<PAGE>

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

AS FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH   ,
                                      2003

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-K

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

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                  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>

                   ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921
                         TELEPHONE NUMBER 908-221-2000
                          INTERNET ADDRESS: ATT.COM/IR

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

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

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

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

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

     The aggregate market value of voting common stock held by non-affiliates
was approximately $16.9 billion (based on closing price of those shares as of
the last business day of the registrant's most recently completed second fiscal
quarter). At February 28, 2003, 784,731,748 shares of AT&T common stock were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive proxy statement relating to the
2003 Annual Meeting of Shareowners (Part III)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                   SCHEDULE A

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

<Table>
<Caption>
                                                                     NAME OF EACH EXCHANGE
                   TITLE OF EACH CLASS                                ON WHICH REGISTERED
                   -------------------                               ---------------------
<S>                                                         <C>
Common Shares                                               New York, Boston, Chicago,
  (Par Value $1 Per Share)                                  Philadelphia and Pacific
                                                            Stock Exchanges
</Table>

<Table>
<S>                                                         <C>
Five Year 5 5/8% Notes due March 15, 2004
Five Year 6 3/8% Notes due March 15, 2004
Ten Year 6 3/4% Notes, due April 1, 2004
Ten Year 7 1/2% Notes, due April 1, 2004
Ten Year 7% Notes, due May 15, 2005
Twelve Year 7 1/2% Notes, due June 1, 2006
Twelve Year 7 3/4% Notes, due March 1, 2007                 New York Stock Exchange
Ten Year 6% Notes due March 15, 2009
6 1/2% Notes due March 15, 2013
Thirty Year 8 1/8% Debentures, due January 15, 2022
Thirty Year 8.35% Debentures, due January 15, 2025
Thirty-Two Year 8 1/8% Debentures, due July 15, 2024
Thirty Year 6 1/2% Notes due March 15, 2029
Forty Year 8 5/8% Debentures, due December 1, 2031
</Table>
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

                                    GENERAL

     AT&T Corp. was incorporated in 1885 under the laws of the State of New York
and has its principal executive offices at One AT&T Way, Bedminster, New Jersey,
07921 (telephone number, 908-221-2000; internet address, att.com/ir).

     AT&T is among the world's communications leaders, providing voice and data
communications services to large and small businesses, consumers and government
entities. AT&T and its subsidiaries furnish domestic and international long
distance, regional, local and Internet communications services. AT&T's primary
lines of business are AT&T Business Services and AT&T Consumer Services.

                                 RESTRUCTURING

     On October 25, 2000, AT&T announced a restructuring plan to be implemented
by various independent actions designed to fully separate or issue separately
tracked stocks intended to reflect the financial performance and economic value
of each of AT&T's then four major operating units: Broadband Services, Business
Services, Consumer Services and Wireless Services.

     On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. 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 (1.609 as adjusted for
AT&T's November 18, 2002 one-for-five reverse stock split) of AT&T Wireless for
each AT&T share outstanding.

     On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group tracking stock for
one share of Liberty Media Corporation's Series A and Series B common stock,
respectively.

     On November 18, 2002, AT&T completed the spin-off of AT&T Broadband and
simultaneously merged it with Comcast Corporation. Each AT&T shareowner received
a distribution of 0.3235 of a share (1.6175 shares reverse split adjusted) of
Comcast Class A common stock for each share of AT&T common stock outstanding.

     On July 10, 2002, AT&T shareholders approved an amendment to AT&T's charter
to create a new class of AT&T common stock, the AT&T Consumer Services Group
tracking stock. AT&T has not determined when or whether these shares would be
issued, which would be dependent on sufficient market receptivity and support.

     On July 10, 2002, AT&T shareowners approved a one-for-five reverse stock
split of AT&T common stock. The reverse stock split was effected on November 18,
2002 immediately after the completion of the spin-off of AT&T Broadband.

                     DESCRIPTION OF AT&T BUSINESS SERVICES

OVERVIEW

     AT&T Business Services is one of the nation's largest business services
communications providers, offering a variety of global communications services
to over 4 million customers, including large domestic and multinational
businesses, small and medium-sized businesses and government agencies. AT&T
Business Services operates one of the largest telecommunications networks in the
United States and, through AT&T's Global Network Services, provides an array of
services and customized solutions in 60 countries and 850 cities worldwide.

                                        1
<PAGE>

     AT&T Business Services provides a broad range of communications services
and customized solutions, including:

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

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

     - data and Internet Protocol (IP) services for a variety of network
       standards, including frame relay and asynchronous transfer mode (ATM);

     - managed networking services and outsourcing solutions; and

     - wholesale transport services.

INDUSTRY OVERVIEW

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

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

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

     - the Telecommunications Act; and

     - deregulation of communications services markets in selected countries
       around the world.

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

     Use of the Internet, including intranets and extranets, has grown rapidly
in recent years. This growth has been driven by a number of factors, including
the large and growing installed base of personal computers, improvements in
network architectures, increasing numbers of network-enabled applications,
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. Consequently, the Internet has become an
important new global communications and commerce medium. The Internet represents
an opportunity for enterprises to interact in new and different ways with both
existing and prospective customers, employees, suppliers and partners.
Enterprises are responding to this opportunity by substantially increasing their
investment in Internet connectivity and services to enhance internal voice and
data networks.

     In the United States, the Telecommunications Act has had a significant
impact on AT&T Business Services' business by establishing a statutory framework
for opening the local service markets to competition and by allowing regional
phone companies to provide in-region long distance services. In addition, prices
for long distance minutes and other basic communications services have declined
as a result of increased competitive pressures, governmental deregulation,
introduction of more efficient networks and advanced technologies, and product
substitution. Competition in these basic communications services segments has
more recently been based more on price and less on other differentiating factors
that appeal to the larger business market customers, including range of services
offered, bundling of products, customer service, and communications quality,
reliability and availability.

     Furthermore, the introduction and growth of wireless carriers has also put
additional competitive pressure on traditional voice long distance business
services, particularly in the "dial 1" long distance, card and operator services
segments.

                                        2
<PAGE>

SERVICES AND PRODUCTS

  VOICE SERVICES

     Long Distance Voice Services.  AT&T Business Services' long distance voice
communication offerings include the traditional "one plus" dialing of domestic
and international long distance for customers that select AT&T Business Services
as their primary long distance carrier.

     AT&T Business Services offers toll-free (for example, 800) inbound
services, where the receiving party pays for the call. These services are used
in a wide variety of applications, including sales, reservation centers or
customer service centers. AT&T Business Services also offers a variety of
value-added features to enhance customers' toll-free services, including call
routing by origination point and time-of-day routing. In addition, AT&T Business
Services provides virtual private network applications, including dedicated
outbound facilities.

     AT&T Business Services offers audio and video teleconferencing services, as
well as web-based video conferencing. These services offer customers the ability
to establish automated teleconference lines, as well as teleconferences
moderated by an AT&T representative. Customers can also establish a dedicated
audio conference number that can be used at any time without the necessity of a
reservation.

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

     Business local services.  AT&T Business Services' local services provides a
wide range of local voice and data telecommunications services in major
metropolitan markets throughout the United States. Services include basic local
exchange service, Centrex, exchange access, private line, high speed data, pay
phone and video services. AT&T Business Services typically offers local service
as part of a package of services that can include combinations of other AT&T
Business Services offerings.

     Integrated Voice/Data/IP Offers.  AT&T Business Services provides a variety
of integrated service offers targeted at business customers. For small
businesses, AT&T's All in One(R) service offering provides both local and long
distance services through a single bill, providing discounts based on volume and
term commitments. The AT&T Business Network service offers a wide range of voice
and data services through a single service package. Among the features of the
integrated services offering is the ability to enable customers to
electronically order new services, perform maintenance and manage administrative
functions.

     AT&T also has a number of integrated voice and data services, such as
Integrated Network Connections, that provide customers the ability to integrate
access for their voice and data services and thereby qualify for lower prices.

  DATA AND INTERNET SERVICES

     Private Line Services.  AT&T Business Services' data services include
private line and special access services that use high-capacity digital circuits
to carry voice, data and video or multimedia transmission from point-to-point in
multiple configurations. These services provide high-volume customers with a
direct connection to an AT&T Business Services' switch instead of switched
access shared by many users. These services permit customers to create internal
computer networks and to access external computer networks and the Internet,
thereby reducing originating access costs.

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

                                        3
<PAGE>

     AT&T Business Internet Services.  AT&T Business Services provides IP
connectivity and managed IP services, messaging, and electronic commerce
services to businesses. AT&T offers managed Internet services, which give
customers dedicated, high-speed access to the Internet for business applications
at a variety of speeds and types of access, as well as business dial-up service,
a dial-up version of Internet access designed to meet the needs of small- and
medium-sized businesses. AT&T's web services consist of a family of hosting and
transactional services and platforms serving the web needs of thousands of
businesses; these offers include AT&T Small Business Hosting Services.

  MANAGED SERVICES AND OUTSOURCING SOLUTIONS

     AT&T Business Services provides clients with an array of managed networking
services, professional services and outsourcing solutions intended to satisfy
clients' complete networking technology needs, ranging from managing individual
network components such as routers and frame relay networks to managing entire
complex global networks. AT&T Business Services also works selectively with
qualified partners to offer enhanced services to customers.

     Enterprise Networking Services.  With a presence in 60 countries and 850
different cities, AT&T Business Services' enterprise networking services provide
comprehensive support from network design, implementation and installation to
ongoing network operations and lifecycle management of solutions for networks of
varying scales, including Local Area Networks, Wide Area Networks, and Virtual
Private Networks. These managed enterprise networking services include
applications such as e-mail, voice over IP, order entry systems, employee
directories, human resource transaction and other database applications.

     Web Services.  AT&T Business Services' managed web hosting services support
clients' hosted infrastructure needs from the network layer up to managing the
performance of their business applications. With 18 Internet Data Centers
located on three continents and with a capacity of more than 1.8 million square
feet of web hosting space, AT&T's hosting services provide a flexible, managed
environment of network, server and security infrastructure as well as built-in
data storage. AT&T's suite of managed hosting services includes application
performance management, database management, hardware and operating system
management, intelligent content distribution services, high availability data
and computing services, storage services, managed security and firewall
services. AT&T's web hosting services also include a range of business tools,
including client portal services that provide managed hosting customers with
personalized, secure access to detailed reporting information about their
infrastructure and applications.

     High Availability and Security Services.  AT&T Business Services' high
availability and security services deliver integrated solutions to ensure the
continuous operations of clients' critical business processes and availability
of critical data and includes business continuity and disaster recovery
services.

     Outsourcing Solutions.  AT&T Business Services provides customers
consulting, outsourcing and management services for their highly complex global
data networks, including networking-based electronic commerce applications.

TRANSPORT

     AT&T Business Services provides wholesale networking capacity and switched
services to other carriers. AT&T Business Services offers a combination of
high-volume transmission capacity, conventional dedicated line services and
dedicated switched services on a regional and national basis to Internet Service
Providers (ISPs) and facility-based and switchless resellers. AT&T Business
Services' wholesale customers are primarily large tier-one ISPs, competitive
local exchange carriers, regional phone companies, interexchange carriers, cable
companies and systems integrators. AT&T Business Services focuses on ensuring
optimal network utilization through the sale of off-peak capacity. AT&T Business
Services also has sold dedicated network capacity through indefeasible
rights-of-use agreements under which capacity is furnished for contract terms as
long as 25 years.

                                        4
<PAGE>

SALES AND MARKETING

     AT&T Business Services markets its voice and data communications services
through its global sales and marketing organization of approximately 6,800 sales
representatives. The sales and marketing group also uses several outside
telemarketing firms. In addition, the AT&T Solution Center provides a
centralized resource for complex customer requirements.

CUSTOMER CARE AND SUPPORT

     AT&T Business Services' customer care handles contracting, collections,
ordering, provisioning and maintenance processes worldwide. In the U.S. there
are 12,133 customer care associates at 47 customer care centers, of which 41 are
company-owned and 6 are operated by outside customer care firms. For larger and
multinational customers and government agencies, AT&T Business Services provides
customer care services and support through dedicated account teams. Through a
dedicated customer care website customers may submit questions or initiate
service requests, including ordering new services or submitting maintenance
requests.

RATES AND BILLING

     AT&T Business Services provides the majority of its services through
long-term contracts. General descriptions of AT&T Business Services' services,
applicable rates, warranties, limitations on liability, user requirements and
other material service provisioning information are outlined in service guides
that are provided directly to prospective clients or are available on AT&T's
website. Customers enter into contracts, based on the service guides, detailing
customer-specific terms and information, including volume discounts, service
bundling, extended warranties and other customized terms. Through combined
offerings, AT&T Business Services also provides customers with such features as
single billing, unified services for multi-location companies and customized
calling plans. Most intrastate services are provided in accordance with
applicable tariffs filed with the states.

NETWORK

     AT&T Business Services' U.S. network comprises 54,000 route miles of
long-haul backbone fiber-optic cable, plus another 19,600 route miles of local
metropolitan fiber, capable of carrying high speed (10 billion bits or 10
gigabits per second) of traffic. AT&T Business Services upgrades this fiber
network, recently completing the installation of over 12,000 new route miles of
the latest generation fiber-optic cable capable of carrying 40 gigabits per
second when that technology is commercially available. This new fiber capacity
provides AT&T substantial capacity for potential future growth of network
traffic with low incremental capital expenditure requirements. In addition, AT&T
Business Services also has over 700 points-of-presence in the continental U.S.
with the majority served by high-speed fiber-based technology offering
high-speed data connectivity to the majority of U.S. business centers.

     The AT&T Business Services' network also supports AT&T Consumer Services.
On an average business day, the network handles more than 300 million voice
calls, as well as 3,000 trillion bytes (terabytes) of data. On the voice
network, AT&T Business Services employs its patented Real Time Network Routing
to automatically complete domestic voice calls through more than 100 possible
routes. The reliability of certain portions of the network is maximized by using
Synchronous Optical Network rings that can restore service following a network
failure within 50 to 60 milliseconds by reversing the flow of traffic on the
ring. On other routes, AT&T uses its patented FASTAR technology to route traffic
around a fiber-optic cable cut using spare transport capacity elsewhere on the
network. Most recently, AT&T has deployed Intelligent Optical Switches across
the network to expand AT&T's ability to rapidly and automatically restore
network traffic that might be otherwise affected by cable cut or equipment
failure.

     AT&T Business Services has been deploying Dense Wavelength Division
Multiplexing (DWDM) technology that divides an optical fiber into multiple
wavelengths, each now carrying up to 10 gigabits per second of information. When
DWDM was introduced in 1996, the technology could transmit only eight

                                        5
<PAGE>

different wavelengths on a fiber strand. AT&T Business Services is currently
deploying 64- and 80-wavelength DWDM systems, as well as systems capable of
carrying 160 wavelengths per strand.

     Since digital switching was introduced in the late 1970s, the basic element
of the AT&T long-distance voice network has been a circuit switch which was
specifically designed for long-haul use. Currently AT&T Business Services
employs 143 of these switches in the network. AT&T Business Services has
recently installed more than 60 of the latest high-performance carrier-grade
voice switches that allow AT&T to accommodate the transition from
circuit-switched to packet networks. AT&T Business Services will continue to
have both circuit and packet switching technologies for some time.

     In addition to its long distance network, AT&T Business Services has an
extensive local network serving business customers in 90 U.S. cities. AT&T
Business Services' local network now includes 155 local switches and reaches
more than 6,300 buildings with approximately 7,500 miles of fiber. This network
provides voice service and high-speed data connections to business users. In
order to maximize asset utilization, AT&T's local network also handles consumer
traffic, providing most of the dial-in numbers for AT&T Worldnet Service.

     AT&T Business Services also operates one of the largest IP networks in the
United States. As a tier-one provider, AT&T has direct peering relationships
with other tier-one providers, providing service to carriers that route through
public peering sites. AT&T offers multiple access choices to the IP network,
including dial-up, dedicated private line, and digital subscriber loop (DSL), as
well as IP-enabled access through ATM and frame relay networks.

     AT&T Business Services has deployed Internet Data Centers across the U.S.,
offering web-hosting services. AT&T Business Services has 18 Internet Data
Centers, with an aggregate 1.8 million square feet of space, all directly
connected to AT&T Business Services' high-speed IP backbone.

INTERNATIONAL

     AT&T Business Services has entered into a number of agreements and
alliances with international communications companies in order to provide
customers end-to-end network management capabilities and highly customized
solutions. AT&T also has investments with international operations including
foreign communications companies. AT&T is also building out its Global Network
(AGN) in over one hundred cities in various countries.

     AT&T Latin America Corp.  On August 28, 2000, AT&T established AT&T Latin
America in connection with the merger of Netstream, a competitive local exchange
carrier in Brazil, followed by the merger of FirstCom Corporation. AT&T Latin
America provides voice, data and Internet access services in five countries,
Argentina, Brazil, Chile, Colombia and Peru. AT&T owns an approximately 69%
economic interest (approximately 95% voting interest) in AT&T Latin America.
AT&T and the Southern Cross Group, LLC have entered into a non-binding letter of
intent, effective as of December 31, 2002, pursuant to which AT&T has agreed to
sell to the Southern Cross Group, LLC AT&T's entire common equity interest in
AT&T Latin America subject to the negotiation and execution of definitive
documents and receipt of any necessary approvals.

     Alestra. S. de R.L. de C.V.  AT&T also owns a 49% economic interest in
Alestra S. de R.L. de C.V., a competitive telecommunications company in Mexico.
Alestra offers domestic and international voice, data and Internet services
throughout Mexico to business and residential customers. Alestra's network
comprises 3,500 route miles, with four interconnection points to AT&T Business
Services' network at the U.S.-Mexico border.

     Alestra is currently in a liquidity crises and is overdue in making its
November interest payment on its existing notes. To address this liquidity
crises and maintain its viability, Alestra is seeking to restructure its
existing indebtedness to reduce the outstanding aggregate amount of the notes,
to lower interest payments and extend the maturity on the notes. If Alestra's
current restructuring proposal is consummated, the restructuring will be
financed by a capital contribution from Alestra's shareholders in the amount of
$80 million, with AT&T's pro rata share being approximately $39 million.

                                        6
<PAGE>

AT&T LABS

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

PATENTS, TRADEMARKS AND SERVICE MARKS

     AT&T actively pursues patents, trademarks and service marks to protect its
intellectual property within the United States and abroad. AT&T received over
300 patents in 2002 and maintains a global portfolio of over 3,500 trademark and
service mark registrations.

                     DESCRIPTION OF AT&T CONSUMER SERVICES

OVERVIEW

     AT&T Consumer Services is the leading provider of domestic and
international long distance and transaction based communications services to
residential consumers in the United States with approximately 50 million
customer relationships. AT&T Consumer Services provides a broad range of
communications services to consumers individually and in combination with other
services, including:

     - domestic and international long distance;

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

     - local calling offers; and

     - Internet service through its AT&T Worldnet(R) Service.

INDUSTRY OVERVIEW

     The communications services industry continues to change competitively and
technologically both domestically and internationally, providing significant
complexity and risks to the participants in these markets. In the United States,
the Telecommunications Act has had a significant impact on AT&T Consumer
Services' business by establishing a statutory framework for opening the local
service markets to competition and by allowing regional phone companies to
provide in-region long distance services bundled with their existing local
offers franchise. In addition, prices for long distance minutes and other basic
communications services have declined as a result of competitive pressures,
excess network capacity, the introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. In particular,
consumer long distance voice usage is declining as a result of substitution of
wireless services, Internet access and e-mail/instant messaging services.

     The consumer long distance market is characterized by rapid deregulation
and intense competition among long distance providers, and, more recently,
incumbent local exchange carriers. Under the Telecommunications Act, a regional
phone company may offer long distance services in a state within its region if
the Federal Communications Commission (FCC) finds, first, that the regional
phone company's service territory within the state has been sufficiently opened
to local competition, and second, that allowing the regional phone company to
provide these services is in the public interest. As of February, 2003, regional
phone companies have received approval to offer long distance in thirty-five
states and AT&T expects that regional phone companies will be successful in
obtaining approval to offer long distance in most or all of the remaining states
during 2003. The incumbent local exchange carriers presently have numerous
competitive advantages as a result of their historic monopoly control over local
exchanges. While these dynamics are creating downward

                                        7
<PAGE>

pressure on stand-alone long distance services, new opportunities are being
created in the consumer market, including local, data and bundled offers.

     The local voice market is currently dominated by the incumbent local
exchange carriers. The Telecommunications Act has established a statutory
framework for opening the local service markets to competition. AT&T Consumer
Services has already entered the local voice business in selected markets and
expects to expand its presence in this area. AT&T Consumer's ability to remain
in its current local voice markets and to enter and offer local voice services
in new markets is dependent upon the continuation, or in some cases the
implementation, of fair regulatory rules and prices for AT&T Consumer to
purchase certain network capabilities from incumbent local exchange carriers.

     The data services market in the consumer segment is comprised primarily of
Internet access, utilizing either dial-up or broadband access technologies.
Currently, AT&T Consumer Services offers both dial-up and AT&T-branded DSL
internet access services.

SERVICES AND PRODUCTS

  LONG DISTANCE

     AT&T Consumer Services provides interstate and intrastate long distance
telecommunications services throughout the continental United States and
provides, or joins in providing with other carriers, telecommunications services
to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international
telecommunications services to and from virtually all nations and territories
around the world. Consumers can use AT&T Consumer Services' domestic and
international long distance services through traditional "one plus" dialing of
the desired call destination, through dial-up access or through use of AT&T
calling cards.

     In the continental U.S., AT&T Consumer Services provides long distance
telecommunications services over AT&T's backbone network.

  BUNDLED LOCAL AND LONG DISTANCE (ALL DISTANCE)

     At the end of 2002, AT&T Consumer Services offered customers combined local
and long distance services in portions of eight states. AT&T Consumer Services
handles all aspects of the phone service for the customer, including ordering,
customer service, billing, repair and maintenance. AT&T Consumer Services also
offers many of the same local calling features as the incumbent local exchange
carriers, such as call waiting and caller ID.

  CALLING CARD

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

  TRANSACTION-BASED SERVICES

     AT&T Consumer Services offers a variety of transaction-based services that
are designed to provide customers with an alternative to access long distance
services as well as to provide assistance in completing long distance
communications.

     AT&T PrePaid Card.  AT&T is the leading provider of domestic prepaid card
services. AT&T PrePaid cards provide local, long distance and international
calls charged to an AT&T PrePaid card account maintained on AT&T's PrePaid
platform. AT&T PrePaid cards are available in over 60,000 retail locations. The
majority of AT&T Consumer's prepaid card sales in 2002 were to Wal-Mart Stores,
Inc. under an agreement with a one-year term, and the sales to that customer
comprised approximately 5% of AT&T

                                        8
<PAGE>

Consumer Services' revenue and 67% of prepaid card revenue. The agreement is
currently scheduled to expire in January 2004 but could be subject to early
termination if certain events occur.

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

     1-800CALLATT(R) (Collect).  1-800CALLATT for collect calls is AT&T Consumer
Services' lead discounted collect calling offer.

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

     AT&T Direct Services.  AT&T Consumer Services provides customers with the
ability to reach the AT&T network from outside the U.S. By dialing the access
code associated with the country of origin, customers can receive all the
benefits of AT&T Consumer Services' calling card and operator-assisted calling
services.

     AT&T True Messages.  AT&T True Messages is a voice storing and forwarding
service. Using this service, callers can record a message in their own voice and
have it delivered to a telephone number that they called or they can access AT&T
True Messages directly and send a message.

     Easy reach 800.  AT&T Consumer Services offers a personal 800 number that
lets people call home from virtually any phone, anytime, anywhere in the U.S. as
an option to collect calling.

     Accessible Communication Service.  AT&T Consumer Services provides
Telecommunications Relay Service for the deaf and hearing-impaired and speech
impaired customers to help them communicate with anyone in the world on the
phone.

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

AT&T WORLDNET SERVICE

     AT&T offers dial-up and DSL Internet access to consumer with its AT&T
Worldnet Service, a leading provider of Internet access services in the United
States. AT&T Worldnet Service offers internet-based communications services such
as e-mail, content, personal web pages, and instant messaging. This product line
was broadened in 2002 with the addition of a pre-paid Internet product and the
Any Connection Plan, a "Bring Your Own Access" product for users of AT&T
Worldnet on broadband connections where the AT&T DSL product is not available.

     On January 6, 2003, AT&T announced an extension of an existing agreement
with data services provider Covad Communications Group, Inc. ("Covad") to
broaden availability of consumer broadband AT&T DSL Service. Under this
arrangement, AT&T expects to pursue offering DSL services to residential
customers throughout the U.S., using Covad's nationwide network. Covad's network
covers more than 40 million homes and businesses in 96 of the largest
Metropolitan Statistical Areas (MSAs) throughout the U.S.

MARKETING, SALES AND CUSTOMER CARE

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

                                        9
<PAGE>

     AT&T Consumer Services relies on an integrated sales and service team to
solicit and handle customer contact opportunities. The customer care centers
consist of a network of 22 service centers, of which 10 are operated by AT&T and
12 are outsourced to outside vendors. The breadth of support provided by the
centers ranges from universal sales and service to specialized services based on
functional area or customer needs.

     AT&T Consumer Services also has begun to implement various initiatives
aimed at improving the overall quality of its sales channels as well as lowering
its costs of adding new subscribers, including the expansion of AT&T Consumer
Services' on-line capacity and capabilities, including billing, sales and
service, and the increased use of interactive voice response technology. AT&T
Consumer Services is also pursuing the use of e-mail to create a more
convenient, interactive relationship with the consumer, while streamlining its
existing processes and reducing the costs of providing services.

     In January 2002, AT&T entered into a five-year agreement with Accenture
which requires Accenture to provide new technology development and ongoing
management direction to improve AT&T Consumer Services' customer care and sales
operations, with goals of reducing costs, raising productivity, and improving
sales and customer service.

CUSTOMER OFFERS

     AT&T Consumer Services offers long distance customers a family of calling
plans. Currently, there are two leading long distance offers. The first is the
AT&T One Rate(R) 7c Plan. For a monthly plan fee of $4.95, customers pay 7c per
minute for direct dialed state-to-state long distance calls from home, at all
times. The second is the AT&T Unlimited(SM) Plan, which offers AT&T residential
long distance subscribers unlimited intraLATA and interLATA long distance calls
from home to all other AT&T residential long distance customers served by AT&T
Consumer Services in the United States for $19.95 per month. All other domestic
direct-dialed calls under this plan are priced at 7 cents per minute.

     AT&T Consumer Services also offers various reward and partnership programs
for higher spending long distance customers. For example, customers enrolled in
AT&T rewards receive redemption options every six months based on their long
distance spending. AT&T Consumer Services relationships with third parties
provide customers with options ranging from airline miles to hotel nights to
premium cable channel upgrades to college education savings accounts.

     AT&T Worldnet Service seeks to build brand recognition and customer
loyalty. In addition to direct marketing through brand name mass advertising,
direct mail and magazine insert promotions and bundling offers, AT&T Worldnet
Service maintains a large indirect channel marketing effort thorugh which AT&T
Worldnet Service software is bundled in new computers produced by major
manufacturers and is included in millions of copies of software titles published
by independent software vendors. AT&T Worldnet Service also has a co-branded ISP
offer that enables businesses to offer customers their own branded,
full-featured Internet access in affiliation with AT&T.

RATES AND BILLING

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

     AT&T Consumer Services long distance charges may include fees per minute
for transporting a call, per call or per minute surcharges, monthly recurring
charges, minimums and price structures that offer a fixed number of minutes each
month for a specific price and price structure that offer unlimited calling to
certain numbers for a monthly fee. The fees per minute for transporting a call
may vary by time of day or length of call and by whether the call is domestic or
international. Within the United States, in-state rates may vary from interstate
rates. These rate structures apply to customer dialed calls, calling card calls,
directory

                                        10
<PAGE>

assistance calls, operator-assisted calls and certain miscellaneous services.
Customers also may be assessed a percentage of revenue, or a fixed monthly fee,
to satisfy AT&T Consumer Services' obligations to recover U.S. federal- and
state-mandated assessments and access surcharges.

     Customers for combined long distance and local services are usually charged
a flat rate per month for local service and usage fees and/or monthly charges
for long distance. AT&T Worldnet Service offers a variety of pricing plan
options. Generally, customers are charged a flat rate for a certain number of
hours with charges for each additional hour of usage. AT&T Worldnet Service also
offers a plan without a usage restriction.

     AT&T Consumer Services generally provides billing via traditional paper
copy or on-line billing.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

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

     In August 1996, the FCC adopted rules and regulations, including pricing
rules, to implement the local competition provisions of the Telecommunications
Act. These rules and regulations rely on state public utility commissions (PUCs)
to develop the specific rates and procedures applicable to particular states
within the framework prescribed by the FCC. Numerous parties sought appeal of
the FCC's order. In July 1997, the Eighth Circuit Court of Appeals (Eighth
Circuit) issued a decision holding that the FCC lacked authority to establish
pricing rules under the Telecommunications Act applicable to interconnection
with, and the purchase of unbundled network elements and wholesale services
from, incumbent local exchange carriers. The Eighth Circuit accordingly vacated
the rules that the FCC had adopted in August 1996.

     The Supreme Court also vacated the FCC's rule identifying and defining the
unbundled network elements that incumbent local exchange carriers are required
to make available to new entrants, and directed the FCC to reexamine this issue
in light of the standards mandated by the Telecommunications Act. In November
1999, the FCC completed its reexamination of the unbundled network elements that
incumbent local exchange carriers are required to make available to new
entrants, and released an order (UNE Remand Order) that re-adopted the original
list of elements, with certain limited exceptions. This order was appealed to
the District of Columbia Circuit Court of Appeals (D.C. Circuit). In December
2001 the FCC opened a proceeding to review the availability of unbundled network
elements based on current market conditions (Triennial Review).

     On May 13, 2002, the Supreme Court held that a prior Eighth Circuit Court
ruling had erred by invalidating the FCC rule that the prices for network
elements should be based on the most efficient alternatives. It also rejected
the claim by the incumbent local exchange carriers that the Eighth Circuit erred
by not requiring prices to be based on their historical cost. It further
reinstated the FCC's rules requiring incumbent local exchange carriers to
provide competitors with "new" combinations of network elements. On May 24,
2002, the D.C. Circuit ruled on the appeal from the FCC's 1999 UNE Remand Order.
The D.C. Circuit held that the FCC had not properly justified its holding that
competitive carriers were impaired without access to the network elements of
incumbent LECs. AT&T and others have asked the Supreme Court to review this
decision.

     The FCC stated that it would address the D.C. Circuit's decision in the
FCC's Triennial Review proceeding. On February 20, 2003, in a 3-2 vote, the FCC
adopted a new unbundling framework. Under the new framework, each State
Commission is authorized to conduct a granular analysis of local market
conditions, using criteria provided by the FCC, to make final unbundling
determinations. In the same Order, the FCC also granted the incumbent local
exchange companies significant broadband deregulation, concluding that the
incumbent LECs are no longer required to unbundle fiber-to-the-home loops or
bandwidth in hybrid copper-fiber loops for the provision of competitive
broadband services. The FCC also eliminated all line-sharing obligations. The
FCC's new rules were announced in a detailed news release, but the final written

                                        11
<PAGE>

order is not expected until at least March 2003. Therefore, final details cannot
be known until that time. It is highly likely that several decisions in this
order will be appealed by certain carriers to the relevant federal Court of
Appeals, and some parties may seek to stay the effectiveness of the new rules.

     It is likely that the United States House of Representatives will consider
legislation in 2003 that would further deregulate the incumbent local exchange
carriers; however, the prospects that the United States Senate will pass any
such legislation remains uncertain. The FCC also opened proceedings in December
2001 and in February 2002 that could further reduce the level of federal
oversight of the regional phone companies' broadband offerings.

     In view of the proceedings pending before the courts, the FCC and state
PUCs, and possible legislation, there can be no assurance that the prices and
other conditions established by the FCC and in the various states will provide
for effective local service entry and competition or provide AT&T with new
market opportunities.

     Regulation of Rates.  AT&T is subject to the jurisdiction of the FCC with
respect to interstate and international rates, lines and services, and other
matters. From July 1989 to October 1995, the FCC regulated AT&T under a system
known as "price caps" whereby AT&T's prices, rather than its earnings, were
limited. On October 12, 1995, recognizing a decade of enormous change in the
long distance market and finding that AT&T lacked market power in the interstate
long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for
its domestic interstate services. Subsequently, the FCC determined that AT&T's
international services were also non-dominant. As a result, AT&T became subject
to the same regulations as its long distance competitors for these services.

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

     AT&T remains subject to the statutory requirements of Title II of the
Communications Act of 1934, as amended. AT&T must offer telecommunications
services under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory. It also is subject to the FCC's complaint process,
and it must give notice to the FCC and affected customers prior to
discontinuance, reduction or impairment of service.

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

     In May 2000, the FCC adopted the CALLS order for the price cap local
exchange carriers, which made additional significant access and price cap
changes. The CALLS order reduced by $3.2 billion during 2000 the interstate
access charges that AT&T and other long distance carriers paid to these local
exchange carriers for access to their networks, and established target access
rates, which, over the subsequent two years, resulted in further reductions,
albeit of a much smaller magnitude. Once the target rates are reached, the
annual price reductions required by the price cap order no longer apply. Also,
under the CALLS order, the caps on certain line-based charges to end users have
been increased so that these costs increasingly are recovered from end user
customers rather than long distance carriers. In addition, the CALLS order
removed implicit subsidies from access charges and converted them into an
explicit, portable subsidy administered as part of the universal service program
described below. These restructurings allowed the reduction in access charges
assessed on long distance carriers on a usage basis. As part of the CALLS order,
AT&T agreed to pass through to customers access charge reductions over the
five-year life of the CALLS order and made certain other commitments regarding
the rate structure of certain residential long distance offerings. The FCC CALLS
order was reversed and remanded in part, and is the subject of ongoing remand
proceedings before the FCC.

     In November 2001, the FCC adopted various measures that reduced per-minute
interstate access charges that AT&T pays to the remaining local exchange
carriers that operate under rate of return regulation and provide about 8% of
the nation's phone lines. Once these changes are fully implemented by July 2003,
it is expected that long distance carriers will be paying about $900 million (or
roughly 50%) per year less in access charges to these generally small, rural
local exchange carriers. The FCC did not require long distance carriers,

                                        12
<PAGE>

such as AT&T, to pass on their savings to end users, but expected competition to
force them to do so. To offset the reductions in access charges paid by long
distance carriers, the local exchange carriers were allowed to increase their
line-based charges to end users to the same levels established for the price cap
carriers, and were granted additional subsidies from a new universal service
mechanism. As part of this ongoing proceeding, the FCC is considering further
measures that would give these carriers additional pricing flexibility and
possibly the option to operate under some form of price cap regulation.

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

     Sprint PCS, a wireless carrier, sued AT&T for access charges for AT&T long
distance calls terminated on Sprint PCS' network and for toll-free calls that
Sprint PCS customers originated and which were terminated on AT&T's network.
AT&T refused to pay Sprint PCS based on longstanding industry practice that
wireless carrier-long distance carrier interconnection is on a bill and keep
basis and that wireless carriers had charged their customers for calls they
received. In July 2002, the FCC ruled that wireless carriers such as Sprint PCS
are not prohibited from charging AT&T access charges, but that AT&T was not
required to pay such charges absent a contractual obligation to do so. The FCC
further held that the question whether the parties entered into a contract
concerning an access payment obligation is not a matter of federal
communications law but rather should to be determined by the district court that
had referred the issue to the FCC. AT&T has petitioned for review of the FCC's
ruling in the U.S. Court of Appeals for the District of Columbia Circuit, AT&T
Corp. v. FCC et al., (D.C. Circuit filed Aug. 1, 2002). Because there was no
express contract between the AT&T and Sprint PCS, if the appeal is unsuccessful,
the district court will need to determine whether an implied-in-fact contract
can be inferred from the parties' conduct and their tacit understanding. An
adverse decision in this litigation may result in additional wireless carriers
seeking similar compensation from AT&T. AT&T believes the case is without merit
and intends to defend vigorously, but cannot predict the outcome of any such
proceeding.

     Finally, in the May 1997 universal service order, the FCC adopted a new
mechanism for funding universal service, which includes programs that defray the
costs of telephone service in high-cost areas, for low-income consumers, and for
schools, libraries and rural health care providers. Specifically, the FCC
expanded the set of carriers that must contribute to support universal service
from solely long distance carriers to all carriers, including local exchange
carriers, that provide interstate telecommunications services. Similarly, the
set of carriers eligible for the universal service support has been expanded
from only local exchange carriers to any eligible carrier providing local
service to a customer, including AT&T as a new entrant in local markets. The
universal service order also adopted measures to provide discounts on
telecommunications services, Internet access and inside wiring for eligible
schools and libraries and on telecommunications services only for rural health
care providers. The mechanism used to collect universal service contributions
relies on historical revenues, which disproportionately shifts the burden of
these programs to carriers that are losing market share, like AT&T in the long
distance market, to carriers that are growing market share. In December 2002,
the FCC reformed the universal service assessment mechanism so that, effective
April 2003, it will be based on projected revenues, which eliminates the
disadvantage that AT&T previously experienced. The December 2002 order also
limited how carriers would be able to reflect universal service fees on their
end-user customers' bills and permitted alternative recovery mechanisms for
administrative costs.

                                  COMPETITION

     Competition in communications services is based on price and pricing plans,
types of services offered, customer service, access to customer premises and
communications quality, reliability and availability. AT&T's principal
competitors include Worldcom, Sprint and regional phone companies. AT&T also

                                        13
<PAGE>

experiences significant competition in long distance from newer entrants as well
as dial-around resellers. In addition, long distance telecommunications
providers have been facing competition from non-traditional sources, including
as a result of technological substitutions, such as Internet telephony, high
speed cable Internet service, e-mail and wireless services. Providers of
competitive high-speed data offerings include cable television companies, direct
broadcast satellite companies and DSL resellers.

     Incumbent local exchange carriers own the only universal telephone
connection to the home, have very substantial capital and other resources,
long-standing customer relationships and extensive existing facilities and
network rights-of-way, and are AT&T's primary competitors in the local services
market. AT&T also competes in the local services market with a number of
competitive local exchange carriers, a few of which have existing local networks
and significant financial resources.

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

     In addition, the Telecommunications Act permits regional phone companies to
provide in-region interLATA interexchange services after demonstrating to the
FCC that providing these services is in the public interest and satisfying the
conditions for developing local competition established by the
Telecommunications Act. Regional phone companies have obtained permission from
the FCC to provide interLATA interexchange services in thirty five states. AT&T
expects that the regional phone companies will be successful in obtaining
approval to offer long distance in most or all of the remaining states during
2003.

     To the extent that regional phone companies obtain in-region interLATA
authority before the Telecommunications Act's checklist of conditions have been
fully or satisfactorily implemented and adequate facilities-based local exchange
competition exists, or before there is an ability to resell at fair and
competitive rates, there is a substantial risk that AT&T and other interexchange
service providers will be at a disadvantage to regional phone companies in
providing both local service and combined service packages. Because substantial
numbers of long distance customers seek to purchase local, interexchange and
other services from a single carrier as part of a combined or full service
package, any competitive disadvantage, inability to profitably provide local
service at competitive rates or delays or limitations in providing local service
or combined service packages could materially adversely affect AT&T's future
revenue and earnings. In any event, the simultaneous entrance of numerous new
competitors for interexchange and combined service packages is likely to
materially adversely affect AT&T's future long distance revenue and earnings.

     In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services, local conditions and obstacles,
and changes in regulations that grant to AT&T access to regional phone
companies' infrastructure, could materially adversely affect the timing and
success of AT&T's entrance into the local exchange services market and AT&T's
ability to offer combined service packages that include local service.

                                   EMPLOYEES

     At December 31, 2002 AT&T employed approximately 71,000 persons in its
operations, approximately 93% of whom are located domestically. About 37% of the
domestically located employees of AT&T are represented by unions. Of those so
represented, about 95% are represented by the Communications Workers of America
(CWA), which is affiliated with the AFL-CIO; about 4% by the International
Brotherhood of Electrical Workers (IBEW), which is also affiliated with the
AFL-CIO. In addition, there is a very small remainder of domestic employees
represented by other unions. Labor agreements covering most of these employees
extend through November 2003.

                                        14
<PAGE>

     At December 31, 2002, AT&T Business Services employed approximately 54,100
individuals in its operations. Of those employees, approximately 49,300 are
located domestically. About 26% of the domestically located employees of AT&T
Business Services are represented by unions.

     At December 31, 2002, AT&T Consumer Services employed approximately 13,200
individuals in its operations, virtually all of whom are located in the United
States. About 73% of the domestically located employees of AT&T Consumer
Services are represented by unions.

                  SEGMENT, OPERATING REVENUE AND RESEARCH AND
                        DEVELOPMENT EXPENSE INFORMATION

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

                             AVAILABLE INFORMATION

     Shareowners may access and download free of charge via a hyperlink on
AT&T's website at att.com/ir copies of the Company's annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports. These documents are generally available on the same
day they are filed or furnished electronically by AT&T with the Securities and
Exchange Commission.

              CONTINUING IMPLICATIONS OF SPLIT-OFFS AND SPIN-OFFS

     Since 1997 AT&T has split-off or spun-off a number of operating units
including Lucent Technologies Inc., NCR Corp., AT&T Wireless Services, Inc.,
Liberty Media Corporation and AT&T Broadband. In connection with these
transactions, AT&T has retained various potential obligations and liabilities
relating to these former units; for example, AT&T has entered into various
agreements which contain allocations or sharing of certain potential costs or
liabilities or otherwise contain continuing potential burdens or restrictions on
AT&T. These potential obligations and liabilities include potential tax
liabilities and restrictions, potential litigation liabilities and the potential
for liability in connection with AT&T guarantees to third parties of obligations
of its former units.

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

     Because of restrictions imposed by Section 355(e) of the Internal Revenue
Code, AT&T's ability to enter into certain transactions involving the issuance
of significant amounts of its stock may be limited. Under agreements between
AT&T and AT&T Broadband/Comcast, AT&T generally has agreed not to engage in such
transactions for a period of 25 months following the spin-off of AT&T Broadband
without a counsel's

                                        15
<PAGE>

opinion or ruling from the IRS, in each case in form and substance reasonably
satisfactory to AT&T Broadband/Comcast. AT&T believes that the practical impact
of these restrictions will diminish significantly with the passage of time.

     Litigation.  Pursuant to agreements entered into with its former units,
AT&T shares in the cost of certain litigation (relating to matters arising while
the units were affiliated with AT&T) if the settlement exceeds certain
thresholds. For example, in connection with a settlement in 2002 of Sparks v.
AT&T, a class action against AT&T, Lucent Technologies and other defendants
filed in 1996, pursuant to agreements between AT&T and Lucent Technologies, AT&T
was responsible for its proportionate share of the settlement and estimated
legal costs. This amount totaled up to $33 million, net of tax. With the
exception of the Sparks matter, as of December 31, 2002, AT&T has made the
assessment that none of the potential litigation liabilities relating to matters
arising while the units were affiliated with AT&T were probable of incurring
costs in excess of the threshold above which AT&T would be required to share in
the costs. However, in the event these former units were unable to meet their
obligations with respect to these liabilities due to financial difficulties,
AT&T could be held responsible for all or a portion of the costs, irrespective
of the sharing agreements.

     Guarantees.  From time to time AT&T had guaranteed to third parties the
debt or other obligations of its former units, and in some cases may remain
secondarily liable with respect to such obligations. In addition, in connection
with the split-off or spin-off of its former units, AT&T has issued guarantees
to third parties for certain debt or other obligations of its former units. For
example, in connection with the split-off of AT&T Wireless, AT&T issued a
guarantee in the amount of $3.6 billion plus interest of a put right held by a
third party in the event that AT&T Wireless failed to achieve certain technical
milestones by June 30, 2004. In the event AT&T's former units are unable to meet
obligations which AT&T has guaranteed, the third parties could look to AT&T for
payment.

                             SPECIAL CONSIDERATIONS

     Investors should carefully consider the following factors regarding their
investment in AT&T Corp. securities.

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

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

     - market share loss and loss of key customers;

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

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

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

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

                                        16
<PAGE>

     We Face Competition from a Variety of Sources.

     - AT&T traditionally has competed with other long distance carriers. In
       recent years, AT&T has begun to compete with regional phone companies,
       which own their own access facilities and historically have dominated
       local telecommunications, and with other competitive local exchange
       carriers, for the provision of local and long distance services. Regional
       phone companies have already been permitted to offer long distance
       services in many states within their regions and AT&T expects that they
       will obtain permission to offer long distance services in most or all
       remaining states throughout their regions during 2003. The regional phone
       companies presently have numerous advantages as a result of their
       historic monopoly control over local exchanges and facilities. Some of
       the regional phone companies have financial, personnel and other
       resources significantly greater than those of AT&T.

     - Competition as a result of technological change.  AT&T is also subject to
       additional competitive pressures from the development of new technologies
       and the increased availability of domestic and international transmission
       capacity. The telecommunications industry is in a period of rapid
       technological evolution, marked by the introduction of new product and
       service offerings and increasing satellite, wireless, fiber optic and
       coaxial cable transmission capacity for services similar to those
       provided by AT&T. AT&T cannot predict which of many possible future
       product and service offerings will be important to maintain its
       competitive position, or what expenditures will be required to develop
       and provide these products and services. In particular, the rapid
       expansion of usage of wireless and e-mail services has contributed to an
       overall decline in traffic volume on traditional wireline networks.

     - Competition as a result of excess capacity.  AT&T faces competition as a
       result of excess capacity resulting from substantial network build out by
       competitors that had access to inexpensive capital.

     The Regulatory and Legislative Environment Creates Challenges for
AT&T.  AT&T faces risks relating to regulations and legislation. These risks
include:

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

     - new head-on competition as regional phone companies begin to enter the
       long distance business, and

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

     This dependency on supply materially adversely impacts AT&T's cost
structure, and ability to create and market desirable and competitive end-to-end
products for customers.

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

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

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

                                        17
<PAGE>

     The Financial Condition and Prospects of AT&T May be Materially Adversely
Affected by Further Ratings Downgrades.  On May 29, 2002, Moody's lowered its
rating of long-term debt issued or guaranteed by AT&T to Baa2 from A3. Moody's
also confirmed AT&T's short-term rating as Prime-2. On October 8, 2002, Moody's
confirmed AT&T's Baa2 rating on senior long term debt with a negative outlook.
Moody's ratings outlook for AT&T remains negative but AT&T is not currently on
review for any additional downgrade by Moody's. On June 3, 2002, Fitch Ratings
also downgraded AT&T's long-term debt rating to BBB+ from A-, with the rating
remaining on Rating Watch Negative pending completion of the AT&T Comcast
transaction. On November 18, 2002, Fitch affirmed the BBB+ rating on AT&T,
removed the ratings from Rating Watch Negative and assigned an outlook of
stable. On January 31, 2003 Fitch affirmed the ratings at BBB+ but revised the
rating outlook to negative. On November 18, 2002, Standard & Poor's affirmed
AT&T's long-term debt ratings at BBB+, removed the ratings from Credit Watch and
assigned a stable outlook. On January 27, 2003, Standard & Poor's affirmed
AT&T's credit rating at BBB+ but revised the outlook to negative from stable.
Additional debt rating downgrades could require AT&T to pay higher rates on
certain existing debt and pay higher rates or prepay certain operating leases.
If AT&T's ratings are downgraded below investment grade by Standard & Poors or
Moody's, there are provisions in AT&T's securitization programs which could
require the outstanding balances to be paid by the collection of the
receivables. Further ratings actions could occur at any time. As a result, the
cost of any new financings may be higher.

     AT&T's Labor Agreements Expire in November 2003.  At December 31, 2002 AT&T
employed approximately 71,000 persons. About 37% of the domestically located
employees of AT&T are represented by unions. Of those so represented, about 95%
are represented by the Communications Workers of America (CWA) and about 4% by
the International Brotherhood of Electrical Workers (IBEW), both of which are
affiliated with the AFL-CIO. Approximately 93% of these union employees are in
AT&T Business Services or AT&T Consumer Services operations. Approximately
one-third of AT&T Business Services employees are represented by unions and
approximately three-fourths of AT&T Consumer Services employees are represented
by unions.

     AT&T's labor agreements with the CWA and IBEW expire on November 8, 2003
and AT&T expects to begin formal negotiations with the CWA and IBEW in September
2003.

     AT&T cannot predict the outcome of these negotiations. AT&T may be unable
to reach an agreement with these unions prior to the expiration date of the
labor agreements. Union employees may take labor actions prior to the expiration
of the labor agreements, or, if no agreement is reached, thereafter, including
work stoppages or work slowdowns. Such actions could cause material disruptions
to AT&T's ability to provide services and prove costly to AT&T, including as a
result of supporting service delivery through the use of contractor resources.
In addition, new labor agreements may impose significant new costs on AT&T,
which could impair its financial condition and results of operations in the
future.

                                        18
<PAGE>

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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

     -- financial condition,

     -- results of operations,

     -- cash flows,

     -- dividends,

     -- financing plans,

     -- business strategies,

     -- operating efficiencies,

     -- capital and other expenditures,

     -- competitive positions,

     -- availability of capital,

     -- growth opportunities for new and existing products,

     -- benefits from new technologies,

     -- availability and deployment of new technologies,

     -- plans and objectives of management, and

     -- other matters.

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

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

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

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

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

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

                                        19
<PAGE>

     - the availability and cost of capital,

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

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

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

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

     - 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 the Company has no control.

     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.

ITEM 2.  PROPERTIES

     AT&T's properties consist primarily of plant and equipment used to provide
long distance and local telecommunications services. AT&T properties also
include administrative office buildings. AT&T owns and leases properties to
support its offices, facilities and equipment.

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

     AT&T continues to manage the deployment and utilization of its assets in
order to meet its global growth objectives while at the same time ensuring that
these assets are generating value for the shareholder. AT&T will continue to
manage its asset base consistent with globalization initiatives, marketplace
forces, productivity growth and technology change.

ITEM 3.  LEGAL PROCEEDINGS

     In the normal course of business, AT&T is subject to proceedings, lawsuits
and other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties and outcomes are not predictable with assurance. Consequently,
AT&T is unable to ascertain the ultimate aggregate amount of monetary liability
or financial impact with respect to these matters at December 31, 2002. While
these matters could affect operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to AT&T beyond that provided for at
year-end would not be material to AT&T's annual consolidated financial position
or results of operations.

     The Company has been named as a defendant in several purported securities
class action lawsuits filed in the United States District Courts for the
District of New Jersey and for the Southern District of New York filed on behalf
of persons who purchased securities of the Company for various periods from
October 25, 1999 through May 1, 2000. These lawsuits assert claims under Section
11 of the Securities Act of 1933, as amended, and Section 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and allege, among other things,
that during the period referenced above, the Company made materially false and

                                        20
<PAGE>

misleading statements and omitted to state material facts concerning its future
business prospects. The complaints seek unspecified damages. Similar claims have
been asserted by plaintiffs against the Company in two derivative actions, which
are pending in New Jersey federal court. These class actions have been
consolidated and were, until recently, stayed by the Court. The complaints seek
unspecified damages. The Company believes that the lawsuits are without merit
and intends to defend them vigorously.

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

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

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

     Two putative class actions have been filed in Delaware state court on
behalf of shareholders of AT&T Latin America ("ATTLA"). The complaints allege
that AT&T and its designees to the ATTLA board of directors violated their
fiduciary duties to ATTLA as a result of purported changes in AT&T's
relationship with ATTLA, including AT&T's decision to discontinue funding to
ATTLA and an alleged change in AT&T's plan to enter into a tax sharing agreement
with ATTLA. The plaintiffs seek unspecified damages. The Company believes that
these lawsuits are without merit and intends to defend them vigorously.

     Thirty putative class actions have been filed in various jurisdictions
around the country challenging the manner in which AT&T discloses FCC-imposed
universal service fund charges to its customers and recoups those charges from
its customers. The plaintiffs in each lawsuit seek unspecified damages. The
Company believes that these lawsuits are without merit and intends to defend
them vigorously.

                                        21
<PAGE>

     The Company has been named as a defendant in an action pending in Maryland
federal court in which the plaintiff alleges that the Company misappropriated
the plaintiff's purported trade secrets and proprietary intellectual property
used in the process of analyzing large sets of data, a process which is referred
to as "data mining." The action is scheduled for trial in May 2003. The Company
believes the lawsuit is without merit and is defending it vigorously.

     Numerous class actions have been brought against the Company throughout the
country in which the plaintiffs have asserted superior property rights to the
Company with respect to railroad right of way corridors on which the Company has
installed fiber optic cable under agreements with the various railroads.
Although the Company denies any liability, it has engaged in settlement
negotiations concerning the so-called "active line" claims that have been
consolidated and are pending in Indiana federal court. The Company has settled
claims on a state-by-state basis and recently obtained preliminary approval for
separate settlements of claims in Ohio, Connecticut, Wisconsin and Maryland and
concluded negotiations for a similar settlement for Virginia claims. The Company
anticipates using these settlements as a template for settling other "active
line" claims and doing so in similar groupings of four to six states. However,
these settlements do not involve "active line" claims along railroad right of
way obtained under federal land grant statutes nor do they address claims that
are based upon the installation of fiber optic cable in pipeline or other
utility right of way.

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

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

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

                                    PART II

ITEM 5.  MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
         RELATED SHAREOWNER MATTERS

     AT&T (ticker symbol "T") is listed on the New York Stock Exchange, as well
as the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges in the
United States, and on the Euronext-Paris and the IDR (International Depository
Receipt) in Brussels as well as the London and Geneva stock exchanges. As of
December 31, 2002, AT&T had approximately 783 million shares outstanding, held
by more than 3.3 million shareowners.

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

                                        22
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

                          AT&T CORP. AND SUBSIDIARIES

                SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)

<Table>
<Caption>
                                  2002       2001       2000       1999      1998       1997       1996
                                 -------   --------   --------   --------   -------   --------   --------
                                                               (UNAUDITED)
                                             (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                              <C>       <C>        <C>        <C>        <C>       <C>        <C>
RESULTS OF OPERATIONS AND
  EARNINGS PER SHARE
Revenue........................  $37,827   $ 42,197   $ 46,850   $ 49,609   $47,287   $ 46,226   $ 45,716
Operating income...............    4,361      7,832     12,793     12,544     7,632      6,835      8,341
Income (loss) from continuing
  operations...................      963     (2,640)     9,532      6,019     4,915      4,088      5,064
INCOME FROM CONTINUING
  OPERATIONS
AT&T Common Stock Group:(2)
  Income.......................      963         71      8,044      8,041     4,915      4,088      5,064
  Earnings (loss) per basic
    share......................     1.29      (0.91)     11.54      13.04      9.18       7.65       9.60
  Earnings (loss) per diluted
    share......................     1.26      (0.91)     11.01      12.61      9.10       7.65       9.60
  Cash dividends declared per
    share......................     0.75       0.75     3.4875       4.40      4.40       4.40       4.40
Liberty Media Group:(2)
  (Loss) income................       --     (2,711)     1,488     (2,022)       --         --         --
  (Loss) earnings per basic and
    diluted share..............       --      (1.05)      0.58      (0.80)       --         --         --
ASSETS AND CAPITAL
Property, plant and equipment,
  net..........................  $25,604   $ 26,803   $ 26,083   $ 25,587   $21,780   $ 19,177   $ 16,871
Total assets -- continuing
  operations...................   55,272     62,329     90,293     89,554    40,134     41,029     38,229
Total assets...................   55,272    165,481    242,802    169,499    59,550     67,690     63,669
Long-term debt.................   18,812     24,025     13,572     13,543     5,555      7,840      8,861
Total debt.....................   22,574     34,159     42,338     25,091     6,638     11,895     11,334
Shareowners' equity............   12,312     51,680    103,198     78,927    25,522     23,678     21,092
Debt ratio(3)..................     64.7%      86.3%     122.1%      83.7%     36.7%      57.2%      61.6%
OTHER INFORMATION
Employees -- continuing
  operations(4)................   71,000     77,700     84,800     96,500    94,500    116,800    117,100
AT&T year-end stock price per
  share........................  $ 26.11   $  37.19   $  27.57   $  80.81   $ 79.88   $  65.02   $  43.91
</Table>

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

(1) Prior period amounts have been restated to reflect the spin-off of AT&T
    Broadband and the 1-for-5 reverse stock split, as applicable, both of which
    occurred on November 18, 2002.

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

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

(4) Data provided excludes LMG.

                                        23
<PAGE>

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

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

RESTRUCTURING OF AT&T

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

     On November 18, 2002, AT&T spun-off AT&T Broadband (which was primarily
comprised of the AT&T Broadband segment) to AT&T shareowners. Simultaneously,
AT&T Broadband combined with Comcast Corporation (Comcast). The combination was
accomplished through a distribution of stock to AT&T shareowners, who received
0.3235 of a share (1.6175 shares adjusted for the 1-for-5 reverse stock split)
of Comcast Class A common stock for each share of AT&T they owned at market
close on November 15, 2002, the record date. The Internal Revenue Service (IRS)
ruled that the transaction qualified as tax-free for AT&T and its shareowners
for U.S. federal income tax purposes, with the exception of cash received for
fractional shares. Approximately 1.2 billion new Comcast shares were issued to
AT&T shareowners at a value of approximately $31.1 billion, based on the Comcast
stock price on November 18, 2002. AT&T shareowners received a 56% economic stake
and a 66% voting interest in new Comcast.

     In connection with the non-pro rata spin-off of AT&T Broadband, AT&T wrote
up the net assets of AT&T Broadband to fair value. This resulted in a noncash
gain of $1.3 billion, which represented the difference between the fair value of
the AT&T Broadband business at the date of the spin-off and AT&T's book value in
AT&T Broadband, net of certain charges triggered by the spin-off and their
related income tax effect. These charges included compensation expense due to
the accelerated vesting of stock options as well as the enhancement of certain
incentive plans. The gain was recorded in 2002 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 the time of
disposition, 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 Liberty Media Group (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. The operating results from August 1, 2001, through August 10,
2001, were deemed immaterial to our consolidated results.

     The LMG tracking stock, which had reflected 100% of the performance of LMG,
was issued in 1999 in connection with AT&T's acquisition of Tele-Communications,
Inc. (TCI). AT&T did not have a controlling financial interest in LMG for
financial accounting purposes; therefore, AT&T's 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 Statements of Operations as "Equity (losses) earnings
from Liberty Media Group" prior to its split-off from AT&T.

     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 (1.609 shares adjusted
for the 1-for-5 reverse stock split) 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. The
impact of operating results from July 1, 2001 through July 9, 2001, were deemed
immaterial to our

                                        24
<PAGE>

consolidated results. 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 2001 as a "Gain on
disposition of discontinued operations." At the time of split-off, AT&T retained
approximately $3 billion, or 7.3%, of AT&T Wireless common stock.

     AT&T issued the AT&T Wireless tracking stock in April 2000, 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.

     The earnings attributable to AT&T Wireless Group are excluded from the
earnings available to AT&T Common Stock Group and are included in "Net (loss)
from discontinued operations." 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, is referred to as the
AT&T Common Stock Group and is represented by AT&T common stock.

FORWARD-LOOKING STATEMENTS

     This document may contain forward-looking statements with respect to AT&T's
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 necessary
estimates reflecting the best judgment of senior management that rely on a
number of assumptions concerning future events, many of which are outside AT&T's
control, and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in
light of various important factors that could cause actual results to differ
materially from estimates or projections contained in the forward-looking
statements including, without limitation:

     - the impact of existing and new competitors in the markets in which AT&T
       competes, 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 and profitability,

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

     - the availability and cost of capital,

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

     - 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,

                                        25
<PAGE>

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

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

     - 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 the Company has no control.

     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 this document is filed. 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, 2002, 2001, and 2000, and
financial condition as of December 31, 2002 and 2001.

CRITICAL ACCOUNTING 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
useful lives of plant and equipment, pension and other postretirement benefits,
income taxes and legal contingencies. 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 (see note 2 to the consolidated financial statements for a complete
discussion of AT&T's significant accounting policies):

     Estimated useful lives of plant and equipment -- We estimate the useful
lives of plant and equipment in order to determine the amount of depreciation
and amortization expense to be recorded during any reporting period. The
majority of our telecommunications plant and equipment is depreciated using the
group method, which develops a depreciation rate (annually) based on the average
useful life of a specific group of assets, rather than the individual asset as
would be utilized under the unit method. Such estimated life of the group
changes as the composition of the group of assets changes and their related
lives. The estimated life of the group is based on historical experience with
similar assets as well as taking into account anticipated technological or other
changes. If technological changes were to occur more rapidly than anticipated or
in a different form than anticipated, the useful lives assigned to these assets
may need to be shortened, resulting in the recognition of increased depreciation
and amortization expense in future periods. Likewise, if the anticipated
technological or other changes occur more slowly than anticipated, the life of
the group could be extended based on the life assigned to new assets added to
the group. This could result in a reduction of depreciation and amortization
expense in future periods. A one-year decrease or increase in the useful life of
these assets would increase or decrease depreciation and amortization expense by
approximately $0.5 billion. 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 follow the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," utilizing cash flows which take into account management's
estimates of future operations.

     Pension and postretirement benefits -- The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis utilizing several different assumptions. A
significant assumption used in determining our net pension credit (income) and
postretirement benefit expense is the expected long-term rate of return on plan
assets. In 2002, we used an expected long-

                                        26
<PAGE>

term rate of return of 9.0%. For 2003, we will lower this expected rate of
return to 8.5%. In determining this revised rate, we considered the current and
projected investment portfolio mix and estimated long-term investment returns
for each asset class. The projected portfolio mix of the plan assets is
developed in consideration of the expected duration of related plan obligations
and as such is more heavily weighted toward equity investments, including public
and private equity positions. Plan assets also include fixed income and real
estate investments. The actual return on pension plan assets over the last 10
and 15 years has been 10.4% and 10.9%, respectively, although the return for the
last two years has been negative. The expected return on plan assets is
determined by applying the expected long-term rate of return to the
market-related value of plan assets. The market-related value is a calculated
value that amortizes the difference between actual and expected returns evenly
over a five-year period. The combined market-related value of plan assets of the
pension and postretirement benefit plans as of December 31, 2002, was
approximately $19.5 billion; about $2 billion higher than the related fair value
of plan assets. The expected return on assets of the pension and postretirement
benefit plans included in 2002 operating income was income of $1.7 billion. The
reduction in the expected long-term rate of return to 8.5% will reduce the
expected return credit by approximately $0.1 billion in 2003.

     Another significant estimate is the discount rate used in the annual
actuarial valuation of pension and postretirement benefit plan obligations. In
determining the appropriate discount rate at year-end, we considered the current
yields on high quality corporate fixed-income investments with maturities
corresponding to the expected duration of the benefit obligations. As of
December 31, 2002, we reduced the discount rate by 75 basis points to 6.5%.
Changes in the discount rate do not have a material impact on our results of
operations.

     Income taxes -- Deferred income taxes are provided for the effect of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for income tax
purposes. We measure deferred tax assets and liabilities using enacted tax rates
that, if changed, would result in either an increase or decrease in the
provision for income taxes in the period of change. A one-percentage point
increase in the enacted federal income tax rate as of December 31, 2002, would
decrease net income by approximately $0.1 billion. A valuation allowance is
recorded when it is more likely than not that a deferred tax asset will not be
realized. In assessing the likelihood of realization, management considers
estimates of future taxable income, the character of income needed to realize
future tax benefits, and all available evidence.

     Legal Contingencies -- We are currently involved in certain legal
proceedings and have accrued amounts that represent our estimate of the probable
outcome of these matters. Such estimates of outcome are derived from
consultation with outside counsel, as well as an assessment of litigation and
settlement strategies. In addition, we may be responsible for a portion of
certain legal proceedings associated with former affiliates pursuant to
separation and distribution agreements. Such agreements provide AT&T to share in
the cost of certain litigation (relating to matters while affiliated with AT&T)
if a judgment or settlement exceeds certain thresholds. With the exception of
the Sparks matter (see Discontinued Operations discussion), as of December 31,
2002, we are not aware of, and have not been advised of, any matters in which it
is probable that costs would be incurred in excess of the thresholds above which
we would be required to share in the costs. However, in the event these former
subsidiaries were unable to meet their obligations with respect to these
liabilities due to financial difficulties, AT&T could be held responsible for
all or a portion of these costs, irrespective of the sharing agreements.
Depending on how these matters are resolved, these costs could be material.

CONSOLIDATED RESULTS OF OPERATIONS

     The comparison of 2002 results with 2001 results was impacted by the April
1, 2002, unwind of Concert, our joint venture with British Telecommunications
plc (BT). The venture's assets and customer accounts were distributed back to
the parent companies. Under the partnership termination agreement, each of the
partners generally reclaimed the customer contracts and assets that were
initially contributed to the joint venture, including international transport
facilities and gateway assets. In addition, AT&T assumed certain other assets
that BT originally contributed to the joint venture. As a result, 2002 results
include revenue and

                                        27
<PAGE>

expenses associated with these customers and businesses for the period April 1,
2002 through December 31, 2002, while 2001 and the first quarter of 2002
includes our proportionate share of Concert's earnings and related charges in
"Net losses related to other equity investments." In addition, the assets
reclaimed are consolidated in each line item of the Consolidated Balance Sheet
at December 31, 2002, versus an equity investment in Concert at December 31,
2001, included in "Other assets."

     For the period August 28, 2000, through December 31, 2002, AT&T's interest
in AT&T Latin America was fully consolidated in AT&T's results. In December
2002, AT&T signed a non-binding term-sheet for the sale of its 69% economic
interest (95% voting interest) in AT&T Latin America and began accounting for
AT&T Latin America as an asset held for sale (the operations of AT&T Latin
America did not qualify for treatment as a discontinued operation). As a result
of this action, as well as our belief that no changes to the plan will be made
and that a sale will be completed within one year, we recorded an impairment
charge of $1.0 billion to write down AT&T Latin America's assets and liabilities
to fair value, and reclassified these assets and liabilities to "Other current
assets" and "Other current liabilities" at December 31, 2002.

     The consolidated financial statements of AT&T reflect AT&T Broadband and
AT&T Wireless as discontinued operations. AT&T Broadband was spun-off on
November 18, 2002, and AT&T Wireless was split-off on July 9, 2001. Accordingly,
the revenue, costs and expenses and cash flows of AT&T Broadband and AT&T
Wireless have been excluded from the respective captions in the Consolidated
Statements of Operations and Consolidated Statements of Cash Flows, and have
been reported through their respective dates of separation as "Net (loss) from
discontinued operations" and as "Net cash (used in) provided by discontinued
operations." In addition, the assets and liabilities of AT&T Broadband have been
excluded from the respective captions in the Consolidated Balance Sheet at
December 31, 2001, and have been reported as "Current assets of discontinued
operations," "Non-current assets of discontinued operations," "Current
liabilities of discontinued operations," "Non-current liabilities of
discontinued operations," "Minority Interest of Discontinued Operations," and
"Company-Obligated Convertible Quarterly Income Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of
Discontinued Operations."

     A 1-for-5 reverse stock split of AT&T common stock was effected on November
18, 2002. Shares (except shares authorized), per share amounts and stock prices
were restated to reflect the stock split on a retroactive basis. In addition,
our stock prices were restated to reflect the AT&T Broadband disposition.

     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 long distance 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.

  REVENUE

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
AT&T Business Services..................................   $26,558     $27,705     $28,559
AT&T Consumer Services..................................    11,527      14,843      18,643
Corporate and Other.....................................      (258)       (351)       (352)
                                                           -------     -------     -------
Total Revenue...........................................   $37,827     $42,197     $46,850
                                                           =======     =======     =======
</Table>

     Total revenue decreased 10.4%, or $4.4 billion, in 2002 compared with 2001,
and decreased 9.9%, or $4.7 billion, in 2001 compared with 2000. The decrease in
both years was largely driven by continued declines in long distance voice
revenue of approximately $5.2 billion in 2002 and $5.5 billion in 2001. In
addition, 2001 revenue declined by $0.5 billion due to the elimination of PICC.
The long distance voice decline reflects the impact of pricing pressures and
substitution, including a shift from higher-priced products such as business
retail to lower-priced products such as business wholesale and prepaid cards.
Partially offsetting the declines was growth in data/Internet
Protocol(IP)/managed services within AT&T Business Services and local voice
services within both AT&T Consumer Services and AT&T Business Services of
approximately $0.8 billion in

                                        28
<PAGE>

2002, and $1.4 billion in 2001. The 2002 variances include a positive impact
attributable to the reintegration of customers and assets from the unwind of
Concert.

     In 2003, we expect our long distance voice revenue to continue to decline
due to ongoing competition and product substitution. This decline in revenue is
expected to be partially offset by growth in our local voice services and
data/IP/managed services.

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
Access and other connection.............................   $10,790     $12,085     $13,139
Costs of services and products..........................     8,363       8,621       8,235
Selling, general and administrative.....................     7,988       8,064       7,387
Depreciation and amortization...........................     4,888       4,559       4,538
Net restructuring and other charges.....................     1,437       1,036         758
                                                           -------     -------     -------
Total operating expenses................................   $33,466     $34,365     $34,057
                                                           =======     =======     =======
Operating income........................................   $ 4,361     $ 7,832     $12,793
Operating margin........................................      11.5%       18.6%       27.3%
</Table>

     Included within access and other connection expenses are costs we pay to
connect calls using the facilities of other service providers, as well as the
Universal Service Fund contributions and per-line charges mandated by the FCC.
Costs paid to telephone companies outside of the United States to connect
international calls are also included within access and other connection
expenses.

     Access and other connection expenses decreased 10.7%, or $1.3 billion, in
2002 compared with 2001. Approximately $0.5 billion of this decrease was due to
lower Universal Service Fund contributions and lower per-line charges, which
were primarily driven by the decline in long distance voice revenue. In
addition, domestic access charges decreased by $0.5 billion primarily due to
product mix and FCC-mandated access-rate reductions. International connection
charges decreased by approximately $0.4 billion driven primarily by lower rates
and the reintegration of customers and assets from the unwind of Concert. These
reductions were partially offset by an increase in local connectivity costs.
Since most of the Universal Service Fund contributions, per-minute access-rate
reductions and per-line charges are passed through to the customer, these
reductions generally result in a corresponding reduction in revenue.

     In 2003, we expect access rates to be flat or slightly lower than 2002 as
most of the FCC-mandated rate reductions have been implemented. We also expect
our local connectivity costs to continue to increase as we continue to grow our
local voice business.

     Access and other connection expenses decreased 8.0%, or $1.1 billion, in
2001 compared with 2000. 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.

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

     Costs of services and products decreased $0.3 billion, or 3.0%, in 2002
compared with 2001. Approximately $0.5 billion of the decrease was due to the
overall impact of lower revenue and related costs at AT&T Consumer Services and
AT&T Business Services. In addition, costs decreased approximately $0.2 billion
due to losses on certain long-term contracts recorded in 2001 by AT&T Business
Services. These decreases were partially offset by an increase of $0.1 billion
in AT&T Business Services' provision for uncollectible receivables

                                        29
<PAGE>

primarily attributable to the weak economy. Cost of services and products also
increased as a result of the reintegration of customers and assets from the
unwind of Concert.

     In 2001, these costs increased $0.4 billion, or 4.7%, compared with 2000.
The increase was driven by approximately $0.6 billion of higher costs associated
with our growth businesses, primarily at AT&T Business Services, including the
cost of equipment sold. 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) primarily due to the lower expected
long-term rate of return on plan assets and the effects of lower actual plan
assets. These increases were partially offset by approximately $0.4 billion of
lower costs associated with decreased revenue, primarily lower volumes at AT&T
Business Services, including our international operations, and lower payphone
compensation costs.

     Selling, general and administrative (SG&A) expenses decreased $76 million,
or 0.9%, in 2002 compared with 2001. This decrease was driven by a reduction in
the number of residential customers as well as cost control efforts of $0.7
billion, and lower transaction costs of $0.2 billion associated with the AT&T
restructuring. Partially offsetting these decreases was $0.3 billion of lower
pension credits (income) primarily due to the lower expected long-term rate of
return on plan assets and the effects of lower actual plan assets, and $0.3
billion associated with increased marketing and sales expenses for new local
consumer service offerings and increased investment for business sales and
customer care development. SG&A expenses also increased as a result of the
reintegration of customers and assets from the unwind of Concert.

     We expect SG&A expenses, and to a lesser extent costs of services and
products, will be unfavorably impacted in the future due to lower pension
credits (income) and higher post-retirement expenses resulting from a lower
expected long-term rate of return on plan assets in 2003 of 8.5% compared with
the 9% rate used in 2002 and the effects of lower actual plan assets. We also
expect SG&A expenses to be impacted by higher compensation costs associated with
stock options reflecting the decision to expense stock option grants, commencing
with options granted in 2003.

     SG&A expenses increased $0.7 billion, or 9.2%, in 2001 compared with 2000.
Increased expenses in support of growth businesses, primarily data/IP/managed
services, and local voice services, drove approximately $0.5 billion of the
increase. These expenses included infrastructure development costs associated
with increased sales headcount, advertising, and other general and
administrative expenses. 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. 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. Partially offsetting these increases was the impact of cost
control efforts as well as decreased customer care and billing expenses of
approximately $0.7 billion, primarily from AT&T Consumer Services.

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

     In 2003, the adoption of SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that obligations associated with the retirement of
tangible long-lived assets be recorded as liabilities only if such liability is
unavoidable and legally enforceable, will have a favorable impact on
depreciation expense. (See "New Accounting Pronouncements" for a further
discussion of SFAS No. 143.) However, we continue to invest in our asset base,
which will increase depreciation expense in 2003.

     Depreciation and amortization expenses increased $21 million in 2001
compared with 2000. The increase was primarily due to a larger asset base
resulting from continued infrastructure investment. Certain infrastructure
assets placed in service in 2001 extended the average life of the overall
assets, partially mitigating the impact of the larger asset base.

                                        30
<PAGE>

     Total capital expenditures were $3.9 billion, $5.6 billion and $6.8 billion
for 2002, 2001 and 2000, respectively. The decrease in spending was primarily
due to cost containment efforts. We continue to focus the majority of our
capital spending on our growth businesses of data/IP/managed services.

     In 2002, net restructuring and other charges were $1,437 million. The net
charge included $1,203 million related to AT&T Business Services, $211 million
related to AT&T Consumer Services and $23 million related to the Corporate and
Other group.

     Included in the $1,437 million was a $1,029 million charge for the
impairment of the net assets of our consolidated subsidiary, AT&T Latin America.
In December 2002, the AT&T Board of Directors approved a plan for AT&T to sell
its approximate 95% voting stake in AT&T Latin America in its current condition.
On December 31, 2002, AT&T signed a non-binding term sheet for the sale of our
shares within one year for a nominal amount. As a result of this plan, we
classified AT&T Latin America as an asset "held for sale" at fair market value,
in accordance with SFAS No. 144. Consequently, there are approximately $160
million of assets (principally cash and accounts receivable) included in Other
Current Assets and approximately $160 million of liabilities (principally
secured short-term debt) included in Other Current Liabilities. The $1,029
million charge to write the assets and liabilities down to their fair values was
reported within our AT&T Business Services segment.

     Also included in net restructuring and other charges was a $204 million
impairment charge related to certain Digital Subscriber Line (DSL) assets
(including internal-use software, licenses, and property, plant & equipment)
that will not be utilized by AT&T as result of changes to our "DSL build"
strategy. Instead of building DSL capabilities in all geographic areas initially
targeted, we have signed an agreement with Covad Communications to offer DSL
services over their network. As a result, the assets in these areas were
impaired. This charge was reported within our AT&T Consumer Services segment.

     In 2002, AT&T recorded net business restructuring charges of $204 million.
These activities consisted of new exit plans totaling $377 million and reversals
of $173 million. The new plans primarily consisted of $334 million for employee
separation costs primarily in AT&T Business Services, and $39 million of
facility closing reserves. Slightly more than 4,800 employees will be separated
in conjunction with these exit plans, approximately one-half of which are
management employees and one-half are non-management employees. The majority of
these employee separations will be involuntary and are largely the result of
improved processes and automation in provisioning and maintenance of services
for business customers. Due to the timing of these separations, these exit plans
did not yield cash savings in 2002, nor did we realize a benefit to operating
income in 2002. Future cash and expense savings is dependent upon the timing of
actual separations and associated payments. In the first full year following the
completion of these exit plans, we expect to realize approximately $300 million
of cash savings and benefit to operating income. Approximately 14% of the
employees affected by these exit plans had left their positions by December 31,
2002, and we expect those remaining to leave their positions by the end of 2003.
Termination benefits of approximately $328 million were paid throughout 2002 for
the current and prior year's separation plans.

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

     During 2001, net restructuring and other charges were $1,036 million which
were primarily comprised of $862 million for employee separations, of which $388
million related to benefits to be paid from pension assets as well as pension
and postretirement curtailment losses, and $166 million for facility closings.
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. These charges
were slightly offset by the reversal of $33 million related to business
restructuring plans announced in the fourth quarter 1999 and the first quarter
2000 (of which $15 million related to employee separations and $18 million
related to contract terminations). The net charge consisted of $570 million
related

                                        31
<PAGE>

to AT&T Business Services, $31 million related to AT&T Consumer Services and
$435 million related to the Corporate and Other group.

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

     During 2000, we recorded $758 million of net restructuring and other
charges which included $586 million for employee separations associated with
AT&T's initiative to reduce costs, of which $144 million primarily related to
pension and postretirement curtailment losses. The charge also included $91
million related to the government-mandated disposition of AT&T Communications
(U.K.) Ltd., which would have competed directly with Concert, and $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. The net charge consisted of $395 million related to AT&T
Business Services, $97 million related to AT&T Consumer Services and $266
million related to the Corporate and Other group.

     These plans covered separation costs for approximately 6,100 employees,
mainly in AT&T Business Services, including network operations, primarily for
the consolidation of customer-care and call centers. Approximately one-half of
whom were management employees and one-half were non-management employees.
Approximately 5,500 of the employee separations related to involuntary
terminations and approximately 600 related to voluntary terminations.

     AT&T's operating income in 2002 decreased $3.5 billion, or 44.3%, compared
with 2001 and decreased $5.0 billion, or 38.8%, in 2001 compared with 2000.
AT&T's operating margin was 11.5% in 2002 compared with 18.6% in 2001 and 27.3%
in 2000. The decline in 2002 was primarily due to the decline in revenue
combined with increased net restructuring and other charges and increased
depreciation and amortization expenses. Also contributing to the decline was a
lower rate of decline in selling, general and administrative expenses and costs
of services and products compared with the revenue rate of decline. The decline
in operating margin in 2001 was primarily due to a decline in revenue combined
with increased selling, general and administrative expenses, costs of services
and products, net restructuring and other charges, and depreciation and
amortization expenses. The operating margin declines in both years reflect
pricing pressures and a shift from higher-margin retail long distance services
to lower-margin wholesale long distance service and other lower-margin services
such as lower-priced optional calling plans and prepaid cards.

     We expect the operating margin to continue to decline in 2003 despite the
expected benefit from lower net restructuring and other charges. The expected
decline is primarily due to a continued decline in the long distance business
reflecting the impact of accelerating growth in wholesale services as well as a
shift to lower-margin services such as lower-priced optional calling plans and
prepaid cards.

<Table>
<Caption>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                            --------------------------------
                                                             2002        2001         2000
                                                            ------     --------     --------
                                                                 (DOLLARS IN MILLIONS)
<S>                                                         <C>        <C>          <C>
Other (expense) income....................................   $(77)      $1,327       $1,190
</Table>

     Other (expense) income in 2002 was expense of $77 million compared with
income of $1.3 billion in 2001. The unfavorable variance of $1.4 billion was
primarily due to $1.2 billion of higher net gains on sales of businesses and
investments in 2001, including gains on the sale of AT&T's retained interest in
AT&T Wireless and Japan Telecom. The unfavorable variance was also due to
impairments of $0.2 billion recorded in 2002 related to certain leases of
aircraft which are accounted for as leveraged leases, $0.2 billion of lower
income related to mark-to-market adjustments on derivative instruments and lower
investment-related income of $0.2 billion. Favorably impacting other (expense)
income were lower investment impairment charges of $0.4 billion in 2002,
primarily driven by lower impairment charges for Time Warner Telecom.

     At December 31, 2002, we had investments in leveraged leases of aircraft of
$601 million [$(185) million net of deferred taxes], which we lease to airlines
as well as aircraft related companies. Several airline carriers who have leases
have recently experienced financial difficulties. While these airlines are
current on their lease rental payments, we could record additional impairment
charges in 2003 if any of these carriers declare

                                        32
<PAGE>

bankruptcy or renegotiate their lease terms with us. In addition, in the event
of bankruptcy or a renegotiation of lease terms, if any portion of the
non-recourse debt is canceled, such amounts would result in taxable income to
AT&T and accordingly a cash tax expense.

     Other (expense) income in 2001 was income of $1.3 billion compared with
income of $1.2 billion in 2000. The favorable variance of $0.1 billion was
driven primarily by higher net gains on the sales of businesses and investments
of $0.5 billion which reflect the gains on the sales of AT&T's retained interest
in AT&T Wireless and Japan Telecom in 2001, $0.2 billion related to the
settlement, in 2001, of disputes relating to the buyer's obligations resulting
from the sale of AT&T Universal Card Services, and higher income related to
mark-to-market adjustments on derivative instruments of $0.2 billion. Partially
offsetting these increases was investment impairment charges of $0.5 billion,
primarily consisting of the impairment of Time Warner Telecom, and lower
interest income of $0.2 billion.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
Interest (expense)......................................   $(1,448)    $(1,493)    $(1,503)
</Table>

     Interest expense decreased $45 million, or 3.0%, in 2002 compared with
2001, and decreased $10 million, or 0.6%, in 2001 compared with 2000. The
decrease in both periods was primarily due to lower average debt balances,
reflecting our debt reduction efforts, partially offset by higher average
interest rates. Average interest rates were higher in both periods due to the
mix of short-term and long-term debt. The 2002 average rate was adversely
affected by the $10 billion bond offering in November 2001. We expect interest
expense to be lower in future periods as a result of our debt reduction efforts.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
(Provision) for income taxes............................   $(1,587)    $(2,890)    $(4,487)
Effective tax rate......................................      56.0%       37.7%       35.9%
</Table>

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

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

     In 2000, the effective tax rate was positively impacted by the tax benefits
associated with certain legal entity restructurings and investments.

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                            2002         2001         2000
                                                           ------       ------       ------
                                                                (DOLLARS IN MILLIONS)
<S>                                                        <C>          <C>          <C>
Minority interest income.................................   $114         $131          $41
</Table>

     Minority interest income represents an adjustment to AT&T's income to
reflect the less than 100% ownership of consolidated subsidiaries. Minority
interest income decreased $17 million in 2002 compared with 2001 as a result of
lower net losses of AT&T Latin America in 2002. In December 2002, AT&T fully
utilized the minority interest balance related to AT&T Latin America; therefore,
we will no longer record minority interest income related to AT&T Latin America.

                                        33
<PAGE>

     Minority interest income increased $0.1 billion in 2001 compared with 2000
primarily due to AT&T Latin America, which we acquired on August 28, 2000;
therefore, 2001 includes a full year of results, compared with a partial year in
2000.

<Table>
<Caption>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                           ----------------------------------
                                                            2002         2001          2000
                                                           -------     ---------     --------
                                                                 (DOLLARS IN MILLIONS)
<S>                                                        <C>         <C>           <C>
Equity (losses) earnings from Liberty Media Group........   $  --       $(2,711)      $1,488
</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.

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                            2002         2001         2000
                                                           -------     ---------     ------
                                                                (DOLLARS IN MILLIONS)
<S>                                                        <C>         <C>           <C>
Net (losses) earnings related to other equity
  investments............................................   $(400)      $(4,836)       $10
</Table>

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

     Net (losses) related to other equity investments, net of income taxes, were
$4.8 billion in 2001 compared with income of $10 million in 2000. The
unfavorable variance of $4.8 billion was primarily due to greater losses of $2.2
billion for Concert, $1.8 billion for AT&T Canada and $0.8 billion for Net2Phone
primarily due to impairment charges recorded in 2001.

     The after-tax amortization of excess basis associated with nonconsolidated
investments, recorded as a reduction of income, totaled $36 million in 2001, and
$37 million in 2000.

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                            2002        2001        2000
                                                         ----------   ---------   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
Net (loss) from discontinued operations, net of income
  taxes................................................   $(14,513)    $(4,052)    $(4,863)
Gain on disposition of discontinued operations.........      1,324      13,503          --
</Table>

     Net (loss) from discontinued operations, net of income taxes, primarily
represents the operating results of AT&T Broadband and AT&T Wireless, which AT&T
disposed of and accounted for as discontinued operations. Accordingly, the
revenue, costs and expenses of AT&T Broadband and AT&T Wireless have been
excluded from the respective captions in the Consolidated Statements of
Operations.

     In 2002, the net (loss) from discontinued operations included a loss of
$14.5 billion from the discontinued operations of AT&T Broadband, and an
estimated loss on the litigation settlement associated with the business of
Lucent Technologies Inc., which was spun-off from AT&T in 1996 and accounted for
as a discontinued operation. Sparks, et al. v. AT&T and Lucent Technologies Inc.
et al., was a class action lawsuit filed in 1996 in Illinois state court. On
August 9, 2002, a settlement proposal was submitted to and accepted by the
court. In accordance with the separation and distribution agreement between AT&T
and Lucent Technologies Inc., AT&T recorded its proportionate share of the
settlement and estimated legal costs, which totaled $33 million, net of tax.
Depending upon the number of claims submitted and accepted, the actual cost of
the settlement to AT&T may be less than stated amounts, but it is not possible
to estimate the amount at this time.

                                        34
<PAGE>

     In 2002, we realized a noncash gain on the disposition of AT&T Broadband of
$1.3 billion, which represented the difference between the fair value of AT&T
Broadband at the date of the spin-off and AT&T's book value, net of certain
charges triggered by the spin-off of $159 million, and the related income tax
effect of $61 million. These charges included compensation expense due to the
accelerated vesting of stock options as well as the enhancement of certain
incentive plans.

     In 2001, the net (loss) from discontinued operations included a loss of
$4.2 billion from the discontinued operations of AT&T Broadband, and income of
$150 million from the discontinued operations of AT&T Wireless.

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

     In 2000, the net (loss) from discontinued operations consisted of a loss of
$5.4 billion from the discontinued operations of AT&T Broadband, and income of
$536 million from the discontinued operations of AT&T Wireless.

<Table>
<Caption>
                                                                FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                               2002    2001     2000
                                                              ------   -----   ------
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>      <C>     <C>
Cumulative effect of accounting changes.....................  $(856)   $904    $  --
</Table>

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

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

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2002    2001    2000
                                                              -----   -----   -----
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>     <C>
Dividend requirements of preferred stock....................  $ --    $(652)  $  --
Premium on exchange of AT&T Wireless tracking stock.........    --      (80)     --
</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 computed 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. This beneficial feature was being
accreted over the time period DoCoMo was required to hold the shares. On July 9,
2001, in conjunction with the split-off of AT&T Wireless Group, these preferred
shares were converted into AT&T Wireless common stock. As a result, the
beneficial conversion feature was fully accreted.

     In May 2001, AT&T completed an exchange offer of AT&T common stock for AT&T
Wireless tracking stock. In 2001, this exchange resulted in a premium of $80
million, which was a reduction of net income available to common shareowners.
The premium represented the excess of the fair value of the AT&T Wireless
tracking stock issued over the fair value of the AT&T common stock exchanged and
was calculated

                                        35
<PAGE>

based on the closing share prices of AT&T common stock and AT&T Wireless
tracking stock on May 25, 2001.

SEGMENT RESULTS

     AT&T's results are segmented according to the customers we service: AT&T
Business Services and AT&T Consumer Services. The balance of AT&T's continuing
operations (excluding LMG) is included in a "Corporate and Other" group. This
group primarily reflects corporate staff functions and the elimination of
transactions between segments. The discussion of segment results includes
revenue, earnings before interest and taxes (EBIT), capital additions and total
assets.

     EBIT is the primary measure 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 plus other (expense)
income, net, pretax minority interest income and pretax net (losses) earnings
related to other equity investments. 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 is meaningful to investors because it provides an
analysis of operating results using the same measure used by AT&T's chief
operating decision makers. EBIT for AT&T was $3.9 billion, $1.5 billion and
$14.0 billion for the years ended December 31, 2002, 2001 and 2000,
respectively. We provide EBIT, a measure not calculated in accordance with
generally accepted accounting principles (GAAP), for AT&T in order to provide
investors a means to evaluate the financial results of each segment in relation
to total AT&T. The table below provides a reconciliation of EBIT to operating
income. Our calculations of EBIT may or may not be consistent with the
calculation of this measure by other public companies. EBIT should not be viewed
by investors as an alternative to a GAAP measure of performance, such as
operating income.

  Reconciliation of EBIT to Operating Income

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                             2002     2001     2000
                                                            ------   ------   -------
                                                              (DOLLARS IN MILLIONS)
<S>                                                         <C>      <C>      <C>
EBIT......................................................  $3,886   $1,507   $13,973
Deduct:
  Other (expense) income..................................     (77)   1,327     1,190
  Minority interest income................................     114      131        41
  Pretax net (losses) related to other equity
     investments..........................................    (512)  (7,783)      (51)
                                                            ------   ------   -------
Operating income..........................................  $4,361   $7,832   $12,793
                                                            ======   ======   =======
</Table>

     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. The total assets of discontinued
operations and the related (loss) as well as the 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, additions to
nonconsolidated investments and additions to internal-use software.

     Our existing segments reflect certain managerial changes that were
implemented during 2002. The changes primarily include the following: revenue
previously recorded by the AT&T Business Services segment as "Internal revenue"
for services provided to certain other AT&T units and then eliminated within the
Corporate and Other group is now recorded as a contra-expense by AT&T Business
Services; the results of certain units previously included in the Corporate and
Other group were transferred to the AT&T Business Services segment; the
financial impacts of SFAS No. 133 that were previously recorded in the Corporate
and Other group were transferred to the appropriate segments. In addition, AT&T
Consumer Services and total AT&T revenue was restated in accordance with
Emerging Issues Task Force (EITF) issue 01-9, "Accounting

                                        36
<PAGE>

for Consideration Given by a Vendor to a Customer," which requires cash
incentives given to customers previously recorded as advertising and promotion
expense now to be recorded as a reduction of revenue when recognized in the
income statement, unless an identifiable benefit is received in exchange. All
prior periods 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. Their services include long distance,
international, toll-free and local voice; data and IP services; managed
services; and wholesale transport services (sales of services to service
resellers). Data and IP services are broad categories of services in which data
(i.e. e-mail, video or computer files) is transported from one location to
another. In packet services, data is divided into efficiently sized components
and transported between packet switches until it reaches its final destination,
where it is reassembled. Packet services includes IP, frame relay and
Asynchronous Transfer Mode or "ATM." Managed services delivers end-to-end
enterprise networking solutions by managing networks, servers and applications.

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
External revenue
  Services revenue......................................   $25,856     $26,947     $27,900
  Equipment and product sales...........................       379         317         236
                                                           -------     -------     -------
Total external revenue..................................    26,235      27,264      28,136
Internal revenue........................................       323         441         423
                                                           -------     -------     -------
Total revenue...........................................   $26,558     $27,705     $28,559
                                                           =======     =======     =======
EBIT....................................................   $ 1,638     $(2,305)    $ 5,917
Capital additions.......................................     3,716       5,451       6,841
</Table>

<Table>
<Caption>
                                                           AT DECEMBER 31,
                                                          -----------------
                                                           2002      2001
                                                          -------   -------
<S>                                                       <C>       <C>       <C>
Total assets............................................  $36,365   $40,316
</Table>

  REVENUE

     AT&T Business Services revenue decreased $1.1 billion, or 4.1%, in 2002
compared with 2001, and decreased $0.9 billion, or 3.0% in 2001 compared with
2000. The declines were primarily driven by a decline in long distance voice
revenue of $1.7 billion in 2002 and $2.0 billion in 2001. Partially offsetting
the decline was growth in data/IP/managed services, including equipment sales,
and local voice services of $0.7 billion in 2002 and $1.3 billion in 2001.

     In 2003, we expect long distance voice revenue will continue to decline,
reflecting continued competitive pressure as well as an accelerating shift in
the retail/wholesale mix. We expect the declines in long distance voice revenue
will continue to be partially offset by growth in local and data/IP/managed
services.

     Long distance voice revenue declined approximately 12% in 2002 compared
with 2001, and approximately 13% in 2001 compared with 2000, reflecting the
continued impact of pricing pressures and a change in the wholesale-retail
product mix. While long distance volumes grew at a low single-digit rate in 2002
and 2001, the increase was driven by growth in lower-priced wholesale volumes
that was essentially offset by a decrease in higher-priced retail volumes. These
factors are expected to continue to negatively impact revenue in 2003.

                                        37
<PAGE>

     Data/IP/managed services, excluding equipment and product sales, increased
approximately 5% in 2002 compared with 2001. Growth was driven by increased
sales in packet services, which grew at a rate of approximately 17%, partially
offset by a decline in private line services (a service in which the connection
is dedicated to the customer), reflecting an industry trend of customers
migrating from private line services to more cost-effective and
technologically-advanced packet services. When we include equipment and product
sales, data/IP/managed services increased approximately 6%.

     Data/IP/managed services increased approximately 13% in 2001 compared with
2000, with or without the impact of equipment sales. The growth was led by
packet services, which grew at a mid-20 percent rate.

     Local voice services revenue grew approximately 13% in 2002 compared with
2001 and more than 20% in 2001 compared with 2000. This growth reflects our
continued focus on increasing the utilization of our existing footprint. AT&T
added approximately 676,000 access lines in 2002. Access lines at the end of
2002 and 2001 were approximately 3.6 million and 2.9 million, respectively.

     AT&T Business Services internal revenue decreased $0.1 billion in 2002
compared with 2001 and was relatively flat in 2001 compared with 2000. The
impact of internal revenue is included in the revenue by product discussions,
above. The decrease in internal revenue in 2002 compared with 2001 was primarily
due to the split-off of AT&T Wireless on July 9, 2001, as these sales are now
reported as external revenue, partially offset by an increase in sales to AT&T
Broadband. Sales to AT&T Broadband were recorded as internal revenue through the
November 18, 2002, date of disposition. Subsequent to November 18, 2002, sales
to AT&T Broadband, now Comcast, are recorded as external revenue.

  EBIT

     In 2002, EBIT increased $3.9 billion, or 171.1%, compared with 2001. The
improvement was primarily due to a decrease in pretax net losses related to
equity investments of $3.5 billion for Concert and $2.6 billion for AT&T Canada
driven primarily by impairment charges and equity losses recorded in 2001, as
well as $0.4 billion in lower restructuring charges recorded in 2002. This
improvement was partially offset by a decrease in the long distance voice
business resulting primarily from the impact of pricing pressures, a $1.0
billion impairment charge recorded in 2002 for AT&T Latin America, and a gain of
approximately $0.5 billion recorded on the sale of our stake in Japan Telecom in
2001.

     In 2001, EBIT decreased $8.2 billion, or 138.9%, compared with 2000. The
decline was primarily due to higher losses of $3.5 billion related to Concert
and $3.0 billion related to AT&T Canada, primarily due to impairment charges
recorded in 2001. Also reflected in the decline was the impact of long distance
voice pricing pressure, as well as a shift from higher-margin long distance
services to lower-margin growth services.

  OTHER ITEMS

     Capital additions decreased $1.7 billion in 2002 compared with 2001 and
$1.4 billion in 2001 compared with 2000 as we continue to maintain a disciplined
focus on capital spending. Although these declines reflect significantly lower
capital expenditures for network assets that support all services provided by
AT&T, we continue to focus the majority of our capital spending on our data, IP
and local voice products.

     Total assets decreased $4.0 billion, or 9.8%, at December 31, 2002,
compared with December 31, 2001. The decrease reflects lower receivables
primarily driven by the settlement of receivables from Concert in connection
with the Concert unwind, improved cash collections and lower revenue. The
decrease also reflects the write-off of the assets associated with the
impairment of AT&T Latin America.

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.

                                        38
<PAGE>

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
Revenue.................................................   $11,527     $14,843     $18,643
EBIT....................................................     2,647       4,875       6,893
Capital additions.......................................       127         140         148
</Table>

<Table>
<Caption>
                                                           AT DECEMBER 31,
                                                          -----------------
                                                           2002      2001
                                                          -------   -------
<S>                                                       <C>       <C>       <C>
Total assets............................................  $ 1,674   $ 2,141
</Table>

  REVENUE

     AT&T Consumer Services revenue declined $3.3 billion, or 22.3%, in 2002
compared with 2001, and $3.8 billion, or 20.4%, in 2001 compared with 2000. The
decline in both periods was primarily due to long distance revenue, which fell
$3.6 billion in both 2002 and 2001. These declines were largely driven by
traditional long distance 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 long distance voice
services revenue was negatively impacted by substitution and the impact of
ongoing competition, which has led to a loss of market share. In addition, the
continued migration of customers to optional calling plans and lower-priced
products, such as prepaid cards, has also negatively impacted revenue. The
revenue decline for 2001 also reflects a $0.5 billion impact due to the
elimination of per-line charges in July 2000. Partially offsetting these
declines was growth of $0.2 billion in both 2002 and 2001 related to local
services. Calling volumes declined at a low-teen percentage rate in 2002, and a
low double-digit percentage rate in 2001 as a result of competition and wireless
and Internet substitution, partially offset by an increase in prepaid card
usage.

     In 2002, approximately 5% of AT&T Consumer Services total revenue and more
than 50% of prepaid card revenue was related to a contract with Wal-Mart, Inc.
If this contract is not renewed at the next renewal date, January 31, 2004
(subject to early termination if certain events occur), AT&T Consumer Services
revenue would be adversely affected if we are unsuccessful in selling the cards
through a different channel. We expect product substitution, competition
(including the continued entry of the Regional Bell Operating Companies (RBOCs)
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 2003.

  EBIT

     EBIT declined $2.2 billion, or 45.7%, in 2002 compared with 2001 and
declined $2.0 billion, or 29.3%, in 2001 compared with 2000. The declines in
both periods were primarily due to the revenue declines in the long distance
business. Also impacting the EBIT decline in 2002 was an asset impairment charge
of $0.2 billion recorded in 2002 related to the Digital Subscriber Line (DSL)
assets that will no longer be utilized by AT&T as a result of the agreement with
Covad Communications to offer DSL services over their network.

     EBIT margin declined to 23.0% in 2002 from 32.8% in 2001 and 37.0% in 2000.
The declining EBIT margins primarily reflect the impact of customers who
substitute long distance calling with wireless and Internet service and remain
AT&T Consumer Services customers as well as customers who migrate to optional
calling plans and lower-priced products. These customers generate less revenue,
while their billing, customer care and fixed costs remain. The 2002 margin was
also negatively impacted by the DSL asset impairment charge. The 2001 margin
decline was also impacted by a slight increase in marketing spending targeted at
high-value customers, partially offset by the receipt of $0.2 billion in 2001
from the settlement of disputes relating to obligations resulting from the sale
of AT&T Universal Card Services to Citigroup in 1998.

  OTHER ITEMS

     In 2002, capital additions decreased $13 million, or 9.2%, compared with
2001. In 2001, capital additions decreased $8 million, or 5.2%, compared with
2000.

                                        39
<PAGE>

     Total assets declined $0.5 billion to $1.7 billion at December 31, 2002,
compared with $2.1 billion at December 31, 2001. This decline was primarily due
to lower accounts receivable, reflecting lower revenue and slightly improved
cash collections.

CORPORATE AND OTHER

     This group primarily reflects the results of corporate staff functions and
the elimination of transactions between segments.

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                             2002     2001      2000
                                                             -----   -------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                          <C>     <C>       <C>
Revenue....................................................  $(258)  $  (351)  $ (352)
EBIT.......................................................   (399)   (1,063)   1,163
Capital additions..........................................     63       150    1,594
</Table>

<Table>
<Caption>
                                                            AT DECEMBER 31,
                                                           -----------------
                                                            2002      2001
                                                           -------   -------
<S>                                                        <C>       <C>       <C>
Total assets.............................................  $17,233   $19,872
</Table>

  REVENUE

     In 2002, Corporate and Other revenue was negative $258 million, compared
with negative $351 million in 2001. The year-over-year change was primarily due
to lower internal revenue with AT&T Wireless due to its split-off on July 9,
2001, partially offset by an increase in internal revenue with AT&T Broadband.
In 2003, as a result of the AT&T Broadband spin-off, the elimination of internal
revenue residing in Corporate and Other will decline significantly.

     Revenue for Corporate and Other was essentially flat in 2001 compared with
2000, as lower internal revenue from AT&T Wireless due to its split-off in 2001
was offset by increased sales from AT&T Business Services to AT&T Broadband.

  EBIT

     In 2002, EBIT improved $0.7 billion to a deficit of $0.4 billion. The
improvement was largely due to lower investment impairment charges of
approximately $1.4 billion, primarily related to our investments in Net2Phone
and Time Warner Telecom in 2001. Also contributing to the EBIT improvement was
lower business restructuring charges as well as lower transaction costs
associated with AT&T's restructuring announced in October of 2000, totaling $0.6
billion. These EBIT improvements were partially offset by lower net gains of
$0.7 billion driven by a $0.5 billion tax-free gain recorded in 2001 associated
with the disposal of a portion of AT&T's retained interest in AT&T Wireless.
Also offsetting the EBIT improvements were a lower pension credit (income) of
$0.3 billion primarily driven by a lower long-term expected rate of return and
the effects of lower actual plan assets, a $0.2 billion impairment charge
recorded in 2002 of certain leases of aircraft which are accounted for as
leveraged leases, and a $0.2 billion variance due to mark-to-market adjustments
on derivative instruments.

     EBIT declined $2.2 billion to a deficit of $1.1 billion in 2001 compared
with 2000. The decline was largely due to $1.5 billion of greater investment
impairment charges in 2001, primarily for Net2Phone and Time Warner Telecom.
Also contributing to the decline were higher restructuring and other charges and
higher transaction costs associated with AT&T's restructuring announced in
October 2000, totaling $0.4 billion; and a lower pension credit (income) and
higher postretirement expense of $0.3 billion. These declines were partially
offset by the $0.5 billion gain associated with the disposal of a portion of
AT&T's retained interest in AT&T Wireless.

                                        40
<PAGE>

  OTHER ITEMS

     Capital additions decreased $87 million in 2002 primarily due to a decline
in the purchase of investments. Capital additions decreased $1.4 billion in 2001
primarily as a result of our investment in Net2Phone in 2000.

     Total assets decreased $2.6 billion, to $17.2 billion in 2002. The decrease
was primarily driven by a lower cash balance at December 31, 2002, and a
decrease in investments primarily due to mark-to-market adjustments, partially
offset by derivative-related activity.

FINANCIAL CONDITION

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                2002         2001
                                                              ---------   ----------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Total assets................................................   $55,272     $165,481
Total liabilities...........................................    42,960      105,778
Total shareowners' equity...................................    12,312       51,680
</Table>

     Total assets decreased $110.2 billion, or 66.6%, to $55.3 billion at
December 31, 2002, compared with December 31, 2001. The November 18, 2002,
spin-off of AT&T Broadband accounted for $103.2 billion of the decrease. The
decrease also reflects lower receivables of $3.1 billion primarily driven by
improved cash collections, the settlement of receivables from Concert in
connection with the Concert unwind, and lower revenue. In addition, assets
decreased as a result of a $2.7 billion reduction in cash and the write-off of
$1.1 billion of assets associated with the impairment of our interest in AT&T
Latin America.

     Total liabilities decreased $62.8 billion, or 59.4%, to $43.0 billion at
December 31, 2002, from $105.8 billion at December 31, 2001. The November 18,
2002, spin-off of AT&T Broadband contributed $48.9 billion to the decrease. Also
contributing to the decrease in liabilities was $11.6 billion in lower debt
reflecting the pay-down of short-term debt and AT&T Broadband's assumption of
$3.5 billion of AT&T long-term debt in connection with its spin-off. In
addition, total liabilities decreased as a result of the settlement of AT&T's
obligation to purchase the publicly owned shares of AT&T Canada and due to the
impairment of our interest in AT&T Latin America.

     Minority interest of discontinued operations decreased $3.3 billion at
December 31, 2002, compared with December 31, 2001. The decrease was a result of
the exchange or redemption of all TCI Pacific preferred shares for AT&T common
stock and the November 18, 2002, spin-off of AT&T Broadband. Quarterly income
preferred securities of discontinued operations decreased $4.7 billion at
December 31, 2002, compared with December 31, 2001, as these securities were
converted into Comcast class A common stock in conjunction with the spin-off of
AT&T Broadband.

     Total shareowners' equity decreased $39.4 billion, or 76.2%, to $12.3
billion at December 31, 2002, from $51.7 billion at December 31, 2001. This
decrease was primarily due to a decline of $26.6 billion in additional paid-in
capital principally due to a $31.0 billion reduction resulting from the spin-off
of AT&T Broadband (including compensation expense triggered by the spin-off),
partially offset by an increase of $2.5 billion from the June 2002 common stock
offering and $2.1 billion from the exchange or redemption of all TCI Pacific
preferred shares for AT&T common shares. Retained earnings decreased $13.1
billion at December 31, 2002, compared with December 31, 2001, primarily due to
the net (loss) from discontinued operations partially offset by a $1.3 billion
gain on the spin-off of AT&T Broadband.

     During 2002, when AT&T declared its quarterly dividends to the AT&T Common
Stock Group shareowners, the Company was in an accumulated deficit position. As
a result, the Company reduced additional paid-in capital by $0.6 billion, the
entire amount of the dividends declared.

                                        41
<PAGE>

LIQUIDITY

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
CASH FLOWS:
Provided by operating activities of continuing
  operations............................................   $10,483     $10,005     $10,641
(Used in) investing activities of continuing
  operations............................................    (1,429)     (4,295)    (32,678)
(Used in) provided by financing activities of continuing
  operations............................................    (6,041)     (2,778)     23,745
(Used in) provided by discontinued operations...........    (5,679)      7,683      (2,746)
                                                           -------     -------     -------
Net (decrease) increase in cash and cash equivalents....   $(2,666)    $10,615     $(1,038)
                                                           =======     =======     =======
</Table>

     Net cash provided by operating activities of AT&T's continuing operations
of $10.5 billion for the year ended December 31, 2002, was generated primarily
by $11.4 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 reflecting cash collections and
lower revenue. Partially offsetting these sources of cash were a net change in
other operating assets and liabilities of $1.4 billion due to lower tax
liabilities as well as lower payroll and benefit-related liabilities.

     Net cash provided by operating activities of continuing operations of $10.0
billion for the year ended December 31, 2001, primarily included $11.8 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 $0.9 billion due to lower revenue and strong cash collections in
December 2001. Partially offsetting the cash provided were net changes in other
operating assets and liabilities of $2.1 billion due to tax payments, and a
decrease in accounts payable of $0.5 billion. Net cash provided by operating
activities of continuing operations of $10.6 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 $13.8 billion, partially offset by an increase in accounts
receivable of $2.4 billion due to an increase in the receivables from Concert
and slow customer collections at AT&T Business Services, a decrease in accounts
payable of $0.6 billion and a net change in other assets and liabilities of $0.1
billion.

     AT&T's investing activities resulted in a net use of cash of $1.4 billion
in 2002, compared with $4.3 billion in 2001 and $32.7 billion in 2000. During
2002, AT&T spent $3.9 billion on capital expenditures, paid $3.4 billion to
settle the AT&T Canada obligation and received a $5.8 billion cash distribution
from AT&T Broadband in conjunction with its spin-off. In 2001, AT&T spent $5.8
billion on capital expenditures, and received approximately $1.6 billion from
the sales of investments. During 2000, AT&T used approximately $23.7 billion for
acquisitions of businesses, primarily MediaOne Group, Inc., and spent $7.0
billion on capital expenditures.

     During 2002, net cash used in financing activities was $6.0 billion,
compared with net cash used in financing activities of $2.8 billion in 2001, and
net cash provided by financing activities of $23.7 billion in 2000. During 2002,
AT&T made net payments of $8.2 billion to reduce debt, paid dividends of $0.6
billion, and received $2.7 billion from the issuance of AT&T common stock,
primarily due to the sale of 46 million shares in the second quarter. The
proceeds from this stock sale, along with funds from other short-term sources,
were used to satisfy AT&T's obligation to the AT&T Canada shareholders (see
investing activities above).

     During 2001, AT&T made net debt payments of $6.5 billion, paid AT&T
Wireless $5.8 billion to settle an intercompany loan in conjunction with its
split-off from AT&T, and paid dividends of $0.5 billion. Partially offsetting
these outflows in 2001 was the receipt of $9.8 billion from the issuance of
convertible preferred stock to NTT DoCoMo. During 2000, AT&T received $10.3
billion from the AT&T Wireless Group tracking stock offering and had net
borrowings of debt of $17.0 billion. These sources of cash were partially offset
by the payment of $3.0 billion in dividends.

                                        42
<PAGE>

 WORKING CAPITAL AND OTHER SOURCES OF LIQUIDITY

     At December 31, 2002, our working capital ratio (current assets divided by
current liabilities) was 1.32, reflecting the cash balance on hand as a result
of cash received in conjunction with the spin-off of AT&T Broadband.

     During the second and third quarters of 2002, AT&T renewed both its AT&T
Business Services and AT&T Consumer Services customer accounts receivable
securitization facilities. Together, the programs provide up to $2.0 billion of
available financing, limited by the eligible receivables balance, which varies
from month to month. Proceeds from the securitization are recorded as a
borrowing and included in short-term debt. At December 31, 2002, approximately
$0.2 billion was outstanding. The terms of these facilities have been extended
to June (AT&T Business Services) and July (AT&T Consumer Services) of 2003.

     At December 31, 2002, we had a $3.0 billion 364-day credit facility
available to us that was entered into on October 9, 2002. The credit facility
contains a financial covenant that requires AT&T to meet a net debt-to-EBITDA
ratio (as defined in the credit agreement) not exceeding 2.25 to 1.00 for four
consecutive quarters ending on the last day of each fiscal quarter. It also
contains a covenant that requires AT&T to maintain $1.27 billion in unencumbered
cash, cash equivalents and marketable securities. At December 31, 2002, we were
in compliance with these covenants.

     AT&T reduced its debt in 2002 as a result of the spin-off of AT&T Broadband
on November 18, 2002. The third party debt of TCI and MediaOne Group, Inc. of
$15.0 billion was included in the net assets spun-off with AT&T Broadband. This
debt was included in the liabilities of discontinued operations at December 31,
2001. At the time of spin-off, AT&T and AT&T Broadband settled approximately
$9.4 billion of intercompany debt and transaction-related costs. AT&T received a
$5.8 billion cash distribution from AT&T Broadband, which is reflected in the
cash balance at December 31, 2002. The remainder of the intercompany debt and
transaction-related costs was settled via a debt exchange. In the AT&T Broadband
debt exchange, $3.5 billion of outstanding AT&T notes were exchanged for notes
that, upon completion of the spin-off of AT&T Broadband, became notes of AT&T
Broadband and are unconditionally guaranteed by Comcast and certain of its
subsidiaries. In addition, AT&T completed another exchange in which $4.6 billion
of outstanding AT&T notes were exchanged for new AT&T notes that remain solely
obligations of AT&T and, upon completion of the spin-off of AT&T Broadband, have
revised terms, including revised maturity dates and/or interest rates.

     We anticipate funding our operations in 2003 primarily with cash and cash
equivalents on hand as well as cash from operations. If economic conditions
worsen or do not improve and/or competition and product substitution accelerate
beyond current expectations, our cash flow from operations would decrease,
negatively impacting our liquidity. However, we believe our access to the
capital markets is adequate to provide the flexibility in funding our operations
that we desire. Sources of liquidity include the commercial paper market, a $2.4
billion universal shelf registration, the securitization program and the credit
facility. However, we cannot provide any assurances that all of these sources of
funding will be available at the time they are needed or in the amounts
required.

 CREDIT RATINGS AND RELATED DEBT IMPLICATIONS

     During 2002, AT&T's long-term debt ratings were lowered by Moody's and
Fitch. None of AT&T's ratings are currently under review or on Credit Watch for
further downgrade. As of December 31, 2002, our credit ratings were as follows:

<Table>
<Caption>
                                                      SHORT-TERM   LONG-TERM
CREDIT RATING AGENCY                                    RATING       RATING     OUTLOOK
--------------------                                  ----------   ----------   --------
<S>                                                   <C>          <C>          <C>
Standard & Poor's...................................  A-2          BBB+         Stable*
Moody's.............................................  P-2          Baa2         Negative
Fitch Ratings.......................................  F-2          BBB+         Stable*
</Table>

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

* Subsequent to December 31, 2002, the Outlook was changed to "Negative."

                                        43
<PAGE>

     Our access to the capital markets as well as the cost of our borrowings is
affected by our debt ratings. In 2002, as a result of the Moody's downgrade, the
interest rate on $10.0 billion of notes sold in November 2001, increased by 50
basis points effective with interest payment periods that began after November
15, 2002, for the majority of the notes. The additional interest expense in 2002
was approximately $8 million and is estimated to be an additional $50 million in
2003. Additional debt rating downgrades could require AT&T to pay higher rates
on certain existing debt, prepay certain operating leases and post cash
collateral for certain interest-rate and equity swaps if we are in a net payable
position.

     If our ratings were downgraded below investment grade by Standard & Poor's
or Moody's, there are provisions in our securitization programs, which could
require the outstanding balances to be paid by the collection of the
receivables. We do not believe downgrades below investment grade are likely to
occur.

     The holders of certain private debt with an outstanding balance of $0.9
billion at December 31, 2002, have an annual put right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the debt holders
agreeing not to exercise their put right, AT&T posted a cash-collateralized
letter of credit in 2002 totaling $0.4 billion and expiring March 2005. The
annual put right for 2003 expired on February 13, 2003, without exercise by the
debt holders. The holders could accelerate repayment of the debt based on
certain events such as the occurrence of unfavorable local law or regulation
changes in its country of operation.

     If AT&T's debt ratings are further downgraded, AT&T's access to the capital
market may be restricted and/or such replacement financing may be more costly or
have additional covenants than we had in connection with our debt at December
31, 2002. In addition, the market environment for financing in general, and
within the telecommunications sector in particular, has been adversely affected
by economic conditions and bankruptcies of other telecommunication providers. If
the financial markets become more cautious regarding the industry/ratings
category we operate in, our ability to obtain financing would be further
reduced. This could negatively impact our ability to pursue acquisitions, make
capital expenditures to expand our network or to pay dividends.

 CASH REQUIREMENTS

     Our cash needs for 2003 will be primarily related to capital expenditures,
repayment of debt and payment of dividends. We expect our capital expenditures
for 2003 to be approximately $3.3 billion to $3.5 billion. On January 31, 2003,
we completed the repurchase, with cash, of $3.7 billion of notes with interest
rates of 6.375% and 6.5% and maturities of 2004 and 2013. These notes were
classified as long-term debt at December 31, 2002. In addition, in connection
with the early retirement in February 2003, of exchangeable notes that are
indexed to AT&T Wireless stock, we made cash payments of $152 million to the
debt holders, funded in part by $72 million of proceeds from the sale of our
remaining AT&T Wireless shares.

     AT&T is not required to make cash contributions to its principle pension
plans in 2003. However, based on the final valuation of private equities and
real estate for 2002, cash contributions could be required in 2004.

CONTRACTUAL CASH OBLIGATIONS

     The following summarizes AT&T's contractual cash obligations and commercial
commitments at December 31, 2002, and the effect such obligations are expected
to have on liquidity and cash flow in future periods.

                                        44
<PAGE>

<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(1),(2).....................  $19,988    $5,470     $2,368   $4,201   $7,949
Capital lease obligations...............      101         4         17        7       73
Operating leases(3).....................    2,124       480        729      455      460
Unconditional purchase
  obligations(4),(5),(6),(7)............      674       268        291      115       --
                                          -------    ------     ------   ------   ------
Total Contractual Cash Obligations......  $22,887    $6,222     $3,405   $4,778   $8,482
                                          =======    ======     ======   ======   ======
</Table>

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

(1) We had long-term debt that was indexed to securities (monetized debt). The
    total balance of monetized debt of $519 million at December 31, 2002, had
    scheduled maturity dates of 2005 and 2006. However, in February 2003, we
    redeemed those notes with a combination of shares and cash of $152 million.
    The portion of debt that was settled in shares is excluded from the above
    table and the cash payments were included in "Less than 1 Year" in the above
    table.

(2) We had long-term debt, with original maturity dates of 2004 and 2013, with a
    carrying value of $3.7 billion at December 31, 2002. This debt was settled
    in the first quarter of 2003 and included in "Less than 1 Year" in the above
    table. In connection with the settlement of this debt, we paid premiums of
    $124 million, which are excluded from the above table.

(3) Under certain real estate operating leases, we could be required to make
    payments to the lessors of up to $447 million at the end of the lease term
    (lease terms range from 2004 through 2007). The actual amount paid, if any,
    would be reduced by amounts received by the lessor upon remarketing of the
    property. These amounts are excluded from the above table due to the
    uncertainty of the dollar amounts to be paid, if any, as well as the timing
    of such amounts.

(4) AT&T Consumer Services has unconditional purchase obligations with multiple
    vendors to purchase a broad range of products and services, including the
    outsourcing of billing and customer care services, and the purchase of
    certain promotional items. Such obligations extend through 2005.

(5) AT&T has contractual obligations to utilize network facilities from local
    exchange carriers with terms greater than one year. Since the contracts have
    no minimum volume requirements, and are based on an interrelationship of
    volumes and discounted rates, we assessed our minimum commitment based on
    penalties to exit the contracts, assuming we exited the contracts on
    December 31, 2002. At December 31, 2002, the penalties AT&T would have
    incurred to exit all of these contracts would have been $2.1 billion. These
    amounts are excluded from the above table due to the uncertainty of the
    dollar amounts to be paid, if any, as well as the timing of such amounts.

(6) AT&T has contractual obligations under two contracts that extend through
    2006 for services that include computer application design, development,
    maintenance and testing as well as the operation of data centers that host
    many of the computer applications operated throughout AT&T. Payments under
    these contracts are based in part on the volume and type of services we
    require. Since AT&T can terminate either or both of these contracts for
    convenience at any time by paying a fee, we assessed our minimum commitment
    based on the termination for convenience fees, which decline each year
    during the term of the contracts. If we elect to exit both of these
    contracts, the maximum termination fees we would be obligated to pay in the
    year of termination would be approximately $359 million in 2003, $308
    million in 2004, $239 million in 2005, or $164 million in 2006. These
    termination fees are excluded from the above table due to the uncertainty of
    the dollar amounts to be paid, if any, as well as the timing of such
    amounts.

(7) AT&T has contractual obligations that extend through 2009 for services that
    include payroll and related human resource services. Payments under these
    contracts are based on level of service required and fluctuates based on
    volume. Since there is no minimum service requirement and we can exit the
    contract at any time by paying a termination fee, we assessed our minimum
    commitment based on these

                                        45
<PAGE>

    termination fees, assuming we terminated the contracts on December 31 of
    each year. Such termination fees would be approximately $50 million in 2003,
    $44 million in 2004, $38 million in 2005, $23 million in 2006, $11 million
    in 2007 or $3 million in 2008. These amounts are excluded from the above
    table due to the uncertainty of the dollar amounts to be paid, if any, as
    well as the timing of such amounts.

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

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

<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 of debt(1)....................   $  506       $ --      $   --   $ --     $506
Guarantees of other obligations(2),(3)...    4,968        180       4,646    142       --
                                            ------       ----      ------   ----     ----
Total....................................   $5,474       $180      $4,646   $142     $506
                                            ======       ====      ======   ====     ====
</Table>

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

(1) Prior to the spin-off of AT&T Broadband, we had guaranteed certain debt of
    AT&T Broadband, which we continue to provide. Under the terms of the merger
    agreement between AT&T Broadband and Comcast, if Comcast does not call the
    debt in 2003, they must provide us with a letter of credit in the amount of
    $500 million. In addition, Comcast has provided us with an indemnification
    for this debt.

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

(3) AT&T provides a guarantee of an obligation that AT&T Wireless has to DoCoMo.
    In connection with an investment DoCoMo made in AT&T Wireless, AT&T and AT&T
    Wireless agreed that under certain circumstances, including that AT&T
    Wireless fails to meet specific technological milestones by June 30, 2004
    (revised to December 31, 2004, pursuant to an amended agreement between AT&T
    Wireless and DoCoMo), DoCoMo would have the right to require AT&T Wireless
    to repurchase its AT&T Wireless common stock for $9.8 billion plus interest.
    In the event AT&T Wireless is unable to satisfy its entire obligation, AT&T
    is secondarily liable for up to $3.65 billion, plus interest.

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 had 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. At
December 31, 2002, our foreign currency market exposures were principally Euros,
Japanese yen, and Swiss francs.

     The fair value of foreign exchange contracts is subject to the changes in
foreign currency exchange rates. For the purpose of assessing specific risks, we
use a sensitivity analysis to determine the effects that market

                                        46
<PAGE>

risk exposures may have on the fair value of our financial instruments and
results of operations. To perform the sensitivity analysis, we assess the risk
of loss in fair values from the effect of a hypothetical 10% adverse change in
the value of foreign currencies, assuming no change in interest rates.

     For foreign exchange contracts outstanding at December 31, 2002 and 2001,
assuming a hypothetical 10% appreciation of the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the foreign exchange contracts would have decreased $66 million and $492
million, respectively. The decrease in the change from 200l was primarily due to
a $5.3 billion decline in the notional amount of contracts outstanding. This
decline was largely due to debt under the Euro Commercial Paper Program paid
down in 2002, and the satisfaction of the obligation to purchase the outstanding
shares of AT&T Canada in 2002. Because our foreign exchange contracts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying transactions.

     We have also entered into combined interest rate foreign currency contracts
to hedge foreign-currency-denominated debt. At December 31, 2002 and 2001,
assuming a hypothetical 10% appreciation in the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the combined interest rate foreign currency contracts would have decreased
$0.5 billion and $0.4 billion, respectively. Because our foreign exchange
contracts are entered into for hedging purposes, we believe that these losses
would be largely offset by gains on the underlying foreign-currency-denominated
debt.

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

     We use interest rate swaps to manage the impact of interest rate changes on
earnings and cash flows. We perform a sensitivity analysis on our interest rate
swaps to assess the risk of changes in fair value. The model to determine
sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At
December 31, 2002 and 2001, assuming a hypothetical 10% decrease in interest
rates, the fair value of interest rate swaps would have decreased by $1 million
and $2 million, respectively. We believe the decrease in fair value would be
largely offset by an increase in the fair value of the underlying hedged debt.

     As discussed above, we have also entered into combined interest rate
foreign currency contracts to hedge foreign-currency-denominated debt. Assuming
a hypothetical 10% increase in interest rates, the fair value of the contracts
would have decreased by $3 million at December 31, 2002, and by a negligible
amount at December 31, 2001.

     The fair value of our fixed-rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains or losses in the
market value of the debt due to differences between the market interest rates
and rates at the inception of the obligation. Assuming a 10% downward shift in
interest rates at December 31, 2002 and 2001, the fair value of unhedged debt
would have increased by $0.7 billion and $1.0 billion, respectively.

     At December 31, 2002, we had certain notes, with embedded derivatives,
which were indexed to the market price of equity securities we owned. Changes in
the market prices of these securities resulted in changes in the fair value of
the derivatives. Assuming a hypothetical 10% increase in the market price of
these equity securities, the fair value of the collars would have decreased by
$46 million and $112 million at December 31, 2002 and 2001, respectively.
Because these collars hedged the underlying equity securities monetized, we
believed that the decrease in the fair value of the collars would have been
largely offset by increases in the fair value of the underlying equity
securities. The changes in fair values referenced above do not represent the
actual changes in fair value we would incur under normal market conditions
because all variables other than the equity prices were held constant in the
calculations.

     We use equity hedges to manage our exposure to changes in equity prices
associated with various equity awards of previously affiliated companies.
Assuming a hypothetical 10% decrease in equity prices of these companies, the
fair value of the equity hedges (net liability) would have increased by $9
million at December 31, 2002, and by a negligible amount at December 31, 2001.
Because these contracts are entered

                                        47
<PAGE>

into for hedging purposes, we believe that the increase in fair value would be
largely offset by decreases in the underlying liabilities.

     In order to determine the changes in fair value of our various financial
instruments, including options, equity collars and other equity awards, we use
certain financial modeling techniques, 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.

NEW ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations that are
legally enforceable and unavoidable, and are associated with the retirement of
tangible long-lived assets, be recorded as liabilities when those obligations
are incurred, with the amount of the liability initially measured at fair value.
The offset to the initial asset retirement obligation is an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its future value, and the asset is depreciated over 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 was
adopted on January 1, 2003. AT&T currently includes, in its group depreciation
rates, an amount related to the retirement costs for certain assets. However,
such amounts are not legally enforceable or unavoidable; therefore, AT&T will be
required to reverse the amount accrued in accumulated depreciation. As of
January 1, 2003, AT&T will report approximately $40 million as the cumulative
effect of a change in accounting principles related to the adoption of SFAS No.
143. The impact of no longer including the cost of removal in the group
depreciation rates for these assets, coupled with the cumulative effect impact
on accumulated depreciation, will result in a decrease to depreciation expense
in 2003. However, the costs incurred to remove these assets will be reflected as
a cost in the period incurred as "Costs of services and products."

     On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," costs related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated -nullifying
the guidance under EITF 94-3. Under SFAS No. 146, the cost associated with an
exit or disposal activity is recognized in the periods in which it is incurred
rather than at the date the company committed to the exit plan. This statement
is effective for exit or disposal activities initiated after December 31, 2002,
with earlier application encouraged. Previously issued financial statements will
not be restated. The provisions of EITF 94-3 shall continue to apply for exit
plans initiated prior to the adoption of SFAS No. 146. Accordingly, the initial
adoption of SFAS No. 146 will not have an effect on AT&T's results of
operations, financial position or cash flows. Liabilities associated with future
exit and disposal activities will not be recognized until actually incurred.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This standard provides alternate methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation and requires more prominent disclosure about the method used. This
statement is effective for fiscal years ending after December 15, 2002. For
AT&T, this means it is effective for December 31, 2002.

                                        48
<PAGE>

Currently AT&T applies the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and we do not expense our stock
options. However, as previously announced, AT&T will begin expensing all stock
options issued after January 1, 2003, and will continue to apply the
disclosure-only provisions to stock options issued prior to January 1, 2003.
This method of transition is in compliance with the provisions of SFAS No. 148.
The adoption of the disclosure provisions of SFAS No. 148 will not have an
impact on AT&T's results of operations, financial position or cash flows;
however, the expensing of the stock options issued after January 1, 2003, will
have a negative impact on our results of operations. (See note 2 to the
Consolidated Financial Statements for the required disclosure under this
standard.)

     In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that an entity
issuing a guarantee (including those embedded in a purchase or sales agreement)
must recognize, at the inception of the guarantee, a liability equal to the fair
value of the guarantee. The recording of this liability is not dependent on the
probability that the payments will be required. The offset to the liability will
depend on the circumstances under which the guarantee was issued, but could
include: cash/accounts receivable if it is a standalone transaction, net proceed
in a sales transaction, or expense if no compensation is received. FIN 45 also
requires detailed information about each guarantee or group of guarantees even
if the likelihood of making a payment is remote. The disclosure requirements of
this interpretation are effective for financial statements of periods ending
after December 15, 2002, which makes them effective for AT&T for December 31,
2002 (see note 9 to the Consolidated Financial Statements for the disclosures
required under this interpretation). The recognition and measurement provisions
of this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. FIN 45 could have an impact on the
future results of AT&T depending on guarantees issued; however, at this time we
do not believe that the adoption of this statement will have a material impact
on our results of operation, financial position or cash flows.

     In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin (ARB) No.
51." FIN 46 requires the primary beneficiary to consolidate a variable interest
entity (VIE) if it has a variable interest that will absorb a majority of the
entity's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. FIN 46 applies immediately to
VIEs created after January 31, 2003, and to VIEs in which the entity obtains an
interest after that date. For VIEs acquired before February 1, 2003, the
effective date for AT&T is July 1, 2003. AT&T is currently in the process of
determining the impact of this statement on its results of operations, financial
position and cash flows. The disclosures relating to our present involvement
with possible VIEs and our maximum exposure to losses are included in note 18 to
the Consolidated Financial Statements.

     In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the timing of revenue
recognition for arrangements in which goods or services or both are delivered
separately in a bundled sales arrangement. The EITF requires that when the
deliverables included in this type of arrangement meet certain criteria they
should be accounted for separately as separate units of accounting. This may
result in a difference in the timing of revenue recognition but will not result
in a change in the total amount of revenue recognized in a bundled sales
arrangement. The allocation of revenue to the separate deliverables is based on
the relative fair value of each item. If the fair value is not available for the
delivered items then the residual method must be used. This method requires that
the amount allocated to the undelivered items in the arrangement is their full
fair value. This would result in the discount, if any, being allocated to the
delivered items. This consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003, which, for AT&T,
is July 1, 2003. AT&T is currently evaluating the impact of this consensus on
its results of operations, financial position and cash flows.

     In January 2003, the EITF reached a consensus on EITF 02-18, "Accounting
for Subsequent Investments in an Investee after Suspension of Equity Method Loss
Recognition." This consensus states that if an additional investment, in whole
or in part, represents the funding of prior losses, the investor should
recognize previously suspended losses. This determination would be based on
various factors including whether the investment results in an increased
ownership percentage, the fair value of the consideration received is equivalent
to the consideration paid and whether the investment is acquired from a third
party or

                                        49
<PAGE>

directly from an investee. If any of these provisions are met, the additional
investment would generally not be considered as funding prior losses. When
appropriate to recognize prior losses, the amount recognized would be limited to
the amount of the additional investment determined to represent the funding of
prior losses. The consensus will be effective for additional investments made
after February 5, 2003.

SUBSEQUENT EVENTS

     In January 2003, AT&T early retired $3.7 billion of long-term notes. In
February 2003, AT&T redeemed exchangeable notes that were indexed to AT&T
Wireless common stock and subsequently sold its remaining AT&T Wireless
holdings. For further information on these items, see the contractual cash
obligations table in the liquidity discussion.

                                        50
<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>
        David W. Dorman                       Thomas W. Horton
        Chairman of the Board,                Senior Executive Vice President,
        Chief Executive Officer               Chief Financial Officer
</Table>

                                        51
<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 operations, 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 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 for the year ended December 31, 2000 of Liberty Media Group, an
equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's
financial statements include equity method earnings of $1,488 million for the
year ended December 31, 2000. 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, for the
year ended December 31, 2000, 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. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002.

PRICEWATERHOUSECOOPERS LLP

New York, New York
January 23, 2003, except for Note 20,
as to which the date is February 28, 2003

                                        52
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
AT&T Corp.:

     We have audited the combined statements of operations and comprehensive
earnings, attributed net assets, and cash flows of Liberty Media Group for the
year ended December 31, 2000. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of the operations and cash flows
of Liberty Media Group for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.

                                          KPMG LLP

Denver, Colorado
February 26, 2001

                                        53
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                  FOR THE YEARS ENDED
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                2002      2001      2000
                                                              --------   -------   -------
                                                                 (DOLLARS IN MILLIONS,
                                                               EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>        <C>       <C>
Revenue.....................................................  $ 37,827   $42,197   $46,850
Operating Expenses
Access and other connection.................................    10,790    12,085    13,139
Costs of services and products (excluding depreciation of
  $3,391, $2,954 and $3,119 included below).................     8,363     8,621     8,235
Selling, general and administrative.........................     7,988     8,064     7,387
Depreciation and amortization...............................     4,888     4,559     4,538
Net restructuring and other charges.........................     1,437     1,036       758
                                                              --------   -------   -------
Total operating expenses....................................    33,466    34,365    34,057
                                                              --------   -------   -------
Operating income............................................     4,361     7,832    12,793
Other (expense) income, net.................................       (77)    1,327     1,190
Interest (expense)..........................................    (1,448)   (1,493)   (1,503)
                                                              --------   -------   -------
Income from continuing operations before income taxes,
  minority interest income, and net (losses) earnings
  related to equity investments.............................     2,836     7,666    12,480
(Provision) for income taxes................................    (1,587)   (2,890)   (4,487)
Minority interest income....................................       114       131        41
Equity (losses) earnings from Liberty Media Group...........        --    (2,711)    1,488
Net (losses) earnings related to other equity investments...      (400)   (4,836)       10
                                                              --------   -------   -------
Income (loss) from continuing operations....................       963    (2,640)    9,532
Net (loss) from discontinued operations (net of income tax
  benefits of $6,014, $3,715, and $1,364)...................   (14,513)   (4,052)   (4,863)
Gain on disposition of discontinued operations (net of
  income tax benefit of $61 in 2002)........................     1,324    13,503        --
                                                              --------   -------   -------
(Loss) income before cumulative effect of accounting
  changes...................................................   (12,226)    6,811     4,669
Cumulative effect of accounting changes (net of income taxes
  of $530 and $(578)).......................................      (856)      904        --
                                                              --------   -------   -------
Net (loss) income...........................................   (13,082)    7,715     4,669
Dividend requirements of preferred stock....................        --      (652)       --
Premium on exchange of AT&T Wireless tracking stock.........        --       (80)       --
                                                              --------   -------   -------
(Loss) income attributable to common shareowners............  $(13,082)  $ 6,983   $ 4,669
                                                              ========   =======   =======
AT&T Common Stock Group -- per basic share:
Earnings (loss) from continuing operations..................  $   1.29   $ (0.91)  $ 11.54
(Loss) from discontinued operations.........................    (19.44)    (5.60)    (7.09)
Gain on disposition of discontinued operations..............      1.77     18.53        --
Cumulative effect of accounting changes.....................     (1.15)     0.49        --
                                                              --------   -------   -------
AT&T Common Stock Group (loss) earnings.....................  $ (17.53)  $ 12.51   $  4.45
                                                              ========   =======   =======
AT&T Common Stock Group -- per diluted share:
Earnings (loss) from continuing operations..................  $   1.26   $ (0.91)  $ 11.01
(Loss) from discontinued operations.........................    (18.95)    (5.60)    (6.76)
Gain on disposition of discontinued operations..............      1.73     18.53        --
Cumulative effect of accounting changes.....................     (1.12)     0.49        --
                                                              --------   -------   -------
AT&T Common Stock Group (loss) earnings.....................  $ (17.08)  $ 12.51   $  4.25
                                                              ========   =======   =======
AT&T Wireless Group -- per basic and diluted share:
Earnings....................................................  $     --   $  0.08   $  0.21
Liberty Media Group -- per basic and diluted share:
(Loss) earnings -- before cumulative effect of accounting
  changes...................................................  $     --   $ (1.05)  $  0.58
Cumulative effect of accounting changes.....................        --      0.21        --
                                                              --------   -------   -------
Liberty Media Group (loss) earnings.........................  $     --   $ (0.84)  $  0.58
                                                              ========   =======   =======
</Table>

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

                                        54
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
                                      ASSETS
Cash and cash equivalents...................................  $  8,014    $ 10,680
Accounts receivable, less allowances of $669 and $754.......     5,286       7,153
Other receivables...........................................       173       1,431
Deferred income taxes.......................................       910       1,192
Other current assets........................................     1,520         622
Current assets of discontinued operations...................        --       1,649
                                                              --------    --------
TOTAL CURRENT ASSETS........................................    15,903      22,727
Property, plant and equipment, net..........................    25,604      26,803
Goodwill, net of accumulated amortization in 2001 of $564...     4,626       5,314
Other purchased intangible assets, net of accumulated
  amortization of $244 and $190.............................       556         661
Prepaid pension costs.......................................     3,596       3,329
Other assets................................................     4,987       5,144
Non-current assets of discontinued operations...............        --     101,503
                                                              --------    --------
TOTAL ASSETS................................................  $ 55,272    $165,481
                                                              ========    ========
                                    LIABILITIES
Accounts payable............................................  $  3,819    $  4,156
Payroll and benefit-related liabilities.....................     1,519       1,606
Debt maturing within one year...............................     3,762      10,134
Other current liabilities...................................     2,924       3,929
Current liabilities of discontinued operations..............        --       5,801
                                                              --------    --------
TOTAL CURRENT LIABILITIES...................................    12,024      25,626
Long-term debt..............................................    18,812      24,025
Long-term benefit-related liabilities.......................     4,001       3,459
Deferred income taxes.......................................     4,739       2,438
Other long-term liabilities and deferred credits............     3,384       7,159
Non-current liabilities of discontinued operations..........        --      43,071
                                                              --------    --------
TOTAL LIABILITIES...........................................    42,960     105,778
Minority Interest of Discontinued Operations................        --       3,303
Company-Obligated Convertible Quarterly Income Preferred
  Securities of Subsidiary Trust Holding Solely Subordinated
  Debt Securities of AT&T of Discontinued Operations........        --       4,720
                                SHAREOWNERS' EQUITY
AT&T Common Stock, $1 par value, authorized 6,000,000,000
  shares; issued and outstanding 783,037,580 shares (net of
  171,801,716 treasury shares) at December 31, 2002 and
  708,481,149 shares (net of 170,349,286 treasury shares) at
  December 31, 2001.........................................       783         708
Additional paid-in capital..................................    28,163      54,798
Accumulated deficit.........................................   (16,566)     (3,484)
Accumulated other comprehensive loss........................       (68)       (342)
                                                              --------    --------
TOTAL SHAREOWNERS' EQUITY...................................    12,312      51,680
                                                              --------    --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY...................  $ 55,272    $165,481
                                                              ========    ========
</Table>

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

                                        55
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

<Table>
<Caption>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2002        2001        2000
                                                              ---------   ---------   ---------
                                                                    (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
AT&T Common Stock
  Balance at beginning of year..............................  $    708    $    752    $    639
  Shares issued (acquired), net:
    Under employee plans....................................         6           3           1
    For acquisitions........................................        --           9         121
    Settlement of put option................................        --          31          --
    For exchange of AT&T Wireless tracking stock............        --         (74)         --
    For funding AT&T Canada obligation......................        46          --          --
    Redemption of TCI Pacific preferred stock...............        10          --          --
    Other...................................................        13         (13)         (9)
                                                              --------    --------    --------
Balance at end of year......................................       783         708         752
                                                              --------    --------    --------
AT&T Wireless Group Common Stock
  Balance at beginning of year..............................        --         362          --
  Shares issued:
    For stock offering......................................        --          --         360
    Under employee plans....................................        --           2           2
    For exchange of AT&T Wireless tracking stock............        --         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
    Other...................................................        --          14         (12)
  Liberty Media Group split-off.............................        --      (2,378)         --
                                                              --------    --------    --------
Balance at end of year......................................        --          --       2,364
                                                              --------    --------    --------
Liberty Media Group Class B Common Stock
  Balance at beginning of year..............................        --         206         217
  Shares issued (acquired), net.............................        --           6         (11)
  Liberty Media Group split-off.............................        --        (212)         --
  Other.....................................................        --          --          --
                                                              --------    --------    --------
Balance at end of year......................................        --          --         206
                                                              --------    --------    --------
Additional Paid-In Capital
  Balance at beginning of year..............................    54,798      93,504      62,083
  Shares issued (acquired), net:
    Under employee plans....................................       328         291         100
    For acquisitions........................................        --         862      23,583
    Settlement of put option................................        --       3,361          --
    For funding AT&T Canada obligation......................     2,485          --          --
    Redemption of TCI Pacific preferred stock...............     2,087          --          --
    Other*..................................................        31      (1,054)     (2,804)
  Proceeds in excess of par value from issuance of AT&T
    Wireless common stock...................................        --          --       9,915
  Gain on issuance of common stock by affiliates............        --          20         530
  Conversion of preferred stock.............................        --       9,631          --
  AT&T Wireless Group split-off.............................        --     (20,955)         --
  Liberty Media Group split-off.............................        --     (30,768)         --
                                                                       (continued on next page)
</Table>

                                        56
<PAGE>
                          AT&T CORP. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2002        2001        2000
                                                              ---------   ---------   ---------
                                                                    (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>         <C>
  AT&T Broadband spin-off...................................   (31,032)         --          --
  Exchange of AT&T Wireless tracking stock..................        --        (284)         --
  Beneficial conversion value of preferred stock............        --         295          --
  Dividends declared -- AT&T Common Stock Group.............      (569)       (265)         --
  Other.....................................................        35         160          97
                                                              --------    --------    --------
Balance at end of year......................................    28,163      54,798      93,504
                                                              --------    --------    --------
Guaranteed ESOP Obligation
  Balance at beginning of year..............................        --          --         (17)
  Amortization..............................................        --          --          17
                                                              --------    --------    --------
Balance at end of year......................................        --          --          --
                                                              --------    --------    --------
(Accumulated Deficit)/Retained Earnings
  Balance at beginning of year..............................    (3,484)      7,408       6,712
  Net (loss) income.........................................   (13,082)      7,715       4,669
  Dividends declared -- AT&T Common Stock Group.............        --        (275)     (2,485)
  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)
  AT&T Wireless Group split-off.............................        --     (17,593)         --
                                                              --------    --------    --------
Balance at end of year......................................   (16,566)     (3,484)      7,408
                                                              --------    --------    --------
Accumulated Other Comprehensive (Loss)
  Balance at beginning of year..............................      (342)     (1,398)      6,979
  Other comprehensive income (loss).........................       266       1,742      (8,377)
  AT&T Wireless Group split-off.............................        --          72          --
  Liberty Media Group split-off.............................        --        (758)         --
  AT&T Broadband spin-off...................................         8          --          --
                                                              --------    --------    --------
Balance at end of year......................................       (68)       (342)     (1,398)
                                                              --------    --------    --------
Total Shareowners' Equity...................................  $ 12,312    $ 51,680    $103,198
                                                              ========    ========    ========
Summary of Total Comprehensive (Loss) Income:
  (Loss) income before cumulative effect of accounting
    changes.................................................   (12,226)      6,811       4,669
  Cumulative effect of accounting changes...................      (856)        904          --
  Net (loss) income.........................................   (13,082)      7,715       4,669
  Other comprehensive income (loss)[net of income taxes of
    $(169), $(1,119), and $5,348]...........................       266       1,742      (8,377)
                                                              --------    --------    --------
Comprehensive (Loss) Income.................................  $(12,816)   $  9,457    $ (3,708)
                                                              ========    ========    ========
</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.

                                        57
<PAGE>

                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                   FOR THE YEARS ENDED
                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------
                                                                  (DOLLARS IN MILLIONS)
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net (loss) income...........................................  $(13,082)  $  7,715   $  4,669
Deduct:
  Loss from discontinued operations.........................   (14,513)    (4,052)    (4,863)
  Gain on disposition of discontinued operations............     1,324     13,503         --
  Cumulative effect of accounting changes -- net of income
    taxes...................................................      (856)       904         --
                                                              --------   --------   --------
Income (loss) from continuing operations....................       963     (2,640)     9,532
Adjustments to reconcile income (loss) from continuing
  operations to net cash provided by operating activities of
  continuing operations:
  Net gains on sales of businesses and investments..........       (30)    (1,231)      (734)
  Cost investment impairment charges........................       146        531          7
  Net restructuring and other charges.......................     1,418        973        577
  Depreciation and amortization.............................     4,888      4,559      4,538
  Provision for uncollectible receivables...................     1,058        884        925
  Deferred income taxes.....................................     2,631     (1,338)     1,005
  Net revaluation of certain financial instruments..........         8       (150)        --
  Minority interest income..................................      (114)      (131)       (41)
  Equity losses (earnings) from Liberty Media Group.........        --      2,711     (1,488)
  Net losses related to other equity investments............       512      7,783         51
  Decrease (increase) in receivables........................       707        888     (2,382)
  Decrease in accounts payable..............................      (175)      (508)      (585)
  Net change in other operating assets and liabilities......    (1,400)    (2,126)      (148)
  Other adjustments, net....................................      (129)      (200)      (616)
                                                              --------   --------   --------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
  OPERATIONS................................................    10,483     10,005     10,641
                                                              --------   --------   --------
INVESTING ACTIVITIES
Capital expenditures and other additions....................    (3,878)    (5,767)    (7,025)
Proceeds from sale or disposal of property, plant and
  equipment.................................................       468         73        555
Increase in other receivables...............................        --         --       (981)
Investment distributions and sales..........................        10      1,585        414
Investment contributions and purchases......................        (2)      (101)    (1,787)
Net dispositions (acquisitions) of businesses, net of cash
  disposed/acquired.........................................       (18)        15    (23,742)
Decrease in AT&T Canada obligation..........................    (3,449)        --         --
Proceeds from AT&T Broadband................................     5,849         --         --
Increase in restricted cash.................................      (442)        --         --
Other investing activities, net.............................        33       (100)      (112)
                                                              --------   --------   --------
NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING
  OPERATIONS................................................    (1,429)    (4,295)   (32,678)
                                                              --------   --------   --------
FINANCING ACTIVITIES
Proceeds from long-term debt issuances, net of issuance
  costs.....................................................        79     11,392        739
Retirement of long-term debt................................    (1,091)      (725)      (688)
(Decrease) increase in short-term borrowings, net...........    (7,157)   (17,168)    16,973
Repayment of borrowings from AT&T Wireless..................        --     (5,803)        --
Issuance of convertible preferred securities and warrants...        --      9,811         --
Issuance of AT&T common shares..............................     2,684        224         99
Issuance of AT&T Wireless Group common shares...............        --         54     10,314
Net issuance (acquisition) of treasury shares...............        --         24       (581)
Dividends paid on common stock..............................      (555)      (549)    (3,047)
Other financing activities, net.............................        (1)       (38)       (64)
                                                              --------   --------   --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF
  CONTINUING OPERATIONS.....................................    (6,041)    (2,778)    23,745
                                                              --------   --------   --------
Net cash (used in) provided by discontinued operations......    (5,679)     7,683     (2,746)
Net (decrease) increase in cash and cash equivalents........    (2,666)    10,615     (1,038)
Cash and cash equivalents at beginning of year..............    10,680         65      1,103
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $  8,014   $ 10,680   $     65
                                                              ========   ========   ========
</Table>

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  AT&T RESTRUCTURING AND DISCONTINUED OPERATIONS

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

     AT&T Broadband, which was spun-off from AT&T on November 18, 2002, was
accounted for as a discontinued operation pursuant to Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." In accordance with SFAS No. 144, prior period financial
statements have been restated to reflect AT&T Broadband as a discontinued
operation in all periods. AT&T Wireless, which was split-off from AT&T on July
9, 2001, was accounted for as a discontinued operation pursuant to Accounting
Principles Board (APB) Opinion No. 30, "Reporting Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Since AT&T Wireless was separated in 2001, it was reflected as a discontinued
operation in the prior year's financial statements. As discontinued operations,
the revenue, costs and expenses and cash flows of AT&T Broadband and AT&T
Wireless have been excluded from the respective captions in the Consolidated
Statements of Operations and Consolidated Statements of Cash Flows, and have
been reported through their respective dates of separation as "Net (loss) from
discontinued operations" and as "Net cash (used in) provided by discontinued
operations." In addition, the assets and liabilities of AT&T Broadband have been
excluded from the respective captions in the Consolidated Balance Sheet at
December 31, 2001, and have been reported as "Current assets of discontinued
operations," "Non-current assets of discontinued operations," "Current
liabilities of discontinued operations," "Non-current liabilities of
discontinued operations," "Minority Interest of Discontinued Operations" and
"Company-Obligated Convertible Quarterly Income Preferred Securities of
Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of
Discontinued Operations."

  AT&T BROADBAND

     On November 18, 2002, AT&T spun-off AT&T Broadband, which was comprised
primarily of the AT&T Broadband segment, to AT&T shareowners. Simultaneously,
AT&T Broadband combined with Comcast Corporation (Comcast) to form new Comcast.
The combination was accomplished through a distribution of stock to AT&T
shareowners, who received 0.3235 (1.6175 adjusted for the 1-for-5 reverse stock
split) of a share of Comcast Class A common stock for each share of AT&T they
owned at market close on November 15, 2002, the record date. The Internal
Revenue Service (IRS) ruled that the transaction qualified as tax-free for AT&T
and its shareowners for U.S. federal income tax purposes, with the exception of
cash received for fractional shares. Approximately 1.2 billion Comcast shares
were issued to AT&T shareowners at a value of approximately $31.1 billion, based
on the Comcast stock price on November 18, 2002. AT&T shareowners received a 56%
economic stake and a 66% voting interest in new Comcast.

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

     Revenue for AT&T's Broadband business (which included At Home Corporation,
or "Excite@Home" through September 2001) was $8.9 billion, $10.1 billion and
$8.4 billion for 2002, 2001 and 2000, respectively. Net (loss) from discontinued
operations before income taxes was $(20.5) billion, $(8.1) billion, and $(7.1)
billion for 2002, 2001, and 2000, respectively for the AT&T Broadband business.
The loss for 2002

                                        59
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

included pretax impairment charges of $16.5 billion ($11.8 billion after taxes)
relating to goodwill and franchise costs which was recorded in the second
quarter of 2002.

     Interest expense of $359 million, $333 million and $463 million was
allocated to discontinued operations in 2002, 2001 and 2000, respectively, based
on the balance of intercompany debt between AT&T Broadband and AT&T. At the time
of the spin-off of AT&T Broadband, this intercompany debt was settled via a $5.8
billion cash distribution from AT&T Broadband and the exchange of $3.5 billion
of AT&T notes for notes of AT&T Broadband which are unconditionally guaranteed
by Comcast and certain of its subsidiaries (see note 8).

     At December 31, 2001, current assets of $1.6 billion, non-current assets of
$101.5 billion (including net goodwill of $19.4 billion), current liabilities of
$5.8 billion, non-current liabilities of $43.1 billion, minority interest of
$3.3 billion, and company-obligated convertible quarterly income preferred
securities of $4.7 billion were attributable to the discontinued operations of
the AT&T Broadband business. Current assets were primarily comprised of accounts
receivable and investments, while non-current assets were primarily comprised of
goodwill, franchise costs and investments. Current liabilities were primarily
comprised of short-term debt, accounts payable and payroll and benefit-related
liabilities, while non-current liabilities were primarily comprised of long-term
debt and deferred income taxes.

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

  AT&T WIRELESS

     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 was used for acquisitions,
network expansion, capital expenditures and general corporate purposes. AT&T
utilized the remaining net proceeds of $3.3 billion for general corporate
purposes.

     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 (5.88 shares adjusted for the 1-for-5 reverse stock split) 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 (74.4 million shares adjusted
for the 1-for-5 reverse stock split) of AT&T common stock were tendered in
exchange for 437.7 million shares of AT&T Wireless Group tracking stock. In
conjunction with the exchange offer, AT&T recorded an $80 million premium as a
reduction to net income available to common shareowners. The premium represented
the excess of the fair value of the AT&T Wireless Group tracking stock issued
over the fair value of the AT&T common stock exchanged.

     On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis, and 1,136
million shares of AT&T Wireless common stock held by AT&T were distributed to
AT&T common shareowners on a basis of 0.3218 shares (1.609 shares adjusted for
the 1-for-5 reverse stock split) of AT&T Wireless for each AT&T share
outstanding. AT&T common shareowners received whole shares of AT&T Wireless
common stock and cash payments for fractional shares. The IRS ruled that the
transaction qualified as tax-free for AT&T and its shareowners for U.S. federal
income tax purposes, with the

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exception of cash received for fractional shares. For accounting purposes, the
deemed effective split-off date was June 30, 2001. The impact of operating
results from the July 1, 2001 through July 9, 2001, were deemed immaterial to
our consolidated results. The split-off of AT&T Wireless resulted in a tax-free
noncash 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 2001 as a "Gain on
disposition of discontinued operations." At the time of split-off, AT&T retained
approximately $3.0 billion, or 7.3%, of AT&T Wireless common stock, about half
of which was used in a debt-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 was exchangeable into AT&T Wireless shares (or their
cash equivalent) at maturity (see notes 7 and 8).

     Revenue for AT&T Wireless was $6.6 billion for 2001 and $10.4 billion for
2000. Income from discontinued operations before income taxes for AT&T Wireless
was $308 million for 2001 and $844 million for 2000. Interest expense of $153
million and $330 million was allocated to AT&T Wireless discontinued operations
in 2001 and 2000, respectively, based on the debt of AT&T that was attributable
to AT&T Wireless.

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

  LUCENT TECHNOLOGIES INC.

     Net (loss) from discontinued operations for 2002 reflects an estimated loss
on a litigation settlement associated with the business of Lucent Technologies
Inc. (Lucent), which was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and
Lucent Technologies Inc. et al., was a class action lawsuit filed in 1996 in
Illinois state court. The complaint sought damages on behalf of present and
former customers based on a claim that the AT&T Consumer Products business
(which became part of Lucent in 1996) and Lucent had defrauded and misled
customers who leased telephones, resulting in payments in excess of the cost to
purchase the telephones. AT&T and Lucent have denied any wrongdoing, but settled
this matter to avoid the uncertainty and expense of protracted litigation. On
August 9, 2002, a settlement proposal was submitted to and accepted by the
court. In accordance with the separation and distribution agreement between AT&T
and Lucent, AT&T's estimated proportionate share of the settlement and legal
costs totaled $45 million pretax ($33 million after-tax), reflecting a fourth
quarter adjustment to the initial estimate. Depending upon the number of claims
submitted and accepted, the actual cost of the settlement to AT&T may be less
than stated amounts, but it is not possible to estimate the amount at this time.
While similar consumer class actions are pending in various state courts, the
Illinois state court has held that the class it certified covers claims in the
other state court class actions.

  SUMMARY

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                         ----------------------------------
                                                            2002        2001        2000
                                                         ----------   ---------   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                      <C>          <C>         <C>
AT&T Broadband, net of income tax benefits of $6,002,
  $3,873, and $1,671...................................   $(14,480)    $(4,202)    $(5,399)
AT&T Wireless, net of income taxes of $(158), and
  $(307)...............................................         --         150         536
Lucent Technologies Inc., net of income tax benefit of
  $12..................................................        (33)         --          --
                                                          --------     -------     -------
Net (loss) from discontinued operations, net of income
  taxes................................................   $(14,513)    $(4,052)    $(4,863)
                                                          ========     =======     =======
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  LIBERTY MEDIA CORPORATION

     As a result of our merger with Tele-Communications, Inc. (TCI) in 1999, we
acquired Liberty Media Group (LMG). Although LMG was wholly owned, we accounted
for it as an equity method investment since we did not have a controlling
financial interest. On August 10, 2001, AT&T completed the split-off of Liberty
Media Corporation (LMC) as an independent, publicly-traded company. AT&T
redeemed each outstanding share of Class A and Class B LMG tracking stock for
one share of Liberty Media Corporation's Series A and Series B common stock,
respectively. The IRS ruled that the split-off of Liberty Media Corporation
qualified as a tax-free transaction for AT&T, Liberty Media and their
shareowners. The operating results of LMG through July 31, 2001, the deemed
effective split-off date for accounting purposes, were reflected as "Equity
(losses) earnings from Liberty Media Group." The impact of the operating results
from August 1 through August 10, 2001, was deemed immaterial to our consolidated
results. At the time of disposition, AT&T did not exit the line of business that
Liberty Media Group operated in; therefore, at the time of its separation,
Liberty Media Group was not accounted for as a discontinued operation.

     Upon split-off, AT&T paid LMG $803 million pursuant to a tax-sharing
agreement related to TCI net operating losses generated prior to AT&T's merger
with TCI. In addition, in 2002, AT&T received approximately $114 million from
LMG related to taxes pursuant to a tax-sharing agreement between LMG and AT&T
Broadband, which existed prior to the TCI merger. At December 31, 2001, this
receivable was included in "Accounts receivable."

     Summarized results of operations for LMG were as follows:

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

2.  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 loss" within shareowners' equity.
Gains and losses from foreign currency transactions are included in results of
operations.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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.

  REVENUE RECOGNITION

     We recognize long distance, local voice and data services revenue based
upon minutes of traffic processed or contracted fee schedules. In addition, we
record an estimated revenue reduction for adjustments to customer accounts. This
estimate is based on a detailed analysis that compares accounts receivable aging
at different points in time to determine the appropriate level of adjustments.
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 as incurred. Advertising and
promotional expenses were $814 million, $874 million and $801 million in 2002,
2001 and 2000, respectively.

  INCOME TAXES

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

  CASH EQUIVALENTS

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

  PROPERTY, PLANT AND EQUIPMENT

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

asset group has an average life. A depreciation rate is developed based on the
average useful life for the specific asset group. This method requires the
periodic revision of depreciation rates. Under the unit method, assets are
depreciated based on the useful life of the individual asset. When we sell or
retire assets depreciated using the group method, the difference between the
proceeds, if any, and the cost of the asset is charged or credited to
accumulated depreciation, without recognition of a gain or loss. When we sell
assets that were depreciated using the unit method, we include the related gains
or losses in "Other (expense) income, net."

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

     We use accelerated depreciation methods 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.

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

  GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. Beginning January 1, 2002, in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets," goodwill and indefinite-lived intangible assets
are no longer amortized, but instead are tested for impairment at least annually
(see note 3). Intangible assets that have finite useful lives are amortized over
their useful lives, which range from five to 20 years.

  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

     All derivatives are recognized on the balance sheet at fair value. Certain
derivatives, at inception, are designated as hedges and evaluated for
effectiveness at least quarterly throughout the hedge period. These derivatives
are designated as either (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), or (2) a
hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability (cash flow hedge).
All other derivatives are not formally designated for accounting purposes
(undesignated). These derivatives, except for warrants, although undesignated
for accounting purposes, are entered into to hedge economic risks.
                                        64
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

     Changes in the fair value of undesignated derivatives are recorded in
"Other (expense) income, net," along with the change in fair value of the
underlying 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 the derivative 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.

     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, the derivative is adjusted for
changes in fair value through "Other (expense) income, net." For fair value
hedges, the underlying asset or liability will no longer be adjusted for changes
in fair value and any asset or liability recorded in connection with a firm
commitment will be removed from the balance sheet and recorded in current period
earnings. For cash flow hedges, gains and losses that were accumulated in "Other
comprehensive income (loss)" as a component of shareowners' equity in connection
with a forecasted transaction, will be recognized immediately in "Other
(expense) income, net."

  STOCK-BASED COMPENSATION

     As of December 31, 2002, AT&T had a Long-Term Incentive Program and an
Employee Stock Purchase Plan, which are described more fully in note 12. 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, stock
appreciation rights (SARs), and certain occasions when we have modified the
terms of the stock option vesting schedule in conjunction with the 2001
split-off of AT&T Wireless and the 2002 spin-off of AT&T Broadband.

     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

                                        65
<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>
                                                AT&T COMMON STOCK        AT&T WIRELESS
                                                      GROUP                  GROUP
                                            --------------------------   -------------
FOR THE YEARS ENDED DECEMBER 31,              2002      2001     2000    2001    2000
--------------------------------            --------   ------   ------   -----   -----
                                                      (DOLLARS IN MILLIONS)
<S>                                         <C>        <C>      <C>      <C>     <C>
Net (loss) income.........................  $(13,082)  $9,114   $3,105   $  35   $  76
Add: Stock-based employee compensation
  included in reported net (loss) income,
  net of tax..............................        43       75     (156)     --      --
Deduct: Total stock-based employee
  compensation expense determined under
  the fair value based method for all
  awards, net of tax......................      (345)    (692)    (324)    (17)    (25)
                                            --------   ------   ------   -----   -----
Pro forma net (loss) income...............  $(13,384)  $8,497   $2,625   $  18   $  51
                                            ========   ======   ======   =====   =====
Basic (loss) earnings per share...........  $ (17.53)  $12.51   $ 4.45   $0.08   $0.21
Proforma basic (loss) earnings per
  share...................................  $ (17.93)  $11.66   $ 3.77   $0.04   $0.14
Diluted (loss) earnings per share.........  $ (17.08)  $12.51   $ 4.25   $0.08   $0.21
Proforma diluted (loss) earnings per
  share...................................  $ (17.47)  $11.66   $ 3.60   $0.04   $0.14
</Table>

     The stock-based employee compensation (expense) income, net of tax, for
AT&T Common Stock Group included in income (loss) from continuing operations was
$(55) million, $(71) million and $(7) million in 2002, 2001 and 2000,
respectively, and included in discontinued operations was $12 million, $(4)
million and $163 million in 2002, 2001 and 2000, respectively. The amounts
attributed to discontinued operations included income (expense), net of tax, of
$51 million, $(2) million and $166 million in 2002, 2001 and 2000, respectively,
related to grants of SARs of affiliated companies held by certain employees
subsequent to the TCI merger and prior to the AT&T Broadband spin-off. In
addition, we entered into an equity hedge in 1999 to offset potential future
compensation costs associated with these SARS. (Expense), net of tax, related to
this hedge was $(56) million, $(10) million, and $(200) million in 2002, 2001,
and 2000, respectively.

     Total stock-based employee compensation (expense), net of tax, determined
under the fair value based method for all awards related to continuing
operations was $(288) million, $(562) million, and $(315) million for 2002, 2001
and 2000, respectively, and related to discontinued operations was $(57) million
$(147) million and $(34) million for 2002, 2001 and 2000, respectively.

     Pro forma earnings (loss) for AT&T Common Stock Group from continuing
operations was $730 million, $(1,152) million and $7,736 million for 2002, 2001
and 2000, respectively, and from discontinued operations was $(14,582) million,
$(4,213) million and $(5,111) million for 2002, 2001 and 2000, respectively.

     Pro forma earnings (loss) for AT&T Common Stock Group per basic share from
continuing operations was $0.98, $(1.58) and $11.10 for 2002, 2001 and 2000,
respectively, and from discontinued operations was $(19.53), $(5.78) and $(7.33)
for 2002, 2001 and 2000, respectively.

     Pro forma earnings (loss) for AT&T Common Stock Group per diluted share
from continuing operations was $0.96, $(1.58) and $10.59 for 2002, 2001 and
2000, respectively, and from discontinued operations was $(19.04), $(5.78) and
$(6.99) for 2002, 2001 and 2000, respectively.

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AT&T Common Stock Group for 2001 includes expense of $10 million due to the
conversion of AT&T common stock options in connection with the split-off of AT&T
Wireless, and also includes expense of $12 million due to the accelerated
vesting of AT&T Wireless stock options held by AT&T employees at the date of the
split-off.

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

  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.

  CONCENTRATIONS

     As of December 31, 2002, other than the guarantee issued in connection with
the split-off of AT&T Wireless (see note 9), we do not have any significant
concentration of business transacted with a particular customer, supplier,
lender or former affiliate that could, if suddenly adversely impacted, severely
impact our operations. We also do not have a concentration of available sources
of labor, services or other rights that could, if suddenly eliminated, severely
impact our operations. We invest our cash with many high-quality credit
institutions.

  RECLASSIFICATIONS AND RESTATEMENTS

     We reclassified and restated certain amounts for previous years to conform
to the 2002 presentation.

3.  IMPACTS OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The table below presents the impact of SFAS No. 142 on net (loss) income
and (loss) earnings per share, had the standard been in effect on January 1,
2000:

<Table>
<Caption>
                                                                              AT&T             LIBERTY
                                             AT&T COMMON STOCK GROUP     WIRELESS GROUP      MEDIA GROUP
                                           ---------------------------   ---------------   ----------------
FOR THE YEARS ENDED DECEMBER 31,             2002      2001      2000     2001     2000     2001      2000
--------------------------------           --------   -------   ------   ------   ------   -------   ------
                                                   (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>        <C>       <C>      <C>      <C>      <C>       <C>
Net (loss) income:
Reported income (loss) from continuing
  operations.............................  $    963   $    71   $8,044   $  --    $  --    $(2,711)  $1,488
Dividend requirements of preferred
  stock..................................        --      (652)      --      --       --         --       --
Premium on exchange of AT&T Wireless
  tracking stock.........................        --       (80)      --      --       --         --       --
Reported income (loss) from continuing
  operations available to common
  shareowners............................       963      (661)   8,044      --       --     (2,711)   1,488
Add back amortization, net of tax:
  Goodwill...............................        --       175      149      --       --        350      568
  Equity method excess basis.............        --        37       37      --       --        346      654
  Franchise costs........................        --        --       --      --       --          4        8
Adjusted income (loss) from continuing
  operations available to common
  shareowners............................       963      (449)   8,230      --       --     (2,011)   2,718
Reported (loss) income from discontinued
  operations.............................   (14,513)   (4,087)  (4,939)     35       76         --       --
Add back discontinued operations
  amortization, net of tax...............        --     1,588    1,705      36       27         --       --
Gain on disposition of discontinued
  operations.............................     1,324    13,503       --      --       --         --       --
Cumulative effect of accounting
  changes................................      (856)      359       --      --       --        545       --
Adjusted net (loss) income available to
  common shareowners.....................  $(13,082)  $10,914   $4,996   $  71    $ 103    $(1,466)  $2,718
Basic (loss) earnings per share:
Reported basic earnings (loss) per share
  from continuing operations.............  $   1.29   $ (0.91)  $11.54   $  --    $  --    $ (1.05)  $ 0.58
Add back amortization, net of tax:
  Goodwill...............................        --      0.24     0.21      --       --       0.14     0.22
  Equity method excess basis.............        --      0.05     0.05      --       --       0.13     0.25
  Franchise costs........................        --        --       --      --       --         --     0.01
Adjusted basic earnings (loss) per share
  from continuing operations.............      1.29     (0.62)   11.80      --       --      (0.78)    1.06
Reported (loss) earnings from
  discontinued operations................    (19.44)    (5.60)   (7.09)   0.08     0.21         --       --
Add back discontinued operations
  amortization, net of tax...............        --      2.18     2.45    0.08     0.08         --       --
Gain on disposition of discontinued
  operations.............................      1.77     18.53       --      --       --         --       --
Cumulative effect of accounting
  changes................................     (1.15)     0.49       --      --       --       0.21       --
Adjusted basic (loss) earnings per
  share..................................  $ (17.53)  $ 14.98   $ 7.16   $0.16    $0.29    $ (0.57)  $ 1.06
Diluted (loss) earnings per share:
Reported diluted earnings (loss) per
  share from continuing operations.......  $   1.26   $ (0.91)  $11.01   $  --    $  --    $ (1.05)  $ 0.58
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                              AT&T             LIBERTY
                                             AT&T COMMON STOCK GROUP     WIRELESS GROUP      MEDIA GROUP
                                           ---------------------------   ---------------   ----------------
FOR THE YEARS ENDED DECEMBER 31,             2002      2001      2000     2001     2000     2001      2000
--------------------------------           --------   -------   ------   ------   ------   -------   ------
                                                   (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>        <C>       <C>      <C>      <C>      <C>       <C>
Add back amortization, net of tax:
  Goodwill...............................        --      0.24     0.20      --       --       0.14     0.22
  Equity method excess basis.............        --      0.05     0.05      --       --       0.13     0.25
  Franchise costs........................        --        --       --      --       --         --     0.01
Adjusted diluted earnings (loss) per
  share from continuing operations.......      1.26     (0.62)   11.26      --       --      (0.78)    1.06
Reported (loss) earnings from
  discontinued operations................    (18.95)    (5.60)   (6.76)   0.08     0.21         --       --
Add back discontinued operations
  amortization, net of tax...............        --      2.18     2.34    0.08     0.08         --       --
Gain on disposition of discontinued
  operations.............................      1.73     18.53       --      --       --         --       --
Cumulative effect of accounting
  changes................................     (1.12)     0.49       --      --       --       0.21       --
Adjusted diluted (loss) earnings per
  share..................................  $ (17.08)  $ 14.98   $ 6.84   $0.16    $0.29    $ (0.57)  $ 1.06
</Table>

  EMERGING ISSUES TASK FORCE (EITF) ISSUE 01-9, "ACCOUNTING FOR CONSIDERATION
  GIVEN BY A VENDOR TO A CUSTOMER"

     During 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer," that
cash incentives given to customers should be characterized as a reduction of
revenue when recognized in the income statement, unless an identifiable benefit
is received in exchange. Prior to this consensus, cash incentives to acquire
customers were recorded as advertising and promotion expense within selling,
general and administrative expenses. These cash incentives are now recorded as a
reduction of revenue and prior periods have been reclassified to conform to this
presentation. The amounts reclassified as a reduction of revenue for the years
ended December 31, 2001 and 2000, were $236 million and $250 million,
respectively. Net income was not affected by this reclassification.

  SFAS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS"

     On January 1, 2002, AT&T adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes 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. The initial
adoption had no impact on AT&T's results of operations, financial position or
cash flows.

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

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

     AT&T Group's cumulative-effect increase to net income of $359 million was
comprised of $130 million related to continuing operations primarily
attributable to warrants held in both public and private companies,
                                        69
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and $229 million related to discontinued operations primarily attributable to
embedded and non-embedded net purchase options related to indexed debt
instruments.

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

     LMG's cumulative-effect increase to income of $545 million was primarily
attributable to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also included in the
cumulative-effect was $87 million previously included in "Accumulated other
comprehensive loss" primarily related to changes in the fair value of LMG's
warrants and options to purchase certain available-for-sale securities.

4.  SUPPLEMENTARY FINANCIAL INFORMATION

  SUPPLEMENTARY INCOME STATEMENT INFORMATION

<Table>
<Caption>
                                                                FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              -----------------------
                                                              2002     2001     2000
                                                              -----   ------   ------
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>      <C>
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses...........................  $ 254   $  274   $  313
                                                              =====   ======   ======
OTHER (EXPENSE) INCOME, NET
Aircraft leveraged-lease write-downs........................  $(244)  $   --   $   --
Cost investment impairment charges..........................   (146)    (531)      (7)
Net revaluation of certain financial instruments............     (8)     150       --
Investment-related income...................................    116      285      435
Settlements associated with businesses disposed of..........    107      154       --
Net gains on sales of businesses and investments............     30    1,231      734
Miscellaneous, net..........................................     68       38       28
                                                              -----   ------   ------
Total other (expense) income, net...........................  $ (77)  $1,327   $1,190
                                                              =====   ======   ======
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  SUPPLEMENTARY BALANCE SHEET INFORMATION

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment.................   $48,169     $47,552
Buildings and improvements..................................     8,129       7,969
Land and improvements.......................................       327         370
                                                               -------     -------
Total property, plant and equipment.........................    56,625      55,891
Accumulated depreciation....................................    31,021      29,088
                                                               -------     -------
Property, plant and equipment, net..........................   $25,604     $26,803
                                                               =======     =======
</Table>

<Table>
<Caption>
                                                             AT&T       AT&T
                                                           BUSINESS   CONSUMER
                                                           SERVICES   SERVICES   TOTAL
                                                           --------   --------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                        <C>        <C>        <C>
GOODWILL
Balance at December 31, 2001.............................   $5,244      $70      $5,314
Write-off of goodwill of AT&T Latin America..............     (777)      --        (777)
Translation adjustment...................................       91       --          91
Other....................................................       (2)      --          (2)
                                                            ------      ---      ------
Balance at December 31, 2002.............................   $4,556      $70      $4,626
                                                            ======      ===      ======
</Table>

<Table>
<Caption>
                                                            GROSS
                                                           CARRYING   ACCUMULATED
                                                            AMOUNT    AMORTIZATION   NET
                                                           --------   ------------   ----
                                                               (DOLLARS IN MILLIONS)
<S>                                                        <C>        <C>            <C>
INTANGIBLE ASSETS
Amortizable purchased intangible assets at December 31,
  2002:
  Customer lists and relationships.......................    $557         $132       $425
  Other..................................................     243          112        131
                                                             ----         ----       ----
Total intangible assets..................................    $800         $244       $556
                                                             ====         ====       ====
</Table>

     The amortization expense associated with purchased intangible assets for
the year ended December 31, 2002, was approximately $83 million. Amortization
expense for purchased intangible assets is estimated to be approximately $65
million for the year ending December 31, 2003, $50 million for the year ending
December 31, 2004, and $45 million for each of the years ending December 31,
2005, 2006, and 2007.

LEVERAGED LEASES

     We lease to third parties 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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investment in leveraged leases is primarily included in "Other assets."
Following is a summary of our investment in leveraged leases:

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ----------------
                                                               2002     2001
                                                              ------   -------
                                                                (DOLLARS IN
                                                                 MILLIONS)
<S>                                                           <C>      <C>
Rental receivables (net of nonrecourse debt*)...............  $ 476    $  635
Estimated unguaranteed residual values......................    483       720
Unearned income.............................................   (211)     (297)
Allowance for credit losses.................................    (23)      (28)
                                                              -----    ------
Investment in leverage leases (included in "Other
  assets")..................................................    725     1,030
Deferred taxes..............................................    932     1,063
                                                              -----    ------
Net investment..............................................  $(207)   $  (33)
                                                              =====    ======
</Table>

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

* The rental receivables are net of nonrecourse debt of $1.4 billion and $2.0
  billion at December 31, 2002 and 2001, respectively.

  SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                             2002     2001     2000
                                                             -----   ------   -------
                                                              (DOLLARS IN MILLIONS)
<S>                                                          <C>     <C>      <C>
OTHER COMPREHENSIVE INCOME (LOSS)
Net foreign currency translation adjustment [net of taxes
  of $(82), $160 and $181](1)..............................  $ 132   $ (250)  $  (309)
Net revaluation of certain financial instruments:
  Unrealized (losses) gains [net of taxes of $340, $(343)
     and $4,686](2)........................................   (550)     475    (7,317)
  Recognition of previously unrealized losses (gains) on
     available-for-sale securities [net of taxes of $(539),
     $(950) and $480](3)...................................    869    1,535      (750)
Net minimum pension liability adjustment (net of taxes of
  $112, $14 and $1)........................................   (185)     (18)       (1)
                                                             -----   ------   -------
Total other comprehensive income (loss)....................  $ 266   $1,742   $(8,377)
                                                             =====   ======   =======
</Table>

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

(1) Includes LMG's foreign currency translation adjustments, net of taxes of
    $149 in 2001 through July 31, 2001, and $202 in 2000.

(2) Includes LMG's unrealized gains (losses) on available-for-sale securities,
    net of taxes of $(1,286) in 2001 through July 31, 2001, and $6,117 in 2000.

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

                                        72
<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 STATEMENT OF OPERATIONS LINE ITEMS
  IMPACTED

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                             -------------------------------------------------------------
                                                    2002                 2001                 2000
                                             ------------------   ------------------   -------------------
                                             PRETAX   AFTER-TAX   PRETAX   AFTER-TAX   PRETAX    AFTER-TAX
                                             ------   ---------   ------   ---------   -------   ---------
                                                                 (DOLLARS IN MILLIONS)
<S>                                          <C>      <C>         <C>      <C>         <C>       <C>
AT&T GROUP:
  Other (expense) income, net:
  Other-than-temporary investment
     impairments...........................  $  148     $ 91      $  475    $  293     $    --     $  --
  Other derivative activity................      28       17          --        --          --        --
  Sales of various securities..............      --       --        (238)     (147)       (433)     (267)
  Income from discontinued operations:
  Other-than-temporary investment
     impairments...........................   1,232      761         510       315         290       179
  Reclassification of securities to
     "trading" in conjunction with the
     adoption of SFAS No. 133*.............      --       --       1,154       713          --        --
  Sales of various securities..............      --       --         555       343         (43)      (27)
LIBERTY MEDIA GROUP:
  Earnings (losses) from Liberty Media
     Group:
  Sales of various securities..............      --       --         173       105      (1,044)     (635)
  Cumulative effect of accounting
     change*...............................      --       --        (144)      (87)         --        --
                                             ------     ----      ------    ------     -------     -----
Total recognition of previously unrealized
  losses (gains) on available-for-sale
  securities...............................  $1,408     $869      $2,485    $1,535     $(1,230)    $(750)
                                             ======     ====      ======    ======     =======     =====
</Table>

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

* See note 3 for detailed discussion.

  SUPPLEMENTARY CASH FLOW INFORMATION

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2002     2001     2000
                                                             ------   ------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                          <C>      <C>      <C>
Interest payments, net of capitalized interest of $61, $121
  and $143.................................................  $1,532   $1,537   $1,420
Income tax (receipts) payments.............................    (814)   1,441    3,379
</Table>

5.  EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE

     During 2001 and 2000, in addition to AT&T Common Stock, the AT&T Wireless
Group and Liberty Media Group tracking stocks were outstanding. The tracking
stocks represented an interest in the economic performance of the net assets of
each of the respective groups. The earnings attributable to AT&T Wireless Group
and Liberty Media Group were excluded from the earnings attributable to the AT&T
Common stock group. On July 9 and August 10, 2001, AT&T Wireless and Liberty
Media Group, respectively, were separated from AT&T and the tracking stocks were
redeemed (see note 1).

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                              AT&T COMMON STOCK            AT&T WIRELESS           LIBERTY MEDIA
                                                    GROUP                      GROUP                   GROUP
                                         ----------------------------   -------------------   ------------------------
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                         -----------------------------------------------------------------------------
                                           2002      2001      2000     2002    2001   2000   2002     2001      2000
                                         --------   -------   -------   -----   ----   ----   -----   -------   ------
                                                                     (DOLLARS IN MILLIONS)
<S>                                      <C>        <C>       <C>       <C>     <C>    <C>    <C>     <C>       <C>
Income (loss) from continuing
  operations before cumulative effect
  of accounting change.................  $    963   $    71   $ 8,044   $ --    $--    $--    $ --    $(2,711)  $1,488
Dividend requirements of preferred
  stock................................        --      (652)       --     --     --     --      --         --       --
Premium on exchange of AT&T Wireless
  tracking stock.......................        --       (80)       --     --     --     --      --         --       --
                                         --------   -------   -------   -----   ---    ---    -----   -------   ------
Income (loss) from continuing
  operations attributable to common
  shareowners..........................       963      (661)    8,044     --     --     --      --     (2,711)   1,488
(Loss) income from discontinued
  operations...........................   (14,513)   (4,087)   (4,939)    --     35     76      --         --       --
Gain on disposition of discontinued
  operations...........................     1,324    13,503        --     --     --     --      --         --       --
Cumulative effect of accounting
  changes..............................      (856)      359        --     --     --     --      --        545       --
                                         --------   -------   -------   -----   ---    ---    -----   -------   ------
  Net (loss) income attributable to
    common shareowners.................  $(13,082)  $ 9,114   $ 3,105   $ --    $35    $76    $ --    $(2,166)  $1,488
                                         ========   =======   =======   =====   ===    ===    =====   =======   ======
</Table>

  AT&T COMMON STOCK GROUP

     On November 18, 2002, a 1-for-5 reverse stock split of AT&T common stock as
approved by shareowners on July 10, 2002, was effected. Shares (except shares
authorized) and per share amounts were restated to reflect the stock split on a
retroactive basis.

     Basic earnings per common share (EPS) is computed by dividing income
attributable to common shareowners by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
(considering the combined income and share impact) that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The potential issuance of common stock is assumed to occur at
the beginning of the year, and the incremental shares are included using the
treasury stock method, which assumes the proceeds (after-tax) from exercise are
used by the Company to purchase common stock at the average market price during
the period. The incremental shares (difference between the shares assumed to be
issued and the shares assumed to be purchased), to the extent they would have
been dilutive, are included in the denominator of the diluted EPS calculation.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                          ----------------------------------
                                                          2002(1)    2001(1),(2)    2000(1)
                                                          --------   ------------   --------
                                                                 (SHARES IN MILLIONS)
<S>                                                       <C>        <C>            <C>
Weighted-average common shares..........................    746          729          697
Effect of dilutive securities:
  Stock options.........................................      1           --            4
  Preferred stock of subsidiary.........................      3           --            8
  Convertible quarterly income preferred securities.....     16           --           14
  Excite@Home Put Options...............................     --           --            8
                                                            ---          ---          ---
Weighted-average common shares and potential common
  shares................................................    766          729          731
                                                            ===          ===          ===
</Table>

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

(1) For 2002, 2001 and 2000, no adjustments were made to income for the
    computation of diluted EPS.

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

  Preferred Stock of Subsidiary

     Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was
required to redeem the outstanding TCI Pacific Communications, Inc. Class A
Senior Cumulative Exchangeable Preferred Stock (TCI Pacific preferred stock) for
AT&T common stock. All outstanding shares of TCI Pacific preferred stock were
either exchanged or redeemed for AT&T common stock during 2001 and 2002 (see
note 10). At December 31, 2001, the carrying value of TCI Pacific preferred
stock was included in "Minority Interest of Discontinued Operations." Dividends
were included in "Net (loss) from discontinued operations" for 2002, 2001 and
2000.

  Convertible Quarterly Income Preferred Securities (Quarterly Preferred
  Securities)

     On June 16, 1999, AT&T Finance Trust I, a wholly owned subsidiary of AT&T,
completed the private sale of 100 million shares of 5.0% cumulative quarterly
income preferred securities (quarterly preferred securities) to Microsoft
Corporation. Such securities were convertible into AT&T common stock. However,
in connection with the AT&T Broadband spin-off (see note 1), Comcast assumed the
quarterly preferred securities and Microsoft agreed to convert these preferred
securities into shares of Comcast common stock. At December 31, 2001, these
securities were included in "Company-Obligated Convertible Quarterly Income
Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt
Securities of AT&T of Discontinued Operations." Dividends were included in "Net
(loss) from discontinued operations" for 2002, 2001 and 2000.

  AT&T WIRELESS GROUP

     Basic EPS from discontinued operations for AT&T Wireless Group for 2001
through June 30, 2001, the deemed effective split-off date for accounting
purposes, 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.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  LIBERTY MEDIA GROUP

     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, and 2,572 million in 2000. Potentially
dilutive securities, including fixed and nonvested performance awards and stock
options, have not been factored into the dilutive calculations because past
history indicated that these contracts were generally settled in cash.

6.  NET RESTRUCTURING AND OTHER CHARGES

     In 2002, net restructuring and other charges were $1,437 million which
included a $1,029 million charge for the impairment of the net assets of our
consolidated subsidiary, AT&T Latin America. In December 2002, the AT&T Board of
Directors approved a plan for AT&T to sell its approximate 95% voting stake in
AT&T Latin America in its current condition. On December 31, 2002, we signed a
non-binding term sheet for the sale of our shares within one year for a nominal
amount. As a result of this plan, we classified AT&T Latin America as an asset
held for sale at fair market value, in accordance with SFAS No. 144.
Consequently, there are approximately $160 million of assets (principally cash
and accounts receivable) included in Other Current Assets and approximately $160
million of liabilities (principally secured short-term debt) included in Other
Current Liabilities. The $1,029 million charge to write the assets and
liabilities down to their fair values was reported within our AT&T Business
Services segment.

     Also included in net restructuring and other charges was a $204 million
impairment charge related to certain Digital Subscriber Line (DSL) assets
(including internal-use software, licenses, and property, plant & equipment)
that will not be utilized by AT&T as result of changes to our "DSL build"
strategy. Instead of building DSL capabilities in all geographic areas initially
targeted, we have signed an agreement with Covad Communications to offer DSL
services over their network. As a result, the assets in these areas were
impaired. This charge was reported within our AT&T Consumer Services segment.

     In 2002, AT&T recorded net business restructuring charges of $204 million.
These activities consisted of new exit plans totaling $377 million and reversals
of $173 million. The new plans primarily consisted of $334 million for employee
separation costs ($28 million of which was recorded as a pension liability
associated with management employees to be separated in 2002 which will be
funded from the pension trust) and $39 million of facility closing reserves.
Slightly more than 4,800 employees will be separated in conjunction with these
exit plans, approximately one-half of which are management employees and
one-half are non-management employees. The majority of these employee
separations will be involuntary. Approximately 14% of the employees affected by
these exit plans had left their positions by December 31, 2002, and we expect
those remaining to leave their positions by the end of 2003.

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                 TYPE OF COST
                                                    --------------------------------------
                                                     EMPLOYEE     FACILITY
                                                    SEPARATIONS   CLOSINGS   OTHER   TOTAL
                                                    -----------   --------   -----   -----
                                                            (DOLLARS IN MILLIONS)
<S>                                                 <C>           <C>        <C>     <C>
BALANCE AT JANUARY 1, 2000........................     $ 150        $239     $ 21    $ 410
  Additions.......................................       442           2       62      506
  Deductions......................................      (350)        (67)     (47)    (464)
                                                       -----        ----     ----    -----
BALANCE AT DECEMBER 31, 2000......................       242         174       36      452
  Additions.......................................       474         166       12      652
  Deductions......................................      (230)        (36)     (29)    (295)
                                                       -----        ----     ----    -----
BALANCE AT DECEMBER 31, 2001......................       486         304       19      809
  Additions.......................................       306          78       --      384
  Deductions......................................      (413)        (99)     (16)    (528)
                                                       -----        ----     ----    -----
BALANCE AT DECEMBER 31, 2002......................     $ 379        $283     $  3    $ 665
                                                       =====        ====     ====    =====
</Table>

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

     Deductions reflect cash payments of $366 million, $249 million and $410
million for 2000, 2001, and 2002, respectively. These payments included cash
termination benefits of $254 million, $202 million, and $328 million, for 2000,
2001 and 2002, respectively, which were primarily funded through cash from
operations. In 2000, 2001 and 2002, reserves of $98 million, $13 million and $9
million, respectively, were transferred out of the restructuring liability to
long-term liability accounts as a result of exiting managers deferring severance
payments, primarily related to executives. Also included in 2001 and 2002
deductions are reversals of prior business restructuring reserves of $33 million
and $109 million, respectively. The business restructuring plans of 2000 and
2001 were substantially complete as of December 31, 2001 and 2002, respectively.

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

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

     During 2000, we recorded $758 million of net restructuring and other
charges which included $586 million for employee separations, of which $144
million primarily related to pension and postretirement curtailment losses, $91
million related to the government-mandated disposition of AT&T Communications
(U.K.) Ltd., which would have competed directly with Concert and $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.

     The charge covered separation costs for approximately 6,100 employees,
approximately one-half of whom were management employees and one-half were
non-management employees. Approximately 5,500 of the
                                        77
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee separations were related to involuntary terminations and approximately
600 related to voluntary terminations.

7.  INVESTMENTS

  EQUITY METHOD INVESTMENTS

     We have investments in various companies and partnerships that are
accounted for under the equity method of accounting and included within "Other
assets." Under the equity method, investments are stated at initial cost, and
are adjusted for subsequent contributions and our share of earnings, losses and
distributions as well as declines in value that are "other than temporary." At
December 31, 2002 and 2001, we had equity investments of $135 million and $313
million, respectively. Distributions from equity investments totaled $5 million,
$25 million, and $13 million for the years ended December 31, 2002, 2001 and
2000, respectively.

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

<Table>
<Caption>
                                                                                   OTHER EQUITY
                                     CONCERT(1)             AT&T CANADA           INVESTMENTS(2)
                                  ----------------   -------------------------   ----------------
FOR THE YEARS ENDED DECEMBER 31,   2001      2000     2002      2001     2000     2001     2000
--------------------------------  -------   ------   -------   ------   ------   ------   -------
                                                       (DOLLARS IN MILLIONS)
<S>                               <C>       <C>      <C>       <C>      <C>      <C>      <C>
Revenue........................   $ 6,189   $7,748   $   947   $1,000   $1,001   $3,813   $11,751
Operating (loss) income........    (3,574)     329      (853)    (226)    (225)      86       542
(Loss) income from continuing
  operations before
  extraordinary items &
  cumulative effect of
  accounting changes...........    (3,609)     103    (1,247)    (521)    (351)     (18)      307
Net (loss) income..............   $(3,609)  $  103   $(2,220)  $ (518)  $ (351)  $  (20)  $   260
</Table>

<Table>
<Caption>
AT DECEMBER 31,                  2001               2002      2001              2001
---------------                 -------            -------   ------            ------
                                                (DOLLARS IN MILLIONS)
<S>                             <C>       <C>      <C>       <C>      <C>      <C>      <C>
Current assets................  $ 3,744            $   386   $  391            $  171
Non-current assets............    1,758                496    2,577               645
Current liabilities...........    4,296              3,152      256               179
Non-current liabilities.......       76                 41    2,963               589
Redeemable preferred stock....       --                 --       --                 7
Minority interest.............       --                 --       --                --
</Table>

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

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

(2) AT&T did not have any individually significant equity investments in 2002
    and on a combined basis such investments were not significant to AT&T's 2002
    financial results.

  Concert

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In 2001, 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 impairment charge ($2.9 billion pretax) included in "Net
(losses) related to other equity investments." The charge related to the
difference between the fair market value of the net assets AT&T was to receive
in the transaction and the carrying value of AT&T's investment in Concert.
Certain items reserved for in 2001 were favorably settled resulting in a $60
million after-tax reversal in 2002, recorded within "Net (losses) earnings
related to other equity investments."

  AT&T Canada

     At December 31, 2002, AT&T had an approximate 31% ownership interest in
AT&T Canada. Pursuant to a 1999 merger agreement, AT&T had a commitment to
purchase, or arrange for another entity to purchase, the publicly owned shares
of AT&T Canada for the Back-end Price, which was the greater of the contractual
floor price or the fair market value. The floor price accreted 4% each quarter,
commencing on June 30, 2000.

     In 2002 and 2001, AT&T recorded charges reflecting the estimated loss on
this commitment. The charges represented the difference between the underlying
value of the publicly owned AT&T Canada shares and the price AT&T had committed
to pay for them, including the 4% accretion of the floor price. After-tax
charges of $0.3 billion ($0.5 billion pretax) and $1.8 billion ($3.0 billion
pretax) were recorded within "Net (losses) related to other equity investments"
for 2002 and 2001, respectively. At December 31, 2001, this liability of $3.0
billion was included in "Other long-term liabilities and deferred credits."

     During 2002, AT&T arranged for third parties (Tricap Investment Corporation
and CIBC Capital Partners) to purchase the remaining 69% equity in AT&T Canada.
As part of this agreement, AT&T agreed to fund the purchase price on behalf of
the third parties. Tricap and CIBC Partners made a nominal payment to AT&T upon
completion of the transaction. Although AT&T held an approximate 31% ownership
interest in AT&T Canada throughout 2002, it did not record equity earnings or
losses since its investment balance was written down to zero largely through
losses generated by AT&T Canada. Subsequent to December 31, 2002, AT&T entered
into an agreement to dispose of its stake in AT&T Canada. In February 2003,
pursuant to that agreement, AT&T disposed of substantially all of its AT&T
Canada shares.

  Impairments -- Equity Investments

     Declines in value of equity method investments judged to be
other-than-temporary are recorded in "Net (losses) related to other equity
investments." In 2002 and 2001, we recorded impairment charges on equity method
investments of $0.3 billion after-tax ($0.5 billion pretax), and $4.3 billion
after-tax ($7.0 billion pretax), respectively.

     The 2002 charges primarily related to AT&T Canada and the 2001 charges
primarily related to AT&T Canada and Concert, as discussed above. In addition,
in 2001, we recorded an impairment charge on our investment in Net2Phone, Inc.
(Net2Phone) of $0.7 billion after-tax ($1.1 billion pretax). This charge
resulted from the deterioration of market valuations of Internet-related
companies. In October 2001, AT&T contributed its investment in Net2Phone to NTOP
Holdings, LLC (NTOP), and received ownership in NTOP. At December 31, 2001 AT&T
retained an approximate 10% interest in NTOP, which was accounted for as a cost
method investment. It was subsequently sold in December 2002.

  COST METHOD INVESTMENTS

     At December 31, 2002 and 2001, we had cost method investments included in
"Other assets" of $0.6 billion and $1.6 billion, respectively. Under the cost
method, earnings are recognized only to the extent distributions are received
from the accumulated earnings of the investee. Distributions received in excess
of accumulated earnings are recognized as a reduction of our investment balance.
The Company's cost

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investments are classified as available-for-sale and are reported at fair value,
with unrealized gains and losses, net of tax, recorded as a separate component
of "Other comprehensive income (loss)" in shareowners' equity. At December 31,
2002 and 2001, approximately $0.5 billion and $1.3 billion, respectively, of
these investments were indexed to certain long-term debt instruments (see note
8).

  Impairments -- Cost Investments

     Declines in value of available-for-sale securities, judged to be
other-than-temporary, are recorded in "Other (expense) income, net." During 2002
and 2001, we believed that certain investments would not recover our cost basis
in the foreseeable future given the significant decline in stock prices, the
length of time these investments had been below market, and industry specific
issues. Accordingly, we believed the declines in value were other-than-temporary
and, as a result, recorded investment impairment charges on such securities of
$0.1 billion after-tax ($0.1 billion pretax) and $0.3 billion after-tax ($0.5
billion pretax) for 2002 and 2001, respectively, consisting primarily of charges
related to Time Warner Telecom in both years. In addition, during 2002, we
recorded a pretax impairment charge of $0.6 billion related to our holdings in
AT&T Wireless, which is monetized by debt indexed to the value of the AT&T
Wireless shares (see note 8). The debt contains an embedded derivative that is
designated as a cash flow hedge. At the time we recognized the
other-than-temporary decline in the value of AT&T Wireless as an expense, as
permitted by SFAS No. 133, we also recognized, in earnings, the previously
unrecognized gain on the embedded derivative of $0.6 billion pretax, resulting
in no net income impact.

  AT&T Wireless Group

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

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

  Japan Telecom Co. Ltd

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  DEBT OBLIGATIONS

<Table>
<Caption>
                                                                  DEBT MATURING
                                                                 WITHIN ONE YEAR
                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                2002         2001
                                                              ---------   ----------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Commercial paper............................................   $1,091      $ 5,087
Short-term notes............................................    1,086        3,970
Currently maturing long-term debt...........................    1,581          955
Other.......................................................        4          122
                                                               ------      -------
Total debt maturing within one year.........................   $3,762      $10,134
                                                               ======      =======
Weighted-average interest rate of short-term debt...........      3.7%         5.0%
</Table>

  SECURITIZATIONS

     During 2002, AT&T renewed both its AT&T Business Services and AT&T Consumer
Services customer accounts receivable securitization facilities, the terms of
which have been extended to June (AT&T Business Services) and July (AT&T
Consumer Services) of 2003. Together, the 2002 programs provide up to $2.0
billion of available financing, limited by monthly eligible receivable balances,
which vary from month to month. At December 31, 2002, the available financing
was collateralized by $4.6 billion of accounts receivable. Approximately $0.2
billion and $2.3 billion was outstanding at December 31, 2002 and 2001,
respectively, and was included in "Short-term notes" in the table above. Under
the program, accounts receivable are sold on a discounted, revolving basis, to
special-purpose, wholly-owned and fully consolidated subsidiaries of AT&T, which
assign interests in such receivables to unrelated third-party financing
entities.

  CREDIT FACILITY

     At December 31, 2002, we had a $3.0 billion 364-day credit facility
available to us that was entered into on October 9, 2002. The credit facility
contains a financial covenant that requires AT&T to meet a net debt-to-EBITDA
ratio (as defined in the credit agreement) not exceeding 2.25 to 1.00 for four
consecutive quarters ending on the last day of each fiscal quarter. It also
contains a covenant that requires AT&T to maintain $1.27 billion in unencumbered
cash, cash equivalents and marketable securities. At December 31, 2002, we were
in compliance with these covenants.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                             LONG-TERM DEBT
       DEBENTURES AND NOTES                                                  AT DECEMBER 31,
-----------------------------------                                       ---------------------
INTEREST RATES(2)       MATURITIES                                        2002(1)       2001(1)
-----------------       -----------                                       -------       -------
                                                                          (DOLLARS IN MILLIONS)
<S>                     <C>           <C>                                 <C>           <C>
  4.59% - 6.00%         2004 - 2009                                       $ 1,455       $ 6,760
  6.06% - 6.50%         2004 - 2029                                         6,678         4,960
  6.75% - 7.50%         2004 - 2006                                         2,449         4,459
  7.75% - 8.85%         2003 - 2031                                         6,796         5,328
 9.90% - 19.95%(3)      2004 - 2004                                            13            21
Variable rate           2003 - 2054                                         3,012         3,440
                                                                          -------       -------
Total debentures and notes..............................................   20,403        24,968
Other...................................................................      105           162
Unamortized discount, net...............................................     (115)         (150)
                                                                          -------       -------
Total long-term debt....................................................   20,393        24,980
Less: Currently maturing long-term debt.................................    1,581           955
                                                                          -------       -------
Net long-term debt......................................................  $18,812       $24,025
                                                                          =======       =======
</Table>

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

(1) Debt amounts are included within the range of interest rates that are
    applied at each respective balance sheet date. See below for discussion on
    interest rate changes that occurred during 2002.

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

(3) Interest rates greater than 10% are related to $8 million in bank loans held
    by AT&T Latin America in 2001. In 2002, AT&T Latin America is classified as
    an "asset held for sale," and accordingly its associated liabilities,
    including debt, was recorded at fair value and included in "Other current
    liabilities" at December 31, 2002 (see note 6).

     The following table shows maturities at December 31, 2002, of the $20,393
million in total long-term obligations:

<Table>
<Caption>
 2003     2004     2005     2006    2007   LATER YEARS
------   ------   ------   ------   ----   -----------
                (DOLLARS IN MILLIONS)
<S>      <C>      <C>      <C>      <C>    <C>
$1,581   $2,437   $1,185   $4,328   $296     $10,566
</Table>

     In connection with the spin-off of AT&T Broadband, AT&T completed two debt
exchanges. In the AT&T Broadband debt exchange, $3.5 billion of outstanding AT&T
notes (with interest rates ranging from 6.0% to 8.63%) were exchanged for notes
that, upon completion of the spin-off of AT&T Broadband, became notes of AT&T
Broadband and are unconditionally guaranteed by Comcast and certain of its
subsidiaries.

     Also, $4.6 billion of outstanding long-term AT&T notes (with fixed interest
rates ranging from 5.63% to 8.0%, and maturities of 2004, 2025 and 2029) were
exchanged for new AT&T notes (with fixed interest rates ranging from 6.38% to
8.6%, and maturities of 2004, 2013 and 2025) that upon completion of the
spin-off of AT&T Broadband, have revised terms, including revised maturity dates
and/or interest rates.

     As a result of a long-term debt rating downgrade by Moody's, the interest
rate on approximately $10.0 billion of notes (with interest rates ranging from
6.0% to 8.0%) sold in November 2001, increased by 50 basis points effective with
interest payment periods that begin after November 15, 2002, for the majority of
the notes.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The holders of certain private debt with an outstanding balance of $0.9
billion at December 31, 2002, have an annual put right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the debt holders
agreeing to not exercise their put right for 2002, AT&T posted a
cash-collateralized letter of credit in 2002, totaling $0.4 billion, and
expiring in March, 2005. The $0.4 billion is considered restricted cash and is
included in "Other assets" at December 31, 2002. The annual put right in 2003
expired on February 13, 2003, without exercise by the debt holders. The debt
holders could accelerate repayment of the debt based on certain events such as
the occurrence of unfavorable local law or regulation changes in its country of
operation.

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

  EXCHANGEABLE NOTES

     During 2001, we issued long-term debt (exchangeable notes) that was indexed
to AT&T Wireless common stock and, at AT&T's option, was mandatorily redeemable
with a number of shares of AT&T Wireless common stock that was equal to the
underlying shares multiplied by an exchange ratio, or its cash equivalent. The
notes were accounted for as indexed debt instruments because the carrying value
of the debt was dependent upon the fair market value of the underlying
securities. In addition, the notes contained embedded derivatives that required
separate accounting. The economic characteristics of the embedded derivatives
(i.e. equity-like features) were not clearly and closely related to those of the
host instruments (a debt security). As a result, the embedded derivatives were
separated from the host debt instrument for valuation purposes and were carried
at fair value within the host debt instrument. The embedded derivatives for
these exchangeable notes were designated as cash flow hedges. The options hedged
the market risk of a decline in value of AT&T Wireless securities. The market
risk of a decline in these securities, below the respective put prices, had been
eliminated. In addition, any market gains we may have earned had been limited to
the call prices. These designated options were carried at fair value with
changes in fair value recorded, net of income taxes, within "Accumulated other
comprehensive loss" as a component of shareowners' equity. There was no
ineffectiveness recognized on the cash flow hedges.

     The shares of AT&T Wireless common stock were accounted for as
"available-for-sale" securities under SFAS No. 115 with changes in the carrying
value of the underlying securities that are not "other-than-temporary" being
recorded as unrealized gains or losses, net of income taxes, within "Other
comprehensive income (loss)" as a component of shareowners' equity. See note 7
for a discussion of impairments recorded in 2002.

     Following is a summary of the exchangeable notes outstanding at December
31, 2002:

<Table>
<Caption>
                                          PUT PRICE   CALL PRICE   CARRYING
MATURITIES   FACE VALUE   INTEREST RATE   PER SHARE   PER SHARE     VALUE
----------   ----------   -------------   ---------   ----------   --------
              (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S>          <C>          <C>             <C>         <C>          <C>
  Indexed to 45.8 million shares of AT&T Wireless common stock:
2005...         $220       LIBOR + 0.4%    $14.41       $18.87       $87
2006...          220       LIBOR + 0.4%     14.41        19.31        87
2006...          220       LIBOR + 0.4%     14.41        19.74        87
Indexed to 45 million shares of AT&T Wireless common stock:
   2006         $204       LIBOR + 0.4%    $13.57       $19.03       $85
   2006          201       LIBOR + 0.4%     13.37        19.27        86
   2006          204       LIBOR + 0.4%     13.57        19.90        87
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In February 2003, AT&T redeemed these exchangeable notes that had a
carrying value of $652 million at the time of settlement. The notes were settled
with 78.6 million shares of AT&T Wireless common stock and $152 million in cash.
The settlement resulted in a pretax gain of approximately $176 million. The 12.2
million remaining AT&T Wireless shares were subsequently sold (see note 7).

9.  FINANCIAL INSTRUMENTS

     In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than trading.
These instruments include letters of credit, guarantees of debt and certain
obligations of former affiliates, interest rate swap agreements, foreign
currency exchange contracts, option contracts, equity contracts and warrants.
Collateral is generally not required for these types of instruments. However, as
the requirements for collateral are generally dependent upon debt ratings and
market conditions, AT&T may be required to post collateral for interest rate and
equity swaps, as well as letters of credit in the future.

     By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counter-parties, and our maximum potential loss may
exceed the amount recognized in our balance sheet. However, at December 31, 2002
and 2001, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counter-parties to these financial instruments.
We control our exposure to credit risk through credit approvals, credit limits
and monitoring procedures. Other than the guarantee issued in connection with
the split-off of AT&T Wireless, we do not have any significant exposure to any
individual customer or counter-party, nor do we have any major concentration of
credit risk related to any financial instruments.

  LETTERS OF CREDIT

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

     The notional amounts outstanding at December 31, 2002 and 2001, were $923
million and $408 million, respectively. The letters of credit in effect at
December 31, 2002, were collateralized by restricted cash of $496 million, of
which $442 million was recorded in "Other assets" and $54 million was recorded
in "Other current assets." The fair values of the letters of credit, based on
the fees paid to obtain the obligations, were immaterial at December 31, 2002
and 2001.

  GUARANTEES

     From time to time, we guarantee the debt of our subsidiaries, and, in
connection with the separation of certain subsidiaries, we issued guarantees for
certain debt and other obligations of our former subsidiaries AT&T Capital
Corp., NCR, AT&T Wireless and AT&T Broadband. We also issue indemnifications as
part of our software license agreements.

     Total notional amounts of guaranteed debt at December 31, 2002 and 2001,
were $506 million and $59 million, respectively. Prior to the spin-off of AT&T
Broadband, we had guaranteed certain debt of AT&T Broadband that matures in
2038. Such guarantee remained outstanding after the spin-off of AT&T Broadband
and at December 31, 2002 totaled $500 million. Comcast has provided us with an
indemnification for this debt and, under the terms of the merger agreement
between AT&T Broadband and Comcast, if Comcast does not call the debt in 2003
they must provide us with a letter of credit in the amount of $500 million. The
remaining guarantees for debt have expiration dates ranging from 2003 to 2020.
Should the financial condition of debtors, including AT&T Broadband and Comcast,
deteriorate to the point at which they are unable to meet their obligations,
third party creditors could look to us for payment. We currently hold no
collateral for these

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

guarantees, and have not recorded corresponding obligations. At December 31,
2002 and 2001, there were no quoted market prices for similar agreements.

     AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT
DoCoMo (DoCoMo). The amounts of the guarantee at December 31, 2002 and 2001,
were $4.1 billion and $3.9 billion, respectively. On January 21, 2001, DoCoMo
invested approximately $9.8 billion for shares of AT&T preferred stock that were
converted into AT&T Wireless common stock in connection with the split-off of
AT&T Wireless. Of the initial investment, AT&T retained approximately $3.6
billion, with the remainder of the proceeds allocated to AT&T Wireless. In
connection with that investment, AT&T and AT&T Wireless agreed that, under
certain circumstances, including if AT&T Wireless fails to meet specific
technological milestones by June 30, 2004, DoCoMo would have the right to
require AT&T Wireless to repurchase its AT&T Wireless common stock for $9.8
billion, plus interest. In the event AT&T Wireless is unable to satisfy the
entire obligation, AT&T is secondarily liable for up to $3.65 billion, plus
accrued interest. On December 26, 2002, AT&T Wireless and DoCoMo entered into an
amendment to the original agreement which, among other things, extended the
deadline for compliance with the technological milestones to December 31, 2004.
We currently hold no collateral for this guarantee, and have not recorded a
corresponding obligation. At December 31, 2002 and 2001, there were no quoted
market prices for similar agreements.

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

     The total notional amounts of software license indemnifications with a
stated maximum liability, at December 31, 2002 and 2001, were approximately $50
million and $30 million, respectively. In addition, in a few instances, our
liability is limited by the value of the licensing fees received or is not
limited at all. Amounts related to these indemnifications cannot be estimated.
The indemnifications generally have terms that coincide with the software
license which may be until terminated by the licensee. Under the terms of these
agreements, we indemnify licensees against damages, expenses and losses arising
from third party claims and proceedings against trademark, copyright and/or
patent infringement. We currently hold no collateral for these guarantees and
have not recorded corresponding obligations. At December 31, 2002, there were no
quoted market prices for similar agreements.

  INTEREST RATE SWAP AGREEMENTS

     We enter into interest rate swaps to manage our exposure to changes in
interest rates. We enter into swap agreements to manage the fixed/floating mix
of our debt portfolio in order to reduce aggregate risk 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 the exchange of
fixed-rate for floating-rate payments without the exchange of the underlying
principal amount. Floating-rate payments are tied to the LIBOR. We also
designated certain interest-rate swaps as cash flow hedges under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table indicates the types of swaps in use at December 31,
2002 and 2001, the respective notional amounts and their weighted-average
interest rates. Average floating rates are those in effect at the reporting
date, and may change significantly over the lives of the contracts:

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                               2002     2001
                                                              ------   ------
                                                                (DOLLARS IN
                                                                 MILLIONS)
<S>                                                           <C>      <C>
Floating-rate to fixed-rate swaps -- notional amount........  $ 190    $ 218
  Weighted-average receive rate.............................   1.81%    2.08%
  Weighted-average pay rate.................................   7.30%    7.31%
</Table>

     In addition, we have combined interest rate, foreign currency swap
agreements for foreign-currency-denominated debt, which hedge our risk to both
interest rate and currency movements. At December 31, 2002 and 2001, the
notional amounts related to these contracts was $3.8 billion, of which $3.1
billion was associated with our Euro bond offering in 2001.

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

<Table>
<Caption>
                                                             2002                2001
                                                       -----------------   -----------------
                                                         FAIR/CARRYING       FAIR/CARRYING
                                                             VALUE               VALUE
                                                       -----------------   -----------------
                                                       ASSET   LIABILITY   ASSET   LIABILITY
                                                       -----   ---------   -----   ---------
                                                               (DOLLARS IN MILLIONS)
<S>                                                    <C>     <C>         <C>     <C>
Interest rate swap agreements........................  $ --       $23      $ --       $18
Combined interest rate foreign currency swap
  agreements.........................................   660        --        18        26
</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. At December
31, 2002, our foreign exchange contracts consisted principally of Euros,
Japanese yen, and Swiss francs. At December 31, 2001, our foreign exchange
contracts consisted principally of Canadian dollars (which related to our
obligation to purchase the remaining shares of AT&T Canada), Euros, Japanese
yen, Swiss francs, and Brazilian reais. In addition, we are subject to foreign
exchange risk related to other foreign-currency-denominated transactions. The
notional amounts under contract at December 31, 2002 and 2001, were $742 million
and $6.4 billion, respectively. The decrease from 200l was primarily due to
approximately $5.3 billion in 2001 of foreign exchange contracts relating to a
Euro Commercial Paper Program and our obligation to purchase the outstanding
AT&T Canada shares we did not own. A significant portion of our debt under the
Euro Commercial Paper Program was paid down in 2002, and our obligation to
purchase the outstanding shares of AT&T Canada was satisfied in 2002. The
following table summarizes the fair and carrying values of the foreign exchange
contracts at December 31, 2002 and 2001. These foreign exchange contracts are
valued using current market quotes which were obtained from independent sources.

<Table>
<Caption>
                                                              2002                2001
                                                        -----------------   -----------------
                                                          FAIR/CARRYING       FAIR/CARRYING
                                                              VALUE               VALUE
                                                        -----------------   -----------------
                                                        ASSET   LIABILITY   ASSET   LIABILITY
                                                        -----   ---------   -----   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                     <C>     <C>         <C>     <C>
Foreign exchange contracts............................   $41       $2        $72      $299
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  EQUITY OPTION AND EQUITY SWAP CONTRACTS

     We enter into equity option and equity swap contracts, which are
undesignated, to manage our exposure to changes in equity prices associated with
various equity awards of previously affiliated companies (see note 12). The
notional amounts outstanding on these contracts at December 31, 2002 and 2001,
were $112 million and $19 million, respectively. The following table summarizes
the carrying and fair values of these instruments at December 31, 2002 and 2001.
Fair values are based on market quotes.

<Table>
<Caption>
                                                              2002                2001
                                                        -----------------   -----------------
                                                          CARRYING/FAIR       CARRYING/FAIR
                                                              VALUE               VALUE
                                                        -----------------   -----------------
                                                        ASSET   LIABILITY   ASSET   LIABILITY
                                                        -----   ---------   -----   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                     <C>     <C>         <C>     <C>
Equity hedges.........................................  $ --       $25      $ --       $15
</Table>

  WARRANTS

     We may obtain warrants to purchase equity securities in private and public
companies as a result of certain transactions. Private warrants and public
warrants that provide for net share settlement (i.e. allow for cashless
exercise) are considered to be derivative instruments and recognized on our
balance sheet at fair value (in accordance with SFAS No. 133). 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, as determined by using the
Black-Scholes model, was $2 million and $24 million at December 31, 2002 and
2001, respectively.

  DEBT SECURITIES

     The carrying value of debt with an original maturity of less than one year
approximates market value. The table below summarizes the carrying and fair
values of long-term debt (including currently maturing long-term debt),
excluding capital leases, at December 31, 2002 and 2001. The fair values of
long-term debt were obtained based on quotes or rates available to us for debt
with similar terms and maturities.

<Table>
<Caption>
                                                  2002                          2001
                                       ---------------------------   ---------------------------
                                       CARRYING VALUE   FAIR VALUE   CARRYING VALUE   FAIR VALUE
                                       --------------   ----------   --------------   ----------
                                                         (DOLLARS IN MILLIONS)
<S>                                    <C>              <C>          <C>              <C>
Long-term debt, excluding capital
  leases.............................     $20,292        $21,030        $24,820        $24,704
</Table>

  DERIVATIVE IMPACTS

     The following table summarizes the activity in "Accumulated other
comprehensive loss" in Shareowners' equity related to derivatives designated as
cash flow hedges during the periods January 1, 2001 (date of the company's
adoption of SFAS No. 133) through December 31, 2002. Unrealized amounts recorded
within

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Accumulated other comprehensive loss" prior to adoption of SFAS No. 133 were
recognized in earnings in conjunction with the adoption of SFAS No. 133 ($1.6
billion pretax; $1.0 billion after-tax), (see note 3).

<Table>
<Caption>
                                                               PRETAX    AFTER-TAX
                                                              --------   ----------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>        <C>
Balance at January 1, 2001..................................  $    --      $   --
Unrealized gains (losses)...................................     (480)       (296)
Realized (gains) losses reclassified into earnings..........       85          52
                                                              -------      ------
Balance at December 31, 2001................................  $  (395)     $ (244)
Unrealized gains (losses)...................................    1,747       1,078
Realized (gains) losses reclassified into earnings..........   (1,259)       (777)
Net amounts spun-off with AT&T Broadband....................      317         196
                                                              -------      ------
Balance at December 31, 2002................................  $   410      $  253
                                                              =======      ======
</Table>

     Included within the balance at December 31, 2002, were unrealized gains of
$131 million pretax ($81 million after-tax) on embedded derivatives related to
exchangeable notes that were indexed to AT&T Wireless common stock, which were
settled in February 2003. The remaining balance of unrealized gains at December
31, 2002, was largely offset within "Accumulated other comprehensive loss" by
unrealized losses on the underlying debt. Based upon the expiration or maturity
dates of these remaining derivatives designated as cash flow hedges, we do not
expect additional amounts to be transferred into earnings within the next year.

10.  EQUITY TRANSACTIONS

     Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was
required to redeem the outstanding TCI Pacific Communications, Inc. Class A
Senior Cumulative Exchangeable Preferred Stock for AT&T common stock. Each share
of TCI Pacific preferred stock was exchangeable at the option of the holder for
8.365 shares (1.673 adjusted for the 1-for-5 reverse stock split) of AT&T common
stock. All outstanding shares (approximately 6.2 million) of TCI Pacific
preferred stock with a carrying value of $2.1 billion at December 31, 2001
(included in Minority Interest of Discontinued Operations in the Consolidated
Balance Sheet), were either exchanged or redeemed for approximately 51.8 million
shares (10.4 million shares adjusted for the 1-for-5 reverse stock split) of
AT&T common stock. No gain or loss was recorded on the exchange/redemption of
the TCI Pacific preferred stock.

     During 2002, AT&T issued 14.7 million shares (2.9 million shares adjusted
for the 1-for-5 reverse stock split) of AT&T common stock to certain current and
former senior managers in settlement of their deferred compensation accounts.
Pursuant to AT&T's deferred compensation plan, senior managers may defer short-
and long-term incentive compensation awards. The issuance of these shares
resulted in an increase to total shareowners' equity of $196 million.

     In June 2002, AT&T completed a public equity offering of 230 million shares
(46 million shares adjusted for the 1-for-5 reverse stock split) of AT&T common
stock for net proceeds of $2.5 billion. AT&T utilized the proceeds from the
offering to satisfy a portion of its obligation to AT&T Canada common
shareholders (see note 7).

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded upon the issuance of the preferred stock and represented the excess of
the fair value of the preferred shares issued over the proceeds received.

11.  PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS

     We sponsor noncontributory, defined benefit pension plans covering the
majority of our 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.

     The following table shows the components of the net periodic benefit
(credit) costs for continuing operations included in our Consolidated Statements
of Operations:

<Table>
<Caption>
                                               PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                          ---------------------------   ------------------------
FOR THE YEARS ENDED DECEMBER 31,           2002      2001      2000      2002     2001     2000
--------------------------------          -------   -------   -------   ------   ------   ------
                                                          (DOLLARS IN MILLIONS)
<S>                                       <C>       <C>       <C>       <C>      <C>      <C>
Service cost -- benefits earned during
  the period............................  $   209   $   226   $   239   $  23    $  26    $  34
Interest cost on benefit obligations....    1,002       938       983     365      344      351
Amortization of unrecognized prior
  service cost..........................      152       172       174      12        4        4
Credit for expected return on plan
  assets................................   (1,526)   (1,647)   (1,812)   (187)    (201)    (230)
Amortization of transition asset........      (34)      (89)     (156)     --       --       --
Amortization of (gains) losses..........      (22)     (182)     (332)      5       --      (16)
Charges for special termination
  (credits) benefits*...................      (19)      188        --      --       28       16
Net curtailment losses (gains)*.........       --       113       121      --       59      (14)
Net settlement losses*..................        6         4         8      --       --       --
                                          -------   -------   -------   -----    -----    -----
Net periodic benefit (credit) cost......  $  (232)  $  (277)  $  (775)  $ 218    $ 260    $ 145
                                          =======   =======   =======   =====    =====    =====
</Table>

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

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

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

                                        89
<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>
                                                                      POSTRETIREMENT
                                                 PENSION BENEFITS        BENEFITS
                                                 -----------------   -----------------
FOR THE YEARS ENDED DECEMBER 31,                  2002      2001      2002      2001
--------------------------------                 -------   -------   -------   -------
                                                         (DOLLARS IN MILLIONS)
<S>                                              <C>       <C>       <C>       <C>
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year..........  $13,878   $12,898   $ 5,277   $ 4,851
Service cost...................................      209       226        23        26
Interest cost..................................    1,002       938       365       344
Plan amendments................................       34        62        14        --
Actuarial losses...............................    1,134       655       640       373
Benefit payments...............................   (1,221)   (1,072)     (480)     (406)
Special termination (credits) benefits.........      (19)      188        --        28
Settlements....................................      (32)      (17)       --        --
Curtailment losses.............................       --        --        --        61
                                                 -------   -------   -------   -------
Benefit obligation, end of year................  $14,985   $13,878   $ 5,839   $ 5,277
                                                 =======   =======   =======   =======
Change in fair value of plan assets:
Fair value of plan assets, beginning of year...  $18,449   $21,055   $ 2,156   $ 2,521
Actual return on plan assets...................   (1,663)   (1,576)     (255)     (214)
Employer contributions.........................       70        59       324       255
Benefit payments...............................   (1,221)   (1,072)     (480)     (406)
Settlements....................................      (32)      (17)       --        --
                                                 -------   -------   -------   -------
Fair value of plan assets, end of year.........  $15,603   $18,449   $ 1,745   $ 2,156
                                                 =======   =======   =======   =======
At December 31,
Funded (unfunded) benefit obligation...........  $   618   $ 4,571   $(4,094)  $(3,121)
Unrecognized net loss (gain)...................    1,715    (2,624)    1,684       606
Unrecognized transition asset..................       --       (34)       --        --
Unrecognized prior service cost (credits)......      769       887       (10)      (12)
                                                 -------   -------   -------   -------
Net amount recorded............................  $ 3,102   $ 2,800   $(2,420)  $(2,527)
                                                 =======   =======   =======   =======
</Table>

     The AT&T Management Pension Plan had an unfunded accumulated benefit
obligation of $1.1 billion as of December 31, 2002. The accumulated benefit
obligation of $9.4 billion at December 31, 2002, was in excess of the fair value
of the plan assets of $8.3 billion. Our nonqualified pension plans had an
unfunded accumulated benefit obligation of $98 million and $113 million at
December 31, 2002 and 2001, respectively.

     The unfunded accumulated benefit obligation for the AT&T Management Pension
Plan is attributed primarily to the loss in value of the plan assets and the
impact of the decline in the discount rate used to value the pension benefit
obligations. As a result, due to the under-funded status of these plans, in
2002, the Company recorded an additional minimum pension liability of $699
million. The offset to this liability was an intangible asset of $410 million
and a charge to "Other comprehensive income (loss)" of $289 million ($179
million, net of tax).

     Our postretirement welfare benefit plans and telephone concession benefit
plans had accumulated postretirement benefit obligations of $5.9 billion at
December 31, 2002, which was in excess of plan assets of

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1.7 billion. Our postretirement welfare benefit plans and telephone concession
benefit plans had accumulated postretirement benefit obligations of $5.3 billion
at December 31, 2001, which was in excess of plan assets of $2.2 billion.

     At December 31, 2002 and 2001, our pension plan assets included $13 million
and $31 million of AT&T common stock, respectively.

     The following table provides the amounts recorded in our Consolidated
Balance Sheets:

<Table>
<Caption>
                                                                      POSTRETIREMENT
                                                  PENSION BENEFITS       BENEFITS
                                                  ----------------   -----------------
AT DECEMBER 31,                                    2002      2001     2002      2001
---------------                                   -------   ------   -------   -------
                                                         (DOLLARS IN MILLIONS)
<S>                                               <C>       <C>      <C>       <C>
Prepaid pension cost............................  $ 3,596   $3,329   $    --   $    --
Benefit related liabilities.....................   (1,255)    (591)   (2,420)   (2,527)
Intangible asset (in "Other assets")............      456       46        --        --
Accumulated other comprehensive income..........      305       16        --        --
                                                  -------   ------   -------   -------
Net amount recorded.............................  $ 3,102   $2,800   $(2,420)  $(2,527)
                                                  =======   ======   =======   =======
</Table>

     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. These assumptions were reassessed as of December 31, 2002.
The discount rate was reduced to 6.5% based on current yields on high quality
corporate fixed-income investments with maturities corresponding to the expected
duration of the benefit obligations. The expected long-term rate of return on
plan assets was adjusted downward to 8.5% effective January 1, 2003, primarily
in consideration of the current and projected investment portfolio mix and
estimated long-term investment returns for each asset class. Additionally, the
rate of projected compensation increases was reduced to 4.25% reflecting
expected inflation levels, our actual recent experience and future outlook. Our
previous years' disclosed compensation rates have been restated to include the
component of the assumed compensation rate increase attributable to employee
promotion.

<Table>
<Caption>
                                                               WEIGHTED-AVERAGE
                                                                 ASSUMPTIONS
                                                              ------------------
AT DECEMBER 31,                                               2002   2001   2000
---------------                                               ----   ----   ----
<S>                                                           <C>    <C>    <C>
Discount rate...............................................  6.50%  7.25%  7.50%
Expected return on plan assets..............................   9.0%   9.5%   9.5%
Rate of compensation increase...............................  4.25%   5.9%   5.9%
</Table>

     We assumed a rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) of 10.9%. This rate was assumed to
gradually decline after 2002 to 5.0% by 2010 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 million and $10 million, respectively, and would increase or
decrease the health-care component of the accumulated postretirement benefit
obligation by $175 million and $152 million, 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. Contributions relating to continuing
operations amounted to $135 million in 2002, $131 million in 2001, and $206
million in 2000.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  STOCK-BASED COMPENSATION PLANS

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

     Under the initial terms of the Program, there were 30 million shares of
AT&T common stock available for grant with a maximum of 4.5 million common
shares that could be used for awards other than stock options. Subsequent to the
1999 modification, beginning with January 1, 2000, the remaining shares
available for grant at December 31 of the prior year, plus 1.75% of the shares
of AT&T common stock outstanding on January 1 of each year, become available for
grant. Under the amended terms, a maximum of 7.5 million shares may be used for
awards other than stock options. In 2001, as a result of the AT&T Wireless
split-off, the number of shares available for grant increased by 3.5 million
which includes 0.6 million for awards other than stock options. In 2002, AT&T
restructured stock options and other stock-based awards in conjunction with the
AT&T Broadband spin-off. The number of shares available for grant increased by
44.5 million which includes 0.8 million for awards other than stock options. The
exercise price of any stock option is equal to the stock price when the option
is granted. Generally, the options vest over three or four years and are
exercisable up to 10 years from the date of grant. (All above share amounts have
been adjusted for the 1-for-5 reverse stock split.)

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

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

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

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 21 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 1.3 million, 1.2 million and 1.1 million shares to employees in
2002, 2001 and 2000, respectively. (All above share amounts have been adjusted
for the 1-for-5 reverse stock split.)

     A summary of the AT&T common stock option transactions is shown below. (All
share and per share amounts have been restated to reflect the 1-for-5 reverse
stock split.)

<Table>
<Caption>
                                                WEIGHTED-            WEIGHTED-            WEIGHTED-
                                                 AVERAGE              AVERAGE              AVERAGE
                                                EXERCISE             EXERCISE             EXERCISE
                                       2002      PRICE*      2001     PRICE*      2000     PRICE*
                                      -------   ---------   ------   ---------   ------   ---------
                                                          (SHARES IN THOUSANDS)
<S>                                   <C>       <C>         <C>      <C>         <C>      <C>
Outstanding at January 1,...........   63,509    $122.90    49,805    $179.10    33,753    $187.10
Options assumed in mergers..........                                              5,923     123.55
Options granted.....................   15,183      68.84    13,680     110.85    14,914     180.60
AT&T Wireless split-off
  adjustments.......................                         4,330
AT&T Broadband spin-off
  adjustments.......................   37,049
Options and SARs exercised..........     (436)     32.28    (1,044)     58.15    (2,290)    110.35
Options canceled or forfeited.......  (17,048)    125.72    (3,262)    155.35    (2,495)    228.05
At December 31:
Options outstanding.................   98,257      40.64    63,509     122.90    49,805     179.10
Options exercisable.................   46,770      49.88    34,289     130.25    26,290     152.20
Shares available for grant..........   27,751                6,944                6,841
</Table>

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

* The weighted-average exercise prices for the period prior to the AT&T Wireless
  split-off in 2001, and for the year ended December 31, 2000, have not been
  adjusted to reflect the impact of the split-off. The weighted-average exercise
  prices for the period prior to the AT&T Broadband spin-off in 2002, and for
  the years ended December 31, 2001 and 2000, have not been adjusted to reflect
  the impact of the spin-off.

                                        93
<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, 2002:

<Table>
<Caption>
                                            OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                               ---------------------------------------------   -------------------------------
                                                 WEIGHTED-
                                   NUMBER         AVERAGE                          NUMBER
                               OUTSTANDING AT    REMAINING      WEIGHTED-      EXERCISABLE AT     WEIGHTED-
                                DECEMBER 31,    CONTRACTUAL      AVERAGE        DECEMBER 31,       AVERAGE
RANGE OF EXERCISE PRICES            2002           LIFE       EXERCISE PRICE        2002        EXERCISE PRICE
------------------------       --------------   -----------   --------------   --------------   --------------
                               (IN THOUSANDS)                                  (IN THOUSANDS)
<S>                            <C>              <C>           <C>              <C>              <C>
$ 3.93 - $23.70..............       3,368           5.6           $16.76            2,316           $14.57
$23.88.......................      10,417           9.7           $23.88                8           $23.88
$23.94 - $28.00..............       1,166           8.5           $25.75              406           $25.59
$28.03.......................      21,465           9.1           $28.03              422           $28.03
$28.23 - $33.66..............       9,148           8.2           $32.15            3,716           $32.04
$33.68.......................       8,341           8.2           $33.68            2,823           $33.68
$33.77 - $38.27..............       8,206           4.6           $35.68            7,172           $35.68
$38.31.......................       3,657           4.1           $38.31            3,657           $38.31
$38.48 - $46.73..............       4,050           4.6           $44.35            3,459           $44.21
$46.91.......................       5,553           7.6           $46.91            3,113           $46.91
$47.04 - $61.54..............       8,609           5.5           $59.06            8,506           $59.15
$61.66 - $87.01..............       9,136           6.9           $71.10            7,146           $71.71
$87.51 - $90.80..............       5,141           6.1           $87.52            4,026           $87.52
                                   ------                                          ------
                                   98,257           7.4           $40.64           46,770           $49.88
                                   ======                                          ======
</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>

     In 2002, AT&T offered employees the option to cancel certain outstanding
stock option grants and replace them with restricted stock units. Approximately
15 million stock options were canceled as a result of this offer, and 2.5
million restricted stock units were granted which vest over a three-year period.
The 2.5 million restricted stock units were restructured into 6.5 million units
as a result of the spin-off of AT&T Broadband. Those options that were eligible
for cancelation but retained by the employee became variable awards and will be
marked to market until the options are exercised, forfeited, or expired
unexercised. The cancelation of stock options had an immaterial impact on 2002
results of operations.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The weighted-average fair values at date of grant for AT&T common stock
options granted during 2002, 2001 and 2000 were $24.49, $39.50 and $60.50,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2002, 2001 and 2000
were 3.73%, 4.61% and 6.29%, respectively. The following assumptions were
applied for 2002, 2001 and 2000, respectively: (i) expected dividend yields of
1.17%, 0.85% and 1.6%, (ii) expected volatility rates of 40.0%, 36.9% and 33.5%
and (iii) expected lives of 4.7 years in 2002, 2001 and 2000.

     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,
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.

     Effective January 1, 2003, AT&T will begin recording compensation expense
pursuant to SFAS No. 123, "Accounting for Stock Based Compensation," for AT&T
common stock options issued subsequent to January 1, 2003. The fair value of
these stock options will be measured on the grant date and recognized in the
income statement over the vesting period. (For additional information, see note
2.)

13.  INCOME TAXES

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
U.S. federal statutory income tax rate..................        35%         35%         35%
Federal income tax (provision) at statutory rate........   $  (993)    $(2,683)    $(4,368)
Amortization of investment tax credits..................        16          18          23
State and local income tax (provision), net of federal
  income tax effect.....................................      (222)       (209)       (292)
AT&T Latin America charge...............................      (360)         --          --
Foreign operations, net of tax credits..................      (140)       (107)        (20)
Investment dispositions, acquisitions and legal entity
  restructurings........................................        93          91          70
Research and other credits..............................        51          42          36
Other differences, net..................................       (32)        (42)         64
                                                           -------     -------     -------
(Provision) for income taxes............................   $(1,587)    $(2,890)    $(4,487)
                                                           =======     =======     =======
Effective income tax rate...............................      56.0%       37.7%       35.9%
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2002        2001        2000
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>         <C>         <C>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
United States...........................................   $ 2,924     $ 7,671     $12,727
Foreign.................................................       (88)         (5)       (247)
                                                           -------     -------     -------
Total...................................................   $ 2,836     $ 7,666     $12,480
                                                           =======     =======     =======
(PROVISION) FOR INCOME TAXES
Current:
  Federal...............................................   $ 1,041     $(1,554)     (3,126)
  State and local.......................................        19        (192)       (416)
  Foreign...............................................       (95)        (98)        (87)
                                                           -------     -------     -------
                                                               965      (1,844)     (3,629)
                                                           -------     -------     -------
Deferred:
  Federal...............................................    (2,201)       (936)       (851)
  State and local.......................................      (360)       (129)        (34)
  Foreign...............................................        (7)          1           4
                                                           -------     -------     -------
                                                            (2,568)     (1,064)       (881)
Deferred investment tax credits.........................        16          18          23
                                                           -------     -------     -------
(Provision) for income taxes............................   $(1,587)    $(2,890)    $(4,487)
                                                           =======     =======     =======
</Table>

     We also recorded current and deferred income tax benefits that resulted
from net losses (earnings) related to other equity investments in the amounts of
$112 million in 2002, $2.9 billion in 2001, and $59 million in 2000.

     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.

                                        96
<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,
                                                              ---------------
                                                               2002     2001
                                                              ------   ------
                                                                (DOLLARS IN
                                                                 MILLIONS)
<S>                                                           <C>      <C>
DEFERRED INCOME TAX ASSETS
  Reserves and allowances...................................  $  845   $2,237
  Employee pensions and other benefits......................     604      843
  Business restructuring....................................     297      359
  Investments...............................................     281      423
  Net operating loss, capital loss and credit
     carryforwards..........................................     252       70
  Advance payments..........................................     174       30
  Other deferred tax assets.................................     162      419
  Valuation allowance.......................................    (689)     (34)
                                                              ------   ------
Total deferred income tax assets............................   1,926    4,347
                                                              ------   ------
DEFERRED INCOME TAX LIABILITIES
  Property, plant and equipment.............................   3,135    3,230
  Leveraged and capital leases..............................   1,059    1,078
  Capitalized software and intangible assets................     743      575
  Other.....................................................     818      710
                                                              ------   ------
Total deferred income tax liabilities.......................   5,755    5,593
                                                              ------   ------
Net deferred income tax liability...........................  $3,829   $1,246
                                                              ======   ======
</Table>

     The net increase in the valuation allowance in 2002 of $655 million was
primarily attributable to the book and tax basis difference relating to our
investment in AT&T Latin America.

     At December 31, 2002, the tax effect of net operating and capital loss
carryforwards for federal and state income tax purposes were $10 million and
$130 million, respectively, which expire through 2021. In addition, at December
31, 2002, federal tax credit carryforwards were $1 million, with no expiration
date, and state tax credit carry-forwards were $111 million expiring through
2016.

14.  COMMITMENTS AND CONTINGENCIES

     In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance.

     In connection with the separation of its former subsidiaries, AT&T has
entered into a number of separation and distribution agreements that provide,
among other things, for the allocation and/or sharing of certain costs
associated with potential litigation liabilities. For example, pursuant to these
agreements, AT&T shares in the cost of certain litigation (relating to matters
while affiliated with AT&T) if the settlement exceeds certain thresholds. With
the exception of the Sparks matter (see note 1), as of December 31, 2002, we
have assessed that none of the litigation liabilities allocated to former
subsidiaries were probable of incurring costs in excess of the threshold above
which we would be required to share in the costs. However, in the event these
former subsidiaries were unable to meet their obligations with respect to these
liabilities due to financial difficulties, AT&T could be held responsible for
all or a portion of the costs, irrespective of the sharing agreements.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Consequently, we are unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact with respect to these matters at December
31, 2002. 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.

  LEASES AND OTHER COMMITMENTS

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

     We lease land, buildings and equipment through contracts that expire in
various years through 2040. Our rental expense under operating leases was $529
million in 2002, $552 million in 2001 and $583 million in 2000. The total of
minimum rentals to be received in the future under non-cancelable operating
subleases as of December 31, 2002, was $250 million.

     The following table shows our future minimum commitments due under
non-cancelable operating and capital leases at December 31, 2002:

<Table>
<Caption>
                                                              OPERATING    CAPITAL
                                                                LEASES      LEASES
                                                              ----------   --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
2003........................................................    $  480       $ 10
2004........................................................       409         19
2005........................................................       320          8
2006........................................................       252          8
2007........................................................       203          8
Later years.................................................       460        100
                                                                ------       ----
Total minimum lease payments................................    $2,124        153
                                                                ======
Less: Amount representing interest..........................                   52
                                                                             ----
Present value of net minimum lease payments.................                 $101
                                                                             ====
</Table>

     In addition, under certain real estate operating leases, we could be
required to make payments to the lessor of up to $447 million at the end of the
lease term (ending in years 2004 through 2007). The actual amount paid, if any,
would be reduced by amounts received by the lessor upon remarketing of the
property. (See note 18 for a discussion of the possible consolidation of certain
of entities that we lease facilities from.)

     AT&T has contractual obligations to utilize network facilities from local
exchange carriers with terms greater than one year. Since the contracts have no
minimum volume requirement and are based on an interrelationship of volumes and
discounted rates, we assessed our minimum exposure based on penalties to exit
the contracts on December 31 of each year. At December 31, 2002, the penalties
AT&T would incur if we exited all of these contracts would be $2.1 billion.

15.  SEGMENT REPORTING

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

     AT&T Business Services provides a variety of services to various sized
businesses and government agencies including long distance, international,
toll-free and local voice, data and Internet protocol (IP) services; managed
services; and wholesale transport services.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     The balance of AT&T's continuing operations (excluding LMG) is included in
a "Corporate and Other" group. This group primarily reflects corporate staff
functions and the elimination of transactions between segments. LMG was not an
operating segment of AT&T prior to its split-off from AT&T because AT&T did not
have a controlling financial interest in LMG for financial accounting purposes.
Therefore, we accounted for this investment under the equity method.
Additionally, LMG's results were not reviewed by the chief operating
decision-makers for purposes of determining resources to be allocated.

     Total assets for our reportable segments include all assets, except
intercompany receivables. 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. In addition, as the assets of discontinued
operations are not considered to be a part of AT&T's ongoing operations, they
are included in a category separate from reportable segments and the Corporate
and Other group for reporting purposes. Capital additions for each segment
include capital expenditures for property, plant and equipment, additions to
nonconsolidated investments, and additions to internal-use software (which are
included in "Other assets").

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see note 2). 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 inter-segment transactions at market prices.
AT&T Business Services sells services to AT&T Consumer Services at cost-based
prices, which approximate market prices. Generally AT&T Business Services
accounts for these sales as contra-expense.

  REVENUE

<Table>
<Caption>
                                                              FOR THE YEARS ENDED
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                           2002      2001      2000
                                                          -------   -------   -------
                                                             (DOLLARS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
AT&T Business Services external revenue.................  $26,235   $27,264   $28,136
AT&T Business Services internal revenue.................      323       441       423
                                                          -------   -------   -------
Total AT&T Business Services revenue....................   26,558    27,705    28,559
AT&T Consumer Services external revenue.................   11,527    14,843    18,643
                                                          -------   -------   -------
Total reportable segments...............................   38,085    42,548    47,202
Corporate and Other.....................................     (258)     (351)     (352)
                                                          -------   -------   -------
Total revenue...........................................  $37,827   $42,197   $46,850
                                                          =======   =======   =======
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  DEPRECIATION AND AMORTIZATION

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2002     2001     2000
                                                             ------   ------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                          <C>      <C>      <C>
AT&T Business Services.....................................  $4,546   $4,234   $4,255
AT&T Consumer Services.....................................     230      200      167
                                                             ------   ------   ------
Total reportable segments..................................   4,776    4,434    4,422
Corporate and Other........................................     112      125      116
                                                             ------   ------   ------
Total depreciation and amortization........................  $4,888   $4,559   $4,538
                                                             ======   ======   ======
</Table>

  NET (LOSSES) EARNINGS RELATED TO OTHER EQUITY INVESTMENTS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                              2002     2001     2000
                                                              -----   -------   ----
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>       <C>
AT&T Business Services pretax net (losses)..................  $(454)  $(6,482)  $ (8)
Corporate and Other pretax net (losses).....................    (58)   (1,301)   (43)
                                                              -----   -------   ----
Total pretax (losses).......................................   (512)   (7,783)   (51)
Total tax benefit...........................................    112     2,947     61
                                                              -----   -------   ----
Total net (losses) earnings related to other equity
  investments...............................................  $(400)  $(4,836)  $ 10
                                                              =====   =======   ====
</Table>

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

<Table>
<Caption>
                                                              FOR THE YEARS ENDED
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                           2002      2001      2000
                                                          -------   -------   -------
                                                             (DOLLARS IN MILLIONS)
<S>                                                       <C>       <C>       <C>
AT&T Business Services EBIT.............................  $ 1,638   $(2,305)  $ 5,917
AT&T Consumer Services EBIT.............................    2,647     4,875     6,893
                                                          -------   -------   -------
Total reportable segments EBIT..........................    4,285     2,570    12,810
Corporate and Other EBIT................................     (399)   (1,063)    1,163
                                                          -------   -------   -------
Total EBIT..............................................    3,886     1,507    13,973
Deduct:
  Minority interest income..............................      114       131        41
  Pretax net (losses) related to other equity
     investments........................................     (512)   (7,783)      (51)
Add: Interest (expense).................................   (1,448)   (1,493)   (1,503)
                                                          -------   -------   -------
Income from continuing operations before income taxes,
  minority interest income and losses related to other
  equity investments....................................  $ 2,836   $ 7,666   $12,480
                                                          =======   =======   =======
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  ASSETS

<Table>
<Caption>
                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                2002         2001
                                                              ---------   ----------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
AT&T Business Services......................................   $36,365     $ 40,316
AT&T Consumer Services......................................     1,674        2,141
                                                               -------     --------
Total reportable segments...................................    38,039       42,457
Corporate and Other assets(1)...............................    17,233       19,872
Total assets from discontinued operations...................        --      103,152
                                                               -------     --------
Total Assets................................................   $55,272     $165,481
                                                               =======     ========
</Table>

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

(1) Includes cash of $7.8 billion for 2002 and $10.4 billion for 2001

  CAPITAL ADDITIONS

<Table>
<Caption>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2002     2001     2000
                                                             ------   ------   ------
                                                              (DOLLARS IN MILLIONS)
<S>                                                          <C>      <C>      <C>
AT&T Business Services.....................................  $3,716   $5,451   $6,841
AT&T Consumer Services.....................................     127      140      148
                                                             ------   ------   ------
Total reportable segments..................................   3,843    5,591    6,989
Corporate and Other........................................      63      150    1,594
                                                             ------   ------   ------
Total capital additions....................................  $3,906   $5,741   $8,583
                                                             ======   ======   ======
</Table>

     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.

16.  RELATED PARTY TRANSACTIONS

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

     Included in "Revenue" was $268 million, $1.1 billion and $1.1 billion for
services provided to Concert for the years ended December 31, 2002, 2001 and
2000, respectively.

     Included in "Access and other connection" 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 $491 million, $2.1 billion and $2.4
billion for the years ended December 31, 2002, 2001 and 2000, respectively.

     The Consolidated Balance Sheet at December 31, 2001, included a loan of
$1.0 billion to Concert, which was included within "Other assets." Interest
income of $67 million was recognized for the year ended December 31, 2000. In
the third quarter of 2001, this loan together with the associated accrued
interest was written off in connection with the decision to unwind Concert (see
note 7).

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 2001, AT&T had a floating-rate loan payable to Concert in
the amount of $80 million. The loan was included in "Debt maturing within one
year" at December 31, 2001. This loan was paid off in conjunction with the
unwind of Concert. Interest expense was $5 million and $6 million for the years
ended December 31, 2001 and 2000, respectively.

     Included in "Accounts receivable" at December 31, 2001, was $438 million
related to telecommunications transactions with Concert. Included in "Accounts
payable" at December 31, 2001, was $201 million related to transactions with
Concert.

     Included in "Other receivables" at December 31, 2001, was $781 million
related to administrative transactions performed on behalf of Concert. Included
in "Other current liabilities" at December 31, 2001, was $935 million related to
administrative transactions performed by Concert on behalf of AT&T.

     We had various related party transactions with LMG. Included in "Costs of
services and products" were programming expenses related to services from LMG.
These expenses amounted to $199 million for the seven months ended July 31,
2001, the effective split-off date of LMG for accounting purposes, and $239
million for the year ended December 31, 2000.

17.  QUARTERLY INFORMATION (UNAUDITED)

     2002

<Table>
<Caption>
                                                 FIRST      SECOND(1)      THIRD      FOURTH(2)
                                               ---------   -----------   ---------   -----------
                                                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>         <C>           <C>         <C>
Revenue......................................   $ 9,548      $  9,580     $ 9,409      $ 9,290
Operating income (loss)......................     1,634         1,592       1,415         (280)
Income (loss) from continuing operations.....       446           603         525         (611)
Net (loss) from discontinued operations (net
  of income taxes)...........................      (565)      (13,433)       (318)        (197)
Gain on disposition of discontinued
  operations (net of income taxes)...........        --            --          --        1,324
(Loss) income before cumulative effect of
  accounting change..........................      (119)      (12,830)        207          516
Cumulative effect of accounting change (net
  of income taxes)...........................      (856)           --          --           --
Net (loss) income............................      (975)      (12,830)        207          516
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                 FIRST      SECOND(1)      THIRD      FOURTH(2)
                                               ---------   -----------   ---------   -----------
                                                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>         <C>           <C>         <C>
AT&T Common Stock Group:(3)
Earnings (loss) per share -- basic:
Earnings (loss) from continuing operations...   $  0.63      $   0.83     $  0.68      $ (0.79)
(Loss) from discontinued operations..........     (0.80)       (18.41)      (0.41)       (0.26)
Gain on disposition of discontinued
  operations.................................        --            --          --         1.71
Cumulative effect of accounting change.......     (1.21)           --          --           --
AT&T Common Stock Group (loss) earnings......   $ (1.38)     $ (17.58)    $  0.27      $  0.66
Earnings (loss) per share -- diluted:
Earnings (loss) from continuing operations...   $  0.60      $   0.80     $  0.67      $ (0.79)
(Loss) from discontinued operations..........     (0.76)       (17.91)      (0.41)       (0.26)
Gain on disposition of discontinued
  operations.................................        --            --          --         1.71
Cumulative effect of accounting change.......     (1.16)           --          --           --
AT&T Common Stock Group (loss) earnings......   $ (1.32)     $ (17.11)    $  0.26      $  0.66
Dividends declared...........................    0.1875        0.1875      0.1875       0.1875
AT&T common stock
  High.......................................   $ 39.47      $  32.50     $ 26.35      $ 29.42
  Low........................................     27.62         18.64       16.81        21.43
  Quarter-end close..........................     32.19         21.94       24.62        26.11
</Table>

     2001

<Table>
<Caption>
                                                   FIRST        SECOND      THIRD(4)       FOURTH
                                                 ----------   ----------   -----------   ----------
                                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>          <C>          <C>           <C>
Revenue........................................   $10,890      $10,602       $10,537      $10,168
Operating income...............................     2,451        2,265         2,313          803
Income (loss) from continuing operations.......       556       (1,433)       (1,547)        (216)
Net (loss) from discontinued operations (net of
  income taxes)................................    (1,804)        (525)         (548)      (1,175)
Gain on disposition of discontinued operations
  (net of income taxes)........................        --           --        13,503           --
Net (loss) income before cumulative effect of
  accounting change............................    (1,248)      (1,958)       11,408       (1,391)
Cumulative effect of accounting change (net of
  income taxes)................................       904           --            --           --
Net (loss) income(5)...........................      (344)      (1,958)       11,408       (1,391)
AT&T Common Stock Group:(3)
Earnings (loss) per share -- basic:
Earnings (loss) from continuing operations.....   $  1.41      $  0.51       $ (2.68)     $ (0.31)
(Loss) from discontinued operations............     (2.36)       (0.77)        (0.77)       (1.66)
Gain on disposition of discontinued
  operations...................................        --           --         19.10           --
Cumulative effect of accounting change.........      0.47           --            --           --
AT&T Common Stock Group (loss) earnings........   $ (0.48)     $ (0.26)      $ 15.65      $ (1.97)
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                   FIRST        SECOND      THIRD(4)       FOURTH
                                                 ----------   ----------   -----------   ----------
                                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>          <C>          <C>           <C>
Earnings (loss) per share -- diluted:
Earnings (loss) from continuing operations.....   $  1.32      $  0.48       $ (2.68)     $ (0.31)
(Loss) from discontinued operations............     (2.21)       (0.72)        (0.77)       (1.66)
Gain on disposition of discontinued
  operations...................................        --           --         19.10           --
Cumulative effect of accounting change.........      0.44           --            --           --
AT&T Common Stock Group (loss) earnings........   $ (0.45)     $ (0.24)      $ 15.65      $ (1.97)
Dividends declared.............................    0.1875       0.1875        0.1875       0.1875
AT&T Wireless Group (loss) earnings from
  discontinued operations per basic and diluted
  share(3),(6).................................   $ (0.02)     $  0.08            --           --
Liberty Media Group (loss) earnings per basic
  and diluted share(7).........................   $ (0.06)     $ (0.82)      $  0.04           --
Stock price(8)
AT&T common stock
  High.........................................   $ 40.00      $ 37.05       $ 44.00      $ 41.01
  Low..........................................     27.67        31.56         33.85        30.24
  Quarter-end close............................     33.92        35.03         39.57        37.19
AT&T Wireless Group common stock(6)
  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(7)
  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(7)
  High.........................................   $ 18.69      $ 18.75       $ 18.35           --
  Low..........................................     14.20        12.50         12.00           --
  Quarter-end close............................     15.00        18.15            --           --
</Table>

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

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

(2) Fourth quarter 2002 net income included $1,463 of net restructuring and
    other charges.

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

(4) Third quarter 2001 net income included a gain on disposition of discontinued
    operations of $13,503, or $19.10 per share.

(5) First quarter 2001 net income included cumulative effect of accounting
    change of $359 and $545, or $0.44 per diluted share and $0.21 per share, for
    AT&T Common Stock Group and LMG, respectively, due to the adoption of SFAS
    No. 133.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) 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.

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

(8) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T
    Common Stock prices have been restated to reflect the spin-off of AT&T
    Broadband and for the 1-for-5 reverse stock split.

18.  VARIABLE INTEREST ENTITIES

     As stated in note 19, AT&T is currently assessing the potential impacts of
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." As
part of that assessment, we have determined that one entity, from which we
currently lease two buildings, may be determined to be a Variable Interest
Entity and subject to consolidation. We have no ownership interest in this
entity and our transactions with it have met the requirements to be classified
as operating leases, with AT&T being the lessee. At the end of their respective
lease terms (including any extensions), AT&T has the option to: renew the lease
for a new term, purchase the property at the unamortized loan funding amount, or
exercise the remarketing option. Under the remarketing option, AT&T could be
held liable for a loss in value relative to the properties. At December 31,
2002, our maximum exposure was $99 million. This entity has approximately $105
million of total assets, (principally the leased properties) and $110 million of
liabilities (principally long term debt secured by the properties).

     In addition, we have six leases with another entity, having characteristics
similar to those described above. It is possible that this entity may be deemed
to be a VIE. We may, therefore, have variable interests in specified assets of
this entity and be subject to "silo" consolidation of the specific assets and
related liabilities. At December 31, 2002, our maximum total exposure related to
this entity was $328 million. The estimated building value is approximately $362
million and the outstanding long-term debt is approximately $386 million.

19.  NEW ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations that are
legally enforceable and unavoidable, and are associated with the retirement of
tangible long-lived assets, be recorded as liabilities when those obligations
are incurred, with the amount of the liability initially measured at fair value.
The offset to the initial asset retirement obligation is an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its future value, and the asset is depreciated over 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 was
adopted on January 1, 2003. AT&T currently includes in its group depreciation
rates an amount related to the cost of removal for certain assets. However, such
amounts are not legally enforceable or unavoidable; therefore, AT&T will be
required to reverse the amount accrued in accumulated depreciation. As of
January 1, 2003, AT&T will report approximately $40 million as the cumulative
effect of a change in accounting principles related to this reversal. The impact
of no longer including the cost of removal in the group depreciation rates,
coupled with the cumulative effect impact on accumulated depreciation, will
result in a decrease to depreciation expense in 2003. However, the costs
incurred to remove these assets will be reflected as a cost in the period
incurred as "Costs of services and products."

     On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
                                       105
<PAGE>
                       AT&T CORP. AND SUBSIDIARIES (AT&T)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," costs related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated -nullifying
the guidance under EITF 94-3. Under SFAS No. 146 the cost associated with an
exit or disposal activity is recognized in the periods in which it is incurred
rather than at the date the company committed to the exit plan. This statement
is effective for exit or disposal activities initiated after December 31, 2002,
with earlier application encouraged. Previously issued financial statements will
not be restated. The provisions of EITF 94-3 shall continue to apply for exit
plans initiated prior to the adoption of SFAS No. 146. Accordingly, the initial
adoption of SFAS No. 146 will not have an effect on AT&T's results of
operations, financial position or cash flows. Liabilities associated with future
exit and disposal activities will not be recognized until actually incurred.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." This standard provides alternate methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation and requires more prominent disclosure about the method used. This
statement is effective for fiscal years ending after December 15, 2002. For
AT&T, this means it is effective for December 31, 2002. Currently AT&T applies
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and we do not expense our stock options. However, as previously
announced, AT&T will begin expensing all stock options issued after January 1,
2003, and will continue to apply the disclosure-only provisions to stock options
issued prior to January 1, 2003. This method of transition is in compliance with
the provisions of SFAS No. 148. The adoption of the disclosure provisions of
SFAS No. 148 will not have an impact on AT&T's results of operations, financial
position or cash flows; however, the expensing of the stock options issued after
January 1, 2003, will have a negative impact on our results of operations.

     In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that an entity
issuing a guarantee (including those embedded in a purchase or sales agreement)
must recognize, at the inception of the guarantee, a liability equal to the fair
value of the guarantee. FIN 45 also requires detailed information about each
guarantee or group of guarantees even if the likelihood of making a payment is
remote. The disclosure requirements of this interpretation are effective for
financial statements of periods ending after December 15, 2002, which makes them
effective for AT&T for December 31, 2002 (see note 9 for the disclosures
required under this interpretation). The recognition and measurement provisions
of this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. FIN 45 could have an impact on the
future results of AT&T depending on guarantees issued; however, at this time we
do not believe that the adoption of this statement will have a material impact
on our results of operation, financial position or cash flows.

     In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin (ARB) No.
51." FIN 46 requires the primary beneficiary to consolidate a variable interest
entity (VIE) if it has a variable interest that will absorb a majority of the
entity's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. FIN 46 applies immediately to
VIEs created after January 31, 2003, and to VIEs in which the entity obtains an
interest after that date. For VIEs acquired before February 1, 2003, the
effective date for AT&T is July 1, 2003. AT&T is currently in the process of
determining the impact of this statement on its results of operations, financial
position and cash flows. The disclosures relating to our present involvement
with VIEs and our maximum exposure to losses are included in note 18.

     In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the timing of revenue
recognition for arrangements in which goods or services or both are delivered
separately in a bundled sales arrangement. The EITF requires that when the

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deliverables included in this type of arrangement meet certain criteria they
should be accounted for separately as separate units of accounting. This may
result in a difference in the timing of revenue recognition but will not result
in a change in the total amount of revenue recognized in a bundled sales
arrangement. The allocation of revenue to the separate deliverables is based on
the relative fair value of each item. If the fair value is not available for the
delivered items then the residual method must be used. This method requires that
the amount allocated to the undelivered items in the arrangement is their full
fair value. This would result in the discount, if any, being allocated to the
delivered items. This consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003, which, for AT&T,
is July 1, 2003. AT&T is currently evaluating the impact of this consensus on
its results of operations, financial position and cash flows.

     In January 2003, the EITF reached a consensus on EITF 02-18, "Accounting
for Subsequent Investments in an Investee after Suspension of Equity Method Loss
Recognition." This consensus states that if the additional investment, in whole
or in part, represents the funding of prior losses, the investor should
recognize previously suspended losses. This determination would be based on
various factors including whether the investment results in an increased
ownership percentage, the fair value of the consideration received is equivalent
to the consideration paid and whether the investment is acquired from a third
party or directly from an investee. If any of these provisions are met, the
additional investment would generally not be considered as funding prior losses.
When appropriate to recognize prior losses, the amount recognized would be
limited to the amount of the additional investment determined to represent the
funding of prior losses. The consensus will be effective for additional
investments made after February 5, 2003.

20.  SUBSEQUENT EVENTS

     In January 2003, AT&T early retired $3.7 billion of long-term notes. In
February 2003, AT&T redeemed exchangeable notes that were indexed to AT&T
Wireless common stock and subsequently sold its remaining AT&T Wireless
holdings. For further information on these items, see notes 7 and 8.

                                       107
<PAGE>

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

     There have been no changes in independent accountants and no disagreements
with independent accountants on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure during
the last two years.

                                    PART III

ITEMS 10 THROUGH 13.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding executive officers of the Company is set forth below.
The other information required by Item 10 is incorporated by reference to that
portion of the Company's definitive proxy statement for the 2003 annual meeting
of shareowners under the captions "Nominees for Election as Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance".

                      EXECUTIVE OFFICERS OF THE REGISTRANT
                             (AS OF MARCH 1, 2003)

<Table>
<Caption>
                                                                                            BECAME
                                                                                        AT&T EXECUTIVE
NAME                                AGE                                                   OFFICER ON
----                                ---                                                 --------------
<S>                                 <C>   <C>                                           <C>
Betsy J. Bernard..................  47    President                                         04-01
James W. Cicconi..................  49    Executive Vice President and General              12-98
                                          Counsel
Nicholas S. Cyprus................  49    Vice President and Controller                     01-03
David W. Dorman...................  47    Chairman of the Board and Chief Executive         12-00
                                          Officer
Edward M. Dwyer...................  46    Vice President and Treasurer                      01-03
Hossein Eslambolchi...............  45    President, AT&T Labs, AT&T Chief Technology       01-03
                                          Officer and AT&T Business Chief Information
                                          Officer
Robert S. Feit....................  40    Vice President -- Law and Secretary               01-03
Mirian M. Graddick-Weir...........  47    Executive Vice President, Human Resources         03-99
Thomas W. Horton..................  41    Senior Executive Vice President and Chief         06-02
                                          Financial Officer
Frank Ianna.......................  52    Executive Vice President, Chief Quality           03-97
                                          Officer and President, AT&T Network
                                          Services
John C. Petrillo..................  52    Executive Vice President, Corporate               01-96
                                          Strategy and Business Development
John Polumbo......................  51    President and Chief Executive                     10-02
                                          Officer -- AT&T Consumer
Constance K. Weaver...............  50    Executive Vice President, Public Relations,       10-02
                                          Brand & Business Marketing
</Table>

     All of the above executive officers have held high level managerial
positions with AT&T or its affiliates for more than the past five years, except
Messrs. Cicconi, Dorman, Horton, Polumbo and Ms. Bernard. Prior to joining AT&T
in April 2001, Ms. Bernard was Executive Vice President -- National Mass Markets
for Qwest Communications International from 2000 to 2001, Executive Vice
President -- Retail Markets for US West from 1998 to 2000, and President, Chief
Executive Officer and Director of Avirnex Communications from 1997 to 1998.
Prior to joining AT&T in September 1998 as Senior Vice President -- Law and
Government Affairs, Mr. Cicconi was a partner at the law firm of Akin, Gump,
Strauss, Hauer & Feld, L.L.P. from 1991 to 1998. Prior to joining AT&T in
December 2000, Mr. Dorman was Chief Executive Officer of Concert, a global
venture created by AT&T and British Telecom, from 1999 to 2000; Chairman,
President and

                                       108
<PAGE>

Chief Executive Officer of PointCast, an Internet-based news and information
service company, from 1998 to 1999; Executive Vice President of SBC
Communications from 1996 to 1998; and Chief Executive Officer of Pacific Bell
from 1994 to 1996. Prior to joining AT&T in 2002, Mr. Horton served in various
high level management positions of AMR Corporation, the parent company of
American Airlines; he was Senior Vice President and Chief Financial Officer from
2000 to 2002, Vice President-Europe Division from 1998 to 2000 and Vice
President and Controller from 1993 to 1998. Prior to becoming an Executive
Officer of AT&T in 2002, Mr. Polumbo served as Senior Vice President of AT&T
Business Global Ventures from September 2001 and prior to joining AT&T, Mr.
Polumbo served as President of the Global Services Unit of Concert, from June
1999 to September 2001 and from August 1998 to May 1999 he was President and
Chief Operating Officer of Excite, Inc. and from September 1997 to August 1998
was President and Chief Executive Officer of Pacific Bell Wireless (now part of
Cingular Wireless).

ITEM 11.  EXECUTIVE COMPENSATION

     There is incorporated by reference in this Item 11 that portion of the
Company's definitive proxy statement for the 2003 annual meeting of shareowners
under the captions "Five Year Performance Graph" and "Executive Compensation".

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

     There is incorporated by reference in this Item 12 that portion of the
Company's definitive proxy statement for the 2003 annual meeting of shareowners
under the captions "Stock Ownership of Management and Directors" and "Ownership
of Voting Securities in Excess of Five of Five Percent by Beneficial Owners".

     Securities authorized under equity compensation plans as of December 31,
2002, were as follows:

                      EQUITY COMPENSATION PLAN INFORMATION

<Table>
<Caption>
                                    (A)                      (B)                         (C)
                                                                                NUMBER OF SECURITIES
                                                                               REMAINING AVAILABLE FOR
                          NUMBER OF SECURITIES TO      WEIGHTED-AVERAGE         FUTURE ISSUANCE UNDER
                          BE ISSUED UPON EXERCISE     EXERCISE PRICE OF       EQUITY COMPENSATION PLANS
                          OF OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,       (EXCLUDING SECURITIES
PLAN CATEGORY             WARRANTS AND RIGHTS(2)    WARRANTS AND RIGHTS(2)   REFLECTED IN COLUMN (A))(2)
-------------             -----------------------   ----------------------   ---------------------------
                                                      (SHARES IN THOUSANDS)
<S>                       <C>                       <C>                      <C>
Equity compensation
  plans approved by
  shareholders..........          89,756                    $40.93                     27,751
Equity compensation
  plans not approved by
  shareholders(1).......               0                    $    0                          0
                                  ------                    ------                     ------
     Total..............          89,756                    $40.93                     27,751
                                  ======                    ======                     ======
</Table>

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

(1) With respect to equity compensation plans that AT&T has assumed in
    connection with mergers, acquisitions or consolidations, the aggregate
    number of shares of AT&T common stock to be issued upon exercise of
    outstanding options, warrants and rights outstanding under such plans on
    December 31, 2002 was 8,500,266 shares and the weighted average exercise
    price of such outstanding options, warrants and rights was $37.5914, as
    adjusted for the November 18, 2002 spin-off of AT&T Broadband and AT&T
    one-for-five reverse stock split. These shares were granted under plans
    administered by the companies acquired by AT&T and upon acquisition no
    longer provided shares for future grants.

(2) AT&T's 1997 Long Term Incentive Program (as amended, the "1997 LTIP")
    originally provided for the issuance of 150 million shares of AT&T common
    stock. In 1999 the Plan was amended to provide for an annual increase in the
    number of shares available for awards under the 1997 LTIP equal to 1.75% of
    the number of shares of AT&T common stock outstanding on the first day of
    each year commencing

                                       109
<PAGE>

January 1, 2000. Pursuant to this provision, an additional 61,992,101 shares of
AT&T common stock became available for awards on January 1, 2002. The 1997 LTIP
limits the number of shares which may be used for awards other than stock
     options or stock appreciation rights. As of December 31, 2002, 2.8 million
     shares remained available, as adjusted for the November 18, 2002 spin-off
     of AT&T Broadband and AT&T one-for-five reverse stock split. The 1997 LTIP
     is currently the only equity compensation plan under which AT&T grants
     awards relating to its equity securities. Effective with the November 18,
     2002, spin-off of AT&T Broadband, any grants held under these plans by an
     active AT&T Broadband employee were cancelled effective with the spin-off.
     Any grants held under these plans by an active AT&T employee were adjusted
     in accordance with footnote 6 as described in the Summary Compensation
     Table. All other grants held under these plans that were outstanding on
     November 18, 2002 were adjusted into stock options exercisable for AT&T
     common shares and Comcast common shares effective with the November 18,
     2002 spin-off of AT&T Broadband and AT&T one-for-five reverse stock split,
     whereby the aggregate fair market value of the original award immediately
     prior to the spin-off of AT&T Broadband was maintained.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is incorporated by reference in this Item 13 that portion of the
Company's definitive proxy statement for the 2003 annual meeting of shareowners
under the captions "Certain Relationships and Related Transactions".

                                    PART IV

ITEM 14.  CONTROLS AND PROCEDURES

     Within 90 days prior to the date of this report, we completed an
evaluation, under the supervision and with the participation of our management
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in alerting them timely to
material information required to be included in our Exchange Act filings. There
have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.

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

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

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

<Table>
<Caption>
                                                              PAGES
                                                              -----
<S>                                                           <C>
          Report of Management..............................    51
          Report of Independent Accountants.................    52
     Statements:
          Consolidated Statement of Operations..............    54
          Consolidated Balance Sheets.......................    55
          Consolidated Statements of Changes in Shareowners'
          Equity............................................    56
          Consolidated Statements of Cash Flows.............    58
          Notes to Consolidated Financial Statements........    59
     (2) Financial Statement Schedule:
          Report of Independent Accountants.................   118
     Schedule:
          II -- Valuation and Qualifying Accounts...........   119
</Table>

                                       110
<PAGE>

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

     (3) Exhibits:

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

<Table>
<S>             <C>
(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, Certificate of Amendment
                of the registrant filed on June 20, 2001 and Certificate of
                Amendment of the registrant filed on November 18, 2002.
(3)b            By-Laws of the registrant, as amended March 20, 2003.
(4)             No instrument which defines the rights of holders of long
                term debt, of the registrant and all of its consolidated
                subsidiaries, is filed herewith pursuant to Regulation S-K,
                Item 601(b)(4)(iii)(A), except for the instruments referred
                to in 4(i)(1) and 4(i)(2) below. Pursuant to this
                regulation, the registrant hereby agrees to furnish a copy
                of any such instrument not filed herewith to the SEC upon
                request.
(4)(i)(1)       Indenture between American Telephone and Telegraph Company
                and The Bank of New York, as trustee, dated as of September
                7, 1990 (incorporated by reference to Exhibit 4A to Form SE
                filed September 10, 1990, file no. 33-36756), as
                supplemented by First Supplemental Indenture dated October
                30, 1992 (incorporated by reference to Exhibit 4.AA to
                Current Report on Form 8-K filed December 1, 1992) and by
                Second Supplemental Indenture dated November 14, 2002
                (incorporated by reference to Exhibit 4.10 to Amendment No.
                1 to Form S-4 filed September 26, 2002, file no. 333-97953).
(4)(i)(2)       Indenture between AT&T Corp. and The Bank of New York, as
                trustee, dated as of November 1, 2001 (incorporated by
                reference to Exhibit 4 to Form S-4 filed May 12, 2002, file
                no. 333-87960).
(10)(i)1        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).
(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).
</Table>

                                       111
<PAGE>
<Table>
<S>             <C>
(10)(i)7        Amended and Restated Tax Sharing Agreement by and between
                AT&T Corp. and AT&T Wireless Services, Inc., dated as of
                June 4, 2001 (incorporated by reference to Exhibit 10.2 to
                the AT&T Wireless Services, Inc. Registration Statement on
                Form S-1/A (Commission file No. 333-59174), filed June 21,
                2001).
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)15       Second Amendment to Tax Sharing Agreement dated as of
                September 24, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc., and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.6 to the Registration Statement on Form S-1 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).
</Table>

                                       112
<PAGE>
<Table>
<S>             <C>
(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).
(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).
</Table>

                                       113
<PAGE>
<Table>
<S>             <C>
(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).
(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       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)36       Employee Benefits Agreement dated as of December 19, 2001
                between AT&T Corp. and AT&T Broadband Corp. (incorporated by
                reference to Exhibit (10)(i)37 to Form 10-K for 2001, File
                No. 1-1105).
</Table>

                                       114
<PAGE>
<Table>
<S>             <C>
(10)(i)37       Amended and Restated 364-Day Revolving Credit Facility
                Agreement, dated as of October 9, 2002, among AT&T Corp.,
                the Lenders party hereto, JPMORGAN CHASE BANK, CITIBANK,
                N.A., CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH and
                GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative
                Agents, and CITIBANK, N.A., as Paying Agent (incorporated by
                reference to Form 8-K filed October 10, 2002, File No.
                1-1105).
(10)(iii)(A)1   AT&T Short Term Incentive Plan as amended March, 1994
                (incorporated by reference to Exhibit (10)(iii)(A)1 to Form
                10-K for 1994, File No. 1-1105).
(10)(iii)(A)2   AT&T 1987 Long Term Incentive Program as amended December
                17, 1997 (incorporated by reference to Exhibit 10)(iii)(A)2
                to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)3   AT&T Senior Management Individual Life Insurance Program as
                amended March 3, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4   AT&T Senior Management Long Term Disability and Survivor
                Protection Plan, as amended and restated effective January
                1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4
                to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)5   AT&T Senior Management Financial Counseling Program dated
                December 29, 1994 (incorporated by reference to Exhibit
                (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6   AT&T Deferred Compensation Plan for Non-Employee Directors,
                as amended December 15, 1993 (incorporated by reference to
                Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No.
                1-1105).
(10)(iii)(A)7   The AT&T Directors Individual Life Insurance Program as
                amended March 2, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)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 (incorporated by reference to Exhibit
                (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9   AT&T Excess Benefit and Compensation Plan, as amended and
                restated effective October 1, 1996 (incorporated by
                reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996,
                File No. 1-1105).
(10)(iii)(A)10  AT&T Non-Qualified Pension Plan, as amended and restated
                January 1, 1995 (incorporated by reference to Exhibit
                (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)11  AT&T Senior Management Incentive Award Deferral Plan, as
                amended January 21, 1998 (incorporated by reference to
                Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No.
                1-1105).
(10)(iii)(A)12  AT&T Mid-Career Hire Program revised effective January 1,
                1988 (incorporated by reference to Exhibit (10)(iii)(A)4 to
                Form SE, dated March 25, 1988, File No. 1-1105) including
                AT&T Mid-Career Pension Plan, as amended and restated July
                1, 1999 (incorporated by reference to Exhibit (10)(iii)(A)12
                to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13  AT&T 1997 Long Term Incentive Program as amended through
                March 14, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14  Form of Indemnification Contract for Officers and Directors
                (incorporated by reference to 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 (incorporated by reference to Exhibit
                10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16  AT&T Corp. Senior Management Universal Life Insurance
                Program effective October 1, 1999 (incorporated by reference
                to Exhibit (3)b to Form 10-K for 2000, File No. 1-1105).
</Table>

                                       115
<PAGE>
<Table>
<S>             <C>
(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 (incorporated by
                reference to Exhibit (10)(iii)(A)17 to Form 10-K for 1999,
                File No. 1-1105).
(10)(iii)(A)18  AT&T Senior Officer Severance Plan effective October 9,
                1997, as amended October 30, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
                1-1105), and as amended, restated and renamed AT&T Senior
                Officer Separation Plan as of January 1, 2003.
(10)(iii)(A)19  Form of Pension Agreement between AT&T Corp. and Frank Ianna
                dated October 30, 1997 (incorporated by reference to 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 (incorporated by reference
                to 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 as amended on October 1, 2002 including original
                agreement dated April 9, 2001 (incorporated by reference to
                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 (incorporated by
                reference to Exhibit (10)(iii)(A)23 to Form 10-K for 1997,
                File No. 1-1105).
(10)(iii)(A)23  Form of Agreement between AT&T Corp. and C. Michael
                Armstrong dated November 18, 2002.
(10)(iii)(A)24  Liberty Media 401(K) Savings Plan (incorporated 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 (incorporated by reference to Exhibit
                (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)26  AT&T Corp. Senior Management Universal Life Insurance
                Program for Former Executives effective October 1, 1999
                (incorporated by reference to Exhibit (10)(iii)(A)26 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Form of Special Deferral Agreement between AT&T Corp. and C.
                Michael Armstrong dated November 5, 2002.
(10)(iii)(A)28  Form of Agreement between AT&T Corp. and Hossein Eslambolchi
                dated January 4, 2001 including amendment dated March 9,
                2001.
(10)(iii)(A)29  Form of Special Deferral Agreement between AT&T Corp. and
                Frank Ianna dated January 16, 2001 (incorporated by
                reference to 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 (incorporated by reference to
                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 (incorporated by reference to
                Exhibit (10)(iii)(A)31 to Form 10-K for 2000, File No.
                1-1105).
(10)(iii)(A)32  AT&T Corp. board resolutions adopting change in control
                provision to various plans effective October 23, 2000
                (incorporated by reference to Exhibit (10)(iii)(A)32 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)33  Form of Loan Agreement between AT&T Corp. and David Dorman
                dated April 13, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34  Form of Employment Agreement between AT&T Corp. and David
                Dorman dated May 18, 2001 (incorporated by reference to
                Exhibit (10)(iii)(A)35 to Form 10-K for 2001, File No.
                1-1105) including amendment dated December 31, 2002.
</Table>

                                       116
<PAGE>

<Table>
<S>                <C>
(10)(iii)(A)35     Form of Special Equity Agreement between AT&T Corp. and Hossein Eslambolchi dated January 31,
                   2001.
(10)(iii)(A)36     Form of Employment Agreement between AT&T Corp. and Hossein Eslambolchi dated December 28, 1999
                   including amendment dated January 6, 2000.
(10)(iii)(A)37     Form of Agreement between AT&T Corp. and James W. Cicconi dated July 29, 1998.
(10)(iii)(A)38     Form of Special Deferral Agreement between AT&T Corp. and James W. Cicconi dated April 2, 2001.
(10)(iii)(A)39     AT&T Corp. board resolution approving special payment to Betsy J. Bernard effective on April 1,
                   2002.
(10)(iii)(A)40     Form of Retention Agreement between AT&T Corp. and Frank Ianna effective December 1, 2000.
(12)               Computation of Ratio of Earnings to Fixed Charges.
(21)               List of subsidiaries of AT&T.
(23a)              Consent of PricewaterhouseCoopers LLP.
(23b)              Consent of KPMG LLP.
(23c)              Consent of KPMG LLP.
(23d)              Consent of KPMG LLP.
(23e)              Consent of PricewaterhouseCoopers LLP.
(24)               Powers of Attorney executed by officers and directors who signed this report.
(99.1)             CEO Certification of Periodic Financial Reports
(99.2)             CFO Certification of Periodic Financial Reports
(99.3)             AT&T Canada Inc. Financial Statements.
(99.4)             Liberty Media Corporation Financial Statements.
(99.5)             Concert B.V. Financial Statements.
</Table>

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

     (b) Reports on Form 8-K:

     During the fourth quarter 2002, Form 8-K dated October 9, 2002 was filed
pursuant to Item 5 (Other Events) on October 10, 2002, Form 8-K dated October
22, 2002 was filed pursuant to Item 5 (Other Events) on October 22, 2002, Form
8-K dated October 30, 2002 was filed pursuant to Item 5 (Other Events) and Item
7 (Financial Statements and Exhibits) on October 30, 2002, Form 8-K dated
November 4, 2002 was filed pursuant to Item 5 (Other Events) and Item 7
(Financial Statements and Exhibits) on November 4, 2002, Form 8-K dated November
6, 2002 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial
Statements and Exhibits) on November 7, 2002, Form 8-K dated November 11, 2002
was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits) on November 12, 2002, Form 8-K dated November 14, 2002 was filed
pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits)
on November 19, 2002, Form 8-K dated November 18, 2002 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on November
19, 2002, Form 8-K dated November 18, 2002 was filed pursuant to Item 5 (Other
Events) and Item 7 (Financial Statements and Exhibits) on November 19, 2002 and
Form 8-K dated November 18, 2002 was filed pursuant to Item 2 (Acquisition or
Disposition of Assets) and Item 7 (Financial Statements and Exhibits) on
December 3, 2002.

                                       117
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                   CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

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

     Our audits of the consolidated financial statements referred to in our
report dated January 23, 2003, except for Note 20, as to which the date is
February 28, 2003, appearing in the 2002 Annual Report to Shareholders of AT&T
Corp. (which report and consolidated financial statements are included in this
Annual Report on Form 10-K) also included an audit of the consolidated financial
statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion,
this consolidated financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP

New York, New York
January 23, 2003

                                       118
<PAGE>

                                                          SCHEDULE II -- SHEET 1

                                   AT&T CORP.
                       AND ITS CONSOLIDATED SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
COLUMN A                                            COLUMN B     COLUMN C      COLUMN D
                                                   BALANCE AT   CHARGED TO                     COLUMN E
                                                   BEGINNING    COSTS AND                     BALANCE AT
DESCRIPTION                                        OF PERIOD     EXPENSES    DEDUCTIONS(A)   END OF PERIOD
-----------                                        ----------   ----------   -------------   -------------
                                                                    (DOLLARS IN MILLIONS)
<S>                                                <C>          <C>          <C>             <C>
Year 2002
Allowances for doubtful accounts(b)..............    $  809       $1,058        $1,147          $  720
Deferred tax asset valuation allowance(c)........    $   34       $  655        $   --          $  689
Year 2001
Allowances for doubtful accounts(b)..............    $1,164       $  884        $1,239          $  809
Deferred tax asset valuation allowance...........    $   18       $   16        $   --          $   34
Year 2000
Allowances for doubtful accounts(b)..............    $1,179       $  925        $  940          $1,164
Deferred tax asset valuation allowance...........    $   99       $    3        $   84          $   18
</Table>

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

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

(b) Includes allowances for doubtful accounts on long-term receivables of $51
    million, $55 million, and $53 million at December 31, 2002, 2001, and 2000,
    respectively (included in Other assets in the Consolidated Balance Sheets).

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

                                       119
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          AT&T CORP.

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

                                          By:       /s/ T. W. HORTON
                                            ------------------------------------
                                                        T. W. Horton
                                            Senior Executive Vice President and
                                                  Chief Financial Officer

                                          By:       /s/ N. S. CYPRUS
                                            ------------------------------------
                                                        N. S. Cyprus
                                               Vice President and Controller

March 28, 2003

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

PRINCIPAL EXECUTIVE OFFICERS:
David W. Dorman*
Chairman of the Board and Chief Executive Officer

PRINCIPAL FINANCIAL OFFICER:
Thomas W. Horton
Senior Executive Vice President and Chief Financial Officer

PRINCIPAL ACCOUNTING OFFICER:
Nicholas S. Cyprus
Vice President and Controller

DIRECTORS:
Kenneth T. Derr*
David W. Dorman*
M. Kathryn Eickhoff*
Frank C. Herringer*
Amos B. Hostetter, Jr.*
Shirley A. Jackson*
Jon C. Madonna*
Donald F. McHenry*
Tony L. White*

March 28, 2003
By:
                                                         /s/ R. S. FEIT
                                                    ----------------------------
                                                             R. S. Feit
                                                        (attorney-in-fact)*
                                       120
<PAGE>

       CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATIONS

                                   AT&T CORP.

                           CERTIFICATIONS PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

                                 CERTIFICATION

I, David W. Dorman, certify that:

          1.  I have reviewed this annual report on Form 10-K of AT&T;

          2.  Based on my knowledge, this annual report does not contain any
     untrue statement of a material fact or omit to state a material fact
     necessary to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the period
     covered by this annual report;

          3.  Based on my knowledge, the financial statements, and other
     financial information included in this annual report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     annual report;

          4.  The registrant's other certifying officers and I are responsible
     for establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
     have:

             a) designed such disclosure controls and procedures to ensure that
        material information relating to the registrant, including its
        consolidated subsidiaries, is made known to us by others within those
        entities, particularly during the period in which this annual report is
        being prepared;

             b) evaluated the effectiveness of the registrant's disclosure
        controls and procedures as of a date within 90 days prior to the filing
        date of this annual report (the "Evaluation Date"); and

             c) presented in this annual report our conclusions about the
        effectiveness of the disclosure controls and procedures based on our
        evaluation as of the Evaluation Date;

          5.  The registrant's other certifying officers and I have disclosed,
     based on our most recent evaluation, to the registrant's auditors and the
     audit committee of registrant's board of directors (or persons performing
     the equivalent function):

             a) all significant deficiencies in the design or operation of
        internal controls which could adversely affect the registrant's ability
        to record, process, summarize and report financial data and have
        identified for the registrant's auditors any material weaknesses in
        internal controls; and

             b) any fraud, whether or not material, that involves management or
        other employees who have a significant role in the registrant's internal
        controls; and

          6.  The registrant's other certifying officers and I have indicated in
     this annual report whether or not there were significant changes in
     internal controls or in other factors that could significantly affect
     internal controls subsequent to the date of our most recent evaluation,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses.

                                                  /s/ DAVID W. DORMAN
                                          --------------------------------------
                                                 Chief Executive Officer

Date: March 28, 2002

                                       121
<PAGE>

                                 CERTIFICATION

I, Thomas W. Horton, certify that:

          1.  I have reviewed this annual report on Form 10-K of AT&T;

          2.  Based on my knowledge, this annual report does not contain any
     untrue statement of a material fact or omit to state a material fact
     necessary to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the period
     covered by this annual report;

          3.  Based on my knowledge, the financial statements, and other
     financial information included in this annual report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     annual report;

          4.  The registrant's other certifying officers and I are responsible
     for establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
     have:

             a) designed such disclosure controls and procedures to ensure that
        material information relating to the registrant, including its
        consolidated subsidiaries, is made known to us by others within those
        entities, particularly during the period in which this annual report is
        being prepared;

             b) evaluated the effectiveness of the registrant's disclosure
        controls and procedures as of a date within 90 days prior to the filing
        date of this annual report (the "Evaluation Date"); and

             c) presented in this annual report our conclusions about the
        effectiveness of the disclosure controls and procedures based on our
        evaluation as of the Evaluation Date;

          5.  The registrant's other certifying officers and I have disclosed,
     based on our most recent evaluation, to the registrant's auditors and the
     audit committee of registrant's board of directors (or persons performing
     the equivalent function):

             a) all significant deficiencies in the design or operation of
        internal controls which could adversely affect the registrant's ability
        to record, process, summarize and report financial data and have
        identified for the registrant's auditors any material weaknesses in
        internal controls; and

             b) any fraud, whether or not material, that involves management or
        other employees who have a significant role in the registrant's internal
        controls; and

          6.  The registrant's other certifying officers and I have indicated in
     this annual report whether or not there were significant changes in
     internal controls or in other factors that could significantly affect
     internal controls subsequent to the date of our most recent evaluation,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses.

                                                 /s/ THOMAS W. HORTON
                                          --------------------------------------
                                                 Chief Financial Officer

Date: March 28, 2002

                                       122
<PAGE>

                                 EXHIBIT INDEX

<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, Certificate of Amendment
                of the registrant filed on June 20, 2001 and Certificate of
                Amendment of the registrant filed on November 18, 2002.
(3)b            By-Laws of the registrant, as amended March 20, 2003.
(4)             No instrument which defines the rights of holders of long
                term debt, of the registrant and all of its consolidated
                subsidiaries, is filed herewith pursuant to Regulation S-K,
                Item 601(b)(4)(iii)(A), except for the instruments referred
                to in 4(i)(1) and 4(i)(2) below. Pursuant to this
                regulation, the registrant hereby agrees to furnish a copy
                of any such instrument not filed herewith to the SEC upon
                request.
(4)(i)(1)       Indenture between American Telephone and Telegraph Company
                and The Bank of New York, as trustee, dated as of September
                7, 1990 (incorporated by reference to Exhibit 4A to Form SE
                filed September 10, 1990, file no. 33-36756), as
                supplemented by First Supplemental Indenture dated October
                30, 1992 (incorporated by reference to Exhibit 4.AA to
                Current Report on Form 8-K filed December 1, 1992) and by
                Second Supplemental Indenture dated November 14, 2002
                (incorporated by reference to Exhibit 4.10 to Amendment No.
                1 to Form S-4 filed September 26, 2002, file no. 333-97953).
(4)(i)(2)       Indenture between AT&T Corp. and The Bank of New York, as
                trustee, dated as of November 1, 2001 (incorporated by
                reference to Exhibit 4 to Form S-4 filed May 12, 2002, file
                no. 333-87960).
(10)(i)1        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).
(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).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)15       Second Amendment to Tax Sharing Agreement dated as of
                September 24, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc., and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.6 to the Registration Statement on Form S-1 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).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(i)19       Sixth Amendment to Tax Sharing Agreement dated as of
                December 10, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.10 to the Registration Statement on Form S-1 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).
(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).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(i)28       Sixth Supplement to Inter-Group Agreement dated as of
                December 30, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.19 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(10)(i)29       Seventh Supplement to Inter-Group Agreement dated as of July
                25, 2000, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.21 to
                the Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)30       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Inter-Group Agreement dated as
                of March 9, 1999, as supplemented, between and among AT&T
                Corp., on the one hand, and Liberty Media Corporation,
                Liberty Media Group LLC and each Covered Entity listed on
                the signature pages thereof, on the other hand (incorporated
                by reference to Exhibit 10.20 to the Registration Statement
                on Form S-1 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).
(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       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)36       Employee Benefits Agreement dated as of December 19, 2001
                between AT&T Corp. and AT&T Broadband Corp. (incorporated by
                reference to Exhibit (10)(i)37 to Form 10-K for 2001, File
                No. 1-1105).
(10)(i)37       Amended and Restated 364-Day Revolving Credit Facility
                Agreement, dated as of October 9, 2002, among AT&T Corp.,
                the Lenders party hereto, JPMORGAN CHASE BANK, CITIBANK,
                N.A., CREDIT SUISSE FIRST BOSTON, CAYMAN ISLANDS BRANCH and
                GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative
                Agents, and CITIBANK, N.A., as Paying Agent (incorporated by
                reference to Form 8-K filed October 10, 2002, File No.
                1-1105).
(10)(iii)(A)1   AT&T Short Term Incentive Plan as amended March, 1994
                (incorporated by reference to Exhibit (10)(iii)(A)1 to Form
                10-K for 1994, File No. 1-1105).
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(iii)(A)2   AT&T 1987 Long Term Incentive Program as amended December
                17, 1997 (incorporated by reference to Exhibit 10)(iii)(A)2
                to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)3   AT&T Senior Management Individual Life Insurance Program as
                amended March 3, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4   AT&T Senior Management Long Term Disability and Survivor
                Protection Plan, as amended and restated effective January
                1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4
                to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)5   AT&T Senior Management Financial Counseling Program dated
                December 29, 1994 (incorporated by reference to Exhibit
                (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6   AT&T Deferred Compensation Plan for Non-Employee Directors,
                as amended December 15, 1993 (incorporated by reference to
                Exhibit (10)(iii)(A)6 to Form 10-K for 1993, File No.
                1-1105).
(10)(iii)(A)7   The AT&T Directors Individual Life Insurance Program as
                amended March 2, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)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 (incorporated by reference to Exhibit
                (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9   AT&T Excess Benefit and Compensation Plan, as amended and
                restated effective October 1, 1996 (incorporated by
                reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996,
                File No. 1-1105).
(10)(iii)(A)10  AT&T Non-Qualified Pension Plan, as amended and restated
                January 1, 1995 (incorporated by reference to Exhibit
                (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)11  AT&T Senior Management Incentive Award Deferral Plan, as
                amended January 21, 1998 (incorporated by reference to
                Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No.
                1-1105).
(10)(iii)(A)12  AT&T Mid-Career Hire Program revised effective January 1,
                1988 (incorporated by reference to Exhibit (10)(iii)(A)4 to
                Form SE, dated March 25, 1988, File No. 1-1105) including
                AT&T Mid-Career Pension Plan, as amended and restated July
                1, 1999 (incorporated by reference to Exhibit (10)(iii)(A)12
                to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13  AT&T 1997 Long Term Incentive Program as amended through
                March 14, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14  Form of Indemnification Contract for Officers and Directors
                (incorporated by reference to 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 (incorporated by reference to Exhibit
                10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16  AT&T Corp. Senior Management Universal Life Insurance
                Program effective October 1, 1999 (incorporated by reference
                to Exhibit (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 (incorporated by
                reference to Exhibit (10)(iii)(A)17 to Form 10-K for 1999,
                File No. 1-1105).
(10)(iii)(A)18  AT&T Senior Officer Severance Plan effective October 9,
                1997, as amended October 30, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
                1-1105), and as amended, restated and renamed AT&T Senior
                Officer Separation Plan as of January 1, 2003.
</Table>
<PAGE>
<Table>
<S>             <C>
(10)(iii)(A)19  Form of Pension Agreement between AT&T Corp. and Frank Ianna
                dated October 30, 1997 (incorporated by reference to 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 (incorporated by reference
                to 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 as amended on October 1, 2002 including original
                agreement dated April 9, 2001 (incorporated by reference to
                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 (incorporated by
                reference to Exhibit (10)(iii)(A)23 to Form 10-K for 1997,
                File No. 1-1105).
(10)(iii)(A)23  Form of Agreement between AT&T Corp. and C. Michael
                Armstrong dated November 18, 2002.
(10)(iii)(A)24  Liberty Media 401(K) Savings Plan (incorporated 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 (incorporated by reference to Exhibit
                (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)26  AT&T Corp. Senior Management Universal Life Insurance
                Program for Former Executives effective October 1, 1999
                (incorporated by reference to Exhibit (10)(iii)(A)26 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Form of Special Deferral Agreement between AT&T Corp. and C.
                Michael Armstrong dated November 5, 2002.
(10)(iii)(A)28  Form of Agreement between AT&T Corp. and Hossein Eslambolchi
                dated January 4, 2001 including amendment dated March 9,
                2001.
(10)(iii)(A)29  Form of Special Deferral Agreement between AT&T Corp. and
                Frank Ianna dated January 16, 2001 (incorporated by
                reference to 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 (incorporated by reference to
                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 (incorporated by reference to
                Exhibit (10)(iii)(A)31 to Form 10-K for 2000, File No.
                1-1105).
(10)(iii)(A)32  AT&T Corp. board resolutions adopting change in control
                provision to various plans effective October 23, 2000
                (incorporated by reference to Exhibit (10)(iii)(A)32 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)33  Form of Loan Agreement between AT&T Corp. and David Dorman
                dated April 13, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34  Form of Employment Agreement between AT&T Corp. and David
                Dorman dated May 18, 2001 (incorporated by reference to
                Exhibit (10)(iii)(A)35 to Form 10-K for 2001, File No.
                1-1105) including amendment dated December 31, 2002.
(10)(iii)(A)35  Form of Special Equity Agreement between AT&T Corp. and
                Hossein Eslambolchi dated January 31, 2001.
(10)(iii)(A)36  Form of Employment Agreement between AT&T Corp. and Hossein
                Eslambolchi dated December 28, 1999 including amendment
                dated January 6, 2000.
(10)(iii)(A)37  Form of Agreement between AT&T Corp. and James W. Cicconi
                dated July 29, 1998.
(10)(iii)(A)38  Form of Special Deferral Agreement between AT&T Corp. and
                James W. Cicconi dated April 2, 2001.
</Table>
<PAGE>

<Table>
<S>                <C>
(10)(iii)(A)39     AT&T Corp. board resolution approving special payment to Betsy J. Bernard effective on April 1,
                   2002.
(10)(iii)(A)40     Form of Retention Agreement between AT&T Corp. and Frank Ianna effective December 1, 2000.
(12)               Computation of Ratio of Earnings to Fixed Charges.
(21)               List of subsidiaries of AT&T.
(23a)              Consent of PricewaterhouseCoopers LLP.
(23b)              Consent of KPMG LLP.
(23c)              Consent of KPMG LLP.
(23d)              Consent of KPMG LLP.
(23e)              Consent of PricewaterhouseCoopers LLP.
(24)               Powers of Attorney executed by officers and directors who signed this report.
(99.1)             CEO Certification of Periodic Financial Reports.
(99.2)             CFO Certification of Periodic Financial Reports.
(99.3)             AT&T Canada Inc. Financial Statements.
(99.4)             Liberty Media Corporation Financial Statements.
(99.5)             Concert B.V. Financial Statements.
</Table>