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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, DC 20549****Form 10-Q**   þ     **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934**   **For the quarterly period ended September 30, 2005** **or** **o** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934**   **For the transition period    from           to****Commission file number 1-1105****AT&T Corp.**   **A New York** **I.R.S. Employer****Corporation** **No. 13-4924710****One AT&T Way, Bedminster, New Jersey 07921****Telephone — Area Code 908-221-2000**     Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has beensubject to such filing requirements for the past90 days.     Yes þ          No o     Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Exchange ActRule 12b-2)     Yes þ          No o     Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the ExchangeAct).     Yes o          No o     At October 31, 2005, the following shares of stock wereoutstanding: AT&T common stock — 803,449,166

**TABLE OF CONTENTS**
PART I -- FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II -- OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION

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**PART I — FINANCIAL INFORMATION****Item 1.*****Financial Statements*****AT&T CORP. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions, except per share amounts)****Revenue** $6,620  $7,638  $20,395  $23,264 **Operating Expenses**                    Access and other connection  2,317   2,411   7,111   7,530     Costs of services and products (excluding depreciation of $409,    $409, $1,232 and $2,280 included below)  1,498   1,783   4,686   5,406     Selling, general and administrative  1,228   1,653   3,830   5,160     Depreciation and amortization  623   647   1,889   3,128     Asset impairment and net restructuring and other charges  (1)  12,469   35   12,736                  Total operating expenses  5,665   18,963   17,551   33,960              **Operating Income (Loss)**  955   (11,325)  2,844   (10,696)    Other income (expense), net  10   (34)  (113)  (172)    Interest (expense)  (166)  (192)  (538)  (611)             **Income (Loss) Before Income Taxes, Minority Interest (Loss)    Income and Net Earnings Related to Equity Investments**  799   (11,551)  2,193   (11,479)    (Provision) benefit for income taxes  (279)  4,402   (845)  4,741     Minority interest (loss) income  (1)  —   (1)  1     Net earnings related to equity investments  1   2   9   2              **Net Income (Loss)** $520  $(7,147) $1,356  $(6,735)             **Weighted-Average Shares Used to Compute Earnings (Loss) per    Share:**                    Basic  803   795   801   794     Diluted  812   795   809   794 **Earnings (Loss) per Basic Share** $0.65  $(8.99) $1.69  $(8.48)             **Earnings (Loss) per Diluted Share** $0.64  $(8.99) $1.68  $(8.48)             **Dividends Declared per Common Share** $0.2375  $0.2375  $0.7125  $0.7125              The notes are an integral part of the consolidated financialstatements.
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**AT&T CORP. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****(Unaudited)**           **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)****Assets**            Cash and cash equivalents $2,837  $3,698     Accounts receivable, less allowances of $401 and $523  2,994   3,195     Deferred income taxes  1,016   1,111     Other current assets  546   1,383        **Total Current Assets**  7,393   9,387     Property, plant and equipment, net of accumulated depreciation    of $2,791 and $1,588  10,845   11,509     Goodwill  4,753   4,888     Other purchased intangible assets, net  290   375     Prepaid pension costs  4,149   3,991     Other assets  2,278   2,654        **Total Assets** $29,708  $32,804         **Liabilities**            Accounts payable and accrued expenses $2,361  $2,716     Compensation and benefit-related liabilities  1,684   2,193     Debt maturing within one year  522   1,886     Other current liabilities  2,456   2,293        **Total Current Liabilities**  7,023   9,088     Long-term debt  7,160   8,779     Long-term compensation and benefit-related liabilities  3,240   3,322     Deferred income taxes  1,667   1,356     Other long-term liabilities and deferred credits  2,743   3,240        **Total Liabilities**  21,833   25,785 **Shareowners’ Equity**            Common stock, $1 par value, authorized    2,500,000,000 shares; issued and outstanding    803,013,312 shares (net of 171,983,367 treasury shares) at    September 30, 2005 and 798,570,623 shares (net of    171,983,367 treasury shares) at December 31, 2004  803   799     Additional paid-in capital  26,787   27,170     Accumulated deficit  (19,824)  (21,180)    Accumulated other comprehensive income  109   230        **Total Shareowners’ Equity**  7,875   7,019        **Total Liabilities and Shareowners’ Equity** $29,708  $32,804        The notes are an integral part of the consolidated financialstatements.
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**AT&T CORP. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’EQUITY****(Unaudited)**              **For the Nine Months**  **Ended September 30,**     **2005** **2004**       **(Dollars in millions)****AT&T Common Stock**              Balance at beginning of year $799  $792       Shares issued under employee plans  4   2       Other  —   2             Balance at end of period  803   796        **Additional Paid-In Capital**              Balance at beginning of year  27,170   27,722       Shares issued, net:               Under employee plans  89   57        Other  —   22       Dividends declared  (571)  (566)      Other  99   52             Balance at end of period  26,787   27,287        **Accumulated Deficit**              Balance at beginning of year  (21,180)  (14,707)      Net income (loss)  1,356   (6,735)      Treasury shares issued at less than cost  —   (4)            Balance at end of period  (19,824)  (21,446)       **Accumulated Other Comprehensive Income (Loss)**              Balance at beginning of year  230   149       Other comprehensive loss  (121)  (351)            Balance at end of period  109   (202)       **Total Shareowners’ Equity** $7,875  $6,435        **Summary of Total Comprehensive Income (Loss):**              Net income (loss) $1,356  $(6,735)      Other comprehensive (loss) [net of income taxes of $75 and $192]  (121)  (351)       **Total Comprehensive Income (Loss)** $1,235  $(7,086)       AT&T accounts for treasury stock as retired stock. Theamount attributable to treasury stock at September 30, 2005and December 31, 2004, was $(17,011) million.We have 100 million authorized shares of preferred stock at$1 par value.The notes are an integral part of the consolidated financialstatements.
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**AT&T CORP. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**            **For the Nine Months**  **Ended September 30,**     **2005** **2004**       **(Dollars in millions)****Operating Activities**            Net income (loss) $1,356  $(6,735)    Adjustments to reconcile net income (loss) to net cash provided    by operating activities:             Asset impairment and net restructuring and other charges  21   12,662      Net (gains) on sales of assets  (6)  (16)     Loss on early extinguishment of debt  206   301      Depreciation and amortization  1,889   3,128      Provision for uncollectible receivables  122   371      Deferred income taxes  478   (4,469)     Decrease in receivables  90   178      Decrease in accounts payable and accrued expenses  (387)  (488)     Net change in other operating assets and liabilities  (1,012)  (839)     Other adjustments, net  (29)  (82)       **Net Cash Provided by Operating Activities**  2,728   4,011        **Investing Activities**            Capital expenditures and other additions  (1,072)  (1,459)    Proceeds from sale or disposal of property, plant and equipment  150   58     Investment distributions and sales  14   37     Net dispositions of businesses  82   8     Decrease in restricted cash  546   7     Other investing activities, net  27   9        **Net Cash Used in Investing Activities**  (253)  (1,340)       **Financing Activities**            Retirement of long-term debt, including redemption premiums  (2,723)  (3,711)    Decrease in short-term borrowings, net  (316)  (511)    Issuance of common shares  68   45     Dividends paid on common stock  (570)  (565)    Other financing activities, net  205   345        **Net Cash Used in Financing Activities**  (3,336)  (4,397)           Net decrease in cash and cash equivalents  (861)  (1,726)    Cash and cash equivalents at beginning of year  3,698   4,353        **Cash and Cash Equivalents at End of Period** $2,837  $2,627        The notes are an integral part of the consolidated financialstatements.
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)****1.****Basis of Presentation**     The consolidated financial statements have been prepared byAT&T Corp. (AT&T) pursuant to the rules and regulationsof the Securities and Exchange Commission (SEC) and, in theopinion of management, include all adjustments of a normal andrecurring nature necessary for a fair statement of theconsolidated results of operations, financial position and cashflows for each period presented. The consolidated results forinterim periods are not necessarily indicative of results forthe full year. These financial results should be read inconjunction with AT&T’s Forms 10-Q for thequarters ended March 31, 2005 and June 30, 2005, andForm 10-K/ A for the year ended December 31, 2004.**2.****Merger Agreement with SBC Communications Inc.**     On January 31, 2005, AT&T and SBC Communications Inc.(SBC) announced an agreement for SBC to acquire AT&T.Under the terms of the agreement, each AT&T share will beexchanged for 0.77942 of a share of SBC common stock. Inaddition, at the time of closing, we will pay our shareowners aspecial dividend of $1.30 per share. At the time of theannouncement, this consideration was valued at $19.71 pershare, or approximately $16.0 billion. The stockconsideration in the transaction is expected to be tax-free toour shareowners. On June 30, 2005, AT&T shareownersvoted to approve the proposed merger agreement with SBC. InOctober 2005, the Department of Justice and the FederalCommunications Commission (FCC) approved the merger. Theacquisition, which remains subject to approval by otherregulatory authorities and customary closing conditions, isexpected to close by the end of 2005. However, it is possiblethat factors outside of our control could require us to completethe merger at a later time or not to complete it at all. Theterms of certain of our agreements, including contracts,employee benefit arrangements and debt instruments, haveprovisions which could result in changes to the terms orsettlement amounts of these agreements upon a change in controlof AT&T.**3.****Summary of Significant Accounting Policies**     We have a Long Term Incentive Program under which stock options,performance shares, restricted stock and other awards in commonstock are granted, as well as an Employee Stock Purchase Plan(ESPP). Employee purchases of company stock under the ESPP weresuspended in 2003. Effective January 1, 2003, we adoptedthe fair-value recognition provisions of Statement of FinancialAccounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation,” and we began to recordstock-based compensation expense for all employee awards(including stock options) granted or modified afterJanuary 1, 2003. For awards issued prior to January 1,2003, we apply Accounting Principles Board (APB) OpinionNo. 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting forour plans. Under APB Opinion No. 25, no compensationexpense has been recognized for stock options, other than forcertain occasions when we have modified the terms of the stockoption vesting schedule.
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**     If we had elected to recognize compensation costs based on thefair value at the date of grant of all awards granted prior toJanuary l, 2003, consistent with the provisions ofSFAS No. 123, net income (loss) and earnings (loss)per share amounts would have been as follows:                    **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions, except per share amounts)**    Net income (loss) $520  $(7,147) $1,356  $(6,735)**Add:**                     Stock-based employee compensation expense included in reported    results, net of income taxes  30   22   81   57 **Deduct:**                     Total stock-based employee compensation expense determined under    the fair value method for all awards, net of income taxes  (44)  (49)  (134)  (145)                 Pro forma net income (loss) $506  $(7,174) $1,303  $(6,823)                 Basic earnings (loss) per share $0.65  $(8.99) $1.69  $(8.48)    Pro forma basic earnings (loss) per share $0.63  $(9.02) $1.63  $(8.59)    Diluted earnings (loss) per share $0.64  $(8.99) $1.68  $(8.48)    Pro forma diluted earnings (loss) per share $0.62  $(9.02) $1.61  $(8.59)     Pro forma stock-based compensation expense reflected above maynot be indicative of future compensation expense that may berecorded. Future compensation expense may differ due to variousfactors, such as the number of awards granted and the marketvalue of such awards at the time of grant, as well as theplanned adoption of SFAS No. 123 (revised 2004),“Share-Based Payment,” beginning in the first quarterof 2006 (see note 12).     For a detailed discussion of significant accounting policies,please refer to our Form 10-K/ A for the year endedDecember 31, 2004.**4.****Supplementary Financial Information*****Supplementary Balance Sheet Information***               **AT&T** **AT&T**    **Business** **Consumer**    **Services** **Services** **Total**         **(Dollars in millions)***Goodwill:*                Balance at January 1, 2004 $4,731  $70  $4,801     Translation adjustment  90   —   90     Other  (3)  —   (3)              Balance at December 31, 2004 $4,818  $70  $4,888     Translation adjustment  (92)  —   (92)    Goodwill allocated to sale of payphone business  (43)  —   (43)              Balance at September 30, 2005 $4,683  $70  $4,753           
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**               **Gross**      **Carrying** **Accumulated**    **Amount** **Amortization** **Net**         **(Dollars in millions)***Other purchased intangible assets:*                Customer lists and relationships $528  $229  $299     Other  275   199   76               Balance at December 31, 2004 $803  $428  $375               Customer lists and relationships $521  $282  $239     Other  206   155   51               Balance at September 30, 2005 $727  $437  $290                Amortization expense associated with purchased intangible assetsfor the three and nine months ended September 30, 2005, was$26 million and $79 million, respectively.Amortization expense for the three and nine months endedSeptember 30, 2004, was $28 million and$89 million, respectively. Amortization expense forpurchased intangible assets is estimated to be approximately$110 million for each of the years ending December 31,2005 and 2006, and approximately $80 million for each ofthe years ending December 31, 2007 and 2008, at which timethe purchased intangible assets will be fully amortized.     During the third quarter of 2004, we recorded a $15 millionimpairment charge relating to other purchased intangible assets(customer lists and relationships) (see note 6).*Restricted cash:*     Recorded within other current assets as of December 31,2004, was restricted cash of $546 million relating to debtthat matured in February 2005 (see note 8).*Income taxes payable:*     Recorded within other current liabilities were $574 millionand $281 million of income taxes payable as ofSeptember 30, 2005 and December 31, 2004, respectively.***Supplementary Shareowners’ Equity Information***                   **Net Foreign** **Net Revaluation** **Net** **Accumulated**  **Currency** **of Certain** **Minimum** **Other**  **Translation** **Financial** **Pension** **Comprehensive**  **Adjustment** **Instruments** **Liability** **Income (Loss)**           **(Dollars in millions)***Accumulated other comprehensive income (loss):*                    Balance at January 1, 2005 $319  $19  $(108) $230     Change  (116)  (5)  —   (121)                 Balance at September 30, 2005 $203  $14  $(108) $109              
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**            **For the Nine Months**  **Ended September 30,**     **2005** **2004**       **(Dollars in millons)***Other comprehensive (loss):*            Net foreign currency translation adjustment [net of income taxes    of $72 and $11] $(116) $(17)    Net revaluation of certain financial instruments:             Unrealized gains (losses) [net of income taxes of $3 and $(7)]  (6)  11      Recognition of previously unrealized losses (gains) [net of    income taxes of $0 and    $15](1)  1   (24)    Net minimum pension liability adjustment [net of income taxes of    $173]  —   (321)           Total other comprehensive (loss) $(121) $(351)        (1)     See table below for a summary of recognition of previously    unrealized losses (gains).                    **For the Nine Months Ended September 30,**     **2005** **2004**       **Pretax** **After Taxes** **Pretax** **After Taxes**           **(Dollars in millions)***Recognition of previously unrealized losses (gains):*                    Other income (expense), net:                     Sale of various securities $1  $1  $(12) $(7)     Other financial instrument activity  —   —   (27)  (17)                 Total recognition of previously unrealized losses (gains) $1  $1  $(39) $(24)             **5.****Earnings Per Common Share and Potential Common Share**     Basic earnings (losses) per common share (EPS) is computedby dividing net income (loss) by the weighted-average number ofcommon shares outstanding for the period. Diluted EPS reflectsthe potential dilution (considering the combined income andshare impact) that could occur if securities or other contractsto issue common stock were exercised or converted into commonstock. The potential issuance of common stock is assumed tooccur at the beginning of the year (or at the time of issuanceif later), and the incremental shares are included using thetreasury stock method. The proceeds utilized in applying thetreasury stock method consist of the amount, if any, to be paidupon exercise, the amount of compensation cost attributed tofuture service not yet recognized, and any tax benefits creditedto paid-in-capital related to the exercise. These proceeds arethen assumed to be used to purchase common stock at theaverage-market price during the period. The incremental shares(difference between the shares assumed to be issued and theshares assumed to be purchased), to the extent they would havebeen dilutive, are included in the denominator of the dilutedEPS calculation. Potentially dilutive securities for all periodspresented were stock options, restricted stock units andperformance shares. No adjustments were made to income for thecomputation of diluted EPS. Since AT&T recorded a loss forthe three and nine months ended September 30, 2004, dilutedloss per share is the same as basic loss per share, as anypotentially dilutive securities would be antidilutive.**6.****Asset Impairment and Net Restructuring and Other Charges**     Asset impairment and net restructuring and other charges for thethree months ended September 30, 2005, were a net credit of$1 million. During the third quarter of 2005, managementreevaluated preexisting restructuring reserves and determinedthe actual or revised estimated obligations under these reservesdiffered
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**from the estimates initially made. As a result, a net$11 million of excess preexisting employee separationrestructuring liabilities were reversed. These activities werepartially offset by an additional $10 million net chargerecorded to preexisting facilities closing and other reserves.These adjustments were recorded in the Corporate and Other groupand did not result from changes to the actual or plannedheadcount separations or the number of vacated facilities.     Asset impairment and net restructuring and other charges of$35 million for the nine months ended September 30,2005, consisted of $55 million of net facility closing andother reserves and a related $5 million asset impairmentcharge. These activities were partially offset by the netreversal of $25 million of excess preexisting employeeseparation restructuring liabilities.     The net facilities closing and other reserves of$55 million for the nine months ended September 30,2005, primarily reflected a $45 million charge recorded inthe second quarter of 2005 associated with the continuedconsolidation of our real estate portfolio and reflected thepresent value of contractual lease obligations, net of estimatedsublease income, associated with vacant facilities primarilyresulting from workforce reductions. In addition, we recorded a$10 million net charge in the third quarter of 2005 basedon a reevaluation of preexisting facilities closing and otherreserves as discussed above. Facilities closing and othercharges of $53 million were recorded in the Corporate andOther group and $2 million in AT&T Business Services.Additionally, the Corporate and Other group and AT&TBusiness Services recorded $2 million and $3 million,respectively, of leasehold improvement impairment chargesrelated to the second quarter 2005 facilities closing reserve.     The net reversal of $25 million of excess preexistingemployee separation restructuring liabilities for the ninemonths ended September 30, 2005, was the result ofmanagement’s reevaluation of employee separationrestructuring reserves. Management determined the actual orrevised estimates of separation and related benefit paymentsdiffered from the estimates initially made, resulting in a netreversal of $25 million. AT&T Business Servicesrecorded $23 million of the reversal and the Corporate andOther group recorded $12 million. AT&T ConsumerServices recorded an additional $10 million charge as aresult of this review. The adjustment to these reserves did notresult from changes to the actual or planned headcountseparations.     The following table displays the activity and balances of therestructuring reserve account:                    **Type of Cost**     **Employee** **Facility**    **Separations** **Closings** **Other** **Total**           **(Dollars in millions)**    Balance at January 1, 2005 $506  $228  $2  $736      Net charges  (25)  57   (2)  30      Net deductions  (313)  (55)  —   (368)                 Balance at September 30, 2005 $168  $230  $—  $398                   Net deductions primarily reflected total cash payments of$368 million. These cash payments include cash terminationbenefits of $310 million and $58 million of facilityclosing reserve payments, which were funded primarily throughcash from operations.     Asset impairment and net restructuring and other charges of$12,469 million for the three months endedSeptember 30, 2004, were comprised of $11,389 millionof asset impairment charges and $1,080 million of netbusiness restructuring and other obligations.     In July 2004, we announced a strategic change in our businessfocus away from traditional consumer services and towardsbusiness markets and emerging technologies. As a result of thisstrategic change, we performed an evaluation of our long-livedassets, including property, plant and equipment and internal-usesoftware (the asset group) as of July 1, 2004, as thisstrategic change created a “triggering event”
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**necessitating such a review. In assessing impairments forlong-lived assets we follow the provisions ofSFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” We operate an integratedtelecommunications network; therefore, we performed our testingof the asset group at the entity level, as this is the lowestlevel for which identifiable cash flows are available.     In performing the test, we determined that the total of theexpected future undiscounted cash flows directly related to theexisting service potential of the asset group was less than thecarrying value of the asset group; therefore, an impairmentcharge was required. The impairment charges of$11,389 million represented the difference between the fairvalues of the asset group and its carrying values and wereincluded within asset impairment and net restructuring and othercharges in the consolidated statements of operations. Theimpairment charges resulted from sustained pricing pressure andthe evolution of services toward newer technologies in thebusiness market as well as changes in the regulatoryenvironment, which led to a shift away from traditional consumerservices.     AT&T Business Services recorded impairment charges of$11,330 million resulting in reductions to property, plantand equipment of $11,023 million, internal-use software of$287 million, other purchased intangibles of$15 million and other long-lived assets of $5 million.AT&T Consumer Services recorded impairment charges of$59 million resulting in reductions to property, plant andequipment of $11 million and internal-use software of$48 million. As a result of the asset impairments, a newcost basis was established for those assets that were impaired.The new cost basis resulted in a reduction of gross property,plant and equipment and internal-use software and the write-offof accumulated depreciation and accumulated amortization.     We calculated the fair value of our asset group using discountedcash flows. The discounted cash flows calculation was madeutilizing various assumptions and estimates regarding futurerevenue, expenses and cash flows projections through 2012. Thetime horizon was determined based on the estimated remaininguseful life of the primary assets in the asset group; theprimary assets are those from which the most significant cashflows are generated, principally consisting of the transportcentral office equipment. Pursuant to SFAS No. 144,the forecasts were developed without contemplation ofinvestments in new products. The 10% discount rate utilized wasdetermined using a weighted-average cost of capital (debt andequity) and was more heavily weighted towards debt given thatthe asset group, which primarily consisted of tangible assets,can be financed with a larger proportion of debt. Whenallocating the impairment to the asset categories, market valueswere utilized, to the extent determinable, to ensure that noasset category was impaired below its fair value.     The strategic change in business focus also created a“triggering event” for a review of our goodwill. Wefollow the provisions of SFAS No. 142, “Goodwilland Other Intangible Assets,” for determining impairments.SFAS No. 142 indicates that if other types of assets(in addition to goodwill) of a reporting unit are being testedfor impairment at the same time as goodwill, then those assetsare to be tested for impairment prior to performing the goodwillimpairment testing. Accordingly, the impairment charges notedabove reduced the carrying value of the reporting units whenperforming the impairment test for goodwill.     The goodwill impairment test requires us to estimate the fairvalue of our overall business enterprise down to the reportingunit level. Our reporting units are AT&T Business Servicesand AT&T Consumer Services. We estimated fair value usingboth a discounted cash flows model, as well as an approach usingmarket comparables, both of which are weighted equally todetermine fair value. Under the discounted cash flows method, weutilized estimated long-term revenue and cash flows forecasts,as well as assumptions of terminal value, together with anapplicable discount rate, to determine fair value. Under themarket approach, fair value was determined by comparing ourreporting units to similar businesses (or guideline companies).We then compared the carrying value of our reporting units totheir fair value. Since the fair value of our reporting unitsexceeded their carrying amounts, no goodwill impairment chargewas recorded.
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**     The net business restructuring activities of $1,080 millionfor the third quarter of 2004 consisted of $1,043 millionfor employee separations (of which $339 million related tobenefit plan curtailment costs) and $37 million of facilityclosing obligations.     This exit plan covered separation costs for approximately 11,200employees (the majority of which were involuntary),approximately 60% of whom were managers. This activity resultedfrom the continued integration and automation of variousfunctions within network operations, and our strategic change infocus away from traditional consumer services and towardsbusiness markets and emerging technologies.     Facility closing reserves of $37 million for the threemonths ended September 30, 2004, were primarily associatedwith the continued consolidation of our real estate portfolioand reflect the present value of contractual lease obligations,net of estimated sublease income, associated with vacantfacilities resulting from workforce reductions and networkequipment space that will not be used.     Asset impairment and net restructuring and other charges of$12,736 million for the nine months endedSeptember 30, 2004, were comprised of $11,511 millionof asset impairments and $1,225 million in net businessrestructuring and other obligations.     The asset impairment charges of $11,511 million primarilyreflect the third quarter asset impairments of$11,389 million as discussed above. In addition, werecorded real estate impairment charges of $122 millionrelated to the decision made during the first quarter of 2004 todivest five owned properties in an effort to further reducecosts and consolidate our real estate portfolio. In accordancewith SFAS No. 144, an impairment charge was recorded,within the Corporate and Other group, to reduce the book valueof the five properties to fair-market value based on third-partyassessments (including broker appraisals). The sales of theseproperties have been completed.     The net restructuring obligations of $1,225 million for thenine months ended September 30, 2004, were primarilycomprised of $1,147 million of net employee separations (ofwhich $339 million related to benefit plan curtailmentcosts) and $78 million of facility closing obligations.These exit plans covered separation costs for approximately12,600 employees (the majority of which were involuntary),nearly one-half of whom were managers. These activities resultedfrom the continued integration and automation of variousfunctions within network operations, reorganizations throughoutour non-U.S. operations, and our strategic change in focusaway from traditional consumer services and towards businessmarkets and emerging technologies.     The facility closing reserves of $78 million for the ninemonths ended September 30, 2004, were primarily associatedwith the consolidation of our real estate portfolio and reflectthe present value of contractual lease obligations, net ofestimated sublease income, associated with vacant facilitiesresulting from workforce reductions and network equipment spacethat will not be used.     Approximately 90% of headcount reductions associated with all ofour 2004 exit plans were completed as of September 30,2005. As of September 30, 2005, we had approximately 39,500employees compared with approximately 47,600 employees atDecember 31, 2004.**7.****Debt Obligations*****Securitizations***     In May 2005, we repaid $125 million of short-termborrowings outstanding under the AT&T Consumer Servicesaccounts receivable securitization facility and subsequentlyterminated the facility.***Long-Term Debt***     In April 2005, we completed the early retirement of$1.25 billion of our outstanding 7.30% Notes maturingin November 2011, which carried an interest rate of 9.05% at thetime of retirement. The notes were
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**repurchased with cash and resulted in a loss of approximately$0.2 billion recorded in other income (expense), net.**8.****Financial Instruments**     In the normal course of business, we use various financialinstruments, including derivative financial instruments, tomanage our market risk associated with changes in interest ratesand foreign exchange rates. We do not use financial instrumentsfor trading or speculative purposes. The following informationpertains to financial instruments with significant activitysince December 31, 2004.***Letters of Credit***     Letters of credit are guarantees we purchase, which ensure ourperformance or payment to third parties in accordance withspecified terms and conditions. Management has determined thatour letters of credit do not create additional risk to us. Thenotional amounts outstanding at September 30, 2005 andDecember 31, 2004, were $0.3 billion and$1.2 billion, respectively. The decrease in the notionalamount of the letters of credit was primarily related to thematurity of debt in February 2005. In addition, restricted cashof $546 million, recorded within other current assets as ofDecember 31, 2004, which collateralized these letters ofcredit, was released upon maturity of this debt.***Interest Rate Swap Agreements***     We enter into interest rate swap agreements to manage thefixed/floating mix of our debt portfolio in order to reduceaggregate risk of interest rate movements. These agreementsinvolve the exchange of floating-rate for fixed-rate payments orthe exchange of fixed-rate for floating-rate payments withoutthe exchange of the underlying notional amount. Floating-ratepayments and receipts are primarily tied to the LondonInter-Bank Offered Rate (LIBOR). During the first quarter of2005, all of our floating-rate to fixed-rate swaps (notionalamount of $108 million), designated as cash flow hedges,matured.     In addition, we have combined interest-rate foreign-currencyswap agreements for foreign-currency-denominated debt, whichhedge our risk to both interest rate and currency movements. Asof September 30, 2005, the notional amount and fair valueof these contracts was $0.6 billion and $0.3 billion,respectively, compared with $1.4 billion and$0.7 billion, respectively, at December 31, 2004. Thedecreases in the notional amount and fair value of theseagreements were primarily related to the February 2005 maturityof $0.7 billion notional amount of contracts relating todebt that also matured in February 2005.***Foreign Exchange***     We enter into foreign currency contracts to manage our exposureto changes in currency exchange rates related toforeign-currency-denominated transactions. As ofSeptember 30, 2005, the notional amount outstanding onthese contracts was $0.7 billion compared with$0.6 billion as of December 31, 2004. The increase inthe notional amount was primarily attributable to changes in theforward contracts portfolio, the majority of which were notdesignated for accounting purposes, as well as an increase inour net investment hedges.***Equity Option and Equity Swap Contracts***     We entered into equity options and equity swap contracts, whichwere undesignated, to manage our exposure to changes in equityprices associated with various equity awards tied to previouslyaffiliated companies. During the first quarter of 2005, all ofthe previously outstanding equity awards and the related equityoption and equity swap contracts expired (notional amount of$29 million).
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)****9.****Pension, Postretirement and Other Employee Benefit Plans**     We sponsor noncontributory defined benefit pension planscovering the majority of our U.S. employees. Ourpostretirement benefit plans for current and certain futureretirees include health-care benefits, life insurance coverageand telephone concessions.     The following table shows the components of net periodic benefit(credit) cost for our U.S. plans:                                   **Pension** **Postretirement** **Pension** **Postretirement**  **Benefits** **Benefits** **Benefits** **Benefits**           **For the Three Months Ended** **For the Nine Months Ended**  **September 30,** **September 30,**       **2005** **2004** **2005** **2004** **2005** **2004** **2005** **2004**                   **(Dollars in millions)**    Service cost — benefits earned during the period $45  $55  $5  $6  $133  $165  $13  $18     Interest cost on benefit obligations  229   231   77   89   686   691   236   268     Amortization of unrecognized prior service cost  21   32   9   13   66   97   28   39     Credit for expected return on plan assets  (335)  (359)  (40)  (45)  (1,004)  (1,078)  (121)  (133)    Amortization of losses  19   1   20   25   59   3   65   75     Net curtailment loss*  —   220   —   119   —   220   —   119                              Net periodic benefit (credit) cost $(21) $180  $71  $207  $(60) $98  $221  $386                           *     Included in asset impairment and net restructuring and other    charges (see note 6).     In 2003, the Medicare Prescription Drug Improvement andModernization Act of 2003 was signed into law. The Actintroduced a prescription drug benefit under Medicare (MedicarePart D), as well as a federal subsidy to sponsors ofretiree health-care benefits. In 2004, we determined that theprescription drug benefit provided to a specific portion of ourpostretirement benefit plan participants is actuariallyequivalent to Medicare Part D.     In the second quarter of 2005, we determined that theprescription drug benefit provided to the remaining planparticipants is also actuarially equivalent to the MedicarePart D benefits and therefore, we expect to be entitled tothe federal subsidy. The impact of such expected federal subsidywill not have a significant effect on our accumulatedpostretirement benefit obligation or net periodic postretirementbenefit cost.     We expect to contribute approximately $550 million to thepostretirement benefit plans in 2005. As of September 30,2005, approximately $400 million of such contributions havebeen made.***Non-U.S. Plans***     Certain non-U.S. operations have varying types of pensionprograms providing benefits for substantially all of theiremployees.
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**     The following table shows the components of net periodic benefitcost for non-U.S. plans:                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Service cost — benefits earned during the period $6  $5  $18  $17     Interest cost on benefit obligations  9   6   30   25     Credit for expected return on plan assets  (8)  (5)  (26)  (20)    Amortization of losses  2   2   8   7                  Net periodic benefit cost $9  $8  $30  $29              **10.****Commitments and Contingencies**     In the normal course of business we are subject to proceedings,lawsuits and other claims, including proceedings under laws andregulations related to disputes with other carriers,environmental and other matters. Such matters are subject tomany uncertainties, and outcomes are not predictable withassurance. Consequently, we are unable to ascertain the ultimateaggregate amount of monetary liability or financial impact withrespect to these matters at September 30, 2005. However, ifthese matters are adversely settled, such amounts could bematerial to our consolidated financial statements.     During the second quarter of 2005, we reached a settlement for$29 million, subject to final approval by the Court, of theclass action claims brought by participants in our Long TermSavings Plan for Management Employees (the Plan). The lawsuitalleged we breached our fiduciary duties to the Plan and Planparticipants by making materially false and misleadingstatements and omitting to state material facts concerning ourfuture business prospects. Final approval was received inSeptember 2005. The settlement of this lawsuit did not have amaterial impact on our results of operations.     In 2004, following an FCC ruling against a petition we filed inwhich we asked the FCC to decide the issue of whether certainphone-to-phone Internet protocol (“IP”) telephonyservices are exempt from paying access charges, SBC filed alawsuit in federal district court in Missouri asserting claimsthat we avoided interstate and intrastate access charges. Duringthe first quarter of 2005, AT&T and SBC settled a variety ofclaims and disputes between the parties, including thislitigation. The settlement of all matters resulted in AT&Tpaying SBC approximately $60 million, which did not have amaterial impact on our results of operations. Other carriers,including BellSouth Telecommunications, Inc. (BellSouth) havefiled similar lawsuits in various jurisdictions. These claimsdid not specify damages.     During the second quarter of 2005, we settled and paid lawsuitsbrought by the trustee for the bondholders’ liquidatingtrust, as well as a preference claim brought by creditors of AtHome Corporation (At Home). Under the terms of the settlementagreement, the bondholders were paid $340 million, inaddition to AT&T and Comcast Corporation (Comcast)relinquishing claims held in reserve by the At Home estate.Under the terms of a separation agreement with our formerbroadband subsidiary, which was spun off to Comcast in 2002, thesettlement was shared equally between the two parties. Thesettlement of this litigation did not have a material impact onour results of operations.     Class action lawsuits filed in California on behalf of At Homeshareholders, which alleged AT&T breached fiduciaryobligations, have been dismissed and are on appeal.     In February 2005, the FCC ruled against AT&T and ourpetition for a declaratory ruling that our enhanced prepaid cardservices is an interstate information service. Following thisdecision, Qwest Communications International, Inc. (Qwest) fileda lawsuit against us asserting claims for breach of federal andstate tariffs, unjust enrichment, fraudulent misrepresentationand breach of contract. Qwest seeks unspecified
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**damages. Other carriers, including BellSouth, have filed similarlawsuits in various jurisdictions, all seeking unspecifieddamages.**11.****Segment Reporting**     Our results are segmented according to the customers we service:AT&T Business Services and AT&T Consumer Services.     AT&T Business Services provides a variety of communicationservices to various-sized businesses and government agenciesincluding long distance, international, toll-free and localvoice, including wholesale transport services, as well as dataservices and Internet protocol and enhanced (IP&E) services,which includes the management of network servers andapplications. AT&T Business Services also providesoutsourcing solutions and other professional services.     AT&T Consumer Services provides a variety of communicationservices to residential customers. These services includetraditional long distance voice services, such as domestic andinternational dial services (long distance or local toll callswhere the number “1” is dialed before the call) andcalling card services. Transaction services, such as prepaidcard and operator-assisted calls, are also offered.Collectively, these services represent stand-alone long distanceservices and are not offered in conjunction with any otherservice. AT&T Consumer Services also provides dial-upInternet services, and all distance services, which generallybundle long distance, local and local toll.     The balance of our operations is included in a “Corporateand Other” group. This group primarily reflects corporatestaff functions and the elimination of transactions betweensegments.     Total assets for each segment include all assets, exceptintercompany receivables. Nearly all prepaid pension assets,taxes and corporate-owned or leased real estate are held at thecorporate level and, therefore, are included in the Corporateand Other group. Capital additions for each segment includecapital expenditures for property, plant and equipment,additions to internal-use software (included in other assets)and additions to nonconsolidated investments. We evaluateperformance based on several factors, of which the primaryfinancial measure is operating income.     AT&T Business Services sells services to AT&T ConsumerServices at cost-based prices. These sales are recorded byAT&T Business Services as contra-expense.
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)*****Revenue***                     **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    AT&T Business Services                      Long distance voice services $2,063  $2,364  $6,311  $7,363       Local voice services  313   390   1,048   1,183                   Total voice services  2,376   2,754   7,359   8,546       Data services  1,505   1,693   4,608   5,098       IP&E services  630   587   1,838   1,705                   Total data and IP&E services  2,135   2,280   6,446   6,803      Outsourcing, professional services and other  598   611   1,778   1,779                  Total AT&T Business Services  5,109   5,645   15,583   17,128     AT&T Consumer Services                     Stand-alone long distance voice and other services  924   1,256   2,923   4,045      Bundled services  575   724   1,854   2,053                  Total AT&T Consumer Services  1,499   1,980   4,777   6,098                   Total reportable segments  6,608   7,625   20,360   23,226                  Corporate and Other  12   13   35   38                  Total revenue $6,620  $7,638  $20,395  $23,264              ***Reconciliation of Operating Income (Loss) to Income (Loss)    before Income Taxes, Minority Interest (Loss) Income and Net    Earnings Related to Equity Investments***                    **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    AT&T Business Services $513  $(11,095) $1,629  $(10,860)    AT&T Consumer Services  541   281   1,605   892                   Total reportable segments  1,054   (10,814)  3,234   (9,968)    Corporate and Other  (99)  (511)  (390)  (728)                 Operating income (loss)  955   (11,325)  2,844   (10,696)    Other income (expense), net  10   (34)  (113)  (172)    Interest (expense)  (166)  (192)  (538)  (611)                 Income (loss) before income taxes, minority interest (loss)    income and net earnings related to equity investments $799  $(11,551) $2,193  $(11,479)             
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)*****Assets***            **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)**    AT&T Business Services $19,541  $20,621     AT&T Consumer Services  595   743             Total reportable segments  20,136   21,364     Corporate and Other  9,572   11,440            Total assets $29,708  $32,804        ***Capital Additions***                    **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    AT&T Business Services $344  $391  $1,063  $1,324     AT&T Consumer Services  —   9   —   37                   Total reportable segments  344   400   1,063   1,361     Corporate and Other  6   6   15   10                  Total capital additions $350  $406  $1,078  $1,371              ***Geographic Information***                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)***Revenue*(1)                     United    States(2) $6,235  $7,227  $19,168  $22,078     International  385   411   1,227   1,186                  Total revenue $6,620  $7,638  $20,395  $23,264                         **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)***Long-Lived    Assets*(3)            United    States(2) $14,227  $14,968     International  1,661   1,804            Total long-lived assets $15,888  $16,772         (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.
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**    Reflecting the dynamics of our business, we continually reviewour management model and structure, which may result inadjustments to our operating segments in the future.**12.****New Accounting Pronouncements**     In June 2005, the Financial Accounting Standards Board(FASB) issued FASB Staff Position FSPFAS No. 143-1, “Accounting for ElectronicEquipment Waste Obligations,” to address the accounting forobligations associated with the Directive on Waste Electricaland Electronic Equipment (the Directive) issued by the EuropeanUnion (EU). The Directive was enacted on February 13, 2003,and directs EU-member countries to adopt legislation to regulatethe collection, treatment, recovery, and environmentally sounddisposal of electrical and electronic waste equipment. TheDirective concludes that commercial users are obligated toretire, in an environmentally sound manner, specific assets thatqualify as historical waste. FSP FAS No. 143-1 iseffective for reporting periods ending after June 8, 2005,which is June 30, 2005 for us, or the date of adoption ofthe Directive by the applicable EU-member countries, if later.We have evaluated the impact to our operations in EU countriesthat have adopted legislation and have deemed these costs to beimmaterial. We will continue to evaluate the impact as otherEU-member countries enact legislation. However, if the remainingEU-member countries enact similar legislation, we do not expecta material impact to our results of operations.     In March 2005, the FASB issued FASB Interpretation(FIN) 47, “Accounting for Conditional Asset RetirementObligations,” an interpretation of SFAS No. 143,“Accounting for Asset Retirement Obligations.”FIN 47 clarifies that the term *conditional assetretirement obligation*, as used in SFAS No. 143,refers to a legal obligation to perform an asset retirementactivity in which the timing and/or method of settlement areconditional on a future event that may or may not be within thecontrol of the entity. The obligation to perform the assetretirement activity is unconditional even though uncertaintyexists about the timing and/or method of settlement. FIN 47requires an entity to recognize a liability for the fair valueof the conditional asset retirement obligation if the fair valueof the liability can be reasonably estimated. FIN 47 iseffective for fiscal years ending after December 15, 2005,which is December 31, 2005 for us; however, earlierapplication is permitted. We are currently evaluating the impactof FIN 47 on our results of operations, financial positionand cash flows.     In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment,” which requiresa public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based onthe grant-date fair value of the award. Additional guidance toassist in the initial interpretation of this revised statementwas subsequently issued by the SEC in Staff AccountingBulletin No. 107. SFAS No. 123 (revised2004) eliminates the alternative of using APB OpinionNo. 25 intrinsic-value method of accounting that wasprovided for in SFAS No. 123 as originally issued.Effective January 1, 2003, we adopted the fair-valuerecognition provisions of original SFAS No. 123 on aprospective basis and we began to record stock-basedcompensation expense for all employee awards (including stockoptions) granted or modified after January 1, 2003, usingthe nominal-vesting approach. Had we used the non-substantivevesting method, which will be required upon adoption, ourresults of operations would not have been materially differentfrom those reported for the nine months ended September 30,2005 and 2004. Adoption of the revised standard will requirethat we begin to recognize expense for unvested awards issuedprior to January 1, 2003. Additionally, this standardrequires that estimated forfeitures be considered in determiningcompensation expense. For equity awards other than stockoptions, we have not previously included estimated forfeituresin determining compensation expense. Accordingly, the differencebetween the expense we have recognized to date and thecompensation expense as calculated considering estimatedforfeitures will be reflected as a cumulative effect ofaccounting change upon adoption. Further, SFAS No. 123(revised 2004) requires that excess tax benefits be recognizedas an addition to paid-in capital and amendsSFAS No. 95, “Statement of Cash Flows,” torequire that the excess tax benefits be reported as a financingcash inflow rather than as a reduction of taxes paid.SFAS No. 123 (revised 2004) is effective for
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**AT&T CORP. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) — (Continued)**annual periods beginning after June 15, 2005, which isJanuary 1, 2006 for us. We intend to elect a modifiedprospective adoption beginning in the first quarter of 2006 anddo not anticipate that the adoption of SFAS No. 123(revised 2004) will have a material impact on our results ofoperations.     In December 2004, the FASB issued FASB Staff Position FSPFAS 109-2, “Accounting and Disclosure Guidance for theForeign Earnings Repatriation Provision within the American JobsCreation Act of 2004,” which provides guidance on theaccounting and disclosure requirements for the repatriationprovision of the Act. The Act creates a one-time tax incentivefor U.S. corporations to repatriate accumulated incomeearned abroad by providing a tax deduction of 85% of dividendsreceived for certain foreign earnings that are repatriated. Inan effort to assist taxpayers with the interpretation of therepatriation provision of the Act, in May 2005, the UnitedStates Department of Treasury issued detailed guidance oncertain technical aspects that required clarification. Basedupon this guidance, in the third quarter of 2005, we completedour evaluation of the impact of the repatriation provision andrecorded an income tax benefit of $6 million related todeferred taxes previously provided on foreign earnings.**13.****Subsequent Events**     On October 5, 2005, we entered into a $0.5 billion364-day Revolving Credit Facility Agreement (the“Agreement”) with a group of financial institutions,including J.P. Morgan Securities Inc., Citigroup GlobalMarkets Inc. and Banc of America Securities LLC. The Agreementreplaces the $1.0 billion 364-day Revolving Credit FacilityAgreement dated October 6, 2004.
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**Item 2.*****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 withinthe meaning of the Private Securities Litigation Reform Act of1995 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, growthopportunities for new and existing products, benefits from newtechnologies, availability and deployment of new technologies,plans and objectives of management, mergers and acquisitions,and other matters.     Statements in this document that are not historical facts arehereby identified as “forward-looking statements” forthe purpose of the safe harbor provided by Section 27A ofthe Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. The words “estimate,”“project,” “intend,” “expect,”“believe,” “plan,” and similar expressionsare intended to identify forward-looking statements. Readers arecautioned not to place undue reliance on these forward-lookingstatements, 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 Corp. may includeforward-looking statements. In addition, other written or oralstatements which constitute forward-looking statements have beenmade and may in the future be made by or on behalf of AT&T,including with respect to the matters referred to above. Theseforward-looking statements are necessarily estimates, reflectingthe best judgment of senior management that rely on a number ofassumptions concerning future events, many of which are outsideof our control, and involve a number of risks and uncertaintiesthat could cause actual results to differ materially from thosesuggested by the forward-looking statements. Theseforward-looking statements should, therefore, be considered inlight of various important factors, including those set forth inthis document. Important factors that could cause actual resultsto differ materially from estimates or projections contained inthe 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,  •     the ongoing global and domestic trend toward consolidation in    the telecommunications industry, which may have the effect of    making the competitors 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 invalidity of portions of the FCC’s Triennial Review    Order,  •     the risks associated with technological requirements; wireless,    Internet, Voice over Internet Protocol (VoIP) or other    technology substitution and changes; and other technological    developments,
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 •     the risks associated with the repurchase by us of debt or equity    securities, which may adversely affect our liquidity or    creditworthiness,  •     the uncertainties created by the proposed acquisition of our    company by SBC Communications, Inc.,  •     the impact of the significant recent reductions in the number of    our employees,  •     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 informationmanagement believes is relevant to an assessment andunderstanding of AT&T’s consolidated results ofoperations for the three and nine months endedSeptember 30, 2005 and 2004, and financial condition as ofSeptember 30, 2005 and December 31, 2004.
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS****Overview**     AT&T Corp. (AT&T) is among the world’scommunications leaders, providing voice and data communicationsservices to large and small businesses, consumers and governmentagencies. We provide domestic and international long distance,regional and local communications services, data and Internetservices.**Critical Accounting Estimates and Judgments**     The preparation of financial statements in accordance withgenerally accepted accounting principles requires management tomake estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses as well as thedisclosure of contingent assets and liabilities. Managementbases its estimates and judgments on historical experience andother factors that are believed to be reasonable under thecircumstances. Actual results may differ from these estimatesunder different assumptions or conditions.     For a discussion of the critical accounting estimates weidentified that we believe require significant judgment in thepreparation of our consolidated financial statements, pleaserefer to AT&T’s Form 10-K/ A for the year endedDecember 31, 2004.**Consolidated Results of Operations*****Revenue***                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    AT&T Business Services $5,109  $5,645  $15,583  $17,128     AT&T Consumer Services  1,499   1,980   4,777   6,098     Corporate and Other  12   13   35   38                  Total revenue $6,620  $7,638  $20,395  $23,264                   Total ***revenue***decreased $1.0 billion, or13.3%, in the third quarter of 2005 and decreased$2.9 billion, or 12.3%, for the nine months endedSeptember 30, 2005, compared with the same periods of 2004.These decreases were primarily driven by continued declines instand-alone long distance voice revenue of $0.6 billion inthe third quarter of 2005 and $2.2 billion for the ninemonths ended September 30, 2005, compared with the sameperiods of 2004. These declines were reflective of increasedcompetition, which has led to lower prices in the businessmarkets, and loss of market share in AT&T Consumer Servicesand small- and medium-sized business markets. In addition,stand-alone long distance voice revenue was negatively impactedby substitution. Total long distance voice volumes (includinglong distance volumes sold as part of a bundled product)increased approximately 3% in the third quarter of 2005 comparedwith the third quarter of 2004 primarily due to an increase inlower-priced wholesale volumes, partially offset by a decreasein higher-priced consumer and business retail volumes. Totallong distance volumes decreased approximately 3% for the ninemonths ended September 30, 2005, compared with therespective period in 2004, primarily due to declines in consumerand business retail volumes, partially offset by an increase inbusiness wholesale volumes. Also contributing to the overallrevenue decline was lower data services revenue of$0.2 billion in the third quarter of 2005 and$0.5 billion for the nine months ended September 30,2005, compared with the respective periods of 2004, primarilydriven by competitive pricing pressure and lower volumes,including the impact of technology migration.     Revenue by segment is discussed in greater detail in the SegmentResults section.
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)****     *Operating Expenses***                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Access and other connection $2,317  $2,411  $7,111  $7,530     Costs of services and products  1,498   1,783   4,686   5,406     Selling, general and administrative  1,228   1,653   3,830   5,160     Depreciation and amortization  623   647   1,889   3,128     Asset impairment and net restructuring and other charges  (1)  12,469   35   12,736                  Total operating expenses $5,665  $18,963  $17,551  $33,960                  Operating income (loss) $955  $(11,325) $2,844  $(10,696)    Operating margin  14.4%  (148.3)%  13.9%  (46.0)%     Included within ***access and other connection expenses***are costs we pay to connect calls using the facilitiesof other service providers, as well as the Universal ServiceFund contributions and per-line charges mandated by the FederalCommunications Commission (FCC). We pay domestic access chargesto local exchange carriers to complete long distance callscarried across the AT&T network and originated or terminatedon a local exchange carrier’s network. We also pay localconnectivity charges for leasing components of local exchangecarrier networks in order to provide local service to ourcustomers. International connection charges paid to telephonecompanies to connect international calls are also includedwithin access and other connection expenses. Universal ServiceFund contributions are charged to all telecommunicationscarriers by the FCC based on a percentage of state-to-state andinternational services revenue to provide affordable services toeligible customers. In addition, the FCC assesses charges on aper-line basis. Since most of the Universal Service Fundcontributions and per-line charges are passed through to thecustomer, a change in these rates generally results in acorresponding change in revenue.     Access and other connection expenses decreased$0.1 billion, or 3.9%, in the third quarter of 2005 and$0.4 billion, or 5.6%, for the nine months endedSeptember 30, 2005, compared with the same periods of 2004.The declines were due to lower average rates, as well as changesin product and country mix relating to domestic access andinternational connection charges, totaling $0.1 billion forthe third quarter of 2005 and $0.4 billion for theyear-to-date period. The decreased rates reflect a greaterproportion of calls that have non-access incurring terminations(such as when a call terminates over our own network or over aleased line), as well as the impact of rate negotiations,settlements and more efficient network usage. In addition, thesedeclines were attributable to lower volumes primarily relatingto local service of $0.1 billion for the third quarter of2005 and lower volumes relating to local and domestic longdistance services of $0.3 billion for the nine months endedSeptember 30, 2005. These declines were partially offset byan increase in Universal Service Fund expense of$0.1 billion for the third quarter of 2005 and$0.2 billion for the nine months ended September 30,2005, primarily due to higher revenue subject to assessment.     ***Costs of services and products***include the costsof operating and maintaining our networks, the provision foruncollectible receivables and other service-related costs,including cost of equipment sold.     Costs of services and products decreased $0.3 billion, or16.0%, in the third quarter of 2005 and $0.7 billion, or13.3%, for the nine months ended September 30, 2005,compared with the same periods of 2004. These declines wereprimarily driven by the overall impact of cost cuttinginitiatives, primarily
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**headcount reductions, as well as lower revenue. Alsocontributing to the declines was a lower provision foruncollectible receivables, resulting from improved collectionsand lower revenue.     ***Selling, general and administrative expenses***decreased $0.4 billion, or 25.7%, in the thirdquarter of 2005, and $1.3 billion, or 25.8%, for the ninemonths ended September 30, 2005, compared with the sameperiods of 2004. These declines were primarily attributable tocost control efforts throughout AT&T, as well as lower costsresulting from decreased customer levels, totaling$0.3 billion and $0.8 billion for the three and ninemonths ended September 30, 2005, respectively. Cost controlefforts included headcount reductions, as well as continuedprocess improvements. In addition, the declines reflect lowermarketing and customer acquisition spending of $0.2 billionin the third quarter of 2005 and $0.7 billion for the ninemonths ended September 30, 2005, primarily as a result ofour strategic decision in the third quarter of 2004 to shift ourfocus away from traditional consumer services. Also impactingthe third quarter of 2005 decline compared with the same periodin 2004 was a $50 million legal accrual recorded in thethird quarter of 2004 associated with the settlement of anAT&T shareholder class action lawsuit. The decline for thenine months ended September 30, 2005, was partially offsetby increased costs relating to the pending merger with SBC of$0.1 billion.     ***Depreciation and amortization expenses***decreased$24 million, or 3.7%, in the third quarter of 2005, and$1.2 billion, or 39.6%, for the nine months endedSeptember 30, 2005, compared with the same periods of 2004.The decline in the third quarter of 2005 compared with the thirdquarter of 2004 was primarily due to a lower depreciable assetbase. The year-to-date decrease was primarily attributable toasset impairment charges of $11.4 billion recorded in thethird quarter of 2004, which decreased depreciation andamortization expense by approximately $1.1 billion in thenine months ended September 30, 2005, compared with thesame period of 2004. Capital expenditures were $0.3 billionand $0.4 billion for the three months endedSeptember 30, 2005 and 2004, respectively, and were$1.1 billion and $1.4 billion for the nine monthsended September 30, 2005 and 2004, respectively. Wecontinue to focus the majority of our capital spending on ouradvanced services offerings of Internet protocol and enhanced(IP&E) services and data services, both of which includemanaged services.     ***Asset impairment and net restructuring and other charges***for the three months ended September 30, 2005, werea net credit of $1 million. During the third quarter of2005, management reevaluated preexisting restructuring reservesand determined the actual or revised estimated obligations underthese reserves differed from the estimates initially made. As aresult, a net $11 million of excess preexisting employeeseparation restructuring liabilities were reversed. Theseactivities were partially offset by an additional$10 million net charge recorded to preexisting facilitiesclosing and other reserves. These adjustments were recorded inthe Corporate and Other group and did not result from changes tothe actual or planned headcount separations or the number ofvacated facilities.     Asset impairment and net restructuring and other charges of$35 million for the nine months ended September 30,2005, consisted primarily of net charge of $55 million forfacility closing and other reserves and a related$5 million asset impairment charge. These activities werepartially offset by the net reversal of $25 million ofexcess preexisting employee separation restructuring liabilities.     The net facilities closing and other reserves of$55 million for the nine months ended September 30,2005, primarily reflected a $45 million charge recorded inthe second quarter of 2005 associated with the continuedconsolidation of our real estate portfolio and reflected thepresent value of contractual lease obligations, net of estimatedsublease income associated with vacant facilities primarilyresulting from workforce reductions. In addition, we recorded a$10 million net charge in the third quarter of 2005 basedon a reevaluation of preexisting facilities closing and otherreserves as discussed above. Net facilities closing and othercharges of $53 million were recorded in the Corporate andOther group and $2 million in AT&T Business Services.Additionally, the Corporate and Other group and AT&TBusiness Services recorded $2 million and $3 million,
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**respectively, of leasehold improvement impairment chargesrelated to the second quarter 2005 facilities closing reserve.     The net reversal of $25 million of excess preexistingemployee separation restructuring liabilities for the ninemonths ended September 30, 2005, was the result ofmanagement’s reevaluation of preexisting employeeseparation restructuring reserves. Management determined theactual or revised estimates of separation and related benefitpayments differed from the estimates initially made, resultingin a net reversal of $25 million. AT&T BusinessServices recorded $23 million of the reversal and theCorporate and Other group recorded $12 million. AT&TConsumer Services recorded an additional $10 million chargeas a result of this review. The adjustment to these reserves didnot result from changes to the actual or planned headcountseparations.     Asset impairment and net restructuring and other charges of$12,469 million for the three months endedSeptember 30, 2004, were comprised of $11,389 millionof asset impairment charges and $1,080 million of netbusiness restructuring and other charges. Charges in the amountof $11,859 million were recorded in AT&T BusinessServices, $188 million in AT&T Consumer Services and$422 million in the Corporate and Other group.     In July 2004, we announced a strategic change in our businessfocus away from traditional consumer services and towardsbusiness markets and emerging technologies. As a result of thisstrategic change, we performed an evaluation of our long-livedassets, including property, plant and equipment and internal-usesoftware (the asset group) as of July 1, 2004, as thisstrategic change created a “triggering event”necessitating such a review. In assessing impairments oflong-lived assets we follow the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-LivedAssets.” We operate an integrated telecommunicationsnetwork; therefore, we performed our testing of the asset groupat the entity level, as this is the lowest level for whichidentifiable cash flows are available.     In performing the test, we determined that the total of theexpected future undiscounted cash flows directly related to theexisting service potential of the asset group was less than thecarrying value of the asset group; therefore, an impairmentcharge was required. The impairment charges of$11,389 million represented the difference between the fairvalue of the asset group and its carrying value and wereincluded within asset impairment and net restructuring and othercharges in the consolidated statements of operations. Theimpairment charges resulted from sustained pricing pressure andthe evolution of services toward newer technologies in thebusiness market as well as changes in the regulatoryenvironment, which led to a shift away from traditional consumerservices.     AT&T Business Services recorded impairment charges of$11,330 million resulting in reductions to property, plantand equipment of $11,023 million, internal-use software of$287 million, other purchased intangibles of$15 million and other long-lived assets of $5 million.AT&T Consumer Services recorded impairment charges of$59 million resulting in reductions to property, plant andequipment of $11 million and internal-use software of$48 million.     We calculated the fair value of our asset group using discountedcash flows. The discounted cash flows calculation was madeutilizing various assumptions and estimates regarding futurerevenue, expenses and cash flows projections through 2012. Thetime horizon was determined based on the estimated remaininguseful life of the primary assets in the asset group; theprimary assets are those from which the most significant cashflows are generated, principally consisting of the transportcentral office equipment. Pursuant to SFAS No. 144,the forecasts were developed without contemplation ofinvestments in new products. The 10% discount rate utilized wasdetermined using a weighted-average cost of capital (debt andequity) and was more heavily weighted towards debt given thatthe asset group, which primarily consists of tangible assets,can be financed with a larger proportion of debt. Whenallocating the impairment to the asset categories, market
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**values were utilized, to the extent determinable, to ensure thatno asset category was impaired below its fair value.     The use of different assumptions within our discounted cashflows model when determining fair value, including the selectionof the discount rate, could result in different valuations forour long-lived assets. For every percentage point difference inthe discount rate selected, the amount of the impairment wouldhave increased or decreased by approximately $0.4 billion.     The strategic change in business focus also created a“triggering event” for a review of our goodwill. Wefollow the provisions of SFAS No. 142, “Goodwilland Other Intangible Assets” for determining impairments.SFAS No. 142 indicates that if other types of assets(in addition to goodwill) of a reporting unit are being testedfor impairment at the same time as goodwill, then those assetsare to be tested for impairment prior to performing the goodwillimpairment testing. Accordingly, the impairment charges notedabove reduced the carrying value of the reporting units whenperforming the impairment test for goodwill.     The goodwill impairment test requires us to estimate the fairvalue of our overall business enterprise down to the reportingunit level. Our reporting units are AT&T Business Servicesand AT&T Consumer Services. We estimated fair value usingboth a discounted cash flows model, as well as an approach usingmarket comparables, both of which are weighted equally todetermine fair value. Under the discounted cash flows method, weutilized estimated long-term revenue and cash flows forecasts,as well as assumptions of terminal value, together with anapplicable discount rate, to determine fair value. Under themarket approach, fair value was determined by comparing ourreporting units to similar businesses (or guideline companies).We then compared the carrying value of our reporting units totheir fair value. Since the fair value of our reporting unitsexceeded their carrying amounts, no goodwill impairment chargewas recorded.     The net business restructuring activities of $1,080 millionfor the third quarter of 2004 consisted of $1,043 millionfor employee separations (of which $339 million related tobenefit plan curtailment costs) and $37 million of facilityclosing obligations.     This exit plan covered separation costs for approximately 11,200employees (the majority of which were involuntary),approximately 60% of whom were managers. This activity resultedfrom the continued integration and automation of variousfunctions within network operations, and our strategic change infocus away from traditional consumer services and towardsbusiness markets and emerging technologies.     Facility closing reserves of $37 million were primarilyassociated with the continued consolidation of our real estateportfolio and reflect the present value of contractual leaseobligations, net of estimated sublease income, associated withvacant facilities resulting from workforce reductions andnetwork equipment space that will not be used.     Asset impairment and net restructuring and other charges of$12,736 million for the nine months endedSeptember 30, 2004, were comprised of $11,511 millionof asset impairments and $1,225 million in net businessrestructuring and other obligations. In this period, charges inthe amount of $12,002 million were recorded in AT&TBusiness Services, $189 million in AT&T ConsumerServices and $545 million in the Corporate and Other group.     The asset impairment charges of $11,511 million primarilyreflect the third quarter asset impairments of$11,389 million as discussed above. In addition, werecorded real estate impairment charges of $122 millionrelated to the decision made during the first quarter of 2004 todivest five owned properties in an effort to further reducecosts and consolidate our real estate portfolio. In accordancewith SFAS No. 144, an impairment charge was recorded,within the Corporate and Other group, to reduce the book valueof the five properties to fair-market value based on third-partyassessments (including broker appraisals). The sales of theseproperties have been completed.
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**     The net restructuring obligations of $1,225 million for thenine months ended September 30, 2004, were primarilycomprised of $1,147 million of net employee separations (ofwhich $339 million related to benefit plan curtailmentcosts) and $78 million of facility closing obligations.These exit plans covered separation costs for approximately12,600 employees (the majority of which were involuntary),nearly one-half of whom were managers. These activities resultedfrom the continued integration and automation of variousfunctions within network operations, reorganizations throughoutour non-U.S. operations, and our strategic change in focusaway from traditional consumer services and towards businessmarkets and emerging technologies. Nearly one-half of theemployees impacted by these exit plans are managers.     The facility closing reserves of $78 million were primarilyassociated with the consolidation of our real estate portfolioand reflect the present value of contractual lease obligations,net of estimated sublease income, associated with vacantfacilities resulting from workforce reductions and networkequipment space that will not be used.     ***Operating income (loss)***improved to income of$1.0 billion in the third quarter of 2005 compared with aloss of $11.3 billion in the third quarter of 2004. For thenine months ended September 30, 2005, operating income was$2.8 billion compared with a loss of $10.7 billion forthe same period of 2004. For the three and nine months endedSeptember 30, 2004, the operating loss included$12.5 billion and $12.7 billion, respectively, ofasset impairment and net restructuring and other charges. Also,as a result of the third quarter 2004 asset impairment charges,operating income for the nine months ended September 30,2005, included $1.1 billion of benefits due to lowerdepreciation on the impaired assets. ***Operating margins***improved 162.7 percentage points in the thirdquarter of 2005 and 59.9 percentage points in the ninemonths ended September 30, 2005, compared with the sameperiods of 2004. Asset impairment and net restructuring andother charges negatively impacted the margins for the three andnine months ended September 30, 2004, by163.3 percentage points and 54.8 percentage points,respectively. The benefits due to lower depreciation positivelyimpacted the margin for the nine months ended September 30,2005, by 5.3 percentage points. Excluding these items,operating margins were essentially flat in the third quarter of2005 and the nine months ended September 30, 2005, comparedwith the same periods of 2004, as operating margin improvementsat AT&T Consumer Services were essentially offset by loweroperating margins at AT&T Business Services. AT&TConsumer Services’ operating margin improvements resultedprimarily from greater rates of decline in selling, general andadministrative expenses in relation to revenue. AT&TBusiness Services’ lower operating margins were primarilyreflective of the declining higher-margin long distance retailvoice and data businesses coupled with a shift to lower-marginproducts, such as advanced and wholesale services.                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Other income (expense), net $10  $(34) $(113) $(172)     ***Other income (expense), net***, in the third quarterof 2005 was income of $10 million compared with expense of$34 million in the third quarter of 2004. The favorablevariance was primarily due to settlements of insurance claimsand legal matters in 2005, losses in 2004 associated with theearly repurchase of long-term debt, and increasedinvestment-related income. These improvements were partiallyoffset by an impairment of our investment in leveraged leases ofcertain aircraft as a result of the bankruptcy filings of DeltaAir Lines, Inc. and Northwest Airlines Corp. Other income(expense), net, for the nine months ended September 30,2005, compared with the same period of 2004, improved$59 million reflecting lower losses on early repurchases oflong-term debt and increased investment-related income.Partially offsetting these favorable variances were higherimpairment charges of our investment in leveraged leases ofcertain aircraft, and a settlement in 2004 associated with abusiness disposition.
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**     We continue to hold $0.4 billion of investments inleveraged leases, including leases of commercial aircraft.Should the financial difficulties in the U.S. airlineindustry lead to further bankruptcies or lease restructurings,we could record additional losses associated with our aircraftlease portfolio. In addition, in the event of bankruptcy orrenegotiation of lease terms, if any portion of the non-recoursedebt is canceled, such amounts would result in taxable income toAT&T and, accordingly, a cash tax expense.                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Interest (expense) $(166) $(192) $(538) $(611)     ***Interest (expense)***decreased 13.7%, or$26 million, in the third quarter of 2005 compared with thethird quarter of 2004, and decreased 12.0%, or $73 million,for the nine months ended September 30, 2005, compared withthe nine months ended September 30, 2004. These declineswere reflective of a lower debt balance due to early debtredemptions and scheduled debt maturities in 2004 and 2005,partially offset by the impact of interest rate step-ups oncertain bonds as a result of long-term debt ratings downgradesin 2004.                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    (Provision) benefit for income taxes $(279) $4,402  $(845) $4,741     Effective tax rate  35.0%  38.1%  38.5%  41.3%     The ***effective tax rate***is the(provision) benefit for income taxes as a percentage ofincome (loss) before income taxes. The effective tax rate forthe third quarter of 2005 was positively impacted by taxbenefits associated with the settlement of prior-year stateincome tax liabilities and tax benefits recognized in connectionwith the Foreign Earnings Repatriation Provision of the AmericanJobs Creation Act of 2004. The effective income tax benefit ratefor the nine months ended September 30, 2004, waspositively impacted by approximately 3.2 percentage pointsdue to the reversal of a portion of the valuation allowance werecorded in 2002 attributable to the book and tax basisdifference related to our investment in AT&T Latin America.During February 2004, the subsidiaries of AT&T Latin Americawere sold to Telefonos de Mexico S.A. de C.V., or Telmex, andthe AT&T Latin America plan of liquidation became effective.As a result, we no longer needed a portion of the valuationallowance and recorded an income tax benefit of$0.4 billion in the first quarter of 2004.**Segment Results**     Our results are segmented according to the customers we service:AT&T Business Services and AT&T Consumer Services. Thebalance of our operations is included in a Corporate and Othergroup. This group primarily reflects corporate staff functionsand the elimination of transactions between segments. Thediscussion of segment results includes revenue, operatingincome, capital additions and total assets.     Operating income is the primary measure used by our chiefoperating decision makers to measure our operating results andto measure segment profitability and performance. Seenote 11 to our consolidated financial statements for areconciliation of segment results to consolidated results.     Total assets for each segment include all assets, exceptintercompany receivables. Nearly all prepaid pension assets,taxes and corporate-owned or leased real estate are held at thecorporate level, and therefore are included in the Corporate andOther group. A substantial majority of our property, plant andequipment (including network assets) is included in the AT&TBusiness Services segment. Capital additions for each
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**segment include capital expenditures for property, plant andequipment, additions to internal-use software and additions tononconsolidated investments.     We continually review our management model and structure, whichmay result in additional adjustments to our operating segmentsin the future.***AT&T Business Services***     AT&T Business Services provides a variety of globalcommunications services to large domestic and multinationalbusinesses, government agencies and small- and medium-sizedbusinesses. These services include long distance, international,toll-free and local voice, including wholesale transportservices (sales of services to service resellers, such as otherlong distance companies, local service providers, wirelesscarriers and cable companies), as well as data services andIP&E services. AT&T Business Services also providesoutsourcing solutions and other professional services.                    **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Revenue(1)                     Long distance voice services $2,063  $2,364  $6,311  $7,363      Local voice services  313   390   1,048   1,183                  Total voice services  2,376   2,754   7,359   8,546      Data services  1,505   1,693   4,608   5,098      IP&E services  630   587   1,838   1,705                  Total data and IP&E services  2,135   2,280   6,446   6,803     Outsourcing, professional services and other  598   611   1,778   1,779                  Total revenue $5,109  $5,645  $15,583  $17,128     Operating income (loss) $513  $(11,095) $1,629  $(10,860)    Capital additions $344  $391  $1,063  $1,324            **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)**    Total assets $19,541  $20,621  (1)     Revenue includes equipment and product sales of    $118 million and $103 million for the three months    ended September 30, 2005 and 2004, respectively, and    $310 million and $241 million for the nine months    ended September 30, 2005 and 2004, respectively.***Revenue***     AT&T Business Services revenue decreased $0.5 billion,or 9.5%, in the third quarter of 2005 and $1.5 billion, or9.0%, in the nine months ended September 30, 2005, comparedwith the same prior-year periods. These declines reflectcontinued pricing pressure in traditional long distance voiceand data services as well as volume weakness in data services.     Long distance voice revenue in the third quarter of 2005declined $0.3 billion, or 12.7%, and declined$1.1 billion, or 14.3%, for the nine months endedSeptember 30, 2005, compared with the same prior-yearperiods. These declines were driven by a decrease in the averageprice per minute in both the retail and
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**wholesale businesses combined with a decline in retail volumes,primarily due to the impacts of competition and substitution.Partially offsetting these declines was an increase inlower-priced wholesale minutes. Total long distance volumesincreased about 10% in the third quarter of 2005 and increasedapproximately 3% in the nine months ended September 30,2005, compared with the same prior-year periods. The significantincrease in volumes in the third quarter of 2005 reflectsincreased wholesale business with several wireless carriers.     Local voice services revenue declined $0.1 billion, or19.7%, in the third quarter of 2005, and $0.1 billion, or11.4%, for the nine months ended September 30, 2005,compared with the same prior-year periods. The decrease in bothperiods reflects declines in our bundled product offers, andlower payphone-related revenue as a result of the sale of ourpayphone business. In addition, for the nine months endedSeptember 30, 2005, compared to the same period in 2004,the declines reflect lower reciprocal compensation revenue(revenue generated when local exchange carriers use our localnetwork to terminate calls).     Data services revenue for the third quarter of 2005 declined$0.2 billion, or 11.1%, and $0.5 billion, or 9.6%, forthe nine months ended September 30, 2005, compared with thesame prior-year periods. The declines were primarily driven bycompetition, which has led to declining prices. In addition, thedeclines were attributable to weak demand including the effectof technology migration. For the third quarter of 2005 comparedwith the same period of 2004, this decline also reflects highercustomer disconnects of prepaid network capacity in 2004, whichnegatively impacted the growth rate by approximately1.5 percentage points.     IP&E services revenue increased $43 million, or 7.3%,in the third quarter of 2005, and $0.1 billion, or 7.8%,for the nine months ended September 30, 2005, compared withthe same prior-year periods. The increases were primarilyattributable to growth in our customer base associated withadvanced products such as E-VPN (Enhanced Virtual PrivateNetwork) and IP-enabled frame relay services, partially offsetby declines in legacy products of Managed Internet Access andVirtual Private Networks.     Outsourcing, professional services and other revenue declined2.3% in the third quarter of 2005, and 0.1% for the nine monthsended September 30, 2005, compared with the same periods of2004. These declines were primarily driven by the impact ofcontract terminations and renegotiations. Partially offsettingthe year-to-date decline was strength in government and retailprofessional services and equipment and product sales.***Operating Income (Loss)***     Operating income was $0.5 billion in the third quarter of2005, an increase of $11.6 billion, or 104.6%, comparedwith a loss of $11.1 billion in the third quarter of 2004.Operating income for the nine months ended September 30,2005, of $1.6 billion increased $12.5 billion comparedwith an operating loss of $10.9 billion for the nine monthsended September 30, 2004. Operating income for the threeand nine months ended September 30, 2005, reflects lowerasset impairment and net restructuring and other charges of$11.9 billion and $12.0 billion, respectively. As aresult of the 2004 asset impairment charges, the nine monthsended September 30, 2005, included a net benefit of$1.0 billion due to lower depreciation on the impairedassets. Exclusive of these items, the decline in operatingincome in the third quarter and nine months endedSeptember 30, 2005, reflects decreased long distance voiceand data services revenue partially offset by a reduction inoperating expenses due to cost controls.     Operating margin was 10.0% and (196.5)% for the third quarter of2005 and 2004, respectively. For the nine months endedSeptember 30, 2005 and 2004, operating margin was 10.5% and(63.4)%, respectively. The asset impairment and netrestructuring and other charges negatively impacted the thirdquarter and nine months ended September 30, 2004 operatingmargin by 210.0 and 70.1 percentage points, respectively.The net depreciation benefit positively impacted the nine monthsended September 30, 2005 operating margin by6.5 percentage points and had no impact on the thirdquarter results, when compared to 2004. Excluding the impacts ofthese items, the decreased margins were primarily reflective ofthe declining higher-margin long
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**distance retail voice and data businesses coupled with a shiftto lower-margin products, such as advanced and wholesaleservices.***Other Items***     Capital additions were $0.3 billion in the third quarter of2005 and were $1.1 billion for the nine months endedSeptember 30, 2005. We continue to concentrate the majorityof capital spending on our advanced services offerings ofIP&E services and data services, both of which includemanaged services.     Total assets declined $1.1 billion, or 5.2%, atSeptember 30, 2005, from December 31, 2004, primarilydriven by lower net property, plant and equipment andinternal-use software as a result of depreciation andamortization expenses, partially offset by capital additions,and lower accounts receivable.**AT&T Consumer Services**     AT&T Consumer Services provides a variety of communicationservices to residential customers. These services includetraditional long distance voice services such as domestic andinternational dial services (long distance or local toll callswhere the number “1” is dialed before the call) andcalling card services. Transaction services, such as prepaidcard and operator-assisted calls, are also offered.Collectively, these represent stand-alone long distance servicesand are not offered in conjunction with any other service. Inaddition, AT&T Consumer Services provides dial-up Internetservices and all distance services, which generally bundle longdistance, local and local toll.                    **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Revenue                     Stand-alone long distance voice and other services $924  $1,256  $2,923  $4,045      Bundled services  575   724   1,854   2,053                  Total revenue $1,499  $1,980  $4,777  $6,098     Operating income $541  $281  $1,605  $892     Capital additions $—  $9  $—  $37            **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)**    Total assets $595  $743 ***Revenue***     AT&T Consumer Services revenue declined $0.5 billion,or 24.3%, in the third quarter of 2005 and $1.3 billion, or21.7%, for the nine months ended September 30, 2005,compared with the same prior-year periods. These declines wereprimarily due to stand-alone long distance voice services, whichdecreased $0.3 billion to $0.9 billion in the thirdquarter of 2005, and decreased $1.1 billion to$2.7 billion for the nine months ended September 30,2005, largely due to the impact of ongoing competition, whichhas led to a loss of market share, as well as substitution.Partially offsetting the declines in stand-alone long distancevoice services were targeted price increases during the latterpart of 2004 and throughout 2005. Also contributing to theoverall revenue declines was lower bundled services revenue dueto our third quarter 2004 strategic decision to shift our focusaway from traditional consumer services.
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**     Total long distance calling volumes (including long distancevolumes sold as part of a bundle) declined approximately 32% forthe third quarter of 2005, and approximately 30% in the ninemonths ended September 30, 2005, compared with the sameprior-year periods, primarily as a result of competition andwireless and Internet substitution.***Operating Income***     Operating income increased $0.3 billion, or 92.7%, in thethird quarter of 2005 and $0.7 billion, or 80.0%, for thenine months ended September 30, 2005, compared with thesame prior-year periods. Operating margin increased to 36.1% inthe third quarter of 2005 from 14.2% in the third quarter of2004, and to 33.6% for the nine months ended September 30,2005, from 14.6% for the nine months ended September 30,2004. Operating income for the third quarter and the nine monthsended September 30, 2004, included asset impairment and netrestructuring and other charges of $0.2 billion. As aresult of the 2004 asset impairment charges, operating incomefor the nine months ended September 30, 2005, included$66 million of benefits due to lower depreciation on assetsimpaired by AT&T Consumer Services, as well as lowernetwork-related charges from AT&T Business Services. Theasset impairment and net restructuring and other chargesnegatively impacted operating margin for the third quarter andnine months ended September 30, 2004, by 9.5 and3.1 percentage points, respectively. The net depreciationbenefit positively impacted the operating margin for the ninemonths ended September 30, 2005, by 1.4 percentagepoints and had no impact on the third quarter 2005 results, whencompared to 2004. Excluding these items, the increases inoperating margin were primarily due to greater rates of declinein selling, general and administrative expenses and costs ofservices and products in relation to revenue. The declines inselling, general and administrative expenses reflectedreductions in sales and marketing expenses, primarily due to ourstrategic decision in the third quarter of 2004 to shift ourfocus away from traditional consumer services. Costs of servicesand products declined primarily due to reduced bad debt expensesas a result of improved collections and lower revenue. Alsocontributing to the increase in operating margin were targetedprice increases during the latter part of 2004 and throughout2005. These increases in operating margin were partially offsetby a lower rate of decline in access and other connectionexpenses relative to revenue.***Other Items***     Capital additions declined $9 million during the thirdquarter of 2005 and $37 million for the nine months endedSeptember 30, 2005, compared with the same prior-yearperiods, primarily due to our change in strategic focus.     Total assets declined $0.1 billion at September 30,2005, from December 31, 2004. The decline was primarily dueto lower accounts receivable, reflecting lower revenue andimproved cash collections.**Corporate and Other**     This group primarily reflects the results of corporate stafffunctions, brand licensing fee revenue and the elimination oftransactions between segments.                   **For the Three Months** **For the Nine Months**  **Ended September 30,** **Ended September 30,**       **2005** **2004** **2005** **2004**           **(Dollars in millions)**    Revenue $12  $13  $35  $38     Operating (loss) $(99) $(511) $(390) $(728)    Capital additions $6  $6  $15  $10 
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**           **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)**    Total assets $9,572  $11,440 ***Operating (Loss)***     Operating (loss) decreased $412 million to$(99) million for the third quarter of 2005 and decreased$338 million to $(390) million for the nine monthsended September 30, 2005, compared with the same periods of2004. The decreases in operating (loss) in the third quarter of2005 and the nine months ended September 30, 2005, comparedwith the respective periods of 2004 were primarily due to lowerasset impairment and net restructuring and other charges.Partially offsetting the decreased loss for the nine monthsended September 30, 2005, compared with the same period of2004, were costs recorded in 2005 relating to the pending mergerwith SBC as well as increased pension expenses primarily as aresult of higher loss amortization and a lower expected returnresulting from a 25 basis point decrease in both thediscount rate and the expected rate of return in 2005.***Other Items***     Total assets decreased $1.9 billion to $9.6 billion atSeptember 30, 2005, from December 31, 2004. Thisdecrease was primarily driven by the maturity of debt andrelated combined interest rate foreign currency swap agreementsin February 2005, as well as the April 2005 early redemption ofdebt.**Financial Condition**           **At** **At**  **September 30,** **December 31,**  **2005** **2004**       **(Dollars in millions)**    Total assets $29,708  $32,804     Total liabilities $21,833  $25,785     Total shareowners’ equity $7,875  $7,019      ***Total assets***declined $3.1 billion, or 9.4%,to $29.7 billion at September 30, 2005, compared withDecember 31, 2004. Total assets declined primarily as aresult of cash payments made related to scheduled maturities ofdebt, as well as the April 2005 debt repurchase and common stockdividend payments. Cash from operations partially offset thesedeclines (see “Liquidity” discussion for furtherdetails). Total assets also declined due to depreciation andamortization expense recorded during the period, loweringproperty, plant and equipment and other assets. While notimpacting total assets, the release of restricted cash and thesettlement of a hedge related to debt that matured in February2005, resulted in a decrease in other current assets with acorresponding increase to cash.     ***Total liabilities***decreased $4.0 billion, or15.3%, to $21.8 billion at September 30, 2005,compared with December 31, 2004. The decrease in totalliabilities was primarily due to a lower debt balance of$3.0 billion, attributable to scheduled repayments of debt,as well as an April 2005 debt repurchase. Additionally,short-term and long-term compensation and benefit-relatedliabilities declined by $0.6 billion, primarily due to thepayment of year-end bonus and salary accruals, employeeseparation payments and contributions to the postretirementbenefit trust, partially offset by higher pension andpostretirement benefit accruals.     ***Total shareowners’ equity***increased$0.9 billion, or 12.2%, to $7.9 billion atSeptember 30, 2005, compared with December 31, 2004.This increase was primarily due to net income for the period,partially offset by dividends declared.
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)****Liquidity**            **For the Nine Months**  **Ended September 30,**     **2005** **2004**       **(Dollars in millions)*****Cash Flows:***             Provided by operating activities $2,728  $4,011      Used in investing activities  (253)  (1,340)     Used in financing activities  (3,336)  (4,397)            Net decrease in cash and cash equivalents $(861) $(1,726)            Net cash provided by ***operating activities***of$2.7 billion for the nine months ended September 30,2005, declined $1.3 billion from $4.0 billion in thecomparable prior-year period, largely driven by the decliningstand-alone long distance voice and data businesses. Inaddition, the year-over-year decrease reflects payments in 2005for settlements of the At Home Corporation and AT&Tshareholder litigation of $220 million net of amountscollected from Comcast Corporation (see note 10 for afurther discussion of these matters), as well as higher employeeseparation payments in 2005. Favorably impacting cash flows in2005 compared with 2004 was our continued focus on controllingcosts.     Our ***investing activities***resulted in net cash usedof $0.3 billion for the nine months endedSeptember 30, 2005, compared with $1.3 billion for thenine months ended September 30, 2004. The decline in netcash used primarily reflects the release of restricted cashrelated to debt that matured in February 2005, as well as areduction in capital expenditures. Also contributing to thedecline were higher proceeds from sales of property, plant andequipment and businesses.     During the nine months ended September 30, 2005, net cashused in ***financing activities***was $3.3 billioncompared with $4.4 billion for the nine months endedSeptember 30, 2004. During 2005, we made net payments of$3.0 billion to reduce debt (including redemption premiumsand foreign currency mark-to-market payments) as a result ofscheduled maturities and an April 2005 debt repurchase, and paiddividends of $0.6 billion. In addition, reflected as another financing activity in 2005 was the receipt ofapproximately $0.3 billion for the settlement of a combinedinterest rate foreign currency swap agreement in conjunctionwith the scheduled repayment of debt. During 2004, we made netpayments of $4.2 billion to reduce debt (includingredemption premiums and foreign currency mark-to-marketpayments), primarily reflecting the early termination of debt,and paid dividends of $0.6 billion. Reflected as an otherfinancing item in 2004 was the receipt of approximately$0.4 billion for the settlement of a combined interest rateforeign currency swap agreement in conjunction with the earlyrepayment of Euro notes during 2004.***Working Capital and Other Sources of Liquidity***     At September 30, 2005, our working capital ratio (currentassets divided by current liabilities) was 1.05.     We have a variety of sources of liquidity available to us asdiscussed below. However, the SBC merger agreement provides thatwe cannot incur additional indebtedness over $100 millionin the aggregate or issue equity (other than for employee andshareowner plans) or convertible securities without the priorconsent of SBC. The merger agreement also requires us to pay aspecial dividend in excess of $1.0 billion in connectionwith the closing of the transaction. We expect to havesufficient liquidity from cash on hand and cash from operationsto fund all liquidity needs, including the special dividend,through the expected closing of the merger without anyadditional borrowings or financings. If competition and productsubstitution accelerate beyond current expectations and/oreconomic conditions worsen or do not improve, our cash flows from
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**operations would decrease, negatively impacting our liquidity.Similarly, if we were to experience unexpected requirements toexpend cash, our liquidity could be negatively impacted.However, we believe our access to the capital markets isadequate to provide the flexibility we desire in funding ouroperations, subject to SBC’s consent.     In the event we need additional financing and SBC agreed to suchfinancing, we could utilize the AT&T Business Services’364-day accounts receivable securitization facility, which hasbeen extended through July 2006. The amended AT&T BusinessServices facility provides for up to $0.8 billion ofavailable financing, limited by the eligible receivablesbalance, which varies from month to month. Proceeds from thesecuritization facility are recorded as borrowings and areincluded in short-term debt. Approximately $0.1 billion wasoutstanding under the facility at September 30, 2005. OnMay 6, 2005, we repaid $0.1 billion of borrowingsoutstanding under the AT&T Consumer Services facility andsubsequently terminated this facility. In addition, we have$2.4 billion remaining under a universal shelf registration.     Further financing is available through the $0.5 billionsyndicated 364-day credit facility that was entered into onOctober 5, 2005. The entire facility can be utilized forletters of credit, which reduces the amount available forborrowings. No borrowings or letters of credit are currentlyoutstanding under this facility. This facility replaced ourexisting $1.0 billion 364-day credit facility datedOctober 6, 2004.     On April 1, 2005, we entered into a $0.3 billioncredit facility maturing on March 20, 2006. This creditfacility collateralizes our letters of credit issued in thenormal course of business, which were previously issued againstthe $0.5 billion sub-limit in the facility that matured inOctober 2005. At September 30, 2005, approximately$0.3 billion of letters of credit were collateralized underthis facility.     We cannot provide any assurances that any or all of thesesources of funding will be available at the time they are neededor in the amounts required. Additionally, as our short-termcredit ratings from Standard and Poor’s (S&P) andMoody’s Investors Services, Inc. (Moody’s) have beenwithdrawn at our request, there is no assurance that we willhave any significant access to the commercial paper market.Furthermore, the combination of the requirement to reserve cashto pay the special dividend and the SBC-merger restrictions onincurring indebtedness could limit our ability to utilizesources of liquidity, which in turn, could negatively impactAT&T.     The $1.0 billion credit facility that was in place atSeptember 30, 2005, and the securitization facility containfinancial covenants that require us to meet a debt-to-EBITDA(defined as operating income plus depreciation and amortizationexpenses excluding any asset impairment or net restructuring andother charges) ratio not exceeding 2.25 to 1 (calculatedpursuant to the credit facility) and an EBITDA-to-net interestexpense ratio of at least 3.50 to 1 (calculated pursuant to thecredit facility) for four consecutive quarters ending on thelast day of each fiscal quarter. At September 30, 2005, wewere in compliance with these covenants. The $0.5 billioncredit facility contains similar covenants.***Credit Ratings and Related Debt Implications***     As of September 30, 2005, our credit ratings were asfollows:             **Short-Term** **Long-Term**  **Credit Rating Agency** **Rating** **Rating** **Outlook**           Standard & Poor’s  Withdrawn   BB+      Watch Positive    Fitch  B   BB+      Watch Positive    Moody’s  Withdrawn   Ba1      Review for Possible Upgrade     As a result of the SBC merger announcement, on January 31,2005 and February 1, 2005, Fitch and S&P, respectively,put our long-term debt ratings on “watch positive” andremoved the “outlook negative” and, on
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**January 31, 2005, Moody’s placed our long-term debtrating on “review for possible upgrade” and removedthe “outlook negative” debt rating. In addition, basedon our request, S&P and Moody’s have withdrawn ourshort-term credit ratings.     Our access to capital markets, as well as the cost of ourborrowings, are affected by our debt ratings. If our debtratings were downgraded, we would be required to pay higherrates on certain existing debt and could be required to postcash collateral for certain interest-rate swaps in which we werein a net payable position. Additionally, our access to thecapital markets may be further restricted and/or suchreplacement financing may be more costly or have additionalcovenants than we had in connection with our debt atSeptember 30, 2005.     AT&T is generally the obligor for debt issuances. However,there are some instances in which AT&T is not the obligor,for example, the securitization facility and certain capitalleases. The total debt of these entities, which are fullyconsolidated, was approximately $0.2 billion atSeptember 30, 2005, and is included within short-term andlong-term debt.***Cash Requirements***     Our cash needs for 2005 will primarily relate to capitalexpenditures, repayment of debt, the payment of dividends andincome tax related payments. During April 2005, we repurchased$1.25 billion of our outstanding debt, which resulted in aloss of $0.2 billion. We expect our capital expenditures in2005 to be approximately $1.5 billion. We expect income taxpayments to be significantly higher in 2005 compared with 2004.     We anticipate contributing approximately $550 million tothe U.S. postretirement benefit plans in 2005,approximately $400 million of which was contributed as ofSeptember 30, 2005. We expect to contribute approximately$30 million to our U.S. nonqualified pension plan in2005. No contribution is expected for our U.S. qualifiedpension plans in 2005.***Contractual Cash Obligations***     We have contractual obligations to purchase certain goods orservices from various other parties. During the nine monthsended September 30, 2005, we entered into new contracts andmodified the commitment amounts of certain existing contracts,including commitments to utilize network facilities from localexchange carriers, which were previously assessed based ontermination fees (see discussion below). The net effect of thesechanges was an increase to our unconditional purchaseobligations of approximately $1.3 billion in 2005,$874 million in aggregate for 2006 and 2007, and$52 million in aggregate for 2008 and 2009. A portion ofthe 2005 obligation was satisfied in the nine months endedSeptember 30, 2005. Also during the nine months endedSeptember 30, 2005, we entered into contracts under whichwe have calculated the minimum obligation for such agreementsbased on termination fees that can be paid to exit thecontracts. In addition, we modified existing contracts thatcontained termination fees. The net effect of these changes isan increase to termination fees of approximately$47 million in 2005, $148 million in aggregate for2006 and 2007, $46 million in aggregate for 2008 and 2009and $10 million in 2010 and beyond. Termination fees forany individual contract would not be paid in every year, ratheronly in the year of termination.     We have contractual obligations to utilize network facilitiesfrom local exchange carriers with terms greater than one year.Since the contracts have no minimum volume requirements, and arebased on an interrelationship of volumes and discount rates, weassessed our minimum commitment based on the penalties to exitthe contracts, assuming we exit the contracts as ofDecember 31 of each year. During the nine months endedSeptember 30, 2005, we entered into new contracts withlocal exchange carriers, which had minimum purchase requirementsand therefore are discussed above and no longer assessed basedon termination fees. In
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**addition, the termination fees with other local exchangecarriers changed based on increases or decreases to the level ofservices purchased. The net effect of these changes resulted ina decrease to termination fees of approximately$0.4 billion in 2005, and an increase of approximately$0.7 billion in aggregate for 2006 and 2007, andapproximately $0.2 billion in aggregate for 2008 and 2009.Termination fees for any individual contract would not be paidin every year, rather only in the year of termination.**Risk Management**     We are exposed to market risk from changes in interest andforeign currency exchange rates. In addition, we are exposed tomarket risk from fluctuations in the prices of securities. On alimited basis, we use certain derivative financial instruments,including interest rate swaps, foreign currency exchangecontracts, combined interest rate foreign currency contracts,forwards and other derivative contracts, to manage these risks.We do not use financial instruments for trading or speculativepurposes. All financial instruments are used in accordance withBoard-approved policies.**Recently Issued Accounting Pronouncements**     In June 2005, the Financial Accounting Standards Board(FASB) issued FASB Staff Position FSPFAS No. 143-1, “Accounting for ElectronicEquipment Waste Obligations,” to address the accounting forobligations associated with the Directive on Waste Electricaland Electronic Equipment (the Directive) issued by the EuropeanUnion (EU). The Directive was enacted on February 13, 2003,and directs EU-member countries to adopt legislation to regulatethe collection, treatment, recovery, and environmentally sounddisposal of electrical and electronic waste equipment. TheDirective concludes that commercial users are obligated toretire, in an environmentally sound manner, specific assets thatqualify as historical waste. FSP FAS No. 143-1 iseffective for reporting periods ending after June 8, 2005,which is June 30, 2005 for us, or the date of adoption ofthe Directive by the applicable EU-member countries, if later.We have evaluated the impact to our operations in EU countriesthat have adopted legislation and have deemed these costs to beimmaterial. We will continue to evaluate the impact as otherEU-member countries enact legislation. However, if the remainingEU-member countries enact similar legislation, we do not expecta material impact to our results of operations.     In March 2005, the FASB issued FASB Interpretation(FIN) 47, “Accounting for Conditional Asset RetirementObligations,” an interpretation of SFAS No. 143,“Accounting for Asset Retirement Obligations.”FIN 47 clarifies that the term *conditional assetretirement obligation*, as used in SFAS No. 143,refers to a legal obligation to perform an asset retirementactivity in which the timing and/or method of settlement areconditional on a future event that may or may not be within thecontrol of the entity. The obligation to perform the assetretirement activity is unconditional even though uncertaintyexists about the timing and/or method of settlement. FIN 47requires an entity to recognize a liability for the fair valueof the conditional asset retirement obligation if the fair valueof the liability can be reasonably estimated. FIN 47 iseffective for fiscal years ending after December 15, 2005,which is December 31, 2005 for us; however, earlierapplication is permitted. We are currently evaluating the impactof FIN 47 on our results of operations, financial positionand cash flows.     In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment,” which requiresa public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based onthe grant-date fair value of the award. Additional guidance toassist in the initial interpretation of this revised statementwas subsequently issued by the SEC in Staff AccountingBulletin No. 107. SFAS No. 123 (revised2004) eliminates the alternative of using Accounting PrinciplesBoard (APB) Opinion No. 25 intrinsic-value method ofaccounting that was provided for in SFAS No. 123 asoriginally issued. Effective January 1, 2003, we adoptedthe fair-value recognition provisions of original
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**AT&T CORP. AND SUBSIDIARIES****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND****RESULTS OF OPERATIONS — (Continued)**SFAS No. 123 on a prospective basis and we began torecord stock-based compensation expense for all employee awards(including stock options) granted or modified afterJanuary 1, 2003, using the nominal vesting approach. Had weused the non-substantive vesting method, which will be requiredupon adoption, our results of operations would not have beenmaterially different from those reported for the nine monthsended September 30, 2005 and 2004. Adoption of the revisedstandard will require that we begin to recognize expense forunvested awards issued prior to January 1, 2003.Additionally, this standard requires that estimated forfeituresbe considered in determining compensation expense. For equityawards other than stock options, we have not previously includedestimated forfeitures in determining compensation expense.Accordingly, the difference between the expense we haverecognized to date and the compensation expense as calculatedconsidering estimated forfeitures will be reflected as acumulative effect of accounting change upon adoption. Further,SFAS No. 123 (revised 2004) requires that excess taxbenefits be recognized as an addition to paid-in capital andamends SFAS No. 95, “Statement of CashFlows,” to require that the excess tax benefits be reportedas a financing cash inflow rather than as a reduction of taxespaid. SFAS No. 123 (revised 2004) is effective forannual periods beginning after June 15, 2005, which isJanuary 1, 2006 for us. We intend to elect a modifiedprospective adoption beginning in the first quarter of 2006 anddo not anticipate that the adoption of SFAS No. 123(revised 2004) will have a material impact on our results ofoperations.     In December 2004, the FASB issued FASB Staff Position FSPFAS 109-2, “Accounting and Disclosure Guidance for theForeign Earnings Repatriation Provision within the American JobsCreation Act of 2004,” which provides guidance on theaccounting and disclosure requirements for the repatriationprovision of the Act. The Act creates a one-time tax incentivefor U.S. corporations to repatriate accumulated incomeearned abroad by providing a tax deduction of 85% of dividendsreceived for certain foreign earnings that are repatriated. Inan effort to assist taxpayers with the interpretation of therepatriation provision of the Act, in May 2005, the UnitedStates Department of Treasury issued detailed guidance oncertain technical aspects that required clarification. Basedupon this guidance, in the third quarter of 2005 we completedour evaluation of the impact of the repatriation provision andrecorded an income tax benefit of $6 million related todeferred taxes previously provided on foreign earnings.
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**Item 3.*****Quantitative and Qualitative Disclosures About Market    Risk***     The information required by this Item is contained in thesection entitled “Risk Management” in Item 2.**Item 4.*****Controls and Procedures***     As of the end of the period covered by this report, we completedan evaluation, under the supervision and with the participationof our management including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant toExchange Act Rules 13a-15 or 15d-15. Based upon thatevaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls andprocedures were effective as of September 30, 2005. Therehave not been any changes in our internal controls overfinancial reporting identified in connection with the evaluationrequired by Exchange Act Rules 13a-15 or l5d-15 orotherwise that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.
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**PART II — OTHER INFORMATION****Item 1.*****Legal Proceedings***     Refer to Part 1, Footnote 10, “Commitments andContingencies” for discussion of certain legal proceedings.**Item 2.*****Unregistered Sales of Equity Securities and Use of    Proceeds***     The following table contains information about our purchases ofour equity securities during the third quarter of 2005.**Issuer Purchases of Equity Securities**                                                    **Maximum Number**          **Total Number**  **(or Approximate**          **of Shares**  **Dollar Value) of**          **(or Units)**  **Shares or Units**    **Total Number**  **Average Price**  **Purchased as**  **that May Yet**    **of Shares**  **Paid per**  **Part of Publicly**  **Be Purchased**    **(or Units)**  **Share**  **Announced Plans**  **Under the Plans** **Period**  **Purchased(1)(2)**  **(or Unit)**  **or Programs**  **or Programs**                       July 1, 2005 to July 31, 2005   4,130   $20.6039    0    0                        August 1, 2005 to August 31, 2005   9,386   $19.9889    0    0                        September 1, 2005 to September 30, 2005   15,970   $19.6058    0    0                          Total   29,486   $19.8676    0    0                     (1)     Represents restricted stock units and performance shares    redeemed to pay taxes related to the vesting of restricted stock    units and performance shares awarded under employee benefit    plans. (2)     Does not include shares purchased in the open market by the    trustee of our Shareowner Dividend Reinvestment and Stock    Purchase Plan as follows: 14,505 shares in July at an    average price paid per share of $19.1397; 305,251 shares in    August at an average price paid per share of $19.8295; and    36,244 shares in September at an average price paid per    share of $19.6365.
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**Item 6.*****Exhibits and Reports on Form 8-K***     (a) *Exhibits:*     **Exhibit**  **Number**      12      Computation of Ratio of Earnings to Fixed Charges.  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.     (b) *Reports on Form 8-K*     During the third quarter of 2005, the following reports onForm 8-K were filed and/or furnished: Form 8-K datedJuly 20, 2005 was furnished pursuant to Item 2.02(Results of Operations and Financial Condition) and 9.01(Financial Statements and Exhibits), on July 21, 2005;Form 8-K dated September 16, 2005 was filed pursuantto Item 8.01 (Other Events); and Form 8-K datedSeptember 21, 2005 was filed pursuant to Item 1.01(Entry into a Material Definitive Agreement).
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**SIGNATURES**     Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized. AT&T Corp.          /s/ C.R. Reidy           By: Christopher R. Reidy *Vice President and Controller*Date: November 3, 2005
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**EXHIBIT INDEX**     **Exhibit**  **Number**      12      Computation of Ratio of Earnings to Fixed Charges.  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.