<PAGE>

 AS FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3,
                                      2002

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

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                  FORM 10-K/A

<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, 2001



                                   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                                  I.R.S. EMPLOYER
                 CORPORATION                                   NO. 13-4924710
</Table>

            295 NORTH MAPLE AVENUE, BASKING RIDGE, NEW JERSEY 07920
                         TELEPHONE NUMBER 908-221-2000

          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.  [ ]

     At February 28, 2002, the aggregate market value of voting common stock
held by non-affiliates was approximately $54 billion. At February 28, 2002,
3,545,275,809 shares of AT&T common stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                     NONE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

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

OVERVIEW

     AT&T Corp.  (AT&T or the company) is among the world's communications
leaders, providing voice, data and video communications services to large and
small businesses, consumers and government agencies. We provide domestic and
international long distance, regional and local communications services, cable
(broadband) television and Internet communication services.

RESTRUCTURING OF AT&T

     On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.

     On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an
agreement to combine AT&T Broadband with Comcast. Under the terms of the
agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with
Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T
Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast
common stock based on an exchange ratio calculated pursuant to a formula
specified in the merger agreement. If determined as of the date of the merger
agreement, the exchange ratio would have been approximately 0.34, assuming the
AT&T shares held by Comcast are included in the number of shares of AT&T common
stock outstanding. Assuming Comcast retains its AT&T shares and converts them
into exchangeable preferred stock of AT&T as contemplated by the merger
agreement, the exchange ratio would be approximately 0.35. Assuming certain
conditions, AT&T shareowners will own an approximate 55% economic stake and an
approximate 61% voting interest in the new company, calculated as of the date of
the merger agreement. The merger of AT&T Broadband and Comcast is subject to
regulatory review, approval by both companies' shareowners and certain other
conditions, and is expected to close by the end of 2002. AT&T also intends to
proceed with the creation of a tracking stock for its AT&T Consumer Services
business, which is expected to be distributed to AT&T shareowners following
shareowner approval. AT&T has not yet determined the timing of the distribution,
which may be made within a year of shareowner approval or may be made
thereafter, depending on market conditions. Additionally, the AT&T board of
directors could decide not to proceed with the distribution of the tracking
stock, or could proceed at a time or in a manner different from its current
intentions.

     These restructuring activities are complicated and involve a substantial
number of steps and transactions, including obtaining various approvals, such as
Internal Revenue Service (IRS) rulings. AT&T anticipates, however, that the
transactions associated with AT&T's restructuring plan will be tax-free to U.S.
shareowners. Future financial conditions, superior alternatives or other factors
may arise or occur that make it inadvisable to proceed with part or all of
AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring
plan may not occur as we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to AT&T shareowners in the restructuring.

     On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of 372.2 million shares of AT&T common
stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group
tracking stock. In conjunction with the exchange offer, AT&T recorded an $80
premium as a reduction to net income available to common shareowners. The
premium represents the excess of the fair value of the AT&T Wireless Group
tracking stock issued over the fair value of the AT&T common stock exchanged.

     On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock held by AT&T were distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. AT&T common shareowners received whole shares of
AT&T Wireless and cash payments for

                                        1
<PAGE>

fractional shares. The IRS ruled that the transaction qualified as tax-free for
AT&T and its shareowners for U.S. federal income tax purposes, with the
exception of cash received for fractional shares. For accounting purposes, the
deemed effective split-off date was June 30, 2001. At the time of split-off,
AT&T retained approximately $3 billion, or 7.3%, of AT&T Wireless common stock,
about half of which was used in a debt-for-equity exchange in July in 2001. The
remaining portion of these holdings was monetized in October and December
through the issuance of debt that is exchangeable into Wireless shares (or their
cash equivalents) at maturity. The split-off of AT&T Wireless resulted in a
noncash tax-free gain of $13.5 billion, which represented the difference between
the fair value of the AT&T Wireless tracking stock at the date of the split-off
and AT&T's book value in AT&T Wireless Services. This gain was recorded in the
third quarter of 2001 as a "Gain on disposition of discontinued operations" in
the Consolidated Statement of Income.

     On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly traded company (since AT&T did not exit
the line of business that Liberty Media Group (LMG) operated in, LMG was not
accounted for as a discontinued operation). AT&T redeemed each outstanding share
of Class A and Class B LMG tracking stock for one share of Liberty Media
Corporation's Series A and Series B common stock, respectively. The IRS ruled
that the split-off of Liberty Media Corporation qualified as a tax-free
transaction for AT&T, Liberty Media and their shareowners. For accounting
purposes, the deemed effective split-off date was July 31, 2001.

TRACKING STOCKS

     During the periods 1999 through 2001, AT&T had one or more tracking stocks
outstanding. In 1999, in connection with the acquisition of Tele-Communications,
Inc. (TCI), AT&T issued a separate tracking stock to reflect 100% of the
performance of LMG. In 2000, AT&T issued a tracking stock to track the financial
performance of AT&T Wireless Group. The shares initially issued tracked
approximately 16% of the performance of AT&T Wireless Group.

     A tracking stock is designed to provide financial returns to its holders
based on the financial performance and economic value of the assets it tracks.
Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or
Liberty Media Class A or B tracking stock did not represent a direct legal
interest in the assets and liabilities of any of the groups, but an ownership of
AT&T in total. The specific shares represented an interest in the economic
performance of the net assets of each of the groups.

     The earnings attributable to AT&T Wireless Group are excluded from the
earnings available to AT&T Common Stock Group and are reflected as "Income
(loss) from discontinued operations," net of applicable taxes of AT&T Wireless
Group in the Consolidated Statements of Income. Similarly, the earnings and
losses related to LMG are excluded from the earnings available to AT&T Common
Stock Group. The remaining results of operations of AT&T, including the
financial performance of AT&T Wireless Group not represented by the tracking
stock, are referred to as the AT&T Common Stock Group and are represented by
AT&T common stock.

     We did not have a controlling financial interest in LMG for financial
accounting purposes; therefore, our ownership in LMG was reflected as an
investment accounted for under the equity method in AT&T's consolidated
financial statements. The amounts attributable to LMG are reflected in the
accompanying consolidated financial statements as "Equity (losses) earnings from
Liberty Media Group" and "Investment in Liberty Media Group and related
receivables, net" prior to its split-off from AT&T.

     AT&T Wireless Group was an integrated business of AT&T, and LMG was a
combination of certain assets and businesses of AT&T; neither was a stand-alone
entity prior to its split-off from AT&T.

MERGER WITH MEDIAONE GROUP, INC.

     We completed the merger with MediaOne Group, Inc. (MediaOne) on June 15,
2000, in a cash and stock transaction valued at approximately $45 billion. We
issued approximately 603 million shares of AT&T common stock, of which 60
million were treasury shares, and made cash payments of approximately $24
billion.

                                        2
<PAGE>

     The merger was recorded under the purchase method of accounting, whereby
the assets and liabilities of MediaOne Group were recorded at fair value on the
date of the acquisition. Accordingly, the results of MediaOne have been included
with the financial results of AT&T, within AT&T Broadband, since the date of
acquisition. In accordance with the purchase method of accounting, periods prior
to the merger were not restated to include the results of MediaOne.

FORWARD-LOOKING STATEMENTS

     This document may contain forward-looking statements with respect to AT&T's
restructuring plan, financial condition, results of operations, cash flows,
dividends, financing plans, business strategies, operating efficiencies or
synergies, budgets, capital and other expenditures, network build out and
upgrade, competitive positions, availability of capital, growth opportunities
for existing products, benefits from new technologies, availability and
deployment of new technologies, plans and objectives of management, and other
matters.

     These forward-looking statements, including, without limitation, those
relating to the future business prospects, revenue, working capital, liquidity,
capital needs, network build out, interest costs and income, are necessarily
estimates reflecting the best judgment of senior management 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 that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements including, without
limitation:

     - the risks associated with the implementation of AT&T's restructuring
       plan, which is complicated and involves a substantial number of different
       transactions each with separate conditions, any or all of which may not
       occur as we currently intend, or which may not occur in the timeframe we
       currently expect,

     - the risks associated with each of AT&T's main business units, operating
       as independent entities as opposed to as part of an integrated
       telecommunications provider following completion of AT&T's restructuring
       plan, including the inability of these groups to rely on the financial
       and operational resources of the combined company and these groups having
       to provide services that were previously provided by a different part of
       the combined company,

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

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

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

     - the effects of vigorous competition in the markets in which the company
       operates, which may decrease prices charged, increase churn and change
       customer mix, profitability and average revenue per user,

     - the ability to enter into agreements to provide services, and the cost of
       entering new markets necessary to provide services,

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

     - the availability and cost of capital and the consequences of increased
       leverage,

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

                                        3
<PAGE>

     - the requirements imposed on the company or latitude allowed to
       competitors by the Federal Communications Commission (FCC) or state
       regulatory commissions under the Telecommunications Act of 1996 or other
       applicable laws and regulations,

     - the risks associated with technological requirements, technology
       substitution and changes and other technological developments,

     - the results of litigation filed or to be filed against the company,

     - the possibility of one or more of the markets in which the company
       competes being impacted by changes in political, economic or other
       factors, such as monetary policy, legal and regulatory changes or other
       external factors over which these groups have no control, and

     - the risks related to AT&T's investments and joint ventures.

     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. Moreover, in the future, AT&T,
through its senior management, may make forward-looking statements about the
matters described in this document or other matters concerning AT&T.

     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, 2001, 2000 and 1999, and
financial condition as of December 31, 2001 and 2000.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

     AT&T's financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. The preparation of
these financial statements 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
continually evaluates its estimates and judgments including those related to
revenue recognition, allowances for doubtful accounts, useful lives of property,
plant and equipment, internal use software and intangible assets, investments,
derivative contracts, pension and other postretirement benefits and income
taxes. 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 believe that of our significant accounting policies, the
following may involve a higher degree of judgment or complexity:

     Revenue recognition -- We only record revenue for transactions which are
considered to be part of our central, ongoing operations. We recognize long
distance and local voice and data services revenue based upon minutes of traffic
processed or contracted fee schedules including sales of prepaid calling cards.
Cable video and nonvideo installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable distribution
systems. Customer activation fees, along with the related costs up to but not
exceeding the revenues, are deferred and amortized over the customer
relationship period. We recognize other products and services revenue when the
products are delivered and accepted by customers and when services are provided
in accordance with contract terms. 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. Any sales of installed fiber are not
recognized as revenue. We consider these transactions to be sales of property,
plant and equipment and record any gain or loss in "Other income (expense)" in
the Consolidated Statements of Income.

     Allowances for doubtful accounts -- We maintain allowances for doubtful
accounts for estimated losses which result from the inability of our customers
to make required payments. We base our allowances on the likelihood of
recoverability of accounts receivable based on past experience and taking into
account current collection trends that are expected to continue. If economic or
specific industry trends worsen beyond our

                                        4
<PAGE>

estimates, we would increase our allowances for doubtful accounts by recording
additional expense. Accounts receivable are fully reserved for when past due 180
days or more.

     Estimated useful lives of property, plant and equipment, internal use
software and intangible assets -- We estimate the useful lives of property,
plant and equipment, internal use software and intangible assets in order to
determine the amount of depreciation and amortization expense to be recorded
during any reporting period. The useful lives are estimated at the time the
asset is acquired and are 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 and
amortization expense in future periods. Alternatively, these types of
technological changes could result in the recognition of an impairment charge to
reflect the write-down in value of the asset. We review these types of assets
for impairment annually, or when events or circumstances indicate that the
carrying amount may be not be recoverable over the remaining lives of the
assets. In assessing impairments, we use cash flows which take into account
management's estimates of future operations. Beginning January 1, 2002, in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," we will no longer
amortize goodwill, excess basis related to equity-method investments and
franchise costs, but will test these assets at least annually for impairment.

     Investments -- We hold investments in other companies which we account for
under either the cost method or equity method of accounting. Many of these
companies are publicly traded and have volatile share prices however, some of
these companies are not publicly traded and therefore the value may be difficult
to determine. For investments that are not publicly traded we estimate fair
value using market-based (comparable sales) and income-based (discounted cash
flow) methods. In addition, we have monetized some of these investments by
issuing debt that is tied to the trading price of the security, and which can be
settled in shares or cash. Some of our cost-method investments are classified as
"trading" securities under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and are marked-to-market through the income
statement. However, other cost method investments are classified as
"available-for-sale" under SFAS No. 115 and are marked-to-market through other
comprehensive income on the balance sheet. We record an investment impairment
charge on our "available-for-sale" and equity-method investments when we believe
the decline in the investment value is other than temporary. When determining an
other than temporary decline, we consider, among other items, the length of time
the trading price has been below our carrying value, the financial condition of
the investee company, including the industry in which they operate, and our
ability or intent to retain the investment. If the financial condition of the
investee company or the industry in which it operates were to be materially
different than our expectation, we would record an expense to reflect the other
than temporary decline in value of the investment. At December 31, 2001,
unrealized losses on "available-for-sale" securities included in "Other
comprehensive income" as a component of shareowners' equity were approximately
$0.3 billion (pretax).

     Derivative contracts -- We enter into derivative contracts to mitigate
market risk from changes in interest rates, foreign currency exchange rates and
equity prices. Certain exchangeable debt (debt exchangeable into or tied to the
value of securities we own) contain embedded derivatives that require accounting
separate from the debt instrument, while other exchangeable debt has derivatives
issued in conjunction with net purchased options. The fair value of option based
derivatives is determined using the Black-Scholes option pricing model, which is
based on a set of inputs, including the price of the underlying stock,
volatility of the underlying stock and interest rates. These inputs are based on
prevailing market indications that are either directly observable in the market,
received from qualified investment banking firms or are internally calculated.
Changes in these inputs would result in a change in the fair value of the option
contracts. Changes in the fair value of option contracts accounted for as cash
flow hedges would be recorded, net of income taxes, within Other Comprehensive
Income on the balance sheet. Changes in the fair value of option contracts
undesignated for accounting purposes would be recorded within other income
(expense) on the income statement. Generally, fair value calculations of other
derivative contracts (e.g., interest rate swaps and foreign exchange forwards)
require less judgment and are valued based on market interest rates and foreign
exchange rates.

                                        5
<PAGE>

     Pension and postretirement benefits -- The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining our
net pension credit (income) and postretirement expense is the expected long-term
rate of return on plan assets. In 2001, we assumed an expected long-term rate of
return on plan assets of 9.5%. On average, our actual return on plan assets over
the long-term has substantially exceeded 9.5%; however, in the past two years,
the plan's assets have experienced rates of return substantially lower than
9.5%. For 2002, we will lower our expected long-term rate of return assumption
from 9.50% to 9.0%, reflecting the generally expected moderation of long-term
rates of return in the financial markets. We expect this decrease in the
expected long-term rate of return to decrease operating income by approximately
$0.1 billion.

     Another estimate that affects our net pension credit and postretirement
expense is the discount rate used in the annual actuarial valuations of pension
and postretirement benefit plan obligations. At the end of each year, we
determine the appropriate discount rate, which represents the interest rate that
should be used to determine the present value of future cash flows currently
expected to be required to settle the pension and postretirement benefit
obligations. The discount rate is generally based on the yield on high-quality
corporate fixed-income investments. At December 31, 2001, we lowered our
discount rate to 7.25% from 7.5% at December 31, 2000. Changes in the discount
rate do not have a material impact on our results of operations.

     Income taxes -- We record deferred tax assets and liabilities using enacted
tax rates for the effect of temporary differences between the book and tax bases
of assets and liabilities. If enacted tax rates changed, we would adjust our
deferred tax assets and liabilities, through the provision for income taxes in
the period of change, to reflect the enacted tax rate expected to be in effect
when the deferred tax items reverse. A one percentage point change in the
enacted tax rates would increase or decrease net income by approximately $0.7
billion. We record a valuation allowance on deferred tax assets to reflect the
expected future tax benefits to be realized. In determining the appropriate
valuation allowance, we take into account the level of expected future taxable
income and available tax planning strategies. If future taxable income was lower
than expected or if expected tax planning strategies were not available as
anticipated, we may record additional valuation allowance through income tax
expense in the period such determination was made. At December 31, 2001, we had
long-term deferred tax assets (included within long-term deferred tax
liabilities) of $5.4 billion, which included a valuation allowance of $57
million.

CONSOLIDATED RESULTS OF OPERATIONS

     The comparison of 2001 results with 2000 results was affected by events
such as acquisitions and dispositions that occurred in these two years. For
example, included in 2001 was a full year of MediaOne results; however, 2000
included MediaOne's results only since the June 15, 2000, date of acquisition.
In addition, we had dispositions of certain cable systems during each year and
disposed of international businesses during 2000. Cable systems and businesses
disposed of in 2000 were included in 2000 results for part of the year and not
in 2001 results. Likewise, cable systems disposed of in 2001 were included in
2000 results for the full year and in 2001 results for part of the year. Also,
At Home Corp. (Excite@Home) affected the comparison of annual results.

     For the period January 1, 2000, through August 31, 2000, Excite@Home was
accounted for as an equity method investment. For the period September 1, 2000,
through December 31, 2000, Excite@Home was fully consolidated as a result of
corporate governance changes, which gave AT&T the right to designate six of the
11 Excite@Home board members, and therefore, a controlling interest. In 2001,
Excite@Home was fully consolidated for the period January 1, 2001, through
September 28, 2001, the date Excite@Home filed for Chapter 11 bankruptcy
protection. As a result of the bankruptcy and AT&T removing four of its six
members from the Excite@Home board of directors, AT&T no longer consolidated
Excite@Home as of September 30, 2001. The consolidation of Excite@Home
(effective September 1, 2000) resulted in the inclusion of 100% of its results
in each line item of AT&T's Consolidated Balance Sheets and Consolidated
Statements of Income. The approximate 77% of Excite@Home not owned by AT&T is
shown in the 2000 Consolidated Balance Sheet within "Minority Interest" and as a
component of "Minority interest income (expense)" in the 2001 and 2000
Consolidated Statements of Income. As a result of the significant losses
incurred by Excite@Home,
                                        6
<PAGE>

the minority interest balance was fully utilized (in September); therefore, in
September 2001 AT&T recognized more than its 23% share of losses of Excite@Home.
Under the equity method of accounting, any earnings or losses are included as a
component of "Net losses related to other equity investments" in the
Consolidated Statement of Income. Beginning October 1, 2001, AT&T no longer
records equity earnings or losses related to Excite@Home since AT&T recognized
losses in excess of its investment in Excite@Home.

     Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier
Charges (PICC or per-line charges) that AT&T pays for residential and
single-line business customers. The elimination of these per-line charges
resulted in lower access expense as well as lower revenue, since AT&T has
historically billed its customers for these charges.

     The comparison of 2000 results with 1999 results was also affected by the
acquisition of MediaOne and the elimination PICC. In addition, we acquired TCI
and the IBM Global Network (now AT&T Global Network Services or AGNS) during
1999. Therefore, twelve months of their results are included in 2000's results,
but are included for only a part of 1999 (since their respective dates of
acquisition). Dispositions of certain cable systems and international businesses
occurred during 1999 and 2000, affecting comparability. The consolidation of
Excite@Home, effective September 1, 2000, also affected comparability. Prior to
September 1, 2000, Excite@Home was accounted for as an equity method investment.

     Finally, the comparison of 2000 results with 1999 results was impacted by
the launch of Concert on January 5, 2000, our global joint venture with British
Telecommunications plc (BT). AT&T contributed all of its international
gateway-to-gateway assets and the economic value of approximately 270
multinational customers specifically targeted for direct sales by Concert. As a
result, 2000 results do not include the revenue and expenses associated with
these customers and businesses, while 1999 does, and 2000 results include our
proportionate share of Concert's earnings in "Net losses related to other equity
investments" in the Consolidated Statements of Income. On October 16, 2001, AT&T
and BT announced that they had reached binding agreements to unwind Concert.
Under the Concert dissolution agreement with BT, AT&T will reclaim customer
contracts and assets that were initially contributed to the venture, including
international transport facilities and gateway assets. In addition, AT&T
Business Services will obtain ownership of certain frame relay assets located in
the Asia Pacific region that BT initially contributed to the venture. AT&T
Business Services expects to combine these assets with its existing
international networking and other assets. The unwind of Concert is expected to
close by the end of the first half of 2002.

  REVENUE

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>         <C>         <C>
AT&T Business Services..................................   $28,024     $28,900     $28,692
AT&T Consumer Services..................................    15,079      18,894      21,753
AT&T Broadband..........................................     9,799       8,226       5,070
Corporate and other.....................................      (352)       (487)       (542)
                                                           -------     -------     -------
Total Revenue...........................................   $52,550     $55,533     $54,973
                                                           =======     =======     =======
</Table>

     Total revenue decreased 5.4%, or $3.0 billion, in 2001 compared with 2000.
The decline was largely driven by accelerating declines in long distance voice
revenue of approximately $5.7 billion. Partially offsetting the decline was
revenue of approximately $2.2 billion, primarily attributable to growth in data
and Internet protocol (IP), local and outsourcing services within AT&T Business
Services, and increased revenue from AT&T Broadband, primarily telephony,
high-speed data, expanded basic cable and digital video. Also offsetting the
decline was revenue of approximately $0.3 billion largely due to net
acquisitions (primarily MediaOne), and the consolidation of Excite@Home,
partially offset by the elimination of PICC. We expect long distance revenue to
continue to be negatively impacted by ongoing competition and product
substitution and while we expect data and IP revenue to continue to grow, we
expect the growth rate to slow. Revenue in 2002 will be positively impacted by
the inclusion of revenue resulting from the unwind of Concert, including

                                        7
<PAGE>

revenue from multinational customers and foreign-billed revenue previously
contributed to Concert. In addition, we expect revenue from AT&T Broadband to
increase.

     Total revenue increased 1.0%, or $0.6 billion, in 2000 compared with 1999
primarily driven by a growing demand for our IP, outsourcing within AT&T
Business Services and growth in AT&T Broadband of approximately $2.2 billion, as
well as the impact of acquisitions and the consolidation of Excite@Home,
partially offset by the impact of Concert, dispositions and the elimination of
PICC of approximately $1.5 billion. These revenue increases were partially
offset by continued declines in long distance voice revenue of approximately
$2.9 billion.

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>         <C>         <C>
Access and other connection.............................   $12,136     $13,140     $14,439
</Table>

     Access and other connection expenses decreased 7.6%, or $1.0 billion, in
2001 compared with 2000. Included within access and other connection expenses
are costs that we pay to connect calls on the facilities of other service
providers, as well as the Universal Service Fund contributions and per-line
charges mandated by the FCC. Approximately $1.6 billion of the decrease was due
to mandated reductions in per-minute access-rates, lower per-line charges and
lower international connection rates. In July 2000, per-line charges that AT&T
paid for residential and single-line business customers were eliminated by the
FCC. These reductions were partially offset by a $0.6 billion increase due to
overall volume growth primarily related to local and international services and
higher Universal Service Fund contributions. Since most of these charges are
passed through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.

     In 2002, access and other connection expenses will continue to decline as a
result of mandated reductions in per minute access rates, lower universal
service fund contributions and lower long distance call volumes. These
reductions will be partially offset by an increase in local connectivity
expenses primarily due to growth in local services. In addition, the unwind of
Concert will also result in lower access and other connections expenses, since
in 2001 the charge from Concert was recorded as access and other connection
expenses and in 2002 as we take back assets, we will record the expenses in each
line item based on how the assets and customers are served and managed.

     Access and other connection expenses decreased 9.0% to $13.1 billion in
2000, compared with $14.4 billion in 1999. Mandated reductions in per-minute
access costs and decreased per-line charges resulted in lower costs of
approximately $1.5 billion. Also contributing to the decrease was more efficient
network usage. These decreases were partially offset by approximately $0.6
billion of higher costs due to volume increases, and $0.5 billion as a result of
higher Universal Service Fund contributions.

     Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
are also included within access and other connection expenses. International
interconnection charges decreased approximately $0.5 billion in 2000, as a
result of the commencement of operations of Concert. Concert incurred most of
our international settlements and earned most of our foreign-billed revenue,
previously incurred and earned directly by AT&T. In 2000, Concert billed us a
net expense composed of international settlement (interconnection) expense and
foreign-billed revenue. The amount charged by Concert in 2000 was lower than
interconnection expense incurred in 1999, since AT&T recorded these transactions
as revenue and expense, as applicable. Partially offsetting the decline were
costs incurred related to Concert products that AT&T now sells to its customers.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>         <C>         <C>
Costs of services and products..........................   $13,960     $12,795     $11,013
</Table>

                                        8
<PAGE>

     Costs of services and products include the costs of operating and
maintaining our networks, costs to support our outsourcing contracts (including
cost of equipment sold), programming for cable services, the provision for
uncollectible receivables and other service-related costs.

     These costs increased $1.2 billion, or 9.1%, in 2001 compared with 2000.
Approximately $0.6 billion of the increase was driven by net acquisitions,
primarily MediaOne, and the consolidation of Excite@Home. Also contributing to
the increase was approximately $0.8 billion of higher costs associated with our
growth businesses, primarily at AT&T Business Services, including the cost of
equipment sold within our outsourcing solutions business, and higher cable
television programming costs. In addition, costs increased approximately $0.3
billion due to estimated losses on certain long-term contracts at AT&T Business
Services and a lower pension credit (income) and higher postretirement expense
in 2001 resulting from a decreased return on plan assets. These increases were
partially offset by approximately $0.4 billion of lower costs associated with
lower revenue, primarily lower volumes at AT&T Business Services, including our
international operations and lower payphone compensation costs.

     In 2002, costs of services and products are expected to increase slightly
as a result of the unwind of Concert, significantly offset by the
deconsolidation of Excite@Home.

     Costs of services and products increased $1.8 billion, or 16.2%, in 2000
compared with 1999. Nearly $1.9 billion of the increase was due to acquisitions
and the impact of consolidating Excite@Home, net of the impact of Concert and
divestments of international businesses. The expense also increased due to
higher costs associated with new outsourcing contracts of approximately $0.5
billion and approximately $0.3 billion of higher cable television programming
costs principally due to rate increases and higher costs associated with new
broadband services. These increases were partially offset by approximately $0.9
billion of cost savings from continued cost control initiatives and a higher
pension credit in 2000, primarily driven by a higher pension trust asset base,
resulting from increased investment returns.

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2001        2000       1999
                                                           ---------   --------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                        <C>         <C>        <C>
Selling, general and administrative......................   $10,832     $9,752     $10,894
</Table>

     Selling, general and administrative (SG&A) expenses increased $1.1 billion,
or 11.1%, in 2001 compared with 2000. Approximately $0.2 billion of the increase
was due to expenses associated with acquisitions, primarily MediaOne, net of the
impact of dispositions. Increased expenses in support of growth businesses,
primarily data and IP, broadband, and local voice services, drove approximately
$0.8 billion of the increase. These expenses included customer care, facilities
and other related expenses, advertising, research and development and other
general and administrative expenses. Also included in the increased SG&A
expenses were transaction costs of approximately $0.2 billion associated with
AT&T's restructuring announced in October 2000. A lower pension credit (income)
and higher postretirement expense resulting from decreased return on plan
assets, combined with higher compensation accruals contributed approximately
$0.3 billion to the increase. Partially offsetting these increases were lower
costs associated with the impact of cost control efforts and decreased customer
care and billing expenses of approximately $0.8 billion primarily from AT&T
Consumer Services.

     As a result of the unwind of Concert as well as lower pension credit
(income), selling, general and administrative expenses are expected to increase
slightly in 2002.

     Selling, general and administrative expenses decreased $1.1 billion, or
10.5%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease
was due to savings from continued cost-control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased historical investment returns. Partially offsetting this decrease
was approximately $0.5 billion of higher

                                        9
<PAGE>

expenses associated with our growing broadband business, and nearly $0.5 billion
of expenses associated with acquisitions and the consolidation of Excite@Home,
net of the impact of Concert and dispositions.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
                                                               DOLLARS IN MILLIONS
<S>                                                          <C>      <C>      <C>
Depreciation and other amortization........................  $6,865   $5,924   $5,137
</Table>

     Depreciation and other amortization expenses increased $0.9 billion, or
15.9%, in 2001 compared with 2000. Approximately $0.4 billion of the increase
was attributable to the acquisition of MediaOne and the consolidation of
Excite@Home, partially offset by net dispositions, primarily cable systems. The
remaining increase was primarily due to a higher asset base resulting from
continued infrastructure investments.

     Depreciation and other amortization expenses are expected to increase in
2002 reflecting the infrastructure investments made in 2001 as well as the
impact of the unwind of Concert.

     In 2000, depreciation and other amortization expenses rose $0.8 billion, or
15.3%, compared with 1999. Approximately $0.5 billion of the increase was due to
acquisitions and the consolidation of Excite@Home, net of dispositions and the
impact of Concert. The remaining increase was primarily due to a higher asset
base resulting from continued infrastructure investment.

     Total capital expenditures for 2001, 2000 and 1999 were $8.4 billion, $10.5
billion and $11.2 billion, respectively. We continue to focus the vast majority
of our capital spending on our growth businesses of broadband, data and IP, and
local.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
                                                               DOLLARS IN MILLIONS
<S>                                                          <C>      <C>      <C>
Amortization of goodwill, franchise costs and other
  purchased intangibles....................................  $2,473   $2,665   $1,057
</Table>

     Amortization of goodwill, franchise costs and other purchased intangibles
decreased $0.2 billion, or 7.2%, in 2001 compared with 2000. The decrease was
primarily due to a lower goodwill balance relating to Excite@Home as a result of
the impairment charges recorded in the fourth quarter of 2000 and the first
quarter of 2001, partially offset by the acquisition of MediaOne. Franchise
costs represent the value attributable to agreements with local authorities that
allow access to homes in AT&T Broadband's service areas. Other purchased
intangibles arising from business combinations primarily included customer
relationships.

     In 2002, we will no longer amortize goodwill or franchise costs in
accordance with the provisions of SFAS No. 142. Accordingly, amortization of
goodwill, franchise costs and other purchased intangibles will be significantly
lower in 2002. A further discussion of the impacts of SFAS No. 142 is included
in "New Accounting Pronouncements" in this document.

     In 2000, amortization of goodwill, franchise costs and other purchased
intangibles increased $1.6 billion, or 152.3%, compared with the prior year.
This increase was largely attributable to the consolidation of Excite@Home, as
well as acquisitions, primarily MediaOne and TCI.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                               2001     2000    1999
                                                              ------   ------   ----
                                                               DOLLARS IN MILLIONS
<S>                                                           <C>      <C>      <C>
Net restructuring and other charges.........................  $2,530   $7,029   $975
</Table>

     During 2001, we recorded $2,530 million of net restructuring and other
charges including approximately $1,330 million of restructuring and exit costs
associated with AT&T's continued cost reduction initiatives and $1,200 million
of asset impairment charges which were primarily related to Excite@Home.

                                        10
<PAGE>

     The $1,330 million of charges for restructuring and exit plans were
comprised of $1,014 million for employee separations and benefit plan
curtailment costs, $322 million for facility closings and $27 million related to
termination of contractual obligations. The restructuring and exit plans support
our cost reduction efforts through headcount reductions across all segments of
the business, primarily network support and customer care functions in AT&T
Business Services, continued cost reduction efforts by Excite@Home (which was
still consolidated into AT&T's results until September 2001), in addition to
impacts of the MediaOne merger. These charges were slightly offset by the
reversal in December 2001 of $33 million related to the business restructuring
plans for fourth quarter 1999 and first quarter 2000.

     Included in the $1,014 million of employee separations were $200 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Approximately 18 thousand employees will be separated in
conjunction with these exit plans, approximately one-half of which are
management and one-half are nonmanagement employees. Nearly 17 thousand employee
separations related to involuntary terminations and more than one thousand
related to voluntary terminations. Approximately 50% of the employees affected
by the 2001 restructuring charges left their positions as of December 31, 2001,
and the remaining will leave the company throughout 2002. Termination benefits
of approximately $341 million were paid throughout 2001.

     The $1,200 million of asset impairments consisted of $1,032 million
associated with the write-down of goodwill and other intangibles, warrants
granted in connection with distributing the @Home service and fixed assets.
These charges were due to continued deterioration in the business climate of,
and reduced levels of venture capital funding activity for, Internet advertising
and other Internet-related companies, continued significant declines in the
market values of Excite@Home's competitors in the Internet advertising industry,
and changes in its operating and cash flow forecasts for the remainder of 2001.
These charges were also impacted by Excite@Home's decision to sell or shut down
narrowband operations. As a result of the foregoing, and other factors,
Excite@Home entered into bankruptcy proceedings in September 2001. In addition,
AT&T recorded a related goodwill impairment charge of $139 million associated
with its acquisition goodwill of Excite@Home. Since we consolidated, but only
owned approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but rather was
eliminated in our 2001 Consolidated Statement of Income as a component of
"Minority interest income (expense)." Additionally, we recorded asset impairment
charges of $29 million related to the write-down of unrecoverable support assets
where the carrying value was no longer supported by estimated future cash flows.

     The restructuring and exit plans did not yield cash savings (net of
severance benefit payouts) in 2001. In subsequent years, the net cash savings
will increase, due to the timing of actual separations and associated payments,
until the completion of the exit plan at which time we expect to yield
approximately $1.1 billion of cash savings per year. Accordingly, there was no
benefit to operating income (net of the restructuring charges recorded) in 2001.
In subsequent years, the operating income benefit will continue to increase, due
to timing of actual separations, until the completion of the exit plan, at which
time we expect a benefit to operating income of approximately $1.2 billion per
year.

     As a result of continuing realignment within AT&T Broadband, we expect to
record a restructuring charge in the first quarter of 2002 in the range of $50
million to $100 million.

     During 2000, we recorded $7,029 million of net restructuring and other
charges including $6,179 million of asset impairment charges related to
Excite@Home, $759 million for restructuring and exit costs associated with
AT&T's initiative to reduce costs, and $91 million related to the
government-mandated disposition of AT&T Communications (U.K.) Ltd., which would
have competed directly with Concert.

     The asset impairment charges related to Excite@Home resulted from the
deterioration of the market conditions and market valuations of Internet-related
companies during the fourth quarter of 2000, which caused Excite@Home to
conclude that intangible assets related to their acquisitions of
Internet-related companies may not be recoverable. Accordingly, Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions, including Excite,
                                        11
<PAGE>

were impaired as of December 31, 2000. As a result, Excite@Home recorded
impairment charges of $4,609 million in December 2000, representing the excess
of the carrying amount of the impaired assets over their fair value.

     The impairment was allocated to each asset group based on a comparison of
carrying values and fair values. The impairment write-down within each asset
group was allocated first to goodwill, and if goodwill was reduced to zero, to
identifiable intangible assets in proportion to carrying values.

     Since we consolidated but only owned approximately 23% of Excite@Home, 77%
of the charge recorded by Excite@Home was not included as a reduction to AT&T's
net income, but rather was eliminated in our 2000 Consolidated Statement of
Income as "Minority interest income (expense)."

     Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1,570 million associated with the
acquisition of our investment in Excite@Home. The write-down of our investment
to fair value was determined utilizing discounted expected future cash flows.

     The $759 million charge for restructuring and exit plans was primarily due
to headcount reductions, mainly in AT&T Business Services, including network
operations, primarily for the consolidation of customer-care and call centers,
as well as synergies created by the MediaOne merger.

     Included in exit costs was $503 million of cash termination benefits
associated with the separation of approximately 7,300 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were non-management
employees. Approximately 6,700 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.

     We also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the year, and net losses of
$32 million related to the disposition of facilities primarily due to synergies
created by the MediaOne merger.

     Also included in restructuring and exit costs in 2000 was $144 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Further, we recorded an asset impairment charge of $18 million
related to the write-down of unrecoverable assets in certain businesses where
the carrying value was no longer supported by estimated future cash flows.

     During 1999, we recorded $975 million of net restructuring and other
charges. A $594 million in-process research and development charge was recorded
reflecting the estimated fair value of research and development projects at TCI,
as of the date of the acquisition, which had not yet reached technological
feasibility or had no alternative future use. The projects identified related to
efforts to offer voice over IP, product-integration efforts for advanced set-top
devices, cost-savings efforts for broadband-telephony implementation, and in-
process research and development related to Excite@Home. We estimated the fair
value of in-process research and development for each project using an income
approach, which was adjusted to allocate fair value based on the project's
percentage of completion. Under this approach, the present value of the
anticipated future benefits of the projects was determined using a discount rate
of 17%. For each project, the resulting net present value was multiplied by a
percentage of completion based on effort expended to date versus projected costs
to complete.

     Also in 1999, a $145 million charge for restructuring and exit costs was
recorded as part of AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions in AT&T Business Services, including network operations, primarily
for the consolidation of customer-care and call centers.

     Included in exit costs was $142 million of cash termination benefits
associated with the separation of approximately 2,800 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were non-management
employees. Approximately 1,700 employee separations were related to involuntary
terminations and approximately 1,100 to voluntary terminations.
                                        12
<PAGE>

     We also recorded net losses of $307 million related to the
government-mandated disposition of certain international businesses that would
have competed directly with Concert, and $50 million related to a contribution
agreement AT&T Broadband entered into with Phoenixstar, Inc. That agreement
requires AT&T Broadband to satisfy certain liabilities owed by Phoenixstar and
its subsidiaries. The remaining obligation under this contribution agreement and
an agreement that MediaOne had is $35 million, which was fully accrued for at
December 31, 2001. In addition, we recorded benefits of $121 million related to
the settlement of pension obligations for former employees who accepted AT&T's
1998 voluntary retirement incentive program (VRIP) offer.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                             2001     2000     1999
                                                            ------   ------   -------
                                                               DOLLARS IN MILLIONS
<S>                                                         <C>      <C>      <C>
Operating income..........................................  $3,754   $4,228   $11,458
</Table>

     In 2001, operating income decreased $0.5 billion, or 11.2%. The decline was
primarily attributable to accelerating declines in the long distance business.
In addition, the acquisition of MediaOne and net dispositions negatively
impacted operating income by $0.7 billion. Significantly offsetting these
decreases was the net impact of Excite@Home (including the effect of lower asset
impairments).

     Operating income decreased $7.2 billion, or 63.1%, in 2000 compared with
1999. The decrease was primarily due to higher net restructuring and other
charges of $6.1 billion. Also contributing to the decrease was the impact of the
acquisition of MediaOne and the consolidation of Excite@Home, which lowered
operating income by $1.5 billion. A majority of the impact of operating losses
and the restructuring charge generated by Excite@Home was offset in "Minority
interest income (expense)" in the Consolidated Statement of Income, reflecting
the approximate 77% of Excite@Home we do not own. Partially offsetting these
decreases were cost-control initiatives and a larger pension credit associated
with our mature long distance businesses and related support groups, partially
offset by lower long distance revenue.

<Table>
<Caption>
                                                                FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                               2001      2000    1999
                                                              -------   ------   ----
                                                                DOLLARS IN MILLIONS
<S>                                                           <C>       <C>      <C>
Other (expense) income......................................  $(1,547)  $1,150   $826
</Table>

     Other (expense) income in 2001 was an expense of $1.5 billion compared with
income of $1.2 billion in 2000. The unfavorable variance of $2.7 billion was
driven primarily by higher investment impairment charges of $0.8 billion, mostly
consisting of impairments of Vodafone plc and Time Warner Telecom. Also
contributing to the higher expense was an expense of $0.8 billion reflecting
mark-to-market charges in conjunction with the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and $0.8 billion
of lower net gains on the sales of businesses and investments.

     Other (expense) income improved $0.3 billion, or 39.3%, in 2000 compared
with 1999. This improvement was primarily due to greater net gains on sales of
businesses and investments of approximately $0.7 billion, and higher
investment-related income of approximately $0.3 billion. The higher gains on
sales were driven by significant gains associated with the swap of cable
properties with Comcast and Cox, the sale of our investment in Lenfest and
related transactions, which gains aggregated approximately $0.5 billion. In
1999, we recorded significant gains associated with the sale of our Language
Line Services business and a portion of our ownership interest in AT&T Canada,
which aggregated approximately $0.3 billion. Offsetting the improvements to
other (expense) income in 2000 was an approximate $0.5 billion charge reflecting
the increase in the fair value of put options held by Comcast and Cox related to
Excite@Home stock, and approximately $0.2 billion of higher investment
impairment charges.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
                                                               DOLLARS IN MILLIONS
<S>                                                          <C>      <C>      <C>
Interest expense...........................................  $3,242   $2,964   $1,503
</Table>

                                        13
<PAGE>

     In 2001, interest expense increased $0.3 billion, or 9.4%. The increase was
due primarily to a higher average debt balance in 2001, compared with 2000. The
higher average debt balance was primarily a result of our June 2000 acquisition
of MediaOne, including outstanding debt of MediaOne and debt issued to fund the
MediaOne acquisition. The impact of MediaOne was partially offset by the
company's debt reduction efforts in 2001.

     Interest expense increased 97.2%, or $1.5 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt balance as a
result of our June 2000 acquisition of MediaOne, including outstanding debt of
MediaOne and debt issued to fund the MediaOne acquisition, and our March 1999
acquisition of TCI.

<Table>
<Caption>
                                                                FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                              2001     2000     1999
                                                              -----   ------   ------
                                                                DOLLARS IN MILLIONS
<S>                                                           <C>     <C>      <C>
(Benefit) provision for income taxes........................  $(791)  $3,284   $4,016
</Table>

     The effective income tax rate is the (benefit) provision for income taxes
as a percent of (loss) income from continuing operations before income taxes.
The effective income tax rate was 76.4% in 2001, 136.1% in 2000 and 37.3% in
1999. In 2001, the effective tax rate was positively impacted by a significant
net tax benefit related to Excite@Home, including a benefit from the
deconsolidation and the put obligation settlement with Cox and Comcast,
partially offset by the prior consolidation of its operating losses (which
included asset impairment charges) for which the company was unable to record
tax benefits. Also positively impacting the effective tax rate was the net
impact of a tax-free exchange with Comcast of AT&T stock held by Comcast for an
entity owning certain cable systems and the resulting reduction of a previously
established deferred tax liability. In addition, a benefit was recognized
associated with the tax-free gain from the disposal of a portion of AT&T's
retained interest in AT&T Wireless in a debt-for-equity exchange.

     In 2000, the effective tax rate was negatively impacted by Excite@Home, for
which the company was unable to record tax benefits associated with its pretax
losses. Therefore, the $4.6 billion restructuring charges taken by Excite@Home
in 2000 had no associated tax benefit. The company also recorded a related
nondeductible asset impairment charge of $1.6 billion associated with its
acquisition of Excite@Home and a nondeductible charge to reflect the increase in
the fair value of the put options related to Excite@Home held by Comcast and
Cox, both of which negatively impacted the effective tax rate. The 2000
effective tax rate was positively impacted by a tax-free gain resulting from an
exchange of AT&T stock for an entity owning certain cable systems and other
assets with Cox and the benefit of the write-off of the related deferred tax
liability.

     The 1999 effective tax rate was negatively impacted by a non-tax-deductible
research and development charge, but positively impacted by a change in the net
operating loss utilization tax rules that resulted in a reduction in the
valuation allowance and the income tax provision.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2001    2000    1999
                                                              ----   ------   -----
                                                               DOLLARS IN MILLIONS
<S>                                                           <C>    <C>      <C>
Minority interest income (expense)..........................  $963   $4,103   $(126)
</Table>

     Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T's income to reflect the less than 100%
ownership of consolidated subsidiaries as well as dividends on preferred stock
issued by subsidiaries of AT&T. Minority interest income (expense) decreased
$3.1 billion in 2001 compared with 2000 primarily due to lower losses generated
by Excite@Home, mainly as a result of lower goodwill impairment charges recorded
by Excite@Home in 2001 compared with 2000. As a result of significant losses
incurred by Excite@Home, AT&T fully utilized the minority interest balance
during the third quarter of 2001; therefore, we no longer recorded minority
interest income related to Excite@Home.

     The $4.2 billion increase in minority interest income (expense) in 2000
resulted from the consolidation of Excite@Home effective September 1, 2000. The
minority interest income in 2000 primarily reflects losses

                                        14
<PAGE>

generated by Excite@Home, including the goodwill impairment charge, that were
attributable to the approximate 77% of Excite@Home not owned by AT&T.

     The income tax benefit within minority interest income (expense) was $100
million in both 2001 and 2000, and a benefit of $54 million in 1999.

<Table>
<Caption>
                                                              FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                           --------------------------
                                                            2001      2000     1999
                                                           -------   ------   -------
                                                              DOLLARS IN MILLIONS
<S>                                                        <C>       <C>      <C>
Equity (losses) earnings from Liberty Media Group........  $(2,711)  $1,488   $(2,022)
</Table>

     Equity (losses) earnings from LMG, which are recorded net of income taxes,
were a loss of $2.7 billion in 2001, compared with earnings of $1.5 billion in
2000. The decline of $4.2 billion was largely driven by gains on dispositions
recorded in 2000, including gains associated with the mergers of various
companies that LMG had investments in, as well as higher stock compensation
expense in 2001 compared with 2000. Partially offsetting these declines were
lower impairment charges recorded on LMG's investments to reflect other than
temporary declines in value. Equity losses for 2001 reflect results through July
31, 2001, the deemed effective date of the split-off.

     Equity (losses) earnings from LMG were earnings of $1.5 billion in 2000,
compared with losses of $2.0 billion in 1999. The improvement was primarily due
to gains on dispositions, including gains associated with the mergers of various
companies that LMG had investments in. Gains were recorded for the difference
between the carrying value of LMG's interest in the acquired company and the
fair value of securities received in the merger. In addition, lower stock
compensation expense in 2000 compared with 1999 contributed to the improvement.
These were partially offset by impairment charges recorded on LMG's investments
to reflect other than temporary declines in value and higher losses relating to
LMG's equity affiliates.

<Table>
<Caption>
                                                              FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              --------------------
                                                               2001    2000   1999
                                                              ------   ----   ----
                                                              DOLLARS IN MILLIONS
<S>                                                           <C>      <C>    <C>
Net losses related to other equity investments..............  $4,850   $588   $756
</Table>

     Net losses related to other equity investments were $4.9 billion in 2001
compared with $0.6 billion in 2000, an increase of approximately $4.3 billion.
The increase was driven primarily by higher net equity investment impairment
charges of $4.3 billion. The pretax impairment charges were $7.0 billion and
consisted primarily of $3.0 billion in charges related to the estimated loss on
AT&T's commitment to purchase the shares of AT&T Canada we do not own, a $2.9
billion impairment charge related to the unwind of Concert and an impairment of
our investment in Net2Phone of $1.1 billion. In addition, we recorded higher
equity losses of $0.7 billion from Concert and Net2Phone. These losses were
partially offset by $0.6 billion in losses recorded for Excite@Home in the first
eight months of 2000 when we recorded the investment as an equity method
investment. Excite@Home was fully consolidated beginning in September 2000.

     In 2000, net losses related to other equity investments were $0.6 billion,
a 22.2% improvement compared with 1999. This improvement was primarily a result
of higher earnings from our investment in Cablevision Systems Corp.
(Cablevision) of approximately $0.2 billion due to gains from cable-system
sales. Partially offsetting this improvement were losses from our stake in TWE,
which we acquired in connection with the MediaOne merger, and greater equity
losses from Excite@Home, which aggregated approximately $0.1 billion.

     The income tax benefit recorded on net losses related to other equity
investments was $0.4 billion in both 2001 and 2000, and a benefit of $0.5
billion in 1999. The amortization of excess basis associated with
nonconsolidated investments, recorded as a reduction of income, totaled $0.2
billion in 2001, and $0.5 billion

                                        15
<PAGE>

in both 2000 and 1999. Effective January 1, 2002, in accordance with the
provisions of SFAS No. 142, we will no longer amortize excess basis related to
nonconsolidated investments.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                               2001     2000   1999
                                                              -------   ----   ----
                                                               DOLLARS IN MILLIONS
<S>                                                           <C>       <C>    <C>
Gain on disposition of discontinued operations..............  $13,503    $--    $--
</Table>

     In 2001, we realized a gain on the disposition of discontinued operations
of $13.5 billion, representing the difference between the fair value of the AT&T
Wireless tracking stock on July 9, 2001, the date of the split-off, and AT&T's
book value in AT&T Wireless Services.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               DOLLARS IN MILLIONS
<S>                                                           <C>     <C>     <C>
Cumulative effect of accounting change......................  $904     $--     $--
</Table>

     Cumulative effect of accounting change, net of applicable income taxes, is
comprised of $0.4 billion for AT&T Group (other than LMG) and $0.5 billion for
LMG in 2001. The $0.4 billion recorded by AT&T, excluding LMG, was attributable
primarily to fair value adjustments of equity derivative instruments embedded in
indexed debt instruments and warrants held in both public and private companies
due to the adoption of SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities."

     The $0.5 billion recorded by LMG represents the impact of separately
recording the embedded call option obligations associated with LMG's senior
exchangeable debentures due to the adoption of SFAS No. 133.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               DOLLARS IN MILLIONS
<S>                                                           <C>     <C>     <C>
Dividend requirements of preferred stock....................  $652     $--     $--
</Table>

     Dividend requirements of preferred stock were $0.7 billion in 2001. The
preferred stock dividend represented interest in connection with convertible
preferred stock issued to NTT DoCoMo in January of 2001 as well as accretion of
the beneficial conversion feature associated with this preferred stock. The
beneficial conversion feature was recorded upon the issuance of the NTT DoCoMo
preferred stock and represented the excess of the fair value of the preferred
shares issued over the proceeds received. On July 9, 2001, in conjunction with
the split-off of AT&T Wireless Group, these preferred shares were converted into
AT&T Wireless common stock. As a result, we fully amortized the remaining
beneficial conversion feature balance.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2001    2000    1999
                                                              -----   -----   -----
                                                               DOLLARS IN MILLIONS
<S>                                                           <C>     <C>     <C>
Premium on exchange of AT&T Wireless tracking stock.........   $80     $--     $--
</Table>

     The premium on exchange of AT&T Wireless tracking stock was $80 million in
2001. The premium, which is a reduction of net income available to common
shareowners, represents the excess of the fair value of the AT&T Wireless
tracking stock issued over the fair value of the AT&T common stock exchanged and
was calculated based on the closing share prices of AT&T common stock and AT&T
Wireless tracking stock on May 25, 2001.

                                        16
<PAGE>

<Table>
<Caption>
                                                                 FOR THE YEARS ENDED
                                                                    DECEMBER 31,
                                                             ---------------------------
                                                              2001       2000      1999
                                                             -------    ------    ------
                                                                (DOLLARS IN MILLIONS,
                                                              EXCEPT PER SHARE AMOUNTS)
<S>                                                          <C>        <C>       <C>
AT&T Common Stock Group -- per basic share:
  (Loss) earnings from continuing operations...............  $(1.33)    $0.76     $1.91
  AT&T Common Stock Group earnings.........................    2.50      0.89      1.77
AT&T Common Stock Group -- per diluted share:
  (Loss) earnings from continuing operations...............   (1.33)     0.75      1.87
  AT&T Common Stock Group earnings.........................    2.50      0.88      1.74
</Table>

     In 2001, AT&T had a loss from continuing operations before cumulative
effect of accounting change per diluted share of $1.33, compared with earnings
of $0.75 per diluted share in 2000. The decline of $2.08 per diluted share was
primarily attributable to an unfavorable variance in net losses related to other
equity investments, other (expense) income and lower operating income, excluding
net restructuring and other charges, in 2001 compared with 2000, partially
offset by lower net restructuring and other charges in 2001.

     Earnings per diluted share (EPS) attributable to continuing operations of
the AT&T Common Stock Group were $0.75 in 2000 compared with $1.87 in 1999, a
decrease of 59.9%. The decrease was primarily due to higher restructuring and
asset impairment charges and the MediaOne acquisition, including the impact of
shares issued, operating losses of MediaOne and additional interest expense.
Also contributing to the decrease was the impact of Excite@Home, including the
mark-to-market adjustment related to the put options held by Comcast and Cox.
These decreases were partially offset by improvements in other (expense) income,
primarily associated with higher net gains on sales of businesses and
investments, and higher investment-related income, and lower losses from equity
investments. Also impacting EPS was higher operating income associated with our
mature long distance businesses.

     In 2001, diluted EPS of AT&T Common Stock Group of $2.50 included a loss
from continuing operations as discussed above of $1.33, income from discontinued
operations of $0.03, a gain on the disposition of discontinued operations of
$3.70 and income related to the cumulative effect of accounting change of $0.10.
In 2000, diluted EPS of AT&T Common Stock Group of $0.88 included earnings from
continuing operations as discussed above of $0.75 and income from discontinued
operations of $0.13. In 1999, diluted EPS of AT&T Common Stock Group of $1.74
included earnings from continuing operations as discussed above of $1.87 and a
loss from discontinued operations of $0.13.

     LMG reported a loss per share, excluding the cumulative effect of an
accounting change, of $0.84 in 2001 through its split-off from AT&T on August
10, 2001. In 2000, LMG reported earnings per basic and diluted share of $0.58.
The decline of $1.42 per share was primarily due to gains on dispositions
reported in 2000, including gains associated with the mergers of various
companies that LMG had investments in. Partially offsetting the decline were
charges recorded on LMG's investments in 2000.

     EPS for LMG was $0.58 in 2000, compared with a loss of $0.80 per share in
1999. The increase in EPS was primarily due to gains on dispositions, including
gains associated with the mergers of various companies that LMG had investments
in. In addition, lower stock compensation expense in 2000 compared with 1999
contributed to the increase. These increases were partially offset by impairment
charges recorded on LMG's investments to reflect other than temporary declines
in value and higher losses relating to LMG's equity affiliates.

     In 2001, EPS for the AT&T Wireless Group, through its split-off date from
AT&T on July 9, 2001, was $0.08 per basic and diluted share. EPS for AT&T
Wireless Group for the period from April 27, 2000, the stock offering date,
through December 31, 2000, was $0.21 per basic and diluted share.

                                        17
<PAGE>

DISCONTINUED OPERATIONS

     Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of AT&T reflect the
disposition of AT&T Wireless, which was split-off from AT&T on July 9, 2001, as
discontinued operations. Accordingly, the revenue, costs and expenses, and cash
flows of AT&T Wireless through June 30, 2001, the effective split-off date for
accounting purposes, have been excluded from the respective captions in the
2001, 2000 and 1999 Consolidated Statements of Income and Consolidated
Statements of Cash Flows and have been reported as "Income (loss) from
discontinued operations," net of applicable income taxes; and as "Net cash
provided by (used in) discontinued operations." The assets and liabilities of
AT&T Wireless have been excluded from the respective captions in the December
31, 2000 Consolidated Balance Sheet, and are reported as "Net assets of
discontinued operations." The gain associated with the disposition of AT&T
Wireless is recorded as "Gain on disposition of discontinued operations," in the
Consolidated Statement of Income.

SEGMENT RESULTS

     In support of the services we provided in 2001, we segment our results by
the operating units that support our primary lines of business: AT&T Business
Services, AT&T Consumer Services and AT&T Broadband. The balance of AT&T's
operations, excluding LMG, is included in a corporate and other category.
Although not a segment, we also discuss the results of LMG prior to its
split-off as an independent company.

     EBIT and EBITDA are the primary measures used by AT&T's chief operating
decision makers to measure AT&T's operating results and to measure segment
profitability and performance. AT&T calculates EBIT as operating income (loss)
plus other income (expense), pretax minority interest income (expense) and net
pretax losses related to other equity investments. EBITDA is defined as EBIT,
excluding minority interest income (expense) other than Excite@Home's minority
interest income (expense), plus depreciation and amortization. Interest and
income taxes are not factored into the segment profitability measure used by the
chief operating decision makers; therefore, trends for these items are discussed
on a consolidated basis. Management believes EBIT and EBITDA are meaningful to
investors because they provide analyses of operating results using the same
measures used by AT&T's chief operating decision makers. In addition, we believe
that both EBIT and EBITDA allow investors a means to evaluate the financial
results of each segment in relation to total AT&T. EBIT for AT&T was a deficit
of $4.8 billion and earnings of $8.4 billion and $10.9 billion for the years
ended December 31, 2001, 2000 and 1999, respectively. EBITDA for AT&T was $4.7
billion, $17.1 billion and $17.7 billion for the years ended December 31, 2001,
2000 and 1999, respectively. Our calculations of EBIT and EBITDA may or may not
be consistent with the calculation of these measures by other public companies.
EBIT and EBITDA should not be viewed by investors as an alternative to generally
accepted accounting principles (GAAP) measures of income as a measure of
performance or to cash flows from operating, investing and financing activities
as a measure of liquidity. In addition, EBITDA does not take into account
changes in certain assets and liabilities as well as interest and income taxes
which can affect cash flow.

     The discussion of segment results includes revenue, EBIT, EBITDA, capital
additions and total assets. The discussion of EBITDA for AT&T Broadband is
modified to exclude other income (expense) and net pretax losses related to
equity investments. Total assets for each segment generally include all assets,
except intercompany receivables. Prepaid pension assets and corporate-owned or
leased real estate are generally held at the corporate level, and therefore are
included in the corporate and other group. In addition, all impacts of the
adoption of SFAS No. 133, as well as the ongoing investment and derivative
revaluation, are reflected in the corporate and other group. The net assets of
discontinued operations and the related income (loss) and gain on disposition
are not reflected in the corporate and other group. Capital additions for each
segment include capital expenditures for property, plant and equipment,
acquisitions of licenses, additions to nonconsolidated investments, increases in
franchise costs and additions to internal-use software.

     In connection with our corporate restructuring program set forth in late
2000, our existing segments reflect certain managerial changes that were
implemented during 2001. The changes are as follows: AT&T

                                        18
<PAGE>

Business Services was expanded to include the results of international
operations and ventures. In addition, certain corporate costs that were
previously recorded within the corporate and other group have been allocated to
the respective segments in an effort to ultimately have the results of these
businesses reflect all direct corporate costs as well as overhead for shared
services. All prior period results have been restated to reflect these changes.

     Reflecting the dynamics of our business, we continuously 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 offers a variety of global communications services
to small and medium-sized businesses, large domestic and multinational
businesses and government agencies. AT&T Business' services include long
distance, international, toll-free and local voice; data and IP networking;
managed networking services and outsourcing solutions; and wholesale transport
services (sales of services to service resellers).

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>         <C>         <C>
External revenue
  Services revenue......................................   $27,056     $27,972     $28,070
  Equipment and product sales revenue...................       228         185          17
Total external revenue..................................    27,284      28,157      28,087
Internal revenue........................................       740         743         605
Total revenue...........................................    28,024      28,900      28,692
EBIT....................................................    (2,154)      5,990       5,248
EBITDA..................................................     1,949      10,200       9,468
Capital additions.......................................     5,456       6,839       9,091
</Table>

<Table>
<Caption>
                                                           AT DECEMBER 31,
                                                          -----------------
                                                           2001      2000
                                                          -------   -------
<S>                                                       <C>       <C>       <C>
Total assets............................................  $40,339   $42,747
</Table>

  REVENUE

     In 2001, AT&T Business Services revenue decreased $0.9 billion, or 3.0%, to
$28.0 billion. A decline in long distance voice revenue of approximately $2.1
billion drove the revenue decline. Significantly offsetting the decline was
approximately $1.4 billion of growth in data and IP services, local voice
services and outsourcing solutions, including equipment sales.

     In 2000, AT&T Business Services revenue grew $0.2 billion, or 0.7%,
compared with 1999. Strength in data and IP services as well as growth in
outsourcing solutions contributed $1.8 billion to the increase. This growth was
largely offset by an approximate $0.9 billion decline in long distance voice
services as a result of continued pricing pressures in the industry and
approximately $0.5 billion due to the net impacts of Concert, international
dispositions and acquisitions.

     In 2001, long distance voice revenue declined at a low-teen percentage rate
reflecting the continuing impact of pricing pressures, mitigated somewhat by
volume growth. While volumes grew at a low single-digit percentage rate, the
rate of growth declined from a high single-digit percentage growth rate in 2000,
reflecting the economic weakness impacting many key industry sectors, including
travel, financial services, technology and retail, as well as the impact of
wireless and e-mail substitution. These factors, along with pricing pressures,
are expected to continue to negatively impact revenue in 2002. In 2000, long
distance voice services revenue declined at a mid single-digit percentage rate
after excluding the impact of Concert. The decline was primarily due to a
declining average price per minute reflecting the competitive forces within the
industry. Partially offsetting this decline was the high single-digit percentage
growth rate in volumes.

                                        19
<PAGE>

     Data and IP services (including related product sales) grew at a low
double-digit percentage rate in 2001 compared with 2000. The growth was led by
packet services, which include frame relay, IP and Asynchronous Transfer Mode
(ATM). Packet services grew at a rate in the mid-20 percent range. Total IP
services (a component of packet services), which include IP connectivity
services, Virtual Private Network (VPN) services and hosting services, also grew
in the mid-20 percent rate range. The rate of growth of data services revenue
declined in 2001 due primarily to a slow-down in the rate of growth of
high-speed private line services and frame relay services as well as a decline
in international private line services. In 2002, we expect data and IP revenue
to grow; however, we expect the growth rate to decline from the 2001 growth
rate.

     The 2000 data and IP services growth rate (including related product
sales), as compared with 1999, was impacted by acquisitions and the formation of
Concert. Excluding these impacts, data services grew at a high-teens percentage
rate. Growth was led by the continued strength of frame relay services; IP
services, which include IP-connectivity services and VPN services; and
high-speed private-line services.

     Local voice services revenue grew more than 20% in 2001 compared with 2000,
and grew nearly 20% in 2000 compared with 1999. In 2001, AT&T added more than
670 thousand access lines and added more than 867 thousand lines in 2000. Access
lines at the end of 2001 and 2000 were more than 2.9 million and nearly 2.3
million, respectively. Access lines enable AT&T to provide local service to
customers by allowing direct connection from customer equipment to the AT&T
network. At the end of 2001, AT&T served more than 6,300 buildings on-network
(buildings where AT&T owns the connection that runs into the building),
representing an increase of approximately 3.2% over 2000. At the end of 2000,
AT&T served more than 6,100 buildings on-network, compared with slightly more
than 5,800 buildings at the end of 1999. In 2002, we expect local voice services
revenue to grow; however, we expect the growth rate to decline from the 2001
growth rate.

     AT&T Business Services internal revenue was essentially flat in 2001
compared with 2000, and increased $138 million, or 22.7%, in 2000 compared with
1999. The impact of internal revenue is included in the revenue by product
discussions, above. In 2001, AT&T Business Services had lower internal revenue
due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now
reported as external revenue. This decrease was almost entirely offset by
greater sales of services to other AT&T units, primarily AT&T Broadband. The
increase in 2000 was the result of greater sales of business long distance
services to other AT&T units that resell such services to their external
customers, primarily AT&T Broadband and AT&T Wireless.

  EBIT/EBITDA

     In 2001, EBIT decreased $8.1 billion, or 136.0%, compared with 2000. EBITDA
declined $8.3 billion, or 80.9%, in 2001 compared with 2000. The declines in
EBIT and EBITDA were primarily due to charges of $3.0 billion in 2001, related
to the estimated loss on AT&T's commitment to purchase the remaining public
shares of AT&T Canada, and charges of $2.9 billion in 2001 related to the unwind
of Concert. Also reflected in the declines was the impact of pricing pressure
within the long distance voice business, as well as a shift from higher margin
long distance services to lower margin growth services. In 2002, EBIT and EBITDA
are expected to improve, primarily due to the 2001 charges we recorded related
to AT&T Canada and the unwind of Concert, partially offset by lower net gains
recorded in other (expense) income and lower operating income, reflecting
continued softness in the long distance market.

     EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7 billion, or
7.7%, in 2000 compared with 1999. The improvements reflect an increase in
revenue and lower costs as a result of our continued cost-control efforts,
partially offset by the formation of Concert and the acquisition of AGNS.

  OTHER ITEMS

     Capital additions decreased $1.4 billion in 2001, and decreased $2.3
billion in 2000. In 2001, the decrease was a result of lower capital
expenditures for the AT&T world-wide intelligent network, as well as a reduced
investment in Concert. In 2000 the decrease was a result of lower spending for
our network and lower infusions into nonconsolidated international investments.

                                        20
<PAGE>

     Total assets decreased $2.4 billion, or 5.6%, at December 31, 2001,
compared with December 31, 2000. The decrease was primarily due to a decline in
our investments in nonconsolidated subsidiaries, primarily due to the write-down
of our investment in Concert and equity losses from Concert, and reduced
receivables resulting from lower revenue and increased collection efforts. These
declines were partially offset by an increase in property, plant and equipment.

AT&T CONSUMER SERVICES

     AT&T Consumer Services provides a variety of communications services to
residential customers including domestic and international long distance;
transaction based long distance, such as operator assisted service and prepaid
phone cards; local and local toll (intrastate calls outside the immediate local
area); and dial-up Internet.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>         <C>         <C>
Revenue.................................................   $15,079     $18,894     $21,753
EBIT....................................................     4,875       6,893       7,619
EBITDA..................................................     5,075       7,060       7,803
Capital additions.......................................       140         148         299
</Table>

<Table>
<Caption>
                                                           AT DECEMBER 31,
                                                          -----------------
                                                           2001      2000
                                                          -------   -------
<S>                                                       <C>       <C>       <C>
Total assets............................................  $ 2,141   $ 3,150
</Table>

  REVENUE

     AT&T Consumer Services revenue declined $3.8 billion, or 20.2%, in 2001
compared with 2000. The decline was primarily due to a $3.7 billion decline in
traditional voice services, such as domestic and international dial services
(long distance calls where the number "1" is dialed before the call), and
domestic calling card services. The traditional voice services were negatively
impacted by an acceleration of wireless and e-mail product substitution, and the
impact of ongoing competition, which has led to a loss of market share. In
addition, the continued migration of customers to lower-priced products and
optional calling plans has also negatively impacted revenue. As a result of the
acceleration of substitution and competition, calling volumes declined at a low
double-digit percentage rate in 2001. The revenue decline also reflects a $0.5
billion impact due to the elimination of per-line charges in July 2000.
Partially offsetting these revenue declines was revenue growth of $0.6 billion
for prepaid card and local services. We expect product substitution, competition
(including the continued entry of the Regional Bell Operating Companies into the
long distance market) and customer migration to lower-priced calling plans and
products to continue to negatively impact AT&T Consumer Services revenue in
2002.

     In 2000, AT&T Consumer Services revenue decreased 13.1%, or $2.9 billion,
compared with 1999. Approximately $0.9 billion of the decline was due to the
elimination of per-line charges in 2000 and the impact of Concert. The remainder
of the decline was primarily due to a decline in traditional voice services,
reflecting the ongoing competitive nature of the consumer long distance
industry, which has resulted in pricing pressures and a loss of market share.
Also negatively impacting revenue was product substitution and market migration
away from direct-dial wireline and higher-priced calling-card services to the
rapidly growing wireless services and lower-priced prepaid-card services. As a
result, calling volumes declined at a mid single-digit percentage rate in 2000.

  EBIT/EBITDA

     EBIT declined $2.0 billion, or 29.3%, and EBITDA declined $2.0 billion, or
28.1%, in 2001 compared with 2000. In 2001, EBIT and EBITDA margins declined to
32.3% and 33.7%, from 36.5% and 37.4% in 2000, respectively. As customers
substitute long distance calling with wireless and e-mail services and migrate
to

                                        21
<PAGE>

lower priced calling plans and lower margin products, they tend to remain AT&T
Consumer Services customers. These customers generate less revenue, however, the
billing, customer care and fixed costs remain, resulting in lower EBIT margins.
The margin decline was also impacted by a slight increase in marketing spending
targeted at high value customers, partially offset by a $0.2 billion settlement
of disputes relating to obligations resulting from the sale of AT&T Universal
Card Services to Citigroup in 1998, as well as cost control initiatives. In
2002, we expect the impacts of revenue decline to continue to negatively impact
EBIT and EBITDA.

     EBIT and EBITDA both declined $0.7 billion, or 9.5%, in 2000 compared with
1999. The declines primarily reflect the decline in the long distance business,
offset somewhat by cost-control initiatives. In addition, the declines reflect
$0.2 billion of lower gains on sales of businesses, due primarily to the 1999
sale of Language Line Services, and higher restructuring charges. Reflecting our
cost-control initiatives, EBIT and EBITDA margins in 2000 improved to 36.5% and
37.4%, respectively, compared with 35.0% and 35.9%, respectively, in 1999.

  OTHER ITEMS

     In 2001, capital additions decreased $8 million, or 5.2%, compared with
2000. Capital additions decreased $0.2 billion, or 50.6%, in 2000 compared with
1999 as a result of reduced spending on internal-use software, as most of the
functionality upgrades were completed in 1999.

     Total assets declined $1.0 billion, or 32.0%, in 2001. The decline was
primarily due to lower accounts receivable, reflecting lower revenue.

AT&T BROADBAND

     AT&T Broadband offers a variety of services through our cable (broadband)
network, including traditional analog video and advanced services, such as
digital video, high-speed data and broadband telephony.

<Table>
<Caption>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                        --------------------------------
                                                          2001        2000        1999
                                                        ---------   ---------   --------
                                                              DOLLARS IN MILLIONS
<S>                                                     <C>         <C>         <C>
External revenue......................................  $  9,785    $  8,212    $ 5,069
Internal revenue......................................        14          14          1
Total revenue.........................................     9,799       8,226      5,070
EBIT..................................................    (3,215)     (1,240)    (1,545)
EBITDA*...............................................     2,040       1,639        733
Capital additions.....................................     3,607       4,968      4,759
</Table>

<Table>
<Caption>
                                                          AT DECEMBER 31,
                                                        -------------------
                                                          2001       2000
                                                        --------   --------
<S>                                                     <C>        <C>        <C>
Total assets..........................................  $103,060   $114,848
</Table>

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

* EBITDA for AT&T Broadband excludes net losses related to equity investments
  and other income (expense).

     Results of operations for the year ended December 31, 2001, include a full
twelve months of MediaOne operations, while the year ended December 31, 2000,
includes the results of MediaOne since its acquisition on June 15, 2000, and the
year ended December 31, 1999, does not include any results of MediaOne.
Additionally, the results of operations for the year ended December 31, 1999,
include 10 months of TCI's results, reflecting its acquisition in March 1999,
while 2000 and 2001 include a full 12 months of TCI's results.

                                        22
<PAGE>

  REVENUE

     AT&T Broadband revenue grew $1.6 billion in 2001, or 19.1%, compared with
2000. Approximately $0.6 billion of the increase was due to the acquisition of
MediaOne, partially offset by the net dispositions of cable systems. In
addition, the increase was attributable to revenue growth from advanced services
(broadband telephony and high-speed data) of approximately $0.6 billion and
growth in other video services, primarily expanded basic cable and digital
video, of approximately $0.4 billion. We expect 2002 revenue to increase as
demand for advanced services continues to grow.

     AT&T Broadband revenue grew $3.2 billion in 2000, or 62.3%, compared with
1999. Approximately $2.8 billion of the increase in revenue was due to the
acquisition of MediaOne in 2000 and TCI in 1999. In addition, revenue from
advanced services and a basic-cable rate increase contributed approximately $0.4
billion to the revenue increase.

     At December 31, 2001, AT&T Broadband serviced approximately 13.6 million
basic cable customers, passing approximately 24.6 million homes, compared with
16.0 million basic cable customers, passing approximately 28.3 million homes at
December 31, 2000. The decrease in the number of homes passed and basic cable
customers primarily reflect the net disposition of cable systems in 2001. In
addition, the number of basic cable customers declined due to the impacts of
competition. At December 31, 2001, we provided digital video service to
approximately 3.5 million customers, high-speed data service to approximately
1.5 million customers and broadband telephony service to approximately 1.0
million customers. This compares with approximately 2.8 million digital-video
customers, approximately 1.1 million high-speed data customers, and
approximately 547 thousand broadband telephony customers at December 31, 2000.
These amounts reflect the acquisition of MediaOne. At December 31, 1999, AT&T
Broadband serviced approximately 11.4 million basic cable customers, passing
approximately 19.7 million homes. At December 31, 1999, we provided digital
video service to approximately 1.8 million customers, high-speed data service to
approximately 207 thousand customers and broadband telephony service to nearly
8,300 customers.

  EBIT/EBITDA

     The EBIT deficit in 2001 increased $2.0 billion to $3.2 billion from the
2000 deficit of $1.2 billion. The increased deficit was largely due to the
impacts of the acquisition of MediaOne and the net dispositions of cable systems
of approximately $0.8 billion, as well as a $0.9 billion impact of net losses on
the sales of businesses and investments recorded in 2001 compared with net gains
recorded in 2000. In 2001, we recorded net losses from the sale of cable
properties to Comcast, as well as a loss on the sale of part of our ownership
interest in Cablevision. In 2000, we recorded a gain on the sale of Lenfest and
gains on the sales of properties to Cox and Comcast. Also contributing to the
increased deficit were higher depreciation and amortization, programming and
advertising expenses and higher restructuring and other charges of approximately
$0.8 billion, as well as greater investment impairment charges of $0.4 billion.
These increases to the deficit were partially offset by $0.3 billion of lower
pretax equity losses, improved EBIT of approximately $0.4 billion in other video
services, primarily expanded basic cable and digital video, and improved EBIT in
advanced services of approximately $0.2 billion.

     EBITDA, which excludes net losses related to equity investments and other
income (expense), was $2.0 billion in 2001, an improvement of $0.4 billion
compared with $1.6 billion in 2000. This improvement was primarily due to the
acquisition of MediaOne of $0.4 billion and improved EBITDA in other video
services, primarily expanded basic cable and digital video, of approximately
$0.4 billion and improved EBITDA in advanced services of approximately $0.2
billion. Partially offsetting this improvement was the impact of net
dispositions of cable systems of $0.4 billion, increased programming and
advertising expenses of $0.2 billion, and higher restructuring and other charges
of $0.1 billion.

     In 2002, we expect EBITDA, which excludes net losses related to equity
investments and other income (expense), to increase as a result of expense
reductions generated from previous years' restructuring charges as well as
continued growth from advanced services (broadband telephony and high-speed
data).

                                        23
<PAGE>

     EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion,
or 19.7% compared with 1999. This improvement was due to approximately $0.5
billion of higher gains on sales of businesses and investments, primarily gains
on the swap of cable properties with Cox and Comcast and the sale of our
investment in Lenfest, and $0.4 billion lower restructuring charges primarily
associated with an in-process research and development charge recorded in
connection with the 1999 acquisition of TCI. Also contributing to the
improvement were lower pretax losses from equity investments of $0.5 billion,
due in part to a $0.3 billion improvement from our investment in Cablevision due
to gains from cable-system sales. These improvements were largely offset by the
impact of the acquisition of MediaOne and TCI of approximately $0.5 billion and
higher expenses associated with high-speed data and broadband telephony services
of approximately $0.4 billion.

     EBITDA, which excludes net losses related to equity investments and other
income, was $1.6 billion in 2000, an improvement of $0.9 billion compared with
1999. This improvement was due to the impact of the MediaOne and TCI
acquisitions of $0.7 billion and lower restructuring charges of $0.4 billion.
Higher expenses associated with high-speed data and broadband telephony of
approximately $0.2 billion partially offset these increases.

  OTHER ITEMS

     Capital additions decreased $1.4 billion, or 27.4%, to $3.6 billion in
2001, from $5.0 billion in 2000. This decrease was primarily driven by a $0.9
billion decrease in capital expenditures combined with a $0.5 billion decrease
in infusions into nonconsolidated investments. The 2001 spending was primarily
related to the growth and support of advanced services and plant upgrade
expenditures.

     Capital additions increased 4.4% to $5.0 billion in 2000, from $4.8 billion
in 1999. The increase was due to higher capital expenditures of $0.8 billion,
primarily due to MediaOne, which was almost entirely offset by decreased
contributions to various nonconsolidated investments of $0.7 billion. The 2000
spending was primarily related to the growth and support of advanced services
and plant upgrade expenditures. In 1999, spending was largely directed toward
cable-distribution systems, focusing on the upgrade of cable plant assets, as
well as equity infusions into various investments.

     Total assets at December 31, 2001, decreased $11.8 billion, or 10.3%, to
$103.1 billion compared with $114.8 billion at December 31, 2000. The decrease
in total assets was primarily due to lower franchise costs as a result of the
net disposition of cable systems and the current year amortization; lower
investments, primarily related to the impairment of and settlement of
exchangeable notes with Vodafone ADRs, the sale of certain investments,
including shares of Cablevision and Rainbow Media and unfavorable mark-to-market
adjustments on certain investments; and lower other assets primarily due to
unfavorable mark-to-market adjustments on certain derivative instruments, and
the amortization of purchased intangibles.

CORPORATE AND OTHER

     This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the impacts of
Excite@Home.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001         2000        1999
                                                          ---------    ---------    -------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>          <C>          <C>
Revenue.................................................   $  (352)     $  (487)     $(542)
EBIT....................................................    (4,324)      (3,279)      (441)
EBITDA..................................................    (3,737)      (2,382)        37
Capital additions.......................................       327        1,683        271
</Table>

<Table>
<Caption>
                                                             AT DECEMBER 31,
                                                            -----------------
                                                             2001      2000
                                                            -------   -------
<S>                                                         <C>       <C>       <C>
Total assets..............................................  $19,742   $12,101
</Table>

                                        24
<PAGE>

  REVENUE

     Revenue for corporate and other primarily includes negative revenue of $0.8
billion in both 2001 and 2000, representing the elimination of intercompany
revenue, and revenue of Excite@Home of $0.4 billion in 2001 and $0.2 billion in
2000. The increase in revenue of Excite@Home is primarily due to nine months of
revenue included in our 2001 results compared with four months of revenue
included in our 2000 results. The elimination of intercompany revenue was
essentially flat in 2001 compared with 2000, however, we had a higher
elimination of intercompany revenue in 2001 resulting from increased sales from
AT&T Business Services and Excite@Home to AT&T Broadband, offset by lower
intercompany revenue from AT&T Wireless due to its split-off on July 9, 2001.

     Corporate and other revenue was negative $0.5 billion in both 2000 and
1999. Revenue in 2000 primarily included $0.8 billion of negative revenue,
representing the elimination of intercompany revenue, and revenue of Excite@Home
of $0.2 billion. Revenue in 1999 primarily included $0.6 billion of negative
revenue representing the elimination of intercompany revenue.

  EBIT/EBITDA

     EBIT and EBITDA deficits in 2001 increased $1.0 billion and $1.4 billion to
deficits of $4.3 billion and $3.7 billion, respectively. The deficit increases
were largely due to $1.5 billion of greater investment impairment charges, which
included a $1.1 billion impairment charge for Net2Phone and a $0.3 billion
impairment charge for Time Warner Telecom recorded in 2001; and $0.8 billion of
expense due to the adoption, in 2001, of SFAS No. 133. Also contributing to the
deficit increases were higher restructuring and other charges (other than
Excite@Home) and higher transaction costs associated with AT&T's restructuring
announced in October 2000, totaling $0.4 billion; lower net gains on sales of
investments and lower interest income, totaling $0.4 billion; and a lower
pension credit (income) and higher postretirement expense of $0.3 billion. These
increases to the deficits were largely offset by the improved EBIT and EBITDA of
Excite@Home of $2.6 billion primarily due to the goodwill impairment charges
recorded in 2000 by Excite@Home and AT&T related to Excite@Home, partially
offset by a $0.3 billion greater loss in 2001 on the Excite@Home put obligation
with Cox and Comcast.

     In 2000, EBIT and EBITDA deficits increased $2.8 billion and $2.4 billion
to $3.3 billion and $2.4 billion, respectively. The increases in the deficits
were largely related to Excite@Home. In 2000, restructuring and other charges,
net of minority interest, were $2.9 billion higher primarily due to goodwill
impairment charges recorded by Excite@Home and AT&T related to Excite@Home.
Other impacts included a charge of approximately $0.5 billion for the fair
market value increase of put options held by Comcast and Cox related to
Excite@Home, and operating losses from Excite@Home. Partially offsetting these
declines was an increase in the pension credit due to a higher pension trust
asset base resulting from increased investment returns, and lower expenses
associated with our continued efforts to reduce costs, which aggregated
approximately $0.6 billion. In addition, higher net gains on sales of
investments and an increase in interest income increased EBIT and EBITDA by
approximately $0.6 billion.

  OTHER ITEMS

     Capital additions decreased $1.4 billion in 2001 and increased $1.4 billion
in 2000. The spike in capital additions in 2000 was driven by our investment in
Net2Phone.

     Total assets increased $7.6 billion, to $19.7 billion in 2001. The increase
was primarily driven by a higher cash balance at December 31, 2001, mainly a
result of proceeds received from our $10 billion bond offering in November 2001,
and an investment in AT&T Wireless (which was monetized in the fourth quarter of
2001). These increases were partially offset by the impact of Excite@Home, the
write-down of our investment in Net2Phone and the transfer of a loan to Concert
to the AT&T Business Services segment, which was written off in the third
quarter of 2001.

                                        25
<PAGE>

LIBERTY MEDIA GROUP

     LMG produces, acquires and distributes entertainment, educational and
informational programming services through all available formats and media. LMG
is also engaged in electronic-retailing services, direct-marketing services,
advertising sales relating to programming services, infomercials and transaction
processing. LMG was split-off from AT&T on August 10, 2001. The operating
results of LMG were reflected as "Equity (losses) earnings from Liberty Media
Group" in the Consolidated Statements of Income prior to its split-off from
AT&T. Our investment in LMG was included in the Consolidated Balance Sheet at
December 31, 2000. Losses from LMG were $2.7 billion in 2001 through July 31,
2001, the deemed effective split-off date for accounting purposes, compared with
earnings of $1.5 billion in 2000. The decline was primarily due to gains on
dispositions reported in 2000, including gains associated with the mergers of
various companies that LMG had investments in. Gains were recorded for the
difference between the carrying value of LMG's interest in the acquired company
and the fair value of securities received in the merger. Partially offsetting
the decline were charges recorded on LMG's investments in 2000, to reflect other
than temporary declines in value. In 2001, LMG also recorded income of $0.5
billion for the cumulative effect of accounting change representing the impact
of separately recording the embedded call option obligations associated with
LMG's senior exchangeable debentures due to the adoption of SFAS No. 133.

     In 2000, earnings from LMG were $1.5 billion, compared with losses of $2.0
billion from the date of acquisition through December 31, 1999. The improvement
was primarily due to gains on dispositions, including gains associated with the
mergers of various companies that LMG had investments in. In addition, lower
stock compensation expense in 2000 compared with 1999 contributed to the
improvement, partially offset by impairment charges recorded on LMG's
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.

LIQUIDITY

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
                                                                 DOLLARS IN MILLIONS
<S>                                                       <C>         <C>         <C>
CASH FLOWS:
Provided by operating activities of continuing
  operations............................................   $10,558     $11,665     $10,509
Used in investing activities of continuing operations...    (1,860)    (30,045)    (23,884)
(Used in) provided by financing activities of continuing
  operations............................................    (3,030)     25,732      13,854
Provided by (used in) discontinued operations...........     4,860      (8,306)     (2,594)
</Table>

     Net cash provided by operating activities of $10.6 billion for the year
ended December 31, 2001, primarily included the $12.8 billion of income from
continuing operations, adjusted to exclude noncash income items and net gains on
sales of businesses and investments, and a decrease in accounts receivable of
$0.7 billion, partially offset by net changes in other operating assets and
liabilities of $2.2 billion and a decrease in accounts payable of $0.8 billion.
Net cash provided by operating activities of $11.7 billion for the year ended
December 31, 2000, primarily included income from continuing operations,
excluding noncash income items and the adjustment for net gains on sales of
businesses and investments of $15.1 billion, partially offset by an increase in
accounts receivable of $2.5 billion and a decrease in accounts payable of $0.6
billion. Net cash provided by operating activities of $10.5 billion for the year
ended December 31, 1999, primarily included income from continuing operations
excluding noncash income items and the adjustment for net gains on sales of
businesses and investments of $14.9 billion, partially offset by an increase in
accounts receivable of $2.4 billion and net changes in other operating assets
and liabilities of $1.8 billion.

     AT&T's investing activities resulted in a net use of cash of $1.9 billion
in 2001, compared with $30.0 billion in 2000. During 2001, AT&T spent $9.3
billion on capital expenditures and $0.4 billion on nonconsolidated investments
and received approximately $4.9 billion, primarily from the net dispositions of
cable systems, and approximately $3.0 billion from the sales of investments.
During 2000, AT&T used approximately $16.7 billion for acquisitions of
businesses, primarily MediaOne, and spent $11.5 billion on

                                        26
<PAGE>

capital expenditures. During 1999, AT&T spent approximately $11.9 billion on
capital expenditures, approximately $6.0 billion on acquisitions of businesses,
primarily AGNS, and contributed $5.5 billion of cash to LMG.

     During 2001, net cash used in financing activities was $3.0 billion,
compared with net cash provided by financing activities of $25.7 billion in
2000. During 2001, AT&T made net debt payments of $6.4 billion, paid AT&T
Wireless $5.8 billion to settle an intercompany loan in conjunction with its
split-off from AT&T, and paid dividends of $0.5 billion. Partially offsetting
these outflows was the receipt of $9.8 billion from the issuance of convertible
preferred stock to NTT DoCoMo. During 2000, AT&T received $10.3 billion from the
AT&T Wireless Group tracking stock offering and had net borrowings of debt of
$19.5 billion. These were partially offset by the payment of $3.0 billion in
dividends. In 1999, AT&T had net borrowings of debt of $16.3 billion and
received $4.6 billion from the issuance of redeemable preferred securities.
These sources of cash were partially offset by the acquisition of treasury
shares of $4.6 billion and the payment of dividends of $2.7 billion.

     Since the announced restructuring plans to create four new businesses,
AT&T's credit ratings have been under review by the applicable rating agencies.
As a result of this review, in 2001, AT&T's short-term and the long-term ratings
were downgraded as outlined below. These actions have resulted in an increased
cost of borrowings and decreased our access to the capital markets. Our current
credit ratings are as follows:

<Table>
<Caption>
                           SHORT-TERM CREDIT   LONG-TERM CREDIT   CHARACTERIZATION OF LONG-TERM
CREDIT RATING AGENCY            RATING              RATING                CREDIT RATING
--------------------       -----------------   ----------------   -----------------------------
<S>                        <C>                 <C>                <C>
Standard & Poor's........         A-2             BBB+            On credit watch with negative
                                                                  implications
Moody's..................         P-2              A3             Under review with possibility
                                                                  of downgrade
Fitch Ratings............         F-2              A-             Rating watch negative
</Table>

     There are provisions in several of our debt instruments that require us to
pay up to the $0.9 billion present value of future interest payments if our
credit ratings are downgraded below investment grade. We do not believe
downgrades below investment grade are likely to occur.

     In November 2001, we completed a $10 billion private bond offering which
includes provisions that would allow bondholders to require AT&T to repurchase
the notes if certain conditions are not met in conjunction with the spin-off or
other separation of AT&T Broadband from AT&T at the time of notification to
bondholders of the intention to separate AT&T Broadband. These conditions
include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T, excluding
AT&T Broadband, of no more than 2.75 times. In addition, the Moody's and
Standard & Poor's credit ratings for pro forma AT&T, excluding AT&T Broadband,
are required to be at least Baa3 and BBB-, respectively, with such ratings
having at least a stable outlook.

     On December 14, 2001, we amended and restated a pre-existing
revolving-credit facility. The amended facility, which is syndicated to 30
banks, makes $8 billion available to AT&T for a 364-day term. At December 31,
2001, we had not utilized this facility, and we currently have the entire $8
billion facility available to us. The credit facility agreement contains a
financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as
defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter. At December 31, 2001, we
were in compliance with this covenant. If AT&T were to become noncompliant it
could result in the cancellation of the credit facility with any amounts
outstanding under the credit facility becoming payable immediately.

     The holder of certain private debt has an annual right to cause AT&T to
repay up to the $0.7 billion face value of the debt upon payment of an exercise
fee. In exchange for the elimination of this put right for 2002, AT&T will
obtain a letter of credit collateralized by $0.4 billion of cash which will be
restricted in its use. The creditor could also accelerate repayment of the debt
if unfavorable local law changes were to occur in its country of operation.

                                        27
<PAGE>

     If AT&T's debt ratings are further downgraded or any of the risks or
covenants noted above are triggered, AT&T may not be able to obtain sufficient
financing in the timeframe required, and/or such replacement financing may be
more costly or have additional covenants than we had in connection with our debt
at December 31, 2001. In addition, if the financial markets become more cautious
regarding the industry/ratings category we operate in, our ability to issue
commercial paper would be further reduced. This could negatively impact our
ability to pursue acquisitions, make capital expenditures to expand our network
and cable plant or to pay dividends.

     At December 31, 2001, we had current assets of $22.5 billion and current
liabilities of $25.4 billion. Included in current assets was $10.6 billion of
cash and cash equivalents. Included in current liabilities was $13.0 billion of
debt maturing within one year, including $9.2 billion of commercial paper and
debt with an original maturity of one year or less. We expect to fund our
operations primarily with cash from operations, cash on hand, commercial paper
and our securitization program. If economic conditions worsen or do not improve
and/or competition and product substitution accelerate beyond current
expectations, our cash flow from operations would decrease, negatively impacting
our liquidity.

     In addition, potential sources of funds include the sale of our ownership
interest in TWE. On February 28, 2001, we exercised our registration rights in
TWE and formally requested TWE to begin the process of converting the limited
partnership into a corporation with registered equity securities. On May 14,
2001, we named Credit Suisse First Boston as our investment banker for the
registration process under the TWE partnership agreement. If the proposed
spin-off of AT&T Broadband occurs as currently structured, our investment in TWE
will be included in the net assets spun-off.

     In the event our cash flow from operations or access to the commercial
paper markets are negatively impacted, we have alternative funding available
through the utilization of our $8 billion credit facility, as long as we are in
compliance with certain covenants discussed above and our $2.7 billion
receivables securitization program, which is limited by eligible receivables
that change from month to month.

     Subsequent to December 31, 2001, AT&T notified holders of certain Trust
Originated Preferred Securities, originally issued by TCI and MediaOne, that it
will call these securities for early redemption on February 28, 2002, March 4,
2002 and April 1, 2002. These debt redemptions total approximately $1.4 billion
and will be funded with cash on hand. Such amounts are included within
"Short-term debt" on the Consolidated Balance Sheet at December 31, 2001.

     On February 27, 2002, AT&T signed an agreement with AT&T Latin America
(ALA) that restructured approximately $725 million of ALA's short-term and
long-term debt and preferred stock held by AT&T, plus accrued interest and
dividends. At December 31, 2001, $72 million of the $725 million financing was
not drawn. ALA's senior secured vendor financing of $298 million became
effective on March 27, 2002. The AT&T provided debt and preferred facilities are
subordinated to the ALA senior secured vendor financing. The agreement between
AT&T and ALA, which also took effect on March 27, 2002, extends the maturity and
redemption dates of all ALA debt and preferred stock payable to AT&T to October
2008. In addition, while the vendor financing is outstanding, the agreement
defers interest payments on all AT&T debt and dividend payments on AT&T
preferred stock until October 2008.

     If the proposed spin-off of AT&T Broadband occurs as currently structured,
the debt of TCI and MediaOne will be included in the net assets spun-off and
will be included in AT&T Comcast. The amount of this third-party debt at
December 31, 2001, was $19.3 billion. The intercompany debt of AT&T Broadband
payable to AT&T that is outstanding at the time of the spin-off will be repaid
immediately prior to the spin-off. At December 31, 2001 such intercompany debt
amounted to approximately $4.0 billion. In addition, AT&T's quarterly
convertible income preferred securities, which had a book value of $4.7 billion
at December 31, 2001, will be included in the net assets spun-off and will be
included in AT&T Comcast.

                                        28
<PAGE>

     The following summarizes AT&T's contractual cash obligations and commercial
commitments at December 31, 2001, and the effect such obligations are expected
to have on liquidity and cash flow in future periods.

<Table>
<Caption>
                                                     PAYMENTS DUE BY PERIOD
                                      -----------------------------------------------------
                                                LESS THAN      2-3         4-5      AFTER 5
CONTRACTUAL OBLIGATIONS                TOTAL     1 YEAR       YEARS       YEARS      YEARS
-----------------------               -------   ---------   ---------   ---------   -------
                                                      (DOLLARS IN MILLIONS)
<S>                                   <C>       <C>         <C>         <C>         <C>
Long-term debt, including current
  maturities(a).....................  $35,008    $2,975      $5,850      $6,958     $19,225
Operating leases(b).................    2,996       550         924         648         874
Unconditional purchase
  Obligations(c)(d)(e)(f)(g)........    8,532       810         894         910       5,918
                                      -------    ------      ------      ------     -------
Total Contractual Cash
  Obligations.......................  $46,536    $4,335      $7,668      $8,516     $26,017
                                      =======    ======      ======      ======     =======
</Table>

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

 (a) Long-term debt excludes debt that is exchangeable or collateralized by
     securities (monetized debt) since AT&T has the option to settle this debt
     in shares or cash. Amounts due less than one year were $679 million; two to
     three years $4,918 million; and four to five years $3,312 million at
     December 31, 2001. In addition, debt excludes discounts and excess of fair
     value over the recorded value of debt in connection with the TCI and
     MediaOne mergers.

 (b) Under certain real estate operating leases, we could be required to make
     payments to the lessor up to $586 million at the end of the lease term
     (lease terms range from 2002 through 2011). The actual amount paid, if any,
     would be reduced by amounts received by the lessor upon remarketing of the
     property.

 (c) AT&T has contractual obligations to utilize network facilities from local
     exchange carriers with terms greater than one year. These contracts are
     based on volumes and have penalty fees if certain volume levels are not
     met. We assessed our minimum exposure based on penalties to exit the
     contracts. At December 31, 2001, penalties to exit these contracts in any
     given year totaled approximately $1.5 billion.

 (d) AT&T has contractual obligations that extend through 2006 for services that
     include computer application design, development and testing as well as the
     operation of a data center that hosts many of the computer applications
     operated throughout AT&T. These contracts are based on the level of
     services we require and include termination fees if the level of services
     required is reduced in excess of limits outlined in the agreements. These
     contracts also include termination fee clauses if we exit the contracts.
     Since these contracts are based on the level of services we require, we
     assessed our minimum exposure based on the termination fees to exit the
     contracts which decline each year throughout the term of the contracts. If
     we elect to exit these contracts, the maximum termination fees we would be
     obligated to pay in the year of termination would be approximately $475
     million in 2002, $360 million in 2003, $310 million in 2004, $240 million
     in 2005 or $165 million in 2006.

 (e) In connection with the decision to unwind Concert, AT&T has agreed to
     acquire the 9% interest of AT&T Canada owned by British Telecommunications
     plc (BT) and assume BT's portion of the obligation to purchase the AT&T
     Canada shares not already owned by AT&T and BT. We do not know the timing
     or amounts we will have to pay in connection with this obligation but, in
     2001, AT&T recorded a liability of $3.0 billion reflecting the estimated
     loss on AT&T's commitment to purchase the publicly owned shares of AT&T
     Canada.

 (f) AT&T Broadband is party to an agreement under which it purchases certain
     billing services from CSG Systems, Inc. ("CSG"). Unless terminated by
     either party pursuant to terms of the agreement, the agreement expires on
     December 31, 2012. The agreement calls for monthly payments which are
     subject to adjustments and conditions pursuant to the terms of the
     underlying agreements.

 (g) In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year
     affiliation term sheet with Starz Encore Group pursuant to which AT&T may
     be obligated to pay fixed monthly amounts in exchange for unlimited access
     to all of the existing Encore and STARZ! programming. The future
     commitment, which

                                        29
<PAGE>

    is calculated based on a fixed number of subscribers, increases annually
    from $306 million in 2002 to $315 million in 2003 and will increase annually
    through 2022 with inflation, subject to certain adjustments, including
    increases in the number of subscribers. The amounts in the above table do
    not take into account any increase in subscribers or expected inflation. The
    affiliation term sheet further provides that to the extent Starz Encore
    Group's programming costs increase above certain levels, AT&T's payments
    under the term sheet will be increased in proportion to the excess. Excess
    programming costs that may be payable by AT&T in future years are not
    presently estimable and could be significant.

<Table>
<Caption>
                                                       COMMITMENTS BY PERIOD
                                    -----------------------------------------------------------
                                    TOTAL AMOUNTS   LESS THAN      2-3         4-5      AFTER 5
OTHER COMMERCIAL COMMITMENTS          COMMITTED      1 YEAR       YEARS       YEARS      YEARS
----------------------------        -------------   ---------   ---------   ---------   -------
                                                       (DOLLARS IN MILLIONS)
<S>                                 <C>             <C>         <C>         <C>         <C>
Guarantees........................     $1,522          $55         $--         $--      $1,467
</Table>

RISK MANAGEMENT

     We are exposed to market risk from changes in interest and foreign exchange
rates, as well as changes in equity prices associated with previously affiliated
companies. In addition, we are exposed to market risk from fluctuations in the
prices of securities, some of which we have monetized through the issuance of
debt. On a limited basis, we use certain derivative financial instruments,
including interest rate swaps, 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. As of
December 31, 2001, our foreign currency market exposures were principally
Canadian dollars, Euros, Japanese yen, Swiss francs and Brazilian reais.

     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, assuming no change in interest rates. For contracts outstanding at
December 31, 2001 and 2000, a 10% appreciation of the US dollar against foreign
currencies from the prevailing rates would have resulted in an incremental
pretax net unrealized loss of approximately $492 million and $6 million,
respectively. The increase of the change from last year is primarily due to
approximately $5.3 billion of foreign exchange contracts entered into relating
to the commencement of a Euro Commercial Paper Program and our obligation to
purchase the outstanding AT&T Canada shares we do not own. 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.

     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 monitor our interest rate risk on the basis of
changes in fair value. 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. We perform a
sensitivity analysis on our fixed-rate long-term debt 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, 2001 and 2000,
assuming a 10% increase in interest rates, the fair value of interest rate swaps
and the underlying hedged debt would have decreased by $22 million and $11
million, respectively.

                                        30
<PAGE>

     In both 2001 and 2000, we entered into combined interest rate forward
contracts to hedge foreign-currency-denominated debt. Assuming a 10% downward
shift in interest rates, the fair value of the contracts and the underlying
hedged debt would have changed by $112 million and $88 million respectively.

     Assuming a 10% downward shift in interest rates at December 31, 2001 and
2000, the fair value of unhedged debt would have increased by $1.4 billion and
$1.2 billion, respectively.

     We have certain notes which are indexed to the market price of equity
securities we own. Certain of these notes contain embedded derivatives, while
other debt is issued in conjunction with net purchased options. Changes in the
market prices of these securities result in changes in the fair value of the
derivatives. Assuming a 10% downward change in the market price of these
securities, the fair value of the combined collars and underlying debt would
decrease by $661 million and $534 million at December 31, 2001, and 2000
respectively. Because these collars hedge the underlying equity securities
monetized, we believe that the increase in the fair value of the collars would
be largely offset by decreases in the fair value of the underlying equity
securities. The changes in fair values referenced above do not represent the
actual changes in fair value we would incur under normal market conditions
because all variables other than the equity prices were held constant in the
calculations.

     We use equity hedges to manage our exposure to changes in equity prices
associated with stock appreciation rights (SARs) of previously affiliated
companies. Assuming a 10% decrease in equity prices of these companies, the fair
value of the equity hedges (net liability) would have increased by $27 million
and $29 million at December 31, 2001 and 2000, respectively. Because these
contracts are entered into for hedging purposes, we believe that the decrease in
fair value would be largely offset by decreases in the underlying SAR
liabilities.

     In order to determine the changes in fair value of our various financial
instruments, including options, equity collars and SARS, we use certain
financial modeling techniques, including Black-Scholes. 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 the
Company. They do not consider the potential effect of changes in market factors
that would result in favorable impacts to us, and do not represent projected
losses in fair value that we expect to incur. Future impacts would be based on
actual developments in global financial markets. We do not foresee any
significant changes in the strategies used to manage interest rate risk, foreign
currency rate risk or equity price risk in the near future.

FINANCIAL CONDITION

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                              DOLLARS IN MILLIONS
<S>                                                           <C>        <C>
Total assets................................................  $165,282   $234,360
Total liabilities...........................................   105,322    121,611
Total shareowners' equity...................................    51,680    103,198
</Table>

     Total assets decreased $69.1 billion, or 29.5%, to $165.3 billion at
December 31, 2001, from $234.4 billion at December 31, 2000. This decrease was
primarily due to the split-off of LMG in August 2001 and AT&T Wireless in July
2001. In addition, the decrease was due to lower investments and related
advances resulting from the write-down of Concert and Net2Phone, and unfavorable
mark-to-market adjustments on certain investments as well as the sale of other
investments; lower franchise costs as a result of the net disposition of cable
systems and amortization; and lower goodwill, primarily driven by the
impairments associated with Excite@Home, as well as amortization. Partially
offsetting these decreases was a higher cash balance, primarily reflecting
proceeds from our $10.0 billion bond offering in November 2001.

     Total liabilities decreased $16.3 billion, or 13.4%, to $105.3 billion at
December 31, 2001, from $121.6 billion at December 31, 2000. This decrease was
primarily a result of lower debt, due to repayments,
                                        31
<PAGE>

partially offset by our bond offering. In addition, deferred income taxes were
lower, primarily resulting from deferred tax assets recorded as a result of the
write-down of Concert, our obligation to purchase all of the outstanding shares
of AT&T Canada and cable systems sales, partially offset by a higher deferred
tax liability associated with greater tax depreciation. Also contributing to the
total liability decrease was the settlement with AT&T common stock of the
Excite@Home put obligation with Cox and Comcast. Partially offsetting these
decreases was an increase in other long-term liabilities and deferred credits
recorded in the third quarter of 2001 for our obligation to purchase all of the
outstanding shares of AT&T Canada.

     Minority interest decreased $1.3 billion, or 26.5%, to $3.6 billion at
December 31, 2001, from $4.8 billion at December 31, 2000. This decrease was
primarily due to Excite@Home. Due to the significant losses of Excite@Home, we
fully utilized the minority interest balance during the third quarter of 2001,
and therefore no longer have a minority interest balance related to Excite@Home.

     Total shareowners' equity decreased $51.5 billion, or 49.9%, to $51.7
billion at December 31, 2001, from $103.2 billion at December 31, 2000. This
decrease was primarily due to the split-off of LMG, the net impacts of the
split-off of AT&T Wireless and net losses from continuing operations. The
decrease was partially offset by the issuance of stock to settle the Excite@Home
put obligation with Cox and Comcast.

     In September and December 2001, when AT&T declared its quarterly dividends
to the AT&T Common Stock Group shareowners, the company was in an accumulated
deficit position primarily as a result of the split-off of AT&T Wireless. As a
result, the company reduced additional paid-in capital by $0.3 billion, the
entire amount of the dividends declared.

     The ratio of total debt to total capital for AT&T's continuing operations,
excluding LMG (debt of continuing operations divided by total debt of continuing
operations and equity excluding discontinued operations and LMG) was 47.7% at
December 31, 2001, compared with 57.2% at December 31, 2000. For purposes of
this calculation, equity includes the convertible trust preferred securities, as
well as subsidiary redeemable preferred stock and excludes the equity of
discontinued operations and LMG at December 31, 2000. In addition, included in
debt of continuing operations was approximately $8.6 billion and $8.7 billion of
notes at December 31, 2001 and 2000, respectively, which are exchangeable into
or collateralized by securities we own. Excluding this debt, the debt ratio for
AT&T's continuing operations at December 31, 2001, was 43.4%, compared with
53.6% at December 31, 2000. The lower debt, as well as increased equity drove
the decreases in the debt ratios.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" which supercedes Accounting Principles Board (APB) Opinion No. 16.
SFAS No. 141 requires all business combinations initiated after June 30, 2001,
to be accounted for under the purchase method. In addition, SFAS No. 141
establishes criteria for the recognition of intangible assets separately from
goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's
results of operations, financial position or cash flows.

     Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" which supercedes APB Opinion No. 17. Under SFAS No. 142,
goodwill and indefinite-lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for AT&T as of January 1, 2002. In connection with the adoption of this
standard, AT&T's unamortized goodwill balance and excess basis related to equity
method investments will no longer be amortized, but will continue to be tested
for impairment. The goodwill balance as of December 31, 2001, was $24.7 billion,
and the related amortization in 2001 was $0.9 billion. The excess basis balance
at December 31, 2001, was $8.8 billion, with related amortization in 2001 of
$207 million. In addition, we have determined that our franchise costs are
indefinite-lived assets, as defined in SFAS No. 142, and therefore will not be
subject to amortization beginning in 2002. The balance of our franchise costs as
of December 31, 2001, was $42.8 billion and the related amortization for 2001
was $1.2 billion. The adoption of SFAS No. 142 will have a significant impact on
our future operating results due to the cessation of goodwill and franchise cost
amortization. For
                                        32
<PAGE>

2001, the amortization of goodwill, excess basis and franchise costs had an
approximate impact of $0.45 per share. In accordance with SFAS No. 142, 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
will be recognized upon adoption. In accordance with SFAS No. 142, the franchise
costs were tested for impairment as of January 1, 2002, by comparing the fair
value to the carrying value (at market level). An impairment loss of $0.9
billion, net of taxes of $0.5 billion will be recognized as a change in
accounting principle in the first quarter of 2002.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This standard requires that obligations 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. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. For AT&T, this
means that the standard will be adopted on January 1, 2003. AT&T does not expect
that the adoption of this statement will have a material impact on AT&T's
results of operations, financial position or cash flows.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not
have a material impact on AT&T's results of operations, financial position or
cash flows.

SUBSEQUENT EVENTS

     In March 2002, AT&T Canada announced the formation of a committee of the
board of directors to help AT&T Canada with issues they are facing in the
foreseeable future. Such issues include a significant regulatory decision
expected in the next month which could have a significant impact on the future
of sustainable competition in Canada; the effect of AT&T satisfying its
obligation to purchase the shares of AT&T Canada it does not own; and the impact
of these events on operating and financial results of AT&T Canada. In addition,
the committee appointed financial advisors to evaluate various scenarios
regarding issues, opportunities and alternatives for AT&T Canada. It is expected
that the outcome of these evaluations will have a negative effect on the
underlying value of AT&T Canada shares, which will result in AT&T recording up
to $250 million of additional losses on its commitment to purchase the publicly
owned shares of AT&T Canada, excluding any impact of the floor price accretion.

     Effective April 1, 2002, Concert was unwound. Pursuant to the partnership
termination agreement, each of the partners generally reclaimed the customer
contracts and assets that were initially contributed to the joint venture (see
Note 5).

                                        33
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              REPORT OF MANAGEMENT

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

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

     The consolidated financial statements in this annual report have been
audited by PricewaterhouseCoopers LLP, Independent Accountants. Their audits
were conducted in accordance with generally accepted auditing standards and
include an assessment of the internal control structure and selective tests of
transactions. Their report follows.

<Table>
<S>                                            <C>
C. Michael Armstrong                           Charles H. Noski
Chairman of the Board,                         Vice Chairman,
Chief Executive Officer                        Chief Financial Officer
</Table>

                                        34
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

     In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, changes in shareowners' equity and of cash flows present fairly, in
all material respects, the financial position of AT&T Corp. and its subsidiaries
(AT&T) at December 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the three years ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of AT&T's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements as of and for the years
ended December 31, 2000 and 1999 of Liberty Media Group, an equity method
investee, which was acquired by AT&T on March 9, 1999. AT&T's financial
statements include an investment of $34,290 million as of December 31, 2000, and
equity method earnings (losses) of $1,488 million and $(2,022) million, for the
years ended December 31, 2000 and 1999, respectively. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Liberty Media Group, as of and for the years ended December 31, 2000 and 1999,
is based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

     As discussed in the notes to the financial statements, AT&T was required to
adopt Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, effective January 1, 2001.

PRICEWATERHOUSECOOPERS LLP

New York, New York
March 25, 2002

                                        35
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

<Table>
<Caption>
                                                                  FOR THE YEARS ENDED
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                               2001      2000      1999
                                                              -------   -------   -------
                                                                 (DOLLARS IN MILLIONS
                                                               EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>       <C>       <C>
Revenue.....................................................  $52,550   $55,533   $54,973
                                                              -------   -------   -------
Operating Expenses
Costs of services and products (excluding depreciation of
  $4,818, $4,410 and $4,215 included below).................   13,960    12,795    11,013
Access and other connection.................................   12,136    13,140    14,439
Selling, general and administrative.........................   10,832     9,752    10,894
Depreciation and other amortization.........................    6,865     5,924     5,137
Amortization of goodwill, franchise costs and other
  purchased intangibles.....................................    2,473     2,665     1,057
Net restructuring and other charges.........................    2,530     7,029       975
                                                              -------   -------   -------
Total operating expenses....................................   48,796    51,305    43,515
                                                              -------   -------   -------
Operating income............................................    3,754     4,228    11,458
Other (expense) income......................................   (1,547)    1,150       826
Interest expense............................................    3,242     2,964     1,503
                                                              -------   -------   -------
(Loss) income from continuing operations before income
  taxes, minority interest, and (losses) earnings related to
  equity investments........................................   (1,035)    2,414    10,781
(Benefit) provision for income taxes........................     (791)    3,284     4,016
Minority interest income (expense)..........................      963     4,103      (126)
Equity (losses) earnings from Liberty Media Group...........   (2,711)    1,488    (2,022)
Net losses related to other equity investments..............    4,850       588       756
                                                              -------   -------   -------
(Loss) income from continuing operations....................   (6,842)    4,133     3,861
Income (loss) from discontinued operations (net of income
  taxes of $158, $307, and $(238))..........................      150       536      (433)
Gain on disposition of discontinued operations..............   13,503        --        --
                                                              -------   -------   -------
Income before cumulative effect of accounting change........    6,811     4,669     3,428
Cumulative effect of accounting change -- (net of income
  taxes of $578)............................................      904        --        --
                                                              -------   -------   -------
Net income..................................................    7,715     4,669     3,428
Dividend requirements of preferred stock....................      652        --        --
Premium on exchange of AT&T Wireless tracking stock.........       80        --        --
                                                              -------   -------   -------
Net income available to common shareowners..................  $ 6,983   $ 4,669   $ 3,428
                                                              =======   =======   =======
AT&T Common Stock Group -- per basic share:
(Loss) earnings from continuing operations..................  $ (1.33)  $  0.76   $  1.91
Earnings (loss) from discontinued operations................     0.03      0.13     (0.14)
Gain on disposition of discontinued operations..............     3.70        --        --
Cumulative effect of accounting change......................     0.10        --        --
                                                              -------   -------   -------
AT&T Common Stock Group earnings............................  $  2.50   $  0.89   $  1.77
                                                              =======   =======   =======
AT&T Common Stock Group -- per diluted share:
(Loss) earnings from continuing operations..................  $ (1.33)  $  0.75   $  1.87
Earnings (loss) from discontinued operations................     0.03      0.13     (0.13)
Gain on disposition of discontinued operations..............     3.70        --        --
Cumulative effect of accounting change......................     0.10        --        --
                                                              -------   -------   -------
AT&T Common Stock Group earnings............................  $  2.50   $  0.88   $  1.74
                                                              =======   =======   =======
AT&T Wireless Group -- per basic and diluted share:
Earnings from discontinued operations.......................  $  0.08   $  0.21   $    --
Liberty Media Group -- per basic and diluted share:
(Loss) earnings -- before cumulative effect of accounting
  change....................................................  $ (1.05)  $  0.58   $ (0.80)
Cumulative effect of accounting change......................     0.21        --        --
                                                              -------   -------   -------
Liberty Media Group (loss) earnings.........................  $ (0.84)  $  0.58   $ (0.80)
                                                              =======   =======   =======
</Table>

    The notes are an integral part of the consolidated financial statements.
                                        36
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2001        2000
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
ASSETS
Cash and cash equivalents...................................  $ 10,592    $     64
Accounts receivable, less allowances of $827 and $1,185.....     7,736       9,408
Other receivables...........................................     1,645       1,645
Investments.................................................       668       2,102
Deferred income taxes.......................................     1,230         720
Other current assets........................................       657         781
                                                              --------    --------
Total Current Assets........................................    22,528      14,720
                                                              --------    --------
Property, plant and equipment, net..........................    41,322      41,269
Franchise costs, net of accumulated amortization of $2,501
  and $1,664................................................    42,819      48,218
Goodwill, net of accumulated amortization of $1,307 and
  $609......................................................    24,675      26,782
Investment in Liberty Media Group and related receivables,
  net.......................................................        --      34,290
Other investments and related advances......................    23,818      30,875
Prepaid pension costs.......................................     3,337       3,003
Other assets................................................     6,783       7,979
Net assets of discontinued operations.......................        --      27,224
                                                              --------    --------
Total Assets................................................  $165,282    $234,360
                                                              ========    ========
LIABILITIES
Accounts payable............................................  $  4,744    $  5,382
Payroll and benefit-related liabilities.....................     2,084       1,991
Debt maturing within one year...............................    12,958      31,838
Liability under put options.................................        --       2,564
Other current liabilities...................................     5,641       6,200
                                                              --------    --------
Total Current Liabilities...................................    25,427      47,975
                                                              --------    --------
Long-term debt..............................................    40,527      33,089
Long-term benefit-related liabilities.......................     3,594       3,670
Deferred income taxes.......................................    28,160      32,054
Other long-term liabilities and deferred credits............     7,614       4,823
                                                              --------    --------
Total Liabilities...........................................   105,322     121,611
                                                              --------    --------
Minority Interest...........................................     3,560       4,841
Company-Obligated Convertible Quarterly Income Preferred
  Securities of Subsidiary Trust Holding Solely Subordinated
  Debt Securities of AT&T...................................     4,720       4,710
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000
  shares; issued and outstanding 3,542,405,744 shares (net
  of 851,746,431 treasury shares) at December 31, 2001 and
  3,760,151,185 shares (net of 416,887,452 treasury shares)
  at December 31, 2000......................................     3,542       3,760
AT&T Wireless Group Common Stock, $1 par value, authorized
  6,000,000,000 shares, issued and outstanding 361,802,200
  shares at December 31, 2000...............................        --         362
Liberty Media Group Class A Common Stock, $1 par value,
  authorized 4,000,000,000 shares, issued and outstanding
  2,363,738,198 shares (net of 59,512,496 treasury shares)
  at December 31, 2000......................................        --       2,364
Liberty Media Group Class B Common Stock, $1 par value,
  authorized 400,000,000 shares, issued and outstanding
  206,221,288 shares (net of 10,607,776 treasury shares) at
  December 31, 2000.........................................        --         206
Additional paid-in capital..................................    51,964      90,496
(Accumulated deficit) retained earnings.....................    (3,484)      7,408
Accumulated other comprehensive loss........................      (342)     (1,398)
                                                              --------    --------
Total Shareowners' Equity...................................    51,680     103,198
                                                              --------    --------
Total Liabilities and Shareowners' Equity...................  $165,282    $234,360
                                                              ========    ========
</Table>

    The notes are an integral part of the consolidated financial statements.
                                        37
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

<Table>
<Caption>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2001        2000        1999
                                                              ---------   ---------   --------
                                                                   (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
AT&T Common Stock
  Balance at beginning of year..............................  $  3,760    $  3,196    $ 2,630
  Shares issued (acquired), net:
     Under employee plans...................................        15           3         --
     For acquisitions.......................................        44         607        566
     Settlement of put option...............................       155          --         --
     For Wireless tracking stock exchange...................      (372)         --         --
     Other*.................................................       (60)        (46)        --
                                                              --------    --------    -------
Balance at end of year......................................     3,542       3,760      3,196
                                                              --------    --------    -------
AT&T Wireless Group Common Stock
  Balance at beginning of year..............................       362          --         --
  Shares issued:
     For stock offering.....................................        --         360         --
     Under employee plans...................................         2           2         --
     For Wireless stock exchange............................       438          --         --
     Conversion of preferred stock..........................       406          --         --
AT&T Wireless Group split-off...............................    (1,208)         --         --
                                                              --------    --------    -------
Balance at end of year......................................        --         362         --
                                                              --------    --------    -------
Liberty Media Group Class A Common Stock
  Balance at beginning of year..............................     2,364       2,314         --
  Shares issued (acquired), net:
     For acquisitions.......................................        --          62      2,280
     Other..................................................        14         (12)        34
  Liberty Media Group split-off.............................    (2,378)         --         --
                                                              --------    --------    -------
Balance at end of year......................................        --       2,364      2,314
                                                              --------    --------    -------
Liberty Media Group Class B Common Stock
  Balance at beginning of year..............................       206         217         --
  Shares issued (acquired), net.............................         6         (11)       220
  Liberty Media Group split-off.............................      (212)         --         --
  Other.....................................................        --          --         (3)
                                                              --------    --------    -------
Balance at end of year......................................        --         206        217
                                                              --------    --------    -------
Additional Paid-In Capital
  Balance at beginning of year..............................    90,496      59,526     15,195
  Shares issued (acquired), net:
     Under employee plans...................................       279          98        431
     For acquisitions.......................................       827      23,097     42,425
     Settlement of put option...............................     3,237          --         --
     Other*.................................................    (1,007)     (2,767)       323
  Proceeds in excess of par value from issuance of AT&T
     Wireless common stock..................................        --       9,915         --
  Common stock warrants issued..............................        --          --        306
  Gain on issuance of common stock by affiliates............        20         530        667
  Conversion of preferred stock.............................     9,631          --         --
  AT&T Wireless Group split-off.............................   (20,955)         --         --
</Table>

                                        38
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2001        2000        1999
                                                              ---------   ---------   --------
                                                                   (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
  Liberty Media Group split-off.............................   (30,768)         --         --
  Wireless tracking stock exchange..........................        14          --         --
  Beneficial conversion value of preferred stock............       295          --         --
  Dividends declared -- AT&T Common Stock Group.............      (265)         --         --
  Other.....................................................       160          97        179
                                                              --------    --------    -------
Balance at end of year......................................    51,964      90,496     59,526
                                                              --------    --------    -------
Guaranteed ESOP Obligation
  Balance at beginning of year..............................        --         (17)       (44)
  Amortization..............................................        --          17         27
                                                              --------    --------    -------
Balance at end of year......................................        --          --        (17)
                                                              --------    --------    -------
(Accumulated Deficit)/Retained Earnings
  Balance at beginning of year..............................     7,408       6,712      7,800
  Net income................................................     7,715       4,669      3,428
  Dividends declared -- AT&T Common Stock Group.............      (275)     (2,485)    (2,807)
  Dividends accrued -- preferred stock......................      (652)         --         --
  Premium on exchange of AT&T Wireless tracking stock.......       (80)         --         --
  Treasury shares issued at less than cost..................        (7)     (1,488)    (1,709)
  AT&T Wireless Group split-off.............................   (17,593)         --         --
                                                              --------    --------    -------
Balance at end of year......................................    (3,484)      7,408      6,712
                                                              --------    --------    -------
Accumulated Comprehensive Income
  Balance at beginning of year..............................    (1,398)      6,979        (59)
  Other comprehensive income................................     1,742      (8,377)     7,038
  AT&T Wireless Group split-off.............................        72          --         --
  Liberty Media Group split-off.............................      (758)         --         --
                                                              --------    --------    -------
Balance at end of year......................................      (342)     (1,398)     6,979
                                                              --------    --------    -------
Total Shareowners' Equity...................................  $ 51,680    $103,198    $78,927
                                                              ========    ========    =======
Summary of Total Comprehensive Income (Loss):
Income before cumulative effect of accounting change........  $  6,811    $  4,669    $ 3,428
Cumulative effect of accounting change......................       904          --         --
Net income..................................................     7,715       4,669      3,428
Other comprehensive income (loss)[net of income taxes of
  $1,119, $(5,348) and $4,600]..............................     1,742      (8,377)     7,038
                                                              --------    --------    -------
Comprehensive Income (Loss).................................  $  9,457    $ (3,708)   $10,466
                                                              ========    ========    =======
</Table>

---------------
AT&T accounts for treasury stock as retired stock.

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

* Other activity in 2001 and 2000 represents AT&T common stock received in
  exchange for entities owning certain cable systems.

    The notes are an integral part of the consolidated financial statements.
                                        39
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2001        2000        1999
                                                              --------    --------    --------
                                                                   (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES
Net income..................................................  $  7,715    $  4,669    $  3,428
Deduct:
  Income (loss) from discontinued operations................       150         536        (433)
  Gain on disposition of discontinued operations............    13,503          --          --
                                                              --------    --------    --------
(Loss) income from continuing operations....................    (5,938)      4,133       3,861
Adjustments to reconcile (loss) income from continuing
  operations to net cash provided by operating activities of
  continuing operations:
  Cumulative effect of accounting change -- net of income
    taxes...................................................      (904)         --          --
  Net gains on sales of businesses and investments..........      (528)     (1,321)       (585)
  Cost investment impairment charges........................     1,083         248          40
  Put option settlement loss and mark-to-market charges.....       838         537          --
  Net restructuring and other charges.......................     2,343       6,793         678
  Depreciation and amortization.............................     9,338       8,589       6,194
  Provision for uncollectible receivables...................     1,130       1,080       1,216
  Deferred income taxes.....................................    (4,818)        341         354
  Net revaluation of certain financial instruments..........       809          --          --
  Minority interest (income) expense........................    (1,263)     (4,329)         24
  Net equity losses (earnings) from Liberty Media Group.....     2,711      (1,488)      2,022
  Net losses related to other equity investments............     7,889       1,017       1,223
  Decrease (increase) in receivables........................       716      (2,512)     (2,409)
  Decrease in accounts payable..............................      (819)       (577)       (165)
  Net change in other operating assets and liabilities......    (2,153)       (376)     (1,785)
  Other adjustments, net....................................       124        (470)       (159)
                                                              --------    --------    --------
Net Cash Provided by Operating Activities of Continuing
  Operations................................................    10,558      11,665      10,509
                                                              --------    --------    --------
INVESTING ACTIVITIES
Capital expenditures and other additions....................    (9,300)    (11,511)    (11,876)
Proceeds from sale or disposal of property, plant and
  equipment.................................................        83         600         286
(Increase) decrease in other receivables....................      (114)     (1,052)         17
Sales of marketable securities..............................       102          96          --
Purchases of marketable securities..........................       (18)         --          --
Investment distributions and sales..........................     3,014         992       1,574
Investment contributions and purchases......................      (378)     (2,394)     (7,837)
Net dispositions (acquisitions) of businesses, net of cash
  disposed/acquired.........................................     4,913     (16,657)     (5,969)
Other investing activities, net.............................      (162)       (119)        (79)
                                                              --------    --------    --------
Net Cash Used in Investing Activities of Continuing
  Operations................................................    (1,860)    (30,045)    (23,884)
                                                              --------    --------    --------
FINANCING ACTIVITIES
Proceeds from long-term debt issuances, net of issuance
  costs.....................................................    12,415       4,601       8,396
Retirement of long-term debt................................    (1,661)     (2,118)     (2,255)
(Decrease) increase in short-term borrowings, net...........   (17,168)     16,973      10,173
Repayment of borrowings from AT&T Wireless..................    (5,803)         --          --
Issuance of convertible preferred securities and warrants...     9,811          --       4,638
Redemption of redeemable securities.........................        --        (152)         --
Issuance of AT&T common shares..............................       224          99          --
Issuance of AT&T Wireless Group common shares...............        54      10,314          --
Net issuance (acquisition) of treasury shares...............        24        (581)     (4,624)
Dividends paid on common stock..............................      (549)     (3,047)     (2,712)
Dividends paid on preferred securities......................      (336)       (294)       (135)
Other financing activities, net.............................       (41)        (63)        373
                                                              --------    --------    --------
Net Cash (Used in) Provided by Financing Activities of
  Continuing Operations.....................................    (3,030)     25,732      13,854
                                                              --------    --------    --------
Net cash provided by (used in) discontinued operations......     4,860      (8,306)     (2,594)
Net increase (decrease) in cash and cash equivalents........    10,528        (954)     (2,115)
Cash and cash equivalents at beginning of year..............        64       1,018       3,133
                                                              --------    --------    --------
Cash and cash equivalents at end of year....................  $ 10,592    $     64    $  1,018
                                                              ========    ========    ========
</Table>

    The notes are an integral part of the consolidated financial statements.
                                        40
<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED (EXCEPT PER SHARE AMOUNTS)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  CONSOLIDATION

     The consolidated financial statements include all controlled subsidiaries.
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.

  REVENUE RECOGNITION

     We recognize long distance, local voice and data services revenue based
upon minutes of traffic processed or contracted fee schedules. Cable video and
nonvideo installation revenue is recognized in the period the installation
services are provided to the extent of direct selling costs. Any remaining
amount is deferred and recognized over the estimated average period that
customers are expected to remain connected to the cable distribution systems.
Customer activation fees, along with the related costs up to but not exceeding
the revenue, are deferred and amortized over the customer relationship period.
We recognize other products and services revenue when the products are delivered
and accepted by customers and when services are provided in accordance with
contract terms. 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.

  ADVERTISING AND PROMOTIONAL COSTS

     We expense costs of advertising and promotions, including cash incentives
used to acquire customers, as incurred. Advertising and promotional expenses
were $1,549, $1,377 and $1,418 in 2001, 2000 and 1999, respectively. Of these
amounts, $236, $288 and $320 were cash incentives to acquire customers in 2001,
2000 and 1999, respectively.

  INCOME TAXES

     Under the balance sheet method we recognize deferred tax assets and
liabilities at enacted income tax rates for the temporary differences between
the financial reporting basis and the tax basis of our assets and liabilities.
Any effects of changes in income tax rates or tax laws are included in the
provision for income taxes in the period of enactment. When it is more likely
than not that a portion or all of a deferred tax asset will not be realized in
the future, we provide a corresponding valuation allowance against the deferred
tax asset. We amortize investment tax credits 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
generally three months or less to be cash equivalents.

                                        41
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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.
Depreciation is determined based upon the assets' estimated useful lives using
either the group or unit method. The useful lives of communications and network
equipment range from three to 15 years. The useful lives of other equipment
ranges from three to seven years. The useful lives of buildings and improvements
range from 10 to 40 years. 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. The
depreciation rate is developed based on the average useful life for the specific
asset group. This method requires the periodic revision of depreciation rates.
Under the unit method, assets are depreciated based on the useful life of the
individual asset. When we sell or retire assets depreciated using the group
method, the cost is deducted from property, plant and equipment and charged to
accumulated depreciation, without recognition of a gain or loss. When we sell
assets that were depreciated using the unit method, we include the related gains
or losses in "Other income (expense)" in the Consolidated Statements of Income.

     We use accelerated depreciation methods primarily for certain
high-technology computer-processing equipment and digital equipment used in the
telecommunications network, except for switching equipment placed in service
before 1989, where a straight-line method is used. All other plant and equipment
is depreciated on a straight-line basis.

  FRANCHISE COSTS

     Franchise costs include the value assigned to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with business combinations. Such amounts are amortized on a
straight-line basis over 25 or 40 years. Beginning in 2002, in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets", such franchise costs will no longer be
amortized, but will continue to be tested for impairment (see Note 23).

  GOODWILL

     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. We amortize goodwill on a straight-line basis over the periods
benefited, ranging from five to 40 years. Beginning in 2002, in accordance with
the provisions of SFAS No. 142 such goodwill will no longer be amortized, but
will continue to be tested for impairment (see Note 23).

  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
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. AT&T also capitalizes initial
operating-system software costs and amortizes them over the life of the
associated hardware.

     AT&T also capitalizes costs associated with the development of application
software incurred from the time technological feasibility is established until
the software is ready to provide service to customers. These

                                        42
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

capitalized costs are included in property, plant and equipment and are
amortized over a useful life not to exceed five years.

  VALUATION OF LONG-LIVED ASSETS

     Long-lived assets, such as property, plant and equipment, franchise costs,
goodwill, investments and software, are reviewed for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the total of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying value of the asset.

  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. To
qualify for hedge accounting treatment, derivatives, at inception, must be
designated as hedges and evaluated for effectiveness throughout the hedge
period. We designate certain derivative contracts, at the date entered into, as
either (1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (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) or (3) a foreign currency
fair value or cash flow hedge (foreign currency hedge). Other derivatives
(undesignated) are not formally designated for accounting purposes. These
derivatives, except for warrants, although undesignated for accounting purposes
are entered into to hedge economic risks.

     We record changes in the fair value of fair-value hedges (including fair
value foreign currency hedges), along with the changes in fair value of the
hedged asset or liability that is attributable to the hedged risk (including
losses or gains on firm commitments), in "Other income (expense)" in the
Consolidated Statement of Income.

     We record changes in the fair value of cash-flow hedges (including foreign
currency cash flow hedges) that are highly effective in "Other comprehensive
income", net of income taxes, as a component of shareowners' equity, until
earnings are affected by the variability of cash flows of the hedged
transaction.

     Changes in the fair value of undesignated derivatives are recorded in
"Other income (expense)" in the Consolidated Statement of Income, along with the
change in fair value of any related asset or liability.

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

     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 a separate instrument with the
same terms as the embedded instrument would meet the definition of a derivative
instrument. When it is determined that both conditions exist, we designate the
derivatives as described above, and recognize at fair value.

     We formally document all relationships between hedging instruments and
hedged items, as well as its 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.

                                        43
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     We discontinue hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value of cash flows of a hedged item (2) the derivative 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 because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be adjusted for changes in fair value through "Other income
(expense)" in the Consolidated Statement of Income, and the hedged asset or
liability will no longer be adjusted for changes in fair value. When hedge
accounting is discontinued because the hedged item no longer meets the
definition of a firm commitment, the derivative will continue to be adjusted for
changes in the fair value through "Other income (expense)" in the Consolidated
Statement of Income, and any asset or liability that was recorded pursuant to
the recognition of the firm commitment will be removed from the balance sheet
and recorded in current period earnings. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not occur, the
derivative will then be adjusted for changes in the fair value through "Other
income (expense)" in the Consolidated Statement of Income, and gains and losses
that were accumulated in "Other comprehensive income" as a component of
shareowners' equity, will be recognized immediately in "Other income (expense)"
in the Consolidated Statement of Income. In all other situations in which hedge
accounting is discontinued, the derivative will continue to be carried at fair
value on the balance sheet, with changes in its fair value recognized in "Other
income (expense)" in the Consolidated Statement of Income.

  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, depreciation and
amortization, employee benefit plans, taxes, restructuring reserves and
contingencies.

  CONCENTRATIONS

     As of December 31, 2001, we do not have any significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact our operations. We also do not have a
concentration of available sources of labor, services, franchises or other
rights that could, if suddenly eliminated, severely impact our operations. We
invest our cash with several high-quality credit institutions.

  ISSUANCE OF COMMON STOCK BY AFFILIATES

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

  RECLASSIFICATIONS AND RESTATEMENTS

     We reclassified certain amounts for previous years to conform to the 2001
presentation.

                                        44
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  RESTRUCTURING OF AT&T

     On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.

     On December 19, 2001, AT&T and Comcast Corporation (Comcast) announced an
agreement to combine AT&T Broadband with Comcast. Under the terms of the
agreement, AT&T will spin-off AT&T Broadband and simultaneously merge it with
Comcast, forming a new company to be called AT&T Comcast Corporation (AT&T
Comcast). AT&T shareowners will receive a number of shares of AT&T Comcast
common stock based on an exchange ratio calculated pursuant to a formula
specified in the merger agreement. If determined as of the date of the merger
agreement, the exchange ratio would have been approximately 0.34, assuming the
AT&T shares held by Comcast are included in the number of shares of AT&T common
stock outstanding. Assuming Comcast retains its AT&T shares and converts them
into exchangeable preferred stock of AT&T as contemplated by the merger
agreement, the exchange ratio would have been approximately 0.35. Assuming
certain conditions, AT&T shareowners will own an approximate 55% economic stake
and an approximate 61% voting interest in the new company, calculated as of the
date of the merger agreement. The merger of AT&T Broadband and Comcast is
subject to regulatory review, approval by both companies' shareowners and
certain other conditions and is expected to close by the end of 2002. AT&T also
intends to proceed with the creation of a tracking stock for its AT&T Consumer
Services business, which is expected to be distributed to AT&T shareowners
following shareowner approval. AT&T has not yet determined the timing of the
distribution, which may be made within a year of shareowner approval or may be
made thereafter, depending on market conditions. Additionally, the AT&T board of
directors could decide not to proceed with the distribution of the tracking
stock, or could proceed at a time or in a manner different from its current
intentions.

     These restructuring activities are complicated and involve a substantial
number of steps and transactions, including obtaining various approvals, such as
Internal Revenue Service (IRS) rulings. AT&T expects, however, that the
transactions associated with AT&T's restructuring plan will be tax-free to U.S.
shareowners. Future financial conditions, superior alternatives or other factors
may arise or occur that make it inadvisable to proceed with part or all of
AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring
plan may not occur as we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to shareowners in the restructuring.

     On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of 372.2 million shares of AT&T common
stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group
tracking stock. In conjunction with the exchange offer, AT&T recorded an $80
premium as a reduction to net income available to common shareowners. The
premium represents the excess of the fair value of the AT&T Wireless Group
tracking stock issued over the fair value of the AT&T common stock exchanged.

     On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis, and 1,136
million shares of AT&T Wireless common stock, held by AT&T were distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. AT&T common shareowners received whole shares of
AT&T Wireless and cash payments for fractional shares. The IRS ruled that the
transaction qualified as tax-free for AT&T and its shareowners for U.S. federal
income tax purposes, with the exception of cash received for fractional shares.
For accounting purposes, the deemed effective split-off date was June 30, 2001.
At the time of split-off, AT&T retained approximately $3 billion, or 7.3%, of
AT&T Wireless common stock, about half of which was used in a debt-
                                        45
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for-equity exchange in July 2001. The remaining portion of these holdings was
monetized in October and December of 2001 through the issuance of debt that is
exchangeable into Wireless shares (or their cash equivalent) at maturity. The
split-off of AT&T Wireless resulted in a noncash tax-free gain of $13.5 billion,
which represented the difference between the fair value of the AT&T Wireless
tracking stock at the date of the split-off and AT&T's book value in AT&T
Wireless. This gain was recorded in the third quarter of 2001 as a "Gain on
disposition of discontinued operations."

     On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly traded company (since AT&T did not exit
the line of business that Liberty Media Group (LMG) operated in, LMG was not
accounted for as a discontinued operation). AT&T redeemed each outstanding share
of Class A and Class B LMG tracking stock for one share of Liberty Media
Corporation's Series A and Series B common stock, respectively. The IRS ruled
that the split-off of Liberty Media Corporation qualified as a tax-free
transaction for AT&T, Liberty Media and their shareowners. For accounting
purposes, the deemed effective split-off date was July 31, 2001.

3.  SUPPLEMENTARY FINANCIAL INFORMATION

                   SUPPLEMENTARY INCOME STATEMENT INFORMATION

<Table>
<Caption>
                                                                FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                               2001      2000    1999
                                                              -------   ------   ----
<S>                                                           <C>       <C>      <C>
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses...........................  $   325   $  402   $550
                                                              =======   ======   ====
OTHER (EXPENSE) INCOME
Cost investment impairment charges..........................  $(1,083)  $ (248)  $(40)
Settlement loss and mark-to-market charges on Excite@Home
  put options...............................................     (838)    (537)    --
Net revaluation of certain financial instruments............     (809)      --     --
Net gains on sales of businesses and investments............      528    1,321    585
Investment-related income...................................      426      512    203
Miscellaneous, net..........................................      229      102     78
                                                              -------   ------   ----
Total other (expense) income................................  $(1,547)  $1,150   $826
                                                              =======   ======   ====
</Table>

                    SUPPLEMENTARY BALANCE SHEET INFORMATION

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment.................  $ 64,372   $ 60,232
Buildings and improvements..................................     8,512      8,643
Land and improvements.......................................       484        523
                                                              --------   --------
Total property, plant and equipment.........................    73,368     69,398
Accumulated depreciation....................................   (32,046)   (28,129)
                                                              --------   --------
Property, plant and equipment, net..........................  $ 41,322   $ 41,269
                                                              ========   ========
</Table>

                                        46
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LEVERAGED LEASES

     We lease airplanes, energy-producing facilities and transportation
equipment under leveraged leases having original terms of 10 to 30 years,
expiring in various years from 2004 through 2020. The investment in leveraged
leases is primarily included in other assets on the balance sheet. Following is
a summary of our investment in leveraged leases:

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Rentals receivable (net of nonrecourse debt*)...............  $1,241   $1,278
Estimated unguaranteed residual values......................     964      976
Unearned income.............................................    (953)    (997)
Allowance for credit losses.................................     (31)     (33)
                                                              ------   ------
Investment in leveraged leases (included in other assets)...   1,221    1,224
Deferred taxes..............................................   1,105    1,124
                                                              ------   ------
Net investment..............................................  $  116   $  100
                                                              ======   ======
</Table>

---------------
* The rentals receivable are net of nonrecourse debt of $3.2 billion and $3.4
  billion at December 31, 2001 and 2000, respectively.

                 SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                             2001     2000      1999
                                                            ------   -------   ------
<S>                                                         <C>      <C>       <C>
OTHER COMPREHENSIVE INCOME (LOSS)
Net foreign currency translation adjustment [net of income
  taxes of $(160), $(181) and $87](1).....................  $ (250)  $  (309)  $  148
Net revaluation of certain financial instruments:
  Unrealized gains (losses) [net of income taxes of $343,
     $(4,686) and $4,499](2)..............................     475    (7,317)   6,868
  Recognition of previously unrealized losses (gains) on
     available-for-sale securities [net of income taxes of
     $950, $(480) and $7](3)..............................   1,535      (750)      10
Net minimum pension liability adjustment [net of income
  taxes of $(14), $(1) and $7]............................     (18)       (1)      12
                                                            ------   -------   ------
Total other comprehensive income (loss)...................  $1,742   $(8,377)  $7,038
                                                            ======   =======   ======
</Table>

---------------
(1) Includes LMG's foreign currency translation adjustments, net of applicable
    income taxes, totaling $(149) in 2001 through July 31, 2001, $(202) in 2000
    and $60 in 1999, from March 1, 1999, date of acquisition, to December 31,
    1999.

(2) Includes LMG's unrealized gains (losses) on available-for-sale securities,
    net of applicable income taxes, totaling $1,286 in 2001 through July 31,
    2001, $(6,117) in 2000 and $6,497 in 1999, from March 1, 1999, date of
    acquisition, to December 31, 1999.

(3) See below for a summary of the "Recognition of previously unrealized losses
    (gains) on available-for-sale securities" and the income statement line
    items impacted.

                                        47
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

       SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) ON
                               AVAILABLE-FOR-SALE
            SECURITIES AND THE INCOME STATEMENT LINE ITEMS IMPACTED

<Table>
<Caption>
                                                    FOR THE YEARS ENDED DECEMBER 31,
                                      -------------------------------------------------------------
                                             2001                 2000                  1999
                                      ------------------   -------------------   ------------------
                                      PRETAX   AFTER-TAX   PRETAX    AFTER-TAX   PRETAX   AFTER-TAX
                                      ------   ---------   -------   ---------   ------   ---------
<S>                                   <C>      <C>         <C>       <C>         <C>      <C>
AT&T GROUP:
  Other (expense) income:
     Reclassification of securities
       to
       "trading" in conjunction with
       the adoption of SFAS No.
       133(4).......................  $1,154    $  713     $    --     $  --      $--        $--
     Sales of various securities....     317       196        (476)     (294)      (3)        (2)
     Other-than-temporary investment
       impairments..................     985       608         290       179       --         --
LIBERTY MEDIA GROUP:
  Earnings (losses) from Liberty
     Media Group:
     Sale of various securities.....     173       105      (1,044)     (635)      20         12
  Cumulative effect of accounting
     change(4)......................    (144)      (87)         --        --       --         --
                                      ------    ------     -------     -----      ---        ---
Total recognition of previously
  unrealized losses (gains) on
  available-for-sale securities.....  $2,485    $1,535     $(1,230)    $(750)     $17        $10
                                      ======    ======     =======     =====      ===        ===
</Table>

---------------
(4) See Note 14 for detailed discussion.

                      SUPPLEMENTARY CASH FLOW INFORMATION

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2001        2000        1999
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>
Interest payments, net of capitalized interest of $138,
  $177 and $143..........................................   $3,396      $3,059      $1,292
Income tax payments......................................      803       2,369       3,948
</Table>

4.  MERGERS WITH MEDIAONE GROUP, INC., AND TELE-COMMUNICATIONS, INC.

  MERGER WITH MEDIAONE GROUP, INC.

     On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc.
(MediaOne) in a cash and stock transaction valued at approximately $45 billion.
For each share of MediaOne stock, MediaOne shareowners received, in the
aggregate 0.95 of a share of AT&T common stock and $36.27 per share in cash,
consisting of $30.85 per share as stipulated in the merger agreement and $5.42
per share based on AT&T's stock price preceding the merger, which was below a
predetermined amount. AT&T issued approximately 603 million shares of common
stock in the transaction, of which approximately 60 million were treasury
shares. The AT&T shares had an aggregate market value of approximately $21
billion, and cash payments totaled approximately $24 billion.

                                        48
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The merger was accounted for under the purchase method. Accordingly, the
results of MediaOne have been included in the accompanying consolidated
financial statements since the date of acquisition as part of our AT&T Broadband
segment.

     Approximately $17 billion of the purchase price of $45 billion has been
attributed to agreements with local franchise authorities that allow access to
homes in our broadband service areas (franchise costs) and is being amortized on
a straight-line basis over 40 years. Also included in the purchase price was
approximately $22 billion related to nonconsolidated investments, including
investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group
plc (Vodafone), approximately $5 billion related to property, plant and
equipment, and approximately $5 billion of other net assets. In addition,
included was approximately $13 billion in deferred income tax liabilities,
approximately $10 billion attributable to MediaOne debt, and approximately $1
billion of minority interest in Centaur Funding Corporation, a subsidiary of
MediaOne. The purchase resulted in goodwill of approximately $20 billion, which
is being amortized on a straight-line basis over 40 years.

  MERGER WITH TELE-COMMUNICATIONS, INC.

     On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc.
(TCI), renamed AT&T Broadband, in an all-stock transaction valued at
approximately $52 billion. Each share of TCI Group Series A common stock was
converted into 1.16355 shares of AT&T common stock, and each share of TCI Group
Series B common stock was converted into 1.27995 shares of AT&T common stock.
AT&T issued approximately 664 million shares of common stock in the transaction,
of which approximately 149 million were treasury shares. The AT&T shares had an
aggregate market value of approximately $27 billion. Certain subsidiaries of TCI
held TCI Group Series A common stock, which was converted into 216 million
shares of AT&T common stock. These shares were held by the subsidiaries
throughout 1999 and 2000 and were reflected as treasury stock in the balance
sheet. In the second quarter of 2001, these shares were converted into AT&T
Subsidiary Exchangeable Preferred Stock. Each subsidiary preferred share is
exchangeable into 1,000 shares of AT&T Common Stock.

     In addition, TCI simultaneously combined its LMG programming business with
its TCI Ventures Group technology investment business, forming LMG. In
connection with the closing, AT&T issued separate tracking stock in exchange for
the TCI, LMG and TCI Ventures Group tracking shares previously outstanding. We
issued 2,280 million shares of LMG Class A tracking stock (including 120 million
shares related to the conversion of convertible notes) and 220 million shares of
Liberty Media Group Class B tracking stock. The tracking stock was designed to
reflect the separate financial performance and economic value of LMG. These
shares had an aggregate market value of approximately $23 billion. LMG was
split-off from AT&T as an independent, publicly-traded company on August 10,
2001 (see Notes 2 and 10).

     The TCI merger was accounted for under the purchase method. Accordingly,
the results of TCI have been included in the financial results of AT&T since the
date of acquisition as part of our AT&T Broadband segment. The operating results
of TCI have been included in the accompanying consolidated financial statements
at their fair value since March 1, 1999, the deemed effective date of
acquisition for accounting purposes. The impact of the results from March 1
through March 9, 1999, were deemed immaterial to our consolidated results.

     Approximately $20 billion of the purchase price of $52 billion was
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Pursuant to SFAS No. 109, "Accounting for Income Taxes", AT&T
recorded an approximate $13 billion deferred tax liability in connection with
this franchise intangible, which is also included in franchise costs. We do not
expect that this deferred tax liability will ever be paid. This deferred tax
liability is being amortized on a straight-line basis over 40 years and is
included in the provision for income taxes. Also included was approximately $11
billion related to nonconsolidated investments, approximately $5 billion related
to property, plant and equipment, approximately $11 billion of
                                        49
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TCI long-term debt and approximately $7 billion related to other net
liabilities. In addition, our investment in LMG was recorded at approximately
$34 billion, including approximately $11 billion of goodwill.

     In 2002, in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets", we will no longer amortize goodwill, franchise costs
or the deferred tax liability associated with franchise costs related to the
mergers discussed above (see Note 23).

     Following is a summary of the pro forma results of AT&T as if the mergers
with MediaOne and TCI had closed effective January 1, 1999:

<Table>
<Caption>
                                                              FOR THE YEARS ENDED
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                              (SHARES IN MILLION)
                                                                  (UNAUDITED)
<S>                                                           <C>        <C>
Revenue.....................................................  $56,858    $58,609
Income from continuing operations...........................    5,081      6,885
Weighted-average AT&T common shares.........................    3,762      3,784
Weighted-average AT&T common shares and potential common
  shares....................................................    3,821      3,906
Weighted-average Liberty Media Group shares.................    2,572      2,519
AT&T Common Stock Group earnings from continuing operations
  per common share:
  Basic.....................................................  $  0.96    $  2.41
  Diluted...................................................     0.95       2.34
Liberty Media Group earnings (loss) per common share:
  Basic and diluted.........................................  $  0.58    $ (0.89)
</Table>

     Pro forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.

5.  CONCERT AND AT&T CANADA

     On October 16, 2001, AT&T announced a decision to unwind Concert, its
global venture with British Telecommunications plc (BT), which was launched in
January 2000. Under the partnership termination agreement, each of the partners
generally will reclaim the customer contracts and assets that were initially
contributed to the joint venture, including international transport facilities
and gateway assets. In addition, AT&T will assume certain other assets that BT
originally contributed to the joint venture. AT&T also will acquire BT's 9%
interest in AT&T Canada and assume BT's obligation to purchase a portion of the
publicly owned shares of AT&T Canada. The agreement to dissolve the Concert
venture, impacted AT&T's intent and ability to hold its investment in Concert,
therefore, AT&T recorded a $1.8 billion after-tax investment impairment charge
($2.9 billion pretax) in 2001 included in "Net losses related to other equity
investments" in the Consolidated Statement of Income. This charge primarily
relates to the difference between the fair market value of the net assets AT&T
will receive in the transaction and the carrying value of AT&T's investment in
Concert which included a note receivable from Concert of approximately $1.1
billion. Our investment in Concert was accounted for as an equity method
investment. The remaining carrying value of our investment in Concert was
approximately $0.1 billion at December 31, 2001. The agreement to dissolve
Concert remains subject to regulatory approval in the United States, Europe and
other jurisdictions and is expected to close by the first-half of 2002.

     Through a joint venture, AT&T and BT have an approximate 31% equity
ownership of AT&T Canada. In connection with the decision to unwind Concert,
AT&T has agreed to acquire BT's 9% interest in AT&T Canada and assume BT's
portion of the obligation to purchase the AT&T Canada shares not already owned
by

                                        50
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AT&T and BT. AT&T has the right to trigger, at any time, the purchase by AT&T or
another entity the remaining equity of AT&T Canada for the Back-end Price which
is the greater of the floor price (Cdn $47.45 as of December 31, 2001) and the
fair market value. The floor price accretes at 4% each quarter, commencing on
June 30, 2000. In the event foreign ownership restrictions in Canada are lifted,
in whole or in part, prior to June 30, 2003, AT&T is required to purchase the
outstanding shares (to the extent permitted by any remaining foreign ownership
restrictions) at the Back-end Price. If foreign ownership restrictions in Canada
are not lifted and we do not exercise the call right by June 30, 2003, the
shares would be put up for auction, and AT&T would have to make the shareholders
whole for the amount, if any, by which the Back-End Price exceeds the proceeds
received in auction.

     In 2001, AT&T recorded $1.8 billion after-tax charges ($3.0 billion pretax)
reflecting the estimated loss on AT&T's commitment to purchase the publicly
owned shares of AT&T Canada. Included in these charges was approximately $0.6
billion related to the assumption of BT's obligation to purchase the publicly
owned shares of AT&T Canada. These charges reflect the difference between the
underlying value of AT&T Canada shares and the price AT&T has committed to pay
for them, including the 4% accretion of the floor price, and are included in
"Net losses related to other equity investments" in the Consolidated Statement
of Income and the related liability within "Other long-term liabilities and
deferred credits" in the Consolidated Balance Sheet. The purchase commitment
will continue to be evaluated against the difference between the contractual
floor price and underlying value of AT&T Canada shares, which could result in
the recognition of future additional charges in the amount of approximately $1.1
billion, assuming that the commitment is executed on June 30, 2003. As of
December 31, 2001, the aggregate amount that AT&T would need to pay to complete
its obligation related to AT&T Canada is approximately $3.2 billion. This
obligation may be settled using cash or AT&T common stock, or any combination
thereof.

     AT&T no longer records equity earnings or losses related to AT&T Canada
since AT&T's investment balance was written down to zero largely through losses
generated by AT&T Canada. In the event AT&T acquires more than 50% of the voting
equity of AT&T Canada, AT&T Canada's results will be consolidated into AT&T's
results. At December 31, 2001, AT&T Canada had outstanding debt of $2.9 billion
and other net assets of $2.8 billion.

6.  OTHER ACQUISITIONS, EXCHANGES, STOCK OFFERING, AND DISPOSITIONS

  CABLEVISION SYSTEMS CORPORATION

     On October 23, 2001, AT&T sold approximately 19.2 million shares of
Cablevision NY Group Class A common stock and, monetized through a trust, 26.9
million shares of a mandatorily exchangeable trust security that is exchangeable
into up to 26.9 million shares of Cablevision NY Group Class A common stock at
maturity in three years. The offering price was $36.05 per share for both the
common shares and the exchangeable securities. The offerings generated
approximately $1.4 billion of pretax proceeds, net of underwriting fees. The
sale resulted in a pretax loss of approximately $0.3 billion recorded in "Other
(expense) income" in the Consolidated Statement of Income.

     On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision)
completed the transfer of cable systems in which AT&T received cable-systems
serving 358 thousand customers in Boston and Eastern Massachusetts. In exchange,
Cablevision received cable-systems serving approximately 130 thousand customers
in the northern New York suburbs, and 44 million shares of AT&T common stock
valued at approximately $0.9 billion, and approximately $0.2 billion in cash.
Cablevision recorded a gain as a result of the transaction. AT&T did not record
any gain or loss on the transaction, however due to its ownership interest in
Cablevision, AT&T recorded a proportionate amount of a gain recorded by
Cablevision of approximately $0.1 billion included within "Net losses related to
other equity investments" in the Consolidated Statement of Income.

                                        51
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  AT HOME CORPORATION

     On August 28, 2000, AT&T and At Home Corporation (Excite@Home) announced
shareholder approval of a new board of directors and governance structure for
Excite@Home. AT&T was given the right to designate six of the 11 Excite@Home
board members. In addition, Excite@Home converted approximately 50 million of
AT&T's Series A shares into Series B shares, each of which has 10 votes. As a
result of these governance changes, AT&T gained a controlling interest and began
consolidating Excite@Home's results upon the closing of the transaction on
September 1, 2000. As of December 31, 2000, AT&T had, on a fully diluted basis,
approximately 23% of the economic interest and 74% of the voting interest in
Excite@Home.

     The consolidation of Excite@Home resulted in minority interest of
approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term
liabilities of approximately $2.4 billion (including an initial put option
liability), other net assets of approximately $1.2 billion and the removal of
our investment in Excite@Home of approximately $1.9 billion.

     On September 28, 2001, At Home Corporation filed for bankruptcy protection
under Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of
California. As a result of the bankruptcy and AT&T's removal of four of its six
members from the Excite@Home board of directors, AT&T ceased consolidating
Excite@Home as of September 30, 2001. Beginning October 1, 2001, AT&T no longer
records equity earnings or losses related to Excite@Home since AT&T recognized
losses in excess of its investment in Excite@Home.

     The noncash impacts of the deconsolidation of At Home Corporation primarily
included a reduction to property, plant and equipment of approximately $0.3
billion, goodwill of approximately $0.3 billion and debt of approximately $1.0
billion. This resulted in the recording of a liability of approximately $0.4
billion. This liability will continue to be evaluated. In addition, other
noncash items included a tax benefit of $0.7 billion reflecting changes to
deferred tax liabilities.

  COX COMMUNICATIONS, INC. AND COMCAST -- EXCITE@HOME PUT OPTIONS

     In August 2000, in exchange for Cox Communications, Inc. (Cox) and Comcast
relinquishing their rights under the shareholder agreement in connection with
Excite@Home's governance change, AT&T granted put options to Cox and Comcast.
The obligation under these put options was recorded at fair value, with gains or
losses resulting from changes in fair value being recorded as a component of
"Other (expense) income" in the Consolidated Statement of Income. For 2001 and
2000, changes in fair market value resulted in a pretax expense of $63 and $537,
respectively. On May 18, 2001, AT&T, Cox and Comcast reached an agreement to
revise the terms of the put options. Under the new agreement, Cox and Comcast
retained their stakes in Excite@Home and AT&T issued 75 million AT&T common
shares to Cox and more than 80 million AT&T common shares to Comcast. We
recorded an approximate $0.8 billion loss in "Other (expense) income" in the
Consolidated Statement of Income for this put option settlement in 2001. The new
agreement resulted in a tax benefit to AT&T, which essentially offset this loss.

  COMCAST CABLE SYSTEM TRANSACTIONS

     On June 30, 2001, AT&T transferred its 99.75% interest in an entity owning
the Baltimore Maryland cable-system serving approximately 115 thousand customers
to Comcast for approximately $0.5 billion cash. The transaction resulted in a
pretax gain of $0.1 billion recorded in "Other (expense) income" in the
Consolidated Statement of Income.

     On April 30, 2001, AT&T received 63.9 million shares of AT&T common stock
held by Comcast in exchange for cable systems that served approximately 590
thousand customers in six states. The transaction resulted in a pretax loss of
$0.3 billion recorded in "Other (expense) income" in the Consolidated Statement
of Income.

                                        52
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  JAPAN TELECOM CO. LTD

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

  INSIGHT COMMUNICATIONS COMPANY LP

     Effective January 1, 2001, AT&T sold to Insight Communications Company LP
(Insight) several Illinois cable systems serving approximately 98 thousand
customers for $0.4 billion. Insight subsequently contributed the purchased cable
system and additional cable systems serving approximately 177 thousand customers
to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also contributed
cable systems serving approximately 248 thousand customers in Illinois to
Insight Midwest L.P. The transactions resulted in a pretax gain of $0.2 billion,
which was deferred due to a debt support agreement with Insight Midwest, L.P.

  AT&T WIRELESS GROUP

     On April 27, 2000, AT&T created a new class of stock and completed a public
stock offering of 360 million shares, which represented 15.6% of AT&T Wireless
Group tracking stock at a price of $29.50 per share. This stock was intended to
track the financial performance and economic value of AT&T's wireless services
business. The net proceeds to AT&T, after deducting the underwriter's discount
and related fees and expenses, were $10.3 billion. AT&T allocated $7.0 billion
of the net proceeds to AT&T Wireless Group, which were used for acquisitions,
network expansion, capital expenditures and general corporate purposes. The
remaining net proceeds of $3.3 billion were utilized by AT&T for general
corporate purposes. On July 9, 2001, AT&T completed the split-off of AT&T
Wireless (see Notes 2 and 7).

  COX -- CABLE SYSTEM TRANSACTION

     On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock
held by Cox in exchange for an entity owning cable systems serving approximately
312 thousand customers and certain other net assets. The transaction resulted in
a pretax gain of $0.2 billion recorded in "Other (expense) income" in the
Consolidated Statement of Income.

  LENFEST COMMUNICATIONS, INC.

     On January 18, 2000, AT&T sold its ownership in Lenfest Communications,
Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3
million shares of Comcast Class A Special common stock. The transaction resulted
in a pretax gain of $0.2 billion recorded in "Other (expense) income" in the
Consolidated Statement of Income.

  ACC EUROPE

     On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's
principal operations in the United Kingdom as well as ACC's operating companies
in France, Germany and Italy, to WORLDxCHANGE Communications. We were required
to dispose of this investment pursuant to a government mandate since it would
have competed directly with Concert. The transaction resulted in a pretax loss
of $0.2 billion recorded in "Other (expense) income" in the Consolidated
Statement of Income.

                                        53
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  IBM GLOBAL NETWORK

     On April 30, 1999, AT&T completed its acquisition of the IBM Global Network
business (renamed AT&T Global Network Services or AGNS) and its assets in the
United States. The non-U.S. acquisitions were completed in phases throughout
1999 and during the first quarter of 2000. Under the terms of the agreement,
AT&T acquired the global network of IBM, and the two companies entered into
outsourcing agreements with each other. The acquisition was accounted for under
the purchase method. Accordingly, the operating results of AGNS have been
included in the accompanying consolidated financial statements since the date of
acquisition. The pro forma impact of AGNS on historical AT&T results is not
material.

7.  DISCONTINUED OPERATIONS

     Pursuant to AT&T's restructuring plan (see Note 2), AT&T completed the
split-off of AT&T Wireless as a separate, independently traded company on July
9, 2001. All AT&T Wireless tracking stock was converted into AT&T Wireless
common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless
common stock, held by AT&T, were distributed to AT&T common shareowners on a
basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding.
AT&T common shareowners received whole shares of AT&T Wireless and cash payments
for fractional shares. The IRS ruled that the transaction qualified as tax-free
for AT&T and its shareowners for U.S. federal income tax purposes, with the
exception of cash received for fractional shares. AT&T retained approximately $3
billion, or 7.3%, of AT&T Wireless common stock, about half of which was used in
a debt-for-equity exchange in July resulting in a $0.5 billion gain recorded in
"Other (expense) income" in the Consolidated Statement of Income. The remaining
portion of these holdings was monetized in October and December of 2001 through
the issuance of debt that is exchangeable into Wireless shares (or their cash
equivalent) at maturity (see Note 12).

     In connection with the split-off of AT&T Wireless, AT&T wrote-up the net
assets of AT&T Wireless to fair value. This resulted in a tax-free noncash gain
of $13.5 billion, which represented the difference between the fair value of
AT&T Wireless at the date of the split-off and AT&T's book value in AT&T
Wireless. This gain was recorded as a "Gain on disposition of discontinued
operations" in the Consolidated Statement of Income.

     The consolidated financial statements of AT&T have been restated to reflect
AT&T Wireless as a discontinued operation. Accordingly, the revenue, costs and
expenses, assets and liabilities and cash flows of AT&T Wireless have been
excluded from the respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have
been reported through June 30, 2001, the deemed effective split-off date for
accounting purposes, as "Income from discontinued operations", net of applicable
income taxes; as "Net assets of discontinued operations"; and as "Net cash
provided by (used in) discontinued operations". The impact of the operating
results from July 1 through July 9, 2001, were deemed immaterial to our
consolidated results.

     Revenue for discontinued operations was $6,592, $10,448 and $7,627 for
2001, 2000 and 1999, respectively.

     At December 31, 2000, "Net Assets of Discontinued Operations" included
total assets of $35,087 and total liabilities of $7,822. Total assets were
comprised primarily of licensing costs, property, plant and equipment, goodwill
and investments. Total liabilities were comprised primarily of deferred income
taxes, accounts payable and other short-term liabilities. Net assets of
discontinued operations also included minority interest of $41 at December 31,
2000.

     Interest expense of $153, $330 and $253 was allocated to discontinued
operations in 2001, 2000 and 1999, respectively, based on the debt of AT&T that
was attributable to AT&T Wireless. This debt was repaid to AT&T in connection
with the split-off of AT&T Wireless.

                                        54
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The noncash impacts of the split-off of AT&T Wireless include the reduction
of assets of approximately $39.7 billion and reduced shareowners' equity of
approximately $39.7 billion, including the $13.5 billion noncash gain on
split-off.

8.  EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE

     Income (loss) attributable to the different classes of AT&T common stock is
as follows:

<Table>
<Caption>
                                                                       AT&T WIRELESS
                                          AT&T COMMON STOCK GROUP          GROUP             LIBERTY MEDIA GROUP
                                         -------------------------   ------------------   --------------------------
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                         ---------------------------------------------------------------------------
                                          2001      2000     1999    2001   2000   1999    2001      2000     1999
                                         -------   ------   ------   ----   ----   ----   -------   ------   -------
<S>                                      <C>       <C>      <C>      <C>    <C>    <C>    <C>       <C>      <C>
(Loss) income from continuing
  operations before cumulative effect
  of accounting change.................  $(4,131)  $2,645   $5,883   $--    $--     $--   $(2,711)  $1,488   $(2,022)
Dividend requirements of preferred
  stock................................      652       --       --    --     --     --         --       --        --
Premium on Wireless tracking stock
  exchange.............................       80       --       --    --     --     --         --       --        --
(Loss) income from continuing
  operations available to common
  shareowners..........................   (4,863)   2,645    5,883    --     --     --     (2,711)   1,488    (2,022)
Income (loss) from discontinued
  operations...........................      115      460     (433)   35     76     --         --       --        --
Gain on disposition of discontinued
  operations...........................   13,503       --       --    --     --     --         --       --        --
Cumulative effect of accounting
  change...............................      359       --       --    --     --     --        545       --        --
                                         -------   ------   ------   ---    ---     --    -------   ------   -------
Net income (loss) available to common
  shareowners..........................  $ 9,114   $3,105   $5,450   $35    $76     $--   $(2,166)  $1,488   $(2,022)
                                         =======   ======   ======   ===    ===     ==    =======   ======   =======
</Table>

     Basic earnings (loss) per share for AT&T Common Stock Group for 2001, 2000
and 1999 were computed by dividing AT&T Common Stock Group income (loss) by the
weighted-average number of shares outstanding of 3,643 million, 3,486 million
and 3,082 million during 2001, 2000 and 1999, respectively.

     Since AT&T recorded a loss from continuing operations for 2001, the diluted
loss per share is the same as basic, as any potentially dilutive securities
would be antidilutive to continuing operations. At December 31, 2001,
potentially dilutive securities outstanding, included shares issuable for stock
options, convertible quarterly income preferred securities, TCI Pacific
Communications, Inc. preferred securities and the settlement of AT&T's
commitment to purchase the public shares of AT&T Canada (see Note 5).

     Diluted earnings per share (EPS) for AT&T Common Stock Group for 2000 and
1999 were computed by dividing AT&T Common Stock Group income, adjusted for the
conversion of securities, by the weighted-average number of shares and dilutive
potential shares outstanding during the year, assuming conversion of the
potential shares at the beginning of the years presented using the treasury
stock method, which assumes any (after-tax) proceeds are used to repurchase
shares. Shares issuable upon conversion of preferred stock of subsidiaries,
convertible debt securities of a subsidiary and stock options have been included
in the diluted calculation of weighted-average shares to the extent that the
assumed issuance of such shares would have been dilutive, as illustrated below.
The convertible quarterly income preferred securities were antidilutive and were
excluded from the computation of diluted EPS.

                                        55
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A reconciliation of the income and share components for basic and diluted
EPS calculations with respect to AT&T Common Stock Group continuing operations
is as follows:

<Table>
<Caption>
                                                              FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
AT&T Common Stock Group:
  Income from continuing operations.........................   $2,645      $5,883
  Income impact of assumed conversion of preferred stock of
     subsidiary.............................................       32          26
  Income adjusted for conversion of securities..............   $2,677      $5,909
Shares in millions
  Weighted-average common shares............................    3,486       3,082
  Stock options.............................................       19          35
  Preferred stock of subsidiary.............................       40          33
  Convertible debt securities of subsidiary.................       --           2
  Weighted-average common shares and potential common
     shares.................................................    3,545       3,152
</Table>

     Basic EPS from discontinued operations for AT&T Wireless Group for 2001
through June 30, 2001, the deemed effective split-off date for accounting
purposes, and from April 27, 2000, the stock offering date, through December 31,
2000, was computed by dividing income attributable to AT&T Wireless Group by the
weighted-average number of shares outstanding of AT&T Wireless Group of 438
million and 361 million, respectively.

     Basic (loss) earnings per share for LMG was computed by dividing (loss)
income attributable to LMG by the weighted-average number of LMG shares
outstanding of 2,582 million in 2001 through July 31, 2001, the deemed effective
split-off date for accounting purposes, 2,572 million in 2000 and 2,519 million
from March 9, 1999, date of issuance through December 31, 1999. Potentially
dilutive securities, including fixed and nonvested performance awards and stock
options, have not been factored into the dilutive calculations because past
history indicated that these contracts were generally settled in cash.

9.  NET RESTRUCTURING AND OTHER CHARGES

     During 2001, we recorded $2,530 of net restructuring and other charges.
These charges included approximately $1,330 of restructuring and exit costs
associated with AT&T's continued cost reduction initiatives and $1,200 of asset
impairment charges which were primarily related to Excite@Home.

     The $1,330 of charges for restructuring and exit plans were primarily due
to headcount reductions with $1,014 for employee separations and benefit plan
curtailment costs, $322 for facility closings and $27 related to termination of
contractual obligations. The restructuring and exit plans support our cost
reduction efforts through headcount reductions across all segments of the
business, primarily network support and customer care functions in AT&T Business
Services, continued cost reduction efforts by Excite@Home (which was still
consolidated into AT&T's results through September 2001), in addition to impacts
of the MediaOne merger. These charges were slightly offset by the reversal in
December 2001 of $33 related to the business restructuring plans for fourth
quarter 1999 and first quarter 2000.

     Included in the $1,014 of employee separations were $200 of benefit plan
curtailment costs associated with employee separations as part of these exit
plans. Approximately 18 thousand employees will be separated in conjunction with
these exit plans, approximately one-half of which are management and one-half
are non-management employees. Nearly 17 thousand employee separations related to
involuntary terminations and more than 1 thousand related to voluntary
terminations. Approximately 50% of the employees affected by the

                                        56
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001 restructuring charges left their positions as of December 31, 2001, and the
remaining will leave the company throughout 2002. Termination benefits of
approximately $341 were paid throughout 2001.

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

<Table>
<Caption>
                                                               TYPE OF COST
                                                ------------------------------------------
                                                 EMPLOYEE      FACILITY
                                                SEPARATIONS    CLOSINGS    OTHER    TOTAL
                                                -----------    --------    -----    ------
<S>                                             <C>            <C>         <C>      <C>
Balance at January 1, 1999....................    $  118        $ 369      $ 30     $  517
  Additions...................................       142           --         3        145
  Deductions..................................      (110)        (130)      (12)      (252)
Balance at December 31, 1999..................       150          239        21        410
  Additions...................................       503           32        62        597
  Deductions..................................      (394)         (98)      (47)      (539)
Balance at December 31, 2000..................       259          173        36        468
  Additions...................................     1,014          322        27      1,363
  Deductions..................................      (765)        (179)      (44)      (988)
Balance at December 31, 2001..................    $  508        $ 316      $ 19     $  843
</Table>

     Deductions reflect cash payments of $209, $369, and $428 for 1999, 2000 and
2001, respectively. These payments included cash termination benefits of $40,
$257 and $341, respectively, which were primarily funded through cash from
operations. Deductions also reflect noncash utilization of $43, $170 and $560
for 1999, 2000 and 2001, respectively. Noncash utilization in 2001 includes $200
associated with benefit plan curtailment costs, $188 associated with management
separation benefits in connection with U.S. based managers expected to be funded
through AT&T's pension assets, $121 for the deconsolidation of Excite@Home,
reversal of $33 related to the 1999 and 2000 business restructuring plan (of
which $15 related to employee separations and $18 related to contract
terminations) and $18 of deferred severance payments primarily related to
executives. Noncash utilization in 1999 and 2000 included deferred severance
payments primarily related to executives. The business restructuring plans of
1999 and 2000 are substantially complete as of December 31, 2001.

     The $1,200 million of asset impairments consisted of $1,032 million
associated with the write-down of goodwill and other intangibles, warrants
granted in connection with distributing the @Home service and fixed assets.
These charges were due to continued deterioration in the business climate of,
and reduced levels of venture capital funding activity for, Internet advertising
and other Internet-related companies, continued significant declines in the
market values of Excite@Home's competitors in the Internet advertising industry,
and changes in their operating and cash flow forecasts for the remainder of
2001. These charges were also impacted by Excite@Home's decision to sell or shut
down narrowband operations. As a result of the foregoing, and other factors,
Excite@Home entered into bankruptcy proceedings in September 2001. In addition,
AT&T recorded a related goodwill impairment charge of $139 associated with its
acquisition goodwill of Excite@Home. Since we consolidated, but only owned
approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home was not included as a reduction to AT&T's net income, but rather was
eliminated in our Consolidated Statement of Operations as a component of
"Minority interest income (expense)." Additionally, we recorded asset impairment
charges of $29 related to the write-down of unrecoverable support assets where
the carrying value was no longer supported by estimated future cash flows.

     During 2000, we recorded $7,029 of net restructuring and other charges,
which included $6,179 of asset impairment charges related to Excite@Home, $759
for restructuring and exit costs associated with AT&T's initiative to reduce
costs, and $91 related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.

                                        57
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The charges related to Excite@Home included $4,609 of asset impairment
charges recorded by Excite@Home associated with the impairment of goodwill from
various acquisitions, including Excite, and a related goodwill impairment charge
of $1,570 recorded by AT&T associated with goodwill from the acquisition of our
investment in Excite@Home.

     The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS No. 121, "Accounting For The Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", Excite@Home conducted a
detailed assessment of the recoverability of the carrying amounts of acquired
intangible assets. This assessment resulted in a determination that certain
acquired intangible assets, including goodwill, related to these acquisitions,
including Excite, were impaired as of December 31, 2000. As a result,
Excite@Home recorded impairment charges of $4,609 in December 2000, representing
the excess of the carrying amount of the impaired assets over their fair value.

     The review for impairment included a review of publicly traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.

     Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (1) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (2) many Internet companies,
including those acquired by Excite@Home, experienced significant decelerations
in their growth both as a result of economic conditions and due to
Internet-sector specific issues such as competition and the weakening of the
Internet advertising market; and (3) funding sources for Internet-based consumer
businesses, which require considerable amounts of capital, had substantially
evaporated as of December 31, 2000. As a result, Excite@Home concluded that
fundamental, permanent and significant adverse changes had occurred during the
fourth quarter of 2000 in the business climate for companies providing Internet
advertising and other web-based services.

     In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete the acquisitions were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.

     As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.

     Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.

     For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
                                        58
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.

     Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home utilizing the best information available in the
circumstances using reasonable and supportable assumptions and projections, and
including the discounted cash flow and market comparison valuation techniques.
The discounted cash flow analysis considered the likelihood of possible outcomes
and was based on Excite@Home's best estimate of projected future cash flows,
including terminal value cash flows expected to result from the disposition of
the asset at the end of its useful life, discounted at our weighted average cost
of capital. Weighted average cost of capital was based on historical risk
premiums required by investors for companies of Excite@Home's size, industry and
capital structure and included risk factors specific to Excite@Home. The market
comparison model represented Excite@Home's estimate of the prices that a buyer
would be willing to pay currently for similar assets, based on comparable
products and services, customer base, risks, earnings capabilities and other
factors.

     Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in the aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.

     Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1,570 associated with the acquisition
of our investment in Excite@Home. The write-down of our investment to fair value
was determined utilizing discounted expected future cash flows.

     Since we consolidated but owned only approximately 23% of Excite@Home, 77%
of the charge recorded by Excite@Home was not included as a reduction to AT&T's
net income, but rather was eliminated in the Consolidated Statement of Income as
"Minority interest income (expense)."

     The $759 charge for restructuring and exit plans was primarily due to
headcount reductions, mainly in AT&T Business Services, including network
services, primarily for the consolidation of customer-care and call centers, as
well as synergies created by the MediaOne merger.

     Included in exit costs was $503 of cash termination benefits associated
with the separation of approximately 7,300 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were non-management employees. Approximately
6,700 employee separations were related to involuntary terminations and
approximately 600 to voluntary terminations.

     We also recorded $62 of network lease and other contract termination costs
associated with penalties incurred as part of notifying vendors of the
termination of these contracts during the year, and net losses of $32 related to
the disposition of facilities primarily due to synergies created by the MediaOne
merger.

     Also included in restructuring and exit costs in 2000 was $144 of benefit
plan curtailment costs associated with employee separations as part of these
exit plans. Further, we recorded an asset impairment charge of $18 related to
the write-down of unrecoverable assets in certain businesses where the carrying
value was no longer supported by estimated future cash flows.

     During 1999, we recorded $975 of net restructuring and other charges. A
$594 in-process research and development charge was recorded reflecting the
estimated fair value of research and development projects at TCI, as of the date
of acquisition, which had not yet reached technological feasibility or had no
alternative future use. The projects identified related to efforts to offer
voice over Internet protocol (IP), product-integration efforts for advanced
set-top devices that would enable the offering of next-generation digital
                                        59
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

services and cost-savings efforts for broadband-telephony implementation. In
addition, Excite@Home had research and development efforts underway, including
projects to allow for self-provisioning of devices and the development of
next-generation client software, network and back-office infrastructure to
enable a variety of network devices beyond personal computers, and improved
design for the regional data centers' infrastructure.

     Also in 1999, a $145 charge for restructuring and exit costs was recorded
as part of AT&T's initiative to reduce costs. The restructuring and exit plans
primarily focused on the maximization of synergies through headcount reductions
in AT&T Business Services, including network operations, primarily for the
consolidation of customer-care and call centers.

     Included in exit costs was $142 of cash termination benefits associated
with the separation of approximately 2,800 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were non-management employees. Approximately
1,700 employee separations were related to involuntary terminations and
approximately 1,100 to voluntary terminations.

     We also recorded net losses of $307 related to the government-mandated
disposition of certain international businesses that would have competed
directly with Concert, and $50 related to a contribution agreement AT&T
Broadband entered into with Phoenixstar, Inc. That agreement requires AT&T
Broadband to satisfy certain liabilities owed by Phoenixstar and its
subsidiaries. In addition, we recorded benefits of $121 related to the
settlement of pension obligations for former employees who accepted AT&T's 1998
voluntary retirement incentive program (VRIP) offer.

10.  INVESTMENT IN LIBERTY MEDIA GROUP

     As a result of our merger with TCI, we acquired Liberty Media Group (LMG).
Although LMG was wholly-owned, we accounted for it as an equity method
investment since we did not have a controlling financial interest. On August 10,
2001, AT&T completed the split-off of Liberty Media Corporation (LMC) as an
independent, publicly-traded company (see Note 2). The operating results of LMG
from March 1, 1999, the date of acquisition through July 31, 2001, the deemed
effective split-off date for accounting purposes, were reflected as "Equity
(losses) earnings from Liberty Media Group" in the Consolidated Statements of
Income. The impact of the operating results from August 1 through August 10,
2001, were deemed immaterial to our consolidated results. Our investment in LMG
at December 31, 2000, was reflected as "Investment in Liberty Media Group and
related receivables, net" in the accompanying Consolidated Balance Sheet.

     Upon split-off, AT&T paid LMG $0.8 billion pursuant to a tax sharing
agreement, related to TCI net operating losses generated prior to AT&T's merger
with TCI. In addition, AT&T received approximately $0.1 billion from LMG related
to taxes pursuant to a tax-sharing agreement between LMG and AT&T Broadband
which existed prior to the TCI merger. At December 31, 2000, this receivable was
included in "Investment in Liberty Media Group and related receivables, net" in
the Consolidated Balance Sheet. At December 31, 2001, the remaining receivable
from LMG under the tax-sharing agreement was $0.1 billion and was included in
"Accounts receivable" in the Consolidated Balance Sheet.

                                        60
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized results of operations for LMG were as follows:

<Table>
<Caption>
                                         FOR THE SEVEN                           FOR THE TEN
                                         MONTHS ENDED    FOR THE YEAR ENDED     MONTHS ENDED
                                         JULY 31, 2001   DECEMBER 31, 2000    DECEMBER 31, 1999
                                         -------------   ------------------   -----------------
<S>                                      <C>             <C>                  <C>
Revenue................................     $ 1,190            $1,526              $   729
Operating (loss) income................        (426)              436               (2,214)
(Loss) income from continuing
  operations before cumulative effect
  of accounting change.................      (2,711)            1,488               (2,022)
Cumulative effect of accounting
  change...............................         545                --                   --
Net (loss) income......................     $(2,166)           $1,488              $(2,022)
</Table>

<Table>
<Caption>
                                                                   AT
                                                              DECEMBER 31,
                                                                  2000
                                                              ------------
<S>                                                           <C>
Current assets..............................................    $ 2,954
Noncurrent assets...........................................     51,314
Current liabilities.........................................      2,962
Noncurrent liabilities......................................     16,668
Minority interest...........................................        348
</Table>

     During 2000, certain investees of LMG issued common stock. Changes in the
equity of the investees, net of the dilution of LMG's ownership interest,
resulted in an increase to AT&T's additional paid-in capital of $355.

11.  OTHER INVESTMENTS

     We have investments in various companies and partnerships that are
accounted for under the equity method of accounting and included within "Other
investments and related advances" in the Consolidated Balance Sheets. Under the
equity method, investments are stated at initial cost, and are adjusted for
subsequent contributions and our share of earnings, losses and distributions. At
December 31, 2001 and 2000, we had equity investments (other than LMG) of $4.6
billion and $10.5 billion, respectively. The carrying value of these investments
exceeded our share of the underlying reported net assets by approximately $3.1
billion and $8.3 billion, at December 31, 2001 and 2000, respectively. The
excess basis, or goodwill is being amortized over periods ranging from 15 to 40
years. Pretax amortization of excess basis was $0.2 billion, $0.5 billion and
$0.5 billion in 2001, 2000 and 1999, respectively. The amortization is shown as
a component of "Net losses related to other equity investments" in the
Consolidated Statements of Income. Effective January 1, 2002, in accordance with
the provisions of SFAS No. 142, this excess basis will no longer be amortized
(see Note 23). Distributions from equity investments totaled $25, $13, and $85,
for the years ended December 31, 2001, 2000 and 1999, respectively.

                                        61
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Ownership of significant equity investments was as follows:

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                              -----------------
                                                               2001       2000
                                                              ------     ------
<S>                                                           <C>        <C>
Cablevision Systems Corporation.............................     N/A(a)   27.98%(a)
Concert.....................................................   50.00%(b)  50.00%(b)
AT&T Canada Corporation.....................................   21.52%(c)  21.52%(c)
Texas Cable Partnerships....................................   50.00%     50.00%
Net2Phone, Inc..............................................     N/A(d)   31.34%(d)
Insight Midwest LP..........................................   50.00%     50.00%
Century-TCI California, LP..................................   25.00%     25.00%
Kansas City Cable Partners..................................   50.00%     50.00%
Midcontinent Communications.................................   50.00%     50.00%
Parnassos, LP...............................................   33.33%     33.33%
</Table>

---------------
(a) In June 2001, as a result of AT&T no longer having representation on the
    Cablevision board of directors, the accounting of our investment in
    Cablevision was changed from equity method to cost method of accounting. At
    December 31, 2001, we owned 29.8 million shares, or a 16.8% ownership
    interest, of Cablevision NY Group Class A common stock, which had a closing
    market price of $47.45 per share. At December 31, 2000, we owned 48.9
    million shares of Cablevision Systems Corporation Class A common stock,
    which had a closing market price of $84.94 per share.

(b) On October 16, 2001, AT&T announced a decision to unwind Concert, its Global
    venture with BT formed on January 5, 2000 (see Note 5).

(c) AT&T no longer records equity earnings or losses related to AT&T Canada
    because AT&T recognized losses in excess of its investment in AT&T Canada
    (see Note 5).

(d) At December 31, 2000, we owned 18.9 million shares of Net2Phone, Inc. Class
    A common stock, which had a closing market price of $7.38 per share on that
    date. In 2001, AT&T recorded a pretax investment impairment charge of $1.1
    billion included in "Net losses related to other equity investments" in the
    Consolidated Statement of Income. This charge primarily represents the
    difference between the fair market value and the carrying value of our
    investment in Net2Phone, resulting from the deterioration of market
    valuations of Internet-related companies. Also, in October 2001, AT&T
    contributed its investment of 18.9 million shares in Net2Phone to NTOP
    Holdings, LLC (NTOP), and received 189 units of NTOP ownership. AT&T then
    sold 160 units of NTOP to LMC Animal Planet, a subsidiary of Liberty Media
    Corporation, and IDT Corporation. AT&T retained 29 units of NTOP ownership
    at December 31, 2001, which was accounted for as a cost method investment.

                                        62
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized combined financial information for investments accounted for
under the equity method was as follows:

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2001        2000       1999
                                                           ---------   --------   ---------
<S>                                                        <C>         <C>        <C>
CONCERT
Revenue..................................................   $ 6,189     $7,748          --
Operating (loss) income..................................    (3,574)       329          --
(Loss) income from continuing operations before
  extraordinary items and cumulative effect of accounting
  change.................................................    (3,609)       103          --
Net (loss) income........................................    (3,609)       103          --
</Table>

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Current assets..............................................  $3,744   $4,652
Non-current assets..........................................   1,758    4,702
Current liabilities.........................................   4,296    4,677
Non-current liabilities.....................................      76    2,107
Redeemable preferred stock..................................      --       --
Minority interest...........................................      --       --
</Table>

<Table>
<Caption>
                                                            FOR THE YEARS ENDED DECEMBER
                                                                        31,
                                                            ----------------------------
                                                             2001       2000       1999
                                                            -------    -------    ------
<S>                                                         <C>        <C>        <C>
AT&T CANADA
Revenue...................................................  $1,000     $1,001     $ 590
Operating (loss)..........................................    (226)      (225)     (248)
(Loss) from continuing operations before extraordinary
  items and cumulative effect of accounting change........    (521)      (351)       (4)
Net (loss)................................................    (518)      (351)       (4)
</Table>

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Current assets..............................................  $  391   $  227
Non-current assets..........................................   2,590    2,661
Current liabilities.........................................     256      276
Non-current liabilities.....................................   2,963    2,439
Redeemable preferred stock..................................      --       --
Minority interest...........................................      --       --
</Table>

                                        63
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2001       2000        1999
                                                           --------   ---------   ---------
<S>                                                        <C>        <C>         <C>
OTHER EQUITY INVESTMENTS
Revenue..................................................   $8,150     $18,686     $ 8,376
Operating income (loss)..................................       87      (1,051)     (1,278)
Income (loss)from continuing operations before
  extraordinary items and cumulative effect of accounting
  change.................................................      729      (1,503)     (2,266)
Net income (loss)........................................      716      (1,550)     (2,373)
</Table>

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Current assets..............................................  $   654   $ 4,994
Non-current assets..........................................   11,183    25,015
Current liabilities.........................................    1,188     4,042
Non-current liabilities.....................................    7,010    17,970
Redeemable preferred stock..................................        7     1,589
Minority interest...........................................      151       623
</Table>

     We also have investments accounted for under the cost method of accounting.
At December 31, 2001 and 2000, we had cost method investments included in "Other
investments and related advances" in the Consolidated Balance Sheets of $19.2
billion and $20.4 billion, respectively. At December 31, 2001 and 2000,
approximately $7.9 billion and $6.5 billion, respectively, of our cost
investments are indexed to certain long term debt instruments (see Note 12). In
addition, there were approximately $0.7 billion and $2.1 billion of investments
that were classified as current assets at December 31, 2001 and 2000,
respectively, since they are indexed to certain currently maturing debt
instruments. Under the cost method, investments are stated at cost, and earnings
are recognized 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. These
investments, are covered under the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and are carried at fair
value. Some of our cost method investments are classified as "trading"
securities, and are marked-to-market through the income statement. Other cost
investments are classified as "available-for-sale" securities, and are
marked-to-market through other comprehensive income on the balance sheet. We
record an investment impairment charge on our "available-for-sale" securities in
"Other (expense) income" in the Consolidated Statement of Income when we believe
the decline in the investment value is other than temporary. During 2001, we
recorded impairment charges on such securities of $1.1 billion, consisting
primarily of charges related to Vodafone plc and Time Warner Telecom of $0.4
billion and $0.3 billion, respectively.

     In addition, at December 31, 2001 and 2000, our 25.5% interest in TWE is
accounted for as a cost method investment since we do not have the right to
exercise significant influence. On February 28, 2001, we exercised our
registration rights in TWE and formally requested TWE to begin the process of
converting the limited partnership into a corporation with registered equity
securities. If the proposed spin-off of AT&T Broadband occurs as currently
structured, our investment in TWE will be included in the net assets spun-off.

                                        64
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  DEBT OBLIGATIONS

  DEBT MATURING WITHIN ONE YEAR

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Commercial paper............................................  $ 5,087   $16,234
Short-term notes............................................    3,970    11,505
Currently maturing long-term debt...........................    3,779     3,724
Other.......................................................      122       375
                                                              -------   -------
Total debt maturing within one year.........................  $12,958   $31,838
                                                              =======   =======
Weighted-average interest rate of short-term debt...........      5.4%      6.5%
</Table>

  SECURITIZATIONS

     During 2001, AT&T initiated a 364-day accounts receivable securitization
program providing for up to $2.7 billion of funding, limited by monthly eligible
receivables. Under the program, AT&T Business Services and AT&T Consumer
Services accounts receivable were sold on a discounted, revolving basis, to a
special purpose, wholly-owned subsidiary of AT&T, which assigns interests in
such receivables to unrelated third-party financing entities. The securitization
proceeds were recorded as a borrowing and included in "Debt maturing within one
year" in the Consolidated Balance Sheet. At December 31, 2001, such short-term
notes totaled $2.3 billion. The interest payment for the associated loan was
approximately $54 for the year ending December 31, 2001. Interest is currently
paid based on a floating London Interbank Offered Rate (LIBOR) set by the
corresponding agreements. At December 31, 2001, the borrowing was collateralized
by $5.4 billion of accounts receivable.

  CREDIT FACILITY

     On December 14, 2001, we amended and restated a pre-existing
revolving-credit facility. The amended facility, which is syndicated to 30
banks, is for commercial paper back-up and makes $8 billion available to AT&T
for a 364-day term. At December 31, 2001, AT&T had not utilized this facility,
and currently has the entire $8 billion facility available to us. The credit
facility agreement contains a financial covenant that requires AT&T to maintain
a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding
3.00 to 1.00 for four consecutive quarters ending on the last day of each fiscal
quarter. At December 31, 2001, we were in compliance with this covenant. If AT&T
were to become noncompliant it could result in the cancellation of the credit
facility and any amounts outstanding under the credit facility becoming payable
immediately.

                                        65
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  LONG-TERM DEBT

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A)
</Table>

<Table>
<Caption>
INTEREST RATES(B)                          MATURITIES
-----------------                          ----------
<C>                  <S>                                                      <C>       <C>
4.00% --  6.00%      2002 -- 2009..........................................   $ 7,353   $ 6,639
6.06% --  6.50%      2002 -- 2029..........................................     7,253     6,660
6.55% --  7.50%      2002 -- 2037..........................................     8,252     6,470
7.53% --  8.50%      2002 -- 2097..........................................     7,788     5,267
8.60% -- 19.95%*     2002 -- 2038..........................................     6,994     7,317
  Variable rate      2002 -- 2054..........................................     6,744     4,164
                                                                              -------   -------
</Table>

<Table>
<S>                                                           <C>       <C>
Total debentures, notes and trust preferred securities......   44,384    36,517
Other.......................................................      382       360
Unamortized discount, net...................................     (460)      (64)
                                                              -------   -------
Total long-term debt........................................   44,306    36,813
Less: Currently maturing long-term debt.....................    3,779     3,724
                                                              -------   -------
Net long-term debt..........................................  $40,527   $33,089
                                                              =======   =======
</Table>

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

 * 19.95% interest rate relates to bank loans held by AT&T Latin America in the
   amount of $2.7 million

(a) Included in these balances was $858 and $946 representing the remaining
    excess of the fair value over the recorded value of debt in connection with
    the TCI and MediaOne mergers at December 31, 2001 and December 31, 2000,
    respectively. The excess is being amortized to interest expense over the
    remaining lives of the underlying debt obligations.

(b) The actual interest paid on our debt obligations may have differed from the
    stated amount due to our entering into interest rate swap contracts to
    manage our exposure to interest rate risk and our strategy to reduce finance
    costs (see Note 14).

     The following table shows the maturities at December 31, 2001, of the
$44,306 in total long-term obligations:

<Table>
<Caption>
 2002     2003     2004     2005     2006    LATER YEARS
 ----     ----     ----     ----     ----    -----------
<S>      <C>      <C>      <C>      <C>      <C>
$3,779.. $4,753   $5,801   $4,357   $5,867     $19,749
</Table>

     On November 21, 2001, AT&T completed a private bond offering which consists
of $1.5 billion in five-year Senior Notes with an interest rate of 6.5%, $2.75
billion in 10 year Senior Notes with an interest rate of 7.30%, $2.75 billion in
30 year Senior Notes with an interest rate of 8.00%, 1.5 billion Euros of
two-year Senior Notes with a floating interest rate of Euro Interbank Offered
Rate (EURIBOR) plus 1.50% and 2.0 billion Euros of five-year Senior Notes with
an interest rate of 6.00%. We received net proceeds of approximately $10.0
billion from the sale of the notes. The proceeds will primarily be utilized to
retire short-term indebtedness and for general corporate purposes. The bond
offering included provisions that would allow bondholders to require AT&T to
repurchase the notes if certain conditions are not met in conjunction with the
spin-off or the separation of AT&T Broadband from AT&T at the time of
notification to bondholders of the intention to separate AT&T Broadband. These
conditions include a maximum debt to EBITDA ratio (adjusted) for pro forma AT&T
excluding AT&T Broadband of no more than 2.75 times at specified times and if
credit ratings of these notes are downgraded below a certain level.

                                        66
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
  TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES

     Included in long-term and short-term debt are subsidiary-obligated
mandatorily redeemable preferred securities of subsidiary trusts holding solely
subordinated debt securities.

     Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities
outstanding at December 31, 2001 and 2000, as follows:

<Table>
<Caption>
                                                                          CARRYING AMOUNT
                                                    INTEREST   MATURITY   ---------------
SUBSIDIARY TRUST                                      RATE       DATE      2001     2000
----------------                                    --------   --------   ------   ------
<S>                                                 <C>        <C>        <C>      <C>
TCI Communications Financing I....................    8.72%      2045     $  527   $  528
TCI Communications Financing II...................   10.00%      2045        513      514
TCI Communications Financing III..................    9.65%      2027        380      357
TCI Communications Financing IV...................    9.72%      2036        204      204
                                                                          ------   ------
Total.............................................                        $1,624   $1,603
                                                                          ======   ======
</Table>

     The TCI Trusts exist for the purpose of issuing trust preferred securities
and investing the proceeds into subordinated deferrable interest notes
(subordinated debt securities) of TCI. The subordinated debt securities have
interest rates equal to the interest rate of the corresponding trust preferred
securities and have maturity dates ranging from 30 to 49 years from the date of
issuance. The preferred securities are mandatorily redeemable upon repayment of
the subordinated debt securities, and are callable by AT&T. The Financing I and
II trust preferred securities were redeemable at face value beginning in January
and May 2001, respectively. Financing III trust preferred securities are
callable at 104.825% of face value beginning in March 2007. Financing IV trust
preferred securities are callable at face value beginning in March 2002.

     On February 28, 2002, AT&T called for early redemption Financing I and II
preferred securities. On February 26, 2002, AT&T announced that it was notifying
holders that it will call Financing IV preferred securities for early redemption
on April 1, 2002. At December 31, 2001, the Financing I, II and IV trust
preferred securities were reclassed from long-term debt to short-term debt.

     TCI effectively provides a full and unconditional guarantee of the TCI
Trusts' obligations under the trust preferred securities. During 2000, AT&T
provided a full and unconditional guarantee of the trust preferred securities
for TCI Communications Financing I, II and IV subsidiary trusts (see Note 21).

     AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.

     Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred
securities outstanding at December 31, 2001 and 2000, as follows:

<Table>
<Caption>
                                                                              CARRYING
                                                                               AMOUNT
                                                       INTEREST   MATURITY   -----------
SUBSIDIARY TRUST                                         RATE       DATE     2001   2000
----------------                                       --------   --------   ----   ----
<S>                                                    <C>        <C>        <C>    <C>
MediaOne Financing A.................................    7.96%      2025     $ 30   $ 30
MediaOne Financing B.................................    8.25%      2036       28     28
MediaOne Finance II..................................    9.50%      2036      214    214
MediaOne Finance III.................................    9.04%      2038      504    504
                                                                             ----   ----
Total................................................                        $776   $776
                                                                             ====   ====
</Table>

                                        67
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The MediaOne Trusts exist for the purpose of issuing the trust preferred
securities and investing the proceeds into subordinated deferrable interest
notes (subordinated deferrable notes) of MediaOne Group Funding, Inc., a wholly
owned subsidiary of MediaOne. The subordinated deferrable notes have the same
interest rate and maturity date as the trust preferred securities to which they
relate. All of the subordinated deferrable notes are redeemable by AT&T at a
redemption price of $25.00 per security, plus accrued and unpaid interest. Upon
redemption of the subordinated deferrable notes, the trust preferred securities
will be mandatorily redeemable, at a price of $25.00 per share, plus accrued and
unpaid distributions. The 7.96% subordinated deferrable notes became redeemable
after September 11, 2000. The 9.50% and 8.25% subordinated deferrable notes
became redeemable after October 29, 2001. The 9.04% subordinated deferrable
notes are redeemable after October 28, 2003.

     On March 4, 2002, AT&T called for early redemption MediaOne Financing A,
MediaOne Financing B and MediaOne Financing II preferred securities. At December
31, 2001, the Financing A, B and II preferred securities were reclassed from
long-term debt to short-term debt.

     MediaOne has effectively provided a full and unconditional guarantee of the
MediaOne Trusts' obligations under the trust preferred securities. During 2000,
AT&T provided a full and unconditional guarantee of MediaOne's trust preferred
securities (see Note 21).

     AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.

  EXCHANGEABLE NOTES

     Included in long-term and short-term debt are exchangeable notes. During
2001, we issued exchangeable notes which are mandatorily redeemable at AT&T's
option into shares of AT&T Wireless and Cablevision NY Group Class A
(Cablevision) common stock and Rainbow Media Group Class A (Rainbow Media Group)
tracking stock, as applicable or its cash equivalent. During 2000, we issued
exchangeable notes which are mandatorily redeemable at AT&T's option into shares
of Comcast and Microsoft Corporation (Microsoft) common stock, as applicable, or
its cash equivalent. During 1999 and 1998, MediaOne issued exchangeable notes
which are mandatorily redeemable at AT&T's option into (i) Vodafone American
Depository Receipts (ADRs) held by MediaOne, (ii) the cash equivalent, or (iii)
a combination of cash and Vodafone ADRs. The maturity value of these
exchangeable notes varies based upon the fair market value of the security it is
indexed to.

     Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 45.8 million shares of AT&T Wireless common
stock:

<Table>
<Caption>
                                                            PUT PRICE
                                                               PER       CALL PRICE    CARRYING
MATURITIES                   FACE VALUE    INTEREST RATE      SHARE      PER SHARE      VALUE
----------                   ----------    -------------    ---------    ----------    --------
<S>                          <C>           <C>              <C>          <C>           <C>
2005.......................     $220        LIBOR + 0.4%     $14.41        $18.87        $220
2006.......................      220        LIBOR + 0.4%      14.41         19.31         219
2006.......................      220        LIBOR + 0.4%      14.41         19.74         219
</Table>

                                        68
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 45 million shares of AT&T Wireless common stock:

<Table>
<Caption>
                                                            PUT PRICE
                                                               PER       CALL PRICE    CARRYING
MATURITIES                   FACE VALUE    INTEREST RATE      SHARE      PER SHARE      VALUE
----------                   ----------    -------------    ---------    ----------    --------
<S>                          <C>           <C>              <C>          <C>           <C>
2006.......................     $204        LIBOR + 0.4%     $13.57        $19.03        $216
2006.......................      201        LIBOR + 0.4%      13.37         19.27         216
2006.......................      204        LIBOR + 0.4%      13.57         19.90         216
</Table>

     At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of AT&T Wireless common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:

          (a) If the fair market value of a share of AT&T Wireless common stock
     is greater than the call price, the exchange ratio will be a fraction, the
     numerator of which is equal to the sum of (i) the put price, plus (ii) the
     excess of the fair market value of a share of AT&T Wireless common stock
     over the call price, and the denominator of which is equal to the fair
     market value of a share of AT&T Wireless common stock;

          (b) If the fair market value of a share of AT&T Wireless common stock
     is less than or equal to the put price, the exchange ratio will be 1;

          (c) If the fair market value of a share of AT&T Wireless common stock
     is less than or equal to the call price but greater than the put price, the
     exchange ratio will be a fraction, the numerator of which is equal to the
     put price, and the denominator of which is equal to the fair market value
     of a share of AT&T Wireless common stock.

     Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 26.9 million shares of Cablevision common stock:

<Table>
<Caption>
                                                               PUT PRICE
                                                                  PER       CALL PRICE    CARRYING
MATURITY                        FACE VALUE    INTEREST RATE      SHARE      PER SHARE      VALUE
--------                        ----------    -------------    ---------    ----------    --------
<S>                             <C>           <C>              <C>          <C>           <C>
2004..........................     $970           6.50%         $36.05        $43.98       $1,030
</Table>

     At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Cablevision common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:

          (a) If the fair market value of a share of Cablevision common stock is
     greater than the call price, the exchange ratio will be 0.8197;

          (b) If the fair market value of a share of Cablevision common stock is
     less than or equal to the put price, the exchange ratio will be 1;

          (c) If the fair market value of a share of Cablevision common stock is
     less than or equal to the call price but greater than the put price, the
     exchange ratio will be a fraction, the numerator of which is equal to the
     put price, and the denominator of which is equal to the fair market value
     of a share of Cablevision common stock.

                                        69
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 9.8 million shares of Rainbow Media Group
tracking stock:

<Table>
<Caption>
                                                               PUT PRICE
                                                                  PER       CALL PRICE    CARRYING
MATURITY                        FACE VALUE    INTEREST RATE      SHARE      PER SHARE      VALUE
--------                        ----------    -------------    ---------    ----------    --------
<S>                             <C>           <C>              <C>          <C>           <C>
2005..........................     $220           6.25%         $22.50        $27.45        $196
</Table>

     At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Rainbow Media Group tracking stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:

          (a) If the fair market value of a share of Rainbow Media Group
     tracking stock is greater than the call price, the exchange ratio will be
     0.8197;

          (b) If the fair market value of a share of Rainbow Media Group
     tracking stock is less than or equal to the put price, the exchange ratio
     will be 1;

          (c) If the fair market value of a share of Rainbow Media Group
     tracking stock is less than or equal to the call price but greater than the
     put price, the exchange ratio will be a fraction, the numerator of which is
     equal to the put price, and the denominator of which is equal to the fair
     market value of a share of Rainbow Media Group tracking stock.

     Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to 25 million shares of Comcast common
stock:

<Table>
<Caption>
                                                         PUT PRICE                  CARRYING VALUE
                                                            PER       CALL PRICE    --------------
MATURITIES                FACE VALUE    INTEREST RATE      SHARE      PER SHARE     2001     2000
----------                ----------    -------------    ---------    ----------    -----    -----
<S>                       <C>           <C>              <C>          <C>           <C>      <C>
2003....................     $371           6.75%         $41.50        $49.80      $320     $371
2004....................      314           5.50%          41.06         49.27       277      314
2005....................      329           4.63%          39.13         46.96       286      329
</Table>

     At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:

          (a) If the fair market value of a share of Comcast common stock is
     greater than the call price, the exchange ratio will be 0.8333;

          (b) If the fair market value of a share of Comcast common stock is
     less than or equal to the put price, the exchange ratio will be 1;

          (c) If the fair market value of a share of Comcast common stock is
     less than or equal to the call price but greater than the put price, the
     exchange ratio will be a fraction, the numerator of which is equal to the
     put price, and the denominator of which is equal to the fair market value
     of a share of Comcast common stock.

                                        70
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to 10 million shares of Microsoft common
stock:

<Table>
<Caption>
                                                         PUT PRICE                  CARRYING VALUE
                                                            PER       CALL PRICE    --------------
MATURITIES                FACE VALUE    INTEREST RATE      SHARE      PER SHARE     2001     2000
----------                ----------    -------------    ---------    ----------    -----    -----
<S>                       <C>           <C>              <C>          <C>           <C>      <C>
2003....................     $227           6.96%         $67.87        $97.39      $201     $145
2004....................      226           7.00%          67.87        111.64       198      144
2005....................      226           7.04%          67.87        128.60       196      144
</Table>

     At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Microsoft common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:

          (a) If the fair market value of a share of Microsoft common stock is
     greater than the call price, the exchange ratio will be a fraction, the
     numerator of which is equal to the sum of (i) the put price, plus (ii) the
     excess of the fair market value of a share of Microsoft common stock over
     the call price, and the denominator of which is equal to the fair market
     value of a share of Microsoft common stock;

          (b) If the fair market value of a share of Microsoft common stock is
     less than or equal to the put price, the exchange ratio will be 1;

          (c) If the fair market value of a share of Microsoft common stock is
     less than or equal to the call price but greater than the put price, the
     exchange ratio will be a fraction, the numerator of which is equal to the
     put price, and the denominator of which is equal to the fair market value
     of a share of Microsoft common stock.

     Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to 22.3 million shares of Comcast common
stock:

<Table>
<Caption>
                                                         PUT PRICE                  CARRYING VALUE
                                                            PER       CALL PRICE    --------------
MATURITIES                FACE VALUE    INTEREST RATE      SHARE      PER SHARE     2001     2000
----------                ----------    -------------    ---------    ----------    -----    -----
<S>                       <C>           <C>              <C>          <C>           <C>      <C>
2003....................     $267           6.76%         $35.89        $50.64      $244     $267
2004....................      267           6.80%          35.89         58.39       244      267
2005....................      267           6.84%          35.89         67.97       245      267
</Table>

     At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:

          (a) If the fair market value of a share of Comcast common stock is
     greater than or equal to the call price, the exchange ratio will be a
     fraction, the numerator of which is equal to the sum of (i) the put price,
     plus (ii) the excess of the fair market value of a share of Comcast common
     stock over the call price, and the denominator of which is equal to the
     fair market value of a share of Comcast common stock;

          (b) If the fair market value of a share of Comcast common stock is
     less than or equal to the put price, the exchange ratio will be 1;

          (c) If the fair market value of a share of Comcast common stock is
     less than the call price but greater than the put price, the exchange ratio
     will be a fraction, the numerator of which is equal to the put price, and
     the denominator of which is equal to the fair market value of a share of
     Comcast common stock.

                                        71
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to Vodafone ADRs:

<Table>
<Caption>
                                                       PUT PRICE                  CARRYING VALUE
                                                          PER       CALL PRICE    --------------
MATURITIES              FACE VALUE    INTEREST RATE      SHARE      PER SHARE     2001     2000
----------              ----------    -------------    ---------    ----------    ----    ------
<S>                     <C>           <C>              <C>          <C>           <C>     <C>
2001..................    $1,686          6.25%         $19.65        $25.10      $ --    $2,337
2002..................    $1,129          7.00%          43.44         51.26       715     1,012
</Table>

     In the third quarter of 2001, exchangeable notes that were indexed to a
portion of holdings of Vodafone ADR securities matured. Prior to the settlement,
the carrying value of the notes was $1,634. These notes were settled with
approximately 70 million shares of Vodafone ADR's and $252 million in cash.
Approximately 57 million shares of the Vodafone ADR's used in the settlement
were accounted for as "trading" securities and the remaining shares were
accounted for as "available-for-sale" securities under SFAS No. 115. The
settlement resulted in a pretax loss of approximately $392, which was
reclassified from "Other comprehensive income" to "Other (expense) income" in
the Consolidated Statement of Income.

     The exchangeable notes that mature in 2002 are indexed to 26 million
Vodafone ADRs, and will be exchanged at maturity as follows:

          (a) If the fair market value of a Vodafone ADR is greater than or
     equal to the call price, each exchangeable note is equivalent to 0.8475 of
     a Vodafone ADR;

          (b) If the fair market value of a Vodafone ADR is less than or equal
     to the put price, each exchangeable note is equivalent to one Vodafone ADR;
     or

          (c) If the fair market value of a Vodafone ADR is less than the call
     price but greater than the put price, each exchangeable note is equivalent
     to a fraction of a Vodafone ADR equal to (i) the put price divided by (ii)
     the fair market value of a Vodafone ADR.

     The exchangeable notes indexed to AT&T Wireless, Cablevision, Comcast and
Microsoft common stock and Rainbow Media Group that are secured by AT&T's
investments in AT&T Wireless, Cablevision, Comcast, Microsoft and Rainbow Media
Group. The exchangeable notes indexed to Vodafone ADRs that are unsecured
obligations, ranking equally in right of payment with all other unsecured and
unsubordinated obligations of AT&T.

     These exchangeable notes are being accounted for as indexed debt
instruments since the maturity value of the debt is dependent upon the fair
market value of the underlying securities. These exchangeable notes contain
embedded derivatives that require separate accounting as the maturity value of
the debt is dependent upon the fair market value of the underlying AT&T
Wireless, Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone
securities, as applicable. The economic characteristics of the embedded
derivatives (i.e., equity like features) are not clearly and closely related to
that of the host instruments (a debt security). As a result the embedded
derivatives are separated from the host debt instrument for valuation purposes
and are carried at fair value within the host debt instrument. The embedded
derivatives for AT&T Wireless, Cablevision and Rainbow Media Group exchangeable
notes are designated as cash flow hedges. These designated options are carried
at fair value with changes in fair value recorded, net of income taxes, within
"Other comprehensive income" as a component of shareowners' equity. There was no
ineffectiveness recognized on the cash flow hedges. The Comcast, Microsoft,
Vodafone and certain of the Cablevision and Rainbow Media Group options are
undesignated and are carried at fair value with changes in fair value recorded
in "Other income (expense)" in the Consolidated Statement of Income.

     The options hedge the market risk of a decline in value of AT&T Wireless,
Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone securities.
The market risk of a decline in these securities, below the respective put
prices has been eliminated. In addition, any market gains we may earn have been
limited to

                                        72
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the call prices, with the exception of certain debt indexed to Comcast stock,
the Cablevision stock, Rainbow Media Group and Vodafone ADRs, which provide for
our participation in a portion of the market gains above the call price.

     Since all the AT&T Wireless, Cablevision and Rainbow Media Group securities
and a portion of the Comcast, Microsoft and Vodafone ADR securities are cost
method investments being accounted for as "available-for-sale" securities under
SFAS No. 115, changes in the maturity value of the options and the underlying
securities are being recorded as unrealized gains or losses, net of income
taxes, within "Other comprehensive income as a component of shareowners'
equity." The remaining portion of the Comcast, Microsoft and Vodafone securities
are cost method investments being accounted for as "trading" securities as
permitted under SFAS No. 115 and changes in the fair value of the options and
the underlying securities are being recorded as net revaluation of certain
financial instruments within "Other income (expense)" in the Consolidated
Statement of Income.

  OTHER DEBT

     Included in long-term debt is other debt. During 2000, we entered into a
series of purchased and written options on 21.9 million shares of Microsoft
common stock, and issued floating rate debt. The carrying value of the debt at
both December 31, 2001 and 2000, was $1,369, which pays interest at three-month
LIBOR plus 0.4%. The debt in conjunction with the options is, repayable at
AT&T's option in either Microsoft stock or cash and matures annually with $458
maturing in 2003 and 2004, and $453 maturing in 2005 (see Note 14).

     In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and
MediaOne SPC VI, entered into a series of purchased and written options on
Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt.
The carrying value of the debt at both December 31, 2001 and 2000, was $1,739,
which pays interest at three-month LIBOR plus 0.5%. This debt matures in equal
quarterly installments beginning in 2003 and ending in 2005. The assets of
MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are available
only to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne
SPC VI, which are primarily 18.0 million Vodafone ADRs, are available only to
pay the creditors of MediaOne SPC VI. MediaOne SPC IV and VI will generate cash
to settle these notes by selling its Vodafone ADRs to the market (or to AT&T, at
AT&T's option) and cash settle the option (see Note 14).

13.  OTHER SECURITIES

  PREFERRED STOCK OF SUBSIDIARIES

     Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued
5% Class A Senior Cumulative Exchangeable preferred stock, which was outstanding
as of December 31, 2001. Each share is exchangeable, from and after August 1,
2001, for approximately 8.365 shares of AT&T common stock (as adjusted for the
July 2001 split-off of AT&T Wireless Services, Inc. from AT&T), subject to
certain antidilution adjustments. Additionally, Pacific may elect to make any
dividend, redemption or liquidation payment in cash, shares of AT&T common stock
or a combination of the foregoing.

     Dividends on the Pacific preferred stock were $31, $31 and $26 for the
years ended December 31, 2001, 2000 and 1999, respectively and are reported
within "Minority interest income (expense)" in the Consolidated Statements of
Income. The Pacific preferred stock is reflected within "Minority Interest" in
the Consolidated Balance Sheets, and aggregated $2.1 billion at both December
31, 2001 and 2000.

     As of December 31, 2001, 59 thousand shares of the Pacific preferred stock
had been exchanged for 495 thousand shares of AT&T common stock. At December 31,
2001 and 2000 there were approximately 6.2 million and 6.3 million shares
outstanding, respectively.

                                        73
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Pacific has elected to exercise its right to redeem all outstanding shares
of the Pacific preferred stock, that have not been exchanged as of April 26,
2002, at a price of $102.50 per share plus accrued dividends of $0.96 per share.
The redemption price will be paid in AT&T Common Stock, up to a maximum of 52.3
million shares which were registered with the SEC in February of 2002, with any
shortfall paid in cash.

 COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF
 SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND
 RELATED WARRANTS

     On June 16, 1999, AT&T Finance Trust I (AT&T Trust), 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. Proceeds of the issuance were invested by the AT&T
Trust in junior subordinated debentures (debentures) issued by AT&T due 2029,
which represent the sole asset of the AT&T Trust.

     The quarterly preferred securities pay dividends at an annual rate of 5.0%
of the liquidation preference of fifty dollars per security, and are convertible
at any time prior to maturity into 88.016 million shares of AT&T common stock
(as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from
AT&T). The quarterly preferred securities are subject to mandatory redemption
upon repayment of the debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.

     The debentures make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the quarterly
preferred securities can be deferred by the AT&T Trust during any such
interest-payment period. If AT&T defers any interest payments, we may not, among
other things, pay any dividends on our common stock until all interest in
arrears is paid to the AT&T Trust.

     Dividends paid on the quarterly preferred securities were $250, $250 and
$135 for the years ended December 31, 2001, 2000 and 1999, respectively, and
were reported within "Minority interest income (expense)" in the Consolidated
Statements of Income.

     On June 16, 1999, AT&T also issued to Microsoft 53 million warrants, each
to purchase one share of AT&T common stock at a price of fifty-seven dollars per
share at the end of three years (as adjusted for the July 2001 split-off of AT&T
Wireless Services, Inc. from AT&T). Alternatively, the warrants are exercisable
on a cashless basis. If the warrants are not exercised on the three-year
anniversary of the closing date, the warrants expire.

     A discount on the quarterly preferred securities equal to the value of the
warrants of $306 was recognized and is being amortized over the 30-year life of
the quarterly preferred securities as a component of "Minority interest income
(expense)" in the Consolidated Statements of Income.

     In connection with the merger of Comcast and AT&T Broadband (see Note 2),
AT&T Comcast Corporation will assume the quarterly preferred securities. In
conjunction with this transaction, Microsoft Corporation has agreed to convert
these preferred securities into 115 million shares of AT&T Comcast Corporation
common stock.

  CENTAUR FUNDING CORPORATION

     Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued
three series of preferred shares prior to AT&T's acquisition of MediaOne.
Centaur was created for the principal purpose of raising capital through the
issuance of preferred shares and investing those proceeds into notes issued by
MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from
the notes are expected to be

                                        74
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Centaur's primary source of funds to make dividend and redemption payments on
the preferred shares. In addition, the dividend and certain redemption payments
on the preferred shares will be determined by reference to the dividend and
redemption activity of the preferred stock of AirTouch Communications, Inc. (ATI
Shares) held by MediaOne SPC II. Payments on the preferred shares are neither
guaranteed nor secured by MediaOne or AT&T. The assets of MediaOne SPC II, which
include the ATI shares, are available only to pay the creditors of MediaOne SPC
II. These securities remained outstanding at December 31, 2001 and 2000 as
follows:

<Table>
<Caption>
                                                                            CARRYING AMOUNT
                                                                            ---------------
                                            DIVIDEND RATE   MATURITY DATE    2001     2000
                                            -------------   -------------   ------   ------
<S>                                         <C>             <C>             <C>      <C>
Series A..................................    Variable              None    $  100   $  100
Series B..................................        9.08%      April, 2020       927      927
Series C..................................        None       April, 2020       127      118
                                                                            ------   ------
Total.....................................                                  $1,154   $1,145
                                                                            ======   ======
</Table>

     The Auction Market Preference Shares, Series A, have a liquidation value of
$250 thousand per share and dividends are payable quarterly when declared by
Centaur's board of directors out of funds legally available. The 9.08%
Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand
per share and dividends are payable quarterly in arrears when declared by
Centaur's board of directors out of funds legally available. In addition,
dividends may be declared and paid only to the extent that dividends have been
declared and paid on the ATI shares. The preference shares, Series C, have a
liquidation value of $1 thousand per share at maturity. The value of the Series
C will be accreted to reach its liquidation value upon maturity. The Series B
shares rank equally with the Series C shares as to redemption payments and upon
liquidation, and the Series B and Series C shares rank senior to the Series A
shares as to redemption payments and upon liquidation. The preference shares
issued by Centaur are reflected within "Minority interest" in the Consolidated
Balance Sheets.

     Dividends on the preferred shares were $99 for the year ended December 31,
2001 and $55 for the period ended December 31, 2000, and were included within
"Minority interest income (expense)" in the Consolidated Statements of Income.

  CONVERTIBLE PREFERRED STOCK

     On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,512 shares of a new class of AT&T preferred stock with a par value of $1 per
share; and five-year warrants to purchase the equivalent of an additional 41.7
million shares of AT&T Wireless Group tracking stock at $35 per share. The $9.8
billion of proceeds were recorded based on their relative fair values as $9.2
billion for the preferred shares, $0.3 billion for the warrants in other current
liabilities and $0.3 billion for the amortizable beneficial conversion feature.
The beneficial conversion feature represented the excess of the fair value of
the preferred shares issued over the proceeds received and were recorded in
"Additional paid-in capital" in the Consolidated Balance Sheet. Prior to the
split-off of AT&T Wireless Group, the preferred shares, convertible at NTT
DoCoMo's option, were economically equivalent to 406 million shares (a 16
percent interest) of AT&T Wireless Group tracking stock.

     On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group,
these preferred shares were converted into AT&T Wireless common stock. Upon
conversion, AT&T reduced its portion of the financial performance and economic
value in the AT&T Wireless Group by 178 million shares, and the balance of the
406 million shares came from the issuance of 228 million new shares of AT&T
Wireless common stock.

                                        75
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In 2001, included in "Dividends requirements of preferred stock" in the
Consolidated Statement of Income, was the amortization of the beneficial
conversion feature of $0.3 billion as well as dividends on the preferred shares
of $0.3 billion.

14.  FINANCIAL INSTRUMENTS

  ADOPTION OF SFAS NO. 133

     Effective January 1, 2001, AT&T adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and its corresponding amendments
under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. The adoption of SFAS No. 133 on January 1, 2001, resulted
in a pretax cumulative-effect increase to income of $1.5 billion ($0.9 billion
net-of-tax). $0.6 billion ($0.4 billion net-of-tax) and $0.9 billion ($0.5
billion net-of-tax) were attributable to AT&T Group (other than LMG) and LMG,
respectively.

  AT&T GROUP

     AT&T Group's cumulative-effect increase to net income of $0.4 billion was
attributable primarily to equity based derivative instruments embedded in
indexed debt instruments and warrants held in both public and private companies.

     Included in the after-tax cumulative effect benefit of $0.4 billion, was a
$0.2 billion benefit for the changes in the valuation of the embedded and
non-embedded net purchased options related to the indexed debt instruments and
$0.2 billion benefit for changes in the fair value of warrants.

     Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassified $9.3
billion of securities from "available-for-sale" to "trading." This
reclassification resulted in the recognition, in the income statement, of losses
previously recorded within accumulated Other Comprehensive Income (OCI). A
portion of the loss ($1.6 billion pretax; $1.0 billion net-of-tax) was recorded
as part of the cumulative effect of adoption. This loss completely offset a gain
for amounts also previously recorded within accumulated OCI on the indexed debt
obligation that had been considered a hedge of Comcast, Microsoft and Vodafone
available-for-sale securities. The reclassification of securities also resulted
in a pretax charge of $1.2 billion ($0.7 billion net-of-tax) recorded in "Other
(expense) income" in the Consolidated Statement of Income.

     In addition, the adoption of SFAS No. 133 also resulted in a pretax charge
to OCI of $10 ($6 net-of-tax) on cash flow hedges. The net derivative loss
included in OCI as of January 1, 2001 will be reclassified into earnings over
the life of the instruments, of which the last expires in February 2005.

  LMG

     LMG's cumulative-effect increase to income of $0.5 billion was attributable
primarily to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also included in the
cumulative-effect was $87 previously included in OCI related primarily to
changes in the fair value of LMG's warrants and options to purchase certain
available-for-sale securities.

  FINANCIAL INSTRUMENTS

     In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than trading.
These instruments include letters of credit, guarantees of debt, interest rate
swap agreements, foreign currency exchange contracts, option contracts, equity
contracts and warrants. Collateral is generally not required for these types of
instruments.

                                        76
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and our maximum potential loss may
exceed the amount recognized in our balance sheet. However, at December 31, 2001
and 2000, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures. We do not have any significant exposure to any individual
customer or counterparty, nor do we have any major concentration of credit risk
related to any financial instruments.

  LETTERS OF CREDIT

     Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions.
Management has determined that the Company's letters of credit do not create
additional risk to AT&T. The notional amounts outstanding at December 31, 2001
and 2000 were $696 and $833 respectively. The fair values of the letters of
credit, based on the fees paid to obtain the obligations, were immaterial at
December 31, 2001 and 2000.

  GUARANTEES OF DEBT

     From time to time, we guarantee the debt of our subsidiaries and certain
unconsolidated joint ventures. TCI, primarily before the merger, had agreed to
take certain steps to support debt compliance with respect to obligations
aggregating $1,461 at both December 31, 2001 and 2000 of certain cable
television partnerships in which TCI has a noncontrolling ownership interest.
Although there can be no assurance, management believes that it will not be
required to meet its obligations under such guarantees. Additionally, in
connection with the restructuring of AT&T in 1996, we issued guarantees for
certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR.
The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $51
at both December 31, 2001 and 2000, respectively. Total notional amounts of
guaranteed debt at December 31, 2001 and 2000 were $1,522 and $1,557,
respectively. At December 31, 2001 and 2000, there were no quoted market prices
for similar agreements.

  INTEREST RATE SWAP AGREEMENTS

     We enter into interest rate swaps, which are typically designated as either
cash flow or fair value hedges, 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 to interest rate movements.
Interest rate swaps also 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. These agreements
involve the exchange of floating-rate for fixed-rate payments or fixed-rate for
floating-rate without the exchange of the underlying principal amount.
Floating-rate payments are based on rates tied to LIBOR.

     The following table indicates the types of swaps in use at December 31,
2001 and 2000, the respective notional amounts and their weighted-average
interest rates. Average variable rates are those in effect at the reporting
date, and may change significantly over the lives of the contracts:

<Table>
<Caption>
                                                              2001    2000
                                                              -----   -----
<S>                                                           <C>     <C>
Fixed-rate to variable-rate swaps -- notional amount........  $ 500   $ 750
  Average receive rate......................................   9.68%   8.16%
  Average pay rate..........................................   4.02%   8.16%
Variable-rate to fixed-rate swaps -- notional amount........  $ 218   $ 218
  Average receive rate......................................   2.08%   6.81%
  Average pay rate..........................................   7.31%   7.31%
</Table>

                                        77
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition, we also have combined interest rate, foreign currency swap
agreements for foreign-currency-denominated debt, which hedge our risk to both
interest rate and currency movements. At December 31, 2001 and 2000 the notional
amounts related to these contracts were $3,826 and $739 respectively. The
increase is primarily related to the hedges associated with our Euro bond
offering in 2001. The notional amounts of these hedges were approximately $3,087
at December 31, 2001.

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

<Table>
<Caption>
                                                              2001                2000
                                                        -----------------   -----------------
                                                          FAIR/CARRYING       FAIR/CARRYING
                                                              VALUE               VALUE
                                                        -----------------   -----------------
                                                        ASSET   LIABILITY   ASSET   LIABILITY
                                                        -----   ---------   -----   ---------
<S>                                                     <C>     <C>         <C>     <C>
Interest rate swap agreements.........................   $26       $19       $4        $5
Combined interest rate foreign currency swap
  agreements..........................................    18        26        1         3
</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. Although we do not designate most of our foreign exchange
contracts as accounting hedges, we have certain contracts that are designated as
foreign currency cash flow hedges in accordance with SFAS No. 133. In 2001, our
foreign exchange contracts consisted principally of Canadian dollars, related to
our obligation to purchase the remaining shares of AT&T Canada (the Canadian
obligation), Euros, Japanese yen, Swiss francs, and Brazilian reais related to
debt. In 2000, our foreign exchange contracts consisted principally of Brazilian
reais and Swiss francs related to debt. In addition, we are subject to foreign
exchange risk related to other foreign-currency-denominated transactions. The
notional amounts under contract at December 31, 2001 and 2000 were $6,422 and
$71 respectively. The increase in our foreign currency contract activity was
primarily related to foreign exchange contracts entered into relating to the
commencement of a Euro commercial paper program and the Canadian obligation with
notional amounts outstanding of $5.3 billion respectively at December 31, 2001.
The following table summarizes the fair and carrying values of the foreign
exchange contracts at December 31, 2001 and 2000.

<Table>
<Caption>
                                              2001                          2000
                                        -----------------   -------------------------------------
                                          FAIR/CARRYING
                                              VALUE            FAIR VALUE        CARRYING VALUE
                                        -----------------   -----------------   -----------------
                                        ASSET   LIABILITY   ASSET   LIABILITY   ASSET   LIABILITY
                                        -----   ---------   -----   ---------   -----   ---------
<S>                                     <C>     <C>         <C>     <C>         <C>     <C>
Foreign Exchange Contracts............   $72      $299       $1        $2        $--       $1
</Table>

  EQUITY COLLARS

     In 2000, we entered into three series of option agreements (Microsoft
collars) with a single bank counterparty (counterparty) to hedge our exposure to
21.9 million shares of Microsoft common stock. These option agreements, combined
with the underlying shares, secure a floating-rate borrowing from the
counterparty, the face value of which is equal to the product of (i) the
underlying shares multiplied by (ii) the put price. (see Note 12)

     The option agreements are a series of purchased and written options that
hedge a portion of our holdings in Microsoft common stock. The Microsoft collar
is undesignated for accounting purposes in accordance with SFAS No. 133 and is
carried on our balance sheet at fair value, with unrealized gains or losses
being recorded in "Other income (expense)" in the Consolidated Statement of
Income. These unrealized gains or losses are largely offset by the changes in
the fair value of a certain number of our shares of Microsoft common stock that
are classified as "trading in accordance with SFAS No. 115." The carrying value
of the Microsoft collar

                                        78
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

was $6 and $419 at December 31, 2001 and 2000, respectively. The fluctuation of
the carrying value of the collars is primarily due to the change in the market
prices of the underlying shares, which were $66.25 per share and $43.375 per
share at December 31, 2001 and 2000, respectively and the adoption of SFAS No.
133, which required valuing the instruments at fair value rather than intrinsic
value.

     The following is a summary of the Microsoft collars outstanding at December
31, 2001:

<Table>
<Caption>
MATURITY DATE                                               2003     2004      2005
-------------                                              ------   -------   -------
<S>                                                        <C>      <C>       <C>
Put price per share......................................  $62.48   $ 62.48   $ 62.48
Call price per share.....................................   86.26    100.44    118.36
</Table>

     Since the debt and the collar are contracted with the same counterparty,
the treatment is similar to a debt instrument with an embedded instrument and
will be net settled as follows:

     At the expiration of the Microsoft collar, we will satisfy the debt and
collar net obligations under the floating-rate debt by delivering (i) a number
of Microsoft shares equal to the underlying share amount multiplied by the
exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be
calculated at expiration in the following manner:

          (a) If the fair market value of a share of Microsoft common stock is
     greater than the call price, the exchange ratio will be a fraction, the
     numerator of which is equal to the sum of (i) the put price, plus (ii) the
     excess of the fair market value of a share of Microsoft common stock over
     the call price, and the denominator of which is equal to the fair market
     value of a share of Microsoft common stock;

          (b) If the fair market value of a share of Microsoft common stock is
     less than or equal to the put price, the exchange ratio will be 1;

          (c) If the fair market value of a share of Microsoft common stock is
     less than or equal to the call price but greater than the put price, the
     exchange ratio will be a fraction, the numerator of which is equal to the
     put price, and the denominator of which is equal to the fair market value
     of a share of Microsoft common stock.

     Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne
SPC IV and MediaOne SPC VI, each entered into a series of option agreements
("Vodafone collars") with a single bank counterparty ("counterparty") to hedge
its exposure to 47.2 million Vodafone ADRs. In conjunction with the Vodafone
collars, MediaOne SPC IV and MediaOne SPC VI also issued floating-rate debt in a
series of private placements, the face value of which is equal to the product of
(i) the underlying shares multiplied by (ii) the put price. Simultaneous with
the execution of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI each
entered into floating-to-fixed interest rate swaps in which future fixed
payments were prepaid by each of MediaOne SPC IV and MediaOne SPC VI at
inception. Therefore, the on-going interest payments on the floating-rate notes
are paid by the counterparty. These prepaid interest rate swaps are designated
as cash flow hedges in accordance with SFAS No. 133.

     The option agreements are a series of purchased and written options that
hedge a portion of our holdings in Vodafone ADRs. The Vodafone collars are
undesignated for accounting purposes in accordance with SFAS No. 133 and are
carried on our balance sheet at fair value, with unrealized gains or losses
being recorded to "Other income (expense)" in the Consolidated Statement of
Income. These unrealized gains or losses are largely offset by the changes in
the fair value of a certain number of our Vodafone ADRs that are classified as
"trading". The carrying value of the Vodafone collars was $462 and $(453) at
December 31, 2001 and 2000, respectively. The fluctuation of the carrying value
of the collars is primarily due to the change in the per share market price of
the underlying ADRs, which was $25.68 per share and $35.81 per share at December
31, 2001 and 2000, respectively, and the adoption of SFAS No. 133, which
requires valuing the instruments at fair value rather than intrinsic value.

                                        79
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a summary of the Vodafone collars outstanding at December
31, 2001:

<Table>
<Caption>
                                                                  MATURITY DATE
                                                             ------------------------
MEDIAONE SPC IV VODAFONE COLLARS                              2003     2004     2005
--------------------------------                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Average put price per share................................  $34.06   $33.78   $33.53
Average call price per share...............................   49.13    48.85    48.60
</Table>

<Table>
<Caption>
                                                                  MATURITY DATE
                                                             ------------------------
MEDIAONE SPC VI VODAFONE COLLARS                              2003     2004     2005
--------------------------------                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Average put price per share................................  $39.85   $39.86   $39.86
Average call price per share...............................   57.72    57.72    57.73
</Table>

     Since the debt and the collars are contracted with different
counterparties, the instruments will be settled independently. MediaOne SPC IV
and MediaOne SPC VI will satisfy its obligations to the floating-rate debt
holders by delivering cash equal to the face value (see note 12). At the
expiration of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI will
cash settle its collars with the counterparty. Cash settlement of the Vodafone
collars will be completed in the following manner:

          a.  If the fair market value of a Vodafone ADR is greater than the
     call price, MediaOne SPC IV or MediaOne SPC VI (as appropriate) will pay a
     sum of cash equal to the excess of the fair market value of a Vodafone ADR
     over the call price;

          b.  If the fair market value of a Vodafone ADR is less than the put
     price, the counterparty will pay to MediaOne SPC IV or MediaOne SPC VI (as
     appropriate) a sum of cash equal to the excess of the put price over the
     fair market price of a Vodafone ADR;

          c.  If the fair market value of a Vodafone ADR is less than or equal
     to the call price but greater than or equal to the put price, the Vodafone
     collar will expire worthless and no cash payment will be made or received
     by MediaOne SPC IV or MediaOne SPC VI (as appropriate).

     The net value of (i) the sale of all Vodafone ADRs and (ii) the cash
settlement of the Vodafone collars will always be equal to or greater than the
face value of the floating-rate notes. Any remaining cash will be retained by
MediaOne SPC IV and MediaOne SPC VI and would become available to AT&T for
general corporate purposes.

  EQUITY OPTION AND EQUITY SWAP CONTRACTS

     We enter into equity option and equity swap contracts, which are
undesignated in accordance with SFAS No. 133, to manage our exposure to changes
in equity prices associated with stock appreciation rights of previously
affiliated companies. The notional amounts outstanding on these contracts at
December 31, 2001 and 2000 were $360 and $392 million, respectively. The
following table summarizes the carrying and fair values of these instruments.
Market prices are based on market quotes.

<Table>
<Caption>
                                                              2001                2000
                                                        -----------------   -----------------
                                                          CARRYING/FAIR       CARRYING/FAIR
                                                              VALUE               VALUE
                                                        -----------------   -----------------
                                                        ASSET   LIABILITY   ASSET   LIABILITY
                                                        -----   ---------   -----   ---------
<S>                                                     <C>     <C>         <C>     <C>
Equity hedges.........................................   $--       $85       $2       $100
</Table>

  WARRANTS

     We may obtain warrants to purchase equity securities in other private and
public companies as a result of certain transactions. Private warrants and
public warrants that provide for net share settlement (i.e. allow for

                                        80
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cashless exercise) are considered to be derivative instruments and recognized on
our balance sheet at fair value (in accordance with SFAS No. 133). Warrants are
not eligible to be designated as hedging instruments because there is no
underlying exposure. Instead, these are effectively investments in private and
public companies. The fair value of these warrants was $41 at December 31, 2001.

  DEBT AND PREFERRED SECURITIES

     The carrying value of debt maturing within one year approximates market
value. The table below summarizes the carrying and fair values of long-term
debt, excluding capital leases, and certain preferred securities. The market
values of long-term debt were obtained based on quotes or rates available to us
for debt with similar terms and maturities, and the market value of the
preferred securities was based on market quotes. It is not practicable to
estimate the fair market value of our quarterly preferred securities that
aggregated $4,720 and $4,710 at December 31, 2001 and 2000, respectively as
there are no current market quotes available on this private placement.

<Table>
<Caption>
                                                     2001                          2000
                                          ---------------------------   ---------------------------
                                          CARRYING VALUE   FAIR VALUE   CARRYING VALUE   FAIR VALUE
                                          --------------   ----------   --------------   ----------
<S>                                       <C>              <C>          <C>              <C>
Long-term Debt, excluding capital
  leases................................     $43,978        $41,845        $32,591        $29,735
Pacific preferred stock.................       2,100            948          2,121            595
</Table>

  DERIVATIVE IMPACTS

     For the year ended December 31, 2001, "Other comprehensive income", as a
component of shareowners' equity, net of tax, included deferred net unrealized
losses of $244 relating to derivatives that are designated as cash flow hedges.
This amount included net losses of $166 related to the ongoing fair value
adjustments of equity based derivative instruments embedded in certain debt
instruments, net losses of $78 related to certain swaps and foreign currency
transactions.

     For the year ended December 31, 2001, "Other (expense) income" in the
Consolidated Statement of Income, included net gains of $1,328, relating to
ongoing fair value adjustments of undesignated derivatives and derivatives
designated as fair value hedges. The fair value adjustments included net gains
of $1,247 for equity based derivative instruments related to certain debt
instruments, net gains of $81 for changes in the fair value of warrants, swaps
and foreign currency transactions. These gains were offset by the ongoing
mark-to-market adjustments of the "trading" securities underlying the
monetizations of $(983).

15.  PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS

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

                                        81
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table shows the components of the net periodic benefit costs
included in our Consolidated Statements of Income:

<Table>
<Caption>
                                            PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                       ---------------------------   ------------------------
                                                  FOR THE YEARS ENDED DECEMBER 31,
                                       ------------------------------------------------------
                                        2001      2000      1999      2001     2000     1999
                                       -------   -------   -------   ------   ------   ------
<S>                                    <C>       <C>       <C>       <C>      <C>      <C>
Service cost benefits earned during
  the period.........................  $   257   $   248   $   247   $  27    $  35    $  54
Interest cost on benefit
  obligations........................      951       991       919     346      352      324
Amortization of unrecognized prior
  service cost.......................      172       174       159       4        4       13
Credit for expected return on plan
  assets.............................   (1,660)   (1,821)   (1,458)   (201)    (230)    (200)
Amortization of transition asset.....      (89)     (156)     (158)     --       --       --
Amortization of gains................     (181)     (332)      (10)     --      (16)      (1)
Charges for special termination
  benefits*..........................      188        --        --      28       16        5
Net curtailment losses (gains)*......      112       121        --      58      (14)      --
Net settlement losses (gains)*.......        4         8      (121)     --       --       --
                                       -------   -------   -------   -----    -----    -----
Net periodic benefit (credit)cost....  $  (246)  $  (767)  $  (422)  $ 262    $ 147    $ 195
                                       =======   =======   =======   =====    =====    =====
</Table>

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

* Primarily included in "Net restructuring and other charges" in the
  Consolidated Statements of Income.

     In connection with our restructuring plan announced in the fourth quarter
of 2001 we recorded a $188 charge related to management employee separation
benefits expected to be funded by assets of the AT&T Management Pension Plan. We
also recorded pension and postretirement benefit curtailment charges of $170 and
a $28 charge related to expanded eligibility for postretirement benefits for
certain employees expected to exit under the plan.

     In 1998 we offered a voluntary retirement incentive program (VRIP) to
employees who were eligible participants in the AT&T Management Pension Plan.
Approximately 15,300 management employees accepted the VRIP offer and had
terminated employment as of December 31, 1999. The VRIP permitted employees to
choose either a total lump-sum distribution of their pension benefits or
periodic future annuity payments. Lump-sum pension settlements resulted in
settlement gains of $121 recorded in 1999.

                                        82
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                PENSION BENEFITS    POSTRETIREMENT BENEFITS
                                                -----------------   ------------------------
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                --------------------------------------------
                                                 2001      2000        2001          2000
                                                -------   -------   ----------    ----------
<S>                                             <C>       <C>       <C>           <C>
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year.........  $13,063   $12,868    $ 4,886       $ 4,642
Service cost..................................      257       248         27            35
Interest cost.................................      951       991        346           352
Plan amendments...............................       62        32         --           (45)
Actuarial losses (gains)......................      655         5        376           203
Acquisition...................................       --       204         --            38
Benefit payments..............................   (1,117)   (1,228)      (407)         (362)
Special termination benefits..................      188        --         28            16
Settlements...................................      (17)      (57)        --            --
Curtailment losses............................       (7)       --         60             7
                                                -------   -------    -------       -------
Benefit obligation, end of year...............  $14,035   $13,063    $ 5,316       $ 4,886
                                                =======   =======    =======       =======
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of
  year........................................  $21,203   $21,854    $ 2,526       $ 2,852
Actual return on plan assets..................   (1,650)      335       (214)         (128)
Employer contributions........................       66        94        255           159
Acquisition...................................       --       205         --             5
Benefit payments..............................   (1,117)   (1,228)      (407)         (362)
Settlements...................................      (17)      (57)        --            --
                                                -------   -------    -------       -------
Fair value of plan assets, end of year........  $18,485   $21,203    $ 2,160       $ 2,526
                                                =======   =======    =======       =======
At December 31,
Funded (unfunded) benefit obligation..........  $ 4,450   $ 7,992    $(3,156)      $(2,360)
Unrecognized net (gain) loss..................   (2,506)   (6,493)       605          (188)
Unrecognized transition asset.................      (34)     (123)        --            --
Unrecognized prior service cost...............      883     1,100        (12)           (9)
                                                -------   -------    -------       -------
Net amount recorded...........................  $ 2,793   $ 2,476    $(2,563)      $(2,557)
                                                =======   =======    =======       =======
</Table>

     At December 31, 2001, our pension plan assets included $31 of AT&T common
stock. At December 31, 2000, our pension plan assets included $34 of AT&T common
stock and $26 of LMG Series A common stock, and $2 of AT&T Wireless Group common
stock.

                                        83
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           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,
                                                  --------------------------------------------
                                                   2001      2000        2001          2000
                                                  -------   -------   ----------    ----------
<S>                                               <C>       <C>       <C>           <C>
Prepaid pension cost............................  $3,337    $3,003     $    --       $    --
Benefit related liabilities.....................    (648)     (579)     (2,563)       (2,557)
Intangible asset................................      50        30          --            --
Accumulated other comprehensive income..........      54        22          --            --
                                                  ------    ------     -------       -------
Net amount recorded.............................  $2,793    $2,476     $(2,563)      $(2,557)
                                                  ======    ======     =======       =======
</Table>

     Our nonqualified pension plans had an unfunded accumulated benefit
obligation of $132 and $125 at December 31, 2001 and 2000, respectively. On
January 1, 2001 our postretirement health and life benefit plans were merged
into one plan. At December 31, 2000, our postretirement health and telephone
benefit plans had accumulated postretirement benefit obligations of $4,282,
which were in excess of plan assets of $1,413.

     The assumptions in the following table were used in the measurement of the
pension and postretirement benefit obligations and the net periodic benefit
costs as applicable.

<Table>
<Caption>
                                                               WEIGHTED-AVERAGE
                                                                 ASSUMPTIONS
                                                               AT DECEMBER 31:
                                                              ------------------
                                                              2001   2000   1999
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Discount rate...............................................  7.25%  7.5%   7.75%
Expected return on plan assets..............................   9.5%  9.5%    9.5%
Rate of compensation increase...............................   4.5%  4.5%    4.5%
</Table>

     We assumed a rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) of 9.5%. This rate was assumed to
gradually decline after 2001 to 5.0% by 2012 and then remain level. 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 rate would increase or decrease the total of the
service and interest-cost components of net periodic postretirement health-care
benefit cost by $11 and $10, respectively, and would increase or decrease the
health-care component of the accumulated postretirement benefit obligation by
$155 and $135, respectively.

     We also sponsor savings plans for the majority of our 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. Our contributions amounted to $185 in 2001,
$220 in 2000 and $197 in 1999.

16.  STOCK-BASED COMPENSATION PLANS

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

     Under the initial terms of the Program, there were 150 million shares of
AT&T common stock available for grant with a maximum of 22.5 million common
shares that could be used for awards other than stock options. Subsequent to the
1999 modification, beginning with January 1, 2000, the remaining shares
available for grant at December 31 of the prior year, plus 1.75% of the shares
of AT&T common stock outstanding on January 1 of each year, become available for
grant. Under the amended terms, a maximum of 37.5 million

                                        84
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares can be used for awards other than stock options. As a result of the
equity restructuring of stock options and other awards in connection with the
AT&T Wireless split-off, the number of shares available for stock option grants
and the number of shares available for other stock-based awards increased by
17.7 million and 2.9 million, respectively. The exercise price of any stock
option is equal to the stock price when the option is granted. Generally, the
options vest over three or four years and are exercisable up to 10 years from
the date of grant.

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

     On April 27, 2000, AT&T created a new class of stock and completed an
offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the
outstanding AT&T Wireless Group shares became available for grant with a maximum
of 1.25% of the outstanding shares that could be used for awards other than
options. On January 1, 2001, the remaining AT&T Wireless Group shares available
for grant at December 31, 2000, plus 2% of the outstanding AT&T Wireless Group
shares on January 1 became available for grant. The exercise price of any stock
option was equal to the stock price when the option was granted. When granted,
the options had a two to three and one-half year vesting period. They are
exercisable up to 10 years from the date of grant. In 2001 and 2000, there were
no grants of awards other than stock options. On April 27, 2000, substantially
all employees were granted AT&T Wireless Group tracking stock options.

     On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis, and AT&T
Wireless common stock held by AT&T was distributed to AT&T common shareowners on
a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding.
All outstanding AT&T Wireless Group tracking stock options and all AT&T common
stock options granted prior to January 1, 2001 were treated in a similar manner.
AT&T modified the terms and conditions of all outstanding stock option grants to
allow the AT&T Wireless common stock options held by AT&T employees to
immediately vest and become exercisable for their remaining contractual term and
to also allow the AT&T common stock options held by AT&T Wireless employees to
immediately vest and become exercisable for their remaining contractual term. In
2001, AT&T recognized $3 of compensation expense related to these modifications.

     Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, and amended on May 23, 2001, we are authorized to sell
up to 105 million shares of AT&T common stock to our eligible employees through
June 30, 2006. Under the terms of the Plan, 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 Plan, we sold
approximately 6 million shares to employees in both 2001 and 2000 and 3 million
shares to employees in 1999.

     We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for our plans. Accordingly, no
compensation expense has been recognized for our stock-based compensation plans
other than for our performance-based and restricted stock awards and stock
appreciation rights (SARs). Stock based-compensation (expense) income was
$(121), $253 and $(462) in 2001, 2000 and 1999, respectively. These amounts
included (expense) income of $(3), $269 and $(382) in 2001, 2000 and 1999,
respectively, related to grants of SARs of affiliated companies held by certain
employees subsequent to the TCI merger. We also entered into an equity hedge in
1999 to offset potential future compensation costs associated with these SARs.
(Expense) income related to this hedge was $(16), $(324) and $227 in 2001, 2000
and 1999, respectively.

                                        85
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the AT&T common stock option transactions is shown below:

<Table>
<Caption>
                                      WEIGHTED-             WEIGHTED-             WEIGHTED-
                                       AVERAGE               AVERAGE               AVERAGE
                                      EXERCISE              EXERCISE              EXERCISE
                             2001       PRICE      2000       PRICE      1999       PRICE
                            -------   ---------   -------   ---------   -------   ---------
                                                  SHARES IN THOUSANDS
<S>                         <C>       <C>         <C>       <C>         <C>       <C>
Outstanding at January
  1.......................  249,026    $35.82     168,763    $37.42     131,904    $30.41
Options assumed in
  mergers.................       --                29,613    $24.71      11,770    $14.79
Options granted...........   68,402    $22.17      74,570    $36.12      47,927    $57.13
AT&T Wireless split-off
  adjustments.............   21,644
Options and SARs
  exercised...............   (5,218)   $11.63     (11,446)   $22.07     (17,858)   $22.87
Options canceled or
  forfeited...............  (16,308)   $31.07     (12,474)   $45.61      (4,980)   $42.44
AT DECEMBER 31:
Options outstanding.......  317,546    $24.58     249,026    $35.82     168,763    $37.42
Options exercisable.......  171,446    $26.05     131,450    $30.44      57,894    $28.21
Shares available for
  grant...................   34,718                34,204                41,347
</Table>

     The weighted average exercise prices for the period prior to the AT&T
Wireless split-off in 2001, and for the years ended December 31, 2000 and 1999
have not been adjusted to reflect the impact of the split-off.

     At December 31, 2001, there were 4.5 million AT&T stock options with 2.2
million tandem SARs outstanding that were originally assumed in connection with
our merger with MediaOne. All of the SARs were exercisable at a price of $19.33.
There were no SARs exercised during 2001 or 2000.

                                        86
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2001:

<Table>
<Caption>
                                       OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                             ----------------------------------------   --------------------------
                                               WEIGHTED-
                                 NUMBER         AVERAGE     WEIGHTED-       NUMBER       WEIGHTED-
                             OUTSTANDING AT    REMAINING     AVERAGE    EXERCISABLE AT    AVERAGE
                              DECEMBER 31,    CONTRACTUAL   EXERCISE     DECEMBER 31,    EXERCISE
RANGE OF EXERCISE PRICES          2001           LIFE         PRICE          2001          PRICE
------------------------     --------------   -----------   ---------   --------------   ---------
                             (IN THOUSANDS)                             (IN THOUSANDS)
<S>                          <C>              <C>           <C>         <C>              <C>
$2.03 -- $13.65............      16,245           4.9        $ 7.90         15,767        $ 7.75
$13.70 -- $16.77...........      12,968           8.6        $15.84          3,882        $15.38
$16.85 -- $17.33...........      28,866           9.4        $16.86          1,319        $16.95
$17.39.....................      48,088           9.2        $17.39          2,907        $17.39
$17.44 -- $18.49...........      11,193           5.3        $17.88          7,312        $17.78
$18.50.....................      14,420           5.6        $18.50         14,420        $18.50
$18.53 -- $19.77...........       9,325           5.7        $19.12          8,159        $19.11
$19.79.....................      15,858           5.1        $19.79         15,858        $19.79
$19.88 -- $24.13...........      19,659           5.8        $22.88         14,768        $22.83
$24.23.....................      25,088           8.6        $24.23          6,287        $24.23
$24.30 -- $31.74...........      24,575           7.4        $27.98         17,337        $28.89
$31.79.....................      23,874           6.1        $31.79         23,874        $31.79
$31.85 -- $34.30...........      19,406           8.1        $34.16          7,372        $34.00
$34.33 -- $44.98...........      22,925           7.7        $38.80         16,105        $38.42
$45.20 -- $46.90...........      25,056           7.1        $45.21         16,079        $45.21
                                -------                                    -------
                                317,546           7.4        $24.58        171,446        $26.05
</Table>

     A summary of the AT&T Wireless Group tracking stock option transactions is
shown below:

<Table>
<Caption>
                                                          WEIGHTED-            WEIGHTED-
                                                           AVERAGE              AVERAGE
                                                          EXERCISE             EXERCISE
                                                 2001       PRICE      2000      PRICE
                                                -------   ---------   ------   ---------
                                                          SHARES IN THOUSANDS
<S>                                             <C>       <C>         <C>      <C>
OUTSTANDING AT JANUARY 1......................   73,626    $29.29         --    $   --
Options granted...............................    4,037    $22.57     76,983    $29.29
Options exercised.............................       (1)   $22.03         --    $   --
Options canceled or forfeited.................   (2,711)   $29.11     (3,357)   $29.43
Options assumed by AT&T Wireless on July
  9th.........................................  (74,951)

AT DECEMBER 31:
Options outstanding...........................       --               73,626    $29.29
Options exercisable...........................       --               12,391    $29.48
Shares available for grant....................       --               41,874
</Table>

     AT&T has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". If AT&T had elected to recognize
compensation costs based on the fair value at the date of

                                        87
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

grant of the awards, consistent with the provisions of SFAS No. 123, net income
and earnings per share amounts would have been as follows:

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                             2001      2000     1999
                                                            -------   ------   ------
<S>                                                         <C>       <C>      <C>
AT&T COMMON STOCK GROUP:
(Loss) income from continuing operations available to
  common shareowners......................................  $(5,423)  $2,342   $5,685
Income (loss) from discontinued operations................       58      283     (492)
Gain on sale of discontinued operations...................   13,503       --       --
Cumulative effect of accounting change....................      359       --       --
Net income available to common shareowners................  $ 8,497   $2,625   $5,193
(LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON
  SHARE -- BASIC:
Continuing operations.....................................  $ (1.48)  $ 0.67   $ 1.84
Discontinued operations...................................     0.01     0.08    (0.16)
Gain on sale of discontinued operations...................     3.70       --       --
Cumulative effect of accounting change....................     0.10       --       --
AT&T Common Stock Group earnings..........................     2.33   $ 0.75   $ 1.68
(LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON
  SHARE -- DILUTED:
Continuing operations.....................................  $ (1.48)  $ 0.66   $ 1.80
Discontinued operations...................................     0.01     0.08    (0.15)
Gain on sale of discontinued operations...................     3.70       --       --
Cumulative effect of accounting change....................     0.10       --       --
AT&T Common Stock Group earnings..........................     2.33   $ 0.74   $ 1.65
AT&T WIRELESS GROUP:
Income....................................................  $    18   $   51   $   --
EARNINGS PER SHARE:
Basic and diluted.........................................  $  0.04   $ 0.14   $   --
</Table>

     The pro forma effect on net loss from continuing operations available to
AT&T common shareowners for 2001 includes an expense of $50 due to the
conversion of AT&T common stock options in connection with the split-off of AT&T
Wireless, and also includes an expense of $175 due to the accelerated vesting of
AT&T Wireless stock options held by AT&T employees after the split-off.

     The weighted-average fair values at date of grant for AT&T common stock
options granted during 2001, 2000 and 1999 were $7.90, $12.10 and $15.64,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2001, 2000 and 1999
were 4.61%, 6.29% and 5.10%, respectively. The following assumptions were
applied for 2001, 2000 and 1999, respectively: (i) expected dividend yields of
..85%, 1.6% and 1.7%, (ii) expected volatility rates of 36.9%, 33.5% and 28.3%
and (iii) expected lives of 4.7 years in 2001 and 2000 and 4.5 years in 1999.

     The weighted-average fair values at date of grant for AT&T Wireless Group
tracking stock options granted during 2001 and 2000 were $11.58 and $14.20,
respectively, and were estimated using the Black-Scholes option-pricing model.
The following weighted-average assumptions were applied for 2001 and 2000,

                                        88
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively: (i) risk-free rate of 4.92% and 6.53%, (ii) expected volatility
rate of 55.0% in 2001 and 2000 and (iii) expected lives of 4.8 years and 3.9
years.

     In January 2002, AT&T modified its outstanding stock option agreements for
AT&T stock options and other equity awards held by current AT&T Broadband
employees to provide that upon the change in control of AT&T Broadband their
stock options and other equity awards granted prior to January 1, 2002 will be
immediately vested and exercisable through their remaining contractual term. The
potential compensation cost associated with this modification for current AT&T
Broadband employees has been measured as of the modification date and is
approximately $50 pretax. The actual charge will be finalized and recorded by
AT&T Broadband at the time of the change in control in connection with the
anticipated merger with Comcast.

17.  INCOME TAXES

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

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                             2001      2000     1999
                                                            -------   ------   ------
<S>                                                         <C>       <C>      <C>
U.S. federal statutory income tax rate....................       35%      35%      35%
Federal income tax (benefit) provision at statutory
  rate....................................................  $  (362)  $  845   $3,774
Amortization of investment tax credits....................      (18)     (23)     (10)
State and local income tax (benefit) provision, net of
  federal income tax provision (benefit) effect...........      (92)     176      279
In-process research and development write-off.............       --       --      208
Amortization of intangibles...............................      188       91       26
Foreign rate differential.................................      209      104       56
Taxes on repatriated and accumulated foreign income, net
  of tax credits..........................................      (84)     (84)     (45)
Research and other credits................................      (43)     (37)     (61)
Valuation allowance.......................................       --       --      (76)
Investment dispositions, acquisitions and legal entity
  restructurings..........................................     (176)    (445)     (94)
Operating losses and charges relating to Excite@Home......      649    2,757       --
Deconsolidation of and put obligation settlement related
  to Excite@Home..........................................   (1,045)      --       --
Other differences, net....................................      (17)    (100)     (41)
                                                            -------   ------   ------
(Benefit) provision for income taxes......................  $  (791)  $3,284   $4,016
Effective income (benefit) tax rate.......................     76.4%   136.1%    37.3%
</Table>

                                        89
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           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 this table:

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2001        2000       1999
                                                           ---------   --------   ---------
<S>                                                        <C>         <C>        <C>
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
  TAXES
  United States..........................................   $(1,030)    $2,823     $10,449
  Foreign................................................        (5)      (409)        332
                                                            -------     ------     -------
  Total..................................................   $(1,035)    $2,414     $10,781
(BENEFIT) PROVISION FOR INCOME TAXES
CURRENT
  Federal................................................   $ 1,392     $2,323     $ 2,896
  State and local........................................       152        281         417
  Foreign................................................       102         89         100
                                                            -------     ------     -------
                                                              1,646      2,693       3,413
DEFERRED
  Federal................................................    (2,125)       633         593
  State and local........................................      (293)       (14)         12
  Foreign................................................        (1)        (5)          8
                                                            -------     ------     -------
                                                             (2,419)       614         613
Deferred investment tax credits..........................       (18)       (23)        (10)
                                                            -------     ------     -------
(Benefit) provision for income taxes.....................   $  (791)    $3,284     $ 4,016
</Table>

     In addition, we also recorded current and deferred income tax benefits
related to minority interest income (expense) and net equity losses related to
other equity investments, respectively in the amounts of $756 and $2,383 in
2001, $279 and $251 in 2000 and $273 and $249 in 1999, respectively.

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

                                        90
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred income tax liabilities and assets consist of the following:

<Table>
<Caption>
                                                               AT DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
LONG-TERM DEFERRED INCOME TAX LIABILITIES
  Property, plant and equipment.............................  $ 6,420   $ 5,393
  Investments...............................................    7,768     9,558
  Franchise costs...........................................   16,839    18,571
  Other.....................................................    2,519     2,694
                                                              -------   -------
  Total long-term deferred income tax liabilities...........   33,546    36,216
LONG-TERM DEFERRED INCOME TAX ASSETS
  Business restructuring....................................      163       127
  Net operating loss/credit carryforwards...................      180       602
  Employee pensions and other benefits, net.................    1,027     1,470
  Reserves and allowances...................................    1,724        99
  Other.....................................................    2,349     2,604
  Valuation allowance.......................................      (57)     (740)
                                                              -------   -------
Total net long-term deferred income tax assets..............    5,386     4,162
Net long-term deferred income tax liabilities...............  $28,160   $32,054
CURRENT DEFERRED INCOME TAX LIABILITIES
  Investments...............................................  $    11   $   670
  Other.....................................................      121       310
                                                              -------   -------
  Total current deferred income tax liabilities.............      132       980
CURRENT DEFERRED INCOME TAX ASSETS
  Business restructuring....................................      216       155
  Employee pensions and other benefits......................      182       377
  Reserves and allowances...................................      493       621
  Other.....................................................      471       586
  Valuation allowance.......................................       (0)      (39)
                                                              -------   -------
Total net current deferred income tax assets................    1,362     1,700
Net current deferred income tax assets......................  $ 1,230   $   720
</Table>

     At December 31, 2001, we had net operating loss carryforwards (tax
effected) for federal and state income tax purposes of $15 and $116,
respectively, expiring through 2020. In addition, we had federal tax credit
carryforwards of $17, of which $1 has no expiration date and $16 expire through
2003. We also had state tax credit carryforwards (tax effected) of $32 expiring
through 2003. In connection with the TCI and MediaOne mergers, we acquired
certain federal and state net operating loss carryforwards that are subject to a
valuation allowance of $23 at December 31, 2001. If in the future, the
realization of these acquired deferred tax assets becomes more likely than not,
any reduction of the associated valuation allowance will be allocated to reduce
franchise costs and other intangibles.

     On September 30, 2001, the assets and liabilities of Excite@Home were
deconsolidated from AT&T's consolidated balance sheet. Accordingly, AT&T's
deferred income tax assets and liabilities at December 31, 2001, presented
above, exclude any amounts related to Excite@Home.

                                        91
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18.  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, 2001. These matters could
affect the operating results of any one quarter when resolved in future periods.
However, we believe 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 statements.

     We lease land, buildings and equipment through contracts that expire in
various years through 2050. Our rental expense under operating leases was $696
in 2001, $705 in 2000 and $622 in 1999. The total of minimum rentals to be
received in the future under non-cancelable operating subleases as of December
31, 2001, was $189.

     The following table shows our future minimum commitments due under
non-cancelable operating and capital leases at December 31, 2001:

<Table>
<Caption>
                                                              OPERATING   CAPITAL
                                                               LEASES     LEASES
                                                              ---------   -------
<S>                                                           <C>         <C>
2002........................................................   $  550      $ 66
2003........................................................      492        63
2004........................................................      432        60
2005........................................................      350        58
2006........................................................      298        44
Later years.................................................      874       131
                                                               ------      ----
Total minimum lease payments................................   $2,996      $422
                                                               ======      ====
Less: Amount representing interest..........................                 95
                                                                           ----
Present value of net minimum lease payments.................               $327
                                                                           ====
</Table>

     In addition, under certain real estate operating leases, we could be
required to make payments to the lessor up to $586 at the end of the lease term
(lease terms range from 2002 through 2011). The actual amount paid, if any,
would be reduced by amounts received by the lessor upon remarketing of the
property.

     AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.6
million digital set-top devices at an average price of $234 per unit in 2002.
During 2001, AT&T satisfied its obligation under a previous agreement with
Motorola, Inc. to purchase set-top devices.

     AT&T has certain commitments relating to AT&T Canada (see Note 5).

     In 1997, AT&T Broadband's predecessor, TCI, entered into a 25-year
affiliation term sheet with Starz Encore Group pursuant to which AT&T may be
obligated to pay fixed monthly amounts in exchange for unlimited access to all
of the existing Encore and STARZ! programming. Starz Encore Group is a
subsidiary of LMG. The future commitment, which is calculated based on a fixed
number of subscribers, increases annually from $306 in 2002 to $315 in 2003 and
will increase annually through 2022 with inflation, subject to certain
adjustments, including increases in the number of subscribers. The affiliation
term sheet further provides that to the extent Starz Encore Group's programming
costs increase above certain levels, AT&T's payments under the term sheet will
be increased in proportion to the excess. Excess programming costs that may be
payable by AT&T in future years are not presently estimable and could be
significant. By letter dated May 29, 2001, AT&T Broadband indicated that in its
view the Starz Encore term sheet as a whole is

                                        92
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unenforceable and reserved its right to terminate the term sheet. Starz Encore
subsequently initiated a lawsuit against AT&T Broadband seeking a declaration
that the term sheet is a binding and enforceable contract.

     AT&T has contractual obligations to utilize network facilities from local
exchange carriers with terms greater than one year. These contracts are based on
volumes and have penalty fees if certain volume levels are not met. We assessed
our minimum exposure based on penalties to exit the contracts. At December 31,
2001, penalties to exit these contracts in any given year totaled approximately
$1.5 billion.

     AT&T Broadband is party to an agreement under which it purchases certain
billing services from CSG Systems, Inc. ("CSG"). Unless terminated by either
party pursuant to terms of the agreement, the agreement expires on December 31,
2012. The agreement calls for monthly payments which are subject to adjustments
and conditions pursuant to the terms of the underlying agreements. The annual
commitment under the agreement is $130 for 2002 and will increase annually with
inflation.

19.  RELATED PARTY TRANSACTIONS

     AT&T has various related party transactions with Concert.

     Included in "Revenue" in the Consolidated Statements of Income was $1,080
for services provided to Concert for the years ended December 31, 2001 and 2000.

     Included in "Access and other connection" in the Consolidated Statements of
Income are charges from Concert representing costs incurred on our behalf to
connect calls made to foreign countries (international settlements) and costs
paid by AT&T to Concert for distributing Concert products totaling $2,073 and
$2,364 for the year ended December 31, 2001 and 2000, respectively.

     AT&T loaned $1,000 to Concert; that loan was included within "Other
investments and related advances" in the Consolidated Balance Sheet. Interest
income of $67 was recognized for the year ended December 31, 2000. This loan
together with the associated accrued interest was written off in connection with
the decision to unwind Concert (see Note 5).

     At December 31, 2001 and 2000, AT&T had a floating rate loan payable to
Concert in the amount of $80 and $126, respectively. The loan, which is due on
demand, is included in "Debt maturing within one year" in the Consolidated
Balance Sheets. Interest expense was $3 and $6 for the year ended December 31,
2001 and 2000, respectively.

     Included in "Accounts receivable" in the Consolidated Balance Sheets at
December 31, 2001 and 2000, was $438 and $462, respectively, related to
telecommunications transactions with Concert. Included in "Accounts payable" in
the Consolidated Balance Sheets at December 31, 2001 and 2000, was $201 and
$518, respectively, related to transactions with Concert.

     Included in "Other receivables" in the Consolidated Balance Sheets at
December 31, 2001 and 2000, was $781 and $1,106, respectively, related to
administrative transactions performed on behalf of Concert. Included in "Other
current liabilities" in the Consolidated Balance Sheets at December 31, 2001 and
2000, was $935 and $1,032, respectively, related to administrative transactions
performed on behalf of Concert.

     We had various related party transactions with LMG. Included in costs of
services and products were programming expenses related to services from LMG.
These expenses amounted to $199 for the 7 months ended July 31, 2001, the
effective split-off date of LMG for accounting purposes, $239 for the year ended
December 31, 2000, and $184 for the 10 months ended December 31, 1999 (see Note
9).

20.  SEGMENT REPORTING

     AT&T's results are segmented according to the way we manage our business:
AT&T Business Services, AT&T Consumer Services and AT&T Broadband.
                                        93
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     AT&T Business Services includes long distance, international and toll-free
voice, local, data and Internet protocol (IP) networking, managed networking
services and outsourcing solutions, and wholesale transport services (sales of
services to service resellers).

     AT&T Consumer Services provides a variety of communications services to
residential customers, including domestic and international long distance,
transaction based long distance, such as operator-assisted and prepaid phone
cards, local and local toll (intrastate calls outside the immediate local area)
and dial-up Internet.

     AT&T Broadband offers a variety of services through our cable (broadband)
network, including traditional analog video and advanced services such as
digital video, high-speed data and broadband telephony.

     The balance of AT&T's continuing operations (excluding LMG) is included in
a "Corporate and Other" group. This group reflects corporate staff functions and
the elimination of transactions between segments, as well as the impacts of
Excite@Home. In addition, all impacts of the adoption of SFAS No. 133 as well as
the ongoing investment and derivative revaluations are reflected in the
Corporate and Other group. LMG was not an operating segment of AT&T prior to its
split-off from AT&T because AT&T did not have a controlling financial interest
in LMG for financial accounting purposes. Therefore, we accounted for this
investment under the equity method. Additionally, LMG's results were not
reviewed by the chief operating decision-makers for purposes of determining
resources to be allocated.

     Total assets for our reportable segments generally include all assets,
except intercompany receivables. AT&T prepaid pension assets and Corporate-owned
or leased real estate are held at the corporate level and therefore, are
included in the Corporate and Other group. AT&T Broadband and MediaOne prepaid
pension assets and owned or leased real estate is included in the AT&T Broadband
segment. In addition, as the "Net Assets of Discontinued Operations" is not
considered to be a part of AT&T's ongoing operations, it is included in a
category separate from reportable segments and Corporate and Other group for
reporting purposes. Capital additions for each segment include capital
expenditures for property, plant and equipment, additions to nonconsolidated
investments, increases in franchise costs and additions to internal-use
software.

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). AT&T evaluates
performance based on several factors, of which the primary financial measure is
earnings before interest and taxes, including pretax minority interest and net
pretax losses from other equity investments (EBIT).

     Generally, AT&T accounts for AT&T Business Services' and AT&T Broadband's
Inter-segment transactions at market prices.

                                        94
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  REVENUE

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
AT&T Business Services external revenue.................   $27,284     $28,157     $28,087
  AT&T Business Services internal revenue...............       740         743         605
                                                           -------     -------     -------
Total AT&T Business Services revenue....................    28,024      28,900      28,692
AT&T Consumer Services external revenue.................    15,079      18,894      21,753
  AT&T Broadband external revenue.......................     9,785       8,212       5,069
  AT&T Broadband internal revenue.......................        14          14           1
                                                           -------     -------     -------
Total AT&T Broadband revenue............................     9,799       8,226       5,070
                                                           -------     -------     -------
     Total reportable segments..........................    52,902      56,020      55,515
Corporate and Other(1)..................................      (352)       (487)       (542)
                                                           -------     -------     -------
Total revenue...........................................   $52,550     $55,533     $54,973
                                                           =======     =======     =======
</Table>

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

(1) Includes $418, $248 and $10 related to Excite@Home in 2001, 2000 and 1999,
    respectively.

  DEPRECIATION AND AMORTIZATION(1)

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2001     2000     1999
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
AT&T Business Services.....................................  $4,215   $4,220   $4,219
AT&T Consumer Services.....................................     200      167      184
AT&T Broadband.............................................   4,376    3,063    1,636
                                                             ------   ------   ------
     Total reportable segments.............................   8,791    7,450    6,039
Corporate and Other(2).....................................     547    1,139      155
                                                             ------   ------   ------
Total depreciation and amortization........................  $9,338   $8,589   $6,194
                                                             ======   ======   ======
</Table>

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

(1) Includes the amortization of goodwill, franchise costs and other purchased
    intangibles.

(2) Includes $404, $991 and $38 related to Excite@Home in 2001, 2000 and 1999,
    respectively.

  (LOSSES) EARNINGS RELATED TO OTHER EQUITY INVESTMENTS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                             -----------------------
                                                              2001     2000    1999
                                                             -------   -----   -----
<S>                                                          <C>       <C>     <C>
AT&T Business Services.....................................  $(3,978)  $  35   $ (72)
AT&T Broadband.............................................      (40)   (215)   (396)
                                                             -------   -----   -----
     Total reportable segments.............................   (4,018)   (180)   (468)
Corporate and Other(1).....................................     (832)   (408)   (288)
                                                             -------   -----   -----
Total net losses related to other equity investments.......  $(4,850)  $(588)  $(756)
                                                             =======   =====   =====
</Table>

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

(1) Includes $(29), $(382) and $(311) related to Excite@Home in 2001, 2000 and
    1999, respectively.

                                        95
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 RECONCILIATION OF EBIT TO INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
 TAXES, MINORITY INTEREST AND LOSSES RELATED TO OTHER EQUITY INVESTMENTS

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2001        2000        1999
                                                          ---------   ---------   ---------
<S>                                                       <C>         <C>         <C>
AT&T Business Services..................................   $(2,154)    $ 5,990     $ 5,248
AT&T Consumer Services..................................     4,875       6,893       7,619
AT&T Broadband..........................................    (3,215)     (1,240)     (1,545)
                                                           -------     -------     -------
     Total reportable segments..........................      (494)     11,643      11,322
Corporate and Other(1)..................................    (4,324)     (3,279)       (441)
Deduct: Pretax minority interest income (expense).......       864       4,003        (180)
Add: Pretax losses related to other equity
  investments...........................................     7,889       1,017       1,223
Interest expense........................................    (3,242)     (2,964)     (1,503)
                                                           -------     -------     -------
Total income from continuing operations before income
  taxes, minority interest and losses related to other
  equity investments....................................   $(1,035)    $ 2,414     $10,781
                                                           =======     =======     =======
</Table>

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

(1) Includes $(714), $(3,603) and $(686) related to Excite@Home in 2001, 2000
    and 1999, respectively.

  ASSETS

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
AT&T Business Services...............................  $ 40,339   $ 42,747   $ 37,974
AT&T Consumer Services...............................     2,141      3,150      3,781
AT&T Broadband.......................................   103,060    114,848     53,810
                                                       --------   --------   --------
     Total reportable segments.......................   145,540    160,745     95,565
Corporate and Other Assets:
  Other segments.....................................     1,145      1,174      1,204
  Prepaid pension costs..............................     3,329      3,003      2,464
  Deferred income taxes..............................       960        406        527
  Other corporate assets(1)(2).......................    14,308      7,518      7,874
Net assets of discontinued operations................        --     27,224     17,363
Investment in Liberty Media Group and Related
  receivables, net...................................        --     34,290     38,460
                                                       --------   --------   --------
Total assets.........................................  $165,282   $234,360   $163,457
                                                       ========   ========   ========
</Table>

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

(1) Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999,
    respectively.

(2) 2001 amount includes cash of $10,425.

                                        96
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  EQUITY INVESTMENTS (EXCLUDING LMG)

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                           --------------------------
                                                            2001     2000      1999
                                                           ------   -------   -------
<S>                                                        <C>      <C>       <C>
AT&T Business Services...................................  $   84   $ 2,355   $   582
AT&T Broadband...........................................   4,287     6,473    10,327
                                                           ------   -------   -------
     Total reportable segments...........................   4,371     8,828    10,909
Corporate and Other(1)...................................     228     1,666     3,012
                                                           ------   -------   -------
Total equity investments.................................  $4,599   $10,494   $13,921
                                                           ======   =======   =======
</Table>

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

(1) Includes $35 and $2,726 related to Excite@Home for 2000 and 1999,
    respectively.

  CAPITAL ADDITIONS

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2001       2000        1999
                                                           --------   ---------   ---------
<S>                                                        <C>        <C>         <C>
AT&T Business Services...................................   $5,456     $ 6,839     $ 9,091
AT&T Consumer Services...................................      140         148         299
AT&T Broadband...........................................    3,607       4,968       4,759
                                                            ------     -------     -------
     Total reportable segments...........................    9,203      11,955      14,149
Corporate and Other(1)...................................      327       1,683         271
                                                            ------     -------     -------
Total capital additions..................................   $9,530     $13,638     $14,420
                                                            ======     =======     =======
</Table>

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

(1) Includes $181 and $92 related to Excite@Home in 2001 and 2000, respectively.

     Geographic information is not presented due to the immateriality of revenue
attributable to international customers.

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

21.  GUARANTEE OF PREFERRED SECURITIES

  TCI SECURITIES:

     Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held subordinated
debt securities of TCI. At December 31, 2001, $1,244 of the guaranteed
redeemable preferred securities remained outstanding.

     In the first quarter of 2002, AT&T notified holders that it will call the
mandatorily redeemable preferred securities issued by TCI Communications
Financing I, TCI Communications Financing II and TCI Communications Financing IV
for early redemption. (see Note 12)

  MEDIAONE SECURITIES:

     Prior to the consummation of the MediaOne merger, MediaOne issued
mandatorily redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of MediaOne. At December 31, 2001, $776 of the
guaranteed securities remained outstanding.

                                        97
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In the first quarter of 2002, AT&T notified holders that it will call the
mandatorily redeemable preferred securities issued by MediaOne Financing A,
MediaOne Financing B and MediaOne Financing II for early redemption (see Note
12).

     AT&T provides a full and unconditional guarantee on the outstanding
securities issued by TCI Communications Financing I, II and IV and the
outstanding securities issued by MediaOne Financing A and B and MediaOne Finance
II and III. Following are the condensed consolidating financial statements of
AT&T Corp., which include the financial results of TCI and MediaOne for each of
the corresponding periods. The results of MediaOne have been included in the
financial results of AT&T since the date of acquisition on June 15, 2000, and
the results of TCI have been included since the March 9, 1999, date of
acquisition.

                                        98
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                     CONSOLIDATING CONDENSED BALANCE SHEET
                            AS OF DECEMBER 31, 2001
<Table>
<Caption>
                                                                                 TCI           MEDIAONE     MEDIAONE
                                    GUARANTOR   GUARANTOR    GUARANTOR        FINANCING        FINANCING     FINANCE
                                      AT&T      SUBSIDIARY   SUBSIDIARY   ------------------   ---------   -----------
                                     PARENT        TCI        MEDIAONE     I      II     IV     A     B     II    III
                                    ---------   ----------   ----------   ----   ----   ----   ---   ---   ----   ----
                                                                  (DOLLARS IN MILLIONS)
<S>                                 <C>         <C>          <C>          <C>    <C>    <C>    <C>   <C>   <C>    <C>
ASSETS
Cash and cash equivalents.........  $ 10,415     $    --      $    12     $ --   $ --   $ --   $--   $--   $ --   $ --
Receivables.......................    11,682
Investments.......................
Deferred income taxes.............       729
Other current assets..............       302          71          689      527    513    204    31    29    220     11
Total Current Assets..............    23,128          71          701      527    513    204    31    29    220     11
Property, plant & equipment,
 net..............................     8,580         135
Franchise costs, net..............                    20
Goodwill, net.....................        70                    2,526
Investment in Liberty Media Group
 and related receivables, net.....
Other investments and related
 advances.........................   130,219      12,747       41,413
Other assets......................     5,445          91                                        21    16     16    516
Net assets of discontinued
 operations.......................
Total Assets......................  $167,442     $13,064      $44,640     $527   $513   $204   $52   $45   $236   $527

LIABILITIES
Debt maturing within one year.....  $ 34,195     $   616      $   753     $527   $513   $204   $30   $28   $214
Liability under put options.......
Other current liabilities.........     8,763         597           59                            1     1      6     11
Total Current Liabilities.........    42,958       1,213          812      527    513    204    31    29    220     11
Long-term debt....................    23,810       9,866          676                                              504
Deferred income taxes.............     1,147                      934
Other long-term liabilities and
 deferred credits.................     6,850          45           23
Total Liabilities.................    74,765      11,124        2,445      527    513    204    31    29    220    515
Minority Interest.................
Company-Obligated Convertible
 Quarterly Income Preferred
 Securities of Subsidiary Trust
 Holding Solely Subordinated Debt
 Securities of AT&T...............     4,720

SHAREOWNERS' EQUITY
AT&T Common Stock.................     3,542
AT&T Wireless Group common stock..
Liberty Media Group Class A Common
 Stock............................
Liberty Media Group Class B Common
 Stock............................
Preferred stock issued to
 subsidiaries.....................    10,559
Other shareowners' equity.........    73,856       1,940       42,195                           21    16     16     12
Total Shareowners' Equity.........    87,957       1,940       42,195                           21    16     16     12
Total Liabilities and Shareowners'
 Equity...........................  $167,442     $13,064      $44,640     $527   $513   $204   $52   $45   $236   $527

<Caption>
                                                     ELIMINATION
                                                         AND
                                    NON-GUARANTOR   CONSOLIDATION   CONSOLIDATED
                                    SUBSIDIARIES     ADJUSTMENTS     AT&T CORP.
                                    -------------   -------------   ------------
                                               (DOLLARS IN MILLIONS)
<S>                                 <C>             <C>             <C>
ASSETS
Cash and cash equivalents.........    $    165        $      --       $ 10,592
Receivables.......................      44,516          (46,817)         9,381
Investments.......................         668                             668
Deferred income taxes.............         501                           1,230
Other current assets..............         (45)          (1,895)           657
Total Current Assets..............      45,805          (48,712)        22,528
Property, plant & equipment,
 net..............................      32,607                          41,322
Franchise costs, net..............      42,799                          42,819
Goodwill, net.....................      22,079                          24,675
Investment in Liberty Media Group
 and related receivables, net.....                                          --
Other investments and related
 advances.........................      63,996         (224,557)        23,818
Other assets......................       8,835           (4,820)        10,120
Net assets of discontinued
 operations.......................                                          --
Total Assets......................    $216,121        $(278,089)      $165,282
LIABILITIES
Debt maturing within one year.....    $  8,985        $ (33,107)      $ 12,958
Liability under put options.......                                          --
Other current liabilities.........      11,419           (8,388)        12,469
Total Current Liabilities.........      20,404          (41,495)        25,427
Long-term debt....................      14,640           (8,969)        40,527
Deferred income taxes.............      26,079                          28,160
Other long-term liabilities and
 deferred credits.................       7,378           (3,088)        11,208
Total Liabilities.................      68,501          (53,552)       105,322
Minority Interest.................       3,560                           3,560
Company-Obligated Convertible
 Quarterly Income Preferred
 Securities of Subsidiary Trust
 Holding Solely Subordinated Debt
 Securities of AT&T...............                                       4,720
SHAREOWNERS' EQUITY
AT&T Common Stock.................                                       3,542
AT&T Wireless Group common stock..                                          --
Liberty Media Group Class A Common
 Stock............................                                          --
Liberty Media Group Class B Common
 Stock............................                                          --
Preferred stock issued to
 subsidiaries.....................                      (10,559)            --
Other shareowners' equity.........     144,060         (213,978)        48,138
Total Shareowners' Equity.........     144,060         (224,537)        51,680
Total Liabilities and Shareowners'
 Equity...........................    $216,121        $(278,089)      $165,282
</Table>

                                        99
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                  CONSOLIDATING CONDENSED STATEMENTS OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
                                                                                    TCI           MEDIAONE      MEDIAONE
                                        GUARANTOR   GUARANTOR    GUARANTOR       FINANCING        FINANCING      FINANCE
                                          AT&T      SUBSIDIARY   SUBSIDIARY   ---------------   -------------   ---------
                                         PARENT        TCI        MEDIAONE     I    II    IV      A       B     II    III
                                        ---------   ----------   ----------   ---   ---   ---   -----   -----   ---   ---
                                                                      (DOLLARS IN MILLIONS)
<S>                                     <C>         <C>          <C>          <C>   <C>   <C>   <C>     <C>     <C>   <C>
Revenue...............................   $19,587     $    --      $    --     $--   $--   $--   $  --   $  --   $--   $--
Operating Expenses
Costs of services and products........     3,310                        1
Access and other connection...........     6,355
Selling, general and administrative...     1,600         406           14
Depreciation and other amortization...     1,470          57
Amortization of goodwill, franchise
 costs and other purchased
 intangibles..........................        35           3           71
Net restructuring and other charges...       693
Total operating expenses..............    13,463         466           86
Operating income (loss)...............     6,124        (466)         (86)
Other (expense) income................     1,245          91          978      43    46    17       4       3    21    47
Interest expense (benefit)............     4,214       1,149          180      43    46    17       3       2    20    45
(Loss) income from continuing
 operations before income taxes,
 minority interest, and (losses)
 earnings related to other equity
 investments..........................     3,155      (1,524)         712                           1       1     1     2
(Benefit) provision for income
 taxes................................      (237)       (569)         299
Minority interest income (expense)....      (160)
Equity losses from Liberty Media
 Group................................                 2,711
Net (losses) earnings related to other
 equity investments...................    (2,690)     (2,098)      (2,577)
(Loss) income from continuing
 operations...........................       542      (5,764)      (2,164)                          1       1     1     2
Income (loss) from discontinued
 operations (net of income taxes).....
Gain on disposition of discontinued
 operations...........................    13,503
Income (loss) before cumulative effect
 of accounting change.................    14,045      (5,764)      (2,164)                          1       1     1     2
Cumulative effect of accounting change
 (net of income taxes)................       508         545          540
Net income (loss).....................    14,553      (5,219)      (1,624)                          1       1     1     2
Dividend requirements of preferred
 stock................................       652
Premium on exchange of AT&T Wireless
 tracking stock.......................        80
Net income (loss) available to common
 shareowners..........................   $13,821     $(5,219)     $(1,624)    $--   $--   $--   $   1   $   1   $ 1   $ 2

<Caption>
                                                         ELIMINATION
                                                             AND
                                        NON-GUARANTOR   CONSOLIDATION   CONSOLIDATED
                                        SUBSIDIARIES     ADJUSTMENTS     AT&T CORP.
                                        -------------   -------------   ------------
                                                   (DOLLARS IN MILLIONS)
<S>                                     <C>             <C>             <C>
Revenue...............................     $35,413         $(2,450)       $52,550
Operating Expenses
Costs of services and products........      12,871          (2,222)        13,960
Access and other connection...........       5,976            (195)        12,136
Selling, general and administrative...       8,822             (10)        10,832
Depreciation and other amortization...       5,338                          6,865
Amortization of goodwill, franchise
 costs and other purchased
 intangibles..........................       2,364                          2,473
Net restructuring and other charges...       1,837                          2,530
Total operating expenses..............      37,208          (2,427)        48,796
Operating income (loss)...............      (1,795)            (23)         3,754
Other (expense) income................        (834)         (3,208)        (1,547)
Interest expense (benefit)............       1,263          (3,740)         3,242
(Loss) income from continuing
 operations before income taxes,
 minority interest, and (losses)
 earnings related to other equity
 investments..........................      (3,892)            509         (1,035)
(Benefit) provision for income
 taxes................................        (284)                          (791)
Minority interest income (expense)....       1,123                            963
Equity losses from Liberty Media
 Group................................                                      2,711
Net (losses) earnings related to other
 equity investments...................      (4,382)          6,897         (4,850)
(Loss) income from continuing
 operations...........................      (6,867)          7,406         (6,842)
Income (loss) from discontinued
 operations (net of income taxes).....         178             (28)           150
Gain on disposition of discontinued
 operations...........................                                     13,503
Income (loss) before cumulative effect
 of accounting change.................      (6,689)          7,378          6,811
Cumulative effect of accounting change
 (net of income taxes)................        (689)                           904
Net income (loss).....................      (7,378)          7,378          7,715
Dividend requirements of preferred
 stock................................                                        652
Premium on exchange of AT&T Wireless
 tracking stock.......................                                         80
Net income (loss) available to common
 shareowners..........................     $(7,378)        $ 7,378        $ 6,983
</Table>

                                       100
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
                                                                                    TCI         MEDIAONE    MEDIAONE
                                        GUARANTOR   GUARANTOR    GUARANTOR       FINANCING      FINANCING    FINANCE
                                          AT&T      SUBSIDIARY   SUBSIDIARY   ---------------   ---------   ---------
                                         PARENT        TCI        MEDIAONE     I    II    IV     A     B    II    III
                                        ---------   ----------   ----------   ---   ---   ---   ---   ---   ---   ---
                                                                    (DOLLARS IN MILLIONS)
<S>                                     <C>         <C>          <C>          <C>   <C>   <C>   <C>   <C>   <C>   <C>
Net Cash Provided by (Used in)
 Operating Activities of Continuing
 Operations...........................  $  6,500     $ (1,238)     $ 808                        $ 1   $ 1   $ 1   $ 2
INVESTING ACTIVITIES
Capital expenditures and other
 additions............................    (1,325)         (67)
Investment distributions and sales....       813       19,730         59
Net (acquisitions) dispositions of
 businesses, net of cash
 acquired/disposed....................        14
Other.................................     6,136          158
Net Cash (Used in) Provided by
 Investing Activities of Continuing
 Operations...........................     5,638       19,821         59
FINANCING ACTIVITIES
Proceeds from long-term debt
 issuances, net of issuance costs.....    11,281
Proceeds from debt from AT&T..........                  3,990
Retirement of long-term debt..........      (629)                   (252)
Retirement of AT&T debt...............    (5,867)     (22,213)      (354)
Repayment of borrowings from AT&T
 Wireless.............................
Issuance of convertible preferred
 securities and warrants..............     9,811
(Decrease)increase in short-term
 borrowings, net......................   (19,589)        (360)
(Decrease)increase in short-term
 borrowings from AT&T, net............     2,471                    (249)
Other.................................       799                                                 (1)   (1)   (1)   (2)
Net Cash (Used in) Provided by
 Financing Activities of Continuing
 Operations...........................    (1,723)     (18,583)      (855)                        (1)   (1)   (1)   (2)
Net cash provided by (used in)
 discontinued operations..............
Net increase (decrease) in cash and
 cash equivalents.....................    10,415                      12
Cash and cash equivalents at beginning
 of year..............................
Cash and cash equivalents at end of
 period...............................  $ 10,415     $     --      $  12      $--   $--   $--   $--   $--   $--   $--

<Caption>
                                                         ELIMINATION
                                                             AND
                                        NON-GUARANTOR   CONSOLIDATION   CONSOLIDATED
                                        SUBSIDIARIES     ADJUSTMENTS     AT&T CORP.
                                        -------------   -------------   ------------
                                                   (DOLLARS IN MILLIONS)
<S>                                     <C>             <C>             <C>
Net Cash Provided by (Used in)
 Operating Activities of Continuing
 Operations...........................    $  4,520        $    (37)       $ 10,558
INVESTING ACTIVITIES
Capital expenditures and other
 additions............................      (7,825)                         (9,217)
Investment distributions and sales....       2,201         (19,789)          3,014
Net (acquisitions) dispositions of
 businesses, net of cash
 acquired/disposed....................       4,899                           4,913
Other.................................       2,725          (9,589)           (570)
Net Cash (Used in) Provided by
 Investing Activities of Continuing
 Operations...........................       2,000         (29,378)         (1,860)
FINANCING ACTIVITIES
Proceeds from long-term debt
 issuances, net of issuance costs.....       1,134                          12,415
Proceeds from debt from AT&T..........                      (3,990)
Retirement of long-term debt..........        (780)                         (1,661)
Retirement of AT&T debt...............                      28,434
Repayment of borrowings from AT&T
 Wireless.............................      (5,803)                         (5,803)
Issuance of convertible preferred
 securities and warrants..............                                       9,811
(Decrease)increase in short-term
 borrowings, net......................       2,781                         (17,168)
(Decrease)increase in short-term
 borrowings from AT&T, net............        (649)         (1,573)
Other.................................      (7,801)          6,383            (624)
Net Cash (Used in) Provided by
 Financing Activities of Continuing
 Operations...........................     (11,118)         29,254          (3,030)
Net cash provided by (used in)
 discontinued operations..............       4,699             161           4,860
Net increase (decrease) in cash and
 cash equivalents.....................         101                          10,528
Cash and cash equivalents at beginning
 of year..............................          64                              64
Cash and cash equivalents at end of
 period...............................    $    165        $     --        $ 10,592
</Table>

                                       101
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                     CONSOLIDATING CONDENSED BALANCE SHEET
                            AS OF DECEMBER 31, 2000
<Table>
<Caption>
                                                                                TCI           MEDIAONE     MEDIAONE
                                   GUARANTOR   GUARANTOR    GUARANTOR        FINANCING        FINANCING     FINANCE
                                     AT&T      SUBSIDIARY   SUBSIDIARY   ------------------   ---------   -----------
                                    PARENT        TCI        MEDIAONE     I      II     IV     A     B     II    III
                                   ---------   ----------   ----------   ----   ----   ----   ---   ---   ----   ----
                                                                 (DOLLARS IN MILLIONS)
<S>                                <C>         <C>          <C>          <C>    <C>    <C>    <C>   <C>   <C>    <C>
ASSETS
Cash and cash equivalents........  $     --     $    --      $    --     $ --   $ --   $ --   $--   $--   $ --   $ --
Receivables......................    11,424       2,577           78
Investments......................
Deferred income taxes............       811
Other current assets.............     1,103          11
Total Current Assets.............    13,338       2,588           78
Property, plant & equipment,
 net.............................     9,463         102           22
Franchise costs, net.............       838          30
Goodwill, net....................       161                   19,786
Investment in Liberty Media Group
 and related receivables, net....                34,290
Other investments and related
 advances........................   164,844      32,650       27,712
Other assets.....................     5,500         186                   528    514    204    51    44    230    516
Net assets of discontinued
 operations......................
Total Assets.....................  $194,144     $69,846      $47,598     $528   $514   $204   $51   $44   $230   $516
LIABILITIES
Debt maturing within one year....  $ 52,556     $   664      $ 2,337     $ --   $ --   $ --   $--   $--   $ --   $ --
Liability under put options......
Other current liabilities........     9,535       1,129           76
Total Current Liabilities........    62,091       1,793        2,413
Long-term debt...................    21,333      30,096        1,702      528    514    204    30    28    214    504
Deferred income taxes............       569                      230
Other long-term liabilities and
 deferred credits................     7,341         773          129
Total Liabilities................    91,334      32,662        4,474      528    514    204    30    28    214    504
Minority Interest................
Company-Obligated Convertible
 Quarterly Income Preferred
 Securities of Subsidiary Trust
 Holding Solely Subordinated Debt
 Securities of AT&T..............     4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................     4,176
AT&T Wireless Group common
 stock...........................       362
Liberty Media Group Class A
 Common Stock....................     2,364
Liberty Media Group Class B
 Common Stock....................       206
Other shareowners' equity........    90,992      37,184       43,124                           21    16     16     12
Total Shareowners' Equity........    98,100      37,184       43,124                           21    16     16     12
Total Liabilities and
 Shareowners' Equity.............  $194,144     $69,846      $47,598     $528   $514   $204   $51   $44   $230   $516

<Caption>
                                                    ELIMINATION
                                                        AND
                                   NON-GUARANTOR   CONSOLIDATION   CONSOLIDATED
                                   SUBSIDIARIES     ADJUSTMENTS     AT&T CORP.
                                   -------------   -------------   ------------
                                              (DOLLARS IN MILLIONS)
<S>                                <C>             <C>             <C>
ASSETS
Cash and cash equivalents........    $     64        $      --       $     64
Receivables......................      48,896          (51,922)        11,053
Investments......................       2,102                           2,102
Deferred income taxes............         (91)                            720
Other current assets.............        (328)              (5)           781
Total Current Assets.............      50,643          (51,927)        14,720
Property, plant & equipment,
 net.............................      31,685               (3)        41,269
Franchise costs, net.............      47,350                          48,218
Goodwill, net....................       6,835                          26,782
Investment in Liberty Media Group
 and related receivables, net....                                      34,290
Other investments and related
 advances........................      19,673         (214,004)        30,875
Other assets.....................      15,714          (12,505)        10,982
Net assets of discontinued
 operations......................      24,876            2,348         27,224
Total Assets.....................    $196,776        $(276,091)      $234,360
LIABILITIES
Debt maturing within one year....    $  5,432        $ (29,151)      $ 31,838
Liability under put options......       2,564                           2,564
Other current liabilities........      11,219           (8,386)        13,573
Total Current Liabilities........      19,215          (37,537)        47,975
Long-term debt...................       2,558          (24,622)        33,089
Deferred income taxes............      31,255                          32,054
Other long-term liabilities and
 deferred credits................         331              (81)         8,493
Total Liabilities................      53,359          (62,240)       121,611
Minority Interest................       4,841                           4,841
Company-Obligated Convertible
 Quarterly Income Preferred
 Securities of Subsidiary Trust
 Holding Solely Subordinated Debt
 Securities of AT&T..............                                       4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................        (416)                          3,760
AT&T Wireless Group common
 stock...........................                                         362
Liberty Media Group Class A
 Common Stock....................                                       2,364
Liberty Media Group Class B
 Common Stock....................                                         206
Other shareowners' equity........     138,992         (213,851)        96,506
Total Shareowners' Equity........     138,576         (213,851)       103,198
Total Liabilities and
 Shareowners' Equity.............    $196,776        $(276,091)      $234,360
</Table>

                                       102
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                  CONSOLIDATING CONDENSED STATEMENTS OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
                                                                                         TCI              MEDIAONE
                                          GUARANTOR   GUARANTOR    GUARANTOR          FINANCING           FINANCING
                                            AT&T      SUBSIDIARY   SUBSIDIARY   ---------------------   -------------
                                           PARENT        TCI        MEDIAONE      I      II      IV       A       B
                                          ---------   ----------   ----------   -----   -----   -----   -----   -----
                                                                     (DOLLARS IN MILLIONS)
<S>                                       <C>         <C>          <C>          <C>     <C>     <C>     <C>     <C>
Revenue.................................   $22,234     $    --       $  --      $  --   $  --   $  --   $  --   $  --
Operating Expenses
Costs of services and products..........     2,961
Access and other connection.............     7,047
Selling, general and administrative.....     2,071          19          29
Depreciation and other amortization.....     1,806          52           7
Amortization of goodwill, franchise
 costs and other purchased
 intangibles............................        50           6         226
Net restructuring and other charges.....       443          60
Total operating expenses................    14,378         137         262
Operating income (loss).................     7,856        (137)       (262)
Other (expense) income..................       971          30          64         43      46      18       2       2
Interest expense (benefit)..............     4,786       1,793         170         43      46      18       1       1
(Loss) income from continuing operations
 before income taxes, minority interest
 and (losses) earnings from equity
 investments............................     4,041      (1,900)       (368)                                 1       1
(Benefit) provision for income taxes....     1,505        (727)        (54)
Minority interest income (expense)......      (161)
Equity earnings from Liberty Media
 Group..................................                 1,488
Net (losses) earnings related to other
 equity investments.....................     6,258      (3,765)       (202)
(Loss) income from continuing
 operations.............................     8,633      (3,450)       (516)                                 1       1
Income from discontinued operations (net
 of income taxes).......................
Net income (loss).......................     8,633      (3,450)       (516)                                 1       1
Dividend requirements on preferred stock
 held by AT&T, net......................
Net income (loss) after preferred stock
 dividends..............................   $ 8,633     $(3,450)      $(516)     $  --   $  --   $  --   $   1   $   1

<Caption>
                                            MEDIAONE                      ELIMINATION
                                             FINANCE          NON-            AND
                                          -------------    GUARANTOR     CONSOLIDATION   CONSOLIDATED
                                           II      III    SUBSIDIARIES    ADJUSTMENTS     AT&T CORP.
                                          -----   -----   ------------   -------------   ------------
                                                             (DOLLARS IN MILLIONS)
<S>                                       <C>     <C>     <C>            <C>             <C>
Revenue.................................  $  --   $  --     $35,386         $(2,087)       $55,533
Operating Expenses
Costs of services and products..........                     11,536          (1,702)        12,795
Access and other connection.............                      6,425            (332)        13,140
Selling, general and administrative.....                      7,649             (16)         9,752
Depreciation and other amortization.....                      4,059                          5,924
Amortization of goodwill, franchise
 costs and other purchased
 intangibles............................                      2,383                          2,665
Net restructuring and other charges.....                      6,526                          7,029
Total operating expenses................                     38,578          (2,050)        51,305
Operating income (loss).................                     (3,192)            (37)         4,228
Other (expense) income..................     11      25       4,242          (4,304)         1,150
Interest expense (benefit)..............     11      24         311          (4,240)         2,964
(Loss) income from continuing operations
 before income taxes, minority interest
 and (losses) earnings from equity
 investments............................              1         739            (101)         2,414
(Benefit) provision for income taxes....              1       2,559                          3,284
Minority interest income (expense)......                      4,264                          4,103
Equity earnings from Liberty Media
 Group..................................                                                     1,488
Net (losses) earnings related to other
 equity investments.....................                       (586)         (2,293)          (588)
(Loss) income from continuing
 operations.............................                      1,858          (2,394)         4,133
Income from discontinued operations (net
 of income taxes).......................                        546             (10)           536
Net income (loss).......................                      2,404          (2,404)         4,669
Dividend requirements on preferred stock
 held by AT&T, net......................                        111            (111)
Net income (loss) after preferred stock
 dividends..............................  $  --   $  --     $ 2,293         $(2,293)       $ 4,669
</Table>

                                       103
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
                                                                                       TCI            MEDIAONE      MEDIAONE
                                        GUARANTOR   GUARANTOR    GUARANTOR          FINANCING         FINANCING      FINANCE
                                          AT&T      SUBSIDIARY   SUBSIDIARY   ---------------------   ---------   -------------
                                         PARENT        TCI        MEDIAONE      I      II      IV      A     B     II      III
                                        ---------   ----------   ----------   -----   -----   -----   ---   ---   -----   -----
                                                                         (DOLLARS IN MILLIONS)
<S>                                     <C>         <C>          <C>          <C>     <C>     <C>     <C>   <C>   <C>     <C>
Net Cash Provided by (used in)
 Operating Activities of Continuing
 Operations...........................  $  2,735     $  (374)     $  (138)    $  --   $  --   $  --   $ 1   $ 1   $  --   $  --
INVESTING ACTIVITIES
Capital expenditures and other
 additions............................       (51)        (79)         (21)
Investment distributions and sales....       363                    1,384
Investment contributions and
 purchases............................    (1,700)     (7,360)
Net (acquisitions) dispositions of
 businesses, net of cash
 acquired/disposed....................   (23,943)
Other.................................    (2,057)        (48)
Net Cash (used in) Provided by
 Investing Activities of Continuing
 Operations...........................   (27,388)     (7,487)       1,363
FINANCING ACTIVITIES
Proceeds from long-term debt
 issuances, net of issuance costs.....       739
Proceeds from debt from AT&T..........     5,867      13,743          275
Retirement of long-term debt..........      (498)     (1,058)
Retirement of AT&T debt...............                (4,990)      (1,500)
Issuance of AT&T Wireless Group common
 shares...............................    10,314
Dividends paid on common stock........    (3,047)
 (Decrease) increase in short-term
   borrowings, net....................    12,108
Other.................................      (830)        166                                           (1)   (1)
Net Cash Provided by (used in)
 Financing Activities of Continuing
 Operations...........................    24,653       7,861       (1,225)                             (1)   (1)
Net cash (used in) provided by
 discontinued operations..............
Net increase (decrease) in cash and
 cash equivalents.....................
Cash and cash equivalents at beginning
 of year..............................
Cash and cash equivalents at end of
 period...............................  $     --     $    --      $    --     $  --   $  --   $  --   $--   $--   $  --   $  --

<Caption>
                                                         ELIMINATION
                                                             AND
                                        NON-GUARANTOR   CONSOLIDATION   CONSOLIDATED
                                        SUBSIDIARIES     ADJUSTMENTS     AT&T CORP.
                                        -------------   -------------   ------------
                                                   (DOLLARS IN MILLIONS)
<S>                                     <C>             <C>             <C>
Net Cash Provided by (used in)
 Operating Activities of Continuing
 Operations...........................    $  9,079        $    361        $ 11,665
INVESTING ACTIVITIES
Capital expenditures and other
 additions............................     (10,760)                        (10,911)
Investment distributions and sales....         629          (1,384)            992
Investment contributions and
 purchases............................        (694)          7,360          (2,394)
Net (acquisitions) dispositions of
 businesses, net of cash
 acquired/disposed....................       7,286                         (16,657)
Other.................................      (6,186)          7,216          (1,075)
Net Cash (used in) Provided by
 Investing Activities of Continuing
 Operations...........................      (9,725)         13,192         (30,045)
FINANCING ACTIVITIES
Proceeds from long-term debt
 issuances, net of issuance costs.....       3,862                           4,601
Proceeds from debt from AT&T..........       4,595         (24,480)
Retirement of long-term debt..........        (562)                         (2,118)
Retirement of AT&T debt...............                       6,490
Issuance of AT&T Wireless Group common
 shares...............................                                      10,314
Dividends paid on common stock........                                      (3,047)
 (Decrease) increase in short-term
   borrowings, net....................         706           4,159          16,973
Other.................................      (1,242)            917            (991)
Net Cash Provided by (used in)
 Financing Activities of Continuing
 Operations...........................       7,359         (12,914)         25,732
Net cash (used in) provided by
 discontinued operations..............      (7,667)           (639)         (8,306)
Net increase (decrease) in cash and
 cash equivalents.....................        (954)                           (954)
Cash and cash equivalents at beginning
 of year..............................       1,018                           1,018
Cash and cash equivalents at end of
 period...............................    $     64        $     --        $     64
</Table>

                                       104
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                  CONSOLIDATING CONDENSED STATEMENTS OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1999
<Table>
<Caption>
                                     GUARANTOR                              TCI FINANCING
                                       AT&T        GUARANTOR      ---------------------------------   NON-GUARANTOR
                                      PARENT     SUBSIDIARY TCI       I          II          IV       SUBSIDIARIES
                                     ---------   --------------   ---------   ---------   ---------   -------------
                                                                 (DOLLARS IN MILLIONS)
<S>                                  <C>         <C>              <C>         <C>         <C>         <C>
Revenue............................   $24,755       $    --          $--         $--         $--         $31,879
Operating Expenses
Costs of services and products.....     1,536                                                             10,707
Access and other connection........     8,403                                                              6,232
Selling, general and
  administrative...................     4,363           575                                                5,960
Depreciation and other
  amortization.....................     2,072            49                                                3,016
Amortization of goodwill, franchise
  costs and other purchased
  intangibles......................        34             4                                                1,019
Net restructuring and other
  charges..........................        18           326                                                  631
Total operating expenses...........    16,426           954                                               27,565
Operating income (loss)............     8,329          (954)                                               4,314
Other (expense) income.............       539             6           36          40          16           2,734
Interest expense (benefit).........     3,186           342           36          40          16             634
(Loss) income from continuing
  operations before income taxes,
  minority interest, and (losses)
  earnings related to other equity
  investments......................     5,682        (1,290)                                               6,414
(Benefit) provision for income
  taxes............................     2,118          (363)                                               2,261
Minority interest income
  (expense)........................       (87)                                                               (39)
Equity losses from Liberty Media
  Group............................                   2,022
Net (losses) earnings related to
  other equity investments.........     4,171        (1,271)                                                (779)
(Loss) income from continuing
  operations.......................     7,648        (4,220)                                               3,335
Income (losses) from discontinued
  operations (net of income
  taxes)...........................                                                                         (458)
Net income (loss)..................   $ 7,648       $(4,220)         $--         $--         $--         $ 2,877

<Caption>
                                     ELIMINATION AND
                                      CONSOLIDATION    CONSOLIDATED
                                       ADJUSTMENTS      AT&T CORP.
                                     ---------------   ------------
                                         (DOLLARS IN MILLIONS)
<S>                                  <C>               <C>
Revenue............................      $(1,661)        $54,973
Operating Expenses
Costs of services and products.....       (1,230)         11,013
Access and other connection........         (196)         14,439
Selling, general and
  administrative...................           (4)         10,894
Depreciation and other
  amortization.....................                        5,137
Amortization of goodwill, franchise
  costs and other purchased
  intangibles......................                        1,057
Net restructuring and other
  charges..........................                          975
Total operating expenses...........       (1,430)         43,515
Operating income (loss)............         (231)         11,458
Other (expense) income.............       (2,545)            826
Interest expense (benefit).........       (2,751)          1,503
(Loss) income from continuing
  operations before income taxes,
  minority interest, and (losses)
  earnings related to other equity
  investments......................          (25)         10,781
(Benefit) provision for income
  taxes............................                        4,016
Minority interest income
  (expense)........................                         (126)
Equity losses from Liberty Media
  Group............................                        2,022
Net (losses) earnings related to
  other equity investments.........       (2,877)           (756)
(Loss) income from continuing
  operations.......................       (2,902)          3,861
Income (losses) from discontinued
  operations (net of income
  taxes)...........................           25            (433)
Net income (loss)..................      $(2,877)        $ 3,428
</Table>

                                       105
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                                   AT&T CORP.

                CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
                     FOR THE YEAR ENDING DECEMBER 31, 1999
<Table>
<Caption>
                                       GUARANTOR   GUARANTOR              TCI FINANCING
                                         AT&T      SUBSIDIARY   ---------------------------------   NON-GUARANTOR
                                        PARENT        TCI           I          II          IV       SUBSIDIARIES
                                       ---------   ----------   ---------   ---------   ---------   -------------
                                                                 (DOLLARS IN MILLIONS)
<S>                                    <C>         <C>          <C>         <C>         <C>         <C>
Net Cash Provided by (used in)
  Operating Activities of Continuing
  Operations.........................  $  2,672     $  (578)       $--         $--         $--        $  8,613
INVESTING ACTIVITIES
Capital expenditures and other
  additions..........................    (1,733)        (60)                                            (9,797)
Investment distributions and sales...        61                                                          1,513
Investment contributions and
  purchases..........................    (5,473)     (1,857)                                            (2,364)
Net (acquisitions) dispositions of
  businesses net of cash
  acquired/disposed..................    (6,405)                                                           436
Other................................      (203)        103                                            (15,056)
Net Cash (used in) Provided by
  Investing Activities of Continuing
  Operations.........................   (13,753)     (1,814)                                           (25,268)
FINANCING ACTIVITIES
Proceeds from long-term debt
  issuances..........................     8,396
Proceeds from debt from AT&T.........                 5,866                                              5,365
Retirement of long-term debt.........    (1,014)     (1,365)                                               124
Retirement of AT&T debt..............                (2,109)
Issuance of AT&T convertible
  preferred securities and
  warrants...........................     4,694                                                            (56)
Net acquisitions of treasury
  shares.............................    (4,624)
Dividends paid on common stock.......    (2,685)                                                           (27)
(Decrease) increase in short-term
  borrowings, net....................    19,154                                                         (1,207)
Other................................   (13,215)                                                        13,365
Net Cash (used in) Provided by
  Financing Activities of Continuing
  Operations.........................    10,706       2,392                                             17,564
Net cash provided by (used in)
  discontinued operations............                                                                   (2,649)
Net increase (decrease) in cash and
  cash equivalents...................      (375)                                                        (1,740)
Cash and cash equivalents at
  beginning of year..................       375                                                          2,758
Cash and cash equivalents at end of
  period.............................  $     --     $    --        $--         $--         $--        $  1,018

<Caption>
                                       ELIMINATION AND
                                        CONSOLIDATION    CONSOLIDATED
                                         ADJUSTMENTS      AT&T CORP.
                                       ---------------   ------------
                                           (DOLLARS IN MILLIONS)
<S>                                    <C>               <C>
Net Cash Provided by (used in)
  Operating Activities of Continuing
  Operations.........................     $   (198)        $ 10,509
INVESTING ACTIVITIES
Capital expenditures and other
  additions..........................                       (11,590)
Investment distributions and sales...                         1,574
Investment contributions and
  purchases..........................        1,857           (7,837)
Net (acquisitions) dispositions of
  businesses net of cash
  acquired/disposed..................                        (5,969)
Other................................       15,094              (62)
Net Cash (used in) Provided by
  Investing Activities of Continuing
  Operations.........................       16,951          (23,884)
FINANCING ACTIVITIES
Proceeds from long-term debt
  issuances..........................                         8,396
Proceeds from debt from AT&T.........      (11,231)
Retirement of long-term debt.........                        (2,255)
Retirement of AT&T debt..............        2,109
Issuance of AT&T convertible
  preferred securities and
  warrants...........................                         4,638
Net acquisitions of treasury
  shares.............................                        (4,624)
Dividends paid on common stock.......                        (2,712)
(Decrease) increase in short-term
  borrowings, net....................       (7,774)          10,173
Other................................           88              238
Net Cash (used in) Provided by
  Financing Activities of Continuing
  Operations.........................      (16,808)          13,854
Net cash provided by (used in)
  discontinued operations............           55           (2,594)
Net increase (decrease) in cash and
  cash equivalents...................                        (2,115)
Cash and cash equivalents at
  beginning of year..................                         3,133
Cash and cash equivalents at end of
  period.............................     $     --         $  1,018
</Table>

                                       106
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

22.  QUARTERLY INFORMATION (UNAUDITED)

<Table>
<Caption>
                                                             FIRST    SECOND    THIRD(1)   FOURTH
                                                            -------   -------   --------   -------
<S>                                                         <C>       <C>       <C>        <C>
2001
Revenue...................................................  $13,551   $13,326   $13,087    $12,586
Operating income(2).......................................      814     1,364     1,365        211
(Loss) income from continuing operations before cumulative
  effect of accounting change(3)..........................   (1,180)   (2,176)   (2,095)    (1,391)
(Loss) income from discontinued operations -- net of
  income taxes............................................      (68)      218        --         --
Net (loss) income before cumulative effect of accounting
  change..................................................   (1,248)   (1,958)   11,408     (1,391)
Net (loss) income(4)......................................  $  (344)  $(1,958)  $11,408    $(1,391)
AT&T Common Stock Group:
Earnings (loss) per share -- basic:
  Continuing operations before cumulative effect of
     accounting change....................................  $  (.17)  $  (.10)  $  (.69)   $  (.39)
  Discontinued operations.................................     (.02)      .05        --         --
  Total...................................................  $  (.10)  $  (.05)  $  3.13    $  (.39)
Earnings (loss) per share -- diluted:
  Continuing operations before cumulative effect of
     accounting change....................................  $  (.17)  $  (.10)  $  (.69)   $  (.39)
  Discontinued operations.................................     (.02)      .05        --         --
  Total...................................................  $  (.10)  $  (.05)  $  3.13    $  (.39)
Dividends declared........................................  $ .0375   $ .0375   $ .0375    $ .0375
AT&T Wireless Group:(5)
  (Loss) earnings from discontinued operations per share:
     Basic and diluted....................................  $  (.02)  $   .08        --         --
Liberty Media Group:(3,6)
  (Loss) earnings per share:
     Basic and diluted....................................  $  (.06)  $  (.82)  $   .04         --
Stock price(7)
AT&T common stock
  High....................................................  $ 19.53   $ 18.07   $ 21.46    $ 20.00
  Low.....................................................    13.40     15.39     16.50      14.75
  Quarter-end close.......................................    16.54     17.09     19.30      18.14
AT&T Wireless Group common stock(5)
  High....................................................    27.30     21.10     19.92         --
  Low.....................................................    17.06     15.29     12.52         --
  Quarter-end close.......................................    19.18     16.35        --         --
Liberty Media Group Class A common stock(6)
  High....................................................    17.25     18.04     17.85         --
  Low.....................................................    11.88     11.50     14.50         --
  Quarter-end close.......................................    14.00     17.49        --         --
Liberty Media Group Class B common stock(6)
  High....................................................    18.69     18.75     18.35         --
  Low.....................................................    14.20     12.50     12.00         --
  Quarter-end close.......................................    15.00     18.15        --         --
</Table>

                                       107
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                             FIRST    SECOND    THIRD(1)   FOURTH
                                                            -------   -------   --------   -------
<S>                                                         <C>       <C>       <C>        <C>
2000
Revenue...................................................  $13,703   $13,744   $14,176    $13,910
Operating income (loss)(2)................................    2,347     3,140     2,907     (4,166)
Income (loss) from continuing operations before the
  cumulative effect of accounting change..................    2,650     1,857     3,074     (3,448)
Income (loss) from discontinued operations -- net of
  income taxes............................................       33       177        (2)       328
Net income (loss).........................................  $ 2,683   $ 2,034   $ 3,072    $(3,120)
AT&T Common Stock Group:
Earnings (loss) per share -- basic:
  Continuing operations before the cumulative effect of
     accounting change....................................  $   .54   $   .49   $   .35    $  (.52)
  Discontinued operations.................................      .01       .05        --        .07
  Total...................................................  $   .55   $   .54   $   .35    $  (.45)
Earnings (loss) per share -- diluted:
  Continuing operations before the cumulative effect of
     accounting change....................................  $   .53   $   .48   $   .35    $  (.52)
  Discontinued operations.................................      .01       .05        --        .07
  Total...................................................  $   .54   $   .53   $   .35    $  (.45)
Dividends declared........................................  $   .22   $   .22   $   .22    $ .0375
AT&T Wireless Group:(5)
  Earnings (loss) from discontinued operations per share:
     Basic and diluted....................................  $    --   $   .06   $  (.01)   $   .16
Liberty Media Group:(6)
  Earnings (loss) per share:
     Basic and diluted....................................  $   .37   $   .10   $   .68    $  (.57)
Stock price(7)
AT&T common stock
  High....................................................  $ 47.37   $ 45.67   $ 27.33    $ 23.30
  Low.....................................................    34.41     24.27     21.16      12.81
  Quarter-end close.......................................    43.73     24.71     22.52      13.40
AT&T Wireless Group common stock
  High....................................................       --     36.00     29.56      24.94
  Low.....................................................       --     23.56     20.50      16.38
  Quarter-end close.......................................       --     27.88     20.88      17.31
Liberty Media Group Class A common stock
  High....................................................    30.72     29.94     26.56      19.25
  Low.....................................................    24.44     19.19     17.44      10.75
  Quarter-end close.......................................    29.63     24.25     18.00      13.56
Liberty Media Group Class B common stock
  High....................................................    36.56     32.69     32.63      20.63
  Low.....................................................    27.00     22.13     18.75      12.75
  Quarter-end close.......................................    32.81     32.50     18.75      18.75
</Table>

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

(1) Third quarter 2001 net income included a gain on disposition of discontinued
    operations of $13,503, or $3.82 per share.

                                       108
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) Operating income (loss) included net restructuring and other charges of $808
    in first quarter 2001, $287 in second quarter 2001, $399 in third quarter
    2001, $1,036 in fourth quarter 2001, $773 in first quarter 2000, $24 in
    third quarter 2000 and $6,232 in fourth quarter 2000.

(3) First quarter 2001 results have been restated to properly classify losses
    related to the implementation of SFAS No. 133. A loss of $1.6 billion pretax
    ($1.1 billion after-tax) was reclassified from other (expense) income to
    cumulative effect of accounting change. There was no impact to the total net
    loss or the loss per share recorded in the first quarter of 2001.

(4) First quarter 2001 net income included cumulative effect of accounting
    change of $359 and $545, or $0.09 per share and $0.21 per share, for AT&T
    Common Stock Group and LMG, respectively, due to the adoption of SFAS No.
    133.

(5) No dividends had been declared on AT&T Wireless Group common stock. AT&T
    Wireless Group was split-off from AT&T on July 9, 2001.

(6) No dividend had been declared on LMG common stock. LMG was split-off from
    AT&T on August 10, 2001.

(7) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T
    Common Stock prices have been restated to reflect the split-off of AT&T
    Wireless.

23.  NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", which supercedes Accounting Principles Board (APB) opinion No.
16. SFAS No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for under the purchase method. In addition, SFAS No. 141
establishes criteria for the recognition of intangible assets separately from
goodwill. The adoption of SFAS No. 141 will not have a material effect on AT&T's
results of operations, financial position or cash flows.

     Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which supercedes APB opinion No. 17. Under SFAS No. 142,
goodwill and indefinite-lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for AT&T as of January 1, 2002. In connection with the adoption of this
standard, AT&T's unamortized goodwill balance and excess basis related to equity
method investments will no longer be amortized, but will continue to be tested
for impairment. The goodwill balance as of December 31, 2001, was $24.7 billion,
and the related amortization in 2001 was $0.9 billion. The excess basis balance
as of December 31, 2001, was $8.8 billion with related amortization in 2001 of
$0.2 billion. In addition, we have determined that our franchise costs are
indefinite-lived assets, as defined in SFAS No. 142, and therefore will not be
subject to amortization beginning in 2002. The balance of our franchise costs as
of December 31, 2001, was $42.8 billion and the related amortization in 2001 was
$1.2 billion. The adoption of SFAS No. 142 will have a significant impact on our
future operating results due to the cessation of goodwill and franchise cost
amortization. For 2001, the amortization of goodwill, excess basis and franchise
costs had an approximate impact of $0.45 per share. In accordance with SFAS No.
142, 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 fair value, and therefore no
impairment loss will be recognized upon adoption. In accordance with SFAS No.
142, the franchise costs were tested for impairment as of January 1, 2002, by
comparing the fair value to the carrying value (at market level). An impairment
loss of $0.9 billion, net of taxes of $0.5 billion will be recognized as a
change in accounting principle in the first quarter of 2002.

                                       109
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations 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. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. For AT&T, this
means that the standard will be adopted on January 1, 2003. AT&T does not expect
that the adoption of this statement will have a material impact on AT&T's
results of operations, financial position or cash flows.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 also amends Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for AT&T as of January 1, 2002. The adoption of SFAS No. 144 will not
have a material impact on AT&T's results of operations, financial position or
cash flows.

24.  SUBSEQUENT EVENTS

     In March 2002, AT&T Canada announced the formation of a committee of its
board of directors to help AT&T Canada with issues they are facing in the
foreseeable future. Such issues include a significant regulatory decision
expected in the next month which could have a significant impact on the future
of sustainable competition in Canada; the effect of AT&T satisfying its
obligation to purchase the shares of AT&T Canada it does not own; and the impact
of these events on operating and financial results of AT&T Canada. In addition,
the committee appointed financial advisors to evaluate various scenarios
regarding issues, opportunities and alternatives for AT&T Canada. It is expected
that the outcome of these evaluations will have a negative effect on the
underlying value of AT&T Canada shares, which will result in AT&T recording up
to $250 of additional losses on its commitment to purchase the publicly owned
shares of AT&T Canada, excluding any impact of the floor price accretion (see
Note 5).

     (Unaudited) Effective April 1, 2002, Concert was unwound. Pursuant to the
partnership termination agreement, each of the partners generally reclaimed the
customer contracts and assets that were initially contributed to the joint
venture (see Note 5).

                                       110
<PAGE>

                                    PART IV

ITEM 14. 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 Management...................................    34
     Report of Independent Accountants......................    35
Statements:
     Consolidated Statements of Income......................    36
     Consolidated Balance Sheets............................    37
     Consolidated Statements of Changes in Shareowners'
      Equity................................................    38
     Consolidated Statements of Cash Flows..................    40
     Notes to Consolidated Financial Statements.............    41
</Table>

     (2) Exhibits:

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

<Table>
<S>             <C>
(3)a            Restated Certificate of Incorporation of the registrant
                filed January 10, 1989, Certificate of Correction of the
                registrant filed June 8, 1989, Certificate of Change of the
                registrant filed March 18, 1992, Certificate of Amendment of
                the registrant filed June 1, 1992, Certificate of Amendment
                of the registrant filed April 20, 1994, Certificate of
                Amendment of the registrant filed June 8, 1998, Certificate
                of Amendment of the registrant filed March 9, 1999,
                Certificate of Amendment of the registrant filed April 12,
                2000,Certificate of Amendment of the registrant filed June
                2, 2000, Certificate of Amendment of the registrant filed on
                June 15, 2000, Certificate of Amendment of the registrant
                filed on January 19, 2001, Certificate of Amendment of the
                registrant filed on June 6, 2001 and Certificate of
                Amendment of the registrant filed on June 20, 2001.
(3)b            By-Laws of the registrant, as amended January 25, 2001
                (Exhibit (3)b to Form 10-K for 2000, 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). Pursuant to this regulation, the
                registrant hereby agrees to furnish a copy of any such
                instrument to the SEC upon request.
(10)(i)1        Form of 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        Form of 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).
</Table>

                                       111
<PAGE>
<Table>
<S>             <C>
(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        Form of Employee Benefits Agreement, dated as of November
                20, 1996, between AT&T Corp. and NCR Corporation
                (incorporated by reference to Exhibit (10)(i)5 to Form 10-K
                for 1996, File No. 1-1105).
(10)(i)6        Separation and Distribution Agreement by and between AT&T
                Corp. and AT&T Wireless Services, Inc., dated as of June 4,
                2001 (incorporated by reference to Exhibit 10.1 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7        Amended and Restated Tax Sharing Agreement by and between
                AT&T Corp. and AT&T Wireless Services, Inc., dated as of
                June 4, 2001 (incorporated by reference to Exhibit 10.2 to
                the AT&T Wireless Services, Inc. Registration Statement on
                Form S-1/A (Commission file No. 333-59174), filed June 21,
                2001).
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
</Table>

                                       112
<PAGE>
<Table>
<S>             <C>
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of Liberty Media
                Corporation (File No. 333-93917) as filed on December 30,
                1999).
(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 of Liberty Media
                Corporation (File No. 333-93917) as filed on December 30,
                1999).
</Table>

                                       113
<PAGE>
<Table>
<S>             <C>
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(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 of Liberty Media Corporation (File No.
                333-93917) as filed on December 30, 1999).
(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).
</Table>

                                       114
<PAGE>
<Table>
<S>             <C>
(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, 2001).
(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,
                2001).
(10)(i)35       Support Agreement dated as of December 19, 2001 among AT&T
                Corp., Comcast Corporation, AT&T Comcast Corporation, Sural
                LLC and Brian L. Roberts (incorporated by reference to
                Exhibit 2.3 to the Registration Statement on Form S-4 of
                AT&T Comcast Corporation (File No. 333-82460) as filed on
                February 11, 2001).
(10)(i)36       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, 2001).
(10)(i)37       Employee Benefits Agreement dated as of December 19, 2001
                between AT&T Corp. and AT&T Broadband Corp. (Exhibit
                (10)(i)37 to Form 10-K for 2001, File No. 1-1105).
(10)(i)38       Amended and Restated 364-Day Competitive Advance and
                Revolving Credit Facility Agreement, dated as of December
                14, 2001, among AT&T Corp., the Lenders party thereto,
                CITIBANK, N.A., CREDIT SUISSE FIRST BOSTON and GOLDMAN SACHS
                CREDIT PARTNERS L.P., as Administrative Agents, and
                CITIBANK, N.A., as Paying Agent. (Exhibit (10)(i)38 to Form
                10-K for 2001, File No. 1-1105).
(10)(iii)(A)1   AT&T Short Term Incentive Plan as amended March, 1994
                (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 (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 (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 (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 (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 (Exhibit (10)(iii)(A)6 to Form
                10-K for 1993, File No. 1-1105).
(10)(iii)(A)7   The AT&T Directors Individual Life Insurance Program as
                amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K
                for 1997, File No. 1-1105).
(10)(iii)(A)8   AT&T Plan for Non-Employee Directors' Travel Accident
                Insurance (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 (Exhibit (10)(iii)(A)9 to
                Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)10  AT&T Non-Qualified Pension Plan, as amended and restated
                January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for
                1996, File No. 1-1105).
(10)(iii)(A)11  AT&T Senior Management Incentive Award Deferral Plan, as
                amended January 21, 1998 (Exhibit (10)(iii)(A)11 to Form
                10-K for 1998, File No. 1-1105).
(10)(iii)(A)12  AT&T Mid-Career Hire Program revised effective January 1,
                1988 (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 (Exhibit
                (10)(iii)(A)12 to Form 10-K for 1999, File No. 1-1105).
</Table>

                                       115
<PAGE>

<Table>
<S>             <C>
(10)(iii)(A)13  AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (Exhibit (10)(iii)(A)13
                to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14  Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE,
                dated March 25, 1987, File No. 1-1105).
(10)(iii)(A)15  Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (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 (Exhibit
                (3)b to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)17  Form of AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993,
                including the first amendment thereto dated December 23, 1997 (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
                (Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)19  Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (Exhibit
                (10)(iii)(A)19 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)20  Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997
                (Exhibit (10)(iii)(A)21 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)21  Form of Employment Agreement between AT&T Corp. and Betsy J. Bernard dated April 6, 2001
                (Exhibit (10)(iii)(A)21 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)22  Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997
                (Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)23  Form of Employment Agreement between AT&T Corp. and William T. Schleyer dated November 6, 2001
                (Exhibit (10)(iii)(A)23 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)24  Liberty Media 401(K) Savings Plan (Incorporation herein by reference to Exhibit 99.1 to
                Post-Effective Amendment No. 2 on Form S-8 to the Registration Statement on Form S-4 of AT&T
                Corp. (Commission File No. 333-70279) filed March 10, 1999).
(10)(iii)(A)25  AT&T Corp. Directors' Universal Life Insurance Program effective June 1, 2000 (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 (Exhibit (10)(iii)(A)26 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Form of Employment Agreement between AT&T Corp. and Charles H. Noski dated December 8, 1999
                (Exhibit (10)(iii)(A)27 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)28  Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 26,
                2001 (Exhibit (10)(iii)(A)28 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)29  Form of Special Deferral Agreement between AT&T Corp. and Frank Ianna dated January 16, 2001
                (Exhibit (10)(iii)(A)29 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)30  Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000 (Exhibit
                (10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)31  Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000 (Exhibit
                (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)32  AT&T Corp. board resolutions adopting change in control provision to various plans effective
                October 23, 2000 (Exhibit (10)(iii)(A)32 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)33  Form of Loan Agreement between AT&T Corp. and David Dorman dated April 13, 2001. (Exhibit
                (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34  Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 16,
                2002. (Exhibit (10)(iii)(A)34 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)35  Form of Employment Agreement between AT&T Corp. and David Dorman dated May 18, 2001. (Exhibit
                (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105).
</Table>

                                       116
<PAGE>

<Table>
<Caption>
(12)            Computation of Ratio of Earnings to Fixed Charges. (Exhibit (12) to Form 10-K for 2001,
                File No. 1-1105).
<S>             <C>
(21)            List of subsidiaries of AT&T. (Exhibit (21) to Form 10-K for 2001, File No. 1-1105).
(23)a           Consent of PricewaterhouseCoopers, LLP.
(23)b           Consent of KPMG, LLP.
(23)c           Consent of KPMG, LLP.
(23)d           Consent of PricewaterhouseCoopers, LLP.
(24)            Powers of Attorney executed by officers and directors who signed this report. (Exhibit
                (24) to Form 10-K for 2001, File No. 1-1105).
(99)            Liberty Media Corporation Financials (Exhibit (99) to Form 10-K for 2001, File No.
                1-1105).
(99)a           AT&T Canada Inc. Financials
(99)b           Concert, B.V. Financials
</Table>

     AT&T will furnish, without charge, to a shareholder upon request a copy of
the annual report to shareholders and the proxy statement, portions of which are
incorporated herein by reference thereto. AT&T will furnish any other exhibit at
cost.

     (b) Reports on Form 8-K:

     During the fourth quarter 2001, Form 8-K dated October 15, 2001 was filed
pursuant to Item 5 (Other Events and Item 7 (Financial Statements and Exhibits)
on October 23, 2001 and Form 8-K dated December 19, 2001 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on December
21, 2001.

                                       117
<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/ MARILYN J. WASSER
                                            ------------------------------------
                                                        M. J. Wasser
                                            Vice President -- Law and Secretary
May 2, 2002

                                       118