<PAGE>
                                                                               .
                                                                               .
                                                                               .

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-K

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

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

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

           FOR THE TRANSITION PERIOD FROM           TO
</Table>

                         COMMISSION FILE NUMBER 1-1105

                                   AT&T CORP.

<Table>
<S>                                            <C>
            A NEW YORK CORPORATION                     I.R.S. EMPLOYER NO. 13-4924710
</Table>

                   ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921

                         TELEPHONE NUMBER 908-221-2000

                        INTERNET ADDRESS: www.att.com/ir

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

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

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

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

     The aggregate market value of voting common stock held by non-affiliates
was approximately $11.6 billion (based on closing price of those shares as of
June 30, 2004). At February 28, 2005, 800,344,093 shares of AT&T common stock
were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive proxy statement relating to the
2005 Annual Meeting of Shareowners (Part III).
<PAGE>

                                   SCHEDULE A

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

<Table>
<Caption>
TITLE OF EACH CLASS                                     NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------                                  ------------------------------------------------
<S>                                                  <C>
Common Shares                                        New York, Boston, Chicago,
  (Par Value $1 Per Share)                           Philadelphia and Pacific Stock Exchanges
Ten Year 7% Notes, due May 15, 2005
Twelve Year 7 1/2% Notes, due June 1, 2006
Twelve Year 7 3/4% Notes, due March 1, 2007
Ten Year 6% Notes due March 15, 2009                 New York Stock Exchange
6 1/2% Notes due March 15, 2013
Thirty Year 8.35% Debentures, due January 15, 2025
Thirty Year 6 1/2% Notes due March 15, 2029
</Table>
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

WHO ARE WE?

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

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

     We are one of the nation's largest business services communications
providers, offering a variety of global communications services to over 2
million customers, including large domestic and multinational businesses, small
and medium-sized businesses and government agencies. We operate one of the
largest telecommunications networks in the United States and, through our Global
Network Services, provide an array of services and customized solutions in 60
countries and 850 cities worldwide.

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

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

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

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

     - managed networking services and outsourcing solutions; and

     - domestic and international wholesale transport services.

     We are also a provider of domestic and international long distance and
transaction based communications services to over 24 million residential stand
alone long distance and bundled consumers in the U.S. We provide a broad range
of communications services to consumers individually and in combination with
other services, including:

     - domestic and international long distance;

     - voice over internet protocol (VoIP) services;

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

     - local calling; and

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

WHO HAS AGREED TO ACQUIRE OUR COMPANY?

     On January 30, 2005 we entered into an Agreement and Plan of Merger with
SBC Communications, Inc. (SBC) and a subsidiary of SBC. The Agreement was
approved by both our board of directors and SBC's. Subject to various conditions
including the obtaining of shareowner, governmental and regulatory approvals, we
have agreed to merge with the SBC subsidiary after which we would become a
subsidiary of SBC. In consideration, upon the closing of the merger, each of our
shareowners would receive 0.77942 shares of SBC common stock for each share of
our common stock. In addition, prior to the closing of the merger, we have
agreed to pay to our shareowners a special dividend in the cash amount of $1.30
per share of our common stock. We currently expect the transaction to close in
late 2005 or early 2006.

                                        1
<PAGE>

WHAT FACTORS HAVE BEEN SHAPING OUR INDUSTRY?

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

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

     - consolidation of existing industry participants;

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

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

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

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

     In the U.S., the Telecommunications Act has had a significant impact on our
business. In 2003-2005, actions have been taken by the Federal courts and the
Federal Communications Commission (FCC) relating to the Telecommunications Act
which are materially adverse to our ability to compete with respect to mass
market local and long distance services (see more detailed discussion under the
topic "What legislative and regulatory developments are important to us?"
below). In addition, prices for long distance minutes and other basic
communications services have declined as a result of competitive pressures,
excess network capacity, the introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. For example,
consumer long distance voice usage is declining as a result of substitution to
wireless services, internet access and e-mail/instant messaging services,
particularly in the "dial one" long distance, card and operator services
segments.

     The long distance market is characterized by rapid deregulation and intense
competition among long distance providers, and, more recently, incumbent local
exchange carriers. Under the Telecommunications Act, a regional phone company
may offer long distance services in a state within its region if the FCC finds,
first, that the regional phone company's service territory within the state has
been sufficiently opened to local competition, and second, that allowing the
regional phone company to provide these services is in the public interest. By
December 2003, regional phone companies had received approval to offer long
distance in all states within their regions. The incumbent local exchange
carriers presently have numerous competitive advantages as a result of their
strong local exchange assets.

     We had entered the local voice business for residential customers, large
business customers, and small to medium sized customers in a significant number
of states by the middle of 2004, when we announced we would no longer be
investing to acquire new mass market local customers. Our ability to remain in
our current local mass market voice markets has been materially and adversely
affected by the recent judicial and regulatory developments.

HOW HAS OUR BUSINESS DEVELOPED AND WHAT IS OUR STRATEGY?

     For the past five years, our traditional long distance services have
experienced an industry-wide trend of lower revenue from lower prices, e-mail
and wireless substitution, and increased competition. In addition, economic
conditions have been generally adverse for significant new telecommunications
spending by our customers. We had evolved several strategies to combat this
challenging environment. We have sought to reduce costs and increase operating
efficiency. We have emphasized our other service offerings such as consumer and
business local services and have bundled them with our long distance services.
We have tried to

                                        2
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add value to our services by investing in innovation, expertise, customer care
and network integration. We have sought to capitalize on new technology, most
recently with our development of voice over internet protocol services. And we
have prudently limited our capital expenditures while reducing our debt.
However, on July 22, 2004 we announced that as a result of recent changes in
regulatory policy governing local telephone service, we would be shifting our
focus away from traditional consumer services, and we would no longer be
investing to acquire new residential local and stand-alone long distance
customers. Going forward, we plan to concentrate our investments on business
markets and emerging technologies.

                         AT&T BUSINESS SERVICES SEGMENT

WHAT SERVICES DO WE OFFER?

WE OFFER VOICE SERVICES.

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

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

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

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

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

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

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

WE OFFER DATA SERVICES

     Private Line Services.  Our data services include private line and special
access services that use high capacity digital circuits to carry voice, data and
video or multimedia transmission from point-to-point in multiple configurations.
These services provide high volume customers with a direct connection to one of
our switches instead of switched access shared by many users. These services
permit customers to obtain voice communications on an on-network and off-network
basis. These services also allow customers to create

                                        3
<PAGE>

internal data networks to link their computers and to access external data
networks and the internet, thereby reducing their costs.

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

WE OFFER MANAGED SERVICES, INTERNET SERVICES AND OUTSOURCING SOLUTIONS

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

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

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

     Enterprise Remote Access Services.  We provide customers a variety of
remote access services including dial, broadband, local radio frequency
(commonly known as wireless fidelity or WiFi) and cellular wireless
technologies. We currently provide dial access in more than 140 countries, WiFi
access in more than 30 countries and third party customer contracted cellular
access in 7 countries.

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

     High availability and security services.  Our high availability and
security services deliver integrated solutions to enable the continuous
operations of clients' critical business processes and availability of critical
data and includes business continuity and disaster recovery services. We also
provide premise based and network based security products such as firewalls,
denial of service prevention, personal firewalls, internet threat
identification, intrusion detection and professional services.

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

                                        4
<PAGE>

WE OFFER TRANSPORT SERVICES TO OTHER SERVICE PROVIDERS

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

HOW DO WE MARKET OUR SERVICES?

     We market our business voice and data communications services through our
global sales and marketing organization of approximately 4,600 sales
representatives. The sales and marketing group also uses several outside
telemarketing firms as well as a number of other marketing agents. In addition,
our solution center provides a centralized resource for complex customer
requirements.

HOW DO WE CARE FOR OUR CUSTOMERS?

     Our customer care handles contracting, collections, ordering, provisioning,
account inquiry and maintenance processes worldwide. For larger and
multinational customers and government agencies, we provide customer care
services and support through dedicated account teams. Through a dedicated
customer care website customers may submit questions or initiate service
requests, including ordering new services or submitting maintenance requests.

HOW DO WE CONTRACT FOR OUR SERVICES?

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

WHAT IS OUR DOMESTIC U.S. NETWORK?

     Our U.S. network is comprised of 55,543 route miles of long-haul backbone
fiber optic cable, plus 21,655 additional route miles of local metropolitan
fiber, capable of carrying high speed (10 billion bits or 10 gigabits per
second) traffic. AT&T Business Services has expanded this fiber network,
recently completing the installation of 14,838 new route miles of the latest
generation fiber optic cable capable of carrying 40 gigabits per second when
that technology is commercially available. This new fiber capacity provides
substantial capacity for potential future growth of network traffic with low
incremental capital expenditure requirements. In addition, we also have 692
points-of-presence in the continental U.S. with the majority served by high
speed fiber-based technology offering high speed data connectivity to the
majority of U.S. business centers.

     On an average business day, our business network, which also supports
Consumer Services, handles a total of 364 million voice calls, as well as 4,411
trillion bytes (terabytes) of data. On the voice network, we employ our patented
Real Time Network Routing to automatically complete domestic voice calls through
more than 100 possible routes. The reliability of certain portions of the
network is maximized by using synchronous optical network (SONET) rings that can
restore service following a network failure within 50 to 60 milliseconds by
reversing the flow of traffic on the ring. On other routes, we use our patented
FASTAR(R)

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technology to route traffic around a fiber optic cable cut using spare transport
capacity elsewhere on the network. Most recently, we have deployed intelligent
optical switches across the network to expand our ability to rapidly and
automatically restore network traffic that might be otherwise affected by a
cable cut or equipment failure.

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

     Since digital switching was introduced in the late 1970s, the basic element
of our long distance voice network has been a circuit switch which was
specifically designed for long-haul use. Currently we employ 138 of these
switches in our network. We have recently installed 68 of the latest high
performance carrier-grade voice switches that allow us to accommodate the
transition from circuit-switched to packet networks. In addition, in support of
our VoIP services, numerous VoIP gateways have been deployed. We will continue
to have both circuit and packet switching technologies for some time.

     In addition to our long distance network, we have an extensive local
network serving business customers in 91 U.S. cities. Our local network now
includes 156 local switches and reaches 6,776 buildings with 8,603 metropolitan
SONET rings. This network provides voice service and high speed data connections
to business users. In order to maximize asset utilization, our local network
also handles consumer traffic, providing most of the dial-in numbers for our
AT&T Worldnet service.

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

     Additionally, we currently offer our business customers over five thousand
WiFi locations in more than 50 countries.

WHAT IS OUR STRATEGY FOR OUR NETWORKS AND SYSTEMS?

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

HOW DO WE OPERATE INTERNATIONALLY?

     AT&T owns international facilities interconnected to networks owned by
numerous other carriers that enable us to offer switched voice and private line
services worldwide. We also use our relationships to offer end-to-end network
management capabilities and highly customized network solutions. The voice
services include long distance and toll-free services within Canada; dedicated
outbound calling originations from 28 countries; and inbound calling center
services that support customer call centers in 28 countries for dedicated
egress; and virtually anywhere using switched egress, and can accept calls from
161 countries besides the U.S.

     In addition, we own and lease facilities, and own and manage ATM, frame
relay and/or IP switches and routers, in 57 countries. We offer managed and
unmanaged IP, ATM and/or frame relay data services to our business customers and
manage in-country dial and other forms of access (broadband, wireless and WiFi
access) to our networks in the 57 countries. Over the past several years, we
have built out our new multi protocol label switching/asynchronous transfer
mode, or MPLS/ATM network. As of the end of 2004 our MPLS/ATM network had been
deployed to 132 cities in 50 countries, with further investments planned for

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seven additional countries in 2005, to supplement, and eventually replace, our
other extensive global data networks.

     We have investments in several foreign communications companies as follows:

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

     In 2004, AT&T and Alestra executed an agreement to extend our MPLS/ATM
network into Mexico enabling us to extend our global data ATM/frame
relay/virtual private network and IP services in Mexico.

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

     Shanghai Symphony Telecom Company, Ltd (Unisiti).  In November 2000, we
entered into a joint venture agreement with China Telecom Shanghai Telecom
Company and Shanghai Information Investment Inc. and established Unisiti, a
Chinese limited liability company that offers broadband IP network services in
Pudong, China. In addition to investing in Unisiti, we provide training and
technical assistance to the company.

     PT Sistelindo Mitralintas (Sistelindo).  Sistelindo is an Indonesia joint
venture company authorized to provide managed data services in Indonesia. We
hold a 20% interest in Sistelindo which we acquired from IBM in December 2001.

WHAT IS AT&T LABS?

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

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

     We actively pursue patents, trademarks and service marks to protect our
intellectual property within the U.S. and abroad. We received over 300 patents
throughout the world in 2004 and maintain a global portfolio of over 5,000
trademark and service mark registrations. We have also entered into agreements
that permit other companies, in exchange for fees and subject to appropriate
safeguards and restrictions, to utilize certain of our trademarks and service
marks

                         AT&T CONSUMER SERVICES SEGMENT

     On July 22, 2004 we announced that as a result of recent changes in
regulatory policy governing local telephone service, we would be shifting our
focus away from traditional consumer services, and we would no longer be
investing to actively acquire new mass market local and stand-alone long
distance customers. However, we continue to provide local and stand-alone long
distance services to our existing mass market customers and continue to accept
orders from existing and new customers.

WHAT SERVICES DO WE PROVIDE?

WE PROVIDE LONG DISTANCE SERVICES

     We provide interstate and intrastate long distance telecommunications
services throughout the continental U.S. and provide, or join in providing with
other carriers, telecommunications services to and from Alaska,

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Hawaii, Puerto Rico and the Virgin Islands and international telecommunications
services to and from virtually all nations and territories around the world.
Consumers can use our domestic and international long distance services through
traditional "one plus" dialing of the desired call destination, through dial-up
access or through use of our calling cards.

     In the continental U.S., we provide long distance telecommunications
services over our backbone network. As of December 31, 2004, we had
approximately 20.4 million stand-alone long distance customers.

WE PROVIDE BUNDLED LOCAL AND LONG DISTANCE SERVICES

     At the end of 2004, we provided customers combined local and long distance
services in portions of 47 states. We handle all aspects of the phone service
for the customer, including ordering, customer service, billing, repair and
maintenance. We also provide many of the same local calling features as the
incumbent local exchange carriers, such as call waiting and caller ID. As of
December 31, 2004, we had approximately 4.2 million bundled local and long
distance customers.

WE PROVIDE CALLING CARD SERVICES

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

WE PROVIDE TRANSACTION-BASED SERVICES

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

     Prepaid cards.  We provide prepaid card services. Our prepaid cards provide
local, long distance and international calls charged to a prepaid card account
maintained on our prepaid platform. In 2004, nearly 5% of AT&T Consumer Services
total revenue and more than 50% of prepaid card revenue was related to a
contract with Wal-Mart, Inc., which was renewed on December 1, 2004. If this
contract is not further renewed at the next renewal date, December 31, 2005
(subject to early termination if certain events occur), AT&T Consumer Services
revenue would be adversely affected if we are unsuccessful in selling the cards
through a different channel. We are currently evaluating the prospective impact
of the February 2005 FCC prepaid card ruling and assessing whether we will pass
the related Universal Service Fund costs to our customers. In the event that we
decide to increase our rates, under certain circumstances, Wal-Mart may choose
to terminate this contract. However, we have the right to match any offer made
by a competitor and continue the existing contract. See Item 3 below, "How might
pending legal proceedings affect us?" for a discussion of the FCC ruling.

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

     1-800CALLATT(R) (Collect).  1-800CALLATT for collect calls is our primary
collect calling service.

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

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

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

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

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     10-10-345(SM) service.  10-10-345 is a non-AT&T-branded dial-around service
that allows customers an alternative way to make a long distance call. Charges
made for calls using 10-10-345 are billed through the local exchange carrier.

WE PROVIDE INTERNET SERVICES

     We provide dial-up and DSL internet access to consumers with our AT&T
Worldnet(SM) service, a provider of internet access services in the U.S. AT&T
Worldnet service offers internet-based communications services such as e-mail,
content, and personal web pages. As of December 31, 2004, we had approximately
1.2 million AT&T Worldnet, dial-up and DSL customers.

WE PROVIDE RESIDENTIAL VOIP SERVICES

     We currently offer our AT&T CallVantage(SM) VoIP services to consumers
wanting area codes and local numbers in portions of 39 states and the District
of Columbia. The service offers enhanced information services, including
advanced call management capabilities and special web-based features. Although
our decision on July 22, 2004 to shift away from mass market services has
curtailed our ability to market this product, as of December 31, 2004 we had
approximately 53 thousand AT&T CallVantage VoIP services customers.

HOW DO WE CARE FOR OUR CUSTOMERS?

     Our customer care centers consist of a network of service centers, either
operated by us or outsourced to outside vendors. The breadth of support provided
by the centers ranges from universal service to specialized services based on
functional area or customer needs. In addition, over 10 languages are supported
within our customer care and service functions and access to over 120 languages
is available through outsourced vendors.

HOW DO WE CHARGE FOR OUR SERVICES?

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

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

     Customers for combined long distance and local services are usually charged
a flat rate per month for local service and a separate monthly rate for each
additional feature not included in the local service option selected by the
customer. Usage fees and/or monthly charges are charged for long distance. AT&T
Worldnet service offers a variety of pricing plan options. Generally, customers
are charged a flat rate for a certain number of hours with charges for each
additional hour of usage. AT&T Worldnet service also offers a plan

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<PAGE>

without a usage restriction. Customers of the AT&T CallVantage VoIP service are
charged a flat monthly fee and may be charged a separate additional monthly fee
for certain features.

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

                                 OTHER MATTERS

WHAT LEGISLATIVE AND REGULATORY DEVELOPMENTS ARE IMPORTANT TO US?

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

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

     On August 21, 2003, the FCC issued its decision in the proceeding it had
initiated to review the availability of unbundled network elements based on
current market conditions (Triennial Review) and adopted a new unbundling
framework. Under the new framework, each state commission was authorized to
conduct a granular analysis of local market conditions, using criteria provided
by the FCC, to make final unbundling determinations. In the same order and
subsequent rulings, the FCC also granted the incumbent local exchange companies
significant broadband deregulation, concluding that the incumbent LECs were no
longer required to unbundle fiber-to-the-home loops, fiber-to-the curb loops or
bandwidth in hybrid copper fiber loops for the provision of mass market
competitive broadband services. The FCC also eliminated all line-sharing
obligations. Aspects of the FCC's August 21, 2003 order were appealed to the
U.S. Court of Appeals for the District of Columbia Circuit. On March 2, 2004,
the court vacated a number of the FCC rulings, including the FCC's delegation to
state commissions of decisions over impairment as applied to mass market
switching and certain transport elements, and the FCC's finding that the need
for so called "hot cuts" created a nationwide impairment justifying access to
mass market switching. In light of the FCC's decision not to appeal the D.C.
Circuit's decision and other anticipated changes in federal policy, we announced
on July 22, 2004 that we would cease active marketing of both local and long
distance services to mass market customers and focus our business on the sale of
telecommunications and related services to enterprise business customers.

     On February 4, 2005, the FCC released its order on remand from the D.C.
Circuit's decision in which it clarified and restated its unbundling rules in
response to the Court's rulings. In particular, the FCC determined that
requesting carriers are not "impaired" under the statutory framework without
access to cost-based mass-market switching. Thus, competitors may not place
orders for new service arrangements that use such switching after the effective
date of the order (March 11, 2005). The Commission also established a 12-month
transition period from the effective date during which competitive carriers must
submit the necessary orders to convert their customers served using unbundled
mass market switching to an alternative service arrangement. During the
transition period, existing arrangements using mass market switching are subject
to an additional one dollar charge above state-set rates. In addition, the FCC
issued modified rules governing the unbundling of high-capacity loop and
transport facilities. The new rules establish criteria that will eliminate
incumbent local exchange carrier unbundling obligations for various loop and
transport facilities depending on the size of the relevant incumbent local
exchange carrier wire centers and the number of competitive carriers that have
established facilities-based collocations in those wire centers. Facilities in
wire centers that are subject to such additional relief are also covered by a
12-month transition (18 months for dark fiber facilities) during which
competitive carriers may not buy new unbundled network elements but may serve
customers on existing elements at a rate that is 15% above state-set rates. By
the end of the transition

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<PAGE>

period, all facilities purchased as unbundled network elements must be
transitioned to other arrangements. Finally, the FCC determined that facilities
purchased as unbundled network elements may not be used exclusively to provide
either mobile wireless or interexchange service.

     On September 15, 2003, the FCC established a proceeding to determine
whether any changes are necessary to the pricing methodology (commonly known as
the TELRIC methodology) that the state PUCs must use in setting rates that we
and other carriers must pay for leasing unbundled network elements or facilities
from the incumbent local exchange carriers. Extensive comments have been filed
by all interested parties in the proceeding and it remains active, but with no
projected date for a decision. The importance of this proceeding is greatly
diminished by action of the FCC in the Triennial Review Remand proceeding
described above, which effectively eliminates unbundled network elements as a
viable means for providing mass market local services and reduces the
availability of unbundled high-capacity loop and transport facilities.

     The FCC and various states have begun to consider whether and to what
extent VoIP communications should be subject to regulation like traditional
telecommunications services, including whether VoIP services should be subject
to access charges, 911 obligations, and universal service funding obligations.
The FCC has initiated a comprehensive rulemaking to address these VoIP issues,
which remains active. On April 21, 2004, the FCC ruled against a petition we
filed in October 2002, holding that our long distance phone-to-phone IP
telephony services are subject to terminating access charges and could not be
terminated over end user local services. As a result of this ruling, we will
begin paying terminating access charges on our long distance phone-to-phone IP
telephony calls. (See Item 3 below, "How might pending legal proceedings affect
us?", for a discussion of related litigation). In response to a petition filed
by Vonage Holdings Corporation, on November 12, 2004, the FCC held that VoIP
services that require broadband connection from the user's location,
IP-compatible customer premise equipment, includes a suite of integrated
capabilities and features, and allow customers to manage personal communications
dynamically, would be treated as jurisdictionally interstate services. Our newer
VoIP services fall within this description and as a result will be subject
predominantly to FCC rules. In March 2005, the FCC is expected to rule on a
petition filed by Level 3 Communications LLC asking for a ruling that access
charges do not apply to VoIP services of the type described in the Vonage Order.

     The FCC also opened proceedings in December 2001 and in February 2002 that
could further reduce the level of federal oversight of the regional phone
companies' broadband offerings. In addition, several of the regional companies
have filed petitions with the FCC seeking forbearance of current regulatory
rules for their broadband services.

     In view of the proceedings pending before the courts, the FCC and state
PUCs, and possible legislation, there can be no assurance that the prices and
other conditions established by the FCC and in the various states will provide
for effective local service competition or will not adversely affect our ability
to continue to serve existing markets or enter new markets. As noted above, in
anticipation of the changes in local competition rules following the D.C.
Circuit's March 2, 2004 decision and the FCC's decision not to appeal that
ruling, we announced on July 22, 2004 that we would cease active marketing
traditional telephone services, both local and long distance, to mass market
customers.

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

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

                                        11
<PAGE>

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

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

     Access charges are subject to the regulatory jurisdiction of the FCC and
state commissions. In May 2000, the FCC adopted the CALLS order for the price
cap local exchange carriers, which made significant access and price cap
changes. The CALLS order reduced, by $3.2 billion during 2000, the interstate
access charges that we and other long distance carriers paid to these local
exchange carriers for access to their networks, and established target access
rates, which in subsequent years resulted in further reductions, albeit of a
much smaller magnitude. As part of the CALLS order, we agreed to pass through to
customers access charge reductions over the five-year life of the CALLS order
and made certain other commitments regarding the rate structure of certain
residential long distance offerings.

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

     As a follow-on to CALLS, the FCC announced on February 10, 2005 that it
will issue a further notice of proposed rulemaking on a number of reform
proposals related to intercarrier compensation and other issues. One proposal
was submitted by the Intercarrier Compensation Forum (ICF), of which we are a
member. The ICF proposal is a consensus plan that, if adopted by the FCC, would
unify the disparate network interconnection and intercarrier compensation
regimes governing interstate and intrastate switched access, reciprocal
compensation, and traffic with one end originating or terminating on VoIP
networks, among other matters. In addition, the ICF proposal also contains
modifications to the universal service system.

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

     On January 31, 2005, the FCC initiated a notice of proposed rulemaking,
regarding the post-CALLS treatment of interstate special access services. In
this proceeding, the FCC will consider whether it should maintain, modify or
repeal its pricing flexibility rules and other issues related to the price cap
regulation of special access services. The FCC has sought comment on whether it
should reduce special access rates, and whether it should grant interim relief
in this regard, commencing as early as July 2005. If the FCC takes action to
reduce special access rates, it could significantly lower our access expenses.

     On December 9, 2004, the FCC released an order granting a formal complaint
that we filed against BellSouth Telecommunications, Inc. and held that the
principal volume discount plan under which we currently obtain special access
service from BellSouth unlawfully discriminates in favor of BellSouth's
interexchange affiliate in violation of Section 272 of the Communications Act.
(The decision denied the

                                        12
<PAGE>

complaint with respect to another BellSouth special access volume discount
plan.) The order directs BellSouth to terminate the unlawful discount plan not
later than June 9, 2005, and encourages Bellsouth to fashion a nondiscriminatory
replacement for that plan. Damages based on the December 9 order's liability
finding will be addressed by the FCC in a subsequent phase of the proceeding.
Both BellSouth and AT&T have filed petitions for appellate review of the
Commission's findings with respect to liability.

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

     As part of the ICF proposal discussed above, the FCC will consider
reforming the federal Universal Service Fund so that universal service is
supported through assessments on working telephone numbers and capacity-based
connections, rather than revenues. This numbers/capacity-based approach to
universal service funding would free regulators from having to decide the
regulatory classification of a particular application and instead would base the
funding obligation on the customer's working telephone number and/or special
access connection, while assuring a stable source of funding.

     For an additional discussion of certain regulatory matters, including the
FCC February 2005 prepaid card service decision, see Item 3 below, "How might
pending legal proceedings affect us?"

HOW AND WITH WHOM DO WE COMPETE?

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

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

     We currently face significant competition and expect that the level of
competition will continue to increase. As competitive, regulatory and
technological changes occur, including those occasioned by the
Telecommunications Act, we anticipate that new and different competitors will
enter and expand their position in the communications services markets. These
will include regional phone company competitors plus entrants from other
segments of the communications and information services industry. Many of these
new

                                        13
<PAGE>

competitors are likely to enter with a strong market presence, well recognized
names and pre-existing direct customer relationships.

     For example, the Telecommunications Act permits regional phone companies to
provide in-region interLATA interexchange services after demonstrating to the
FCC that providing these services is in the public interest and satisfying the
conditions for developing local competition established by the
Telecommunications Act. The regional phone companies had successfully obtained
FCC approval to offer long distance in all of the states within their regions by
the end of 2003. Because substantial numbers of long distance customers seek to
purchase local, interexchange and other services from a single carrier as part
of a combined or full service package, any competitive disadvantage, inability
to profitably provide local service at competitive rates or delays or
limitations in providing local service or combined service packages could
materially adversely affect our future revenue and earnings. On July 22, 2004 we
announced that as a result of recent changes in regulatory policy governing
local telephone service, we would be shifting our focus away from traditional
mass market services, and we would no longer be investing to acquire new mass
market local and stand-alone long distance customers.

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

WHO ARE OUR EMPLOYEES?

     On December 31, 2004, we employed approximately 47,600 persons in our
operations, 23% fewer than we employed on December 31, 2003. Approximately 91%
of our employees are located domestically. Unions represent about 35% of the
domestically located employees. Of those so represented, about 95% are
represented by the Communications Workers of America, which is affiliated with
the AFL-CIO; about 4% by the International Brotherhood of Electrical Workers,
which is also affiliated with the AFL-CIO. In addition, there is a very small
remainder of domestic employees represented by other unions. Labor agreements
covering most of these employees extend through December 2005.

     On December 31, 2004, AT&T Business Services employed approximately 34,700
individuals in its operations. Of those employees, approximately 31,000 are
located domestically. Unions represent about 23% of the domestically located
employees of AT&T Business Services.

     On December 31, 2004, AT&T Consumer Services employed approximately 8,300
individuals in its operations, virtually all of whom are located in the U.S.
Unions represent about 79% of the domestically located employees of AT&T
Consumer Services.

  SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION

     For information about our research and development expense, see Note 3 to
the Consolidated Financial Statements included in Item 8 to this Annual Report.
For information about the consolidated operating revenue contributed by our
major classes of products and services, see the revenue tables and descriptions
following the caption "Segment Results" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7.

WHAT INFORMATION IS AVAILABLE ABOUT OUR COMPANY?

     Shareowners may access and download free of charge via a hyperlink on our
website at www.att.com/ir copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports. These documents are generally available on the same day they are
electronically filed with or furnished to the Securities and Exchange
Commission. Shareowners may also access and download free of charge our
corporate governance documents, including our Code of Conduct, our Code of

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<PAGE>

Ethics for Chief Executive Officer and Senior Financial Officers, our Corporate
Governance Guidelines, and the charters of our Audit Committee, Compensation and
Employee Benefits Committee and Governance and Nominating Committee. In
addition, any shareowner who wishes to obtain a print copy of any of these
documents should write to: AT&T Corp., Investor Relations Department, One AT&T
Way, Bedminster, New Jersey 07921.

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

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

     Tax Considerations.  Under an agreement between us and AT&T
Broadband/Comcast, we generally will be entitled to indemnification for any tax
liability that results from the spin-off failing to qualify as a tax-free
transaction, unless, the tax liability was caused by post or spin-off
transactions of AT&T. AT&T Broadband/Comcast's indemnification obligation is
generally limited to 50% of any tax liability that results from the spin-off
failing to qualify as tax free, unless such liability was caused by a post
spin-off transaction of AT&T Broadband/Comcast. To the extent we were entitled
to an indemnity with respect to such tax liability, we would be required to
collect the claim on an unsecured basis.

     Litigation.  Pursuant to agreements entered into with its former units, we
share in the cost of certain litigation (relating to matters arising while the
units were affiliated with AT&T) if the settlement exceeds certain thresholds.
For example, in connection with a settlement in 2002 of Sparks v. AT&T, a class
action against AT&T, Lucent Technologies and other defendants filed in 1996,
pursuant to agreements between us and Lucent Technologies, we are responsible
for our proportionate share of the settlement and estimated legal costs. We
anticipate that this amount may total as much as $33 million, net of tax.
Similarly, pursuant to agreements between AT&T and NCR Corp., we are potentially
responsible for a portion of any award or settlement relating to the
environmental proceedings brought by certain federal and state governmental
agencies arising out of the presence of polychlorinated biphenyls (PCBs) in
sediments in the lower Fox River and in the Bay of Green Bay, in Wisconsin (Fox
River). NCR was identified as a potentially responsible party because PCBs were
purportedly discharged from two carbonless copy paper manufacturing facilities
it previously owned, which are located along the Fox River. With the exception
of the Sparks and the Fox River matters, as of December 31, 2004, we have made
the assessment that none of the potential litigation liabilities relating to
matters arising while the units were affiliated with AT&T were probable of
incurring costs in excess of the threshold above which we would be required to
share in the costs. However, in the event these former units were unable to meet
their obligations with respect to these liabilities due to financial
difficulties, we could be held responsible for all or a portion of the costs,
irrespective of the sharing agreements.

     Guarantees.  From time to time we have guaranteed to third parties the debt
or other obligations of our former units, and in some cases may remain
secondarily liable with respect to such obligations. In addition, in connection
with the split-off or spin-off of our former units, we have issued guarantees to
third parties for certain debt or other obligations of our former units. In the
event our former units are unable to meet obligations which we have guaranteed,
the third parties could look to us for payment.

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<PAGE>

WHAT SPECIAL CONSIDERATIONS SHOULD INVESTORS CONSIDER?

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

     Our Stock Price Would Likely be Adversely Affected if we do not Consummate
our Transaction with SBC.  The agreement we entered into with SBC and its wholly
owned subsidiary contains numerous conditions to SBC's obligation to close its
acquisition of us. These conditions include:

     - approval of our shareholders;

     - obtaining approval of the FCC, state public utility commissions,
       antitrust clearance, and certain other governmental approvals;

     - operating our business in compliance with the covenants set forth in the
       agreement; and

     - continued accuracy of our representations and warranties, including the
       absence of any material adverse effect on our business.

     We cannot be certain we will obtain the necessary regulatory approvals, or
that we will satisfy other closing conditions. If the transaction were
terminated, or if it appeared reasonably likely to be terminated, this would
likely have a significant adverse effect on our stock price.

     Our Business Could be Adversely Impacted by our Pending Transaction with
SBC.  Uncertainty about the effect of our pending transaction with SBC could
adversely affect our business. This uncertainty could lead to a loss of customer
accounts, an acceleration in revenue declines, an impairment of our ability to
make needed process and operational improvements in our business, an inability
to retain or motivate current employees or attract new employees, and a
deterioration in our results of operations. These adverse effects may be
enhanced by the fact that the governmental and regulatory approval process for
the SBC transaction may be lengthy and the ultimate result is uncertain.

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

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

     - market share loss and loss of key customers;

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

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

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

     - accelerating erosion of AT&T Consumer Services' customer base compounded
       by our decision to no longer invest in the active acquisition of any new
       residential local or stand-alone long distance customers; and

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

     We Face Competition from a Variety of Sources.

     - We traditionally have competed with other long distance carriers. In
       recent years, we have begun to compete with regional phone companies,
       which own their own access facilities and historically have dominated
       local telecommunications, and with other competitive local exchange
       carriers for the

                                        16
<PAGE>

       provision of local and long distance services. Regional phone companies
       now have received permission to offer long distance services in all of
       the states within their regions. The regional phone companies presently
       have numerous advantages as a result of their ownership of local
       exchanges and facilities. Some of the regional phone companies have
       financial, personnel and other resources significantly greater than ours.
       In addition, the regional phone companies are able to offer bundled
       products and services in certain states that we are unable to match. To
       the extent consumers prefer bundled offers (such as those offers that
       include local, long distance and wireless services), we will be at a
       disadvantage to certain of our competitors, including the regional phone
       companies.

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

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

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

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

     - changes in federal policy reducing cost-based access to unbundled
       elements in the incumbent local exchange carriers' networks and reducing
       competitive access to incumbent LEC broadband facilities;

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

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

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

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

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

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

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

                                        17
<PAGE>

     Our Financial Condition and Prospects May be Materially Adversely Affected
by Further Ratings Downgrades.  During the third quarter of 2004, AT&T's long
term and short term credit ratings were lowered by Standard & Poor's, Moody's
and Fitch, as reflected in the table below.

AS OF DECEMBER 31, 2004:

<Table>
<Caption>
                                                      SHORT-TERM   LONG-TERM
CREDIT RATING AGENCY                                    RATING      RATING     OUTLOOK
--------------------                                  ----------   ---------   --------
<S>                                                   <C>          <C>         <C>
Standard & Poor's...................................      B           BB+      Negative
Fitch...............................................      B           BB+      Negative
Moody's.............................................      NR          Ba1      Negative
</Table>

     However, given the SBC acquisition announcement, on January 31, 2005 and
February 1, 2005, Fitch and Standard & Poor's, respectively, placed AT&T's long
term debt ratings on watch positive and removed the outlook negative. On January
31, 2005, Moody's placed AT&T's long term debt rating on review for possible
upgrade and removed the outlook negative. In addition, based on AT&T's request,
Standard & Poor's and Moody's withdrew AT&T's short term credit ratings. Our
debt ratings would be adversely affected if we failed to consummate our
transaction with SBC. Our access to capital markets as well as the cost of our
borrowings are affected by our debt ratings. The third quarter rating actions
discussed above and further debt rating downgrades will require us to pay higher
rates on certain existing debt and have required us to post cash collateral for
certain interest-rate swaps in which we were in a net payable position.
Additionally, if our debt ratings are further downgraded, our access to the
capital markets may be further restricted and/or such replacement financing may
be more costly or have additional covenants than we had in connection with our
debt at December 31, 2004. In addition, the market environment for financing in
general, and within the telecommunications sector in particular, has been
adversely affected by economic conditions and bankruptcies of other
telecommunications providers.

     The SBC merger agreement provides that we cannot incur additional
indebtedness over $100 million in the aggregate or issue equity or convertible
securities without the prior consent of SBC. Without limitation, this could
materially limit our ability to make drawings under our $1 billion dollar credit
facility, to increase the amount of our financing of accounts receivable under
our securitization facility, to issue commercial paper, or to utilize our
universal shelf registration statement for financing purposes. In addition, the
merger agreement requires us to pay a special dividend in excess of $1 billion
in connection with the closing of the transaction. The combination of the
requirement to reserve cash to pay the special dividend and the restriction on
our ability to utilize sources of liquidity, could have a material adverse
affect on our liquidity position. In addition, the SBC merger agreement contains
restrictions on our ability to enter into derivatives contracts without the
prior consent of SBC.

               SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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

     - financial condition,

     - results of operations,

     - cash flows,

     - dividends,

     - financing plans,

     - business strategies,

     - operating efficiencies,

     - capital and other expenditures,

                                        18
<PAGE>

     - competitive positions,

     - availability of capital,

     - growth opportunities for new and existing products,

     - benefits from new technologies,

     - availability and deployment of new technologies,

     - plans and objectives of management,

     - mergers and acquisitions, and

     - other matters.

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

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

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

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

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

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

     - the availability and cost of capital,

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

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

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

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

                                        19
<PAGE>

     - 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,

     - the impact of our decision to shift away from our traditional consumer
       and long distance businesses,

     - 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.

ITEM 2.  PROPERTIES.

WHAT DO WE OWN?

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

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

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

ITEM 3.  LEGAL PROCEEDINGS.

HOW MIGHT PENDING LEGAL PROCEEDINGS AFFECT US?

     In the normal course of business, we are subject to proceedings, lawsuits
and other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties and outcomes are not predictable with assurance. Consequently, we
are unable to ascertain the ultimate aggregate amount of monetary liability or
financial impact with respect to these matters on December 31, 2004. While these
matters could affect operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to us beyond that provided for at
year-end would not be material to our annual consolidated financial position or
results of operations.

     We were named as a defendant in a consolidated group of purported
securities class action lawsuits filed in the United States District Courts for
the District of New Jersey filed on behalf of persons who purchased our common
stock from October 25, 1999 through May 1, 2000. The consolidated lawsuit
asserted claims under Section 10(b) and Rule 10b-5 and Section 20(a) of the
Securities Exchange Act of 1934, as amended, and alleges, among other things,
that during the period referenced above, we made materially false and misleading
statements and omitted to state material facts concerning our future business
prospects. The consolidated complaint sought unspecified damages. After several
days of trial, we settled this lawsuit for $100 million. While we denied any
wrongdoing asserted against us, we settled this lawsuit to avoid the uncertainty
of a jury verdict and the expense of continuing the litigation to the end of the
trial and through the appeal process. Our liability for this settlement will be
shared equally between us and Comcast.

                                        20
<PAGE>

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

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

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

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

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

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

                                        21
<PAGE>

     More than thirty class actions have been brought against us throughout the
country in which the plaintiffs have asserted superior property rights with
respect to railroad right of way corridors on which we have installed fiber
optic cable under agreements with the various railroads. Although we deny any
liability, we have engaged in settlement negotiations concerning the so-called
"active line" claims and any remaining "abandoned line" claims that have been
consolidated and are pending in Indiana federal court. We have settled claims on
a state-by-state basis and obtained final approval of such claims in Ohio,
Connecticut, Wisconsin, Maryland, Virginia, Delaware, West Virginia, Idaho,
Massachusetts and Michigan. In addition, in January of 2005 we obtained
preliminary approval for settlements in Vermont, Minnesota, Kansas, Maine and
Texas and final fairness hearings to approve the settlements are scheduled in
May for Vermont and Minnesota and July for Kansas, Maine and Texas. We also
anticipate using these settlements as a template for settling claims in other
states. None of the current settlements or the settlements we are currently
planning involve claims along railroad right of way obtained under federal land
grant statutes nor do they address claims that are based upon the installation
of fiber optic cable in pipeline or other utility right of way.

     We filed an application for a declaratory ruling with the FCC to decide the
issue of whether phone-to-phone Internet protocol telephony is exempt from
paying access charges. The FCC ruled against us, and as a result, we began
paying terminating access charges on our long distance phone-to-phone Internet
protocol telephony calls. In its decision, the FCC did not make any
determination regarding the appropriateness of retroactive application of its
ruling. The FCC left the matter to be decided on a fact specific, case-by-case
basis. Following the FCC ruling, Qwest Communications International Inc. (Qwest)
filed a lawsuit in federal district court in Colorado in which it asserted a
claim alleging that we avoided interstate and intrastate access charges by
delivering long distance calls to Qwest for termination over Qwest's local
facilities. Qwest is seeking "tens of millions of dollars in access charges"
from us. SBC filed a lawsuit in federal district court in Missouri asserting
claims similar to those asserted against us by Qwest. SBC is seeking $141
million in access charges. Although other carriers have expressed an intention
to make similar claims, to date no other lawsuits have been filed. In our view,
our total potential exposure could be as much as $250 million if we were
required to make payments retroactively. We believe we have a number of defenses
to these claims and intend to defend against them vigorously.

     Qwest has filed a claim against us seeking payment of approximately $60
million in alleged undercharges in connection with terminating toll free calls.
We dispute the allegations of these claims and believe that we have acted
consistently with the terms and conditions of our underlying agreements with
Qwest. In addition, we believe that Qwest's claims have been released in the
ordinary course of business between Qwest and us. To the extent that Qwest may
be entitled to any damages, such damages cannot be substantiated at this time.

     In February 2005, the FCC ruled against AT&T in its petition for a
declaratory ruling that our enhanced prepaid card service is an interstate
information service. The FCC did not agree with our position that intrastate
access charges should not apply to calls made using an enhanced prepaid card
when (1) the prepaid card platform is located outside the state in which either
the calling or the called party is located and (2) the called party receives an
advertisement from the platform which constitutes a separate interstate
communication. The FCC also did not agree with our position that our enhanced
prepaid card service is an information service, and held that it is a
telecommunications service and that we had to make Universal Service Fund (USF)
contributions on revenue derived from the service. Since we did not pay USF and
paid lower interstate access rates, these savings have permitted us to sell
prepaid cards at prices below what otherwise would have been possible. The
recent adverse ruling by the FCC on the prepaid card petition will increase the
future cost of providing the types of prepaid cards that were addressed in the
FCC decision and may materially adversely affect future sales of prepaid cards.
In addition, the FCC ruling directs AT&T to pay "past due" universal service
amounts, including late fees invoiced by the Universal Service Administrator,
and exposes us to potential retroactive liability for intrastate access charges.
Accordingly, we accrued $553 million as of December 2004 for these matters. We
intend to appeal the FCC decision to a federal Court of Appeals.

     Following this FCC decision, Qwest filed a lawsuit against us in Colorado
federal court relating to this issue, asserting claims for breach of federal and
state tariffs, unjust enrichment, fraudulent misrepresentation and breach of
contract. Qwest seeks unspecified damages. We intend to vigorously defend this
and any similar cases that may be filed.

                                        22
<PAGE>

     Former executives of MediaOne and US West filed a lawsuit against us in
Delaware State court, alleging that we purportedly breached certain contractual
obligations we allegedy had to preserve the value of stock options originally
available to officers and directors of MediaOne and US West at the time of the
MediaOne merger with us in June of 2000. The plaintiffs seek unspecified
damages. We believe that this lawsuit is without merit and intend to defend it
vigorously.

     Certain participants in our pension plan filed a class action in New Jersey
federal court, asserting claims pursuant to the Employee Retirement Income
Security Act of 1974. These claims relate to changes we made in our pension plan
and the manner in which we communicated information concerning those changes to
the plan's participants. The plaintiffs seek unspecified damages. We believe
that this lawsuit is without merit and intend to defend it vigorously.

     There is one pending environmental proceeding by a government authority
that is required to be reported pursuant to Instruction 5.C. of Item 103 of
Regulation S-K. We have entered into a consent decree with the U.S. Department
of Justice, which has submitted it for approval by the U.S. District Court for
the District of the Virgin Islands, under which AT&T would pay a civil penalty
of $450,000, in connection with the construction in 1999 of a breakwater in St.
Thomas, U.S. Virgin Islands, without a federal permit.

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

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

                                    PART II

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

     Our common stock (ticker symbol "T") is listed on the New York Stock
Exchange, as well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia
exchanges in the U.S., and on the Euronext-Paris and the IDR (International
Depository Receipt) in Brussels as well as the London and Geneva stock
exchanges. As of December 31, 2004, we had approximately 799 million shares
outstanding, held by approximately 2.3 million shareowners.

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

     In November 2004 we issued shares of our common stock for use under our
Shareowner Dividend Reinvestment and Stock Purchase Plan (DRISPP) which exceeded
by 119,247 the number of shares that were remaining for issuance under the S-3
shelf registration statement then in effect for the DRISPP. The aggregate
proceeds from these issuances were $2,072,883.

                                        23
<PAGE>

     The following table contains information about our purchases of our equity
securities during the fourth quarter of 2004.

                     ISSUER PURCHASES OF EQUITY SECURITIES

<Table>
<Caption>
                                                                                                MAXIMUM NUMBER
                                                                                                (OR APPROXIMATE
                                                                          TOTAL NUMBER OF      DOLLAR VALUE) OF
                                                                         SHARES (OR UNITS)      SHARES OR UNITS
                                       TOTAL NUMBER                      PURCHASED AS PART      THAT MAY YET BE
                                       OF SHARES (OR    AVERAGE PRICE       OF PUBLICLY         PURCHASED UNDER
                                          UNITS)        PAID PER SHARE   ANNOUNCED PLANS OR      THE PLANS OR
PERIOD                                PURCHASED(1)(2)     (OR UNIT)           PROGRAMS             PROGRAMS
------                                ---------------   --------------   ------------------   -------------------
<S>                                   <C>               <C>              <C>                  <C>
October 1, 2004 to October 31,
  2004..............................       15,512          $15.2374              0                     0
                                          -------          --------              --                    --
November 1, 2004 to November 30,
  2004..............................      437,535          $17.1620              0                     0
                                          -------          --------              --                    --
December 1, 2004 to December 31,
  2004..............................       52,735          $18.7363              0                     0
                                          -------          --------              --                    --
  Total.............................      505,782          $17.2671              0                     0
                                          -------          --------              --                    --
</Table>

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

(1) Represents restricted stock units redeemed to pay taxes related to the
    vesting of restricted stock units awarded under employee benefit plans.

(2) Does not include shares purchased in the open market by the trustee of the
    DRISPP as follows: 22,072 shares in November at an average price paid per
    share of $18.05 and 27,689 shares in December at an average price paid per
    share of $19.08, the total average price paid per share being $18.62.

                                        24
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

                          AT&T CORP. AND SUBSIDIARIES

                       SUMMARY OF SELECTED FINANCIAL DATA

<Table>
<Caption>
                                              2004      2003      2002       2001       2000
                                            --------   -------   -------   --------   --------
                                                               (UNAUDITED)
                                             (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>        <C>       <C>       <C>        <C>
RESULTS OF OPERATIONS DATA:
Revenue...................................  $ 30,537   $34,529   $37,827   $ 42,197   $ 46,850
Operating (loss) income...................   (10,088)    3,657     4,361      7,832     12,793
(Loss) income from continuing
  operations..............................    (6,469)    1,863       963     (2,640)     9,532
(Loss) Income from Continuing Operations
  and (Loss) Earnings per Share:
AT&T Common Stock Group:(1)
  (Loss) income...........................  $ (6,469)  $ 1,863   $   963   $     71   $  8,044
  (Loss) earnings per basic share.........     (8.14)     2.37      1.29      (0.91)     11.54
  (Loss) earnings per diluted share.......     (8.14)     2.36      1.26      (0.91)     11.01
  Cash dividends declared per share.......      0.95      0.85      0.75       0.75     3.4875
Liberty Media Group:(1)
  (Loss) income...........................        --        --        --   $ (2,711)  $  1,488
  (Loss) earnings per basic and diluted
     share................................        --        --        --      (1.05)      0.58
BALANCE SHEET DATA:
Property, plant and equipment, net........  $ 11,509   $24,376   $25,604   $ 26,803   $ 26,083
Total assets-continuing operations........    32,804    47,988    55,437     62,329     90,293
Total assets..............................    32,804    47,988    55,437    165,481    242,802
Long-term debt............................     8,779    13,066    18,812     24,025     13,572
Total debt................................    10,665    14,409    22,574     34,159     42,338
Shareowners' equity.......................     7,019    13,956    12,312     51,680    103,198
Debt ratio(2).............................      60.3%     50.8%     64.7%      86.3%     122.1%
OTHER INFORMATION:
Employees -- continuing operations(3).....    47,600    61,600    71,000     77,700     84,800
AT&T year-end stock price per share.......  $  19.06   $ 20.30   $ 26.11   $  37.19   $  27.57
</Table>

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

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

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

(3) Data provided excludes LMG.

                                        25
<PAGE>

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

                          AT&T CORP. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

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

     - financial condition,

     - results of operations,

     - cash flows,

     - dividends,

     - financing plans,

     - business strategies,

     - operating efficiencies,

     - capital and other expenditures,

     - competitive positions,

     - availability of capital,

     - growth opportunities for new and existing products,

     - benefits from new technologies,

     - availability and deployment of new technologies,

     - plans and objectives of management,

     - mergers and acquisitions, and

     - other matters.

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

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

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

                                        26
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

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

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

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

     - the availability and cost of capital,

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

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

     - the 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,

     - 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 our decision to shift away from our traditional consumer
       long distance businesses,

     - the impact of the significant recent reductions in the number of our
       employees,

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

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

     The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations for the years ended December 31, 2004, 2003 and 2002, and
financial condition as of December 31, 2004 and 2003.

OVERVIEW

     On many levels, 2004 was a historic year for AT&T Corp (AT&T). We saw a
continuation of the industry challenges experienced over the past few years.
Ongoing competitive factors included substitution, oversupply and pricing
pressure. In addition, 2004 brought fundamental changes in the regulatory
environment. In June 2004, provisions of the Telecommunications Act of 1996,
which provided a means for long distance companies like AT&T to compete in the
local telephone markets by leasing elements of other companies' local networks
at economic rates, were radically altered. As a result, we made a decision in
July 2004, to no longer compete for traditional residential local and long
distance customers. While we will continue to serve our existing customer base,
we will no longer invest to acquire new residential customers. This strategic
shift triggered an evaluation of our long-lived assets, and in the third quarter
of 2004, we recorded an $11.4 billion impairment charge.

     The start of 2005 is bringing historic changes as well. In January 2005, we
announced an agreement in which SBC Communications Inc. (SBC) would acquire
AT&T. We believe the combination of these

                                        27
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

companies will create a premier communications and networking company. This
agreement is subject to AT&T shareholder and a variety of regulatory approvals;
however, we expect the transaction to close in late 2005 or early 2006.

     During 2004, we continued our momentum of reducing costs, but also invested
in systems and technologies that provide a range of process, efficiency and
automation initiatives for our customers and us. We targeted the specific needs
of these business customers by offering them an unmatched depth and breadth of
products and services and an end-to-end global solutions set including voice,
data, hosting, access, business continuity, Internet protocol and enhanced
(IP&E) services and managed services.

     In 2004, we also continued our deleveraging efforts to strengthen our
financial position by reducing total debt $3.7 billion, or more than 25%,
largely as a result of early redemptions of debt.

     Despite our efforts, we continued to be negatively impacted by industry and
economic factors and our 2004 results reflect these impacts. Business long
distance revenue declined significantly as competition has led to lower prices
in both retail and wholesale markets and loss of market share in the small and
medium-sized business markets. In addition, long distance volumes were
essentially flat, as the decline we experienced in the retail markets driven by
competition and product substitution was largely offset by growth in wholesale
markets. Our wholesale business represents sales of long distance voice services
to resellers such as other long distance companies, local phone service
providers, wireless carriers and cable companies. In 2004, the rate of growth in
wholesale declined as the level of new wholesale contracts slowed. However, as
retail volumes decline, wholesale volumes continue to become a larger percentage
of total business volumes and represented 55% of the total in 2004, compared
with 50% in 2003 and 37% in 2002.

     Competition also negatively impacted revenue from data products. We will
continue to experience declines in long distance and data as we expect
competition to continue to result in lower prices.

     The increase in wholesale volumes, as a percentage of total volumes,
created pressure on the operating income margin, as this business has a lower
margin than the retail long distance business due to substantially lower rates
per minute. Operating income margin was also negatively impacted by growth in
some of our advanced services, such as IP&E. Our focus on new services, while
essential to our business strategy, will continue to have a negative impact on
operating income margin for AT&T Business Services given the lower margin
associated with these new services compared with our declining legacy products
of retail long distance voice and data services.

     AT&T Consumer Services' long distance voice business has experienced
similar trends to those of AT&T Business Services. Stand-alone long distance
voice services revenue has continued to decline due to competition and
technology substitution (customers using wireless or Internet services in lieu
of a wireline call). In addition, customers continued to migrate to lower-priced
calling plans and to bundled calling plans. Customers that migrate to bundled
calling plans negatively impact stand-alone long distance revenue, but
positively contribute to growth in bundled revenue, although generally to a
lesser degree, as bundled long distance pricing is lower. Due to our decision to
no longer invest to acquire new residential local and long distance customers,
the negative trends in stand-alone long distance are expected to accelerate in
2005. However, unlike 2004 and 2003, we do not expect migration to bundled
calling plans to mitigate these declines to the same degree.

     Company-wide reductions within costs of services and products, and selling,
general and administrative expenses are indicative of our success in controlling
costs. As part of our efforts, we reduced total headcount by 23%, which
partially benefited 2004, but will more significantly benefit 2005. Much of this
headcount reduction was facilitated by the investments we made to streamline our
processes that allowed us to cut costs, while also enhancing the customer
experience.

                                        28
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                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

     Other costs such as access and other connection expenses, which represent
the costs we pay to other services providers to connect calls using their
facilities, are less subject to our control given they are based on rates
generally set by governmental agencies. Many of these costs are volume driven
and as volumes of lower-priced services increase, these costs increase as a
percentage of revenue, generating a negative impact to profit margins. In order
to control these costs, we continually search for alternate ways of connecting
to our customers.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

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

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

     ESTIMATED USEFUL LIVES OF PLANT AND EQUIPMENT -- We estimate the useful
lives of plant and equipment in order to determine the amount of depreciation
expense to be recorded during any reporting period. The majority of our
telecommunications plant and equipment is depreciated using the group method,
which develops a depreciation rate (annually) based on the average useful life
of a specific group of assets, rather than for each individual asset as would be
utilized under the unit method. The estimated life of the group is reviewed
annually after discussions with network engineers and a review of activity
levels within the asset categories. Such estimated life of the group is based on
historical experience with similar assets, as well as taking into account
anticipated technological or other changes. If technological changes were to
occur more rapidly than anticipated or in a different form than anticipated, the
useful lives assigned to these assets may need to be shortened, resulting in the
recognition of increased depreciation expense in future periods. Likewise, if
the anticipated technological or other changes occur more slowly than expected,
the life of the group could be extended based on the life assigned to new assets
added to the group. This could result in a reduction of depreciation expense in
future periods. A one-year decrease or increase in the useful life of these
assets would have increased or decreased depreciation expense by approximately
$0.5 billion and $0.3 billion, respectively.

     RECOVERY OF LONG-LIVED ASSETS (OTHER THAN GOODWILL) -- In accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," we review these types of assets
for impairment whenever events or circumstances indicate that the carrying
amount may not be recoverable over the remaining life of the asset or asset
group. In order to determine if the asset or asset group is recoverable, we
determine if the expected future cash flows directly related to the asset or
asset group are less than the carrying amount of the asset or asset group. If
so, we then determine if the carrying amount of the asset or asset group exceeds
its fair value. We determine fair value using estimated discounted cash flows.
The discounted cash flows calculation uses various assumptions and estimates
regarding future revenue, expenses and cash flows projections over the estimated
remaining useful life of the asset or asset group. These forecasts are subject
to changes in external factors including adverse regulatory and legal rulings.
In the third quarter of 2004, we announced a strategic change in business focus,
which created a "triggering event" for a review of our long-lived assets. As a
result of this review, we determined that an impairment charge of $11.4 billion,
representing the difference between the fair value of the asset group and its
carrying value, was required. The use of different assumptions within our
discounted cash flows model when determining fair value, including the selection
of the discount rate, could result in different valuations for our

                                        29
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

long-lived assets. A one percentage point increase or decrease in the discount
rate would have increased or decreased the impairment by approximately $0.4
billion. Additionally, a one percentage point increase or decrease in the
estimated annual undiscounted cash flows utilized in our assessment would have
decreased or increased the impairment by approximately $0.1 billion.

     RECOVERY OF GOODWILL -- In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," we review goodwill for impairment annually, or more
frequently if an event occurs or circumstances change that would more likely
than not reduce the fair value of our business enterprise below its carrying
value. The impairment test requires us to estimate the fair value of our overall
business enterprise at the reporting unit level. We estimate fair value using
both a discounted cash flows model, as well as an approach using market
comparables, both of which are weighted equally to determine fair value. Under
the discounted cash flows method, we utilize estimated long-term revenue and
cash flows forecasts developed as part of our planning process, as well as
assumptions of terminal value, together with an applicable discount rate, to
determine fair value. These forecasts are subject to changes in external factors
including adverse regulatory and legal rulings. Under the market approach, fair
value is determined by a comparison to similar businesses (or guideline
companies). Selection of guideline companies requires management's judgment. The
use of different assumptions within our discounted cash flows model or within
our market approach model when determining fair value could result in different
valuations for goodwill. In the third quarter of 2004, we announced a strategic
change in business focus, which resulted in a "triggering event" for a review of
our goodwill. At the time this review was undertaken, the fair value of our AT&T
Business Services reporting unit exceeded its carrying value by $1.3 billion and
the fair value of our AT&T Consumer Services reporting unit exceeded its
carrying value by $2.1 billion; accordingly, no impairment of goodwill was
required. The carrying values of the reporting units already reflected
long-lived asset impairments recognized in the third quarter in connection with
the same "triggering event." Our annual testing of goodwill is traditionally
performed in the fourth quarter of each fiscal year; however, our third quarter
review satisfied our annual review requirement based on the satisfaction of
certain criteria outlined in SFAS No. 142.

     ACCESS AND OTHER CONNECTION EXPENSES -- We use various estimates and
assumptions to determine the amount of access and other connection expenses
recognized during any reporting period. Switched access costs are accrued
utilizing estimated rates by product, formulated from historical data and
adjusted for known rate changes and volume levels, which are estimated for
certain products and known for other products. Such estimates are adjusted
monthly to reflect newly available information, such as rate changes and new
contractual agreements. Bills reflecting actual incurred information are
generally not received until three to nine months subsequent to the end of the
reporting period, at which point a final adjustment is made to the accrued
switched access expense. Dedicated access costs are estimated based on the
number of circuits and the average projected circuit costs, based on historical
data adjusted for rate changes. These costs are adjusted to reflect actual
expenses over the three months following the end of the reporting period as
bills are received. As of December 31, 2004, approximately $1.1 billion was
accrued relating to our estimated switched and dedicated access costs.

     PENSION AND POSTRETIREMENT BENEFITS -- The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis utilizing several different assumptions. A
significant assumption used in determining our net pension cost (income) and
postretirement benefit expense is the expected long-term rate of return on plan
assets. In 2004, we used an expected long-term rate of return of 8.5%. For 2005,
this rate was reduced 25 basis points to 8.25% for pension assets and 75 basis
points to 7.75% for postretirement assets. In determining these rates, we
considered the current and projected investment portfolio mix and estimated
long-term investment returns for each asset class. The projected portfolio mix
of plan assets is developed in consideration of the expected duration of related
plan obligations and, as such, is more heavily weighted toward equity
investments, including public and private equity positions. The actual average
return on pension plan assets over the last 10 and 15 years has been 12.4% and

                                        30
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                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

11.0% per annum, respectively. The expected return on plan assets is determined
by applying the expected long-term rate of return to the market-related value of
plan assets. Asset gains and losses resulting from actual returns that differ
from our expected returns are recognized in the market-related value of assets
evenly over a five-year period. The market-related value is constrained to be
within 85% to 115% of the fair market value of assets. The market-related value
of plan assets of the pension and postretirement benefit plans as of December
31, 2004, was approximately $18.9 billion, about $2.0 billion lower than the
related fair value of plan assets. The expected return on assets of the pension
and postretirement benefit plans included in 2004 operating income was income of
$1.6 billion. Holding all other factors constant, a 50 basis point decrease or
increase in the expected long-term rate of return on plan assets would have
decreased or increased 2004 operating income by approximately $0.1 billion.

     Another significant estimate is the discount rate used in the annual
actuarial valuation of pension and postretirement benefit plan obligations. In
determining the appropriate discount rate at year end, we considered the current
yields on high quality corporate fixed-income investments with maturities
corresponding to the expected duration of the benefit obligations. As a result
of the plan curtailments that occurred in the third quarter, the assets and
liabilities of our pension and postretirement plans were remeasured at September
30, 2004, and the discount rate used was reduced 25 basis points to 5.75%. This
rate remained unchanged as of December 31, 2004. Changes to the discount rate do
not have a material impact on our results of operations; however, the discount
rate does impact the benefit obligations. Holding all other factors constant, a
50 basis point decrease or increase in the discount rate would increase or
decrease the projected pension and postretirement benefit obligations by
approximately $1.2 billion.

     INCOME TAXES -- Assessment of the appropriate amount and classification of
income taxes is dependent on several factors, including estimates of the timing
and probability of realization of deferred income taxes and the timing of income
tax payments. Deferred income taxes are provided for the effect of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for income tax purposes.
We measure deferred tax assets and liabilities using enacted tax rates that, if
changed, would result in either an increase or decrease in the provision for
income taxes in the period of change. A one percentage point increase in the
enacted federal income tax rate as of December 31, 2004, would have increased
net loss by approximately $10 million. A valuation allowance is recorded when it
is more likely than not that a deferred tax asset will not be realized. In
assessing the likelihood of realization, management considers available
carryback capacity, prior years' results of operations, estimates of future
taxable income, the character of income needed to realize future tax benefits,
and all available evidence both negative and positive. The valuation allowance
was $0.6 billion at December 31, 2004. Actual income taxes could vary from
estimated amounts due to the future impacts of various items, including changes
in income tax laws, our financial condition and results of operations in future
periods, as well as final review of our tax returns by taxing authorities,
which, as a matter of course, are regularly audited by federal, state and
foreign tax authorities.

     LEGAL CONTINGENCIES -- We are currently involved in certain legal
proceedings and have accrued amounts as appropriate that represent our estimate
of the probable outcome of these matters. The judgments we make with regard to
whether to establish a reserve are based on an evaluation of all relevant
factors by internal and external legal counsel, as well as subject matter
experts. The relevant factors analyzed include an analysis of the complaint,
documents, testimony and other materials as applicable. The damages claimed in
most legal proceedings are not a meaningful predictor of actual potential
liability because the amounts claimed generally have little or no relationship
to the actual damages suffered or sustained. In certain cases, the plaintiff may
not have asserted a specified amount of damages. Claims are continually
monitored and reevaluated as new information is obtained. We may not establish a
liability for a particular matter until long after the litigation is filed, once
a liability becomes probable and estimable. The actual settlement of such
matters could differ from the judgments made in determining how much, if any, to
accrue. In addition, we may be responsible for a

                                        31
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                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

portion of certain legal proceedings associated with former affiliates pursuant
to separation and distribution agreements. Such agreements require us to share
in the cost of certain litigation (relating to matters while affiliated with
AT&T) if a judgment or settlement exceeds certain thresholds. However, in the
event these former subsidiaries are unable to meet their obligations with
respect to these liabilities due to financial difficulties, we could be held
responsible for all or a portion of these costs, irrespective of the sharing
agreements.

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

CONSOLIDATED RESULTS OF OPERATIONS

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

     Our consolidated financial statements reflect AT&T Broadband as a
discontinued operation. AT&T Broadband was spun-off on November 18, 2002.
Accordingly, the revenue, expenses and cash flows of AT&T Broadband have been
excluded from the respective captions in the consolidated statements of
operations and consolidated statements of cash flows, and have been reported
through the date of separation as net (loss) from discontinued operations and as
net cash (used in) discontinued operations.

 REVENUE

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2004        2003        2002
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
AT&T Business Services..................................   $22,582     $25,075     $26,672
AT&T Consumer Services..................................     7,904       9,400      11,413
Corporate and Other.....................................        51          54        (258)
                                                           -------     -------     -------
Total revenue...........................................   $30,537     $34,529     $37,827
                                                           =======     =======     =======
</Table>

     Total REVENUE decreased 11.6%, or $4.0 billion, in 2004 compared with 2003,
and decreased 8.7%, or $3.3 billion, in 2003 compared with 2002. The decrease in
both years was largely driven by continued declines in stand-alone long distance
voice revenue of approximately $3.9 billion in 2004 and $4.0 billion in 2003,
reflecting increased competition, which has led to lower prices and loss of
market share in AT&T Consumer Services and small- and medium-sized business
markets. In addition, stand-alone long distance revenue was negatively impacted
by substitution and customer migration to lower-priced products and calling
plans. These declines were partially offset by strength in business wholesale
volumes, predominantly in 2003. Total long

                                        32
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                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

distance voice volumes (including long distance volumes sold as part of a
bundled offer) decreased approximately 5% in 2004, primarily due to declines in
business retail and consumer volumes, partially offset by growth in lower-priced
business wholesale volumes. Total long distance voice volumes increased
approximately 4% in 2003, as growth in business wholesale volumes more than
offset the declines in business retail and consumer volumes. Also contributing
to the 2004 and 2003 revenue declines was lower data services revenue in AT&T
Business Services of $0.9 billion and $0.5 billion, respectively, mostly driven
by competitive pricing pressure, weak demand and technology migration, primarily
in bandwidth and packet services. In addition, lower outsourcing and
professional services revenue of $0.3 billion in 2004 and $0.5 billion in 2003,
contributed to the revenue declines.

     Partially offsetting the declines in total revenue, was an increase in
bundled services revenue (primarily local and long distance voice) in AT&T
Consumer Services of approximately $0.7 billion in 2004 and $0.9 billion in
2003, resulting from subscriber growth. Also positively contributing to total
revenue was AT&T Business Services local revenue, which increased $0.2 billion
in 2004 and $0.3 billion in 2003 and IP&E services revenue, which increased $0.2
billion in 2004 and $0.3 billion in 2003. The local services revenue growth in
2004 was positively impacted by a reciprocal compensation settlement.

     In 2005, we expect total revenue to be between $25 billion and $26 billion,
as stand-alone long distance voice revenue and data services revenue will
continue to be negatively impacted by ongoing competition and the associated
pricing pressure, and product substitution, coupled with declines in AT&T
Business Services local voice revenue and AT&T Consumer Services bundled revenue
due to our shift in focus away from these products as a result of changes in the
regulatory environment.

     Revenue by segment is discussed in greater detail in the Segment Results
section.

 OPERATING EXPENSES

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                            2004        2003        2002
                                                         ----------   ---------   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
Access and other connection............................   $ 10,454     $10,797     $10,790
Costs of services and products.........................      7,074       7,625       8,363
Selling, general and administrative....................      6,557       7,379       7,988
Depreciation and amortization..........................      3,768       4,870       4,888
Asset impairment and net restructuring and other
  charges..............................................     12,772         201       1,437
                                                          --------     -------     -------
Total operating expenses...............................   $ 40,625     $30,872     $33,466
                                                          ========     =======     =======
Operating (loss) income................................   $(10,088)    $ 3,657     $ 4,361
Operating margin.......................................      (33.0)%      10.6%       11.5%
</Table>

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

                                        33
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                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

line basis. Since most of the Universal Service Fund contributions and per-line
charges are passed through to the customer, a reduction in these rates generally
results in a corresponding reduction in revenue.

     Access and other connection expenses decreased $0.3 billion, or 3.2%, in
2004 compared with 2003. Domestic access charges for 2004 included $0.6 billion
of access charges and Universal Service Fund contributions relating to our
enhanced prepaid card service, accrued as a result of the February 2005 FCC
ruling (see note 14 to the consolidated financial statements for additional
information). Domestic access charges for 2003 included a $0.1 billion access
expense adjustment to reflect the proper estimate of the liability relating to
access costs incurred in 2001 and 2002. Excluding these charges, domestic access
charges declined $1.0 billion in 2004, primarily due to lower Universal Service
Fund contributions of $0.3 billion resulting from the decline in long distance
revenue, and lower average rates of $0.3 billion. The lower rates, which include
the impact of settlements were due in part to a greater proportion of calls that
have non-access incurring terminations (such as when a call terminates over our
own network or over a leased line), as well as from rate negotiations and more
efficient network usage. Also contributing to the decline were lower costs of
$0.2 billion due to lower overall volumes and changes in product mix of $0.2
billion (including whether calls are interstate versus intrastate). The declines
in domestic access charges were partially offset by increased local connectivity
costs of $0.3 billion, primarily as a result of subscriber increases due to
increased penetration into existing states and new state entries during 2004.

     In 2005, we expect access and other connection expenses to be lower than in
2004, primarily due to lower volumes expected from declines in customer levels
at AT&T Consumer Services and small business markets, in part driven by our
strategic decision in 2004 to shift our focus away from traditional consumer
services and changes in the regulatory environment, as well as due to our
ongoing efforts to manage our network and negotiate lower rates and continued
changes in product mix.

     Access and other connection expenses increased 0.1%, or $7 million, in 2003
compared with 2002. Access charges for 2003 included a $0.1 billion access
expense adjustment to reflect the proper estimate of the liability relating to
access costs incurred in 2001 and 2002. Excluding this adjustment, domestic
access charges declined $0.5 billion in 2003, primarily due to more efficient
network usage and product mix aggregating $0.4 billion. In addition, the decline
was due to lower Universal Service Fund contributions of $0.2 billion resulting
from the decline in long distance voice revenue and lower per-line charges of
$0.1 billion due to a decline in customer levels. These declines in domestic
access charges were partially offset by higher costs of $0.2 billion as a result
of overall long distance volume growth. Also contributing to the decline in
access and other connection expenses were lower international connection charges
of $0.1 billion, primarily as a result of lower rates. These declines were
partially offset by an increase in local connectivity costs of $0.5 billion,
primarily due to local subscriber increases resulting from new state entries and
growth in existing markets.

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

     Costs of services and products decreased $0.6 billion, or 7.2%, in 2004
compared with 2003. Approximately $0.4 billion of the decline was attributable
to the overall impact of lower revenue and related costs, including cost cutting
initiatives, primarily headcount reductions. Also contributing to the decline
was a lower provision for uncollectible receivables of $0.3 billion resulting
from improved collections and lower revenue. These declines were partially
offset by $0.1 billion due to the impact of a weak U.S. dollar.

     We expect costs of services and products will continue to decline in 2005,
driven by our ongoing cost control efforts and lower expected revenue.

     Costs of services and products decreased $0.7 billion, or 8.8%, in 2003
compared with 2002. Approximately $0.6 billion of the decline was attributable
to the overall impact of lower revenue and related costs, including cost cutting
initiatives. Also contributing to the decline was a lower provision for
uncollectible

                                        34
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

receivables of $0.4 billion resulting from lower revenue and improved
collections, as well as lower expenses of $0.1 billion resulting from the
deconsolidation of our AT&T Latin America subsidiary. These declines were
partially offset by $0.2 billion due to the impact of a weak U.S. dollar and
$0.1 billion of increased postretirement and pension costs resulting from a
lower expected long-term rate of return on plan assets and the effects of lower
actual plan assets.

     SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES decreased $0.8 billion,
or 11.1%, in 2004 compared with 2003. The decline was primarily attributable to
cost control efforts throughout AT&T, as well as reduced customer care volumes
at AT&T Consumer Services resulting from a reduction in the number of
residential customers, impacted in part by our strategic decision in the third
quarter of 2004 to shift our focus away from traditional consumer services,
totaling $0.6 billion. Cost control efforts included headcount reductions as
well as continued process improvements. The year-over-year decline also
reflected $0.2 billion of lower marketing and acquisition spending, as a result
of our change in strategy, somewhat offset by increased advertising and
marketing spending on new initiatives, primarily our Voice over Internet
Protocol (VoIP) offering. These declines were partially offset by a $50 million
legal accrual recorded in 2004, associated with the settlement of an AT&T
shareholder class action lawsuit (see note 14 to the consolidated financial
statements for additional information).

     We expect SG&A expenses will continue to decline in 2005, primarily as a
result of headcount reductions and other cost reduction efforts, as well as
lower advertising and marketing spending, primarily due to our decision in 2004
to stop investing in traditional consumer services.

     SG&A expenses decreased $0.6 billion, or 7.6%, in 2003 compared with 2002.
The decline was primarily attributable to cost control efforts throughout AT&T,
as well as reduced customer care volumes at AT&T Consumer Services resulting
from a reduction in the number of residential customers, totaling $0.6 billion.
Cost control efforts included headcount reductions, lower long distance and
brand advertising and promotional spending, and other process improvements. In
addition, expenses decreased $0.1 billion in connection with the deconsolidation
of AT&T Latin America. Such declines were partially offset by $0.1 billion of
increased pension and postretirement costs, primarily resulting from a lower
expected long-term rate of return on plan assets in 2003 and the effects of
lower actual plan assets, as well as approximately $0.1 billion of increased
marketing, customer care and sales expenses associated with new local service
offerings by AT&T Consumer Services.

     DEPRECIATION AND AMORTIZATION EXPENSES decreased $1.1 billion, or 22.6%, in
2004 compared with 2003. The decrease was primarily attributable to asset
impairment charges of $11.4 billion recorded in the third quarter of 2004, which
decreased depreciation and amortization expense by approximately $1.1 billion.

     In 2005, we expect depreciation and amortization expenses to decrease
compared with 2004, as a result of the full year impact of the asset impairment
charges recorded in the third quarter of 2004 and reduced levels of capital
expenditures in recent years.

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

     Total capital expenditures were $1.8 billion, $3.4 billion and $3.9 billion
for 2004, 2003 and 2002, respectively. The 2003 amount includes $0.4 billion
recorded in connection with the adoption of Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities -- an Interpretation of Accounting Research Bulletin No. 51." The
decreases in expenditures reflect the completion, in prior years, of
infrastructure related projects. We continue to focus the majority of our

                                        35
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

capital spending, primarily associated with meeting customer demands and process
improvements, on our advanced services offerings of IP&E services and data
services, both of which include managed services. We expect capital expenditures
to be approximately $1.5 billion in 2005.

     ASSET IMPAIRMENT AND NET RESTRUCTURING AND OTHER CHARGES of $12.8 billion
for 2004 were comprised of $11.5 billion of asset impairment charges and $1.3
billion of net business restructuring and other obligations. Charges in the
amount of $12.0 billion were recorded in AT&T Business Services, $0.2 billion in
AT&T Consumer Services and $0.6 billion in the Corporate and Other group.

     The asset impairment charges of $11.5 billion primarily reflect third
quarter asset impairments of $11.4 billion as a result of an evaluation of our
long-lived assets, including property, plant and equipment and internal-use
software (the asset group). In addition, we recorded real estate impairment
charges of $0.1 billion related to the decision made during the first quarter of
2004 to divest five owned properties in an effort to further reduce costs and
consolidate our real estate portfolio. The impairment charge was recorded to
reduce the book value of the five properties to fair market value based on third
party assessments (including broker appraisals). The sales of these properties
have been completed.

     The third quarter evaluation resulted from the July 2004 announcement of a
strategic change in our business focus away from traditional consumer services
and towards business markets and emerging technologies. We performed an
evaluation of the asset group as of July 1, 2004, as this strategic change
created a "triggering event" necessitating such a review. In assessing
impairments for long-lived assets, we follow the provisions of SFAS No. 144. We
operate an integrated telecommunications network; therefore, we performed our
testing of the asset group at the reporting unit level, as this is the lowest
level for which identifiable cash flows are available.

     In performing the test, we determined that the total of the expected future
undiscounted cash flows directly related to the existing service potential of
the asset group was less than the carrying value of the asset group; therefore,
an impairment charge was required. The impairment charges of $11.4 billion
represented the difference between the fair value of the asset group and its
carrying value. The impairment charges resulted from sustained pricing pressure
and the evolution of services toward newer technologies in the business market
as well as changes in the regulatory environment, which led to a shift away from
traditional consumer services.

     AT&T Business Services recorded impairment charges of $11.3 billion
resulting in reductions to property, plant and equipment of $11.0 billion,
internal-use software of $0.3 billion, other purchased intangibles of $15
million and other long-lived assets of $5 million. AT&T Consumer Services
recorded impairment charges of $59 million resulting in reductions to property,
plant and equipment of $11 million and internal-use software of $48 million.

     We calculated the fair value of our asset group using discounted cash
flows. The discounted cash flows calculation was made utilizing various
assumptions and estimates regarding future revenue, expenses and cash flows
projections through 2012. The time horizon was determined based on the estimated
remaining useful life of the primary assets in the asset group; the primary
assets are those from which the most significant cash flows are generated,
principally consisting of the transport central office equipment. Pursuant to
SFAS No. 144, the forecasts were developed without contemplation of investments
in new products. The 10% discount rate utilized was determined using a weighted
average cost of capital (debt and equity) and was more heavily weighted towards
debt given that the asset group, which primarily consists of tangible assets,
can be financed with a larger proportion of debt. When allocating the impairment
to the asset categories, market values were utilized, to the extent
determinable, to ensure that no asset category was impaired below its fair
value.

     The strategic change in business focus also created a "triggering event"
for a review of our goodwill. We follow the provisions of SFAS No. 142 for
determining impairments. SFAS No. 142 indicates that if other

                                        36
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

types of assets (in addition to goodwill) of a reporting unit are being tested
for impairment at the same time as goodwill, then those assets are to be tested
for impairment prior to performing the goodwill impairment testing. Accordingly,
the impairment charges noted above reduced the carrying value of the reporting
units when performing the impairment test for goodwill.

     The goodwill impairment test requires us to estimate the fair value of our
overall business enterprise at the reporting unit level. Our reporting units are
AT&T Business Services and AT&T Consumer Services. We estimated fair value using
both a discounted cash flows model, as well as an approach using market
comparables, both of which are weighted equally to determine fair value. Under
the discounted cash flows method, we utilized estimated long-term revenue and
cash flow forecasts, as well as assumptions of terminal value, together with an
applicable discount rate, to determine fair value. Under the market approach,
fair value was determined by comparing our reporting units to similar businesses
(or guideline companies). We then compared the carrying value of our reporting
units to their fair value. Since the fair value of our reporting units exceeded
their carrying amounts, no goodwill impairment charge was recorded.

     The net restructuring and other obligations of $1.3 billion for 2004 were
primarily comprised of $1.2 billion of net employee separations (of which $0.3
billion related to benefit plan curtailment costs) and $0.1 billion of facility
closing obligations. The exit plans will impact approximately 12,600 employees
(the majority of which will be involuntary) across the company. These activities
resulted from the continued integration and automation of various functions
within network operations, reorganizations throughout our non-U.S. operations,
and our strategic change in focus away from traditional consumer services and
towards business markets and emerging technologies. Approximately 60% of the
employees impacted by these exit plans are managers. About 60% of the affected
employees had left their positions as of December 31, 2004. We anticipate that
the remaining employees will exit our business by the end of 2005. These exit
plans did not yield cash savings (net of severance benefit payouts) or a benefit
to operating income (net of the restructuring charges recorded) in 2004;
however, we expect to realize approximately $1.2 billion of annual cash savings
and benefit to operating income in subsequent years, upon completion of the exit
plans. The facility closing reserves were primarily associated with the
consolidation of our real estate portfolio and reflect the present value of
contractual lease obligations, net of estimated sublease income, associated with
vacant facilities resulting from workforce reductions and network equipment
space that will not be used.

     As we continue to evaluate our cost structure and improve processes,
further workforce reductions are anticipated to occur during 2005, and are
expected to result in the recognition of additional charges.

     In 2003, net restructuring and other charges of $0.2 billion primarily
consisted of separation costs associated with our management realignment
efforts. The net charge included $0.1 billion related to AT&T Business Services,
$26 million related to AT&T Consumer Services and $38 million related to the
Corporate and Other group. The separations were involuntary and impacted
approximately 2,000 managers. These activities were partially offset by the
reversal of $17 million of excess vintage employee separation liabilities.

     In 2002, asset impairment and net restructuring and other charges were $1.4
billion, which included a $1.0 billion charge for the impairment of the net
assets of our consolidated subsidiary, AT&T Latin America, a $0.2 billion
impairment charge related to certain Digital Subscriber Line (DSL) assets and
net business restructuring charges of $0.2 billion. Charges in the amount of
$1.2 billion were recorded in AT&T Business Services, $0.2 billion were recorded
in AT&T Consumer Services and $23 million were recorded in the Corporate and
Other group.

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

                                        37
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

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

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

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

<Table>
<Caption>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                           ----------------------------------
                                                             2004         2003         2002
                                                           --------      -------      -------
                                                                 (DOLLARS IN MILLIONS)
<S>                                                        <C>           <C>          <C>
Other (expense) income, net..............................   $(144)        $191         $(77)
</Table>

     OTHER (EXPENSE) INCOME, NET, in 2004 was expense of $0.1 billion, compared
with income of $0.2 billion in 2003. The unfavorable variance of $0.3 billion
can primarily be attributed to $0.2 billion of higher losses associated with the
early repurchase of long-term debt in 2004, compared with 2003. Additionally,
investment related income declined $0.1 billion in 2004 compared with 2003 due
to lower market returns.

     We continue to hold $0.5 billion of investments in leveraged leases,
including leases of commercial aircraft, which we lease to domestic airlines, as
well as aircraft related companies. Should the financial difficulties in the
U.S. airline industry lead to further bankruptcies or lease restructurings, we
could record additional losses associated with our aircraft lease portfolio. In
addition, in the event of bankruptcy or renegotiation of lease terms, if any
portion of the non-recourse debt is canceled, such amounts would result in
taxable income to AT&T and, accordingly, a cash tax expense.

     Other (expense) income, net, in 2003 was income of $0.2 billion compared
with expense of $0.1 billion in 2002. The favorable variance of $0.3 billion can
primarily be attributed to $0.3 billion of lower impairment charges recorded in
2003 compared with 2002. In 2002, due to the occurrence of several airline
bankruptcies, write downs were recorded on certain aircraft leases that are
accounted for as leveraged leases. In 2003, ongoing difficulties in the airline
industry resulted in the write downs of the residual values of certain aircraft.
The lower impairment charges related to these leases and aircraft in 2003
compared with 2002 favorably impacted other income by $0.2 billion in 2003.
Also, in 2003, investment-related impairment charges declined $0.1 billion,
primarily driven by the impairment of Time Warner Telecom in 2002. Our
investment in Time Warner Telecom was subsequently sold in 2003. Further
contributing to the favorable other income variance was higher
investment-related income of $0.1 billion, largely reflecting improved market
returns on certain holdings. Partially offsetting these favorable variances were
losses of $0.1 billion on the early call and repurchase of long-term debt in
2003. This loss was comprised of $0.3 billion associated with the early call and

                                        38
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

repurchase of long-term debt instruments, partially offset by a $0.2 billion
gain on the early retirement of exchangeable notes that were indexed to AT&T
Wireless common stock. Also offsetting the favorable variance was a decline in
settlements associated with business dispositions, primarily reflecting
reimbursements from Comcast Corporation (Comcast) in 2002 in connection with the
debt exchange completed in conjunction with the spin-off of AT&T Broadband.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                           2004        2003         2002
                                                          -------    ---------    ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>        <C>          <C>
Interest (expense)......................................   $(803)     $(1,158)     $(1,448)
</Table>

     INTEREST EXPENSE decreased $0.4 billion, or 30.7%, in 2004 compared with
2003 and decreased $0.3 billion, or 20.0%, in 2003 compared with 2002. The
declines were reflective of significant early debt redemptions and scheduled
debt maturities, with minimal new debt issuances during 2004 and 2003. These
declines were partially offset by the impact of interest rate step-ups on
certain bonds as a result of long-term debt rating downgrades.

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2004       2003        2002
                                                           --------    -------    ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                        <C>         <C>        <C>
Benefit (provision) for income taxes.....................   $4,560      $(816)     $(1,587)
Effective tax rate.......................................     41.3%      30.3%        56.0%
</Table>

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

     The 2004 effective tax benefit rate was positively impacted by
approximately 3.6 percentage points due to the reversal of the valuation
allowance we recorded in 2002 attributable to the book and tax basis difference
related to our investment in AT&T Latin America. During 2004, the subsidiaries
of AT&T Latin America were sold to Telefonos de Mexico S.A. de C.V., or Telmex,
and the AT&T Latin America plan of liquidation became effective. As a result,
the associated valuation allowance was no longer required and we recorded an
income tax benefit of $0.4 billion in 2004.

     The 2003 effective tax rate was positively impacted by approximately 5.3
percentage points due to the recognition of approximately $0.1 billion of tax
benefits associated with refund claims related to additional research and
experimentation tax credits generated in prior years, which received
governmental approval in 2003. In addition, the 2003 effective tax rate was
positively impacted by approximately 1.5 percentage points due to the
recognition of tax benefits in connection with the exchange and sale of our
remaining interest in AT&T Wireless common stock.

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

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                            2004         2003         2002
                                                           ------       ------       ------
                                                                (DOLLARS IN MILLIONS)
<S>                                                        <C>          <C>          <C>
Minority interest income.................................    $1           $1          $114
</Table>

     MINORITY INTEREST INCOME represents the net losses attributable to the
equity that minority holders have in less than 100% owned consolidated
subsidiaries of AT&T. The income in 2002 relates primarily to AT&T Latin
America. In December 2002, the losses attributable to the minority holders of
AT&T Latin America

                                        39
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

exceeded the remaining equity of those minority holders; therefore in 2003,
losses of AT&T Latin America were no longer allocated to the minority holders.
Also in 2003, AT&T Latin America filed for Chapter 11 bankruptcy and the AT&T
appointed members of the AT&T Latin America Board of Directors resigned. This
resulted in the deconsolidation of AT&T Latin America.

<Table>
<Caption>
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                         ---------------------------------
                                                          2004         2003         2002
                                                         ------       ------       -------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>          <C>
Net earnings (losses) related to equity investments....    $5          $(12)        $(400)
</Table>

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

<Table>
<Caption>
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                         --------------------------------
                                                          2004       2003         2002
                                                         ------      -----      ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                      <C>         <C>        <C>
Net (loss) from discontinued operations, net of income
  taxes................................................  $  --       $(13)      $(14,513)
Gain on disposition of discontinued operations.........  $  --       $ --       $  1,324
</Table>

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

     Net (loss) from discontinued operations in 2002 includes a loss of $14.5
billion from the discontinued operations of AT&T Broadband (which was primarily
comprised of the AT&T Broadband segment), which was spun-off to AT&T shareowners
on November 18, 2002.

     Net (loss) from discontinued operations in 2002 also included an estimated
loss on the litigation settlement associated with the business of Lucent
Technologies Inc. (Lucent), which was spun-off from AT&T in 1996 and accounted
for as a discontinued operation. Sparks, et al. v. AT&T and Lucent et al., was a
class action lawsuit filed in 1996 in Illinois state court. On August 9, 2002, a
settlement proposal was submitted to and accepted by the court. We believe that
AT&T and Lucent have complied with all of the

                                        40
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

terms and conditions of the settlement agreement and court order. In accordance
with the separation and distribution agreement between AT&T and Lucent, our
estimated proportionate share of the settlement and legal costs recorded in 2002
totaled $33 million after taxes ($45 million pretax).

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

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                          ----------------------------------
                                                           2004          2003         2002
                                                          -------       ------       -------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>           <C>          <C>
Cumulative effect of accounting changes.................   $  --          $15         $(856)
</Table>

     When we adopt new accounting standards issued by the FASB, the impact, if
any, of changing from the previous accounting principle to the new accounting
principle is recorded as the CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE.

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

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

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

                                        41
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

SEGMENT RESULTS

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

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

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

     Our existing segments reflect certain managerial changes that were
implemented during 2004. The changes primarily include the transfer of our
remaining payphone business from the AT&T Consumer Services segment to the AT&T
Business Services segment.

     We continually review our management model and structure, which may result
in additional adjustments to our operating segments in the future.

AT&T BUSINESS SERVICES

     AT&T Business Services provides a variety of global communications services
to large domestic and multinational businesses, government agencies and small-
and medium-sized businesses. AT&T Business' services include long distance,
international, toll-free and local voice, including wholesale transport services
(sales of services to service resellers, such as other long distance companies,
local service providers, wireless carriers and cable companies), as well as data
services and IP&E services. Data services and IP&E services are broad categories
of services in which data (e.g., e-mail, video or computer file) is transported
from one location to another. Data services include bandwidth services
(dedicated private line services through high-capacity optical transport) and
packet services. In packet services, data is divided into efficiently sized
components and transported between packet switches until it reaches its final
destination, where it is reassembled. IP&E services include all services that
ride on the IP common backbone or that use IP technology, including managed
Internet services, Virtual Private Networks as well as application services
(e.g., hosting). AT&T Business Services also provides outsourcing solutions and
other professional services.

                                        42
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                            2004        2003        2002
                                                         ----------   ---------   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
Revenue(1)(2)
  Long distance voice..................................   $  9,526     $11,199     $12,368
  Local voice..........................................      1,673       1,484       1,155
                                                          --------     -------     -------
Total voice............................................     11,199      12,683      13,523
  Data services........................................      6,693       7,620       8,146
  IP&E services........................................      2,330       2,102       1,791
                                                          --------     -------     -------
Total data services and IP&E services..................      9,023       9,722       9,937
Outsourcing, professional services and other...........      2,360       2,670       3,212
                                                          --------     -------     -------
Total revenue..........................................   $ 22,582     $25,075     $26,672
Operating (loss) income................................   $(10,079)    $ 1,895     $ 1,973
Capital additions......................................      1,701       3,185       3,716
</Table>

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Total assets................................................   $20,621     $34,202
</Table>

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

(1) Revenue in 2002 included internal revenue of $323 million, which represented
    sales to AT&T Broadband through November 18, 2002, the date of disposition.
    Subsequent to the disposition, sales to AT&T Broadband, now Comcast, are
    recorded as external revenue.

(2) Revenue includes equipment and product sales of $334 million, $301 million
    and $379 million in 2004, 2003 and 2002, respectively.

REVENUE

     AT&T Business Services revenue decreased $2.5 billion, or 9.9%, in 2004
compared with 2003 and decreased $1.6 billion, or 6.0%, in 2003 compared with
2002. The decrease in both periods reflects continued pricing pressure and
declines in retail volumes, as well as terminations and reductions in scope of
outsourcing contracts. These declines were partially offset by growth in
wholesale volumes and strength in IP&E services and local services. The local
services growth in 2004 was positively impacted by a reciprocal compensation
settlement. Revenue growth in 2003 was negatively impacted by AT&T Latin
America, which was fully consolidated in 2002, but not in 2003.

     Long distance voice revenue declined $1.7 billion, or 15.0%, in 2004
compared with 2003 and declined $1.2 billion, or 9.4%, in 2003 compared with
2002. The decline in both periods was driven by decreases in the average price
per minute in both the retail and wholesale businesses combined with a decline
in retail volumes, reflecting the impacts of competition and product
substitution, which has led to a loss of market share in the small- and
medium-sized business markets. Partially offsetting these declines was an
increase in lower-priced wholesale minutes, although the rate of growth in 2004
was significantly lower than the rate in 2003. Total long distance volumes were
essentially flat in 2004 and grew approximately 11% in 2003.

     Data services revenue declined $0.9 billion, or 12.2%, in 2004 compared
with 2003 and declined $0.5 billion, or 6.4%, in 2003 compared with 2002. The
declines were primarily driven by competitive pricing pressure, weak demand and
technology migration, primarily in data bandwidth and packet services in both
2004 and 2003, as well as weak demand in international managed data services in
2003. The acceleration in the rate of decline in 2004 compared with the rate in
2003 is reflective of the aggressive pricing environment, which led to an
increased level of price competition in 2004.

                                        43
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

     IP&E services revenue increased $0.2 billion, or 11.0%, in 2004 compared
with 2003 and rose $0.3 billion, or 17.2%, in 2003 compared with 2002. The
increase in 2004 is primarily attributed to a growth in advanced services, such
as Enhanced Virtual Private Network (E-VPN) and IP-enabled frame. Both of these
products are technologically superior to data bandwidth and packet services
products and reflect customer migration to better technology. The increase in
2003 was primarily due to growth in managed Internet services, an increased
customer base associated with Web hosting, and growth in E-VPN. Excluding
equipment and product sales, IP&E services revenue grew 11.8% and 15.8%, in 2004
and 2003, respectively.

     Outsourcing, professional services and other revenue declined $0.3 billion,
or 11.6%, in 2004 compared with 2003 and declined $0.5 billion, or 16.9%, in
2003 compared with 2002. The decline in both periods was primarily due to
customers terminating outsourcing contracts and reducing the scope of contracts.
The 2003 decline also reflects the impact of AT&T Latin America, which was
consolidated in 2002, but not in 2003.

     Local voice services revenue grew $0.2 billion, or 12.7%, in 2004 compared
with 2003 and grew $0.3 billion, or 28.4%, in 2003 compared with 2002. Revenue
for 2004 was positively impacted by a $97 million reciprocal compensation
settlement (revenue generated when local exchange carriers use our local network
to terminate calls). Excluding this settlement, local services revenue grew 6.2%
in 2004. The growth in 2004 primarily reflects growth in our All in One bundle
offer. However, the rate of growth in this offer has declined compared with 2003
as a result of increased price competition and our decision to begin scaling
back our marketing efforts in the small business markets, which primarily
impacts local voice revenue. The growth in 2003 reflects our continued focus on
increasing the utilization of our existing footprint. There were approximately
4.7 million, 4.5 million and 3.6 million access lines in service at the end of
2004, 2003 and 2002, respectively.

     In 2005, we expect to see continued pricing pressure in retail and
wholesale voice and data services, which will more than offset the anticipated
growth in wholesale volumes. In addition, as we continue to scale back our
marketing efforts, we expect revenue from our small business customers to
decline several hundred million dollars in 2005, which will be primarily
reflected in local voice services revenue.

 OPERATING (LOSS) INCOME

     Operating (loss) income declined $12.0 billion in 2004 compared with 2003,
primarily driven by $11.9 billion of higher asset impairment and net
restructuring and other charges resulting almost entirely from the third quarter
2004 asset impairment charges. As a result of these asset impairment charges,
2004 results include a $1.0 billion net benefit due to lower depreciation on the
impaired assets, partially offset by lower network-related charges to AT&T
Consumer Services. In addition, the 2004 operating (loss) reflects decreases in
long distance and data services resulting mainly from continued competitive
pricing pressures, partially offset by ongoing cost control efforts.

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

     Operating margin was (44.6)% in 2004, 7.6% in 2003 and 7.4% in 2002. Asset
impairment and net restructuring and other charges negatively impacted the
operating margin by 48.7, 0.5 and 4.5 percentage points in 2004, 2003 and 2002,
respectively. Excluding the impact of the charges, the downward margin trend is
primarily reflective of the declining higher margin long distance retail voice
and data businesses coupled with a shift to lower margin products, such as
advanced and wholesale services.

                                        44
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

     In 2005, we expect operating income and margin to continue to decline as a
result of the competitive pricing environment and the continued shift to lower
margin products, despite our continued focus on reducing costs.

  OTHER ITEMS

     Capital additions were $1.7 billion, $3.2 billion and $3.7 billion in 2004,
2003 and 2002, respectively. Capital additions continued to decline as a result
of our ongoing disciplined focus on capital spending. During 2004, approximately
one third of our spending related to capitalized software, as we continued to
invest in process improvements and initiatives to improve the customer
experience. In addition, we continued to invest in IP&E services and data
services, both of which included managed services.

     Total assets decreased $13.6 billion, or 39.7%, at December 31, 2004,
compared with December 31, 2003, primarily driven by lower net property, plant
and equipment as a result of asset impairment charges recorded in the third
quarter 2004 and depreciation expense for the year, partially offset by capital
expenditures. In addition, total assets reflect lower accounts receivable
resulting from improved cash collections and revenue declines.

AT&T CONSUMER SERVICES

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

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                             2004     2003     2002
                                                            ------   ------   -------
                                                              (DOLLARS IN MILLIONS)
<S>                                                         <C>      <C>      <C>
Revenue
  Stand-alone long distance voice services and other......  $5,161   $7,401   $10,299
  Bundled services........................................   2,743    1,999     1,114
                                                            ------   ------   -------
Total revenue.............................................  $7,904   $9,400   $11,413
Operating income..........................................  $  832   $2,056   $ 2,584
Capital additions.........................................  $   42   $   74   $   127
</Table>

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                              2004     2003
                                                              -----   -------
                                                                (DOLLARS IN
                                                                 MILLIONS)
<S>                                                           <C>     <C>
Total assets................................................  $743    $1,062
</Table>

  REVENUE

     AT&T Consumer Services revenue declined $1.5 billion, or 15.9%, in 2004
compared with 2003, and declined $2.0 billion, or 17.6%, in 2003 compared with
2002. The decline in both periods was primarily due to stand-alone long distance
voice services, which decreased $2.2 billion to $4.9 billion in 2004 and
declined $2.9 billion to $7.1 billion in 2003, largely due to the impact of
ongoing competition, which has led to a loss of market share, and substitution.
In addition, stand-alone long distance voice services have been negatively

                                        45
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

impacted by the continued migration of customers to lower priced optional
calling plans and other products, such as bundled services. Partially offsetting
the declines in stand-alone long distance voice services were pricing actions
taken, including a monthly fee that we began billing in mid-2003 to recover
costs, including certain access and other connection charges and property taxes.
Partially offsetting the overall decline was an increase in bundled services
revenue, which increased $0.7 billion and $0.9 billion in 2004 and 2003,
respectively, reflecting an increase in subscribers primarily due to penetration
in existing markets, as well as entry into new markets. The increase in bundled
services revenue includes amounts previously incorporated in stand-alone long
distance voice services revenue for existing customers that migrated to bundled
offers.

     Total long distance volumes (including long distance volumes sold as part
of a bundle) declined approximately 20% in 2004 and 17% in 2003, respectively,
as a result of competition and wireless and Internet substitution.

     In 2004, nearly 5% of AT&T Consumer Services total revenue and more than
50% of prepaid card revenue was related to a contract with Wal-Mart, Inc.
(Wal-Mart), which was renewed on December 1, 2004. If this contract is not
further renewed at the next renewal date, December 31, 2005 (subject to early
termination if certain events occur), AT&T Consumer Services revenue would be
adversely affected if we are unsuccessful in selling the cards through a
different channel. We are currently evaluating the prospective impact of the
February 2005 FCC prepaid card ruling and assessing whether we will pass the
related Universal Service Fund costs to our customers. In the event that we
decide to increase our rates, under certain circumstances, Wal-Mart may choose
to terminate this contract. However, we have the right to match any offer made
by a competitor and continue the existing contract.

     As a result of changes in regulatory policy governing local telephone
service in 2004, we announced we will be shifting our focus away from
traditional consumer services, such as residential telephone services, and we
will no longer invest to acquire new residential local and long distance
customers. We will continue to provide our existing customers with quality
service. As a result of this announcement and the continued negative impacts of
competition (including the continued penetration of Regional Bell Operating
Companies into the long distance market), substitution and customer migration to
lower-priced calling plans and products, we expect AT&T Consumer Services
revenue decline to accelerate in 2005.

  OPERATING INCOME

     Operating income declined $1.2 billion, or 59.5%, in 2004 compared with
2003 and declined $0.5 billion, or 20.5%, in 2003 compared with 2002. Operating
margin declined to 10.5% in 2004 from 21.9% in 2003 and 22.6% in 2002. As a
result of the February 2005 FCC ruling, operating income for 2004 included $0.6
billion of domestic access charges relating to our enhanced prepaid card
service, which negatively impacted the operating margin by 7.0 percentage points
(see note 14 to the consolidated financial statements for additional
information). Operating income for 2004 also included asset impairment and net
restructuring and other charges of $189 million, compared with $26 million in
2003 and $211 million in 2002. As a result of the third quarter 2004 asset
impairment charges, operating income for 2004 included a $76 million benefit due
to lower depreciation on assets impaired by AT&T Consumer Services, as well as
lower network-related charges from AT&T Business Services. The 2004 asset
impairment and net restructuring and other charges negatively impacted the
operating margin by 1.5 percentage points. Excluding the impacts of the access
charges accrued in connection with our enhanced prepaid card service and the
asset impairment and net restructuring and other charges, the operating margin
declines were primarily due to lower revenue coupled with increased local
connectivity expenses in both years. During 2004, costs of services and products
and selling, general and administrative expenses experienced a greater rate of
decline than revenue, reflecting the impact of cost controls and lower marketing
and customer acquisition spending as a result of our strategic decision in the
third quarter of 2004 to shift our focus away from traditional consumer
services. During 2003, selling, general

                                        46
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

and administrative costs experienced a slower rate of decline than revenue,
primarily due to initial costs incurred to enter new markets in bundled
services.

 OTHER ITEMS

     Total assets declined $0.3 billion to $0.7 billion at December 31, 2004,
primarily due to lower accounts receivable, reflecting lower revenue and
improved cash collections, as well as decreases in internal-use software and
property, plant and equipment, net, primarily due to the third quarter 2004
asset impairment charges and net depreciation expense for the year.

CORPORATE AND OTHER

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

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2004    2003    2002
                                                              -----   -----   -----
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Revenue.....................................................  $  51   $  54   $(258)
Operating (loss)............................................  $(841)  $(294)  $(196)
Capital additions...........................................  $  24   $ 223   $  63
</Table>

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Total assets................................................   $11,440     $12,724
</Table>

 REVENUE

     Corporate and Other revenue was negative $0.3 billion in 2002, primarily
due to eliminations of internal revenue prior to the spin-off of AT&T Broadband
in November 2002.

 OPERATING (LOSS)

     In 2004, operating (loss) was $(0.8) billion compared with $(0.3) billion
in 2003. The increase in operating (loss) was primarily due to higher asset
impairment and net restructuring and other charges of $0.5 billion, primarily
due to $0.4 billion of higher benefit plan curtailment and employee separation
costs, as well as $0.1 billion of real estate impairment charges to write-down
held-for-sale facilities, all of which have been sold.

     In 2005, we expect up to $0.2 billion of incremental expenses in Corporate
and Other, excluding any net restructuring charges, primarily related to higher
pension plan costs.

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

 OTHER ITEMS

     Capital additions were $0.2 billion in 2003 primarily due to property,
plant and equipment recorded in connection with the adoption of FIN 46 on July
1, 2003.

                                        47
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

     Total assets decreased $1.3 billion to $11.4 billion at December 31, 2004.
This decrease was primarily driven by a lower cash balance of $1.0 billion at
December 31, 2004, primarily resulting from debt repurchases and scheduled
repayments during the year.

FINANCIAL CONDITION

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Total assets................................................   $32,804     $47,988
Total liabilities...........................................   $25,785     $34,032
Total shareowners' equity...................................   $ 7,019     $13,956
</Table>

     TOTAL ASSETS decreased $15.2 billion, or 31.6%, to $32.8 billion at
December 31, 2004, compared with $48.0 billion at December 31, 2003, largely
driven by a reduction in property, plant and equipment of $12.9 billion,
resulting from asset impairment charges and depreciation during the year,
partially offset by capital expenditures. In addition, exclusive of a $0.7
billion reclassification of restricted cash and hedge receivable to other
current assets relating to debt maturing in 2005, other assets declined $1.2
billion, primarily due to a decrease in internal-use software resulting from
amortization during the year and an impairment charge, partially offset by
capital additions. Additionally, other assets declined due to the settlement of
foreign currency swaps associated with Euro debt repurchases. Accounts
receivable declined $0.8 billion, driven by improved cash collections and lower
revenue. Also contributing to the decline in total assets was a decrease in cash
and cash equivalents of $0.7 billion. See "Liquidity" for a discussion of the
decline in cash and cash equivalents.

     TOTAL LIABILITIES decreased $8.2 billion, or 24.2%, to $25.8 billion at
December 31, 2004, from $34.0 billion at December 31, 2003. The decrease was due
in part to a $4.0 billion reduction in deferred income taxes, primarily
associated with the tax benefit recorded for the impairments of property, plant
and equipment and internal-use software during the year. The decrease in total
liabilities was also largely attributable to lower debt balances of $3.7
billion, reflecting the early retirement of $2.7 billion face value of debt and
$0.4 billion of associated mark-to-market adjustments, coupled with scheduled
repayments of debt amounting to $1.2 billion, partially offset by a $0.4 billion
increase in short-term borrowings. Accounts payable and accrued expenses
declined $0.5 billion due to lower year-end capital and other accruals.
Partially offsetting these declines was an increase in total short-term and
long-term compensation and benefit-related liabilities of $0.2 billion,
primarily attributable to higher net reserves for employee separations,
partially offset by a reduction in other accruals.

     TOTAL SHAREOWNERS' EQUITY decreased $6.9 billion, or 49.7%, to $7.0 billion
at December 31, 2004, from $14.0 billion at December 31, 2003. This decrease was
primarily due to the net loss for the year, largely driven by the asset
impairment charges recorded, coupled with dividends declared.

LIQUIDITY

  CASH FLOW OVERVIEW

     Cash and cash equivalents decreased $0.7 billion during 2004, to $3.7
billion, primarily reflecting over $4.2 billion in debt repayments, including
nearly $2.7 billion in early redemptions. Capital expenditures of $1.8 billion
also contributed to the cash decline. Cash generated by operating activities of
$5.5 billion partially offset this cash utilization.

                                        48
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2004        2003        2002
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
Cash flows:
Provided by operating activities of continuing
  operations............................................   $ 5,512     $ 8,530     $10,483
(Used in) investing activities of continuing
  operations............................................    (1,704)     (3,101)     (1,429)
(Used in) financing activities of continuing
  operations............................................    (4,463)     (9,090)     (6,041)
(Used in) discontinued operations.......................        --          --      (5,679)
                                                           -------     -------     -------
Net (decrease) in cash and cash equivalents.............   $  (655)    $(3,661)    $(2,666)
                                                           =======     =======     =======
</Table>

     Net cash provided by OPERATING ACTIVITIES of continuing operations was $5.5
billion in 2004, a decline of $3.0 billion, from $8.5 billion in 2003, driven in
part by the declining stand-alone long distance voice and data businesses. This
downward trend in cash generated by operating activities was also impacted by
income taxes, specifically $25 million of payments in 2004, compared with $1.2
billion of refunds in 2003. Favorably impacting cash flows in 2004 compared with
2003, was our continued focus on streamlining our processes and controlling
costs, as well as a $0.4 billion decline in interest payments primarily
resulting from our ongoing deleveraging efforts.

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

     Our INVESTING ACTIVITIES of continuing operations resulted in a net use of
cash of $1.7 billion in 2004 compared with $3.1 billion in 2003 and $1.4 billion
in 2002. During 2004, we spent $1.8 billion on capital expenditures. During
2003, we spent $3.2 billion on capital expenditures, made payments of $0.2
billion to British Telecommunications plc (BT) primarily associated with assets
we assumed that BT originally contributed to our Concert joint venture, and
received $0.1 billion of proceeds from the sale of our remaining AT&T Wireless
shares. During 2002, we spent $3.9 billion on capital expenditures, paid $3.4
billion to settle the AT&T Canada obligation and received a $5.8 billion
distribution from AT&T Broadband in conjunction with its spin-off. The declining
trend in capital expenditures reflects the completion, in prior years, of
infrastructure related projects and focused spending on advanced services.

     During 2004, net cash used in FINANCING ACTIVITIES of continuing operations
was $4.5 billion, compared with $9.1 billion in 2003 and $6.0 billion in 2002.
During 2004, we made net payments of $4.2 billion to reduce debt (including
redemption premiums and foreign currency mark-to-market revaluations), primarily
due to our ongoing deleveraging efforts, and paid dividends of $0.8 billion.
Included in other financing activities was the receipt of approximately $0.5
billion for the settlement of combined interest rate foreign currency swap
agreements in conjunction with the early repayment of Euro notes in 2004 (such
repayment is included as retirement of long-term debt).

     In 2003, we made net payments of $9.3 billion to reduce debt, including
early termination of debt and paid dividends of $0.6 billion. Reflected as an
other financing item was the receipt of approximately $0.2 billion cash
collateral related to favorable positions of certain combined interest rate
foreign currency swap agreements, as well as $0.5 billion for the settlement of
a combined interest rate foreign currency swap agreement in conjunction with the
scheduled repayment of Euro debt in November 2003 (such repayment is included as
retirement of long-term debt). During 2002, we made net payments of $8.2 billion
to reduce debt, paid dividends of $0.6 billion, and received $2.7 billion from
the issuance of AT&T common stock, primarily due to the sale of 46 million
shares in the second quarter of 2002, the proceeds of which were used in October
2002 to settle a portion of our obligation to the AT&T Canada shareholders.

                                        49
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

  WORKING CAPITAL AND OTHER SOURCES OF LIQUIDITY

     At December 31, 2004, our working capital ratio (current assets divided by
current liabilities) was 1.03.

     At December 31, 2004, we had a $1.0 billion syndicated 364-day credit
facility available to us that was entered into on October 6, 2004. No borrowings
are currently outstanding under the facility. Up to $0.5 billion of the facility
can be utilized for letters of credit, which reduces the amount available. At
December 31, 2004, approximately $0.2 billion of letters of credit were
outstanding under the facility. Additionally, the credit facility contains
financial covenants that require us to meet a total debt-to-EBITDA (defined as
operating income plus depreciation and amortization excluding any asset
impairment or net restructuring and other charges) ratio not exceeding 2.25 to 1
(calculated pursuant to the credit facility) and an EBITDA-to-net interest
expense ratio of at least 3.50 to 1 (calculated pursuant to the credit facility)
for four consecutive quarters ending on the last day of each fiscal quarter. At
December 31, 2004, we were in compliance with these covenants.

     During 2004, we renewed our AT&T Consumer Services and AT&T Business
Services 364-day customer accounts receivable securitization facilities, both of
which extend through July 2005. Together, the programs provided up to $1.35
billion of available financing at December 31, 2004, limited by the eligible
receivables balance, which varies from month to month. Proceeds from the
securitizations are recorded as borrowings and are included in short-term debt.
Approximately $0.3 billion was outstanding at December 31, 2004. The facilities
require us to meet a debt-to-EBITDA ratio not exceeding 2.25 to 1 (calculated
pursuant to the agreements) and an EBITDA-to-net interest expense ratio not
exceeding 3.50 to 1 (calculated pursuant to the agreements) for four consecutive
quarters ending on the last day of each fiscal quarter. At December 31, 2004, we
were in compliance with these covenants.

     We anticipate continuing to fund our operations in 2005 primarily with cash
from operations, as well as cash and cash equivalents on hand; however, we
expect cash from operations to decline in 2005 compared with 2004. If
competition and product substitution accelerate beyond current expectations
and/or economic conditions worsen or do not improve, our cash flows from
operations would decrease, negatively impacting our liquidity. However, we
believe our access to the capital markets is adequate to provide the flexibility
we desire in funding our operations. Sources of liquidity, in addition to our
substantial cash and cash equivalents on hand, include $2.4 billion remaining
under a universal shelf registration; the $1.35 billion securitization program
(limited by eligible receivables); and the $1.0 billion credit facility. In
light of the third quarter 2004 short-term credit rating downgrades discussed
below, there is no longer any assurance that we will continue to have any
significant access to the commercial paper market. In addition, based on our
request, Standard & Poor's (S&P) and Moody's Investors Services, Inc. (Moody's)
have withdrawn our short-term credit ratings. The maximum amount of commercial
paper outstanding during 2004 was approximately $1.0 billion. At December 31,
2004, there was no commercial paper outstanding. We cannot provide any
assurances that any or all of these sources of funding will be available at the
time they are needed or in the amounts required. The SBC merger agreement
provides that we cannot incur additional indebtedness over $100 million in the
aggregate or issue equity or convertible securities without the prior consent of
SBC. Without limitation, this could materially limit our ability to make
drawings under our $1 billion credit facility, to increase the amount of our
financing of accounts receivable under our securitization facility, to issue
commercial paper, or to utilize our universal shelf registration statement for
financing purposes. In addition, the merger agreement requires us to pay a
special dividend in excess of $1.0 billion in connection with the closing of the
transaction. The combination of the requirement to reserve cash to pay the
special dividend and the restriction on our ability to utilize sources of
liquidity, could have a material adverse affect on our liquidity position.
However, we expect to have sufficient liquidity from cash on hand and cash from
operations to fund all liquidity needs including the special dividend and
announced debt buyback (see "Subsequent Events") through the expected closing of
the merger without any additional borrowings or financings.

                                        50
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

  CREDIT RATINGS AND RELATED DEBT IMPLICATIONS

     During the third quarter of 2004, our long-term and short-term credit
ratings were lowered by S&P, Moody's and Fitch Ratings (Fitch), as reflected in
the table below. The rating actions by S&P and Moody's triggered a 100 basis
point interest rate step-up on approximately $6.4 billion in original face value
of debt outstanding as of December 31, 2004 (current carrying value of $6.7
billion). This step-up was effective for interest payment periods that began in
November 2004, which resulted in increased interest expense of approximately $8
million in 2004. The interest rate step-ups are expected to increase interest
expense by approximately $67 million in 2005. As of December 31, 2004, our
credit ratings were as follows:

<Table>
<Caption>
CREDIT RATING AGENCY                        SHORT-TERM RATING   LONG-TERM RATING   OUTLOOK
--------------------                        -----------------   ----------------   --------
<S>                                         <C>                 <C>                <C>
Standard & Poor's.........................          B                 BB+          Negative
Fitch.....................................          B                 BB+          Negative
Moody's...................................         NR                 Ba1          Negative
</Table>

     As a result of the SBC merger announcement, on January 31 and February 1,
2005, Fitch and S&P's, respectively, put our long-term debt ratings on "watch
positive" and removed the "outlook negative." On January 31, 2005, Moody's
placed our long-term debt rating on review for possible upgrade and removed the
"outlook negative." In addition, based on our request, S&P and Moody's withdrew
our short-term credit ratings.

     Our access to capital markets, as well as the cost of our borrowings, are
affected by our debt ratings. The third quarter rating actions discussed above
and further debt rating downgrades will require us to pay higher rates on
certain existing debt and have required us to post cash collateral for certain
interest-rate swaps in which we were in a net payable position.

     Additionally, if our debt ratings are further downgraded, our access to the
capital markets may be further restricted and/or such replacement financing may
be more costly or have additional covenants than we had in connection with our
debt at December 31, 2004. In addition, the market environment for financing in
general, and within the telecommunications sector in particular, has been
adversely affected by economic conditions and bankruptcies of other
telecommunications providers.

     AT&T Corp. is generally the obligor for debt issuances. However, there are
some instances in which AT&T Corp. is not the obligor, for example, the
securitization facilities and certain capital leases. The total debt of these
entities, which are fully consolidated, is approximately $0.4 billion at
December 31, 2004, and is included within short-term and long-term debt.

  CASH REQUIREMENTS

     Our cash needs for 2005 will be primarily related to capital expenditures,
repayment of debt, the payment of dividends and income tax related payments. We
expect our capital expenditures in 2005 will be approximately $1.5 billion. In
addition, we expect income tax payments will be significantly higher in 2005
compared with 2004.

     AT&T anticipates contributing approximately $0.5 billion to the U.S.
postretirement benefit plans in 2005. We expect to contribute approximately $30
million to our U.S. nonqualified pension plan in 2005. No contribution is
expected for our U.S. qualified pension plans in 2005.

  CONTRACTUAL CASH OBLIGATIONS

     The following summarizes AT&T's contractual cash obligations and commercial
commitments at December 31, 2004, and the effect such obligations are expected
to have on liquidity and cash flows in future periods. Included in the table
below are purchase obligations under which we have legal obligations for

                                        51
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

payments in specific years. The minimum commitment for certain obligations is
based on termination penalties that could be paid to exit the contract. Since
termination penalties would not be paid in every year, such penalties are
excluded from the table. (See notes 2 and 3 to the table.) Other long-term
liabilities were included in the table based on the year of required payment or
an estimate of the year of payment. Such estimate of payment is based on a
review of past trends for these items, as well as a forecast of future
activities. Certain items were excluded from the table below as the year of
payment is unknown and could not be reliably estimated since past trends were
not deemed to be an indicator of future payment. (See note 4 to the table.)

<Table>
<Caption>
                                                      PAYMENTS DUE BY PERIOD
                                          -----------------------------------------------
                                                    LESS THAN    2-3      4-5      AFTER
                                           TOTAL     1 YEAR     YEARS    YEARS    5 YEARS
                                          -------   ---------   ------   ------   -------
Contractual Obligations                                (DOLLARS IN MILLIONS)
<S>                                       <C>       <C>         <C>      <C>      <C>
Long-term debt, including current
  maturities(1).........................  $10,012    $1,280     $1,669   $  904   $6,159
Capital lease obligations...............      105        16         20       12       57
Operating leases........................    1,609       364        539      364      342
Unconditional purchase
  obligations(2)(3).....................      807       297        180      111      219
Other long-term obligations reflected in
  the balance sheet at December 31,
  2004(4)(5)............................      926        --        216      186      524
                                          -------    ------     ------   ------   ------
Total contractual cash obligations......  $13,459    $1,957     $2,624   $1,577   $7,301
                                          =======    ======     ======   ======   ======
</Table>

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

(1) Impact of discounts and derivative instruments included in debt amounts on
    the balance sheet are excluded from the table. These debt amounts include
    revaluations on our foreign currency denominated debt of $0.3 billion in
    both 2005 and 2006. We have entered into foreign exchange contracts,
    recorded in other current assets and other assets, which hedge our exposure
    to these foreign currency revaluations.

(2) We have contractual obligations to utilize network facilities from local
    exchange carriers with terms greater than one year. Since the contracts have
    no minimum volume requirements, and are based on an interrelationship of
    volumes and discounted rates, we assessed our minimum commitment based on
    penalties to exit the contracts, assuming we exited the contracts on
    December 31, 2004. At December 31, 2004, the penalties we would have
    incurred to exit all of these contracts would have been $1.3 billion. Such
    termination penalties decline throughout the lives of the contracts, and
    could be $0.9 billion in 2005, $0.9 billion in the aggregate for 2006 and
    2007 and $0.2 billion in the aggregate for 2008 and 2009, assuming all
    contracts are exited. These termination fees are excluded from the above
    table as the fees would not be paid in every year and the timing of such
    payments, if any, is uncertain.

(3) We calculated the minimum obligation for certain agreements to purchase
    goods or services based on termination fees that can be paid to exit the
    contract. If we elect to exit these contracts, termination fees for all such
    contracts in the year of termination could be approximately $467 million in
    2005, $421 million in the aggregate for 2006 and 2007, $68 million in the
    aggregate for 2008 and 2009, or $1 million, in the aggregate, thereafter.
    These termination fees are excluded from the above table as the fees would
    not be paid in every year and the timing of such payments, if any, is
    uncertain.

(4) Other long-term liabilities of $1.6 billion and deferred income taxes of
    $1.4 billion have been excluded from the above table due to the uncertainty
    of the timing of payments, combined with the absence of historical trending
    to be used as a predictor for such payments. Also, long-term liabilities
    totaling $0.6 billion have been excluded from the above table as settlement
    of such liabilities will not require the use of cash.

(5) Certain long-term benefit-related liabilities, including pensions,
    postretirement health and welfare benefits and postemployment benefit
    obligations are appropriately recorded on the balance sheet at present
    value. The accrued liability, which is impacted by various actuarial
    assumptions, will differ from the sum of future value of estimated payments.
    Estimated payments, including payments to fund the benefit trusts, are $1.2
    billion in the aggregate for 2006 and 2007; $1.1 billion in the aggregate
    for 2008 and 2009 and $6.0 billion, thereafter, and differs from the
    obligation recognized on the balance sheet by $5.0 billion. Although we
    provide various employee benefit plans, programs and arrangements to our
    employees, we reserve the right to amend, modify or terminate these plans,
    programs or arrangements at any time, subject to the terms and conditions of
    such plans, programs or arrangements and applicable law. Accordingly, these
    amounts have been excluded from the above table, as we are not legally
    obligated for such cash outflows. See notes 11 and 12 to the consolidated
    financial statements for additional information.

                                        52
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

  OTHER COMMERCIAL COMMITMENTS

     In certain circumstances we guarantee the debt and other obligations of our
subsidiaries, and, in connection with the separation of certain subsidiaries,
these guarantees remained outstanding. At December 31, 2004, these guarantees
relate to our former subsidiaries AT&T Broadband and NCR.

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

     Prior to the spin-off of AT&T Broadband, we had guaranteed various
obligations of AT&T Broadband, including operating leases for real estate,
surety bonds and equity hedges, which we continue to provide. Comcast has
provided indemnifications for the full amount of these guarantees. Such
commitments total $33.9 million and are expected to expire as follows: $13.7
million in 2005 and $20.2 million in the aggregate in 2006 and 2007.

     The total amount of guaranteed debt at December 31, 2004 was $5.6 million.
Such debt guarantees relate to NCR, with the substantial portion of the debt
maturing subsequent to 2009.

OFF-BALANCE SHEET ARRANGEMENTS

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

EMPLOYEE BENEFIT PLANS

     We sponsor noncontributory defined benefit pension plans covering the
majority of our U.S. employees. Our postretirement benefit plans for current and
certain future retirees include health-care benefits, life insurance coverage
and telephone concessions.

     In 2004, we contributed $36 million and $611 million out of operating cash
to fund the non-qualified pension and postretirement plans, respectively. In
2005, we anticipate contributing approximately $30 million to the non-qualified
pension plans and, while not required, approximately $525 million to the
postretirement plans. We were not required to contribute to the qualified
pension plans in 2004, and we do not anticipate any required contributions in
2005. Contributions for 2006 and beyond cannot be estimated at this time due to
the uncertainty regarding various factors that determine the contributions for
those years. These factors include the actual return on plan assets in the
future, the level of interest rates in the future, future salary increases and
future demographic experience.

     Plan assets are held in trust for the participants. Consistent with the
plans' investment policies, assets are invested in equity securities, debt
securities and real estate. Investment securities are exposed to various risks,
including interest rate, credit and overall market volatility risks. As a result
of these risks, it is reasonably possible that the market values of investment
securities could increase or decrease in the near term, which could affect the
value of the trusts and, as a result, the future level of pension and
postretirement plan expense. See note 11 to the consolidated financial
statements for further details on our investments and investment strategy.

     SFAS No. 87 "Employers' Accounting for Pensions" and SFAS No. 106
"Employers' Accounting for Postretirement Benefits other than Pensions" allow
for the deferred recognition of gains and losses. Gains and losses arise from
changes in the projected benefit obligation or plan assets resulting from
experience different from that assumed. The assumptions used in the pension and
postretirement valuations that could differ from actual experience include, but
are not limited to, return on assets, discount rate, benefit payments, and

                                        53
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

demographics of the plan participants. See "Critical Accounting Estimates and
Judgments" for a discussion of the material assumptions used in determining the
pension and postretirement obligations and a sensitivity analysis on the
assumptions. In addition, changes in the assumptions themselves can result in
gain or loss recognition. Gains and losses are amortized into cost to the extent
that they exceed a prescribed amount. The portion of the accumulated net gains
or losses that exceeds 10% of the greater of the market-related value of plan
assets or the projected benefit obligation, is amortized over the
weighted-average remaining service life of the plan participants, which was 9.7
years for our pension and postretirement plans as of December 31, 2004. As such,
significant portions of benefit costs recorded in any period may not reflect the
actual level of cash benefits provided to plan participants.

     As of December 31, 2004, the unrecognized net losses for the pension and
postretirement benefit plans were approximately $2.3 billion. Unrecognized net
losses and gains result from changes in the expected projected benefit
obligation or plan assets resulting from experience different from that assumed
and from any changes in assumptions. During 2004, the unrecognized net losses
were reduced by an asset gain of approximately $0.7 billion, primarily resulting
from actual 2004 pension asset returns of approximately 13% compared with an
8.5% expected return on assets. Partially offsetting this decrease were net
actuarial losses of approximately $0.5 billion primarily due to the 25 basis
point decline in the discount rate.

RISK MANAGEMENT

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

     We enter into foreign currency contracts to minimize our exposure to risk
of adverse changes in currency exchange rates. We are subject to foreign
exchange risk for foreign currency-denominated transactions, such as debt
issued, recognized payables and receivables and forecasted transactions. At
December 31, 2004, our foreign currency exposures were principally Euros,
British pound sterling, Danish krone and Swiss francs.

     The fair value of foreign exchange contracts is subject to the changes in
foreign currency exchange rates. For the purpose of assessing specific risks, we
use a sensitivity analysis to determine the effects that market risk exposures
may have on the fair value of our financial instruments and results of
operations. To perform the sensitivity analysis, we assess the risk of loss in
fair values from the effect of a hypothetical 10% change in the value of foreign
currencies (positive change in the value of the U.S. dollar), assuming no change
in interest rates. See note 9 to the consolidated financial statements for
additional information relating to notional amounts and fair values of financial
instruments.

     For foreign exchange contracts outstanding at December 31, 2004 and 2003,
assuming a hypothetical 10% appreciation of the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the foreign exchange contracts (net asset) would have decreased $37 million
and $77 million, respectively. Because our foreign exchange contracts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying transactions.

     We have also entered into combined interest rate foreign currency contracts
to hedge foreign currency-denominated debt. At December 31, 2004 and 2003,
assuming a hypothetical 10% appreciation in the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the combined interest rate foreign currency contracts (net asset) would have
decreased $0.2 billion and

                                        54
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

$0.4 billion, respectively. Because our foreign exchange contracts are entered
into for hedging purposes, we believe that these losses would be largely offset
by gains on the underlying foreign currency-denominated debt.

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

     We use interest rate swaps to manage the impact of interest rate changes on
earnings and cash flows. We perform a sensitivity analysis on our interest rate
swaps to assess the risk of changes in fair value. The model to determine
sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At
December 31, 2004 and 2003, assuming a hypothetical 10% increase in interest
rates, the fair value of interest rate swaps (net liability) would have
increased by $8 million and $13 million, respectively.

     As discussed above, we have also entered into combined interest rate
foreign currency contracts to hedge foreign currency-denominated debt. Assuming
a hypothetical 10% increase in interest rates, the fair value of the contracts
(net asset) would have increased by $7 million and $33 million at December 31,
2004 and 2003, respectively.

     The fair value of our fixed-rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains or losses in the
market value of the debt due to differences between the market interest rates
and rates at the inception of the obligation. Assuming a 10% upward shift in
interest rates at December 31, 2004 and 2003, the fair value of unhedged debt
would have decreased by $0.4 billion in each year.

     The risk of loss in fair values of all other financial instruments
resulting from a hypothetical 10% change in market prices was not significant as
of December 31, 2004 and 2003.

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

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

     The SBC merger agreement prohibits us from entering into any additional
derivative financial instruments in an aggregate amount exceeding $100 million
without SBC's prior approval.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The revised statement eliminates the
alternative of using Accounting Principles Board(APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," intrinsic value method of accounting
that was provided for in SFAS No. 123 "Accounting for Stock-Based Compensation"
as originally issued. Effective January 1, 2003, we adopted the fair value
recognition provisions of original SFAS No. 123 on a prospective basis and we
began to record stock-based compensation expense for all employee awards
(including stock options) granted or modified after January 1, 2003. Adoption of
the revised standard will require that we begin to recognize expense for
unvested awards issued prior to January 1, 2003. Additionally, this standard
requires that estimated forfeitures be considered in determining compensation
expense. For equity awards other than stock options, we have not previously
included estimated forfeitures in determining compensation expense. Accordingly,
the difference between the expense we have recognized to

                                        55
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)

date and the compensation expense as calculated considering estimated
forfeitures will be reflected as a cumulative effect of accounting change upon
adoption. Further, SFAS No. 123 (revised 2004) requires that excess tax benefits
be recognized as an addition to paid-in capital and amends SFAS No. 95,
"Statement of Cash Flows," to require that the excess tax benefits be reported
as a financing cash inflow rather than as a reduction of taxes paid. SFAS No.
123 (revised 2004) is effective for all awards granted after June 15, 2005, and
to awards modified, repurchased, or cancelled after that date. We intend to
elect a modified prospective adoption, which will result in additional
compensation expense beginning in the third quarter of 2005.

     In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets -- an amendment of APB Opinion No. 29." APB Opinion No. 29 requires that
nonmonetary exchanges of assets be recorded at fair value with an exception for
exchanges of similar productive assets, which can be recorded on a carryover
basis. SFAS No. 153 eliminates the current exception and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges that
take place in fiscal periods beginning after June 15, 2005, which is July 1,
2005 for us; however, earlier application is permitted.

     In December 2004, the FASB issued Staff Position (FSP) No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," which provides
guidance on the accounting and disclosure requirements for the repatriation
provision of the Act. See note 13 to the consolidated financial statements for
further information on the estimated impact to our results with respect to this
provision of the Act.

SUBSEQUENT EVENTS

     On January 31, 2005, AT&T and SBC announced an agreement for SBC to acquire
AT&T. Under the terms of the agreement, each AT&T share will be exchanged for
0.77942 of a share of SBC common stock. In addition, at the time of closing, we
will pay our shareowners a special dividend of $1.30 per share. At the time of
the announcement, this consideration was valued at $19.71 per share, or
approximately $16.0 billion. The stock consideration in the transaction is
expected to be tax-free to our shareowners. The acquisition, which is subject to
approval by our shareowners and regulatory authorities, and other customary
closing conditions, is expected to close in late 2005 or early 2006. While the
merger agreement prohibits us from soliciting competing acquisition proposals,
we may accept a superior proposal prior to the effective date of the merger,
subject to compliance with the terms of the merger agreement and payment of a
$560 million termination fee and all documented out-of-pocket fees incurred by
SBC of up to $40 million. The terms of certain of our agreements including
contracts, employee benefit arrangements and debt instruments have provisions
which could result in changes to the terms or settlement amounts of these
agreements upon a change in control of AT&T.

     In February 2005, the FCC ruled against AT&T and its petition for a
declaratory ruling that our enhanced prepaid card service is an intrastate
information service. As a result of this ruling, we accrued $553 million
(pretax), as of December 31, 2004, which increased the loss per share for the
year ended December 31, 2004, by $0.46. See note 14 for additional details of
this matter.

     In March 2005, we offered to repurchase, for cash, up to $1.25 billion of
our outstanding 7.30% Notes maturing in 2011, which carried an interest rate of
9.05% at the time of the offer. This offer is scheduled to expire in April 2005.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                        56
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The Company's internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that could have a
material effect on the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

     Management conducted an evaluation of the effectiveness of internal control
over financial reporting based on the framework in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2004. Management's assessment of the effectiveness
of the Company's internal control over financial reporting has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.

                                        57
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     We have completed an integrated audit of AT&T Corp.'s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.

Consolidated financial statements and financial statement schedule

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of AT&T Corp. and its subsidiaries (AT&T) at December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     As discussed in Note 1 to the financial statements, AT&T changed the manner
in which it accounts for stock-based compensation for all employee awards
granted or modified after January 1, 2003. As discussed in Note 2 to the
financial statements, AT&T changed the manner in which it accounts for variable
interest entities as of July 1, 2003, the manner in which it accounts for asset
retirement costs as of January 1, 2003, and the manner in which it accounts for
goodwill and other intangible assets as of January 1, 2002.

Internal control over financial reporting

     Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 8, that
the Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the COSO. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment
and on the effectiveness of the Company's internal control over financial
reporting based on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

                                        58
<PAGE>

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

-s- PricewaterhouseCoopers LLP

Florham Park, New Jersey
March 8, 2005

                                        59
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                2004        2003         2002
                                                              ---------   ---------   ----------
                                                                 (DOLLARS IN MILLIONS, EXCEPT
                                                                      PER SHARE AMOUNTS)
<S>                                                           <C>         <C>         <C>
REVENUE.....................................................   $30,537     $34,529     $ 37,827
OPERATING EXPENSES
Access and other connection.................................    10,454      10,797       10,790
Costs of services and products (excluding depreciation of
  $2,691, $3,819, and $3,801 included below)................     7,074       7,625        8,363
Selling, general and administrative.........................     6,557       7,379        7,988
Depreciation and amortization...............................     3,768       4,870        4,888
Asset impairment and net restructuring and other charges....    12,772         201        1,437
                                                               -------     -------     --------
Total operating expenses....................................    40,625      30,872       33,466
                                                               -------     -------     --------
OPERATING (LOSS) INCOME.....................................   (10,088)      3,657        4,361
Other (expense) income, net.................................      (144)        191          (77)
Interest (expense)..........................................      (803)     (1,158)      (1,448)
                                                               -------     -------     --------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
  TAXES, MINORITY INTEREST INCOME AND NET EARNINGS (LOSSES)
  RELATED TO EQUITY INVESTMENTS.............................   (11,035)      2,690        2,836
Benefit (provision) for income taxes........................     4,560        (816)      (1,587)
Minority interest income....................................         1           1          114
Net earnings (losses) related to equity investments.........         5         (12)        (400)
                                                               -------     -------     --------
(LOSS) INCOME FROM CONTINUING OPERATIONS....................    (6,469)      1,863          963
Net (loss) from discontinued operations (net of income tax
  benefit of $6,014 in 2002)................................        --         (13)     (14,513)
Gain on disposition of discontinued operations (net of
  income tax benefit of $61)................................        --          --        1,324
                                                               -------     -------     --------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
  CHANGES...................................................    (6,469)      1,850      (12,226)
Cumulative effect of accounting changes (net of income taxes
  of $(9) and $530).........................................        --          15         (856)
                                                               -------     -------     --------
NET (LOSS) INCOME...........................................   $(6,469)    $ 1,865     $(13,082)
                                                               =======     =======     ========
WEIGHTED-AVERAGE SHARES USED TO COMPUTE (LOSS) EARNINGS PER
  SHARE:
Basic.......................................................       795         788          746
Diluted.....................................................       795         789          766

PER BASIC SHARE:
(Loss) earnings from continuing operations..................   $ (8.14)    $  2.37     $   1.29
(Loss) from discontinued operations.........................        --       (0.02)      (19.44)
Gain on disposition of discontinued operations..............        --          --         1.77
Cumulative effect of accounting changes.....................        --        0.02        (1.15)
                                                               -------     -------     --------
(LOSS) EARNINGS PER BASIC SHARE.............................   $ (8.14)    $  2.37     $ (17.53)
                                                               =======     =======     ========
PER DILUTED SHARE:
(Loss) earnings from continuing operations..................   $ (8.14)    $  2.36     $   1.26
(Loss) from discontinued operations.........................        --       (0.02)      (18.95)
Gain on disposition of discontinued operations..............        --          --         1.73
Cumulative effect of accounting changes.....................        --        0.02        (1.12)
                                                               -------     -------     --------
(LOSS) EARNINGS PER BASIC SHARE.............................   $ (8.14)    $  2.36     $ (17.08)
                                                               =======     =======     ========
</Table>

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

                                        60
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
ASSETS
Cash and cash equivalents...................................  $  3,698    $  4,353
Accounts receivable, less allowances of $523 and $579.......     3,195       4,036
Deferred income taxes.......................................     1,111         715
Other current assets........................................     1,383         744
                                                              --------    --------
TOTAL CURRENT ASSETS........................................     9,387       9,848
Property, plant and equipment, net..........................    11,509      24,376
Goodwill....................................................     4,888       4,801
Other purchased intangible assets, net......................       375         499
Prepaid pension costs.......................................     3,991       3,861
Other assets................................................     2,654       4,603
                                                              --------    --------
TOTAL ASSETS................................................  $ 32,804    $ 47,988
                                                              ========    ========


LIABILITIES
Accounts payable and accrued expenses.......................  $  2,716    $  3,256
Compensation and benefit-related liabilities................     2,193       1,783
Debt maturing within one year...............................     1,886       1,343
Other current liabilities...................................     2,293       2,501
                                                              --------    --------
TOTAL CURRENT LIABILITIES...................................     9,088       8,883
Long-term debt..............................................     8,779      13,066
Long-term compensation and benefit-related liabilities......     3,322       3,528
Deferred income taxes.......................................     1,356       5,395
Other long-term liabilities and deferred credits............     3,240       3,160
                                                              --------    --------
TOTAL LIABILITIES...........................................    25,785      34,032
SHAREOWNERS' EQUITY
Common stock, $1 par value, authorized 2,500,000,000 shares;
  issued and outstanding 798,570,623 shares (net of
  171,983,367 treasury shares) at December 31, 2004 and
  791,911,022 shares (net of 172,179,303 treasury shares) at
  December 31, 2003.........................................       799         792
Additional paid-in capital..................................    27,170      27,722
Accumulated deficit.........................................   (21,180)    (14,707)
Accumulated other comprehensive income......................       230         149
                                                              --------    --------
TOTAL SHAREOWNERS' EQUITY...................................     7,019      13,956
                                                              --------    --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY...................  $ 32,804    $ 47,988
                                                              ========    ========
</Table>

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

                                        61
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

<Table>
<Caption>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2004        2003        2002
                                                              ---------   ---------   ---------
                                                                    (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
COMMON STOCK
  Balance at beginning of year..............................  $    792    $    783    $    708
  Shares issued, net:
     Under employee plans...................................         5           7           6
     For funding AT&T Canada obligation.....................        --          --          46
     Redemption of TCI Pacific preferred stock..............        --          --          10
     Other..................................................         2           2          13
                                                              --------    --------    --------
Balance at end of year......................................       799         792         783
                                                              --------    --------    --------
ADDITIONAL PAID-IN CAPITAL
  Balance at beginning of year..............................    27,722      28,163      54,798
  Shares issued, net:
     Under employee plans...................................       110         123         328
     For funding AT&T Canada obligation.....................        --          --       2,485
     Redemption of TCI Pacific preferred stock..............        --          --       2,087
     Other..................................................        29          36          31
  AT&T Broadband spin-off...................................        --          --     (31,032)
  Dividends declared........................................      (756)       (670)       (569)
  Other.....................................................        65          70          35
                                                              --------    --------    --------
Balance at end of year......................................    27,170      27,722      28,163
                                                              --------    --------    --------
ACCUMULATED DEFICIT
  Balance at beginning of year..............................   (14,707)    (16,566)     (3,484)
  Net (loss) income.........................................    (6,469)      1,865     (13,082)
  Treasury shares issued at less than cost..................        (4)         (6)         --
                                                              --------    --------    --------
Balance at end of year......................................   (21,180)    (14,707)    (16,566)
                                                              --------    --------    --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
  Balance at beginning of year..............................       149         (68)       (342)
  Other comprehensive income................................        81         217         266
  AT&T Broadband spin-off...................................        --          --           8
                                                              --------    --------    --------
Balance at end of year......................................       230         149         (68)
                                                              --------    --------    --------
TOTAL SHAREOWNERS' EQUITY...................................  $  7,019    $ 13,956    $ 12,312
                                                              ========    ========    ========
SUMMARY OF TOTAL COMPREHENSIVE (LOSS) INCOME:
  (Loss) income before cumulative effect of accounting
     changes................................................    (6,469)      1,850     (12,226)
  Cumulative effect of accounting changes...................        --          15        (856)
                                                              --------    --------    --------
  Net (loss) income.........................................    (6,469)      1,865     (13,082)
  Other comprehensive income [net of income taxes of $(51),
     $(134) and $(169)].....................................        81         217         266
                                                              --------    --------    --------
TOTAL COMPREHENSIVE (LOSS) INCOME...........................  $ (6,388)   $  2,082    $(12,816)
                                                              ========    ========    ========
</Table>

We account for treasury stock as retired stock. The amounts attributable to
treasury stock at December 31, 2004 and 2003, were $(17,011) million and
$(17,026) million, respectively.

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

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

                                        62
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                2004        2003         2002
                                                              ---------   ---------   ----------
                                                                    (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES
Net (loss) income...........................................   $(6,469)    $ 1,865     $(13,082)
Deduct:
  Loss from discontinued operations.........................        --         (13)     (14,513)
  Gain on disposition of discontinued operations............        --          --        1,324
  Cumulative effect of accounting changes -- net of income
     taxes..................................................        --          15         (856)
                                                               -------     -------     --------
(Loss) income from continuing operations....................    (6,469)      1,863          963
Adjustments to reconcile (loss) income from continuing
  operations to net cash provided by operating activities of
  continuing operations:
  Asset impairment and net restructuring and other
     charges................................................    12,448          93        1,418
  Net gains on sales of businesses and investments..........       (23)        (53)         (30)
  Loss on early extinguishment of debt......................       314          85           --
  Cost investment impairment charges........................        --           2          146
  Depreciation and amortization.............................     3,768       4,870        4,888
  Provision for uncollectible receivables...................       437         703        1,058
  Deferred income taxes.....................................    (4,500)      1,402        2,631
  Minority interest income..................................        (1)         (1)        (114)
  Net (earnings) losses related to equity investments.......        (9)        (19)         512
  Decrease in receivables...................................       431         600          707
  Decrease in accounts payable and accrued expenses.........      (380)       (494)        (175)
  Net change in other operating assets and liabilities......      (393)       (310)      (1,400)
  Other adjustments, net....................................      (111)       (211)        (121)
                                                               -------     -------     --------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
  OPERATIONS................................................     5,512       8,530       10,483
                                                               -------     -------     --------
INVESTING ACTIVITIES
Capital expenditures and other additions....................    (1,836)     (3,157)      (3,878)
Proceeds from sale or disposal of property, plant and
  equipment.................................................        95         163          468
Investment distributions and sales..........................        37         126           10
Investment contributions and purchases......................        --         (51)          (2)
Net dispositions (acquisitions) of businesses, net of cash
  disposed/acquired.........................................         8        (158)         (18)
Decrease in AT&T Canada obligation..........................        --          --       (3,449)
Proceeds from AT&T Broadband................................        --          --        5,849
Increase in restricted cash.................................       (47)        (57)        (442)
Other investing activities, net.............................        39          33           33
                                                               -------     -------     --------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
  OPERATIONS................................................    (1,704)     (3,101)      (1,429)
                                                               -------     -------     --------
FINANCING ACTIVITIES
Retirement of long-term debt, including redemption
  premiums..................................................    (3,914)     (8,002)      (1,091)
Proceeds from long-term debt issuances, net of issuance
  costs.....................................................        --          --           79
Decrease in short-term borrowings, net......................      (300)     (1,281)      (7,157)
Issuance of AT&T common shares..............................        79         118        2,684
Dividends paid on common stock..............................      (754)       (629)        (555)
Other financing activities, net.............................       426         704           (1)
                                                               -------     -------     --------
NET CASH USED IN FINANCING ACTIVITIES OF CONTINUING
  OPERATIONS................................................    (4,463)     (9,090)      (6,041)
                                                               -------     -------     --------
Net cash used in discontinued operations....................        --          --       (5,679)
Net (decrease) in cash and cash equivalents.................      (655)     (3,661)      (2,666)
Cash and cash equivalents at beginning of year..............     4,353       8,014       10,680
                                                               -------     -------     --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................   $ 3,698     $ 4,353     $  8,014
                                                               =======     =======     ========
</Table>

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

                                        63
<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  CONSOLIDATION

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

  FOREIGN CURRENCY TRANSLATION

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

  USE OF ESTIMATES

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

  REVENUE RECOGNITION

     We recognize long distance, local voice and data services revenue based
upon minutes of traffic processed or contracted fee schedules. In addition, we
record an estimated revenue reduction for adjustments to customer accounts at
the time revenue is recognized based on historical experience. Cash incentives
given to customers are recorded as a reduction of revenue. We recognize other
products and services revenue when title is passed and the products are accepted
by customers and when services are provided in accordance with contract terms.
When installation and set-up fees are billed, the revenue is deferred and
recognized over the associated service contract period. For contracts that
involve the bundling of services, revenue is allocated to the services based on
their relative fair value. We record the sale of equipment to customers as gross
revenue when the equipment will be used in conjunction with the provisioning of
our services and we are the primary obligor in the arrangement. For contracts
where we provide customers with an indefeasible right to use network capacity,
we recognize revenue ratably over the stated life of the agreement. For
agreements involving the resale of third party services in which we are not
considered the primary obligor of the arrangement, we record the revenue net of
the associated costs incurred.

  ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. We maintain an allowance for doubtful accounts for estimated
losses that result from the failure or inability of our customers to make
required payments. When determining the allowance, we consider the probability
of recoverability of

                                        64
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounts receivable based on past experience, taking into account current
collection trends that are expected to continue, as well as general economic
factors, including bankruptcy rates. From this, we develop an allowance based on
the percentage likelihood that an amount will not be collected. The proportion
of accounts receivable reserved for generally increases as the receivable ages
and accounts 180 days past due are typically fully reserved, with the exception
of government accounts, which are reserved for based on contract terms or
payment history. AT&T Business Services accounts receivable less than 180 days
past due may be fully reserved for when specific collection issues are known to
exist, such as pending bankruptcy. Accounts receivable are written off when we
feel it is probable the receivable will not be collected.

  ADVERTISING AND PROMOTIONAL COSTS

     We expense costs of advertising and promotions as incurred.

  INCOME TAXES

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

  CASH EQUIVALENTS

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

  PROPERTY, PLANT AND EQUIPMENT

     We state property, plant and equipment at cost.  Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized. Costs of additions and substantial improvements to
property, plant and equipment are capitalized. The costs of maintenance and
repairs of property, plant and equipment are charged to operating expense. The
estimated useful lives of our property, plant and equipment are as follows:

<Table>
<Caption>

<S>                                                            <C>
Communications, network and other equipment:
  Cable and conduit.........................................      4 - 16 years
  Central office equipment..................................       2 - 7 years
  Circuit switching and signaling equipment.................       2 - 8 years
  Other equipment...........................................       2 - 8 years

Buildings and improvements..................................      5 - 40 years
</Table>

     Depreciation is determined based upon the assets' estimated useful lives
using either the group or unit method. The group method is used for most
depreciable assets, including the majority of communications and network
equipment. The unit method is primarily used for large computer systems,
buildings and support assets. Under the group method, a specific asset group has
an average life. A depreciation rate is developed based on the average useful
life for the specific asset group. This method requires the periodic revision of

                                        65
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

depreciation rates. Under the unit method, assets are depreciated on a
straight-line basis over the estimated useful life of the individual asset. We
depreciate our leasehold improvements over the lesser of their economic useful
lives or the lease term. For purposes of determining the lease term, we include
the initial lease period and all contractually stated renewals that are within
our control where there is economic disincentive not to renew. We record rent
expense on a straight-line basis over the lease term, including all periods for
which rents are determinable. When we sell or retire assets depreciated using
the group method, the difference between the proceeds, if any, and the cost of
the asset is charged or credited to accumulated depreciation, without
recognition of a gain or loss. When we sell assets that were depreciated using
the unit method, we include the related gains or losses in other (expense)
income, net. The fair value of asset retirement obligations are recorded as
liabilities and accreted to their future value; the corresponding increases in
the carrying amounts of the related long-lived assets are depreciated over their
estimated useful lives.

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

  SOFTWARE CAPITALIZATION

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

  GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. Goodwill and indefinite-lived intangible assets are tested for
impairment at least annually. Impairment testing is performed at a reporting
unit level. An impairment charge is recognized if the carrying amount of the
goodwill or indefinite-lived intangible assets exceeds the fair value of the
assets. Fair values are established using discounted cash flows and comparable
market values. Intangible assets that have finite useful lives are amortized
over their useful lives, which range from five to 15 years.

  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

                                        66
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     We record changes in the fair value of fair value hedges, along with the
changes in the fair value of the hedged asset or liability that is attributable
to the hedged risk (including losses or gains on firm commitments), in other
(expense) income, net.

     We record changes in the fair value of cash flow hedges, along with the
changes in the fair value of the hedged asset or liability that is attributable
to the hedged risk, in other comprehensive income, net of income taxes, which is
a component of shareowners' equity, until earnings are affected by the
variability of cash flows of the hedged transaction.

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

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

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

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

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

     We discontinue hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item, (2) the derivative or hedged item expires
or is sold, terminated, or exercised, (3) it is determined that the forecasted
hedged transaction will no longer occur, (4) a hedged firm commitment no longer
meets the definition of a firm commitment, or (5) management determines that the
designation of the derivative as a hedge instrument is no longer appropriate.

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

  STOCK-BASED COMPENSATION

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

                                        67
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

been recognized for stock options, other than for certain occasions when we have
modified the terms of the stock option vesting schedule.

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2004        2003        2002
                                                          ---------   --------   ----------
                                                            (DOLLARS IN MILLIONS, EXCEPT
                                                                 PER SHARE AMOUNTS)
<S>                                                       <C>         <C>        <C>
Net (loss) income.......................................   $(6,469)    $1,865     $(13,082)
ADD:
  Stock-based employee compensation included in reported
     results from continuing operations, net of income
     taxes..............................................        85         75           55
  Stock-based employee compensation included in reported
     results from discontinued operations, net of income
     taxes..............................................        --         --           44
DEDUCT:
  Total stock-based compensation expense determined
     under the fair value method for all awards relating
     to continuing operations, net of income taxes......      (199)      (225)        (288)
  Total stock-based compensation expense determined
     under the fair value method for all awards relating
     to discontinued operations, net of income taxes....        --         --         (113)
                                                           -------     ------     --------
Pro forma net (loss) income.............................   $(6,583)    $1,715     $(13,384)
                                                           =======     ======     ========
Basic (loss) earnings per share.........................   $ (8.14)    $ 2.37     $ (17.53)
Pro forma basic (loss) earnings per share...............   $ (8.28)    $ 2.18     $ (17.93)
Diluted (loss) earnings per share.......................   $ (8.14)    $ 2.36     $ (17.08)
Pro forma diluted (loss) earnings per share.............   $ (8.28)    $ 2.17     $ (17.47)
</Table>

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

     Pro forma (loss) earnings from continuing operations was $(6,583) million,
$1,713 million and $730 million for 2004, 2003 and 2002, respectively, and from
discontinued operations was $(13) million and $(14,582) million for 2003 and
2002, respectively.

     Pro forma (loss) earnings per basic share from continuing operations was
$(8.28), $2.18 and $0.98 for 2004, 2003 and 2002, respectively, and from
discontinued operations was $(0.02) and $(19.53) for 2003 and 2002,
respectively.

     Pro forma (loss) earnings per diluted share from continuing operations was
$(8.28), $2.17 and $0.96 for 2004, 2003 and 2002, respectively, and from
discontinued operations was $(0.02) and $(19.04) for 2003 and 2002,
respectively.

     The pro forma effect on net loss from discontinued operations for 2002
includes expense of $28 million due to the accelerated vesting of AT&T stock
options held by AT&T Broadband employees at the date of spin-off.

                                        68
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  EMPLOYEE SEPARATIONS

     In accordance with SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," we establish obligations for expected termination benefits provided
to former or inactive employees after employment but before retirement. These
benefits include severance payments, medical coverage and other benefits.

  CONCENTRATIONS

     As of December 31, 2004, we do not have any significant concentration of
business transacted with a particular customer, supplier, lender or former
affiliate that could, if suddenly adversely impacted, severely impact our
operations. We also do not have a concentration of available sources of labor,
services or other rights that could, if suddenly eliminated, severely impact our
operations. We invest our cash with many high-quality credit institutions.

  RECLASSIFICATIONS

     We reclassified certain amounts for previous years to conform to the 2004
presentation.

2.  IMPACTS OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

  FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) STAFF POSITION (FSP) NO. 106-2,
  "ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION
  DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003"

     Effective July 1, 2004, we adopted FSP No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." FSP No. 106-2 provides guidance on accounting
for the effects of the new Medicare prescription drug legislation by employers
whose prescription drug benefits are actuarially equivalent to the drug benefit
under Medicare Part D. We have elected a prospective application of FSP No.
106-2, which required the remeasurement of our postretirement plan assets and
accumulated postretirement benefit obligation (APBO) as of July 1, 2004. On
January 21, 2005, the Department of Health and Human Services/Centers for
Medicare and Medicaid Services (CMS) released final regulations implementing
major provisions of the Act. We continue to review the regulations to determine
whether they will result in a significant reduction to our APBO and net periodic
postretirement benefit cost. See note 11 for more information relating to the
implementation of FSP No. 106-2.

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

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

                                        69
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

repaid the associated debt. The noncash impact of the adoption of this
interpretation on the balance sheet at December 31, 2003, included a $433
million increase in property, plant and equipment.

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

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

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

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

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

                                        70
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  SUPPLEMENTARY FINANCIAL INFORMATION

  SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                               2004    2003    2002
                                                              ------   -----   -----
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>      <C>     <C>
Included in selling, general and administrative expenses:
Research and development expenses...........................  $ 167    $277    $254
                                                              =====    ====    ====
Advertising and promotional expenses........................  $ 484    $621    $814
                                                              =====    ====    ====
Other (expense) income, net:
Loss on early extinguishment of debt........................  $(314)   $(85)   $ --
Aircraft leveraged lease write-downs........................    (46)    (65)   (244)
Investment-related income...................................    112     170     108
Legal settlements...........................................     44      16      26
Settlements associated with business dispositions...........     28      39     107
Net gains on sales of businesses and investments............     23      53      30
Cost investment impairment charges..........................     --      (2)   (146)
Miscellaneous, net..........................................      9      65      42
                                                              -----    ----    ----
Total other (expense) income, net...........................  $(144)   $191    $(77)
                                                              =====    ====    ====
</Table>

  SUPPLEMENTARY BALANCE SHEET INFORMATION

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Property, plant and equipment:
Cable and conduit...........................................   $ 3,157     $ 7,830
Central office equipment....................................     2,999      24,444
Circuit switching and signaling equipment...................     1,817      15,050
Other equipment.............................................       774       2,350
                                                               -------     -------
Total communications, network and other equipment...........     8,747      49,674
Buildings and improvements..................................     4,126       8,667
Land and improvements.......................................       224         335
                                                               -------     -------
Total property, plant and equipment.........................    13,097      58,676
Accumulated depreciation....................................     1,588      34,300
                                                               -------     -------
Property, plant and equipment, net..........................   $11,509     $24,376
                                                               =======     =======
</Table>

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004         2003
                                                              --------     --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Included in other current liabilities:
Income taxes payable........................................    $281         $472
                                                                ====         ====
</Table>

                                        71
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                             AT&T       AT&T
                                                           BUSINESS   CONSUMER
                                                           SERVICES   SERVICES   TOTAL
                                                           --------   --------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                        <C>        <C>        <C>
Goodwill:
Balance at January 1, 2003...............................   $4,556      $70      $4,626
Translation adjustment...................................      175       --         175
                                                            ------      ---      ------
Balance at December 31, 2003.............................   $4,731      $70      $4,801
Translation adjustment...................................       90       --          90
Other....................................................       (3)      --          (3)
                                                            ------      ---      ------
Balance at December 31, 2004.............................   $4,818      $70      $4,888
                                                            ======      ===      ======
</Table>

<Table>
<Caption>
                                                            GROSS
                                                           CARRYING   ACCUMULATED
                                                            AMOUNT    AMORTIZATION   NET
                                                           --------   ------------   ----
                                                               (DOLLARS IN MILLIONS)
<S>                                                        <C>        <C>            <C>
Amortizable other purchased intangible assets:
Customer lists and relationships.........................    $548         $162       $386
Other....................................................     271          158        113
                                                             ----         ----       ----
Balance at December 31, 2003.............................    $819         $320       $499
                                                             ====         ====       ====
Customer lists and relationships.........................    $528         $229       $299
Other....................................................     275          199         76
                                                             ----         ----       ----
Balance at December 31, 2004.............................    $803         $428       $375
                                                             ====         ====       ====
</Table>

     Amortization expense associated with purchased intangible assets for the
years ended December 31, 2004, 2003 and 2002, was $115 million, $71 million and
$83 million, respectively. Amortization expense for purchased intangible assets
is estimated to be approximately $110 million for each of the years ending
December 31, 2005 and 2006, and $80 million for each of the years ending
December 31, 2007 and 2008, at which time the purchased intangible assets will
be fully amortized.

     During 2004, we recorded a $15 million impairment charge relating to other
purchased intangible assets (customer lists and relationships) (see note 6).

  Restricted cash:

     Recorded within other current assets as of December 31, 2004, and other
assets as of December 31, 2003, was restricted cash of $546 million and $499
million, respectively, relating to private debt that matures in February 2005.

                                        72
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Leveraged leases:

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

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004         2003
                                                              --------     --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Rental receivables (net of nonrecourse debt)(1).............    $ 384        $ 456
Estimated unguaranteed residual values......................      294          359
Unearned income.............................................     (118)        (153)
Allowance for credit losses.................................      (30)         (22)
                                                                -----        -----
Investment in leveraged leases (primarily included in other
  assets)...................................................      530          640
Deferred taxes..............................................      804          877
                                                                -----        -----
Net investment..............................................    $(274)       $(237)
                                                                =====        =====
</Table>

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

(1) Rental receivables are net of nonrecourse debt of $1.2 billion and $1.3
    billion at December 31, 2004 and 2003, respectively.

  SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION

<Table>
<Caption>
                                                                                    ACCUMULATED
                                       NET FOREIGN   NET REVALUATION      NET          OTHER
                                        CURRENCY       OF CERTAIN       MINIMUM    COMPREHENSIVE
                                       TRANSLATION      FINANCIAL       PENSION       INCOME
                                       ADJUSTMENT      INSTRUMENTS     LIABILITY      (LOSS)
                                       -----------   ---------------   ---------   -------------
                                                         (DOLLARS IN MILLIONS)
<S>                                    <C>           <C>               <C>         <C>
Accumulated other comprehensive
  income (loss):
Balance at January 1, 2003...........     $(19)           $ 140          $(189)        $(68)
Change...............................      219             (115)           113          217
                                          ----            -----          -----         ----
Balance at December 31, 2003.........      200               25            (76)         149
Change...............................      119               (6)           (32)          81
                                          ----            -----          -----         ----
Balance at December 31, 2004.........     $319            $  19          $(108)        $230
                                          ====            =====          =====         ====
</Table>

                                        73
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                              2004    2003     2002
                                                              -----   -----   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Other comprehensive income (loss):
Net foreign currency translation adjustment [net of taxes of
  $(74), $(136) and $(82)]..................................  $119    $219    $ 132
Net revaluation of certain financial instruments:
  Unrealized gains (losses) [net of taxes of $(13), $(45)
     and $340]..............................................    20      72     (550)
  Recognition of previously unrealized (gains) losses [net
     of taxes of $16, $116 and $(539)](1)...................   (26)   (187)     869
Net minimum pension liability adjustment [net of taxes of
  $20, $(69) and $112]......................................   (32)    113     (185)
                                                              ----    ----    -----
Total other comprehensive income............................  $ 81    $217    $ 266
                                                              ====    ====    =====
</Table>

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

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

<Table>
<Caption>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                     ------------------------------------------------------------------
                                             2004                   2003                   2002
                                     --------------------   --------------------   --------------------
                                     PRETAX   AFTER TAXES   PRETAX   AFTER TAXES   PRETAX   AFTER TAXES
                                     ------   -----------   ------   -----------   ------   -----------
                                                           (DOLLARS IN MILLIONS)
<S>                                  <C>      <C>           <C>      <C>           <C>      <C>
Recognition of previously
  unrealized(gains) losses:
  Other income/expense, net:
     Sale of various securities....   $(13)      $ (8)      $(203)      $(125)     $   --      $ --
     Other financial instrument
       activity....................    (29)       (18)       (100)        (62)         28        17
     Other-than-temporary
       investment impairments......     --         --          --          --         148        91
  Income from discontinued
     operations:
     Other-than-temporary
       investment impairments......     --         --          --          --       1,232       761
                                      ----       ----       -----       -----      ------      ----
Total recognition of previously
  unrealized (gains) losses........   $(42)      $(26)      $(303)      $(187)     $1,408      $869
                                      ====       ====       =====       =====      ======      ====
</Table>

  SUPPLEMENTARY CASH FLOWS INFORMATION

<Table>
<Caption>
                                                                FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                              2004    2003      2002
                                                              ----   -------   ------
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>    <C>       <C>
Interest payments, net of capitalized interest of $20, $35
  and $61...................................................  $818   $ 1,258   $1,532
Income tax payments (receipts)..............................  $ 25   $(1,201)  $ (814)
</Table>

                                        74
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4.  DISCONTINUED OPERATIONS

 SUMMARY

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

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                               2003        2002
                                                              -------   -----------
                                                              (DOLLARS IN MILIONS)
<S>                                                           <C>       <C>
NCR Corp. environmental matter, net of income taxes of $0...   $(13)     $     --
AT&T Broadband, net of income tax benefit of $6,002.........     --       (14,480)
Lucent Technologies Inc. litigation matter, net of income
  tax benefit of $12........................................     --           (33)
                                                               ----      --------
Net (loss) from discontinued operations, net of income
  taxes.....................................................   $(13)     $(14,513)
                                                               ====      ========
</Table>

  NCR CORP.

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

  AT&T BROADBAND

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

     In connection with the non-pro rata spin-off of AT&T Broadband, we wrote up
the net assets of AT&T Broadband to fair value. This resulted in a noncash gain
on disposition of $1.3 billion, which represented the difference between the
fair value of the AT&T Broadband business at the date of the spin-off and our
book

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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

value of AT&T Broadband, net of certain charges triggered by the spin-off and
their related income tax effects. These charges included compensation expense
due to accelerated vesting of stock options, as well as the enhancement of
certain incentive plans.

     AT&T Broadband was accounted for as a discontinued operation pursuant to
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
As such, the revenue, expenses and cash flows of AT&T Broadband are excluded
from the respective captions in the consolidated statements of operations and
consolidated statements of cash flows, and are reported through the date of
separation as a component of net (loss) from discontinued operations and as net
cash (used in) discontinued operations.

     Revenue for AT&T's Broadband business was $8.9 billion for 2002. Net (loss)
from discontinued operations before income taxes for 2002 was $(20.5) billion,
which included pretax impairment charges of $16.5 billion ($11.8 billion after
taxes) relating to goodwill and franchise costs.

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

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

  LUCENT TECHNOLOGIES INC.

     Net (loss) from discontinued operations for 2002 included an estimated loss
on a litigation settlement associated with the business of Lucent Technologies
Inc. (Lucent), which was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and
Lucent et al., was a class action lawsuit filed in 1996 in Illinois state court.
The complaint sought damages on behalf of present and former customers based on
a claim that the AT&T Consumer Products business (which became part of Lucent in
1996) and Lucent had defrauded and misled customers who leased telephones,
resulting in payments in excess of the cost to purchase the telephones. On
August 9, 2002, a settlement proposal was submitted to and accepted by the
court. We believe that AT&T and Lucent have complied with all of the terms and
conditions of the settlement agreement and court order. In accordance with the
separation and distribution agreement between AT&T and Lucent, our estimated
proportionate share of the settlement and legal costs recorded in 2002 totaled
$33 million after taxes ($45 million pretax).

5.  EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE

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

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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to be issued and the shares assumed to be purchased), to the extent they would
have been dilutive, are included in the denominator of the diluted EPS
calculation.

     A reconciliation of the share components for basic to diluted EPS
calculations is as follows:

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                          2004(1)(2)    2003(1)    2002(1)
                                                          -----------   --------   --------
                                                                (SHARES IN MILLIONS)
<S>                                                       <C>           <C>        <C>
Weighted-average common shares..........................      795         788        746
Effect of dilutive securities:
  Stock options and restricted stock units..............       --           1          1
  Preferred stock of subsidiary.........................       --          --          3
  Convertible quarterly income preferred securities.....       --          --         16
                                                              ---         ---        ---
Weighted-average common shares and potential common
  shares................................................      795         789        766
                                                              ===         ===        ===
</Table>

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

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

(2) As we reported a loss in 2004, the effects of including incremental shares
    are antidilutive; therefore, both basic and diluted         EPS reflect the
    same calculation. At December 31, 2004, potentially dilutive securities
    included stock options and restricted stock units.

  Preferred Stock of Subsidiary

     Pursuant to the AT&T Broadband and Comcast merger agreement (see note 4),
we were required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock (TCI Pacific preferred
stock) for AT&T common stock. All outstanding shares of TCI Pacific preferred
stock were either exchanged or redeemed for AT&T common stock by the end of 2002
(see note 10). Dividends were included in net (loss) from discontinued
operations for 2002.

  Convertible Quarterly Income Preferred Securities

     On June 16, 1999, AT&T Finance Trust I, a wholly owned subsidiary of AT&T,
completed the private sale of 100 million shares of 5.0% cumulative quarterly
income preferred securities (quarterly preferred securities) to Microsoft Corp.
(Microsoft). Such securities were convertible into AT&T common stock. However,
in connection with the AT&T Broadband spin-off (see note 4), Comcast assumed the
quarterly preferred securities and Microsoft agreed to convert these preferred
securities into shares of Comcast common stock. Dividends were included in net
(loss) from discontinued operations for 2002.

6.  ASSET IMPAIRMENT AND NET RESTRUCTURING AND OTHER CHARGES

     Asset impairment and net restructuring and other charges of $12,772 million
for 2004 were comprised of $11,515 million of asset impairment charges and
$1,257 million of net business restructuring and other obligations. Charges in
the amount of $12,011 million were recorded in AT&T Business Services, $189
million in AT&T Consumer Services and $572 million in the Corporate and Other
group.

     The asset impairment charges of $11,515 million primarily reflect third
quarter asset impairments of $11,389 million as a result of an evaluation of our
long-lived assets, including property, plant and equipment and internal-use
software (the asset group). In addition, we recorded real estate impairment
charges of $122 million related to the decision made during the first quarter of
2004 to divest five owned properties in an effort to further reduce costs and
consolidate our real estate portfolio. The impairment charge was recorded to
reduce the book value of the five properties to fair market value based on third
party assessments (including

                                        77
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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

broker appraisals) and was reflected in the Corporate and Other group. The sales
of these properties have been completed.

     The third quarter evaluation resulted from the July 2004 announcement of a
strategic change in our business focus away from traditional consumer services
and towards business markets and emerging technologies. We performed the
evaluation of the asset group as of July 1, 2004, as this strategic change
created a "triggering event" necessitating such a review. In assessing
impairments for long-lived assets, we follow the provisions of SFAS No. 144. We
operate an integrated telecommunications network; therefore, we performed our
testing of the asset group at the reporting unit level, as this is the lowest
level for which identifiable cash flows are available.

     In performing the test, we determined that the total of the expected future
undiscounted cash flows directly related to the existing service potential of
the asset group was less than the carrying value of the asset group; therefore,
an impairment charge was required. The impairment charges of $11,389 million
represented the difference between the fair value of the asset group and its
carrying value and are included within asset impairment and net restructuring
and other charges in the consolidated statements of operations. The impairment
charges resulted from sustained pricing pressure and the evolution of services
toward newer technologies in the business market as well as changes in the
regulatory environment, which led to a shift away from traditional consumer
services.

     AT&T Business Services recorded impairment charges of $11,330 million
resulting in reductions to property, plant and equipment of $11,023 million,
internal-use software of $287 million, other purchased intangibles of $15
million and other long-lived assets of $5 million. AT&T Consumer Services
recorded impairment charges of $59 million resulting in reductions to property,
plant and equipment of $11 million and internal-use software of $48 million. As
a result of the asset impairments, a new cost basis was established for those
assets that were impaired. The new cost basis resulted in a reduction of gross
property, plant and equipment and internal-use software and the write-off of
accumulated depreciation and accumulated amortization.

     We calculated the fair value of our asset group using discounted cash
flows. The discounted cash flows calculation was made utilizing various
assumptions and estimates regarding future revenue, expenses and cash flows
projections through 2012. The time horizon was determined based on the estimated
remaining useful life of the primary assets in the asset group; the primary
assets are those from which the most significant cash flows are generated,
principally consisting of the transport central office equipment. Pursuant to
SFAS No. 144, the forecasts were developed without contemplation of investments
in new products. The 10% discount rate utilized was determined using a weighted
average cost of capital (debt and equity) and was more heavily weighted towards
debt given that the asset group, which primarily consists of tangible assets,
can be financed with a larger proportion of debt. When allocating the impairment
to the asset categories, market values were utilized, to the extent
determinable, to ensure that no asset category was impaired below its fair
value.

     The strategic change in business focus also created a "triggering event"
for a review of our goodwill. We follow the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" for determining impairments. SFAS No. 142
indicates that if other types of assets (in addition to goodwill) of a reporting
unit are being tested for impairment at the same time as goodwill, then those
assets are to be tested for impairment prior to performing the goodwill
impairment testing. Accordingly, the impairment charges noted above reduced the
carrying value of the reporting units when performing the impairment test for
goodwill.

     The goodwill impairment test required us to estimate the fair value of our
overall business enterprise at the reporting unit level. Our reporting units are
AT&T Business Services and AT&T Consumer Services. We estimated fair value using
both a discounted cash flows model, as well as an approach using market
comparables, both of which are weighted equally to determine fair value. Under
the discounted cash flows

                                        78
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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

method, we utilized estimated long-term revenue and cash flow forecasts, as well
as assumptions of terminal value, together with an applicable discount rate, to
determine fair value. Under the market approach, fair value was determined by
comparing our reporting units to similar businesses (or guideline companies). We
then compared the carrying value of our reporting units to their fair value.
Since the fair value of our reporting units exceeded their carrying amounts, no
goodwill impairment charge was recorded.

     The net restructuring and other obligations of $1,257 million for 2004 were
primarily comprised of $1,152 million of net employee separations (of which $339
million related to benefit plan curtailment costs) and $110 million of facility
closing obligations. The exit plans will impact approximately 12,600 employees
(the majority of which will be involuntary) across the company. These activities
resulted from the continued integration and automation of various functions
within network operations, reorganizations throughout our non-U.S. operations,
and our strategic change in focus away from traditional consumer services and
towards business markets and emerging technologies. Approximately 60% of the
employees impacted by these exit plans are managers. About 60% of the affected
employees had left their positions as of December 31, 2004. We anticipate that
the remaining employees will exit our business by the end of 2005. The facility
closing reserves were primarily associated with the consolidation of our real
estate portfolio and reflect the present value of contractual lease obligations,
net of estimated sublease income, associated with vacant facilities resulting
from workforce reductions and network equipment space that will not be used.

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

<Table>
<Caption>
                                                               TYPE OF COST
                                              -----------------------------------------------
                                               EMPLOYEE
                                              SEPARATIONS   FACILITY CLOSINGS   OTHER   TOTAL
                                              -----------   -----------------   -----   -----
                                                           (DOLLARS IN MILLIONS)
<S>                                           <C>           <C>                 <C>     <C>
Balance at January 1, 2002..................     $ 486            $304          $ 19    $ 809
  Additions.................................       306              78            --      384
  Deductions................................      (413)            (99)          (16)    (528)
                                                 -----            ----          ----    -----
Balance at December 31, 2002................       379             283             3      665
  Additions.................................       208              --            --      208
  Deductions................................      (431)            (78)           (1)    (510)
                                                 -----            ----          ----    -----
Balance at December 31, 2003................       156             205             2      363
  Additions.................................       813             110            --      923
  Deductions................................      (463)            (87)           --     (550)
                                                 -----            ----          ----    -----
Balance at December 31, 2004................     $ 506            $228          $  2    $ 736
                                                 =====            ====          ====    =====
</Table>

     Additions for 2002 in the table above include $39 million facility closing
reserves recorded by Concert in 2001 and transferred to AT&T as part of the
unwind of that joint venture.

     Deductions in 2004, 2003 and 2002, primarily reflect total cash payments of
$511 million, $455 million and $410 million, respectively. These cash payments
include cash termination benefits of $447 million, $377 million and $328 million
in 2004, 2003 and 2002, respectively, all of which were primarily funded through
cash from operations. Deductions in 2004 also included a $26 million non-cash
utilization of facility closing reserves, reflecting the assignment of certain
lease obligations associated with vacated facilities to third parties.
Deductions in 2003 and 2002 included reversals of excess vintage reserves of $17
million and $109 million in 2003 and 2002, respectively. Additionally, in 2004,
2003 and 2002 there were reserve transfers of $13 million, $38 million and $9
million, respectively, out of the restructuring liability into other liability
and equity accounts primarily related to life insurance premiums, deferred
severance payments and accelerated vesting of equity awards.

                                        79
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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 2003, net restructuring and other charges of $201 million primarily
consisted of separation costs associated with our management realignment efforts
(which included approximately $9 million of pension curtailment losses). The
separations were involuntary and impacted approximately 2,000 managers. These
activities were partially offset by the net reversal of $17 million of excess
vintage employee separation liabilities.

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

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

     The impairment charge of $204 million recorded in 2002 relating to certain
DSL assets (including internal-use software, licenses and property, plant and
equipment) that would not be utilized as a result of changes to our "DSL build"
strategy. Instead of building DSL capabilities in all geographic areas initially
targeted, we signed an agreement with Covad Communications to offer DSL services
over its network. As a result, the assets in these areas were impaired. This
charge was recorded within our AT&T Consumer Services segment.

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

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

7.  INVESTMENTS

 EQUITY METHOD INVESTMENTS

     We have investments in various companies and partnerships that are
accounted for under the equity method of accounting and included within other
assets. Under the equity method, investments are stated at initial cost, and are
adjusted for subsequent contributions and our share of earnings, losses and
distributions, as well as declines in value that are "other than temporary." At
December 31, 2004 and 2003, we had equity investments included within other
assets of $101 million and $128 million, respectively. Distributions from equity
investments totaled $9 million, $14 million and $5 million for the years ended
December 31, 2004, 2003

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<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and 2002, respectively. In 2004, 2003 and 2002, equity investments were not
significant to our financial results either individually or on a combined basis.

  Concert

     On April 1, 2002, Concert, our 50% owned joint venture with British
Telecommunications plc (BT), was officially unwound and the venture's assets and
customer accounts were distributed back to the parent companies, as agreed to in
2001. Under the partnership termination agreement, each of the partners
generally reclaimed the customer contracts and assets that were initially
contributed to the joint venture, including international transport facilities
and gateway assets. In addition, we assumed certain other assets that BT
originally contributed to the joint venture. Certain items reserved for in
connection with the dissolution of Concert were favorably settled, resulting in
after-tax reversals of $14 million, $59 million and $60 million in 2004, 2003
and 2002, respectively, which were recorded within net earnings (losses) related
to equity investments.

  AT&T Canada

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

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

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

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

     We own a 49% economic interest in Alestra S. de R.L. de C.V. (Alestra), a
telecommunications company in Mexico. During 2001, we stopped recording equity
losses in Alestra due to the fact that our investment in Alestra was written
down to zero and we had no commitment to fund Alestra or to provide any other
financial support. During 2002, Alestra experienced financial difficulties and
sought to restructure its existing indebtedness to reduce the outstanding
aggregate amount of the notes, to lower interest payments and extend the
maturity on the notes. In 2003, Alestra completed the debt restructuring and
AT&T and the other shareholders agreed to provide additional funding to Alestra.
As a result, we funded $49 million to Alestra. In accordance with Emerging
Issues Task Force issue 02-18, "Accounting for Subsequent Investments in an
Investee after Suspension of Equity Method Loss Recognition," we recognized
suspended losses in Alestra of $29 million during 2003 and equity earnings of $4
million during 2004.

  Impairments -- Equity Investments

     Declines in value of equity method investments judged to be other than
temporary are recorded in net earnings (losses) related to equity investments.
In 2002, we recorded impairment charges on equity method

                                        81
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investments of $0.3 billion after taxes ($0.5 billion pretax), which primarily
related to AT&T Canada as discussed above. There were no material impairment
charges recorded on equity method investments in 2004 or 2003.

  COST METHOD INVESTMENTS

     At December 31, 2004 and 2003, we had cost method investments included in
other assets of $25 million and $57 million, respectively. Under the cost
method, earnings are recognized only to the extent distributions are received
from the accumulated earnings of the investee. Distributions received in excess
of accumulated earnings are recognized as a reduction of our investment balance.
Cost investments are classified as available-for-sale and are reported at fair
value, with unrealized gains and losses, net of income taxes, recorded as a
separate component of other comprehensive income in shareowners' equity. As of
December 31, 2004, unrealized holding losses were $1 million, which related to
investments in an unrealized loss position for less than twelve months. There
were no unrealized holding losses recorded as of December 31, 2003.

  Impairments -- Cost Method Investments

     Declines in value of available-for-sale securities, judged to be
other-than-temporary, are recorded in other (expense) income, net. During 2002,
we believed that we would not recover our cost basis on certain investments in
the foreseeable future given the significant decline in stock prices, the length
of time these investments had been below market, and industry specific issues.
Accordingly, we believed the declines in value were other-than-temporary and, as
a result, recorded investment impairment charges on such securities of $0.1
billion after taxes ($0.1 billion pretax) in 2002. The impairment charges
primarily related to Time Warner Telecom, resulting from significant changes in
the general business climate, as evidenced by the severe downward movement in
the U.S. stock market, including the decline in the value of publicly-traded
industry stocks. Our investment in Time Warner Telecom was subsequently sold in
2003. In addition, during 2002, we recorded a pretax impairment charge of $0.6
billion related to our holdings in AT&T Wireless, which was monetized by debt
indexed to the value of the AT&T Wireless shares. The debt contained an embedded
derivative that was designated as a cash flow hedge. At the time, we recognized
the other-than-temporary decline in the value of AT&T Wireless as an expense,
and, as permitted by SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," we also recognized, in earnings, the previously
unrecognized gain on the embedded derivative of $0.6 billion pretax, resulting
in no net income impact. There were no material impairment charges recorded on
cost method investments in 2004 or 2003.

  AT&T Wireless Group

     In February 2003, we redeemed exchangeable notes that were indexed to AT&T
Wireless common shares that were retained at the time of the split-off of AT&T
Wireless in 2001. The notes were settled with 78.6 million shares of AT&T
Wireless common stock and $152 million in cash. Also in February 2003, we sold
our remaining investment in AT&T Wireless (approximately 12.2 million shares)
for $72 million, resulting in a gain of $22 million recorded in other (expense)
income, net.

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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  DEBT OBLIGATIONS

  DEBT MATURING WITHIN ONE YEAR

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                2004         2003
                                                              ---------    ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Commercial paper............................................   $   --       $  753
Securitizations.............................................      250          150
Bank borrowings(1)..........................................      340            4
Currently maturing long-term debt...........................    1,296          436
                                                               ------       ------
Total debt maturing within one year.........................   $1,886       $1,343
                                                               ======       ======
Weighted-average interest rate of short-term debt(2)........      1.5%         1.3%
</Table>

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

(1) Primarily represents borrowings, the availability of which is contingent on
    the level of cash held by some of our foreign subsidiaries.

(2) Excludes currently maturing long-term debt.

  SECURITIZATIONS

     During 2004, we renewed our AT&T Business Services and AT&T Consumer
Services 364-day customer accounts receivable securitization facilities, both of
which extend through July 2005. Under the programs, accounts receivable are sold
on a discounted, revolving basis, to special-purpose, wholly-owned and fully
consolidated subsidiaries of AT&T, which assign interests in such receivables to
unrelated third-party financing entities. Together, the programs provided up to
$1.35 billion of available financing at December 31, 2004, limited by the
eligible receivables balance, which varies from month to month. The facilities
require us to meet a debt-to-EBITDA (defined as operating income plus
depreciation and amortization excluding any asset impairment or net
restructuring and other charges) ratio not exceeding 2.25 to 1 (calculated
pursuant to the agreements) and an EBITDA-to-net interest expense ratio of at
least 3.50 to 1 (calculated pursuant to the agreements) for four consecutive
quarters ending on the last day of each fiscal quarter. At December 31, 2004, we
were in compliance with these covenants. At December 31, 2004, the available
financing was collateralized by $2.2 billion of accounts receivable.

  CREDIT FACILITY

     At December 31, 2004, we had a $1.0 billion syndicated 364-day credit
facility available to us that was entered into on October 6, 2004. No borrowings
are currently outstanding under the facility. Up to $500 million of the facility
can be utilized for letters of credit, which reduces the amount available. At
December 31, 2004, approximately $242 million of letters of credit were
outstanding under the facility. Additionally, the credit facility contains
financial covenants that requires us to meet a total debt-to-EBITDA ratio not
exceeding 2.25 to 1 (calculated pursuant to the credit facility) and an
EBITDA-to-net interest expense ratio of at least 3.50 to 1 (calculated pursuant
to the credit facility) for four consecutive quarters ending on the last day of
each fiscal quarter. At December 31, 2004, we were in compliance with these
covenants.

                                        83
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  LONG-TERM DEBT

<Table>
<Caption>
                                                                             AT DECEMBER 31,
                                                                          ---------------------
                                                                           2004(1)     2003(1)
                                                                          ---------   ---------
                                                                          (DOLLARS IN MILLIONS)
DEBENTURES AND NOTES
INTEREST RATES(2)                           MATURITIES
-----------------                           ----------
<S>                        <C>                                            <C>         <C>
6.00% -- 6.50%             2009 -- 2029................................     $1,297     $ 1,439
6.75% -- 8.25%             2005 -- 2025................................      1,907       8,017
8.35% -- 10.00%            2011 -- 2031................................      5,720       2,994
Variable rate              2005 -- 2054................................      1,064         980
                                                                            ------     -------
Total debentures and notes.............................................      9,988      13,430
Other(3)...............................................................        106          97
Unamortized discount, net..............................................        (19)        (25)
                                                                            ------     -------
Total long-term debt...................................................     10,075      13,502
Less: currently maturing long-term debt................................      1,296         436
                                                                            ------     -------
Net long-term debt.....................................................     $8,779     $13,066
                                                                            ======     =======
</Table>

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

(1) Debt amounts are included within the range of interest rates that are
    applied at each respective balance sheet date. Due to the 2004 interest rate
    step-up, $2,750 million of our long-term notes maturing in 2011 carried an
    interest rate of 9.05% at December 31, 2004, and 8.05% at December 31, 2003,
    and were included within different interest rate categories in the above
    table for the years presented. See below for a discussion of interest rate
    changes that occurred during 2004.

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

(3) Includes capital lease obligations of $105 million and $96 million as of
    December 31, 2004 and 2003, respectively.

     The following table shows maturities at December 31, 2004, of the $10.1
billion in total long-term obligations:

<Table>
<Caption>
 2005    2006    2007   2008   2009   LATER YEARS
------  ------   ----   ----   ----   -----------
              (DOLLARS IN MILLIONS)
<S>     <C>      <C>    <C>    <C>    <C>
$1,296.. $1,470  $213    $7    $890     $6,199
</Table>

     In 2004, we completed the early retirement of $1,565 million of our
outstanding U.S. dollar denominated long-term debt, which was primarily
comprised of $1,250 million 6.5% Notes maturing in November 2006, $1,215 million
of which carried an interest rate of 7.25% at the time of retirement and $35
million of which carried an interest rate of 8.25% at the time of retirement.
The early retirements also included $141 million of 6.0% Notes maturing in March
2009, $87 million of 7.75% Notes maturing in March 2007, $84 million of 7.5%
Notes maturing in June 2006 and $3 million of 7.0% Notes maturing in May 2005.
The notes were repurchased with cash and resulted in a loss of $179 million
recorded in other (expense) income, net.

     Also in 2004, we completed the early retirement of $1,128 million of
outstanding 6.0% Euro Notes due November 2006, of which $928 million carried an
interest rate of 6.75% at the time of retirement and $200 million carried an
interest rate of 7.75% at the time of retirement. The notes were repurchased
with cash and resulted in a net loss of $135 million recorded in other (expense)
income, net. The carrying value of these notes was $1,577 million, including
$449 million in associated foreign currency mark-to-market adjustments, which
were hedged.

     During the third quarter of 2004, our long-term and short-term credit
ratings were lowered by Standard & Poor's (S&P), Moody's Investors Service
(Moody's) and Fitch Ratings. The rating actions by S&P and Moody's triggered a
100 basis point interest rate step-up on approximately $6.4 billion in original
face value of

                                        84
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

debt outstanding as of December 31, 2004, with a current carrying value of $6.7
billion. This step-up is effective for interest payment periods that began in
November 2004, resulting in an expected increase in interest expense of
approximately $67 million in 2005.

9.  FINANCIAL INSTRUMENTS

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

     By their nature, all such instruments involve exposure to credit risk and
market risk. Credit risk is the risk of nonperformance by counter-parties under
the terms of the contract. We control our exposure to credit risk through credit
approvals, credit limits and monitoring procedures. Our maximum potential loss
may exceed the amount recognized in our balance sheet. However, at December 31,
2004 and 2003, in management's opinion, there was no significant risk of loss in
the event of nonperformance of the counter-parties to these financial
instruments. Market risk is the risk that the value of the instrument may be
adversely affected by changes in interest rates, currency exchange rates or
equity prices. We continually manage this risk through monitoring procedures,
which limit the type and amount of exposure to these risks. At December 31,
2004, we did not have any significant exposure to any individual customer or
counter-party, nor do we have any major concentration of credit risk related to
any financial instruments.

  LETTERS OF CREDIT

     Letters of credit are guarantees we purchase, which ensure our performance
or payment to third parties in accordance with specified terms and conditions.
Management has determined that our letters of credit do not create additional
risk to us.

     The notional amounts outstanding at December 31, 2004 and 2003, were $1.2
billion and $1.1 billion, respectively. The letters of credit in effect at
December 31, 2004, which related to certain private debt maturing on February
28, 2005, were collateralized by restricted cash of $546 million, recorded
within other current assets. The letters of credit in effect as of December 31,
2003, were collateralized by restricted cash of $499 million, recorded within
other assets. The fair values of the letters of credit, based on the fees paid
to obtain the obligations, were $10 million and $9 million as of December 31,
2004 and 2003, respectively.

  GUARANTEES

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

     Total notional amount of guaranteed debt at December 31, 2004 and 2003, was
$6 million, which relates to NCR and has expiration dates ranging from 2010 to
2020. Should the financial condition of NCR deteriorate to the point at which it
is unable to meet its obligations, third party creditors could look to us for
payment. We currently hold no collateral for this guarantee, and have not
recorded a corresponding obligation. At December 31, 2004 and 2003, there were
no quoted market prices for similar agreements.

     The total notional amount of other guaranteed obligations at December 31,
2004 and 2003, was $34 million and $224 million, respectively. Prior to the
spin-off of AT&T Broadband, we guaranteed various obligations of AT&T Broadband.
In connection with the spin-off of AT&T Broadband, we continue to provide

                                        85
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

guarantees of these obligations, including operating leases for real estate,
surety bonds, and equity hedges. These guarantees have expiration dates ranging
from 2005 through 2007. Comcast has provided full indemnification for these
guarantees as of December 31, 2004. Should the financial condition of Comcast
deteriorate to the point at which it is unable to meet its obligations, third
party creditors could look to us for payment. We currently hold no collateral
for these guarantees, and have not recorded corresponding obligations. At
December 31, 2004, there were no quoted market prices for similar agreements.

     We provided a guarantee of an obligation that AT&T Wireless Services, Inc.
(AT&T Wireless) had to NTT DoCoMo that expired on June 30, 2004, in accordance
with the terms of the original agreement. Under this guarantee, we would have
been secondarily liable for up to $3.65 billion, plus accrued interest, in the
event AT&T Wireless was unable to satisfy its entire obligation to NTT DoCoMo.

  INTEREST RATE SWAP AGREEMENTS

     We enter into interest rate swaps to manage our exposure to changes in
interest rates. We enter into swap agreements to manage the fixed/floating mix
of our debt portfolio in order to reduce aggregate risk of interest rate
movements. Interest rate swaps allow us to raise funds at floating rates and
effectively swap them into fixed rates that are generally lower than those
available to us if fixed rate borrowings were made directly, or to swap
fixed-rate borrowings to floating rates to take advantage of lower interest
rates. These agreements involve the exchange of floating-rate for fixed-rate
payments or the exchange of fixed-rate for floating-rate payments without the
exchange of the underlying notional amount. Floating-rate payments and receipts
are primarily tied to the LIBOR (London Inter-Bank Offered Rate). Our
fixed-to-floating interest rate swaps were designated as fair value hedges in
accordance with SFAS No. 133, as amended. The floating-rate to fixed-rate swaps
were designated as cash flow hedges. There was no ineffectiveness recognized in
earnings for our fair value or cash flow hedges during 2004 and 2003.

     The following table indicates the types of swaps in use at December 31,
2004 and 2003, the respective notional amounts and their weighted-average
interest rates. Average floating rates are those in effect at the reporting
date, and may change significantly over the lives of the contracts.

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                               2004          2003
                                                              -------      ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Fixed-rate to floating-rate swaps -- notional amount........   $750         $1,000
  Weighted-average receipt rate.............................   4.83%          4.23%
  Weighted-average pay rate.................................   4.03%          2.67%
Floating-rate to fixed-rate swaps -- notional amount........   $108         $  190
  Weighted-average receipt rate.............................   2.39%          1.38%
  Weighted-average pay rate.................................   8.26%          7.30%
</Table>

     In connection with the early retirement of $1.2 billion of long-term notes
in the first quarter of 2004 (see note 8), we unwound $250 million notional
amount of fixed-to-floating interest rate swaps, designated as fair value
hedges. In addition, a floating-rate to fixed-rate swap with a notional amount
of $82 million matured during the third quarter of 2004. As a result of our
credit ratings downgrade in the third quarter of 2004, we were required to pay
$17 million to two of our swap counterparties, representing the current
mark-to-market on the related fixed-rate to floating-rate interest rate swaps.

     We also have combined interest rate foreign currency swap agreements for
Euro- and Swiss Franc-denominated debt, which hedge our risk to both interest
rate and currency movements. At December 31, 2004 and 2003, the notional amounts
related to these contracts were $1.4 billion and $2.5 billion, respectively,
$0.6 billion and $1.8 billion of which were designated as cash flow hedges for
accounting purposes in 2004 and 2003, respectively. There was no ineffectiveness
recognized in earnings for these hedges during 2004 and 2003.

                                        86
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The remaining combined interest rate foreign currency swap agreements were not
designated for accounting purposes. The decrease in the total notional amount
primarily related to $1.1 billion notional amount of contracts unwound during
2004 in connection with the early retirement of long-term Euro notes (see note
8). As a result of this unwind, we recognized $16 million of unrealized gains as
part of the net gain (loss) on the early extinguishment of debt within other
(expense) income, net. In addition, we returned $136 million of cash collateral
that we held at December 31, 2003, in connection with the unwind of these
combined interest rate swap agreements. As of December 31, 2004, we had received
$193 million of cash collateral (included in cash).

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

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                 -------------------------------------------
                                                         2004                   2003
                                                         ----                   ----
                                                 CARRYING/FAIR VALUE    CARRYING/FAIR VALUE
                                                 --------------------   --------------------
                                                 ASSET      LIABILITY   ASSET      LIABILITY
                                                 -----      ---------   ------     ---------
                                                            (DOLLARS IN MILLIONS)
<S>                                              <C>        <C>         <C>        <C>
Interest rate swap agreements..................  $ --          $23      $   --        $41
Combined interest rate foreign currency swap
  agreements...................................  $681          $--      $1,002        $--
</Table>

  FOREIGN EXCHANGE

     We enter into foreign currency forward contracts to manage our exposure to
changes in currency exchange rates related to foreign-currency-denominated
transactions. At December 31, 2004 and 2003, our foreign exchange contracts
consisted principally of Euros, British pound sterling, and Danish krone. The
notional amounts under contract at December 31, 2004 and 2003, were $0.6 billion
and $1.1 billion, respectively, $23 million and $45 million of which were
designated as cash flow hedges, respectively. The remaining hedges were not
designated for accounting purposes. The decrease in the notional amount was
primarily attributable to a decrease in our forward contract portfolio due to
contract expirations. There was no ineffectiveness recognized in earnings for
these hedges during 2004 and 2003. The following table summarizes the carrying
and fair values of the foreign exchange contracts at December 31, 2004 and 2003.
These foreign exchange contracts are valued using current market quotes, which
were obtained from independent sources.

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                 -------------------------------------------
                                                         2004                   2003
                                                         ----                   ----
                                                 CARRYING/FAIR VALUE    CARRYING/FAIR VALUE
                                                 --------------------   --------------------
                                                 ASSET      LIABILITY   ASSET      LIABILITY
                                                 -----      ---------   ------     ---------
                                                            (DOLLARS IN MILLIONS)
<S>                                              <C>        <C>         <C>        <C>
Foreign exchange contracts.....................  $ 44          $ 6      $   87        $14
</Table>

  EQUITY OPTION AND EQUITY SWAP CONTRACTS

     We enter into equity option and equity swap contracts, which are not
designated for accounting purposes, to manage our exposure to changes in equity
prices associated with various equity awards of previously affiliated companies
(see note 12). The notional amounts outstanding on these contracts at December
31, 2004 and 2003, were $29 million and $91 million, respectively. The decrease
in the notional amount was primarily related to swaps on 1.8 million Comcast
shares, which expired during 2004. The following table

                                        87
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

summarizes the carrying and fair values of these instruments at December 31,
2004 and 2003. Fair values are based on market quotes.

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                 -------------------------------------------
                                                         2004                   2003
                                                         ----                   ----
                                                 CARRYING/FAIR VALUE    CARRYING/FAIR VALUE
                                                 --------------------   --------------------
                                                 ASSET      LIABILITY   ASSET      LIABILITY
                                                 -----      ---------   ------     ---------
                                                            (DOLLARS IN MILLIONS)
<S>                                              <C>        <C>         <C>        <C>
Equity hedges..................................  $  2          $ 7      $    5        $12
</Table>

  DEBT SECURITIES

     The carrying value of debt with an original maturity of less than one year
approximates market value. The table below summarizes the carrying and fair
values of long-term debt (including currently maturing long-term debt),
excluding capital leases, at December 31, 2004 and 2003. The fair values of
long-term debt were obtained based on quotes or rates available to us for debt
with similar terms and maturities.

<Table>
<Caption>
                                                             AT DECEMBER 31,
                                                 ---------------------------------------
                                                        2004                 2003
                                                 ------------------   ------------------
                                                 CARRYING    FAIR     CARRYING    FAIR
                                                  VALUE      VALUE     VALUE      VALUE
                                                 --------   -------   --------   -------
                                                          (DOLLARS IN MILLIONS)
<S>                                              <C>        <C>       <C>        <C>
Long-term debt, excluding capital leases.......   $9,970    $10,928   $13,406    $14,820
</Table>

  DERIVATIVE IMPACTS

     The following table summarizes the activity in accumulated other
comprehensive income in shareowners' equity related to derivatives designated as
cash flow hedges during the periods January 1, 2003 through December 31, 2004.

<Table>
<Caption>
                                                              PRETAX    AFTER TAXES
                                                              -------   ------------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>       <C>
Balance at January 1, 2003..................................   $  83        $ 51
Unrealized gains............................................      39          25
Realized (gains) reclassified into earnings.................    (100)        (62)
                                                               -----        ----
Balance at December 31, 2003................................      22          14
Unrealized gains............................................      39          23
Realized (gains) reclassified into earnings.................     (29)        (18)
                                                               -----        ----
Balance at December 31, 2004................................   $  32        $ 19
                                                               =====        ====
</Table>

     Included within the balance at January 1, 2003, were unrealized gains of
$131 million pretax ($81 million after taxes) on embedded derivatives related to
exchangeable notes that were indexed to AT&T Wireless common stock, which were
settled in February 2003.

     Based on the terms of our derivative instruments designated as cash flow
hedges, we are not aware of any unrealized gains or losses currently recorded in
accumulated other comprehensive income that will be transferred into earnings
during 2005.

10.  EQUITY TRANSACTIONS

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

                                        88
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Pursuant to the AT&T Broadband and Comcast merger agreement (see note 4),
we were required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common stock.
Each share of TCI Pacific preferred stock was exchangeable, at the option of the
holder, for 1.673 shares of AT&T common stock. During 2002, all outstanding
shares (approximately 6.2 million) of TCI Pacific preferred stock were either
exchanged or redeemed for approximately 10.4 million shares of AT&T common
stock. No gain or loss was recorded on the exchange/redemption of the TCI
Pacific preferred stock.

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

11.  PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS

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

  U.S. PLANS

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

<Table>
<Caption>
                                       PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                  ---------------------------   ------------------------
                                             FOR THE YEARS ENDED DECEMBER 31,
                                  ------------------------------------------------------
                                   2004      2003      2002      2004     2003     2002
                                  -------   -------   -------   ------   ------   ------
                                                  (DOLLARS IN MILLIONS)
<S>                               <C>       <C>       <C>       <C>      <C>      <C>
Service cost -- benefits earned
  during the period.............  $   205   $   223   $   209   $  21    $  24    $  23
Interest cost on benefit
  obligations...................      936       941     1,002     357      367      365
Amortization of unrecognized
  prior service cost............      122       145       152      49       40       12
Credit for expected return on
  plan assets...................   (1,442)   (1,449)   (1,526)   (176)    (152)    (187)
Amortization of transition
  asset.........................       --        --       (34)     --       --       --
Amortization of losses
  (gains).......................       30         4       (22)    103       81        5
(Credits) charges for special
  termination benefits *........       --        --       (19)     --       14       --
Net curtailment losses *........      220         9        --     119       --       --
Net settlement losses...........       --        10         6      --       --       --
                                  -------   -------   -------   -----    -----    -----
Net periodic benefit cost
  (credit)......................  $    71   $  (117)  $  (232)  $ 473    $ 374    $ 218
                                  =======   =======   =======   =====    =====    =====
</Table>

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

* Primarily included in asset impairment and net restructuring and other
  charges.

     In connection with the restructuring charges taken during 2004 associated
with employee separations (see note 6), we recorded pension and postretirement
benefit curtailment losses of $339 million.

                                        89
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

<Table>
<Caption>
                                                                       POSTRETIREMENT
                                                   PENSION BENEFITS       BENEFITS
                                                   -----------------   ---------------
                                                    FOR THE YEARS ENDED DECEMBER 31,
                                                   -----------------------------------
                                                    2004      2003      2004     2003
                                                   -------   -------   ------   ------
                                                          (DOLLARS IN MILLIONS)
<S>                                                <C>       <C>       <C>      <C>
Change in benefit obligations:
Benefit obligations, beginning of year...........  $15,767   $14,985   $6,274   $5,839
Service cost.....................................      205       223       21       24
Interest cost....................................      936       941      357      367
Participants' contributions......................       --        --       72       42
Plan amendments..................................       --        24       --      173
Actuarial losses (gains).........................      845       799     (370)     362
Benefit payments.................................   (1,217)   (1,175)    (634)    (547)
Special termination benefits.....................       --        --       --       14
Settlements......................................       --       (29)      --       --
Curtailment losses (gains).......................       80        (1)      93       --
                                                   -------   -------   ------   ------
Benefit obligations, end of year.................  $16,616   $15,767   $5,813   $6,274
                                                   =======   =======   ======   ======
Change in fair value of plan assets:
Fair value of plan assets, beginning of year.....  $17,555   $15,603   $2,057   $1,745
Actual return on plan assets.....................    2,136     3,067      207      316
Employer contributions...........................       36        89      611      501
Participants' contributions......................       --        --       72       42
Benefit payments.................................   (1,217)   (1,175)    (634)    (547)
Settlements......................................       --       (29)      --       --
                                                   -------   -------   ------   ------
Fair value of plan assets, end of year...........  $18,510   $17,555   $2,313   $2,057
                                                   =======   =======   ======   ======
</Table>

<Table>
<Caption>
                                                             AT DECEMBER 31,
                                                   -----------------------------------
                                                    2004     2003     2004      2003
                                                   ------   ------   -------   -------
<S>                                                <C>      <C>      <C>       <C>
Funded (unfunded) benefit obligation.............  $1,894   $1,788   $(3,500)  $(4,217)
Unrecognized net loss............................   1,000      882     1,298     1,807
Unrecognized prior service cost..................     380      639        53       123
                                                   ------   ------   -------   -------
Net amount recorded..............................  $3,274   $3,309   $(2,149)  $(2,287)
                                                   ======   ======   =======   =======
</Table>

                                        90
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                PENSION BENEFITS    POSTRETIREMENT BENEFITS
                                                -----------------   ------------------------
                                                              AT DECEMBER 31,
                                                --------------------------------------------
                                                 2004      2003       2004           2003
                                                -------   -------   ---------      ---------
                                                           (DOLLARS IN MILLIONS)
<S>                                             <C>       <C>       <C>            <C>
Prepaid pension cost..........................  $3,981    $3,853     $    --        $    --
Benefit related liabilities...................    (992)     (901)     (2,149)        (2,287)
Intangible asset (included in other assets)...     224       337          --             --
Accumulated other comprehensive income........      61        20          --             --
                                                ------    ------     -------        -------
Net amount recorded...........................  $3,274    $3,309     $(2,149)       $(2,287)
                                                ======    ======     =======        =======
</Table>

     Included in other comprehensive income was a pretax increase (decrease) of
$41 million, $(285) million, and $289 million, for 2004, 2003 and 2002,
respectively, attributable to the change in the minimum pension liability.

     On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. We are impacted by
the Act since we sponsor postretirement health care plans that provide
prescription drug benefits. On May 19, 2004, the FASB issued FSP No. FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which provides guidance on
accounting for the effects of the new Medicare prescription drug legislation by
employers whose prescription drug benefits are actuarially equivalent to the
drug benefit under Medicare Part D.

     We adopted FSP No. FAS 106-2 effective July 1, 2004, and have elected a
prospective application, which required the remeasurement of our postretirement
plan assets and accumulated postretirement benefit obligation (APBO) as of July
1, 2004. We believe that the prescription drug benefits provided to a specific
portion of our postretirement benefit plan participants would be deemed to be
actuarially equivalent to Medicare Part D benefits based on the benefits
provided under the plan. The subsidy-related reduction in the APBO related to
the adoption for this group was $161 million, which will be amortized to income
over time as an actuarial gain. During 2004, the amortization of the actuarial
gain as well as a reduction of interest cost resulted in a reduction to net
periodic postretirement benefit cost (recorded within selling, general and
administrative expenses and costs of services and products) of approximately $11
million. We did not record any impact of the Act to our remaining plan
participants in 2004 due to the lack of final regulations on determination of
actuarial equivalence.

     On January 21, 2005, the Department of Health and Human Services/Centers
for Medicare and Medicaid Services (CMS) released final regulations implementing
major provisions of the Act. These final regulations had no significant impact
to the reduction of APBO and net periodic postretirement benefit cost that we
recorded in 2004. With respect to the impact of the Act to the remaining plan
participants, we are assessing appropriate integration of the federal subsidy
into the plan benefits. We continue to review the regulations released on
January 21, 2005, to determine whether they will result in a significant
reduction to our APBO and net periodic postretirement benefit cost.

                                        91
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                            PENSION PLAN ASSETS     POSTRETIREMENT PLAN ASSETS
                                            --------------------   ----------------------------
                                                              AT DECEMBER 31,
                                            ---------------------------------------------------
                                                          TARGET                        TARGET
                                            2004   2003   RANGE     2004      2003      RANGE
                                            ----   ----   ------   ------    ------    --------
<S>                                         <C>    <C>    <C>      <C>       <C>       <C>
Equity securities(1)......................   67%    68%   60-70%      70%       61%      65-75%
Debt securities...........................   24%    23%   20-30%      29%       23%      25-35%
Real estate...............................    9%     9%    5-15%       0%        0%          0%
Other(2)..................................    0%     0%       0%       1%       16%        0-1%
                                            ---    ---               ---       ---
  Total...................................  100%   100%              100%      100%
                                            ===    ===               ===       ===
</Table>

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

(1) At December 31, 2004 and 2003, our pension plan assets included $6 million
    and $7 million of AT&T common stock, respectively.

(2) Other postretirement plan assets primarily consisted of cash and cash
    equivalents at December 31, 2004 and 2003. The target range is determined
    based on anticipated cash requirements to partially fund benefit payments.
    In 2003, the year end cash level was higher than the target range due to
    year end cash contributions made to the postretirement welfare benefit plan.
    In 2004, company contributions to the trust were made periodically
    throughout the year reducing the cash balance of the trust at year end.

     The assets of the pension and postretirement welfare benefit plans are
managed with the objective of maximizing excess return subject to prudent risk
taking. In 2004, we completed an asset-liability study for the pension plan. We
will continue to do so at least once every two years (or more frequently, if
necessary) for the pension plans and on an as necessary basis for postretirement
welfare benefit plans, to ensure that an efficient asset allocation is
maintained in order to meet future benefit obligations, given the plans'
tolerance for risk. We use derivative financial instruments including futures
contracts, forward contracts and options to enhance returns on the pension plan
asset investments, to limit exposure to market fluctuations, and as vehicles to
implement portfolio strategy. The use of options is permitted for debt
investments, but is prohibited for public equity investments. It is not our
policy to use these derivative financial instruments for speculative purposes.

     The accumulated benefit obligation for all defined benefit pension plans
was $16.4 billion and $15.5 billion at December 31, 2004 and 2003, respectively.
The following table provides information for pension plans with an accumulated
benefit obligation in excess of plan assets:

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Projected benefit obligation................................   $10,773     $10,340
Accumulated benefit obligation..............................    10,528      10,057
Fair value of plan assets...................................     9,536       9,157
</Table>

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

<Table>
<Caption>
                                         BENEFIT
                                       OBLIGATIONS              NET PERIODIC BENEFIT COST
                                     ---------------        ----------------------------------
                                     AT DECEMBER 31,         FOR THE YEARS ENDED DECEMBER 31,
                                     ---------------        ----------------------------------
                                     2004      2003          2004          2003          2002
                                     -----     -----        ------        ------        ------
<S>                                  <C>       <C>          <C>           <C>           <C>
Discount rate......................  5.75%     6.00%         5.95%         6.50%         7.25%
Rate of compensation increase......  4.00%     4.00%         4.00%         4.25%         5.90%
Expected return on plan assets.....    --        --          8.50%         8.50%         9.00%
</Table>

                                        92
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As a result of the plan curtailments that occurred in the third quarter of
2004, the assets and liabilities of our pension and postretirement plans were
remeasured at September 30, 2004. The discount rate used was reduced from 6.0%
at December 31, 2003, to 5.75%, while other assumptions remained constant for
the purpose of determining the benefit obligations at remeasurement. As a result
of this assumption change at remeasurement, our net periodic benefit cost in the
fourth quarter of 2004 was based on a discount rate of 5.75%.

     The assumptions for pension and postretirement benefits were reassessed as
of December 31, 2004. The discount rate remained unchanged from the September
30, 2004 remeasurement, and was based on current yields on high quality
corporate fixed-income investments with maturities corresponding to the expected
duration of the benefit obligations. Additionally, the rate of projected
compensation increase also remained at 4.0% reflecting expected inflation
levels, our actual recent experience and future outlook. We conducted an
expected long-term rate of return analysis on pension and postretirement benefit
plan assets. This analysis consisted of forward-looking projections for a
risk-free rate of return, inflation rate, and risk premiums for particular asset
classes. Historical returns are used only to assist in determining the
reasonableness of the analysis. The results of this analysis were applied to the
target asset allocation in accordance with our plan investment strategies. The
expected long-term rate of return on plan assets was determined based on the
weighted-average projected returns of each asset class. As a result, the
expected rate of return on plan assets will be reduced from 8.5% to 8.25% for
pension plans and to 7.75% for postretirement plans effective January 1, 2005,
to appropriately reflect the nature of the asset portfolios.

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

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                              2004      2003
                                                              -----     -----
<S>                                                           <C>       <C>
Health care cost trend rate assumed for next year...........  10.8%     10.2%
Rate to which the cost trend rate is assumed to decline
  (ultimate trend rate).....................................   4.8%      5.0%
Year that the rate reaches the ultimate trend rate..........  2010      2008
</Table>

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

<Table>
<Caption>
                                                           ONE PERCENTAGE   ONE PERCENTAGE
                                                           POINT INCREASE   POINT DECREASE
                                                           --------------   --------------
                                                                (DOLLARS IN MILLIONS)
<S>                                                        <C>              <C>
Effect on total of service and interest cost.............       $  9            $  (8)
Effect on accumulated postretirement benefit
  obligation.............................................        164             (145)
</Table>

     We expect to contribute approximately $30 million to the nonqualified
pension plan in 2005. No contribution is expected for the qualified pension plan
in 2005. While not required, we also expect to contribute approximately $525
million to the postretirement benefit plans in 2005.

                                        93
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Benefit payments, which reflect expected future service as appropriate, are
expected to be paid as follows:

<Table>
<Caption>
                                 PENSION
                                 BENEFITS                   POSTRETIREMENT BENEFITS
                              --------------   -------------------------------------------------
                              GROSS PAYMENTS   GROSS PAYMENTS   SUBSIDY RECEIPTS*   NET PAYMENTS
                              --------------   --------------   -----------------   ------------
                                                    (DOLLARS IN MILLIONS)
<S>                           <C>              <C>              <C>                 <C>
2005........................      $1,470           $  595             $ --             $  595
2006........................       1,155              485              (15)               470
2007........................       1,155              480              (15)               465
2008........................       1,155              475              (15)               460
2009........................       1,155              470              (15)               455
2010 -- 2014................       5,805            2,240              (80)             2,160
</Table>

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

* Based on expected subsidy for prescription drug benefits to be received from
  the federal government under Medicare Part D.

     We also sponsor savings plans for the majority of our U.S. employees. The
plans allow employees to contribute a portion of their pretax and/or after-tax
income in accordance with specified guidelines. We match a percentage of the
employee contributions up to certain limits. Contributions to such U.S. savings
plans relating to continuing operations amounted to $122 million in 2004, $136
million in 2003 and $135 million in 2002.

  NON-U.S. PLANS

     Certain non-U.S. operations have varying types of pension programs
providing benefits for substantially all of their employees.

     The following table provides the plans' benefit obligations and fair value
of assets, and a statement of the funded status:

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004         2003
                                                              --------     --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Benefit obligations, end of year............................   $ 812        $ 634
Fair value of plan assets, end of year......................     581          442
                                                               -----        -----
(Unfunded) benefit obligation...............................    (231)        (192)
Unrecognized net loss.......................................     195          165
Unrecognized transition obligation..........................       1            1
                                                               -----        -----
Net amount recorded.........................................   $ (35)       $ (26)
                                                               =====        =====
</Table>

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

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004         2003
                                                              --------     --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Prepaid pension cost........................................   $  10        $   8
Benefit related liabilities.................................    (159)        (137)
Accumulated other comprehensive income......................     114          103
                                                               -----        -----
Net amount recorded.........................................   $ (35)       $ (26)
                                                               =====        =====
</Table>

     The benefit obligations were determined using a weighted average discount
rate of 5.15% and 5.40% at December 31, 2004 and 2003, respectively, and a
weighted average rate of compensation increase of 4.25%

                                        94
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and 3.90% as of December 31, 2004 and 2003, respectively. Net periodic pension
cost was approximately $40 million in 2004, $35 million in 2003 and $20 million
in 2002. The weighted-average expected return on plan assets was 6.20% in 2004
and 2003 and 7.40% in 2002.

     The following table provides information for certain non-U.S. defined
benefit pension plans with accumulated benefit obligations in excess of plan
assets:

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                               2004          2003
                                                              -------       -------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>           <C>
Projected benefit obligation................................   $715          $564
Accumulated benefit obligation..............................    657           512
Fair value of plan assets...................................    501           386
</Table>

     Included in other comprehensive income was a pretax increase of $11 million
and $103 million for the years ended 2004 and 2003, respectively, attributable
to the change in the minimum pension liability.

12.  STOCK-BASED COMPENSATION PLANS

     Under the AT&T 2004 Long Term Incentive Program (Program), which became
effective on May 19, 2004 and replaced the 1997 Long Term Incentive Program, as
amended, we grant stock options, performance shares, restricted stock units and
other awards in AT&T common stock. The Program expires on May 31, 2009. Under
the terms of the Program, there were originally 36 million shares of AT&T common
stock available for any combination of stock compensation awards, including
options, performance shares, restricted stock units and other stock awards. As
of December 31, 2004, 30.8 million shares were still available for grant.

     Under the Program, performance share units (equivalent to one common share)
are awarded to key employees in the form of either common stock or cash at the
end of a three-year period, based on certain financial-performance targets.
Stock options and restricted stock units generally have vesting periods of three
to four years. The exercise price of stock options issued was equal to the stock
price when the options were granted. Stock options are exercisable for up to 10
years from the date of grant.

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

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

                                        95
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Effective January 1, 2003, AT&T began recording compensation expense
pursuant to SFAS No. 123 for all stock options issued subsequent to January 1,
2003. Compensation expense associated with performance shares, restricted stock
and other awards has always been recorded in our financial statements. The fair
value of all stock options issued subsequent to January 1, 2003 is measured on
the grant date using the Black-Scholes option pricing model and recognized in
the statement of operations over the vesting period (see note 1).

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

<Table>
<Caption>
                                      WEIGHTED-             WEIGHTED-             WEIGHTED-
                                       AVERAGE               AVERAGE               AVERAGE
                                      EXERCISE              EXERCISE              EXERCISE
SHARES IN THOUSANDS          2004     PRICE(1)     2003     PRICE(1)     2002     PRICE(1)
-------------------         -------   ---------   -------   ---------   -------   ---------
<S>                         <C>       <C>         <C>       <C>         <C>       <C>
Outstanding at January
  1,......................  118,460    $35.99      98,257    $40.64      63,509    $122.90
  Options granted.........      730     21.41      25,359     17.36      15,183      68.84
  AT&T Broadband spin-off
     adjustments..........       --                    --                37,049
  Options and SARs
     exercised............   (1,419)    16.12        (745)    12.60        (436)     32.28
  Options canceled or
     forfeited............   (5,390)    35.64      (4,411)    36.10     (17,048)    125.72
                            -------               -------               -------
Options outstanding at
  December 31,............  112,381     36.16     118,460     35.99      98,257      40.64
Options exercisable at
  December 31,............   84,912     40.61      68,825     44.18      46,770      49.88
</Table>

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

(1) The weighted-average exercise prices for the period prior to the AT&T
    Broadband spin-off in 2002 have not been adjusted to reflect the impact of
    the spin-off.

                                        96
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2004:

<Table>
<Caption>
                                              OPTIONS OUTSTANDING
                                 ---------------------------------------------      OPTIONS EXERCISABLE
                                                     WEIGHTED-                   --------------------------
                                     NUMBER           AVERAGE        WEIGHTED-       NUMBER       WEIGHTED-
                                 OUTSTANDING AT      REMAINING        AVERAGE    EXERCISABLE AT    AVERAGE
                                  DECEMBER 31,    CONTRACTUAL LIFE   EXERCISE     DECEMBER 31,    EXERCISE
RANGE OF EXERCISE PRICES              2004          LIFE (YEARS)       PRICE          2004          PRICE
------------------------         --------------   ----------------   ---------   --------------   ---------
                                 (IN THOUSANDS)                                  (IN THOUSANDS)
<S>                              <C>              <C>                <C>         <C>              <C>
$3.93 - $17.22.................         448             1.8           $10.69            448        $10.69
$17.32.........................      20,861             8.0           $17.32          7,094        $17.32
$17.47 - $23.70................       3,102             6.2           $20.66          1,759        $20.13
$23.88.........................      10,072             7.0           $23.88          7,222        $23.88
$23.94 - $28.00................       1,133             4.7           $25.74            889        $25.65
$28.03.........................      20,589             6.5           $28.03         13,723        $28.03
$28.23 - $32.54................       2,177             4.9           $30.35          2,061        $30.35
$32.63.........................       5,261             5.8           $32.63          4,486        $32.63
$32.64 - $33.66................       1,077             4.4           $33.44          1,050        $33.45
$33.68.........................       7,700             5.6           $33.68          6,565        $33.68
$33.77 - $38.10................       6,652             2.9           $35.71          6,398        $35.72
$38.31 - $46.73................       7,407             2.2           $41.42          7,370        $41.40
$46.91.........................       5,137             5.0           $46.91          5,095        $46.91
$47.04 - $61.45................       2,835             3.5           $56.62          2,829        $56.63
$61.54.........................       4,816             3.0           $61.54          4,816        $61.54
$61.66 - $87.01................       8,268             4.2           $71.07          8,262        $71.07
$87.51 - $90.80................       4,846             3.9           $87.52          4,845        $87.52
                                    -------                                          ------
                                    112,381             5.6           $36.16         84,912        $40.61
                                    =======                                          ======
</Table>

     During 2004 and 2003, we granted 4.1 million and 2.4 million, respectively,
of restricted stock units, to key employees and the board of directors. The
weighted average fair value at grant date for the 2004 and 2003 restricted stock
unit awards was $16.54 and $19.27, respectively. The awards granted in 2004 vest
over four years, while 2003 awards have a three-year vesting period. In
addition, in 2002, we offered employees the option to cancel certain outstanding
stock options and replace them with restricted stock units. Approximately 15
million stock options were canceled as a result of this offer, and 2.5 million
restricted stock units were granted, which vest over a three-year period. As a
result of the spin-off of AT&T Broadband, the 2.5 million restricted stock units
were restructured into 6.5 million units, with a grant date fair value of
$25.33. Those options that were eligible for cancellation but retained by the
employee became variable awards under APB Opinion No. 25, with compensation
expense recorded based on changes in stock price until the options are
exercised, forfeited or expired unexercised. The cancellation of stock options
had no impact on 2004, 2003 and 2002 results of operations.

     During 2004 and 2002, we granted performance share units to key employees,
which are paid based on the attainment of certain performance measures over a
three-year period. Approximately 3.6 million and 0.9 million units were granted
in 2004 and 2002, respectively.

                                        97
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The weighted-average fair values at date of grant for AT&T common stock
options granted during 2004, 2003 and 2002 were $5.58, $5.49 and $24.49,
respectively, and were estimated using the Black-Scholes option-pricing model.
The 2002 weighted-average grant-date fair value excludes the effects of equity
restructuring relating to the spin-off of AT&T Broadband. The following weighted
average assumptions were used for stock options granted during 2004, 2003 and
2002:

<Table>
<Caption>
                                                                   AT&T COMMON
                                                                  STOCK OPTIONS
                                                              ---------------------
                                                              2004    2003    2002
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Risk-free interest rate.....................................   3.35%   2.53%   3.73%
Expected dividend yield.....................................   4.00%   4.00%   1.17%
Expected volatility.........................................  38.00%  47.90%  40.00%
Expected life (in years)....................................    5.0     5.0     4.7
</Table>

13.  INCOME TAXES

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                           2004        2003         2002
                                                         --------     -------     ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
U.S. federal statutory income tax rate.................       35%         35%           35%
Federal income tax benefit (provision) at statutory
  rate.................................................   $3,862       $(942)      $  (993)
State and local income tax benefit (provision), net of
  federal income tax effect............................      293         (59)         (222)
AT&T Latin America.....................................      394          35          (360)
Foreign operations, net of tax credits.................      (12)          1          (140)
Investment dispositions, acquisitions and legal entity
  restructurings.......................................        3          51            93
Research and other credits.............................       36          12            51
Research tax credit claims for prior years.............       --         143            --
Other differences, net.................................      (16)        (57)          (16)
                                                          ------       -----       -------
Benefit (provision) for income taxes...................   $4,560       $(816)      $(1,587)
                                                          ======       =====       =======
Effective income tax rate..............................     41.3%       30.3%         56.0%
</Table>

                                        98
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                            2004        2003        2002
                                                         ----------   ---------   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
(Loss) income from continuing operations before income
  taxes:
United States..........................................   $(11,018)    $ 2,761     $ 2,924
Foreign................................................        (17)        (71)        (88)
                                                          --------     -------     -------
Total..................................................   $(11,035)    $ 2,690     $ 2,836
                                                          ========     =======     =======
Benefit (provision) for income taxes:
Current:
  Federal..............................................   $    179     $   342     $ 1,041
  State and local......................................        (82)        250          19
  Foreign..............................................        (43)         (6)        (95)
                                                          --------     -------     -------
                                                                54         586         965
                                                          --------     -------     -------
Deferred:
  Federal..............................................      3,952      (1,102)     (2,201)
  State and local......................................        532        (341)       (360)
  Foreign..............................................         15          25          (7)
                                                          --------     -------     -------
                                                             4,499      (1,418)     (2,568)
Amortization of deferred investment tax credits........          7          16          16
                                                          --------     -------     -------
Benefit (provision) for income taxes...................   $  4,560     $  (816)    $(1,587)
                                                          ========     =======     =======
</Table>

     We also recorded current and deferred income tax (provision) benefits that
resulted from earnings (losses) related to equity investments in the amounts of
$(4) million in 2004, $(31) million in 2003 and $112 million in 2002.

     Deferred income taxes are provided for the effects of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes.

                                        99
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred income tax liabilities and assets consist of the following:

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                2004         2003
                                                              ---------    ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Deferred Income Tax Assets:
  Employee compensation and benefits........................   $1,482       $1,536
  Reserves and allowances...................................    1,195          979
  Net operating loss, capital loss and credit
     carryforwards..........................................      515          425
  Business restructuring....................................      243          163
  Other deferred tax assets.................................      208          214
  Valuation allowance.......................................     (575)        (857)
                                                               ------       ------
Total deferred income tax assets............................    3,068        2,460
                                                               ------       ------
Deferred Income Tax Liabilities:
  Pensions..................................................    1,114        1,201
  Leveraged and capital leases..............................      853          937
  Capitalized software and intangible assets................      761          924
  Investments...............................................      422           97
  Property, plant and equipment.............................       90        3,883
  Other.....................................................       63           98
                                                               ------       ------
Total deferred income tax liabilities.......................    3,303        7,140
                                                               ------       ------
Net deferred income tax liability...........................   $  235       $4,680
                                                               ======       ======
</Table>

     In 2004, the valuation allowance declined $282 million. During February
2004, the subsidiaries of AT&T Latin America were sold to Telefonos de Mexico
S.A. de C.V., or Telmex, and the plan of bankruptcy liquidation of AT&T Latin
America became effective. As a result, we no longer needed the valuation
allowance established in 2002 attributable to the book and tax basis difference
related to our investment in AT&T Latin America, and recorded an income tax
benefit of $394 million in 2004. This decline in the valuation allowance was
partially offset by an increase primarily for state net operating loss
carryforwards and state net deferred tax assets.

     At December 31, 2004, we had net operating and capital loss carryforwards
(tax effected) for federal, state and foreign income tax purposes of $4 million,
$374 million and $3 million, respectively, expiring through 2024. In addition,
at December 31, 2004, we had state tax credit carryforwards (after federal tax
effects) of $124 million expiring through 2019 and $10 million with no
expiration date.

     On October 22, 2004, the American Jobs Creation Act of 2004 (the Act)
became law. The Act creates a one-time tax incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing a tax deduction of 85%
of dividends received for certain foreign earnings that are repatriated. The
deduction is subject to a number of requirements and clarification is needed on
various aspects of the law before the impact can be determined. In addition, the
amount of the deduction remains subject to potential local country restrictions
on remittances, as well as to management's decisions with respect to any
repatriation. Based upon the current wording of the law and assuming no
technical corrections, we are considering possible dividend remittances of
approximately $100 million, which we estimate would result in a one-time income
tax benefit in 2005 of approximately $5 million. We expect to complete our
evaluation of the impact of the Act during 2005.

                                       100
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  COMMITMENTS AND CONTINGENCIES

     In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2004. However, we believe
that after final disposition, any monetary liability or financial impact to us
beyond that provided for at December 31, 2004, would not be material to our
annual consolidated financial statements.

     We were named as a defendant in a consolidated group of purported
securities class action lawsuits filed in the United States District Court for
the District of New Jersey on behalf of persons who purchased shares of AT&T
common stock from October 25, 1999 through May 1, 2000. The consolidated lawsuit
alleged, among other things, that during the period referenced above, we made
materially false and misleading statements and omitted to state material facts
concerning our future business prospects. The consolidated complaint sought
unspecified damages. After several days of trial, we settled this lawsuit for
$100 million. While we denied any wrongdoing asserted against us, we settled
this lawsuit to avoid the uncertainty of a jury verdict and the expense of
continuing the litigation to the end of the trial and through the appeal
process. Under terms of a separation agreement between AT&T and our former
broadband subsidiary, which was spun off to Comcast in 2002, the settlement will
be shared equally between the two parties. Accordingly, we recognized our share
of the settlement of $50 million in 2004. In addition, we recorded a $50 million
receivable from Comcast for its proportionate share. We intend to seek
reimbursement from our insurers for the amounts to be paid.

     We have also been named as a defendant in another consolidated group of
securities class actions filed in the United States District Court for the
Southern District of New York, filed on behalf of investors who purchased shares
in the AT&T Wireless tracking stock initial public offering (IPO) from April 26,
2000 through May 1, 2000. This consolidated action alleges that we made
materially false and misleading statements and omitted to state material facts
in the IPO prospectus about our future business prospects. The plaintiffs seek
unspecified damages. We believe that the lawsuit is without merit and intend to
defend it vigorously.

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

     Through a former subsidiary, we owned approximately 23% of the outstanding
common stock and 74% of the voting power of the outstanding common stock of At
Home Corporation (At Home), which filed for bankruptcy protection on September
28, 2001. Until October 1, 2001, AT&T appointed a majority of At Home's
directors and thereafter we appointed none. On November 7, 2002, the trustee for
the bondholders' liquidating trust of At Home (the Bondholders) filed a lawsuit
in California state court asserting claims for breach of fiduciary duty relating
to the conduct of AT&T and its designees on the At Home board of directors in
connection with At Home's declaration of bankruptcy and subsequent efforts to
dispose of some of its businesses or assets, as well as in connection with other
aspects of our relationship with At Home. On November 15, 2002, the Bondholders
filed a lawsuit in California federal court asserting a claim for patent
infringement relating to our broadband distribution and high-speed Internet
backbone networks and equip-

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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ment. The Bondholders seek unspecified damages in these lawsuits. We believe
that these lawsuits are without merit and intend to defend them vigorously.

     In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, and the
directors of At Home, Cox and Comcast. The lawsuits claim that the defendants
breached fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the board of
directors of At Home was reorganized, and we agreed to give Cox and Comcast
rights to sell their At Home shares to us. These actions have been consolidated
by the court and are subject to a stay. Our liability for any such suits would
be shared equally between Comcast and us. In March 2002, a purported class
action was filed in the United States District Court for the Southern District
of New York against, inter alia, AT&T and certain of its senior officers
alleging violations of the federal securities law in connection with the
disclosures made by At Home in the period from April 17 through August 28, 2001.
We believe that these lawsuits are without merit and intend to defend them
vigorously.

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

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

     More than thirty class actions have been brought against us throughout the
country in which the plaintiffs have asserted superior property rights with
respect to railroad right of way corridors on which we have installed fiber
optic cable under agreements with the various railroads. Although we deny any
liability, we have engaged in settlement negotiations concerning the so-called
"active line" claims that have been consolidated and are pending in Indiana
federal court. We have settled claims on a state-by-state basis and obtained
final approval of such claims in Ohio, Connecticut, Wisconsin, Maryland,
Virginia, Delaware, West Virginia, Idaho, Massachusetts and Michigan. In
addition, in January 2005, we obtained preliminary approval for settlements in
Vermont, Minnesota, Kansas, Maine and Texas and final fairness hearings to
approve the settlements are scheduled in May 2005 for Vermont and Minnesota and
July 2005 for Kansas, Maine and Texas. We also anticipate using these
settlements as a template for settling claims in other states. None of the
current settlements or the settlements we are currently planning involve claims
along railroad right of way obtained under federal land grant statutes nor do
they address claims that are based upon the installation of fiber optic cable in
pipeline or other utility right of way.

     On April 21, 2004, the FCC ruled against a petition we filed in October
2002, in which we asked the FCC to decide the issue of whether phone-to-phone IP
telephony services are exempt from paying access charges. As a result of this
ruling, we began paying terminating access charges on long distance
phone-to-phone IP telephony calls. In its decision, the FCC did not make any
determination regarding the appropriateness of retroactive application of its
ruling. The FCC left the matter to be decided on a fact specific, case-by-case
basis. Following the ruling, Qwest Communications International Inc. (Qwest)
filed a lawsuit against us in federal district court in Colorado in which it
asserted a claim alleging that we avoided interstate and intrastate access
charges by delivering long distance calls to Qwest for termination over Qwest's
local facilities. Qwest is seeking "tens of millions of dollars in access
charges." SBC Communications Inc. (SBC) filed a lawsuit in federal district
court in Missouri asserting claims similar to those asserted against us by
Qwest. SBC is seeking $141 million in access charges. Although other carriers
have expressed an intention to make similar claims, to

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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

date no other lawsuits have been filed. In our view, our total potential
exposure could be as much as $250 million if we were required to make payments
retroactively. We believe we have a number of defenses to these claims and
intend to defend against them vigorously.

     Qwest has also filed a claim against us seeking payment of approximately
$60 million in alleged undercharges in connection with terminating toll-free
calls. We dispute the allegations of these claims and believe that we have acted
consistently with the terms and conditions of our underlying agreements with
Qwest. In addition, we believe that Qwest's claims have been released in the
ordinary course of business between Qwest and us. To the extent that Qwest may
be entitled to any damages, such damages cannot be substantiated at this time.

     In February 2005, the FCC ruled against AT&T in its petition for a
declaratory ruling that our enhanced prepaid card service is an interstate
information service. The FCC did not agree with our position that intrastate
access charges should not apply to calls made using an enhanced prepaid card
when (1) the prepaid card platform is located outside the state in which either
the calling or the called party is located and (2) the called party receives an
advertisement from the platform which constitutes a separate interstate
communication. The FCC also did not agree with our position that our enhanced
prepaid card service is an information service, and held that it is a
telecommunications service and that we had to make Universal Service Fund (USF)
contributions on revenue derived from the service. Since we did not pay USF and
paid lower interstate access rates, these savings have permitted us to sell
prepaid cards at prices below what otherwise would have been possible. The
recent adverse ruling by the FCC on the prepaid card petition will increase the
future cost of providing the types of prepaid cards that were addressed in the
FCC decision and may materially adversely affect future sales of prepaid cards.
In addition, the FCC ruling directs AT&T to pay "past due" universal service
amounts, including late fees invoiced by the Universal Service Administrator,
and exposes us to potential retroactive liability for intrastate access charges.
Accordingly, we accrued $553 million as of December 2004 for these matters. We
intend to appeal the FCC decision to a federal Court of Appeals.

     Following this FCC decision, Qwest filed a lawsuit against us in Colorado
federal court relating to this issue, asserting claims for breach of federal and
state tariffs, unjust enrichment, fraudulent misrepresentation and breach of
contract. Qwest seeks unspecified damages. We intend to vigorously defend this
and any similar cases that may be filed relating to this issue.

     In connection with the separation of our former units, we have entered into
a number of separation and distribution agreements that provide, among other
things, for the allocation and/or sharing of certain costs associated with
potential litigation liabilities. For example, pursuant to these agreements, we
share in the cost of certain litigation (relating to matters while affiliated
with us) if the judgment, award or settlement exceeds certain thresholds. With
the exception of two matters already reserved for (Sparks, et al. v. AT&T and
Lucent Technologies and NCR's Fox River environmental clean-up matter, see note
4), we have assessed, as of December 31, 2004, that none of the potential
litigation liabilities relating to matters arising while the units were
affiliated with AT&T were probable of incurring costs in excess of the threshold
above which we would be required to share in the costs. However, in the event
these former units were unable to meet their obligations with respect to these
liabilities due to financial difficulties, we could be held responsible for all
or a portion of the costs, irrespective of the sharing agreements.

     Former executives of MediaOne and US West filed a lawsuit against us in
Delaware State court, alleging that we purportedly breached certain contractual
obligations we allegedy had to preserve the value of stock options originally
available to officers and directors of MediaOne and US West at the time of the
MediaOne merger with us in June of 2000. The plaintiffs seek unspecified
damages. We believe that this lawsuit is without merit and intend to defend it
vigorously.

                                       103
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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Certain participants in our pension plan filed a class action in New Jersey
federal court, asserting claims pursuant to the Employee Retirement Income
Security Act of 1974. These claims relate to changes we made in our pension plan
and the manner in which we communicated information concerning those changes to
the plan's participants. The plaintiffs seek unspecified damages. We believe
that this lawsuit is without merit and intend to defend it vigorously.

  LEASES AND OTHER COMMITMENTS

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

     We lease land, buildings and equipment through contracts that expire in
various years through 2079. Our rental expense, net of sublease rental income,
under operating leases was $420 million in 2004, $473 million in 2003 and $529
million in 2002. The total of minimum rentals to be received in the future under
non-cancelable operating subleases as of December 31, 2004, was $222 million. In
addition, we have liabilities recorded on the balance sheet of approximately
$159 million relating to facilities that have been closed, under which we still
have operating lease commitments. These commitments are included in the table
below.

     The following table shows our future minimum commitments due under
non-cancelable operating and capital leases at December 31, 2004:

<Table>
<Caption>
                                                              OPERATING    CAPITAL
                                                                LEASES      LEASES
                                                              ----------   --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
2005........................................................    $  364       $ 23
2006........................................................       297         18
2007........................................................       242         11
2008........................................................       209         11
2009........................................................       155          8
Later years.................................................       342         76
                                                                ------       ----
Total minimum lease payments................................    $1,609       $147
                                                                ======
Less: amount representing interest..........................                   42
                                                                             ----
Present value of net minimum lease payments.................                 $105
                                                                             ====
</Table>

     We have contractual obligations to purchase certain goods or services from
various other parties. Such unconditional purchase obligations totaled
approximately $807 million as of December 31, 2004. Cash outflows associated
with these obligations are expected to be approximately $297 million in 2005;
$180 million in total for 2006 and 2007; $111 million in total for 2008 and
2009; and $219 million in total for years thereafter.

15.  SEGMENT REPORTING

     Our results are segmented according to the customers we service: AT&T
Business Services and AT&T Consumer Services.

     During 2004, we transferred our remaining payphone business from AT&T
Consumer Services to AT&T Business Services. Prior periods have been restated to
reflect this managerial change.

     AT&T Business Services provides a variety of communication services to
various sized businesses and government agencies including long distance,
international, toll-free and local voice, including wholesale

                                       104
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                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transport services, as well as data services and Internet protocol and enhanced
(IP&E) services, which includes the management of network servers and
applications. AT&T Business Services also provides outsourcing solutions and
other professional services.

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

     The balance of our continuing operations are included in a Corporate and
Other group. This group primarily reflects corporate staff functions and the
elimination of transactions between segments.

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

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

     AT&T Business Services sells services to AT&T Consumer Services at
cost-based prices. These sales are recorded by AT&T Business Services as
contra-expense.

                                       105
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  REVENUE

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2004        2003        2002
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
AT&T Business Services
     Long distance voice................................   $ 9,526     $11,199     $12,368
     Local voice........................................     1,673       1,484       1,155
                                                           -------     -------     -------
  Total voice services..................................    11,199      12,683      13,523
     Data services......................................     6,693       7,620       8,146
     IP&E services......................................     2,330       2,102       1,791
                                                           -------     -------     -------
  Total data and IP&E services(1).......................     9,023       9,722       9,937
  Outsourcing, professional services and other..........     2,360       2,670       3,212
                                                           -------     -------     -------
Total AT&T Business Services(2).........................    22,582      25,075      26,672
AT&T Consumer Services
  Stand-alone long distance, transactional and other
     services...........................................     5,161       7,401      10,299
  Bundled services......................................     2,743       1,999       1,114
                                                           -------     -------     -------
Total AT&T Consumer Services revenue....................     7,904       9,400      11,413
                                                           -------     -------     -------
  Total reportable segments.............................    30,486      34,475      38,085
                                                           -------     -------     -------
Corporate and Other.....................................        51          54        (258)
                                                           -------     -------     -------
Total revenue...........................................   $30,537     $34,529     $37,827
                                                           =======     =======     =======
</Table>

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

(1) During 2004, international managed services revenue (previously included
    entirely in data services revenue) was divided into data services revenue
    and IP&E services revenue consistent with the classifications of domestic
    managed services. Prior periods have been restated to reflect this
    reclassification, which had no impact on total data and IP&E services
    revenue, or total revenue.

(2) Revenue in 2002 included internal revenue of $323 million, which represented
    sales to AT&T Broadband through its date of disposition on November 18,
    2002. Subsequent to the disposition, sales to AT&T Broadband, now Comcast,
    are recorded as external revenue. Such revenue is eliminated within the
    Corporate and Other group.

  DEPRECIATION AND AMORTIZATION

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                           2004         2003         2002
                                                         --------     --------     --------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>          <C>
AT&T Business Services.................................   $3,585       $4,621       $4,547
AT&T Consumer Services.................................       93          141          229
                                                          ------       ------       ------
  Total reportable segments............................    3,678        4,762        4,776
Corporate and Other....................................       90          108          112
                                                          ------       ------       ------
Total depreciation and amortization....................   $3,768       $4,870       $4,888
                                                          ======       ======       ======
</Table>

                                       106
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  NET EARNINGS (LOSSES) RELATED TO EQUITY INVESTMENTS

<Table>
<Caption>
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                         ---------------------------------
                                                          2004         2003         2002
                                                         ------       ------       -------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>          <C>
AT&T Business Services pretax net earnings (losses)....    $18         $ 32         $(454)
Corporate and Other pretax net (losses)................     (9)         (13)          (58)
                                                           ---         ----         -----
Total pretax earnings (losses).........................      9           19          (512)
Total tax (provision) benefit..........................     (4)         (31)          112
                                                           ---         ----         -----
Total net earnings (losses) related to equity
  investments..........................................    $ 5         $(12)        $(400)
                                                           ===         ====         =====
</Table>

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                            2004        2003        2002
                                                         ----------   ---------   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
AT&T Business Services operating (loss) income.........   $(10,079)    $ 1,895     $ 1,973
AT&T Consumer Services operating income................        832       2,056       2,584
                                                          --------     -------     -------
  Total reportable segments operating (loss) income....     (9,247)      3,951       4,557
Corporate and Other operating (loss)...................       (841)       (294)       (196)
                                                          --------     -------     -------
Operating (loss) income................................    (10,088)      3,657       4,361
Other (expense) income, net............................       (144)        191         (77)
Interest (expense).....................................       (803)     (1,158)     (1,448)
                                                          --------     -------     -------
(Loss) income from continuing operations before income
  taxes, minority interest income and net earnings
  (losses) related to equity investments...............   $(11,035)    $ 2,690     $ 2,836
                                                          ========     =======     =======
</Table>

  ASSETS

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
AT&T Business Services......................................   $20,621     $34,202
AT&T Consumer Services......................................       743       1,062
                                                               -------     -------
  Total reportable segments.................................    21,364      35,264
Corporate and Other assets(1)...............................    11,440      12,724
                                                               -------     -------
Total assets................................................   $32,804     $47,988
                                                               =======     =======
</Table>

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

(1) Includes cash of $3.0 billion for 2004 and $4.0 billion for 2003.

                                       107
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  CAPITAL ADDITIONS

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                           2004         2003         2002
                                                         --------     --------     --------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>          <C>
AT&T Business Services.................................   $1,701       $3,185       $3,716
AT&T Consumer Services.................................       42           74          127
                                                          ------       ------       ------
  Total reportable segments............................    1,743        3,259        3,843
Corporate and Other....................................       24          223           63
                                                          ------       ------       ------
Total capital additions................................   $1,767       $3,482       $3,906
                                                          ======       ======       ======
</Table>

  GEOGRAPHIC INFORMATION

Revenue(1)

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2004        2003        2002
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
United States(2)........................................   $28,909     $32,952     $36,202
International...........................................     1,628       1,577       1,625
                                                           -------     -------     -------
Total revenue...........................................   $30,537     $34,529     $37,827
                                                           =======     =======     =======
</Table>

Long-Lived Assets(3)

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
United States(2)............................................   $14,968     $27,758
International...............................................     1,804       1,918
                                                               -------     -------
Total long-lived assets.....................................   $16,772     $29,676
                                                               =======     =======
</Table>

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

(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.

     Reflecting the dynamics of our business, we continually review our
management model and structure, which may result in additional adjustments to
our operating segments in the future.

16.  RELATED PARTY TRANSACTIONS

     We have various related party transactions with Alestra, a
telecommunications company in Mexico, in which we own a 49% equity interest.
Included in revenue was $13 million, $17 million and $52 million for
telecommunications services provided to Alestra for the years ended December 31,
2004, 2003 and 2002, respectively. Included in expenses were charges from
Alestra representing costs incurred on our behalf to transfer service and
connect calls made to Mexico, which totaled $114 million, $170 million and $121
million for the years ended December 31, 2004, 2003 and 2002, respectively. As
of December 31, 2004 and 2003, accounts receivable from Alestra were $5 million
in each year; accounts payable to Alestra for the same periods were $36 million
and $14 million, respectively. Transaction prices were determined based on
contractual terms.

                                       108
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     We had various related party transactions with Concert until the joint
venture was officially unwound on April 1, 2002. Included in revenue was $268
million for services provided to Concert in 2002. Included in access and other
connection expenses are charges from Concert representing costs incurred on our
behalf to connect calls made to foreign countries (international settlements)
and costs paid by us to Concert for distributing Concert products totaling $491
million in 2002.

17.  QUARTERLY INFORMATION (UNAUDITED)

  2004

<Table>
<Caption>
                                                 FIRST      SECOND      THIRD(1)     FOURTH(2)
                                               ---------   ---------   ----------   -----------
                                               (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>         <C>         <C>          <C>
Revenue......................................   $ 7,990     $ 7,636     $  7,638      $ 7,273
Operating income (loss)......................       281         348      (11,325)         608
Net income (loss)............................       304         108       (7,147)         266
Earnings (loss) per basic and diluted
  share(3)...................................   $  0.38     $  0.14     $  (8.99)     $  0.33
Dividends declared...........................   $0.2375     $0.2375     $ 0.2375      $0.2375
Stock prices(4)
High.........................................   $ 22.10     $ 19.75     $  15.85      $ 19.87
Low..........................................     18.70       14.25        13.59        14.25
Quarter-end close............................     19.57       14.63        14.32        19.06
</Table>

  2003

<Table>
<Caption>
                                                   FIRST        SECOND       THIRD        FOURTH
                                                 ----------   ----------   ----------   ----------
                                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>          <C>          <C>          <C>
Revenue........................................   $ 8,986      $ 8,795      $ 8,649      $ 8,099
Operating income...............................     1,166        1,029          829          633
Income from continuing operations..............       529          536          458          340
Net (loss) from discontinued operations (net of
  income taxes)................................        --           --          (13)          --
Income before cumulative effect of accounting
  change.......................................       529          536          445          340
Cumulative effect of accounting change (net of
  income taxes)................................        42           --          (27)          --
Net income.....................................       571          536          418          340
Earnings (loss) per share -- basic(3):
Earnings from continuing operations............   $  0.67      $  0.68      $  0.58      $  0.43
(Loss) from discontinued operations............        --           --        (0.02)          --
Cumulative effect of accounting change.........      0.06           --        (0.03)          --
Earnings per basic share.......................   $  0.73      $  0.68      $  0.53      $  0.43
Earnings (loss) per share -- diluted(3):
Earnings from continuing operations............   $  0.67      $  0.68      $  0.58      $  0.43
(Loss) from discontinued operations............        --           --        (0.02)          --
Cumulative effect of accounting change.........      0.06           --        (0.03)          --
Earnings per diluted share.....................   $  0.73      $  0.68      $  0.53      $  0.43
Dividends declared.............................   $0.1875      $0.1875      $0.2375      $0.2375
Stock prices(4)
  High.........................................   $ 27.89      $ 21.84      $ 23.18      $ 21.95
  Low..........................................     15.75        13.45        18.80        18.31
  Quarter-end close............................     16.20        19.25        21.55        20.30
</Table>

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

(1) The operating (loss) for the third quarter of 2004 included $12.5 billion of
    pretax asset impairment and net restructuring and other charges.

                                       109
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) The operating income for the fourth quarter of 2004 included $0.6 billion of
    access charges relating to an enhanced prepaid card service, as a result of
    the February 2005 FCC ruling (see note 14 for additional information).

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

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

     In September 2003, in conjunction with our review of accounting and
internal control systems, we determined that the liability on the balance sheet
(included in accounts payable and accrued expenses) relating to costs incurred
in 2001 and 2002 pertaining to access and other connection expenses was
understated by $125 million. Since the impact to prior years' annual financial
statements was not material, we recorded additional expense of $125 million ($77
million after taxes) in the third quarter of 2003 to reflect the proper estimate
of the liability, of which $52 million ($32 million after taxes) related to 2001
and $73 million ($45 million after taxes) related to 2002.

18.  NEW ACCOUNTING PRONOUNCEMENTS

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The revised statement eliminates the
alternative of using APB Opinion No. 25 intrinsic value method of accounting
that was provided for in SFAS No. 123 as originally issued. Effective January 1,
2003, we adopted the fair value recognition provisions of original SFAS No. 123
on a prospective basis and we began to record stock-based compensation expense
for all employee awards (including stock options) granted or modified after
January 1, 2003. Adoption of the revised standard will require that we begin to
recognize expense for unvested awards issued prior to January 1, 2003.
Additionally, this standard requires that estimated forfeitures be considered in
determining compensation expense. For equity awards other than stock options, we
have not previously included estimated forfeitures in determining compensation
expense. Accordingly, the difference between the expense we have recognized to
date and the compensation expense as calculated considering estimated
forfeitures will be reflected as a cumulative effect of accounting change upon
adoption. Further, SFAS No. 123 (revised 2004) requires that excess tax benefits
be recognized as an addition to paid-in capital and amends SFAS No. 95,
"Statement of Cash Flows," to require that the excess tax benefits be reported
as a financing cash inflow rather than as a reduction of taxes paid. SFAS No.
123 (revised 2004) is effective for all awards granted after June 15, 2005, and
to awards modified, repurchased, or cancelled after that date. We intend to
elect a modified prospective adoption, which will result in additional
compensation expense beginning in the third quarter of 2005.

     In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets -- an amendment of APB Opinion No. 29." APB Opinion No. 29 requires that
nonmonetary exchanges of assets be recorded at fair value with an exception for
exchanges of similar productive assets, which can be recorded on a carryover
basis. SFAS No. 153 eliminates the current exception and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges that
take place in fiscal periods beginning after June 15, 2005, which is July 1,
2005 for us; however, earlier application is permitted.

     In December 2004, the FASB issued FSP No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004," which provides guidance on the accounting
and disclosure requirements for the repatriation provision of the Act. See note
13 for further information on the estimated impact to our results with respect
to this provision of the Act.

                                       110
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19.  SUBSEQUENT EVENTS

     On January 31, 2005, AT&T and SBC announced an agreement for SBC to acquire
AT&T. Under the terms of the agreement, each AT&T share will be exchanged for
0.77942 of a share of SBC common stock. In addition, at the time of closing, we
will pay our shareowners a special dividend of $1.30 per share. At the time of
the announcement, this consideration was valued at $19.71 per share, or
approximately $16.0 billion. The stock consideration in the transaction is
expected to be tax-free to our shareowners. The acquisition, which is subject to
approval by our shareowners and regulatory authorities, and other customary
closing conditions, is expected to close in late 2005 or early 2006. While the
merger agreement prohibits us from soliciting competing acquisition proposals,
we may accept a superior proposal prior to the effective date of the merger,
subject to compliance with the terms of the merger agreement and payment of a
$560 million termination fee and all documented out-of-pocket fees incurred by
SBC of up to $40 million. The terms of certain of our agreements including
contracts, employee benefit arrangements and debt instruments have provisions
which could result in changes to the terms or settlement amounts of these
agreements upon a change in control of AT&T.

     In February 2005, the FCC ruled against AT&T and its petition for a
declaratory ruling that our enhanced prepaid card service is an intrastate
information service. As a result of this ruling, we accrued $553 million
(pretax), as of December 31, 2004, which increased the loss per share for the
year ended December 31, 2004 by $0.46. See note 14 for additional details of
this matter.

     In March 2005, we offered to repurchase, for cash, up to $1.25 billion of
our outstanding 7.30% Notes maturing in 2011, which carried an interest rate of
9.05% at the time of the offer. This offer is scheduled to expire in April 2005.

                                       111
<PAGE>

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

     Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES

CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, we completed an
evaluation, under the supervision and with the participation of our management
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15 or 15d-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of
December 31, 2004.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     The report required by this Item is contained in Item 8 "Financial
Statements and Supplementary Data."

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

     There have not been any changes in our internal controls over financial
reporting identified in connection with the evaluation required by Exchange Act
Rules 13a-15 or 15d-15 or otherwise that occurred during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.

ITEM 9B.  OTHER INFORMATION

NONE

                                       112
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding our executive officers and our Code of Ethics is set
forth below. The other information required by Item 10 is incorporated by
reference to our definitive proxy statement for the 2005 annual meeting of
shareowners, including information under the captions "Questions and Answers
About the AT&T Annual Meeting and the Merger", "Information About the AT&T
Annual Meeting", "Information About the AT&T Board of Directors and Corporate
Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance". See
also "What information is available about our company?" in Item 2 above.

                      EXECUTIVE OFFICERS OF THE REGISTRANT
                             (AS OF MARCH 1, 2005)

<Table>
<Caption>
                                                                                   BECAME AT&T
NAME                     AGE                                                   EXECUTIVE OFFICER ON
----                     ---                                                   --------------------
<S>                      <C>   <C>                                             <C>
James W. Cicconi.......  52    Executive Vice President and General Counsel           12-98
David W. Dorman........  51    Chairman of the Board and Chief Executive              12-00
                               Officer
Hossein Eslambolchi....  47    President, AT&T GNTS, AT&T CTO and                     01-03
                               AT&T CIO
Robert S. Feit.........  42    Vice President-Law, Corporate Secretary and            01-03
                               Chief Compliance Officer
Mirian M.                50    Executive Vice President, Human Resources              03-99
  Graddick-Weir........
William J. Hannigan....  45    President and Chief Operating Officer                  12-03
Thomas W. Horton.......  43    Vice Chairman and Chief Financial Officer              06-02
John Polumbo...........  53    President and Chief Executive Officer - AT&T           10-02
                               Consumer
Christopher R. Reidy...  48    Vice President and Controller                          05-04
Virasb Vahidi..........  38    Senior Vice President Corporate Strategy and           05-04
                               Development
</Table>

     All of the above executive officers have held high level managerial
positions with AT&T or its affiliates for more than the past five years, except
Messrs. Dorman, Hannigan, Horton, Polumbo, Reidy and Vahidi. Prior to joining
AT&T in December 2000, Mr. Dorman was Chief Executive Officer of Concert, a
global venture created by AT&T and British Telecommunications plc, from 1999 to
2000. Prior to joining AT&T in 2003, Mr. Hannigan was Chairman of the Board,
President and Chief Executive Officer of Sabre Holdings, Inc. from 1999 to 2003.
Prior to joining AT&T in 2002, Mr. Horton served in various high level
management positions of AMR Corporation, the parent company of American
Airlines; he was Senior Vice President and Chief Financial Officer from 2000 to
2002, and Vice President-Europe Division from 1998 to 2000. Prior to becoming an
Executive Officer of AT&T in 2002, Mr. Polumbo served as Senior Vice President
of AT&T Business Global Ventures from September 2001; and as President of the
Global Services Unit of Concert from June 1999 to September 2001. Prior to
joining AT&T in 2000, Mr. Reidy served as the Chief Financial Officer of the
National Basketball Association. Prior to joining AT&T in 2002, Mr. Vahidi
served in various management positions at American Airlines. He was the Managing
Director of Airline Profitability and Financial Analysis from 2000 to 2002, and
Managing Director of International Planning from 1998 to 2000.

     We have adopted a Code of Ethics for the Chief Executive Officer and Senior
Financial Officers which applies to our principal executive officer, principal
accounting officer and controller, principal financial officer and persons
performing similar functions. The Code is posted at our website www.att.com/ir.
Our Board did not grant a waiver of any ethics policy for any director or
executive officer in 2004.

                                       113
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     There is incorporated by reference in this Item 11 that portion of our
definitive proxy statement for the 2005 annual meeting of shareowners under the
captions "Five Year Performance Comparison" and "Executive Compensation".

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

     There is incorporated by reference in this Item 12 that portion of our
definitive proxy statement for the 2005 annual meeting of shareowners under the
captions "Stock Ownership of AT&T Management and Directors" and "Beneficial
Ownership of More than 5% of AT&T Common Stock". Information regarding our
equity compensation plans, including both stockholder approved plans and
non-stockholder approved plans, is set forth in the section entitled "Equity
Compensation Plan Information" and is also incorporated by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is incorporated by reference in this Item 13 that portion of our
definitive proxy statement for the 2005 annual meeting of shareowners under the
caption "Certain Relationships and Related Transactions".

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     There is incorporated by reference in this Item 14 that portion of our
definitive proxy statement for the 2005 annual meeting of shareholders under the
caption "AT&T's Independent Public Accountants".

                                       114
<PAGE>

                                    PART IV

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

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

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

<Table>
<Caption>
                                                              PAGES
                                                              -----
<S>                                                           <C>
Report of Independent Registered Public Accounting Firm.....    58
Statements:
  Consolidated Statements of Operations.....................    60
  Consolidated Balance Sheets...............................    61
  Consolidated Statements of Changes in Shareowners'
     Equity.................................................    62
  Consolidated Statements of Cash Flows.....................    63
  Notes to Consolidated Financial Statements................    64
</Table>

     (2) Financial Statement Schedule:

<Table>
<S>                                                           <C>
Schedule:
  II -- Valuation and Qualifying Accounts...................   123
</Table>

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

     (3) Exhibits:

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

<Table>
<S>             <C>
(2)             Agreement and Plan of Merger among AT&T Corp., SBC
                Communications Inc. and Tau Merger Sub Corporation dated as
                of January 30, 2005 (schedules omitted) (incorporated by
                reference to Form 8-K filed February 2, 2005, File No.
                1-1105).
(3)a            Restated Certificate of Incorporation of the registrant
                filed July 17, 2003 (incorporated by reference to Form 10-Q
                for second quarter 2003, File No. 1-1105).
(3)b            By-Laws of the registrant, as amended March 20, 2003
                (incorporated by reference to Form 10-K for 2002, File No.
                1-1105).
(4)             No instrument which defines the rights of holders of long
                term debt, of the registrant and all of its consolidated
                subsidiaries, is filed herewith pursuant to Regulation S-K,
                Item 601(b)(4)(iii)(A), except for the instruments referred
                to in 4(i)(1) and 4(i)(2) below. Pursuant to this
                regulation, the registrant hereby agrees to furnish a copy
                of any such instrument not filed herewith to the SEC upon
                request.
4(i)(1)         Indenture between American Telephone and Telegraph Company
                and The Bank of New York, as trustee, dated as of September
                7, 1990 (incorporated by reference to Exhibit 4A to Form SE
                filed September 10, 1990, file no. 33-36756), as
                supplemented by First Supplemental Indenture dated October
                30, 1992 (incorporated by reference to Exhibit 4.AA to
                Current Report on Form 8-K filed December 1, 1992) and by
                Second Supplemental Indenture dated November 14, 2002
                (incorporated by reference to Exhibit 4.10 to Amendment No.
                1 to Form S-4 filed September 26, 2002, file no. 333-97953).
4(i)(2)         Indenture between AT&T Corp. and The Bank of New York, as
                trustee, dated as of November 1, 2001 (incorporated by
                reference to Exhibit 4 to Form S-4 filed May 12, 2002, file
                no. 333-87960).
</Table>

                                       115
<PAGE>
<Table>
<S>             <C>
(10)(i)1        Separation and Distribution Agreement by and among AT&T
                Corp., Lucent Technologies Inc. and NCR Corporation, dated
                as of February 1, 1996 and amended and restated as of March
                29, 1996 (incorporated by reference to Exhibit (10)(i)1 to
                Form 10-K for 1996, File No. 1-1105).
(10)(i)2        Distribution Agreement, dated as of November 20, 1996, by
                and between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)2 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)3        Tax Sharing Agreement by and among AT&T Corp., Lucent
                Technologies Inc. and NCR Corporation, dated as of February
                1, 1996 and amended and restated as of March 29, 1996
                (incorporated by reference to Exhibit (10)(i)3 to Form 10-K
                for 1996, File No. 1-1105).
(10)(i)4        Employee Benefits Agreement by and between AT&T Corp. and
                Lucent Technologies Inc., dated as of February 1, 1996 and
                amended and restated as of March 29, 1996 (incorporated by
                reference to Exhibit (10)(i)4 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)5        Employee Benefits Agreement, dated as of November 20, 1996,
                between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)5 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)6        Separation and Distribution Agreement by and between AT&T
                Corp. and AT&T Wireless Services, Inc., dated as of June 4,
                2001 (incorporated by reference to Exhibit 10.1 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7        Amended and Restated Tax Sharing Agreement by and between
                AT&T Corp. and AT&T Wireless Services, Inc., dated as of
                June 4, 2001 (incorporated by reference to Exhibit 10.2 to
                the AT&T Wireless Services, Inc. Registration Statement on
                Form S-1/A (Commission file No. 333-59174), filed June 21,
                2001).
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
</Table>

                                       116
<PAGE>
<Table>
<S>             <C>
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)15       Second Amendment to Tax Sharing Agreement dated as of
                September 24, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc., and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.6 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)16       Third Amendment to Tax Sharing Agreement dated as of October
                20, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.7 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)17       Fourth Amendment to Tax Sharing Agreement dated as of
                October 28, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.8 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)18       Fifth Amendment to Tax Sharing Agreement dated as of
                December 6, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.9 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)19       Sixth Amendment to Tax Sharing Agreement dated as of
                December 10, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.10 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)20       Seventh Amendment to Tax Sharing Agreement dated as of
                December 30, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.11 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)21       Eighth Amendment to Tax Sharing Agreement dated as of July
                25, 2000, by and among AT&T Corp., Liberty Media
                Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)22       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Tax Sharing Agreement dated as
                of March 9, 1999, as amended, among The Associated Group,
                Inc., AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
</Table>

                                       117
<PAGE>
<Table>
<S>             <C>
(10)(i)23       First Supplement to Inter-Group Agreement dated as of May
                28, 1999, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.14 to
                the Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
(10)(i)24       Second Supplement to Inter-Group Agreement dated as of
                September 24, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.15 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)25       Third Supplement to Inter-Group Agreement dated as of
                October 20, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.16 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)26       Fourth Supplement to Inter-Group Agreement dated as of
                December 6, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.17 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)27       Fifth Supplement to Inter-Group Agreement dated as of
                December 10, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.18 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)28       Sixth Supplement to Inter-Group Agreement dated as of
                December 30, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.19 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(10)(i)29       Seventh Supplement to Inter-Group Agreement dated as of July
                25, 2000, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.21 to
                the Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)30       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Inter-Group Agreement dated as
                of March 9, 1999, as supplemented, between and among AT&T
                Corp., on the one hand, and Liberty Media Corporation,
                Liberty Media Group LLC and each Covered Entity listed on
                the signature pages thereof, on the other hand (incorporated
                by reference to Exhibit 10.20 to the Registration Statement
                on Form S-1/A of Liberty Media Corporation (File No.
                333-93917) as filed on February 9, 2000).
(10)(i)31       Eighth Supplement to Inter-Group Agreement dated as of
                November 20, 2000, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.24 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-66034) as filed on
                July 27, 2001).
</Table>

                                       118
<PAGE>
<Table>
<S>             <C>
(10)(i)32       Ninth Supplement to Inter-Group Agreement dated as of June
                14, 2001, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
                Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI,
                Inc., on the other hand (incorporated by reference to
                Exhibit 10.25 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-66034) as filed on
                July 27, 2001).
(10)(i)33       Agreement and Plan of Merger dated as of December 19, 2001
                among AT&T Corp., AT&T Broadband Corp., Comcast Corporation,
                AT&T Broadband Acquisition Corp., Comcast Acquisition Corp.
                and AT&T Comcast Corporation (incorporated by reference to
                Exhibit 2.1 to the Registration Statement on Form S-4 of
                AT&T Comcast Corporation (File No. 333-82460) as filed on
                February 11, 2002).
(10)(i)34       Separation and Distribution Agreement dated as of December
                19, 2001 between AT&T Corp. and AT&T Broadband Corp.
                (incorporated by reference to Exhibit 2.2 to the
                Registration Statement on Form S-4 of AT&T Comcast
                Corporation (File No. 333-82460) as filed on February 11,
                2002).
(10)(i)35       Tax Sharing Agreement dated as of December 19, 2001 between
                AT&T Corp. and AT&T Broadband Corp. (incorporated by
                reference to Exhibit 2.4 to the Registration Statement on
                Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as
                filed on February 11, 2002).
(10)(i)36       Employee Benefits Agreement dated as of December 19, 2001
                between AT&T Corp. and AT&T Broadband Corp. (incorporated by
                reference to Exhibit (10)(i)37 to Form 10-K for 2001, File
                No. 1-1105).
(10)(i)37       Amended and Restated 364-Day Revolving Credit Facility
                Agreement, dated as of October 6, 2004, among AT&T Corp.,
                the Lenders party hereto, JPMorgan Chase Bank and Citicorp
                USA, Inc. as Administrative Agents, ABN Amro Bank N.V., Bank
                of America, N.A. and Royal Bank of Scotland, as
                Co-Syndication Agents, and Barclays Bank PLC, Credit Suisse
                First Boston, Cayman Islands Branch, Deutsch Bank AG New
                York Branch, HSBC Bank USA, Morgan Stanley Bank and UBS
                Securities LLC, as Co-Documentation Agents, with J.P. Morgan
                Securities Inc., Citigroup Global Markets Inc. and Banc of
                America Securities LLC, as Joint Lead Arrangers and Joint
                Bookrunners. (incorporated by reference to Form 8-K filed
                October 7, 2004, File No. 1-1105).
(10)(iii)(A)1   AT&T Short Term Incentive Plan as amended January 2004
                (incorporated by reference to Exhibit (10)(iii)(A)1 to Form
                10-Q for quarter ended Match 31, 2004), amending and
                restating AT&T Short Term Incentive Plan, as amended March
                1994 (incorporated by reference to Exhibit (10)(iii)(A)1 to
                Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2   AT&T 1987 Long Term Incentive Program as amended December
                17, 1997 (incorporated by reference to Exhibit 10)(iii)(A)2
                to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)3   AT&T Senior Management Individual Life Insurance Program as
                amended March 3, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4   AT&T Senior Management Long Term Disability and Survivor
                Protection Plan, as amended and restated effective January
                1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4
                to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)5   AT&T Senior Management Financial Counseling Program dated
                December 29, 1994 (incorporated by reference to Exhibit
                (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6   AT&T Deferred Compensation Plan for Non-Employee Directors,
                as amended December 15, 1993 (incorporated by reference to
                Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No.
                1-1105) and as amended May 18, 2004 (incorporated by
                reference to Exhibit (10)(iii)(A)4 to Form 10-Q for second
                quarter 2004).
(10)(iii)(A)7   The AT&T Directors Individual Life Insurance Program as
                amended March 2, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)7 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)8   AT&T Plan for Non-Employee Directors' Travel Accident
                Insurance (incorporated by reference to Exhibit
                (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
</Table>

                                       119
<PAGE>

<Table>
<S>                <C>
(10)(iii)(A)9      AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996
                   (incorporated by reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105)
                   including Form of Amendment to AT&T Excess Benefit and Compensation Plan dated as of July 28,
                   2003 (incorporated by reference to Exhibit 10(iii)(A)1 to Form 10-Q for third quarter 2003, File
                   No. 1-1105).
(10)(iii)(A)10     AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (incorporated by
                   reference to Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105) including Form of
                   Amendment to AT&T Non-Qualified Pension Plan dated as of July 28, 2003 (incorporated by
                   reference to Exhibit 10(iii)(A)2 to Form 10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)11     AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998 (incorporated
                   by reference to Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No. 1-1105) including Form of
                   Amendment to AT&T Senior Management Incentive Award Deferral Plan dated as of July 28, 2003
                   (incorporated by reference to Exhibit 10(iii)(A)3 to Form 10-Q for third quarter 2003, File No.
                   1-1105).
(10)(iii)(A)12     AT&T Mid-Career Hire Program revised effective January 1, 1988 (incorporated by reference to
                   Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T
                   Mid-Career Pension Plan, as amended and restated July 1, 1999 (incorporated by reference to
                   Exhibit (10)(iii)(A)12 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13     AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (incorporated by
                   reference to Exhibit (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14     Indemnification Agreement for Officers and Directors (incorporated by reference to Exhibit
                   (10)(iii)(A)14 to Form 10-K for 2003, File No. 1-1105).
(10)(iii)(A)15     Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (incorporated by
                   reference to Exhibit (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16     AT&T Corp. Senior Management Universal Life Insurance Program effective October 1, 1999
                   (incorporated by reference to Exhibit (10)(iii)(A)16 to Form 10-K for 2000, File No. 1-1105)
                   including Form of Amendment to AT&T Corp. Senior Management Universal Life Insurance Program
                   dated as of July 28, 2003 (incorporated by reference to Exhibit 10(iii)(A)4 to Form 10-Q for
                   third quarter 2003, File No. 1-1105). AT&T Corp. Executive Life Insurance Program as amended and
                   restated on January 1, 2004.
(10)(iii)(A)17     AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993, including
                   the first amendment thereto dated December 23, 1997 (incorporated by reference to Exhibit
                   (10)(iii)(A)17 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)18     AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997
                   (incorporated by reference to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105),
                   and as amended, restated and renamed AT&T Senior Officer Separation Plan as of January 1, 2003
                   including Form of Amendment of Appendix A of AT&T Senior Officer Severance Plan dated as of July
                   28, 2003 (incorporated by reference to Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003,
                   File No. 1-1105); AT&T Corp. board resolutions adopted February 23, 2004 authorizing amendment
                   of Senior Officer Separation Plan (incorporated by reference to Exhibit (10)(iii)(A)2 to Form
                   10-Q for first quarter 2004, File No. 1-1105); AT&T Senior Officer Separation Plan as amended
                   and restated May 19, 2004 (incorporated by reference to Exhibit (10)(iii)(A)2 to Form 10-Q for
                   second quarter 2004, File No. 1-1105).
(10)(iii)(A)19     Special Incentive Agreement between AT&T Corp. and Hossein Eslambolchi dated June 2, 2003
                   (incorporated by reference to Exhibit (10)(iii)(A)1 to Form 10-Q for second quarter 2003, File
                   No. 1-1105).
(10)(iii)(A)20     Employment Agreement between AT&T Corp. and Thomas W. Horton dated as of June 10, 2002
                   (incorporated by reference to Exhibit (10)(iii)(A)20 to Form 10-K for 2003, File No. 1-1105).
</Table>

                                       120
<PAGE>
<Table>
<S>             <C>
(10)(iii)(A)21  Pension Agreement between AT&T Corp. and Thomas W. Horton
                dated as of July 29, 2003 (incorporated by reference to
                Exhibit (10)(iii)(A)21 to Form 10-K for 2003, File No.
                1-1105).
(10)(iii)(A)22  Modification to Employment Agreement dated September 16,
                2002 to Employment Agreement between AT&T Corp. and Thomas
                W. Horton dated as of June 10, 2002 (incorporated by
                reference to Exhibit (10)(iii)(A)22 to Form 10-K for 2003,
                File No. 1-1105).
(10)(iii)(A)23  Financial Services Agreement between AT&T Corp. and Thomas
                W. Horton dated as of July 24, 2002 (incorporated by
                reference to Exhibit (10)(iii)(A)23 to Form 10-K for 2003,
                File No. 1-1105).
(10)(iii)(A)24  AT&T Corp. Executive Disability Plan dated February 2004
                (incorporated by reference to Exhibit (10)(iii)(A)24 to Form
                10-K for 2003, File No. 1-1105)
(10)(iii)(A)25  AT&T Corp. Directors' Universal Life Insurance Program
                effective June 1, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)26  AT&T Corp. Senior Management Universal Life Insurance
                Program for Former Executives effective October 1, 1999
                (incorporated by reference to Exhibit (10)(iii)(A)26 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Special Temporary Allowance Agreement between AT&T Corp. and
                David Dorman dated December 15, 2003 (incorporated by
                reference to Exhibit (10)(iii)(A)27 to Form 10-K for 2003,
                File No. 1-1105).
(10)(iii)(A)28  Agreement between AT&T Corp. and Hossein Eslambolchi dated
                January 4, 2001 including amendment dated March 9, 2001
                (incorporated by reference to Exhibit (10)(iii)(A)28 to Form
                10-K for 2002, File No. 1-1105).
(10)(iii)(A)29  Board of Directors resolution adopted July 15, 2003 amending
                various executive and management plans as of January 1, 2004
                (incorporated by reference to Exhibit (10)(iii)(A)29 to Form
                10-K for 2003, File No. 1-1105).
(10)(iii)(A)30  AT&T Corp. board resolutions adopting change in control
                provision to various plans effective October 23, 2000
                (incorporated by reference to Exhibit (10)(iii)(A)32 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)31  Employment Agreement between AT&T Corp. and David Dorman
                dated May 18, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105)
                including amendment dated December 31, 2002 (incorporated by
                reference to Form 10-K for 2002, File No. 1-1105) including
                amendment dated July 25, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)7 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)32  Special Equity Agreement between AT&T Corp. and Hossein
                Eslambolchi dated January 31, 2001 (incorporated by
                reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2002,
                File No. 1-1105).
(10)(iii)(A)33  Employment Agreement between AT&T Corp. and Hossein
                Eslambolchi dated December 28, 1999 including amendment
                dated January 6, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)36 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)34  Agreement between AT&T Corp. and James W. Cicconi dated July
                29, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)37 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)35  Special Deferral Agreement between AT&T Corp. and James W.
                Cicconi dated April 2, 2001 (incorporated by reference to
                Exhibit (10)(iii)(A)38 to Form 10-K for 2002, File No.
                1-1105).
(10)(iii)(A)36  Employment Agreement between AT&T Corp. and William J.
                Hannigan dated April 26, 2004 filed herewith.
(10)(iii)(A)37  AT&T 2004 Long Term Incentive Plan (incorporated by
                reference to Exhibit 4.1 to Form S-8 filed on May 26, 2004,
                File No. 333-115909)
</Table>

                                       121
<PAGE>
<Table>
<S>             <C>
(10)(iii)(A)38  Summary of actions taken to amend the definition of "Change
                in Control" in AT&T benefit plans and programs generally
                (incorporated by reference to Exhibit (10)(iii)(A)3 to Form
                10-Q for second quarter 2004).
(12)            Computation of Ratio of Earnings to Fixed Charges.
(14)            Code of Ethics for Chief Executive Officer and Senior
                Financial Officers (incorporated by reference to Exhibit
                (14) to Form 10-K for 2003, File No. 1-1105).
(21)            List of subsidiaries of AT&T.
(23)            Consent of PricewaterhouseCoopers LLP.
(24)            Powers of Attorney executed by officers and directors who
                signed this report.
(31.1)          Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)          Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)          Certification by CEO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
(32.2)          Certification by CFO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
</Table>

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

     (b) Reports on Form 8-K:

     During the fourth quarter 2004, the following Forms 8-K were filed and/or
furnished: Form 8-K dated October 6, 2004 (Item 1.01. Entry into a Material
Agreement and Item 9.01. Financial Statements and Exhibits); Form 8-K/A dated
October 6, 2004 (Item 1.01. Entry into a Material Agreement); Form 8-K dated
October 7, 2004 (Item 2.02. Results of Operations and Financial Condition; Item
2.05. Costs Associated with Exit or Disposal Activities; Item 2.06. Material
Impairments; Item 8.01. Other Events; and Item 9.01. Financial Statements and
Exhibits); Form 8-K dated October 21, 2004 (Item 2.02. Results of Operations and
Financial Condition and Item 9.01. Financial Statements and Exhibits); Form 8-K
dated October 26, 2004 (Item 2.02. Results of Operations and Financial Condition
and Item 9.01. Financial Statements and Exhibits); and Form 8-K dated December
9, 2004 (Item 7.01. Regulation FD Disclosure). To the extent that any
information contained in any 8-K, 8-K/A or any exhibit thereto, was furnished
rather than filed, such information or exhibit is specifically not incorporated
by reference in this 10-K filing.

                                       122
<PAGE>

                                                                     SCHEDULE II

                                   AT&T CORP.
                       AND ITS CONSOLIDATED SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
COLUMN A                                         COLUMN B     COLUMN C      COLUMN D
                                                BALANCE AT   CHARGED TO                     COLUMN E
                                                BEGINNING    COSTS AND                     BALANCE AT
DESCRIPTION                                     OF PERIOD     EXPENSES    DEDUCTIONS(A)   END OF PERIOD
-----------                                     ----------   ----------   -------------   -------------
                                                                 (DOLLARS IN MILLIONS)
<S>                                             <C>          <C>          <C>             <C>
Year 2004
Allowances for doubtful accounts(b)(c)........     $637        $  438        $  494           $581
Deferred tax asset valuation allowance........     $857        $  185        $  467           $575
Year 2003
Allowances for doubtful accounts(b)(c)........     $720        $  710        $  793           $637
Deferred tax asset valuation allowance........     $689        $  208        $   40           $857
Year 2002
Allowances for doubtful accounts(b)...........     $809        $1,058        $1,147           $720
Deferred tax asset valuation allowance(d).....     $ 34        $  655        $   --           $689
</Table>

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

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

(b) Includes allowances for doubtful accounts on long-term receivables of $58
    million, $58 million, and $51 million at December 31, 2004, 2003, and 2002,
    respectively (included in other assets in the Consolidated Balance Sheets).

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

(d) The increase in the deferred tax asset valuation allowance in 2002 was
    primarily due to the asset impairment charge recorded for AT&T's investment
    in AT&T Latin America. During 2004 we recorded an income tax benefit of $0.4
    billion as a result of reversing the valuation allowance recognized in 2002
    due to the sale of AT&T Latin America in February 2004.

                                       123
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          AT&T CORP.

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

March 8, 2005

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

<Table>
<Caption>
                    SIGNATURE                                     TITLE(S)                     DATE
                    ---------                                     --------                     ----
<S>     <C>                                          <C>                                   <C>

               /s/ DAVID W. DORMAN                        Chairman of the Board and        March 8, 2005
    -----------------------------------------              Chief Executive Officer
                 David W. Dorman


               /s/ THOMAS W. HORTON                   Vice Chairman and Chief Financial    March 8, 2005
 ------------------------------------------------                  Officer
                 Thomas W. Horton


                 /s/ C. R. REIDY                        Vice President and Controller      March 8, 2005
 ------------------------------------------------
               Christopher R. Reidy
</Table>

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

<Table>
<S>     <C>                                          <C>                                   <C>
                By: /s/ R.S. FEIT                                                          March 8, 2004
 ------------------------------------------------
                    R.S. Feit
               (Attorney-in-Fact)*
</Table>

                                       124
<PAGE>

                                 EXHIBIT INDEX

<Table>
<S>             <C>
(2)             Agreement and Plan of Merger among AT&T Corp., SBC
                Communications Inc. and Tau Merger Sub Corporation dated as
                of January 30, 2005 (schedules omitted) (incorporated by
                reference to Form 8-K filed February 2, 2005, File No.
                1-1105).
(3)a            Restated Certificate of Incorporation of the registrant
                filed July 17, 2003 (incorporated by reference to Form 10-Q
                for second quarter 2003, File No. 1-1105).
(3)b            By-Laws of the registrant, as amended March 20, 2003
                (incorporated by reference to Form 10-K for 2002, File No.
                1-1105).
(4)             No instrument which defines the rights of holders of long
                term debt, of the registrant and all of its consolidated
                subsidiaries, is filed herewith pursuant to Regulation S-K,
                Item 601(b)(4)(iii)(A), except for the instruments referred
                to in 4(i)(1) and 4(i)(2) below. Pursuant to this
                regulation, the registrant hereby agrees to furnish a copy
                of any such instrument not filed herewith to the SEC upon
                request.
4(i)(1)         Indenture between American Telephone and Telegraph Company
                and The Bank of New York, as trustee, dated as of September
                7, 1990 (incorporated by reference to Exhibit 4A to Form SE
                filed September 10, 1990, file no. 33-36756), as
                supplemented by First Supplemental Indenture dated October
                30, 1992 (incorporated by reference to Exhibit 4.AA to
                Current Report on Form 8-K filed December 1, 1992) and by
                Second Supplemental Indenture dated November 14, 2002
                (incorporated by reference to Exhibit 4.10 to Amendment No.
                1 to Form S-4 filed September 26, 2002, file no. 333-97953).
4(i)(2)         Indenture between AT&T Corp. and The Bank of New York, as
                trustee, dated as of November 1, 2001 (incorporated by
                reference to Exhibit 4 to Form S-4 filed May 12, 2002, file
                no. 333-87960).
(10)(i)1        Separation and Distribution Agreement by and among AT&T
                Corp., Lucent Technologies Inc. and NCR Corporation, dated
                as of February 1, 1996 and amended and restated as of March
                29, 1996 (incorporated by reference to Exhibit (10)(i)1 to
                Form 10-K for 1996, File No. 1-1105).
(10)(i)2        Distribution Agreement, dated as of November 20, 1996, by
                and between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)2 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)3        Tax Sharing Agreement by and among AT&T Corp., Lucent
                Technologies Inc. and NCR Corporation, dated as of February
                1, 1996 and amended and restated as of March 29, 1996
                (incorporated by reference to Exhibit (10)(i)3 to Form 10-K
                for 1996, File No. 1-1105).
(10)(i)4        Employee Benefits Agreement by and between AT&T Corp. and
                Lucent Technologies Inc., dated as of February 1, 1996 and
                amended and restated as of March 29, 1996 (incorporated by
                reference to Exhibit (10)(i)4 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)5        Employee Benefits Agreement, dated as of November 20, 1996,
                between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)5 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)6        Separation and Distribution Agreement by and between AT&T
                Corp. and AT&T Wireless Services, Inc., dated as of June 4,
                2001 (incorporated by reference to Exhibit 10.1 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7        Amended and Restated Tax Sharing Agreement by and between
                AT&T Corp. and AT&T Wireless Services, Inc., dated as of
                June 4, 2001 (incorporated by reference to Exhibit 10.2 to
                the AT&T Wireless Services, Inc. Registration Statement on
                Form S-1/A (Commission file No. 333-59174), filed June 21,
                2001).
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)15       Second Amendment to Tax Sharing Agreement dated as of
                September 24, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc., and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.6 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)16       Third Amendment to Tax Sharing Agreement dated as of October
                20, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.7 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)17       Fourth Amendment to Tax Sharing Agreement dated as of
                October 28, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.8 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)18       Fifth Amendment to Tax Sharing Agreement dated as of
                December 6, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.9 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(i)19       Sixth Amendment to Tax Sharing Agreement dated as of
                December 10, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.10 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)20       Seventh Amendment to Tax Sharing Agreement dated as of
                December 30, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.11 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)21       Eighth Amendment to Tax Sharing Agreement dated as of July
                25, 2000, by and among AT&T Corp., Liberty Media
                Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)22       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Tax Sharing Agreement dated as
                of March 9, 1999, as amended, among The Associated Group,
                Inc., AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
(10)(i)23       First Supplement to Inter-Group Agreement dated as of May
                28, 1999, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.14 to
                the Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
(10)(i)24       Second Supplement to Inter-Group Agreement dated as of
                September 24, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.15 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)25       Third Supplement to Inter-Group Agreement dated as of
                October 20, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.16 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)26       Fourth Supplement to Inter-Group Agreement dated as of
                December 6, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.17 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)27       Fifth Supplement to Inter-Group Agreement dated as of
                December 10, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.18 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(i)28       Sixth Supplement to Inter-Group Agreement dated as of
                December 30, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.19 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(10)(i)29       Seventh Supplement to Inter-Group Agreement dated as of July
                25, 2000, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.21 to
                the Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)30       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Inter-Group Agreement dated as
                of March 9, 1999, as supplemented, between and among AT&T
                Corp., on the one hand, and Liberty Media Corporation,
                Liberty Media Group LLC and each Covered Entity listed on
                the signature pages thereof, on the other hand (incorporated
                by reference to Exhibit 10.20 to the Registration Statement
                on Form S-1/A of Liberty Media Corporation (File No.
                333-93917) as filed on February 9, 2000).
(10)(i)31       Eighth Supplement to Inter-Group Agreement dated as of
                November 20, 2000, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.24 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-66034) as filed on
                July 27, 2001).
(10)(i)32       Ninth Supplement to Inter-Group Agreement dated as of June
                14, 2001, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
                Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI,
                Inc., on the other hand (incorporated by reference to
                Exhibit 10.25 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-66034) as filed on
                July 27, 2001).
(10)(i)33       Agreement and Plan of Merger dated as of December 19, 2001
                among AT&T Corp., AT&T Broadband Corp., Comcast Corporation,
                AT&T Broadband Acquisition Corp., Comcast Acquisition Corp.
                and AT&T Comcast Corporation (incorporated by reference to
                Exhibit 2.1 to the Registration Statement on Form S-4 of
                AT&T Comcast Corporation (File No. 333-82460) as filed on
                February 11, 2002).
(10)(i)34       Separation and Distribution Agreement dated as of December
                19, 2001 between AT&T Corp. and AT&T Broadband Corp.
                (incorporated by reference to Exhibit 2.2 to the
                Registration Statement on Form S-4 of AT&T Comcast
                Corporation (File No. 333-82460) as filed on February 11,
                2002).
(10)(i)35       Tax Sharing Agreement dated as of December 19, 2001 between
                AT&T Corp. and AT&T Broadband Corp. (incorporated by
                reference to Exhibit 2.4 to the Registration Statement on
                Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as
                filed on February 11, 2002).
(10)(i)36       Employee Benefits Agreement dated as of December 19, 2001
                between AT&T Corp. and AT&T Broadband Corp. (incorporated by
                reference to Exhibit (10)(i)37 to Form 10-K for 2001, File
                No. 1-1105).
(10)(i)37       Amended and Restated 364-Day Revolving Credit Facility
                Agreement, dated as of October 6, 2004, among AT&T Corp.,
                the Lenders party hereto, JPMorgan Chase Bank and Citicorp
                USA, Inc. as Administrative Agents, ABN Amro Bank N.V., Bank
                of America, N.A. and Royal Bank of Scotland, as
                Co-Syndication Agents, and Barclays Bank PLC, Credit Suisse
                First Boston, Cayman Islands Branch, Deutsch Bank AG New
                York Branch, HSBC Bank USA, Morgan Stanley Bank and UBS
                Securities LLC, as Co-Documentation Agents, with J.P. Morgan
                Securities Inc., Citigroup Global Markets Inc. and Banc of
                America Securities LLC, as Joint Lead Arrangers and Joint
                Bookrunners. (incorporated by reference to Form 8-K filed
                October 7, 2004, File No. 1-1105).
</Table>
<PAGE>

<Table>
<S>                <C>
(10)(iii)(A)1      AT&T Short Term Incentive Plan as amended January 2004 (incorporated by reference to Exhibit
                   (10)(iii)(A)1 to Form 10-Q for quarter ended Match 31, 2004), amending and restating AT&T Short
                   Term Incentive Plan, as amended March 1994 (incorporated by reference to Exhibit (10)(iii)(A)1
                   to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2      AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (incorporated by reference to
                   Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)3      AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (incorporated
                   by reference to Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4      AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and
                   restated effective January 1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4 to Form
                   10-K for 1996, File No. 1-1105).
(10)(iii)(A)5      AT&T Senior Management Financial Counseling Program dated December 29, 1994 (incorporated by
                   reference to Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6      AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993
                   (incorporated by reference to Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No. 1-1105) and
                   as amended May 18, 2004 (incorporated by reference to Exhibit (10)(iii)(A)4 to Form 10-Q for
                   second quarter 2004).
(10)(iii)(A)7      The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (incorporated by
                   reference to Exhibit (10)(iii)(A)7 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)8      AT&T Plan for Non-Employee Directors' Travel Accident Insurance (incorporated by reference to
                   Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9      AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996
                   (incorporated by reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105)
                   including Form of Amendment to AT&T Excess Benefit and Compensation Plan dated as of July 28,
                   2003 (incorporated by reference to Exhibit 10(iii)(A)1 to Form 10-Q for third quarter 2003, File
                   No. 1-1105).
(10)(iii)(A)10     AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (incorporated by
                   reference to Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105) including Form of
                   Amendment to AT&T Non-Qualified Pension Plan dated as of July 28, 2003 (incorporated by
                   reference to Exhibit 10(iii)(A)2 to Form 10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)11     AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998 (incorporated
                   by reference to Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No. 1-1105) including Form of
                   Amendment to AT&T Senior Management Incentive Award Deferral Plan dated as of July 28, 2003
                   (incorporated by reference to Exhibit 10(iii)(A)3 to Form 10-Q for third quarter 2003, File No.
                   1-1105).
(10)(iii)(A)12     AT&T Mid-Career Hire Program revised effective January 1, 1988 (incorporated by reference to
                   Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T
                   Mid-Career Pension Plan, as amended and restated July 1, 1999 (incorporated by reference to
                   Exhibit (10)(iii)(A)12 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13     AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (incorporated by
                   reference to Exhibit (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14     Indemnification Agreement for Officers and Directors (incorporated by reference to Exhibit
                   (10)(iii)(A)14 to Form 10-K for 2003, File No. 1-1105).
(10)(iii)(A)15     Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (incorporated by
                   reference to Exhibit (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(iii)(A)16  AT&T Corp. Senior Management Universal Life Insurance
                Program effective October 1, 1999 (incorporated by reference
                to Exhibit (10)(iii)(A)16 to Form 10-K for 2000, File No.
                1-1105) including Form of Amendment to AT&T Corp. Senior
                Management Universal Life Insurance Program dated as of July
                28, 2003 (incorporated by reference to Exhibit 10(iii)(A)4
                to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T
                Corp. Executive Life Insurance Program as amended and
                restated on January 1, 2004.
(10)(iii)(A)17  AT&T Benefits Protection Trust Agreement as amended and
                restated as of November 1993, including the first amendment
                thereto dated December 23, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No.
                1-1105).
(10)(iii)(A)18  AT&T Senior Officer Severance Plan effective October 9,
                1997, as amended October 30, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
                1-1105), and as amended, restated and renamed AT&T Senior
                Officer Separation Plan as of January 1, 2003 including Form
                of Amendment of Appendix A of AT&T Senior Officer Severance
                Plan dated as of July 28, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003,
                File No. 1-1105); AT&T Corp. board resolutions adopted
                February 23, 2004 authorizing amendment of Senior Officer
                Separation Plan (incorporated by reference to Exhibit
                (10)(iii)(A)2 to Form 10-Q for first quarter 2004, File No.
                1-1105); AT&T Senior Officer Separation Plan as amended and
                restated May 19, 2004 (incorporated by reference to Exhibit
                (10)(iii)(A)2 to Form 10-Q for second quarter 2004, File No.
                1-1105).
(10)(iii)(A)19  Special Incentive Agreement between AT&T Corp. and Hossein
                Eslambolchi dated June 2, 2003 (incorporated by reference to
                Exhibit (10)(iii)(A)1 to Form 10-Q for second quarter 2003,
                File No. 1-1105).
(10)(iii)(A)20  Employment Agreement between AT&T Corp. and Thomas W. Horton
                dated as of June 10, 2002 (incorporated by reference to
                Exhibit (10)(iii)(A)20 to Form 10-K for 2003, File No.
                1-1105).
(10)(iii)(A)21  Pension Agreement between AT&T Corp. and Thomas W. Horton
                dated as of July 29, 2003 (incorporated by reference to
                Exhibit (10)(iii)(A)21 to Form 10-K for 2003, File No.
                1-1105).
(10)(iii)(A)22  Modification to Employment Agreement dated September 16,
                2002 to Employment Agreement between AT&T Corp. and Thomas
                W. Horton dated as of June 10, 2002 (incorporated by
                reference to Exhibit (10)(iii)(A)22 to Form 10-K for 2003,
                File No. 1-1105).
(10)(iii)(A)23  Financial Services Agreement between AT&T Corp. and Thomas
                W. Horton dated as of July 24, 2002 (incorporated by
                reference to Exhibit (10)(iii)(A)23 to Form 10-K for 2003,
                File No. 1-1105).
(10)(iii)(A)24  AT&T Corp. Executive Disability Plan dated February 2004
                (incorporated by reference to Exhibit (10)(iii)(A)24 to Form
                10-K for 2003, File No. 1-1105)
(10)(iii)(A)25  AT&T Corp. Directors' Universal Life Insurance Program
                effective June 1, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)26  AT&T Corp. Senior Management Universal Life Insurance
                Program for Former Executives effective October 1, 1999
                (incorporated by reference to Exhibit (10)(iii)(A)26 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Special Temporary Allowance Agreement between AT&T Corp. and
                David Dorman dated December 15, 2003 (incorporated by
                reference to Exhibit (10)(iii)(A)27 to Form 10-K for 2003,
                File No. 1-1105).
(10)(iii)(A)28  Agreement between AT&T Corp. and Hossein Eslambolchi dated
                January 4, 2001 including amendment dated March 9, 2001
                (incorporated by reference to Exhibit (10)(iii)(A)28 to Form
                10-K for 2002, File No. 1-1105).
(10)(iii)(A)29  Board of Directors resolution adopted July 15, 2003 amending
                various executive and management plans as of January 1, 2004
                (incorporated by reference to Exhibit (10)(iii)(A)29 to Form
                10-K for 2003, File No. 1-1105).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(iii)(A)30  AT&T Corp. board resolutions adopting change in control
                provision to various plans effective October 23, 2000
                (incorporated by reference to Exhibit (10)(iii)(A)32 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)31  Employment Agreement between AT&T Corp. and David Dorman
                dated May 18, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105)
                including amendment dated December 31, 2002 (incorporated by
                reference to Form 10-K for 2002, File No. 1-1105) including
                amendment dated July 25, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)7 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)32  Special Equity Agreement between AT&T Corp. and Hossein
                Eslambolchi dated January 31, 2001 (incorporated by
                reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2002,
                File No. 1-1105).
(10)(iii)(A)33  Employment Agreement between AT&T Corp. and Hossein
                Eslambolchi dated December 28, 1999 including amendment
                dated January 6, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)36 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)34  Agreement between AT&T Corp. and James W. Cicconi dated July
                29, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)37 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)35  Special Deferral Agreement between AT&T Corp. and James W.
                Cicconi dated April 2, 2001 (incorporated by reference to
                Exhibit (10)(iii)(A)38 to Form 10-K for 2002, File No.
                1-1105).
(10)(iii)(A)36  Employment Agreement between AT&T Corp. and William J.
                Hannigan dated April 26, 2004 filed herewith.
(10)(iii)(A)37  AT&T 2004 Long Term Incentive Plan (incorporated by
                reference to Exhibit 4.1 to Form S-8 filed on May 26, 2004,
                File No. 333-115909)
(10)(iii)(A)38  Summary of actions taken to amend the definition of "Change
                in Control" in AT&T benefit plans and programs generally
                (incorporated by reference to Exhibit (10)(iii)(A)3 to Form
                10-Q for second quarter 2004).
(12)            Computation of Ratio of Earnings to Fixed Charges.
(14)            Code of Ethics for Chief Executive Officer and Senior
                Financial Officers (incorporated by reference to Exhibit
                (14) to Form 10-K for 2003, File No. 1-1105).
(21)            List of subsidiaries of AT&T.
(23)            Consent of PricewaterhouseCoopers LLP.
(24)            Powers of Attorney executed by officers and directors who
                signed this report.
(31.1)          Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)          Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)          Certification by CEO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
(32.2)          Certification by CFO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
</Table>