10)(i)12 Intercompany Agreement dated as of March 9, 1999, between
Liberty and AT&T Corp. (incorporated by reference to Exhibit
10.3 to the Registration Statement on Form S-4 of Liberty
Media Corporation (File No. 333-86491) as filed on September
3, 1999).
(10)(i)13 Tax Sharing Agreement dated as of March 9, 1999, by and
among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 of Liberty Media
Corporation (File No. 333-86491) as filed on September 3,
1999).
(10)(i)14 First Amendment to Tax Sharing Agreement dated as of May 28,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.5 to the
Registration Statement on Form S-4 of Liberty Media
Corporation (File No. 333-86491) as filed on September 3,
1999).
(10)(i)15 Second Amendment to Tax Sharing Agreement dated as of
September 24, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc., and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)16 Third Amendment to Tax Sharing Agreement dated as of October
20, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.7 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)17 Fourth Amendment to Tax Sharing Agreement dated as of
October 28, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.8 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)18 Fifth Amendment to Tax Sharing Agreement dated as of
December 6, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.9 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)19 Sixth Amendment to Tax Sharing Agreement dated as of
December 10, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).

(10)(i)20 Seventh Amendment to Tax Sharing Agreement dated as of
December 30, 1999, by and among AT&T Corp., Liberty Media
Corporation, Tele-Communications, Inc., Liberty Ventures
Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)21 Eighth Amendment to Tax Sharing Agreement dated as of July
25, 2000, by and among AT&T Corp., Liberty Media
Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Liberty Media
Corporation (File No. 333-55998) as filed on February 21,
2001).
(10)(i)22 Instrument dated January 14, 2000, adding The Associated
Group, Inc. as a party to the Tax Sharing Agreement dated as
of March 9, 1999, as amended, among The Associated Group,
Inc., AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1/A of Liberty Media
Corporation (File No. 333-93917) as filed on February 9,
2000).
(10)(i)23 First Supplement to Inter-Group Agreement dated as of May
28, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.14 to
the Registration Statement on Form S-1/A of Liberty Media
Corporation (File No. 333-93917) as filed on February 9,
2000).
(10)(i)24 Second Supplement to Inter-Group Agreement dated as of
September 24, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.15 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)25 Third Supplement to Inter-Group Agreement dated as of
October 20, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)26 Fourth Supplement to Inter-Group Agreement dated as of
December 6, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.17 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)27 Fifth Supplement to Inter-Group Agreement dated as of
December 10, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.18 to the Registration Statement on Form S-1/A of
Liberty Media Corporation (File No. 333-93917) as filed on
February 9, 2000).
(10)(i)28 Sixth Supplement to Inter-Group Agreement dated as of
December 30, 1999, between and among AT&T Corp., on the one
hand, and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.19 to the Registration Statement on Form S-1 of
Liberty Media Corporation (File No. 333-93917) as filed on
December 30, 1999).

(10)(i)29 Seventh Supplement to Inter-Group Agreement dated as of July 25, 2000, between and among AT&T
Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered
Entity listed on the signature pages thereof, on the other hand (incorporated by reference to
Exhibit 10.21 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No.
333-55998) as filed on February 21, 2001).
(10)(i)30 Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the
Inter-Group Agreement dated as of March 9, 1999, as supplemented, between and among AT&T Corp.,
on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity
listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit
10.20 to the Registration Statement on Form S-1/A of Liberty Media Corporation (File No.
333-93917) as filed on February 9, 2000).
(10)(i)31 Eighth Supplement to Inter-Group Agreement dated as of November 20, 2000, between and among AT&T
Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered
Entity listed on the signature pages thereof, on the other hand (incorporated by reference to
Exhibit 10.24 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No.
333-66034) as filed on July 27, 2001).
(10)(i)32 Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001, between and among AT&T
Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC, AGI LLC, Liberty
SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc., on the other hand (incorporated by
reference to Exhibit 10.25 to the Registration Statement on Form S-1 of Liberty Media
Corporation (File No. 333-66034) as filed on July 27, 2001).
(10)(i)33 Agreement and Plan of Merger dated as of December 19, 2001 among AT&T Corp., AT&T Broadband
Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T
Comcast Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on
Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)34 Separation and Distribution Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T
Broadband Corp. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form
S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)35 Tax Sharing Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp.
(incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 of AT&T
Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)36 Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband
Corp. (incorporated by reference to Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105).
(10)(i)37 Amended and Restated 364-Day Revolving Credit Facility Agreement, dated as of October 8, 2003,
among AT&T Corp., the Lenders party hereto, JPMorgan Chase Bank and Citibank, N.A. as
Administrative Agents, Abn Amro Bank N.V., Bank of America, N.A. and Royal Bank of Scotland, as
Co-Syndication Agents, and Credit Suisse First Boston, Cayman Islands Branch, Deutsch Bank AG
New York Branch and Morgan Stanley Bank, as Co-Documentation Agents, with J.P. Morgan Securities
Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners.
(incorporated by reference to Form 8-K filed October 9, 2003, File No. 1-1105).
(10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (incorporated by reference to Exhibit
(10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (incorporated by reference to
Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105).

(10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as
amended March 3, 1998 (incorporated by reference to Exhibit
(10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor
Protection Plan, as amended and restated effective January
1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4
to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated
December 29, 1994 (incorporated by reference to Exhibit
(10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors,
as amended December 15, 1993 (incorporated by reference to
Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No.
1-1105).
(10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as
amended March 2, 1998 (incorporated by reference to Exhibit
(10)(iii)(A)7 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident
Insurance (incorporated by reference to Exhibit
(10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and
restated effective October 1, 1996 (incorporated by
reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996,
File No. 1-1105) including Form of Amendment to AT&T Excess
Benefit and Compensation Plan dated as of July 28, 2003
(incorporated by reference to Exhibit 10(iii)(A)1 to Form
10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated
January 1, 1995 (incorporated by reference to Exhibit
(10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105)
including Form of Amendment to AT&T Non-Qualified Pension
Plan dated as of July 28, 2003 (incorporated by reference to
Exhibit 10(iii)(A)2 to Form 10-Q for third quarter 2003,
File No. 1-1105).
(10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as
amended January 21, 1998 (incorporated by reference to
Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No.
1-1105) including Form of Amendment to AT&T Senior
Management Incentive Award Deferral Plan dated as of July
28, 2003 (incorporated by reference to Exhibit 10(iii)(A)3
to Form 10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1,
1988 (incorporated by reference to Exhibit (10)(iii)(A)4 to
Form SE, dated March 25, 1988, File No. 1-1105) including
AT&T Mid-Career Pension Plan, as amended and restated July
1, 1999 (incorporated by reference to Exhibit (10)(iii)(A)12
to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through
March 14, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14 Indemnification Agreement for Officers and Directors.
(10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised
February 20, 1989 (incorporated by reference to Exhibit
(10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16 AT&T Corp. Senior Management Universal Life Insurance
Program effective October 1, 1999 (incorporated by reference
to Exhibit (10)(iii)(A)16 to Form 10-K for 2000, File No.
1-1105) including Form of Amendment to AT&T Corp. Senior
Management Universal Life Insurance Program dated as of July
28, 2003 (incorporated by reference to Exhibit 10(iii)(A)4
to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T
Corp. Executive Life Insurance Program as amended and
restated on January 1, 2004.
(10)(iii)(A)17 AT&T Benefits Protection Trust Agreement as amended and
restated as of November 1993, including the first amendment
thereto dated December 23, 1997 (incorporated by reference
to Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No.
1-1105).

(10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9,
1997, as amended October 30, 1997 (incorporated by reference
to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
1-1105), and as amended, restated and renamed AT&T Senior
Officer Separation Plan as of January 1, 2003 including Form
of Amendment of Appendix A of AT&T Senior Officer Severance
Plan dated as of July 28, 2003 (incorporated by reference to
Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003,
File No. 1-1105).
(10)(iii)(A)19 Special Incentive Agreement between AT&T Corp. and Hossein
Eslambolchi dated June 2, 2003 (incorporated by reference to
Exhibit (10)(iii)(A)1 to Form 10-Q for second quarter 2003,
File No. 1-1105).
(10)(iii)(A)20 Employment Agreement between AT&T Corp. and Thomas W. Horton
dated as of June 10, 2002.
(10)(iii)(A)21 Pension Agreement between AT&T Corp. and Thomas W. Horton
dated as of July 29, 2003.
(10)(iii)(A)22 Modification to Employment Agreement dated September 16,
2002 to Employment Agreement between AT&T Corp. and Thomas
W. Horton dated as of June 10, 2002.
(10)(iii)(A)23 Financial Services Agreement between AT&T Corp. and Thomas
W. Horton dated as of July 24, 2002.
(10)(iii)(A)24 AT&T Corp. Executive Disability Plan dated February 2004
(10)(iii)(A)25 AT&T Corp. Directors' Universal Life Insurance Program
effective June 1, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)26 AT&T Corp. Senior Management Universal Life Insurance
Program for Former Executives effective October 1, 1999
(incorporated by reference to Exhibit (10)(iii)(A)26 to Form
10-K for 2000, File No. 1-1105).
(10)(iii)(A)27 Special Temporary Allowance Agreement between AT&T Corp. and
Dave Dorman dated December 15, 2003.
(10)(iii)(A)28 Agreement between AT&T Corp. and Hossein Eslambolchi dated
January 4, 2001 including amendment dated March 9, 2001
(incorporated by reference to Exhibit (10)(iii)(A)28 to Form
10-K for 2002, File No. 1-1105).
(10)(iii)(A)29 Board of Directors resolution adopted July 15, 2003 amending
various executive and management plans as of January 1,
2004.
(10)(iii)(A)30 Loan Agreement between AT&T Corp. and David Dorman dated
December 21, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)31 Loan Agreement between AT&T Corp. and David Dorman dated
December 21, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control
provision to various plans effective October 23, 2000
(incorporated by reference to Exhibit (10)(iii)(A)32 to Form
10-K for 2000, File No. 1-1105).
(10)(iii)(A)33 Loan Agreement between AT&T Corp. and David Dorman dated
April 13, 2001 (incorporated by reference to Exhibit
(10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34 Employment Agreement between AT&T Corp. and David Dorman
dated May 18, 2001 (incorporated by reference to Exhibit
(10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105)
including amendment dated December 31, 2002 (incorporated by
reference to Form 10-K for 2002, File No. 1-1105) including
amendment dated July 25, 2003 (incorporated by reference to
Exhibit 10(iii)(A)7 to Form 10-Q for third quarter 2003,
File No. 1-1105).
(10)(iii)(A)35 Special Equity Agreement between AT&T Corp. and Hossein
Eslambolchi dated January 31, 2001 (incorporated by
reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2002,
File No. 1-1105).

(10)(iii)(A)36 Employment Agreement between AT&T Corp. and Hossein
Eslambolchi dated December 28, 1999 including amendment
dated January 6, 2000 (incorporated by reference to Exhibit
(10)(iii)(A)36 to Form10-K for 2002, File No. 1-1105).
(10)(iii)(A)37 Agreement between AT&T Corp. and James W. Cicconi dated July
29, 1998 (incorporated by reference to Exhibit
(10)(iii)(A)37 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)38 Special Deferral Agreement between AT&T Corp. and James W.
Cicconi dated April 2, 2001 (incorporated by reference to
Exhibit (10)(iii)(A)38 to Form 10-K for 2002, File No.
1-1105).
(10)(iii)(A)39 Employment Agreement between AT&T Corp. and John Polumbo
dated September 7, 2001.
(10)(iii)(A)40 Special Temporary Allowance Agreement between AT&T Corp. and
John Polumbo dated December 1, 2003.
(10)(iii)(A)41 Amendment dated July 29, 2003 to Employment Agreement
between AT&T Corp. and John Polumbo dated September 7, 2001.
(10)(iii)(A)42 Amendment dated October 2002 to Exhibit A of Employment
Agreement between AT&T Corp. and John Polumbo dated
September 7, 2001.
(12) Computation of Ratio of Earnings to Fixed Charges.
(14) Code of Ethics for Chief Executive Officer and Senior
Financial Officers
(21) List of subsidiaries of AT&T.
(23a) Consent of PricewaterhouseCoopers LLP.
(23b) Consent of KPMG LLP.
(23c) Consent of PricewaterhouseCoopers LLP.
(23d) Consent of KPMG LLP.
(24) Powers of Attorney executed by officers and directors who
signed this report.
(31.1) Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification by CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(32.2) Certification by CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(99.1) AT&T Canada Inc. March 2003 and 2002 Financial Statements
(99.2) AT&T Canada Inc. December 31, 2002, 2001 and 2000 Financial
Statements
(99.3) Concert B. V. December 31, 2001 and 2000 Financial
Statements
(99.4) Liberty Media Corporation December 2001, 2000 and 1999
Financial Statements