##### Table of Contents









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 June 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


þ o


þ o












---

TABLE OF CONTENTS



|                                                         |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                         | PART I -- FINANCIAL INFORMATION                                                              
|                                                         | Item 1. Financial Statements                                                                 
|                                                         | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                         | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                         | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                            
|                                                         | Item 1. Legal Proceedings                                                                    
|                                                         | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                          
|                                                         | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                         | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                              
|EXHIBIT INDEX                                           
|EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|EX-31.1: CERTIFICATION                                  
|EX-31.2: CERTIFICATION                                  
|EX-32.1: CERTIFICATION                                  
|EX-32.2: CERTIFICATION                                  



---



##### Table of Contents






PART I  FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

AT&T CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------ | - | ------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                           |  | For the Three Months                            |        |   | For the Six Months |  
|                                                                                                           |  | Ended June 30,                                  |        |   | Ended June 30,     |  
|                                                                                                           |  |                                                 |        |   |                    |  
|                                                                                                           |  | 2005                                            |        |   | 2004               |   |        | 2005 |  |   | 2004   |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|                                                                                                           |  | (Dollars in millions, except per share amounts) |       
|Revenue                                                                                                    |  | $                                               | 6,760  |   |                    | $ | 7,636  |      |  | $ | 13,775 |   |  | $ | 15,626 |  
|Operating Expenses                                                                                         |  |                                                 |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Access and other connection                                                                                |  |                                                 | 2,390  |   |                    |   | 2,481  |      |  |   | 4,794  |   |  |   | 5,119  |  
|Costs of services and products (excluding depreciation of $419,
    $935, $823 and $1,871, included below) |  |                                                 | 1,560  |   |                    |   | 1,759  |      |  |   | 3,188  |   |  |   | 3,623  |  
|Selling, general and administrative                                                                        |  |                                                 | 1,325  |   |                    |   | 1,763  |      |  |   | 2,602  |   |  |   | 3,507  |  
|Depreciation and amortization                                                                              |  |                                                 | 630    |   |                    |   | 1,231  |      |  |   | 1,266  |   |  |   | 2,481  |  
|Asset impairment and net restructuring and other charges                                                   |  |                                                 | 36     |   |                    |   | 54     |      |  |   | 36     |   |  |   | 267    |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|Total operating expenses                                                                                   |  |                                                 | 5,941  |   |                    |   | 7,288  |      |  |   | 11,886 |   |  |   | 14,997 |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|Operating Income                                                                                           |  |                                                 | 819    |   |                    |   | 348    |      |  |   | 1,889  |   |  |   | 629    |  
|Other (expense) income, net                                                                                |  |                                                 | (153   | ) |                    |   | 36     |      |  |   | (123   | ) |  |   | (138   | )
|Interest (expense)                                                                                         |  |                                                 | (169   | ) |                    |   | (191   | )    |  |   | (372   | ) |  |   | (419   | )
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|Income Before Income Taxes, Minority Interest Income and Net
    Earnings Related to Equity Investments    |  |                                                 | 497    |   |                    |   | 193    |      |  |   | 1,394  |   |  |   | 72     |  
|(Provision) benefit for income taxes                                                                       |  |                                                 | (198   | ) |                    |   | (87    | )    |  |   | (566   | ) |  |   | 339    |  
|Minority interest income                                                                                   |  |                                                 |       |   |                    |   | 1      |      |  |   |       |   |  |   | 1      |  
|Net earnings related to equity investments                                                                 |  |                                                 | 8      |   |                    |   | 1      |      |  |   | 8      |   |  |   |       |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|Net Income                                                                                                 |  | $                                               | 307    |   |                    | $ | 108    |      |  | $ | 836    |   |  | $ | 412    |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|Weighted-Average Shares Used to Compute Earnings Per
    Share:                                            |  |                                                 |        |   |                    |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                      |  |                                                 | 801    |   |                    |   | 794    |      |  |   | 801    |   |  |   | 794    |  
|Diluted                                                                                                    |  |                                                 | 809    |   |                    |   | 797    |      |  |   | 807    |   |  |   | 796    |  
|                                                                                                          
|Earnings per Basic and Diluted Share                                                                       |  | $                                               | 0.38   |   |                    | $ | 0.14   |      |  | $ | 1.04   |   |  | $ | 0.52   |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  
|Dividends Declared per Common Share                                                                        |  | $                                               | 0.2375 |   |                    | $ | 0.2375 |      |  | $ | 0.4750 |   |  | $ | 0.4750 |  
|                                                                                                           |  |                                                 |        |   |                    |   |        |      |  |   |        |  



1



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(Unaudited)


|                                                                                                                                                                                                                                                              |  |                       |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                                                                                              |  | At                    |         |   | At           |  
|                                                                                                                                                                                                                                                              |  | June 30,              |         |   | December 31, |  
|                                                                                                                                                                                                                                                              |  | 2005                  |         |   | 2004         |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|                                                                                                                                                                                                                                                              |  | (Dollars in millions) |        
|Assets                                                                                                                                                                                                                                                        |  |                       |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                     |  | $                     | 1,913   |   |              | $ | 3,698   |  
|Accounts receivable, less allowances of $429 and $523                                                                                                                                                                                                         |  |                       | 2,993   |   |              |   | 3,195   |  
|Deferred income taxes                                                                                                                                                                                                                                         |  |                       | 922     |   |              |   | 1,111   |  
|Other current assets                                                                                                                                                                                                                                          |  |                       | 498     |   |              |   | 1,383   |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|Total Current Assets                                                                                                                                                                                                                                          |  |                       | 6,326   |   |              |   | 9,387   |  
|Property, plant and equipment, net of accumulated depreciation
    of $2,353 and $1,588                                                                                                                                                                       |  |                       | 11,026  |   |              |   | 11,509  |  
|Goodwill                                                                                                                                                                                                                                                      |  |                       | 4,751   |   |              |   | 4,888   |  
|Other purchased intangible assets, net                                                                                                                                                                                                                        |  |                       | 316     |   |              |   | 375     |  
|Prepaid pension costs                                                                                                                                                                                                                                         |  |                       | 4,099   |   |              |   | 3,991   |  
|Other assets                                                                                                                                                                                                                                                  |  |                       | 2,563   |   |              |   | 2,654   |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|Total Assets                                                                                                                                                                                                                                                  |  | $                     | 29,081  |   |              | $ | 32,804  |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|                                                                                                                                                                                                                                                             
|Liabilities                                                                                                                                                                                                                                                   |  |                       |         |   |              |   |         |  
|Accounts payable and accrued expenses                                                                                                                                                                                                                         |  | $                     | 2,365   |   |              | $ | 2,716   |  
|Compensation and benefit-related liabilities                                                                                                                                                                                                                  |  |                       | 1,661   |   |              |   | 2,193   |  
|Debt maturing within one year                                                                                                                                                                                                                                 |  |                       | 529     |   |              |   | 1,886   |  
|Other current liabilities                                                                                                                                                                                                                                     |  |                       | 2,309   |   |              |   | 2,293   |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|Total Current Liabilities                                                                                                                                                                                                                                     |  |                       | 6,864   |   |              |   | 9,088   |  
|Long-term debt                                                                                                                                                                                                                                                |  |                       | 7,175   |   |              |   | 8,779   |  
|Long-term compensation and benefit-related liabilities                                                                                                                                                                                                        |  |                       | 3,283   |   |              |   | 3,322   |  
|Deferred income taxes                                                                                                                                                                                                                                         |  |                       | 1,448   |   |              |   | 1,356   |  
|Other long-term liabilities and deferred credits                                                                                                                                                                                                              |  |                       | 2,832   |   |              |   | 3,240   |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|Total Liabilities                                                                                                                                                                                                                                             |  |                       | 21,602  |   |              |   | 25,785  |  
|Shareowners Equity                                                                                                                                                                                                                                           |  |                       |         |   |              |   |         |  
|Common stock, $1 par value, authorized
    2,500,000,000 shares; issued and outstanding
    801,635,543 shares (net of 171,983,367 treasury shares) at
    June 30, 2005 and 798,570,623 shares (net of
    171,983,367 treasury shares) at December 31, 2004 |  |                       | 802     |   |              |   | 799     |  
|Additional paid-in capital                                                                                                                                                                                                                                    |  |                       | 26,911  |   |              |   | 27,170  |  
|Accumulated deficit                                                                                                                                                                                                                                           |  |                       | (20,344 | ) |              |   | (21,180 | )
|Accumulated other comprehensive income                                                                                                                                                                                                                        |  |                       | 110     |   |              |   | 230     |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|Total Shareowners Equity                                                                                                                                                                                                                                     |  |                       | 7,479   |   |              |   | 7,019   |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  
|Total Liabilities and Shareowners Equity                                                                                                                                                                                                                     |  | $                     | 29,081  |   |              | $ | 32,804  |  
|                                                                                                                                                                                                                                                              |  |                       |         |   |              |  



2



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS
EQUITY


(Unaudited)


|                                       |                          |                                                                 |                      |         |         |    |        |         |         |    | 
|-------------------------------------- | ------------------------ | --------------------------------------------------------------- | -------------------- | ------- | ------- | -- | ------ | ------- | ------- | -- | 
|                                       |                          | For the Six Months                                              |                     
|                                       |                          | Ended June 30,                                                  |                     
|                                       |                          |                                                                 |                     
|                                       |                          | 2005                                                            |                      |         | 2004    |   
|                                       |                          |                                                                 |                      |         |         |   
|                                       |                          | (Dollars in millions)                                           |                     
|AT&T Common Stock                      |                          |                                                                 |                      |         |         |    |        |        
|                                       |                          | Balance at beginning of year                                    |                      | $       | 799     |    |        | $       | 792     |   
|                                       |                          | Shares issued under employee plans                              |                      |         | 3       |    |        |         | 2       |   
|                                       |                          | Other                                                           |                      |         |        |    |        |         | 1       |   
|                                       |                          |                                                                 |                      |         |         |   
|                                       | Balance at end of period |                                                                 |                      | 802     |         |    |        | 795     |        
|                                       |                          |                                                                 |                      |         |         |   
|Additional Paid-In Capital             |                          |                                                                 |                      |         |         |    |        |        
|                                       |                          | Balance at beginning of year                                    |                      |         | 27,170  |    |        |         | 27,722  |   
|                                       |                          | Shares issued, net:                                             |                      |         |         |    |        |         |         |   
|                                       |                          |                                                                 | Under employee plans |         |         | 61 |        |         |         | 46 | 
|                                       |                          |                                                                 | Other                |         |         |   |        |         |         | 15 | 
|                                       |                          | Dividends declared                                              |                      |         | (381    | )  |        |         | (377    | ) 
|                                       |                          | Other                                                           |                      |         | 61      |    |        |         | 31      |   
|                                       |                          |                                                                 |                      |         |         |   
|                                       | Balance at end of period |                                                                 |                      | 26,911  |         |    |        | 27,437  |        
|                                       |                          |                                                                 |                      |         |         |   
|Accumulated Deficit                    |                          |                                                                 |                      |         |         |    |        |        
|                                       |                          | Balance at beginning of year                                    |                      |         | (21,180 | )  |        |         | (14,707 | ) 
|                                       |                          | Net income                                                      |                      |         | 836     |    |        |         | 412     |   
|                                       |                          | Treasury shares issued at less than cost                        |                      |         |        |    |        |         | (4      | ) 
|                                       |                          |                                                                 |                      |         |         |   
|                                       | Balance at end of period |                                                                 |                      | (20,344 | )       |    |        | (14,299 | )      
|                                       |                          |                                                                 |                      |         |         |   
|Accumulated Other Comprehensive Income |                          |                                                                 |                      |         |         |    |        |        
|                                       |                          | Balance at beginning of year                                    |                      |         | 230     |    |        |         | 149     |   
|                                       |                          | Other comprehensive (loss)                                      |                      |         | (120    | )  |        |         | (27     | ) 
|                                       |                          |                                                                 |                      |         |         |   
|                                       | Balance at end of period |                                                                 |                      | 110     |         |    |        | 122     |        
|                                       |                          |                                                                 |                      |         |         |   
|Total Shareowners Equity              |                          | $                                                               | 7,479                |         |         | $  | 14,055 |        
|                                       |                          |                                                                 |                      |         |         |   
|Summary of Total Comprehensive Income: |                          |                                                                 |                      |         |         |    |        |        
|                                       |                          | Net income                                                      |                      | $       | 836     |    |        | $       | 412     |   
|                                       |                          | Other comprehensive (loss) [net of income taxes of $75 and $16] |                      |         | (120    | )  |        |         | (27     | ) 
|                                       |                          |                                                                 |                      |         |         |   
|Total Comprehensive Income             |                          | $                                                               | 716                  |         |         | $  | 385    |        
|                                       |                          |                                                                 |                      |         |         |   







3



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


|                                                                                      |                                                           |                       |        |        |      |   |        |       |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------- | ------ | ------ | ---- | - | ------ | ----- | -
|                                                                                      |                                                           | For the Six Months    |       
|                                                                                      |                                                           | Ended June 30,        |       
|                                                                                      |                                                           |                       |       
|                                                                                      |                                                           | 2005                  |        |        | 2004 |  
|                                                                                      |                                                           |                       |        |        |      |  
|                                                                                      |                                                           | (Dollars in millions) |       
|Operating Activities                                                                  |                                                           |                       |        |        |      |   |        |      
|Net income                                                                            |                                                           | $                     | 836    |        |      | $ | 412    |      
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                           |                       |        |        |      |   |        |      
|                                                                                      | Asset impairment and net restructuring and other charges  |                       |        | 36     |      |   |        | 226   |  
|                                                                                      | Net losses (gains) on sales of businesses and investments |                       |        | 5      |      |   |        | (14   | )
|                                                                                      | Loss on early extinguishment of debt                      |                       |        | 206    |      |   |        | 274   |  
|                                                                                      | Depreciation and amortization                             |                       |        | 1,266  |      |   |        | 2,481 |  
|                                                                                      | Provision for uncollectible receivables                   |                       |        | 65     |      |   |        | 265   |  
|                                                                                      | Deferred income taxes                                     |                       |        | 352    |      |   |        | (181  | )
|                                                                                      | Decrease in receivables                                   |                       |        | 152    |      |   |        | 98    |  
|                                                                                      | Decrease in accounts payable and accrued expenses         |                       |        | (407   | )    |   |        | (189  | )
|                                                                                      | Net change in other operating assets and liabilities      |                       |        | (1,097 | )    |   |        | (770  | )
|                                                                                      | Other adjustments, net                                    |                       |        | (61    | )    |   |        | (139  | )
|                                                                                      |                                                           |                       |        |        |      |  
|Net Cash Provided by Operating Activities                                             |                                                           |                       | 1,353  |        |      |   | 2,463  |      
|                                                                                      |                                                           |                       |        |        |      |  
|Investing Activities                                                                  |                                                           |                       |        |        |      |   |        |      
|Capital expenditures and other additions                                              |                                                           |                       | (698   | )      |      |   | (1,018 | )    
|Proceeds from sale or disposal of property, plant and equipment                       |                                                           |                       | 134    |        |      |   | 25     |      
|Investment distributions and sales                                                    |                                                           |                       | 12     |        |      |   | 36     |      
|Net dispositions of businesses                                                        |                                                           |                       | 72     |        |      |   | 8      |      
|Decrease (increase) in restricted cash                                                |                                                           |                       | 546    |        |      |   | (1     | )    
|Other investing activities, net                                                       |                                                           |                       | 13     |        |      |   | 6      |      
|                                                                                      |                                                           |                       |        |        |      |  
|Net Cash Provided by (Used in) Investing Activities                                   |                                                           |                       | 79     |        |      |   | (944   | )    
|                                                                                      |                                                           |                       |        |        |      |  
|Financing Activities                                                                  |                                                           |                       |        |        |      |   |        |      
|Retirement of long-term debt, including redemption premiums                           |                                                           |                       | (2,721 | )      |      |   | (3,210 | )    
|Decrease in short-term borrowings, net                                                |                                                           |                       | (310   | )      |      |   | (195   | )    
|Issuance of common shares                                                             |                                                           |                       | 44     |        |      |   | 33     |      
|Dividends paid on common stock                                                        |                                                           |                       | (380   | )      |      |   | (377   | )    
|Other financing activities, net                                                       |                                                           |                       | 150    |        |      |   | 336    |      
|                                                                                      |                                                           |                       |        |        |      |  
|Net Cash Used in Financing Activities                                                 |                                                           |                       | (3,217 | )      |      |   | (3,413 | )    
|                                                                                      |                                                           |                       |        |        |      |  
|Net decrease in cash and cash equivalents                                             |                                                           |                       | (1,785 | )      |      |   | (1,894 | )    
|Cash and cash equivalents at beginning of year                                        |                                                           |                       | 3,698  |        |      |   | 4,353  |      
|                                                                                      |                                                           |                       |        |        |      |  
|Cash and Cash Equivalents at End of Period                                            |                                                           | $                     | 1,913  |        |      | $ | 2,459  |      
|                                                                                      |                                                           |                       |        |        |      |  



4



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation





|   |                                              
|-- | ---------------------------------------------
|2. | Merger Agreement with SBC Communications Inc.





|   |                                           
|-- | ------------------------------------------
|3. | Summary of Significant Accounting Policies



5



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                     |                                                                                                                                |                                                 |      |     |                    |   |      |      |   |   |      |     |   |   |      |     |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | ---- | --- | ------------------ | - | ---- | ---- | - | - | ---- | --- | - | - | ---- | --- | -
|                                     |                                                                                                                                | For the Three Months                            |      |     | For the Six Months |  
|                                     |                                                                                                                                | Ended June 30,                                  |      |     | Ended, June 30,    |  
|                                     |                                                                                                                                |                                                 |      |     |                    |  
|                                     |                                                                                                                                | 2005                                            |      |     | 2004               |   |      | 2005 |   |   | 2004 |    
|                                     |                                                                                                                                |                                                 |      |     |                    |   |      |      |   |   |      |    
|                                     |                                                                                                                                | (Dollars in millions, except per share amounts) |     
|Net income                           |                                                                                                                                | $                                               | 307  |     |                    | $ | 108  |      |   | $ | 836  |     |   | $ | 412  |    
|Add:                                 |                                                                                                                                |                                                 |      |     |                    |   |      |      |   |   |      |     |   |   |      |    
|                                     | Stock-based employee compensation expense included in reported
    results, net of income taxes                                |                                                 |      | 27  |                    |   |      | 17   |   |   |      | 51  |   |   |      | 35  |  
|Deduct:                              |                                                                                                                                |                                                 |      |     |                    |   |      |      |   |   |      |     |   |   |      |    
|                                     | Total stock-based employee compensation expense determined under
    the fair value method for all awards, net of income taxes |                                                 |      | (44 | )                  |   |      | (45  | ) |   |      | (90 | ) |   |      | (96 | )
|                                     |                                                                                                                                |                                                 |      |     |                    |   |      |      |   |   |      |    
|Pro forma net income                 |                                                                                                                                | $                                               | 290  |     |                    | $ | 80   |      |   | $ | 797  |     |   | $ | 351  |    
|                                     |                                                                                                                                |                                                 |      |     |                    |   |      |      |   |   |      |    
|Basic and diluted earnings per share |                                                                                                                                | $                                               | 0.38 |     |                    | $ | 0.14 |      |   | $ | 1.04 |     |   | $ | 0.52 |    
|Pro forma basic earnings per share   |                                                                                                                                | $                                               | 0.36 |     |                    | $ | 0.10 |      |   | $ | 1.00 |     |   | $ | 0.44 |    
|Pro forma diluted earnings per share |                                                                                                                                | $                                               | 0.36 |     |                    | $ | 0.10 |      |   | $ | 0.99 |     |   | $ | 0.44 |    







|   |                                    
|-- | -----------------------------------
|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                          |  |                       | (94   | ) |          |   |   |       |  |   | (94   | )
|Goodwill allocated to sale of payphone business |  |                       | (43   | ) |          |   |   |       |  |   | (43   | )
|                                                |  |                       |       |   |          |   |    |       | 
|Balance at June 30, 2005                        |  | $                     | 4,681 |   |          | $ | 70 |       |  | $ | 4,751 |  
|                                                |  |                       |       |   |          |   |    |       | 

6



---



##### Table of Contents



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 |  |              | $ | 264 |     |  | $ | 257 | 
|Other                              |  |                       | 206 |  |              |   | 147 |     |  |   | 59  | 
|                                   |  |                       |     |  |              |   |     |     | 
|Balance at June 30, 2005           |  | $                     | 727 |  |              | $ | 411 |     |  | $ | 316 | 
|                                   |  |                       |     |  |              |   |     |     | 





| |                 
| | ----------------
| | Restricted cash:





| |                      
| | ---------------------
| | Income taxes payable:





| |             
| | ------------
| | Assets sold:





| |                                              
| | ---------------------------------------------
| | Supplementary Shareowners Equity Information

|                                               |  |                       |      |   |                 |   |    |           |  |   |               |   |  |   |      |  
|---------------------------------------------- |  | --------------------- | ---- | - | --------------- | - | -- | --------- |  | - | ------------- | - |  | - | ---- | -
|                                               |  | Net Foreign           |      |   | Net Revaluation |   |    | Net       |  |   | Accumulated   |  
|                                               |  | Currency              |      |   | of Certain      |   |    | Minimum   |  |   | Other         |  
|                                               |  | Translation           |      |   | Financial       |   |    | Pension   |  |   | Comprehensive |  
|                                               |  | Adjustment            |      |   | Instruments     |   |    | Liability |  |   | Income        |  
|                                               |  |                       |      |   |                 |   |    |           |  |   |               |  
|                                               |  | (Dollars in millions) |     
|Accumulated other comprehensive income (loss): |  |                       |      |   |                 |   |    |           |  |   |               |   |  |   |      |  
|Balance at January 1, 2005                     |  | $                     | 319  |   |                 | $ | 19 |           |  | $ | (108          | ) |  | $ | 230  |  
|Change                                         |  |                       | (117 | ) |                 |   | (3 | )         |  |   |              |   |  |   | (120 | )
|                                               |  |                       |      |   |                 |   |    |           |  |   |               |  
|Balance at June 30, 2005                       |  | $                     | 202  |   |                 | $ | 16 |           |  | $ | (108          | ) |  | $ | 110  |  
|                                               |  |                       |      |   |                 |   |    |           |  |   |               |  

7



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)


|                                                                                     |                                                                                                    |                       |      |    |      |   |     |     |  
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | --------------------- | ---- | -- | ---- | - | --- | --- | -
|                                                                                     |                                                                                                    | For the Six Months    |     
|                                                                                     |                                                                                                    | Ended June 30,        |     
|                                                                                     |                                                                                                    |                       |     
|                                                                                     |                                                                                                    | 2005                  |      |    | 2004 |  
|                                                                                     |                                                                                                    |                       |      |    |      |  
|                                                                                     |                                                                                                    | (Dollars in millions) |     
|Other comprehensive (loss):                                                          |                                                                                                    |                       |      |    |      |   |     |    
|Net foreign currency translation adjustment [net of income taxes
    of $73 and $11] |                                                                                                    | $                     | (117 | )  |      | $ | (19 | )  
|Net revaluation of certain financial instruments:                                    |                                                                                                    |                       |      |    |      |   |     |    
|                                                                                     | Unrealized (gains) losses [net of income taxes of $2 and
    $(6)]                                 |                       |      | (4 | )    |   |     | 10  |  
|                                                                                     | Recognition of previously unrealized losses (gains) [net of
    income taxes of $0 and
    $11](1) |                       |      | 1  |      |   |     | (18 | )
|                                                                                     |                                                                                                    |                       |      |    |      |  
|Total other comprehensive (loss)                                                     |                                                                                                    | $                     | (120 | )  |      | $ | (27 | )  
|                                                                                     |                                                                                                    |                       |      |    |      |  






|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | See table below for a summary of recognition of previously
    unrealized losses (gains).

|                                                          |                                     |                                   |   |                       |             |   |   |        |  |   |             |     |   |   |     |     |  
|--------------------------------------------------------- | ----------------------------------- | --------------------------------- | - | --------------------- | ----------- | - | - | ------ |  | - | ----------- | --- | - | - | --- | --- | -
|                                                          |                                     | For the Six Months Ended June 30, |  
|                                                          |                                     |                                   |  
|                                                          |                                     | 2005                              |   |                       | 2004        |  
|                                                          |                                     |                                   |   |                       |             |  
|                                                          |                                     | Pretax                            |   |                       | After-taxes |   |   | Pretax |  |   | After-taxes |    
|                                                          |                                     |                                   |   |                       |             |   |   |        |  |   |             |    
|                                                          |                                     |                                   |   | (Dollars in millions) |             |   |  
|Recognition of previously unrealized losses (gains):      |                                     |                                   |   |                       |             |   |   |        |  |   |             |     |   |   |     |    
|Other (expense) income, net:                              |                                     |                                   |   |                       |             |   |   |        |  |   |             |     |   |   |     |    
|                                                          | Sale of various securities          |                                   | $ | 1                     |             |   | $ | 1      |  |   | $           | (12 | ) |   | $   | (7  | )
|                                                          | Other financial instrument activity |                                   |   |                      |             |   |   |       |  |   |             | (17 | ) |   |     | (11 | )
|                                                          |                                     |                                   |   |                       |             |   |   |        |  |   |             |    
|Total recognition of previously unrealized losses (gains) |                                     | $                                 | 1 |                       |             | $ | 1 |        |  | $ | (29         | )   |   | $ | (18 | )  
|                                                          |                                     |                                   |   |                       |             |   |   |        |  |   |             |    



|   |                                                     
|-- | ----------------------------------------------------
|5. | Earnings Per Common Share and Potential Common Share





|   |                                                         
|-- | --------------------------------------------------------
|6. | Asset Impairment and Net Restructuring and Other Charges



8



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)








|                           |                |                       |     |      |          |   |     |       |   |   |       |   |  |   |     |      |  
|-------------------------- | -------------- | --------------------- | --- | ---- | -------- | - | --- | ----- | - | - | ----- | - |  | - | --- | ---- | -
|                           |                | Type of Cost          |    
|                           |                |                       |    
|                           |                | Employee              |     |      | Facility |   |     |      
|                           |                | Separations           |     |      | Closings |   |     | Other |   |   | Total |  
|                           |                |                       |     |      |          |   |     |       |   |   |       |  
|                           |                | (Dollars in millions) |    
|Balance at January 1, 2005 |                | $                     | 506 |      |          | $ | 228 |       |   | $ | 2     |   |  | $ | 736 |     
|                           | Net Charges    |                       |     | (14  | )        |   |     | 45    |   |   |       |  |  |   |     | 31   |  
|                           | Net Deductions |                       |     | (236 | )        |   |     | (35   | ) |   |       |  |  |   |     | (271 | )
|                           |                |                       |     |      |          |   |     |       |   |   |       |  
|Balance at June 30, 2005   |                | $                     | 256 |      |          | $ | 238 |       |   | $ | 2     |   |  | $ | 496 |     
|                           |                |                       |     |      |          |   |     |       |   |   |       |  











9



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






|   |                 
|-- | ----------------
|7. | Debt Obligations



| |                
| | ---------------
| | Securitizations





| |               
| | --------------
| | Long-Term Debt





|   |                      
|-- | ---------------------
|8. | Financial Instruments





| |                  
| | -----------------
| | Letters of Credit





| |                              
| | -----------------------------
| | Interest Rate Swap Agreements





10



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




| |                                        
| | ---------------------------------------
| | Equity Option and Equity Swap Contracts





|   |                                                         
|-- | --------------------------------------------------------
|9. | Pension, Postretirement and Other Employee Benefit Plans





|                                                 |  |                            |      |   |                          |   |      |          |  |   |                |   |  |      |     |   |      |   |      |      |  |   |      |   |  |   |     |   |  |   |     |  
|------------------------------------------------ |  | -------------------------- | ---- | - | ------------------------ | - | ---- | -------- |  | - | -------------- | - |  | ---- | --- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | - | --- | - |  | - | --- | -
|                                                 |  | Pension                    |      |   | Postretirement           |   |      | Pension  |  |   | Postretirement |  
|                                                 |  | Benefits                   |      |   | Benefits                 |   |      | Benefits |  |   | Benefits       |  
|                                                 |  |                            |      |   |                          |   |      |          |  |   |                |  
|                                                 |  | For the Three Months Ended |      |   | For the Six Months Ended |  
|                                                 |  | June 30,                   |      |   | June 30,                 |  
|                                                 |  |                            |      |   |                          |  
|                                                 |  | 2005                       |      |   | 2004                     |   |      | 2005     |  |   | 2004           |   |  | 2005 |     |   | 2004 |   |      | 2005 |  |   | 2004 |  
|                                                 |  |                            |      |   |                          |   |      |          |  |   |                |   |  |      |     |   |      |   |      |      |  |   |      |  
|                                                 |  | (Dollars in millions)      |     
|Service cost  benefits earned during the period |  | $                          | 44   |   |                          | $ | 55   |          |  | $ | 4              |   |  | $    | 6   |   |      | $ | 88   |      |  | $ | 110  |   |  | $ | 8   |   |  | $ | 12  |  
|Interest cost on benefit obligations             |  |                            | 228  |   |                          |   | 233  |          |  |   | 79             |   |  |      | 90  |   |      |   | 457  |      |  |   | 460  |   |  |   | 159 |   |  |   | 179 |  
|Amortization of unrecognized prior service cost  |  |                            | 23   |   |                          |   | 33   |          |  |   | 10             |   |  |      | 13  |   |      |   | 45   |      |  |   | 65   |   |  |   | 19  |   |  |   | 26  |  
|Credit for expected return on plan assets        |  |                            | (337 | ) |                          |   | (363 | )        |  |   | (41            | ) |  |      | (44 | ) |      |   | (669 | )    |  |   | (719 | ) |  |   | (81 | ) |  |   | (88 | )
|Amortization of losses                           |  |                            | 16   |   |                          |   | 1    |          |  |   | 23             |   |  |      | 25  |   |      |   | 40   |      |  |   | 2    |   |  |   | 45  |   |  |   | 50  |  
|                                                 |  |                            |      |   |                          |   |      |          |  |   |                |   |  |      |     |   |      |   |      |      |  |   |      |  
|Net periodic benefit (credit) cost               |  | $                          | (26  | ) |                          | $ | (41  | )        |  | $ | 75             |   |  | $    | 90  |   |      | $ | (39  | )    |  | $ | (82  | ) |  | $ | 150 |   |  | $ | 179 |  
|                                                 |  |                            |      |   |                          |   |      |          |  |   |                |   |  |      |     |   |      |   |      |      |  |   |      |  







| |               
| | --------------
| | Non-U.S. Plans



11



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                                 |  |                       |    |   |                    |   |    |      |  |   |      |   |  |   |     |  
|------------------------------------------------ |  | --------------------- | -- | - | ------------------ | - | -- | ---- |  | - | ---- | - |  | - | --- | -
|                                                 |  | For the Three Months  |    |   | For the Six Months |  
|                                                 |  | Ended June 30,        |    |   | Ended June 30,     |  
|                                                 |  |                       |    |   |                    |  
|                                                 |  | 2005                  |    |   | 2004               |   |    | 2005 |  |   | 2004 |  
|                                                 |  |                       |    |   |                    |   |    |      |  |   |      |  
|                                                 |  | (Dollars in millions) |   
|Service cost  benefits earned during the period |  | $                     | 5  |   |                    | $ | 5  |      |  | $ | 12   |   |  | $ | 12  |  
|Interest cost on benefit obligations             |  |                       | 11 |   |                    |   | 8  |      |  |   | 21   |   |  |   | 19  |  
|Credit for expected return on plan assets        |  |                       | (9 | ) |                    |   | (6 | )    |  |   | (18  | ) |  |   | (15 | )
|Amortization of losses                           |  |                       | 3  |   |                    |   | 2  |      |  |   | 6    |   |  |   | 5   |  
|                                                 |  |                       |    |   |                    |   |    |      |  |   |      |  
|Net periodic benefit cost                        |  | $                     | 10 |   |                    | $ | 9  |      |  | $ | 21   |   |  | $ | 21  |  
|                                                 |  |                       |    |   |                    |   |    |      |  |   |      |  



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies











12



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






|    |                  
|--- | -----------------
|11. | Segment Reporting













13



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




| |        
| | -------
| | Revenue

|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |        |       |   |        |        |       | 
|---------------------------- | -------------------------------------------------- | ---------------------------- | ----- | ----- | ------------------ | - | ----- | ----- | ----- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                             |                                                    | For the Three Months         |       |       | For the Six Months |  
|                             |                                                    | Ended June 30,               |       |       | Ended June 30,     |  
|                             |                                                    |                              |       |       |                    |  
|                             |                                                    | 2005                         |       |       | 2004               |   |       | 2005  |       |   | 2004   |       
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|                             |                                                    | (Dollars in millions)        |      
|AT&T Business Services       |                                                    |                              |       |       |                    |   |       |       |       |   |        |        |       |   |        |       
|                             |                                                    | Long distance voice services |       | $     | 2,080              |   |       | $     | 2,386 |   |        | $      | 4,248 |   |        | $      | 4,999 | 
|                             |                                                    | Local voice services         |       |       | 364                |   |       |       | 404   |   |        |        | 735   |   |        |        | 793   | 
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|                             | Total voice services                               |                              |       | 2,444 |                    |   |       | 2,790 |       |   |        | 4,983  |       |   |        | 5,792  |      
|                             |                                                    | Data services                |       |       | 1,518              |   |       |       | 1,690 |   |        |        | 3,103 |   |        |        | 3,405 | 
|                             |                                                    | IP&E services                |       |       | 619                |   |       |       | 565   |   |        |        | 1,208 |   |        |        | 1,118 | 
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|                             | Total data and IP&E services                       |                              |       | 2,137 |                    |   |       | 2,255 |       |   |        | 4,311  |       |   |        | 4,523  |      
|                             | Outsourcing, professional services and other       |                              |       | 574   |                    |   |       | 566   |       |   |        | 1,180  |       |   |        | 1,168  |      
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|Total AT&T Business Services |                                                    |                              | 5,155 |       |                    |   | 5,611 |       |       |   | 10,474 |        |       |   | 11,483 |       
|AT&T Consumer Services       |                                                    |                              |       |       |                    |   |       |       |       |   |        |        |       |   |        |       
|                             | Stand-alone long distance voice and other services |                              |       | 974   |                    |   |       | 1,327 |       |   |        | 1,999  |       |   |        | 2,789  |      
|                             | Bundled services                                   |                              |       | 619   |                    |   |       | 684   |       |   |        | 1,279  |       |   |        | 1,329  |      
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|Total AT&T Consumer Services |                                                    |                              | 1,593 |       |                    |   | 2,011 |       |       |   | 3,278  |        |       |   | 4,118  |       
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|                             | Total reportable segments                          |                              |       | 6,748 |                    |   |       | 7,622 |       |   |        | 13,752 |       |   |        | 15,601 |      
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|Corporate and Other          |                                                    |                              | 12    |       |                    |   | 14    |       |       |   | 23     |        |       |   | 25     |       
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       
|Total revenue                |                                                    | $                            | 6,760 |       |                    | $ | 7,636 |       |       | $ | 13,775 |        |       | $ | 15,626 |       
|                             |                                                    |                              |       |       |                    |   |       |       |       |   |        |       



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Reconciliation of Operating Income to Income before Income
    Taxes and Net Earnings Related to Equity Investments

|                                                                              |                           |                       |      |       |                    |   |      |      |  |   |       |       |  |   |      |     | 
|----------------------------------------------------------------------------- | ------------------------- | --------------------- | ---- | ----- | ------------------ | - | ---- | ---- |  | - | ----- | ----- |  | - | ---- | --- | 
|                                                                              |                           | For the Three Months  |      |       | For the Six Months |  
|                                                                              |                           | Ended June 30,        |      |       | Ended June 30,     |  
|                                                                              |                           |                       |      |       |                    |  
|                                                                              |                           | 2005                  |      |       | 2004               |   |      | 2005 |  |   | 2004  |      
|                                                                              |                           |                       |      |       |                    |   |      |      |  |   |       |      
|                                                                              |                           | (Dollars in millions) |     
|AT&T Business Services                                                        |                           | $                     | 528  |       |                    | $ | 152  |      |  | $ | 1,116 |       |  | $ | 235  |    
|AT&T Consumer Services                                                        |                           |                       | 489  |       |                    |   | 240  |      |  |   | 1,064 |       |  |   | 611  |    
|                                                                              |                           |                       |      |       |                    |   |      |      |  |   |       |      
|                                                                              | Total reportable segments |                       |      | 1,017 |                    |   |      | 392  |  |   |       | 2,180 |  |   |      | 846 | 
|Corporate and Other                                                           |                           |                       | (198 | )     |                    |   | (44  | )    |  |   | (291  | )     |  |   | (217 | )  
|                                                                              |                           |                       |      |       |                    |   |      |      |  |   |       |      
|Operating income                                                              |                           |                       | 819  |       |                    |   | 348  |      |  |   | 1,889 |       |  |   | 629  |    
|Other (expense) income, net                                                   |                           |                       | (153 | )     |                    |   | 36   |      |  |   | (123  | )     |  |   | (138 | )  
|Interest (expense)                                                            |                           |                       | (169 | )     |                    |   | (191 | )    |  |   | (372  | )     |  |   | (419 | )  
|                                                                              |                           |                       |      |       |                    |   |      |      |  |   |       |      
|Income before income taxes and net earnings related to equity
    investments |                           | $                     | 497  |       |                    | $ | 193  |      |  | $ | 1,394 |       |  | $ | 72   |    
|                                                                              |                           |                       |      |       |                    |   |      |      |  |   |       |      

14



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




| |       
| | ------
| | Assets

|                       |                           |                       |        |        |              |   |        |        | 
|---------------------- | ------------------------- | --------------------- | ------ | ------ | ------------ | - | ------ | ------ | 
|                       |                           | At                    |        |        | At           |  
|                       |                           | June 30,              |        |        | December 31, |  
|                       |                           | 2005                  |        |        | 2004         |  
|                       |                           |                       |        |        |              |  
|                       |                           | (Dollars in millions) |       
|AT&T Business Services |                           | $                     | 19,878 |        |              | $ | 20,621 |       
|AT&T Consumer Services |                           |                       | 615    |        |              |   | 743    |       
|                       |                           |                       |        |        |              |  
|                       | Total reportable segments |                       |        | 20,493 |              |   |        | 21,364 | 
|Corporate and Other*   |                           |                       | 8,588  |        |              |   | 11,440 |       
|                       |                           |                       |        |        |              |  
|Total assets           |                           | $                     | 29,081 |        |              | $ | 32,804 |       
|                       |                           |                       |        |        |              |  






|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|* | Includes cash of $1.3 billion at June 30, 2005 and
    $3.0 billion at December 31, 2004.



| |                  
| | -----------------
| | Capital Additions

|                        |                           |                       |     |     |                    |   |     |      |  |   |      |     |  |   |     |     | 
|----------------------- | ------------------------- | --------------------- | --- | --- | ------------------ | - | --- | ---- |  | - | ---- | --- |  | - | --- | --- | 
|                        |                           | For the Three Months  |     |     | For the Six Months |  
|                        |                           | Ended June 30,        |     |     | Ended June 30,     |  
|                        |                           |                       |     |     |                    |  
|                        |                           | 2005                  |     |     | 2004               |   |     | 2005 |  |   | 2004 |    
|                        |                           |                       |     |     |                    |   |     |      |  |   |      |    
|                        |                           | (Dollars in millions) |    
|AT&T Business Services  |                           | $                     | 387 |     |                    | $ | 463 |      |  | $ | 719  |     |  | $ | 933 |    
|AT&T Consumer Services  |                           |                       |    |     |                    |   | 15  |      |  |   |     |     |  |   | 28  |    
|                        |                           |                       |     |     |                    |   |     |      |  |   |      |    
|                        | Total reportable segments |                       |     | 387 |                    |   |     | 478  |  |   |      | 719 |  |   |     | 961 | 
|Corporate and Other     |                           |                       | 6   |     |                    |   | 2   |      |  |   | 9    |     |  |   | 4   |    
|                        |                           |                       |     |     |                    |   |     |      |  |   |      |    
|Total capital additions |                           | $                     | 393 |     |                    | $ | 480 |      |  | $ | 728  |     |  | $ | 965 |    
|                        |                           |                       |     |     |                    |   |     |      |  |   |      |    



| |                       
| | ----------------------
| | Geographic Information

|                     |  |                       |       |  |                    |   |       |      |  |   |        |  |  |   |        | 
|-------------------- |  | --------------------- | ----- |  | ------------------ | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                     |  | For the Three Months  |       |  | For the Six Months |  
|                     |  | Ended June 30,        |       |  | Ended June 30,     |  
|                     |  |                       |       |  |                    |  
|                     |  | 2005                  |       |  | 2004               |   |       | 2005 |  |   | 2004   | 
|                     |  |                       |       |  |                    |   |       |      |  |   |        | 
|                     |  | (Dollars in millions) |      
|Revenue(1)           |  |                       |       |  |                    |   |       |      |  |   |        |  |  |   |        | 
|United
    States(2) |  | $                     | 6,345 |  |                    | $ | 7,242 |      |  | $ | 12,933 |  |  | $ | 14,851 | 
|International        |  |                       | 415   |  |                    |   | 394   |      |  |   | 842    |  |  |   | 775    | 
|                     |  |                       |       |  |                    |   |       |      |  |   |        | 
|Total revenue        |  | $                     | 6,760 |  |                    | $ | 7,636 |      |  | $ | 13,775 |  |  | $ | 15,626 | 
|                     |  |                       |       |  |                    |   |       |      |  |   |        | 

|                         |  |                       |        |  |              |   |        | 
|------------------------ |  | --------------------- | ------ |  | ------------ | - | ------ | 
|                         |  | At                    |        |  | At           |  
|                         |  | June 30,              |        |  | December 31, |  
|                         |  | 2005                  |        |  | 2004         |  
|                         |  |                       |        |  |              |  
|                         |  | (Dollars in millions) |       
|Long-Lived
    Assets(3) |  |                       |        |  |              |   |        | 
|United
    States(2)     |  | $                     | 14,431 |  |              | $ | 14,968 | 
|International            |  |                       | 1,662  |  |              |   | 1,804  | 
|                         |  |                       |        |  |              |  
|Total long-lived assets  |  | $                     | 16,093 |  |              | $ | 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.

15



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






|    |                              
|--- | -----------------------------
|12. | New Accounting Pronouncements



conditional asset
retirement obligation,




16



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






17



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

AT&T CORP. AND SUBSIDIARIES


Forward-Looking Statements








| |   |                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 of these entities larger and better
    financed and afford these competitors with extensive resources
    and greater geographic reach, allowing them to compete more
    effectively,
|
| |  | the effects of vigorous competition in the markets in which we
    operate, which may decrease prices charged and change customer
    mix and profitability,                                                                                                                                                                                      
|
| |  | the ability to establish a significant market presence in new
    geographic and service markets,                                                                                                                                                                                                                                                 
|
| |  | the availability and cost of capital,                                                                                                                                                                                                                                                                                                             
|
| |  | the impact of any unusual items resulting from ongoing
    evaluations of our business strategies,                                                                                                                                                                                                                                                
|
| |  | the requirements imposed on us or latitude allowed to
    competitors by the Federal Communications Commission
    (FCC) or state regulatory commissions under the
    Telecommunications Act or other applicable laws and regulations,                                                                                                           
|
| |  | the 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,                                                                                                                                     

18



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



19



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS


Overview




Critical Accounting Estimates and Judgments






Consolidated Results of Operations




| |        
| | -------
| | Revenue

|                       |  |                       |       |  |                    |   |       |      |  |   |        |  |  |   |        | 
|---------------------- |  | --------------------- | ----- |  | ------------------ | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                       |  | For the Three Months  |       |  | For the Six Months |  
|                       |  | Ended June 30,        |       |  | Ended June 30,     |  
|                       |  |                       |       |  |                    |  
|                       |  | 2005                  |       |  | 2004               |   |       | 2005 |  |   | 2004   | 
|                       |  |                       |       |  |                    |   |       |      |  |   |        | 
|                       |  | (Dollars in millions) |      
|AT&T Business Services |  | $                     | 5,155 |  |                    | $ | 5,611 |      |  | $ | 10,474 |  |  | $ | 11,483 | 
|AT&T Consumer Services |  |                       | 1,593 |  |                    |   | 2,011 |      |  |   | 3,278  |  |  |   | 4,118  | 
|Corporate and Other    |  |                       | 12    |  |                    |   | 14    |      |  |   | 23     |  |  |   | 25     | 
|                       |  |                       |       |  |                    |   |       |      |  |   |        | 
|Total revenue          |  | $                     | 6,760 |  |                    | $ | 7,636 |      |  | $ | 13,775 |  |  | $ | 15,626 | 
|                       |  |                       |       |  |                    |   |       |      |  |   |        | 

revenue




20



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)




| |                   
| | ------------------
| | Operating Expenses

|                                                         |  |                       |       |   |                    |   |       |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | --------------------- | ----- | - | ------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | For the Three Months  |       |   | For the Six Months |  
|                                                         |  | Ended June 30,        |       |   | Ended June 30,     |  
|                                                         |  |                       |       |   |                    |  
|                                                         |  | 2005                  |       |   | 2004               |   |       | 2005 |  |   | 2004   |  
|                                                         |  |                       |       |   |                    |   |       |      |  |   |        |  
|                                                         |  | (Dollars in millions) |      
|Access and other connection                              |  | $                     | 2,390 |   |                    | $ | 2,481 |      |  | $ | 4,794  |   |  | $ | 5,119  |  
|Costs of services and products                           |  |                       | 1,560 |   |                    |   | 1,759 |      |  |   | 3,188  |   |  |   | 3,623  |  
|Selling, general and administrative                      |  |                       | 1,325 |   |                    |   | 1,763 |      |  |   | 2,602  |   |  |   | 3,507  |  
|Depreciation and amortization                            |  |                       | 630   |   |                    |   | 1,231 |      |  |   | 1,266  |   |  |   | 2,481  |  
|Asset impairment and net restructuring and other charges |  |                       | 36    |   |                    |   | 54    |      |  |   | 36     |   |  |   | 267    |  
|                                                         |  |                       |       |   |                    |   |       |      |  |   |        |  
|Total operating expenses                                 |  | $                     | 5,941 |   |                    | $ | 7,288 |      |  | $ | 11,886 |   |  | $ | 14,997 |  
|                                                         |  |                       |       |   |                    |   |       |      |  |   |        |  
|Operating income                                         |  | $                     | 819   |   |                    | $ | 348   |      |  | $ | 1,889  |   |  | $ | 629    |  
|Operating margin                                         |  |                       | 12.1  | % |                    |   | 4.6   | %    |  |   | 13.7   | % |  |   | 4.0    | %

access and other connection expenses




Costs of services and products




21



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)


Selling, general and administrative expenses


Depreciation and amortization expenses


Asset impairment and net restructuring and other charges










22



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)






Operating income Operating margin


|                            |  |                       |      |   |                    |   |    |      |  |   |      |   |  |   |      |  
|--------------------------- |  | --------------------- | ---- | - | ------------------ | - | -- | ---- |  | - | ---- | - |  | - | ---- | -
|                            |  | For the Three Months  |      |   | For the Six Months |  
|                            |  | Ended June 30,        |      |   | Ended June 30,     |  
|                            |  |                       |      |   |                    |  
|                            |  | 2005                  |      |   | 2004               |   |    | 2005 |  |   | 2004 |  
|                            |  |                       |      |   |                    |   |    |      |  |   |      |  
|                            |  | (Dollars in millions) |     
|Other (expense) income, net |  | $                     | (153 | ) |                    | $ | 36 |      |  | $ | (123 | ) |  | $ | (138 | )

Other (expense) income, net,




23



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)




|                   |  |                       |      |   |                    |   |      |      |  |   |      |   |  |   |      |  
|------------------ |  | --------------------- | ---- | - | ------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                   |  | For the Three Months  |      |   | For the Six Months |  
|                   |  | Ended June 30,        |      |   | Ended June 30,     |  
|                   |  |                       |      |   |                    |  
|                   |  | 2005                  |      |   | 2004               |   |      | 2005 |  |   | 2004 |  
|                   |  |                       |      |   |                    |   |      |      |  |   |      |  
|                   |  | (Dollars in millions) |     
|Interest (expense) |  | $                     | (169 | ) |                    | $ | (191 | )    |  | $ | (372 | ) |  | $ | (419 | )

Interest (expense)


|                                     |  |                       |      |   |                    |   |      |      |  |   |      |   |  |   |        |   
|------------------------------------ |  | --------------------- | ---- | - | ------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ------ | --
|                                     |  | For the Three Months  |      |   | For the Six Months |  
|                                     |  | Ended June 30,        |      |   | Ended June 30,     |  
|                                     |  |                       |      |   |                    |  
|                                     |  | 2005                  |      |   | 2004               |   |      | 2005 |  |   | 2004 |  
|                                     |  |                       |      |   |                    |   |      |      |  |   |      |  
|                                     |  | (Dollars in millions) |     
|(Provision) benefit for income taxes |  | $                     | (198 | ) |                    | $ | (87  | )    |  | $ | (566 | ) |  | $ | 339    |   
|Effective tax rate                   |  |                       | 39.7 | % |                    |   | 44.4 | %    |  |   | 40.5 | % |  |   | (469.0 | )%

effective tax rate


Segment Results










24



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)




| |                       
| | ----------------------
| | AT&T Business Services



|                                             |                              |                       |       |       |                    |   |       |       |  |   |        |       |  |   |        |       | 
|-------------------------------------------- | ---------------------------- | --------------------- | ----- | ----- | ------------------ | - | ----- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                             |                              | For the Three Months  |       |       | For the Six Months |  
|                                             |                              | Ended June 30,        |       |       | Ended June 30,     |  
|                                             |                              |                       |       |       |                    |  
|                                             |                              | 2005                  |       |       | 2004               |   |       | 2005  |  |   | 2004   |      
|                                             |                              |                       |       |       |                    |   |       |       |  |   |        |      
|                                             |                              | (Dollars in millions) |      
|Revenue(1)                                   |                              |                       |       |       |                    |   |       |       |  |   |        |       |  |   |        |      
|                                             | Long distance voice services |                       | $     | 2,080 |                    |   | $     | 2,386 |  |   | $      | 4,248 |  |   | $      | 4,999 | 
|                                             | Local voice services         |                       |       | 364   |                    |   |       | 404   |  |   |        | 735   |  |   |        | 793   | 
|                                             |                              |                       |       |       |                    |   |       |       |  |   |        |      
|Total voice services                         |                              |                       | 2,444 |       |                    |   | 2,790 |       |  |   | 4,983  |       |  |   | 5,792  |      
|                                             | Data services                |                       |       | 1,518 |                    |   |       | 1,690 |  |   |        | 3,103 |  |   |        | 3,405 | 
|                                             | IP&E services                |                       |       | 619   |                    |   |       | 565   |  |   |        | 1,208 |  |   |        | 1,118 | 
|                                             |                              |                       |       |       |                    |   |       |       |  |   |        |      
|Total data and IP&E services                 |                              |                       | 2,137 |       |                    |   | 2,255 |       |  |   | 4,311  |       |  |   | 4,523  |      
|Outsourcing, professional services and other |                              |                       | 574   |       |                    |   | 566   |       |  |   | 1,180  |       |  |   | 1,168  |      
|                                             |                              |                       |       |       |                    |   |       |       |  |   |        |      
|Total revenue                                |                              | $                     | 5,155 |       |                    | $ | 5,611 |       |  | $ | 10,474 |       |  | $ | 11,483 |      
|Operating income                             |                              | $                     | 528   |       |                    | $ | 152   |       |  | $ | 1,116  |       |  | $ | 235    |      
|Capital additions                            |                              | $                     | 387   |       |                    | $ | 463   |       |  | $ | 719    |       |  | $ | 933    |      

|             |  |                       |        |  |              |   |        | 
|------------ |  | --------------------- | ------ |  | ------------ | - | ------ | 
|             |  | At                    |        |  | At           |  
|             |  | June 30,              |        |  | December 31, |  
|             |  | 2005                  |        |  | 2004         |  
|             |  |                       |        |  |              |  
|             |  | (Dollars in millions) |       
|Total assets |  | $                     | 19,878 |  |              | $ | 20,621 | 






|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Revenue includes equipment and product sales of $97 million
    and $64 million for the three months ended June 30,
    2005 and 2004, respectively, and $192 million and
    $138 million for the six months ended June 30, 2005
    and 2004, respectively.



| |        
| | -------
| | Revenue





25



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)












| |                 
| | ----------------
| | Operating Income





26



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)




| |            
| | -----------
| | Other Items





AT&T Consumer Services




|                  |                                                    |                       |       |     |                    |   |       |       |  |   |       |       |  |   |       |       | 
|----------------- | -------------------------------------------------- | --------------------- | ----- | --- | ------------------ | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                  |                                                    | For the Three Months  |       |     | For the Six Months |  
|                  |                                                    | Ended June 30,        |       |     | Ended June 30,     |  
|                  |                                                    |                       |       |     |                    |  
|                  |                                                    | 2005                  |       |     | 2004               |   |       | 2005  |  |   | 2004  |      
|                  |                                                    |                       |       |     |                    |   |       |       |  |   |       |      
|                  |                                                    | (Dollars in millions) |      
|Revenue           |                                                    |                       |       |     |                    |   |       |       |  |   |       |       |  |   |       |      
|                  | Stand-alone long distance voice and other services |                       | $     | 974 |                    |   | $     | 1,327 |  |   | $     | 1,999 |  |   | $     | 2,789 | 
|                  | Bundled services                                   |                       |       | 619 |                    |   |       | 684   |  |   |       | 1,279 |  |   |       | 1,329 | 
|                  |                                                    |                       |       |     |                    |   |       |       |  |   |       |      
|Total revenue     |                                                    | $                     | 1,593 |     |                    | $ | 2,011 |       |  | $ | 3,278 |       |  | $ | 4,118 |      
|Operating income  |                                                    | $                     | 489   |     |                    | $ | 240   |       |  | $ | 1,064 |       |  | $ | 611   |      
|Capital additions |                                                    | $                     |      |     |                    | $ | 15    |       |  | $ |      |       |  | $ | 28    |      

|             |  |                       |     |  |              |   |     | 
|------------ |  | --------------------- | --- |  | ------------ | - | --- | 
|             |  | At                    |     |  | At           |  
|             |  | June 30,              |     |  | December 31, |  
|             |  | 2005                  |     |  | 2004         |  
|             |  |                       |     |  |              |  
|             |  | (Dollars in millions) |    
|Total assets |  | $                     | 615 |  |              | $ | 743 | 



| |        
| | -------
| | Revenue





27



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)




| |                 
| | ----------------
| | Operating Income





| |            
| | -----------
| | Other Items





Corporate and Other




|                  |  |                       |      |   |                    |   |     |      |  |   |      |   |  |   |      |  
|----------------- |  | --------------------- | ---- | - | ------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                  |  | For the Three Months  |      |   | For the Six Months |  
|                  |  | Ended June 30,        |      |   | Ended June 30,     |  
|                  |  |                       |      |   |                    |  
|                  |  | 2005                  |      |   | 2004               |   |     | 2005 |  |   | 2004 |  
|                  |  |                       |      |   |                    |   |     |      |  |   |      |  
|                  |  | (Dollars in millions) |     
|Revenue           |  | $                     | 12   |   |                    | $ | 14  |      |  | $ | 23   |   |  | $ | 25   |  
|Operating (loss)  |  | $                     | (198 | ) |                    | $ | (44 | )    |  | $ | (291 | ) |  | $ | (217 | )
|Capital additions |  | $                     | 6    |   |                    | $ | 2   |      |  | $ | 9    |   |  | $ | 4    |  

|             |  |                       |       |  |              |   |        | 
|------------ |  | --------------------- | ----- |  | ------------ | - | ------ | 
|             |  | At                    |       |  | At           |  
|             |  | June 30,              |       |  | December 31, |  
|             |  | 2005                  |       |  | 2004         |  
|             |  |                       |       |  |              |  
|             |  | (Dollars in millions) |      
|Total assets |  | $                     | 8,588 |  |              | $ | 11,440 | 



| |                 
| | ----------------
| | Operating (Loss)



28



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)






| |            
| | -----------
| | Other Items



Financial Condition


|                          |  |                       |        |  |              |   |        | 
|------------------------- |  | --------------------- | ------ |  | ------------ | - | ------ | 
|                          |  | At                    |        |  | At           |  
|                          |  | June 30,              |        |  | December 31, |  
|                          |  | 2005                  |        |  | 2004         |  
|                          |  |                       |        |  |              |  
|                          |  | (Dollars in millions) |       
|Total assets              |  | $                     | 29,081 |  |              | $ | 32,804 | 
|Total liabilities         |  | $                     | 21,602 |  |              | $ | 25,785 | 
|Total shareowners equity |  | $                     | 7,479  |  |              | $ | 7,019  | 

Total assets


Total liabilities


Total shareowners equity


29



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)


Liquidity


|            |                                            |                       |   |        |      |  |   |        |  
|----------- | ------------------------------------------ | --------------------- | - | ------ | ---- |  | - | ------ | -
|            |                                            | For the Six Months    |  
|            |                                            | Ended June 30,        |  
|            |                                            |                       |  
|            |                                            | 2005                  |   |        | 2004 | 
|            |                                            |                       |   |        |      | 
|            |                                            | (Dollars in millions) |  
|Cash Flows: |                                            |                       |   |        |      |  |   |       
|            | Provided by operating activities           |                       | $ | 1,353  |      |  | $ | 2,463  |  
|            | Provided by (used in) investing activities |                       |   | 79     |      |  |   | (944   | )
|            | Used in financing activities               |                       |   | (3,217 | )    |  |   | (3,413 | )
|            |                                            |                       |   |        |      | 
|            | Net decrease in cash and cash equivalents  |                       | $ | (1,785 | )    |  | $ | (1,894 | )
|            |                                            |                       |   |        |      | 

operating activities


investing activities


financing
activities




| |                                               
| | ----------------------------------------------
| | Working Capital and Other Sources of Liquidity





30



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)
















| |                                             
| | --------------------------------------------
| | Credit Ratings and Related Debt Implications



|                     |  |            |           |  |           |  |     |         |  |                            
|-------------------- |  | ---------- | --------- |  | --------- |  | --- | ------- |  | ---------------------------
|                     |  | 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



31



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)










| |                  
| | -----------------
| | Cash Requirements







| |                             
| | ----------------------------
| | Contractual Cash Obligations





32



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)




Risk Management




Recently Issued Accounting Pronouncements




conditional asset
retirement obligation




33



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)






34



---



##### Table of Contents



AT&T CORP. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND


RESULTS OF OPERATIONS  (Continued)









|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



35



---



##### Table of Contents






PART II  OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings








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



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     |  
|                                |       |                 |        |        |               |              |         |                  |                  |  |                 |  
|April 1, 2005 to April 30, 2005 |       |                 | 16,493 |        |               | $            | 18.8779 |                  |                  |  | 0               |   |  |  | 0 |  
|May 1, 2005 to May 31, 2005     |       |                 | 8,242  |        |               | $            | 18.7101 |                  |                  |  | 0               |   |  |  | 0 |  
|June 1, 2005 to June 30, 2005   |       |                 | 23,116 |        |               | $            | 18.8362 |                  |                  |  | 0               |   |  |  | 0 |  
|                                |       |                 |        |        |               |              |         |                  |                  |  |                 |  
|                                | Total |                 |        | 47,851 |               |              | $       | 18.8289          |                  |  |                 | 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: 15,010 shares in April at an
    average price paid per share of $18.8648; 312,803 shares in
    May at an average price paid per share of $19.1336; and
    27,681 shares in June at an average price paid per share of
    $19.1187.






|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders





|                          |  |               |     |  |          |  |     | 
|------------------------- |  | ------------- | --- |  | -------- |  | --- | 
|                          |  | Votes         |    
|                          |  |               |    
|Nominee                   |  | For           |     |  | Withheld | 
|                          |  |               |     |  |          | 
|                          |  | (In millions) |    
|William F. Aldinger       |  |               | 651 |  |          |  | 43  | 
|Kenneth T. Derr           |  |               | 649 |  |          |  | 44  | 
|David W. Dorman           |  |               | 665 |  |          |  | 28  | 
|M. Kathryn Eickhoff-Smith |  |               | 661 |  |          |  | 32  | 
|Herbert L. Henkel         |  |               | 671 |  |          |  | 22  | 
|Frank C. Herringer        |  |               | 652 |  |          |  | 41  | 
|Jon C. Madonna            |  |               | 649 |  |          |  | 44  | 
|Donald F. McHenry         |  |               | 660 |  |          |  | 33  | 
|Tony L. White             |  |               | 576 |  |          |  | 117 | 



36



---



##### Table of Contents





|                                                                                                                                                                     |  |     |        |    |         |  |       |         |  |  |   | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | ------ | -- | ------- |  | ----- | ------- |  |  | - | 
|                                                                                                                                                                     |  | For |        |    | Against |  |       | Abstain | 
|                                                                                                                                                                     |  |     |        |    |         |  |       |         | 
|Ratification of the firm of PricewaterhouseCoopers, LLP as the
    independent auditors to
    audit the registrants financial statements for the year
    2005.(*) |  |     | 663    |    |         |  | 23    |         |  |  | 7 | 
|                                                                                                                                                                     |  |     | (96.64 | )% |         |  | (3.36 | )%      |  |  |   | 



|                                       |  |     |        |    |         |  |        |         |  |  |          |    |  |  |     | 
|-------------------------------------- |  | --- | ------ | -- | ------- |  | ------ | ------- |  |  | -------- | -- |  |  | --- | 
|                                       |  | For |        |    | Against |  |        | Abstain |  |  | Non-Vote |   
|                                       |  |     |        |    |         |  |        |         |  |  |          |   
|Adopt the merger agreement(**)         |  |     | 567    |    |         |  | 6      |         |  |  | 6        |    |  |  | 114 | 
|                                       |  |     | (70.76 | )% |         |  | (0.78  | )%      |  |  | (0.72    | )% |  |  |     | 
|Adjourn to permit further solicitation |  |     | 590    |    |         |  | 95     |         |  |  | 8        |    |  |  | 0   | 
|                                       |  |     | (85.14 | )% |         |  | (13.76 | )%      |  |  |          |    |  |  |     | 



|                                                    |  |     |        |    |         |  |        |         |  |  |          |  |  |  |     | 
|--------------------------------------------------- |  | --- | ------ | -- | ------- |  | ------ | ------- |  |  | -------- |  |  |  | --- | 
|                                                    |  | For |        |    | Against |  |        | Abstain |  |  | Non-Vote | 
|                                                    |  |     |        |    |         |  |        |         |  |  |          | 
|No Future Stock Options(*)                          |  |     | 42     |    |         |  | 528    |         |  |  | 9        |  |  |  | 114 | 
|                                                    |  |     | (7.41  | )% |         |  | (92.59 | )%      |  |  |          |  |  |  |     | 
|Link Restricted Stock Unit Vesting                  |  |     |        |    |         |  |        |         |  |  |          |  |  |  |     | 
|To Performance(*)                                   |  |     | 111    |    |         |  | 458    |         |  |  | 9        |  |  |  | 114 | 
|                                                    |  |     | (19.57 | )% |         |  | (80.43 | )%      |  |  |          |  |  |  |     | 
|Executive Compensation(*)                           |  |     | 57     |    |         |  | 508    |         |  |  | 13       |  |  |  | 114 | 
|                                                    |  |     | (10.15 | )% |         |  | (89.85 | )%      |  |  |          |  |  |  |     | 
|Poison Pill(*)                                      |  |     | 344    |    |         |  | 224    |         |  |  | 11       |  |  |  | 114 | 
|                                                    |  |     | (60.53 | )% |         |  | (39.47 | )%      |  |  |          |  |  |  |     | 
|Shareholder Approval of Future SERPs(*)             |  |     | 166    |    |         |  | 399    |         |  |  | 14       |  |  |  | 114 | 
|                                                    |  |     | (29.38 | )% |         |  | (70.62 | )%      |  |  |          |  |  |  |     | 
|Shareholder Ratification of Severance Agreements(*) |  |     | 379    |    |         |  | 190    |         |  |  | 9        |  |  |  | 114 | 
|                                                    |  |     | (66.58 | )% |         |  | (33.42 | )%      |  |  |          |  |  |  |     | 








37



---



##### Table of Contents








|        |                                 
|------- | --------------------------------
|Item 6. | Exhibits and Reports on Form 8-K

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.                                            

Reports on Form 8-K




38



---



##### Table of Contents






SIGNATURES






| |                              
| | -----------------------------
| | AT&T Corp.                   
|
| | /s/ C.R. Reidy               
| |                              
| | By: Christopher R. Reidy     
| | Vice President and Controller



39



---



##### Table of Contents






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.