AT&T CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-1105

AT&T CORP.

A NEW YORK CORPORATION I.R.S. EMPLOYER NO. 13-4924710

ONE AT&T WAY, BEDMINSTER, NEW JERSEY 07921

TELEPHONE NUMBER 908-221-2000

INTERNET ADDRESS: www.att.com/ir

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

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

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

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

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

The aggregate market value of voting common stock held by non-affiliates
was approximately $15.3 billion (based on closing price of those shares as of
June 30, 2003). At February 29, 2004, 793,522,585 shares of AT&T common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to the
2004 Annual Meeting of Shareowners (Part III).

SCHEDULE A

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

PART I

ITEM 1. BUSINESS.

WHO ARE WE?

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

For more than 125 years, we have been known for quality and reliability in
communications. Backed by the research and development capabilities of AT&T
Labs, we are a global leader in local, long distance, internet and
transaction-based voice and data services. Our primary business segments are
AT&T Business Services and AT&T Consumer Services.

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

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

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

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

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

- managed networking services and outsourcing solutions; and

- domestic and international wholesale transport services.

We are also the leading provider of domestic and international long
distance and transaction based communications services to approximately 35
million residential consumers in the U.S. We provide a broad range of
communications services to consumers individually and in combination with other
services, including:

- domestic and international long distance;

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

- local calling offers; and

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

WHAT FACTORS HAVE BEEN SHAPING OUR INDUSTRY?

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

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

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

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

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

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

In the U.S., the Telecommunications Act has had a significant impact on our
business 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. For example,
consumer long distance voice usage is declining as a result of substitution to
wireless services, internet access and e-mail/instant messaging services,
particularly in the "dial one" long distance, card and operator services
segments.

The long distance market is characterized by rapid deregulation and intense
competition among long distance providers, and, more recently, incumbent local
exchange carriers. Under the Telecommunications Act, a regional phone company
may offer long distance services in a state within its region if the 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 December 2003, regional phone
companies had received approval to offer long distance in all states. 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 pressure on stand-alone long distance services,
new opportunities are being created in the business and consumer markets,
including local, data, IP 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. We had entered
the local voice business for residential customers in 24 states by the end of
2003 and expanded our presence to an additional 11 states in January 2004. We
had entered the local voice business for large business customers in 49 states
and the District of Columbia, and for small to medium sized customers in 30
states and the District of Columbia, by the end of 2003. Our ability to remain
in our 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 us to purchase certain
network capabilities from incumbent local exchange carriers. Additionally, our
ability to remain in our current local voice markets may be dependent on the
outcomes of the FCC's Triennial Review Order impairment cases that are currently
before each of the state commissions and on the validity of the Triennial Review
Order itself, which was recently partially vacated by a U.S. Court of Appeals
(see more detailed discussion under the topic "What legislative and regulatory
developments are important to us?" below). If this decision is not reversed, or
unless the FCC issues new valid rules which assure us fair resale prices, our
current local business could be materially affected.

HOW HAS OUR BUSINESS DEVELOPED AND WHAT IS OUR STRATEGY?

For the past four years, our traditional long distance services have
experienced an industry-wide trend of lower revenue from lower prices, e-mail
and wireless substitution and increased competition, which has led to a decline
in operating income. In addition, economic conditions have been generally
adverse for significant new telecommunications spending by our customers. We
have evolved several strategies to combat this challenging environment. We have
sought to reduce costs and increase operating efficiency. We have emphasized our
other service offerings such as consumer and business local services and have
bundled them with our long distance services. We have tried to add value to our
services by investing in innovation, expertise, customer care and network
integration. We have sought to capitalize on new technology, most recently with
our development of voice over internet protocol (VoIP) services. And we have
prudently limited our capital expenditures while reducing our debt. Going
forward, we aspire to be a provider of choice for high value consumers and
businesses of all sizes, to be in a position to benefit from any improvement in
industry and economic conditions, and to be recognized by our customers as "The
World's Networking Company(SM)".

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AT&T BUSINESS SERVICES SEGMENT

WHAT SERVICES DO WE OFFER?

WE OFFER VOICE SERVICES.

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

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

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

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

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

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

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

WE OFFER DATA SERVICES

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

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WE OFFER MANAGED SERVICES, INTERNET SERVICES AND OUTSOURCING SOLUTIONS

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

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

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

Web services. Our managed web hosting services consist of a family of
hosting and transactional services and platforms serving the needs of
businesses. These services support clients' hosted infrastructure needs from the
network layer to managing the performance of their business applications. With
21 internet data centers located on four continents (13 of which are located in
the U.S. with a capacity of 420 thousand square feet of web hosting space), our
hosting services provide a flexible, managed environment of network, server and
security infrastructure as well as built-in data storage. Our suite of managed
hosting services includes application performance management, database
management, hardware and operating system management, intelligent content
distribution services, high availability data and computing services, storage
services, managed security and firewall services. Our web hosting services also
include a range of business tools, including client portal services that provide
managed hosting customers with personalized, secure access to detailed reporting
information about their infrastructure and applications.

High availability and security services. Our high availability and
security services deliver integrated solutions to enable the continuous
operations of clients' critical business processes and availability of critical
data and includes business continuity and disaster recovery services.

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

WE OFFER TRANSPORT SERVICES TO OTHER CARRIERS

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

HOW DO WE MARKET OUR SERVICES?

We market our business voice and data communications services through our
global sales and marketing organization of approximately 6,800 sales
representatives. The sales and marketing group also uses several

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outside telemarketing firms as well as a number of other marketing agents. In
addition, our solution center provides a centralized resource for complex
customer requirements.

HOW DO WE CARE FOR OUR CUSTOMERS?

Our customer care handles contracting, collections, ordering, provisioning
and maintenance processes worldwide. In the U.S. there are over 12,000 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, we provide customer care services and support
through dedicated account teams. Through a dedicated customer care website
customers may submit questions or initiate service requests, including ordering
new services or submitting maintenance requests.

HOW DO WE CHARGE FOR OUR SERVICES?

We provide the majority of our services through long term contracts.
General descriptions of our 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 our 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, we also provide
customers with such features as single billing, unified services for
multi-location companies and customized calling plans. Most intrastate regulated
services are provided in accordance with applicable tariffs filed with the
states.

WHAT IS OUR NETWORK?

Our U.S. network is comprised of approximately 55,000 route miles of
long-haul backbone fiber optic cable, plus over 21,000 additional route miles of
local metropolitan fiber, capable of carrying high speed (10 billion bits or 10
gigabits per second) traffic. AT&T Business Services upgraded this fiber
network, recently completing the installation of over 14,000 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 substantial capacity for potential future growth of network traffic
with low incremental capital expenditure requirements. In addition, we also have
approximately 750 points-of-presence in the continental U.S. with the majority
served by high speed fiber-based technology offering high speed data
connectivity to the majority of U.S. business centers.

On an average business day, our business network, which also supports
Consumer Services, handles a total of more than 400 million voice calls, as well
as over 3,800 trillion bytes (terabytes) of data. On the voice network, we
employ our patented Real Time Network Routing to automatically complete domestic
voice calls through more than 100 possible routes. The reliability of certain
portions of the network is maximized by using synchronous optical network
(SONET) rings that can restore service following a network failure within 50 to
60 milliseconds by reversing the flow of traffic on the ring. On other routes,
we use our patented FASTAR(R) technology to route traffic around a fiber optic
cable cut using spare transport capacity elsewhere on the network. Most
recently, we have deployed intelligent optical switches across the network to
expand our ability to rapidly and automatically restore network traffic that
might be otherwise affected by a cable cut or equipment failure.

We have been deploying dense wavelength division multiplexing (DWDM)
technology that divides the signal carried by an optical fiber into multiple
wavelengths, each now carrying up to 10 gigabits per second of information. When
DWDM was introduced in 1996, the technology could transmit only eight different
wavelengths on a fiber strand. We are currently deploying 64- and 80-wavelength
DWDM systems, as well as systems capable of carrying 160 wavelengths 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 we employ 140 of these
switches in our network. We have recently installed 68 of the latest high
performance

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carrier-grade voice switches that allow us to accommodate the transition from
circuit-switched to packet networks. We will continue to have both circuit and
packet switching technologies for some time.

In addition to our long distance network, we have an extensive local
network serving business customers in 91 U.S. cities. Our local network now
includes 158 local switches and reaches more than 6,400 buildings with over
8,200 metropolitan SONET rings. This network provides voice service and high
speed data connections to business users. In order to maximize asset
utilization, our local network also handles consumer traffic, providing most of
the dial-in numbers for our AT&T Worldnet service.

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

WHAT IS OUR STRATEGY FOR OUR NETWORKS AND SYSTEMS?

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

HOW DO WE OPERATE INTERNATIONALLY?

We have entered into a number of agreements with international
communications companies in order to provide customers end-to-end network
management capabilities and highly customized solutions. We have investments in
several foreign communications companies as summarized below. In addition, we
have built out our new Multi Protocol Label Switching/Asynchronous Transfer
Mode, or MPLS/ATM, global network to 129 cities in 47 countries, with further
investments planned for 2004 to supplement, and eventually replace, our other
extensive global data networks.

Alestra. S. de R.L. de C.V. We own 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 3,625
route miles, with four interconnection points to our network at the U.S.-Mexico
border.

In November 2003, Alestra consummated a voluntary debt restructuring
pursuant to which $200 million principal amount of debt was tendered by
Alestra's bondholders to Alestra in exchange for $110 million in cash.
Additionally, Alestra's interest payments on its remaining outstanding
indebtedness were lowered. The restructuring was primarily financed by a cash
capital contribution from Alestra's shareholders in the amount of $100 million,
with our pro rata share being approximately $49 million.

AT&T Latin America Corp. On August 28, 2000, we established AT&T Latin
America in connection with the consolidation of several Latin American companies
to provide voice, data and internet access services in five countries. In April
2003, a secured creditor of AT&T Latin America commenced a Chapter 11 proceeding
against it. By way of the Chapter 11 proceeding, on February 24, 2004, Telefonos
de Mexico S.A. de C.V. or Telmex, completed its purchase of substantially all of
AT&T Latin America's assets. On February 25, 2004, AT&T Latin America's Chapter
11 plan of liquidation became effective, and pursuant to the plan our ownership
interest in AT&T Latin America (69% economic interest and approximately 95%
voting interest) was extinguished. Except for certain trade receivables, under
the plan of liquidation, we will not receive any of the proceeds of the sale of
assets to Telmex or any other distributions from the bankruptcy estate in
respect of either our equity ownership in AT&T Latin America or other amounts
owned to us by AT&T Latin America for borrowed money or otherwise.

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

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WHAT IS AT&T LABS?

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

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

We actively pursue patents, trademarks and service marks to protect our
intellectual property within the U.S. and abroad. We received over 300 patents
throughout the world in 2003 and maintain a global portfolio of over 5,000
trademark and service mark registrations.

AT&T CONSUMER SERVICES SEGMENT

WHAT SERVICES DO WE OFFER?

WE OFFER LONG DISTANCE SERVICES

We provide interstate and intrastate long distance telecommunications
services throughout the continental U.S. and provide, or join in providing with
other carriers, telecommunications services to and from Alaska, Hawaii, Puerto
Rico and the Virgin Islands and international telecommunications services to and
from virtually all nations and territories around the world. Consumers can use
our domestic and international long distance services through traditional "one
plus" dialing of the desired call destination, through dial-up access or through
use of our calling cards.

In the continental U.S., we provide long distance telecommunications
services over our backbone network. As of December 31, 2003, we had 30.3 million
stand-alone long distance customers.

WE OFFER BUNDLED LOCAL AND LONG DISTANCE SERVICES

At the end of 2003, we offered customers combined local and long distance
services in portions of 24 states. We handle all aspects of the phone service
for the customer, including ordering, customer service, billing, repair and
maintenance. We also offer many of the same local calling features as the
incumbent local exchange carriers, such as call waiting and caller ID. As of
December 31, 2003, we had 3.9 million bundled local and long distance customers.

WE OFFER CALLING CARD SERVICES

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

WE OFFER TRANSACTION-BASED SERVICES

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

Prepaid cards. We are the leading provider of domestic prepaid card
services. Our prepaid cards provide local, long distance and international calls
charged to a prepaid card account maintained on our prepaid platform. Our
prepaid cards are available in over 60,000 retail locations. The majority of
AT&T Consumer's prepaid card sales in 2003 were to Wal-Mart Stores, Inc. under
an agreement with a one-year term, and the

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sales to that customer comprised approximately 6% of our consumer revenue and
over 60% of our prepaid card revenue. The agreement is currently scheduled to
expire in January 2005 but could be subject to early termination if certain
events occur. During 2003, we sold or recharged more than 75 million prepaid
cards.

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

1-800CALLATT(R) (Collect). 1-800CALLATT for collect calls is our 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 an
extra charge.

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

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

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

10-10-345(SM) service. 10-10-345 is a non-AT&T-branded dial-around service
that allows customers an alternative way to make a long distance call. 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.

WE OFFER INTERNET SERVICES

We offer dial-up and DSL internet access to consumers with our AT&T
Worldnet service, a leading provider of internet access services in the U.S.
AT&T Worldnet service offers internet-based communications services such as
e-mail, content, and personal web pages. As of December 31, 2003, we had
approximately 1.4 million AT&T Worldnet, dial-up or DSL customers.

Our AT&T Worldnet service seeks to build brand recognition and customer
loyalty. In addition to direct marketing through mass advertising, direct mail
and bundling offers, AT&T Worldnet service maintains an indirect channel
marketing effort through which AT&T Worldnet service software is bundled in new
computers produced by major manufacturers.

On January 6, 2003, we announced an extension of an existing agreement with
data services provider Covad Communications Group, Inc. to broaden availability
of the AT&T DSL service. Under this arrangement, we are pursuing DSL resale
service relationships with 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. In 2003, we were also the first to launch "linesplit"
capabilities to allow customers to receive both local service and DSL service
from us. By end of year 2003, we offered this combined local service and DSL
capability in 11 states.

WE INTEND TO OFFER RESIDENTIAL VOIP SERVICES

We announced in December 2003 that we intend to roll out a residential
broadband VoIP offering in major cities across the U.S. in 2004, beginning in
select MSAs in the first quarter of 2004. We have been conducting a trial of
residential VoIP services since October 2003 in three states offering trial
participants unlimited nationwide calling and the opportunity to test our array
of new, enhanced information services, including advanced call management
capabilities and special web-based features. The success of the trial has
resulted in our decision to launch our new consumer VoIP offering in key markets
across the U.S. in 2004.

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HOW DO WE MARKET OUR SERVICES AND CARE FOR OUR CUSTOMERS?

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

We rely on an integrated sales and service team to solicit and handle
customer contact opportunities. Our customer care centers consist of a network
of 22 service centers, of which 9 are operated by AT&T and 13 are outsourced to
outside vendors. The breadth of support provided by the centers ranges from
universal service to specialized services based on functional area or customer
needs. In addition, over 10 languages are supported within our customer care and
service functions and access to over 120 languages is available through
outsourced vendors.

We are continuing to implement various initiatives aimed at improving the
overall quality of our sales channels as well as lowering our costs of adding
new subscribers, including the expansion of our on-line capacity and
capabilities, including billing, sales and service, and the increased use of
interactive voice response technology. We are also pursuing the use of e-mail to
create a more convenient, interactive relationship with the consumer, while
streamlining our existing processes and reducing the costs of providing
services. Our global website provides services in seven languages.

WHAT SPECIAL OFFERS DO WE USE TO MARKET OUR SERVICES?

We offer long distance customers a family of calling plans. Currently,
there are two leading domestic 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 long distance calls nationwide from home, at all times. The
second is the AT&T Unlimited(R) plus plan, which offers our residential long
distance subscribers unlimited intralata and interlata long distance calls for
$24.95 per month.

For international intensive customers, we offer Unlimited Country(R)
service, which allows customers to make unlimited calls from home to select
countries at a fixed price per month. The fixed price charged varies by country,
ranging from $39.95 to $49.95 per month. For customers with different calling
needs, international city specific rates may be found with our AnyHour
Advantage(R) plan starting as low as $3.95 per month.

In addition to our stand-alone long distance offers, we offer a range of
local calling plans which offers consumers unlimited local and their choice of
various calling feature options. The prices of these plans vary by state and by
package. The AT&T OneRate(R) USA plan offers consumers unlimited local and
unlimited long distance from home at a fixed price per month. The fixed price
varies by state, ranging from $41.95 to $59.95 per state.

We also offer various reward and partnership programs for higher spending
local and long distance customers. For example, customers enrolled in our
rewards program receive redemption options every six months based on their
qualified spending. Our relationships with third parties enable us to provide
customers with options ranging from airline miles to hotel nights to retail gift
cards.

HOW DO WE CHARGE FOR OUR SERVICES?

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

9

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

Customers for combined long distance and local services are usually charged
a flat rate per month for local service and a separate monthly rate for each
additional feature not included in the local service option selected by the
customer. Usage fees and/or monthly charges are charged for long distance. AT&T
Worldnet service offers a variety of pricing plan options. Generally, customers
are charged a flat rate for a certain number of hours with charges for each
additional hour of usage. AT&T Worldnet service also offers a plan without a
usage restriction.

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

OTHER MATTERS

WHAT LEGISLATIVE AND REGULATORY DEVELOPMENTS ARE IMPORTANT TO US?

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

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

On August 21, 2003, the FCC issued its decision in the proceeding it had
initiated to review the availability of unbundled network elements based on
current market conditions (Triennial Review) and adopted a new unbundling
framework. Under the new framework, each state commission was authorized to
conduct a granular analysis of local market conditions, using criteria provided
by the FCC, to make final unbundling determinations. In the same order, the FCC
also granted the incumbent local exchange companies significant broadband
deregulation, concluding that the incumbent LECs were no longer required to
unbundle fiber-to-the-home loops or bandwidth in hybrid copper fiber loops for
the provision of mass market competitive broadband services. The FCC also
eliminated all line-sharing obligations. Aspects of the FCC's order were
appealed to the U.S. Court of Appeals for the District of Columbia Circuit. On
March 4, 2004, the court vacated a number of the FCC rulings, including the
FCC's delegation to state commissions of decisions over impairment as applied to
mass market switching and certain transport elements, and the FCC's finding that
the need for so called "hot cuts" created a nationwide impairment justifying
access to mass market switching. The majority of the FCC commissioners adopting
the Triennial Review rulings relating to mass market services have announced
that they will seek a stay of the Court's decision and seek review by the U.S.
Supreme Court.

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On September 15, 2003, the FCC established a proceeding to determine
whether any changes are necessary to the pricing methodology (commonly known as
the TELRIC methodology) that the state PUCs must use in setting rates that we
and other carriers must pay for leasing unbundled network elements or facilities
from the incumbent local exchange carriers.

The FCC and various states have begun to consider whether and to what
extent VoIP communications should be subject to regulation like traditional
telecommunications services, including whether VoIP services should be subject
to access charges, 911 obligations, and universal service funding obligations.
The FCC currently has pending before it petitions requesting guidance on VoIP
services, including petitions from us, Vonage Holdings Corporation, and Level 3
Communications LLC. The FCC has initiated a rulemaking proceeding to address
VoIP issues.

In 2004, Congress is expected to closely review the state of
telecommunications competition with special emphasis on examining the regulatory
treatment of emerging VoIP services, reforms to the universal service and
inter-carrier compensation regimes and the regulatory framework for promoting
the deployment of broadband services. It is highly uncertain whether any
consensus will be reached on any legislative proposals related to these topics
prior to Congressional adjournment.

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.

Congress may enact a moratorium on the taxation of internet access in 2004.
While the length of the moratorium and whether broadband access will be covered
are unsettled, enactment of a moratorium will promote the continued growth of
the internet by reducing taxes on internet access providers.

In view of the proceedings pending before the courts, the FCC and state
PUCs, and possible legislation, there can be no assurance that the prices and
other conditions established by the FCC and in the various states will provide
for effective local service competition or will not adversely affect our ability
to continue to serve existing markets or enter new markets.

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

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

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

Access charges are subject to the regulatory jurisdiction of the FCC and
state commissions. In May 2000, the FCC adopted the CALLS order for the price
cap local exchange carriers, which made significant access and price cap
changes. The CALLS order reduced, by $3.2 billion during 2000, the interstate
access charges that we and other long distance carriers paid to these local
exchange carriers for access to their networks, and

11

established target access rates, which in subsequent years resulted in further
reductions, albeit of a much smaller magnitude. 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. One aspect of the
CALLS order relating to higher end user charges imposed by local exchange
carriers is pending on appeal in the U.S. Court of Appeals for the District of
Columbia Circuit, where oral argument was held November 24, 2003.

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

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

Sprint PCS, a wireless carrier, sued us for access charges for our long
distance calls terminated on Sprint PCS' network and for toll-free calls that
Sprint PCS customers originated and which were terminated on our network. We
refused to pay Sprint PCS based on the longstanding industry practice between
wireless and long distance carriers that the carrier that bills for a service
keeps the payment. In July 2002, the FCC ruled that wireless carriers such as
Sprint PCS are not prohibited from charging us access charges, but that we were
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. Because there was no express contract between
us 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. We contend that the court cannot
find an implied contract, because it would require the court to establish a
wireless access rate, a matter that is preempted by the Communications Act, and
because the facts confirm that no such contract was formed. An adverse decision
in this litigation may result in additional wireless carriers seeking similar
compensation from us. We believe the case is without merit and intend 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, and provides subsidies for
internet access and inside wiring to schools and libraries. Specifically, the
FCC expanded the set of carriers that must contribute to support universal
service from solely long distance carriers to all carriers, including local
exchange carriers, that provide interstate telecommunications services.
Similarly, the set of carriers eligible for the universal service support has
been expanded from only local exchange carriers to any eligible carrier
providing local service to a customer, including us as a new entrant in local
markets. The mechanism used to collect universal service contributions relied on
historical revenues, which disproportionately shifted the burden of these
programs from carriers that are growing market share to carriers that are losing
market share, like us, in the long distance market. In December 2002, the FCC
reformed the universal service assessment mechanism so that, effective April
2003, it is based on projected revenues, which eliminates the disadvantage that
we previously experienced. The December 2002 order also limited how carriers
would be able to reflect universal service fees on their end user customers'
bills and permitted alternative recovery mechanisms for administrative costs.

12

HOW AND WITH WHOM DO WE COMPETE?

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

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

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

For example, the Telecommunications Act permits regional phone companies to
provide in-region interLATA interexchange services after demonstrating to the
FCC that providing these services is in the public interest and satisfying the
conditions for developing local competition established by the
Telecommunications Act. The regional phone companies had successfully obtained
FCC approval to offer long distance in all of the states by the end of 2003.
Because substantial numbers of long distance customers seek to purchase local,
interexchange and other services from a single carrier as part of a combined or
full service package, any competitive disadvantage, inability to profitably
provide local service at competitive rates or delays or limitations in providing
local service or combined service packages could materially adversely affect our
future revenue and earnings.

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

WHO ARE OUR EMPLOYEES?

On December 31, 2003, we employed approximately 61,600 persons in our
operations, approximately 92% of whom are located domestically. Unions represent
about 36% of the domestically located employees. Of those so represented, about
95% are represented by the Communications Workers of America, which is
affiliated with the AFL-CIO; about 4% by the International Brotherhood of
Electrical Workers, which is also affiliated with the AFL-CIO. In addition,
there is a very small remainder of domestic employees represented by other
unions. Labor agreements covering most of these employees extend through
December 2005.

On December 31, 2003, AT&T Business Services employed approximately 45,500
individuals in its operations. Of those employees, approximately 41,300 are
located domestically. Unions represent about 25% of the domestically located
employees of AT&T Business Services.

13

On December 31, 2003, AT&T Consumer Services employed approximately 11,300
individuals in its operations, virtually all of whom are located in the U.S.
Unions represent about 78% of the domestically located employees of AT&T
Consumer Services.

SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION

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

WHAT INFORMATION IS AVAILABLE ABOUT OUR COMPANY?

Shareowners may access and download free of charge via a hyperlink on our
website at www.att.com/ir copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports. These documents are generally available on the same day they are
electronically filed with or furnished to the Securities and Exchange
Commission. Shareowners may also access and download free of charge our
corporate governance documents, including our Code of Conduct, our Code of
Ethics for Chief Executive Officer and Senior Financial Officers, our Corporate
Governance Guidelines, and the charters of our Audit Committee, Compensation and
Employee Benefits Committee and Governance and Nominating Committee. In
addition, any shareowner who wishes to obtain a print copy of any of these
documents should write to: AT&T Corp., Investor Relations Department, One AT&T
Way, Bedminster, New Jersey 07921.

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

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

Tax Considerations. If AT&T or AT&T Broadband/Comcast Corporation were to
engage in certain issuances of shares or change of control transactions
occurring generally within the two-year period following the date of the
spin-off, we could incur material federal income tax liabilities with respect to
the spin-off. AT&T Broadband/Comcast has 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 us.
Moreover, under an agreement between us and AT&T Broadband/Comcast, we generally
will be entitled to indemnification for any tax liability that results from the
spin-off failing to qualify as a tax-free transaction, unless, the tax liability
was caused by post or spin-off transactions of AT&T. AT&T Broadband/ Comcast's
indemnification obligation is generally limited to 50% of any tax liability that
results from the spin-off failing to qualify as tax free, unless such liability
was caused by a post spin-off transaction of AT&T Broadband/Comcast. To the
extent we were entitled to an indemnity with respect to such tax liability, we
would be required to collect the claim on an unsecured basis.

Because of restrictions imposed by Section 355(e) of the Internal Revenue
Code, our ability to enter into certain transactions involving the issuance of
significant amounts of its stock may be limited. Under agreements between us and
AT&T Broadband/Comcast, we generally have 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 opinion or ruling from the IRS, in each case in form and
substance reasonably satisfactory to AT&T Broadband/

14

Comcast. We believe that the practical impact of these restrictions has
diminished significantly with the passage of time.

Litigation. Pursuant to agreements entered into with its former units, we
share in the cost of certain litigation (relating to matters arising while the
units were affiliated with AT&T) if the settlement exceeds certain thresholds.
For example, in connection with a settlement in 2002 of Sparks v. AT&T, a class
action against AT&T, Lucent Technologies and other defendants filed in 1996,
pursuant to agreements between us and Lucent Technologies, we are responsible
for our proportionate share of the settlement and estimated legal costs. We
anticipate that this amount may total as much as $33 million, net of tax.
Similarly, pursuant to agreements between AT&T and NCR Corp., we are potentially
responsible for a portion of any award or settlement relating to the
environmental proceedings brought by certain federal and state governmental
agencies arising out of the presence of polychlorinated biphenyls (PCBs) in
sediments in the lower Fox River and in the Bay of Green Bay, in Wisconsin (Fox
River). NCR was identified as a potentially responsible party because PCBs were
purportedly discharged from two carbonless copy paper manufacturing facilities
it previously owned, which are located along the Fox River. With the exception
of the Sparks and the Fox River matters, as of December 31, 2003, we have made
the assessment that none of the potential litigation liabilities relating to
matters arising while the units were affiliated with AT&T were probable of
incurring costs in excess of the threshold above which we would be required to
share in the costs. However, in the event these former units were unable to meet
their obligations with respect to these liabilities due to financial
difficulties, we could be held responsible for all or a portion of the costs,
irrespective of the sharing agreements.

Guarantees. From time to time we have guaranteed to third parties the debt
or other obligations of our former units, and in some cases may remain
secondarily liable with respect to such obligations. In addition, in connection
with the split-off or spin-off of our former units, we have issued guarantees to
third parties for certain debt or other obligations of our former units. For
example, in connection with the split-off of AT&T Wireless, we issued a
guarantee in the amount of $3.65 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 our former units are unable to meet
obligations which we have guaranteed, the third parties could look to us for
payment.

WHAT SPECIAL CONSIDERATIONS SHOULD INVESTORS CONSIDER?

Investors should carefully consider the following factors regarding their
investment in our 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. We expect
these trends to continue, and we may need to continue to reduce prices in the
future. In addition, we do not expect that we will be able to achieve increased
traffic volumes in the near future to sustain current revenue levels. The extent
to which each of our businesses, financial condition, results of operations and
cash flow could be materially adversely affected will depend on the pace at
which these industry-wide changes continue.

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

- market share loss and loss of key customers;

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

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

- difficulties in AT&T Business Services' and AT&T Consumer 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.

15

We Face Competition from a Variety of Sources.

- We traditionally have competed with other long distance carriers. In
recent years, we have begun to compete with regional phone companies,
which own their own access facilities and historically have dominated
local telecommunications, and with other competitive local exchange
carriers for the provision of local and long distance services. Regional
phone companies now have received permission to offer long distance
services in all of the states within their regions. The regional phone
companies presently have numerous advantages as a result of their
historic monopoly control over local exchanges and facilities. Some of
the regional phone companies have financial, personnel and other
resources significantly greater than ours. In addition, the regional
phone companies are able to offer bundled products and services in
certain states that we are unable to match . To the extent consumers
prefer bundled offers (such as those offers that include local, long
distance and wireless services), we will be at a disadvantage to certain
of our competitors, including the regional phone companies.

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

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

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

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

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

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

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

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

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

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

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

16

In the U.S., 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 we lease in the U.S. 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 us with new market opportunities.

Our Financial Condition and Prospects May be Materially Adversely Affected
by Further Ratings Downgrades. In July 2003, our long-term credit ratings were
lowered by both Standard & Poor's (S&P) and Fitch to BBB from BBB+. S&P removed
the ratings from CreditWatch. Our commercial paper ratings were affirmed by S&P
and Fitch at A-2 and F-2, respectively. On July 24, 2003, Moody's affirmed our
current ratings at Baa2 for long term and P-2 for short term. Moody's continues
to hold our outlook at negative. In January 2004, S&P and Fitch lowered our
commercial paper rating to A-3 and F-3, respectively. Both S&P and Fitch view
our outlook as negative. Additionally, in January, Fitch downgraded the
long-term rating to BBB-. None of our ratings are currently under review or on
CreditWatch for further downgrade. Further debt rating downgrades could require
us to pay higher rates on certain existing debt and post cash collateral for
certain interest rate and equity swaps if we are in a net payable position.
Further ratings actions could occur at any time. If our debt ratings are further
downgraded, our access to the capital markets may be restricted or such
replacement financing may be more costly or have additional covenants than we
had in connection with our debt in December 2003. In addition, the market
environment for financing in general, and within the telecommunications sector,
in particular, has been adversely affected by economic conditions and
bankruptcies of other telecommunications providers. If the financial markets
become more cautious regarding the industry/ratings category we operate in, our
ability to obtain financing would be further reduced and the cost of any new
financings may be higher.

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

17

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

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

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

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

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

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

- the availability and cost of capital,

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

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

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

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

- the risks associated with the repurchase by us of debt or equity
securities, which may adversely affect our liquidity or creditworthiness,

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

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

ITEM 2. PROPERTIES

WHAT DO WE OWN?

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

18

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

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

ITEM 3. LEGAL PROCEEDINGS

HOW MIGHT PENDING LEGAL PROCEEDINGS AFFECT US?

In the normal course of business, we are subject to proceedings, lawsuits
and other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties and outcomes are not predictable with assurance. Consequently, we
are unable to ascertain the ultimate aggregate amount of monetary liability or
financial impact with respect to these matters on December 31, 2003. While these
matters could affect operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to us beyond that provided for at
year-end would not be material to our annual consolidated financial position or
results of operations.

We have been named as a defendant in a consolidated group of purported
securities class action lawsuits filed in the United States District Courts for
the District of New Jersey filed on behalf of persons who purchased our common
stock from October 25, 1999 through May 1, 2000. These lawsuits assert claims
under Section 10(b) and Rule 10b-5 and Section 20(a) of the Securities Exchange
Act of 1934, as amended, and allege, among other things, that during the period
referenced above, we made materially false and misleading statements and omitted
to state material facts concerning our future business prospects. The
consolidated complaint seeks unspecified damages. Similar claims have been
asserted by plaintiffs against us in two derivative actions, which were
dismissed by the New Jersey federal court on January 7, 2004. We believe that we
have meritorious defenses against these actions, and we intend to defend them
vigorously.

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

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

Through a former subsidiary, we owned approximately 23% of the outstanding
common stock and 74% of the voting power of the outstanding common stock of At
Home Corporation (At Home), which filed for

19

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

In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, and the
directors of At Home, Cox and Comcast. The lawsuits claim that the defendants
breached fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the Board of
Directors of At Home was reorganized, and we agreed to give Cox and Comcast
rights to sell their At Home shares to us. These actions have been consolidated
by the court and are subject to a stay. AT&T's liability for any such suits
would be shared equally between us and Comcast. In March 2002 a purported class
action was filed in the United States District Court for the Southern District
of New York against, inter alia, AT&T and certain of its senior officers
alleging violations of the federal securities law in connection with the
disclosures made by At Home in the period from April 17 through August 28, 2001
(the 2002 Lawsuit). A second purported class action was filed in the United
States District Court for the Southern District of New York in the summer of
2003 (the 2003 Lawsuit) by the same attorneys who had filed the 2002 Lawsuit.
The complaint in the 2003 Lawsuit asserts allegations similar to those asserted
in the complaint of the 2002 Lawsuit. The 2003 Lawsuit adds At Home as a
defendant. We believe that these lawsuits are without merit and intend to defend
them vigorously.

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

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 our relationship with ATTLA,
including our decision to discontinue funding to ATTLA and an alleged change in
our plan to enter into a tax sharing agreement with ATTLA. The plaintiffs seek
unspecified damages. We believe that these lawsuits are without merit and intend
to defend them vigorously. On March 12, 2004, the Delaware Chancery Court
granted AT&T's motion to dismiss these claims. Plaintiffs may appeal the
judgment.

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

More than thirty class actions have been brought against us throughout the
country in which the plaintiffs have asserted superior property rights with
respect to railroad right-of-way corridors on which we have installed fiber
optic cable under agreements with the various railroads. Although we deny any
liability, we have engaged in settlement negotiations concerning the so called
"active line" claims that have been consolidated and are pending in Indiana
federal court. We have settled claims on a state-by-state basis and obtained
final approval for separate settlements of such claims in Ohio, Connecticut,
Wisconsin, Maryland and Virginia. In addition, in second quarter 2004, we
anticipate that the parties will request preliminary approval of similar "active
line" settlements in Delaware, Massachusetts, Michigan, West Virginia and Idaho.
We also anticipate

20

using these settlements as a template for settling "active line" claims in other
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
us 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 FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREOWNER MATTERS AND
ISSUER PURCHASERS OF EQUITY SECURITIES

Our common stock (ticker symbol "T") is listed on the New York Stock
Exchange, as well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia
exchanges in the U.S., and on the Euronext-Paris and the IDR (International
Depository Receipt) in Brussels as well as the London and Geneva stock
exchanges. As of December 31, 2003, we had approximately 792 million shares
outstanding, held by approximately 2.7 million shareowners.

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

21

ITEM 6. SELECTED FINANCIAL DATA

AT&T CORP. AND SUBSIDIARIES

SUMMARY OF SELECTED FINANCIAL DATA(1)

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

(1) Certain prior year amounts have been reclassified to conform to the 2003
presentation.

(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 percentage of total
capital, excluding discontinued operations and LMG, (debt plus equity,
excluding LMG and discontinued operations).

(4) Data provided excludes LMG.

22

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

AT&T CORP. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

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

- financial condition,

- results of operations,

- cash flows,

- dividends,

- financing plans,

- business strategies,

- operating efficiencies,

- capital and other expenditures,

- competitive positions,

- availability of capital,

- growth opportunities for new and existing products,

- benefits from new technologies,

- availability and deployment of new technologies,

- plans and objectives of management, and

- other matters.

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

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

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

23

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

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

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

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

- the availability and cost of capital,

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

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

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

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

- the risks associated with the repurchase by us of debt or equity
securities, which may adversely affect our liquidity or creditworthiness,

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

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

The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations for the years ended December 31, 2003, 2002 and 2001, and
financial condition as of December 31, 2003 and 2002.

OVERVIEW

AT&T Corp. (AT&T) has undertaken significant changes to its business in
recent years. In 2002, we spun off our broadband business and in 2001 we spun
off our wireless business. Today, we are in the midst of transforming our
business from a predominantly voice-services business to a more diversified
telecommunications and networking provider.

However, the communications industry we operate in continues to be fraught
with economic and competitive challenges, reflecting significant changes the
industry is undergoing. Industry dynamics that have impacted us include years of
excess investment that has led to overcapacity and lower prices.

Our 2003 results reflect the impacts of this challenging environment. We
continue to see declines in long distance voice revenue, which has long been the
mainstay of our business. For 2003, stand-alone long distance voice services
accounted for approximately one-half of our total revenue compared with nearly
two-thirds in 2001.

We offer a growing list of services to businesses of all sizes, government
agencies and residential customers. Our product set includes stand-alone long
distance voice services, local voice services, data services, Internet Protocol
(IP) and enhanced services, as well as a variety of bundled offerings that
package long-distance voice, local voice, wireless and Internet services. In
addition, we believe our balance sheet
24

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

provides us with a competitive advantage. During 2003, we increased our
quarterly dividend by 27% and reduced our total debt by $8.2 billion. At the
same time, we ended 2003 with $4.4 billion in cash. We believe the strength of
our balance sheet provides us with the flexibility to continue to make
investments in our business that will drive further process enhancements and
operating improvements.

Within AT&T Business Services, we provide long distance voice services to
retail customers and wholesale customers. The retail business has experienced
declines in long distance voice revenue as a result of lower volumes reflecting
a competitive market and wireless and email substitution. Lower volumes can also
be attributed to a weak economy that has affected many of the sectors in which
our customers operate, such as financial services and travel. Although retail
long distance voice volumes have declined, overall long distance voice volumes
have increased due to demand for wholesale long distance voice services created
largely by wireless industry growth. As a result, our wholesale business has
grown, and in 2003 accounted for approximately 50% of AT&T Business Services
total long distance voice volumes compared with approximately 37% in 2002. Our
wholesale business represents sales of long distance voice services to resellers
such as other long distance companies, local phone services providers, wireless
carriers and cable companies, which are typically at a much lower rate per
minute than retail. Although it costs us less to service a wholesale customer
than a retail customer, the wholesale business generally has a lower operating
income margin than the retail business due to lower pricing.

AT&T Consumer Services long distance voice business has experienced similar
trends as those of AT&T Business Services. Stand-alone long distance voice
services revenue has continued to decline due to competition and technology
substitution (customers using wireless or Internet services in lieu of a
wireline call). We have introduced lower-priced calling plans to which many of
our customers have migrated. In addition, customers are migrating to bundled
calling plans that, while negatively impact stand-alone long distance revenue,
positively contribute to growth in bundled revenue, although generally to a
lesser degree, as bundled long distance pricing is lower.

Due to the intense competition in long distance voice services, it is
evident we must continue to diversify and grow our non-long distance voice
products and persist in our cost reduction efforts. We continue to identify
services customers want and stand ready to provide them. We recently rolled out
products such as Wi-Fi (Wireless Fidelity), Switched Ethernet Service and
VoiceTone. All of these products demonstrate our intention to lead the industry
in the next generation of technology. They also demonstrate how we are
leveraging technological innovation to transform the way networking is done,
allowing customers to focus on their core competencies. We continue to roll out
bundled offers to consumers and small businesses, with our unlimited local and
long distance plans of AT&T One Rate USA(SM) for consumers and AT&T All in One
Advantage(SM) Plan for small businesses. During 2003, we experienced revenue
growth in advanced services of Internet Protocol (IP) and enhanced services and
business local voice. We also saw continued success in our consumer bundled
offer. For the fourth quarter of 2003, bundled revenue represented nearly 27% of
total AT&T Consumer Services revenue compared with approximately 13% for the
fourth quarter of 2002. Since these new product offerings are lower priced, and
in some instances have not generated volumes necessary for economies of scale,
they are significantly lower margin products. As a result of this, coupled with
the industry dynamics, we expect an operating income margin in 2004 of six to
eight percent compared with 10.6% in 2003. In addition, in light of the
potential acquisition of AT&T Wireless, we are evaluating opportunities to offer
an AT&T branded wireless product. These opportunities include reselling another
company's wireless service under the AT&T Wireless name. We believe this will
enhance the bundled offers we currently have.

We also have concentrated on, and will continue to concentrate on cost
reductions, particularly within costs of services and products, and selling,
general and administrative (SG&A) expenses. The ratio of total costs of services
and products and SG&A to revenue was essentially flat from 2002 to 2003
reflecting this focus. Contributing to this trend was a total headcount
reduction of 13%, which partially benefited 2003, but

25

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

will more significantly benefit 2004. Much of this headcount reduction was
facilitated by the investments we made to streamline our processes that allowed
us to cut costs, while also enhancing the customer experience. During 2003, we
made improvements in cycle times (complete time to install a customer's service)
and on-time measures (the percentage of time we meet the customer's installation
date), both of which contribute to customer satisfaction.

One of the other ways we manage our costs is to continue to improve the
efficiency of our network. We are in the midst of a multi-year plan to develop a
network technology based in IP called Multiprotocol Label Switching, or MPLS. In
the next few years, we plan to have a fully MPLS-enabled backbone network in all
locations worldwide. Instead of operating separate networks for different types
of data and voice traffic, all traffic types will travel over a single core
network. A network based on IP supports faster provisioning times, thus enabling
customers to be brought online more quickly. We expect that an MPLS-based
network will require less capital expenditures to expand its capabilities and
incur less costs to develop and operate than today's network.

Other costs such as access and other connection expenses, which represent
the costs we pay to other services providers to connect calls using their
facilities, are not as much within our control given they are based on rates
generally set by governmental agencies. Many of these costs are volume driven
and as volumes of lower-priced services increase, these costs as a percentage of
revenue increase, generating a negative impact to profit margins. In order to
control these costs, we continually search for alternate ways of connecting to
our customers. Such initiatives include directly connecting more buildings to
our network, thereby allowing us to avoid paying access charges. We are also
rolling out Voice over Internet Protocol, or VoIP, as an alternative to paying
terminating access fees to local exchange carriers as Internet traffic is not
currently regulated as a telephone service and is therefore not presently
subject to access charges. However, VoIP is an area that is receiving scrutiny
by the FCC and could become regulated, which would eliminate some or all of the
access cost savings we expect to receive. However, VoIP is still a more
efficient use of the network than the traditional circuit switched transport and
is expected to reduce network costs. In 2004, we intend to aggressively market a
full suite of VoIP-enabled services to business customers worldwide via our MPLS
network. For consumers, we intend to launch a VoIP offer in key markets in the
second quarter of 2004.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

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

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

ESTIMATED USEFUL LIVES OF PLANT AND EQUIPMENT -- We estimate the useful
lives of plant and equipment in order to determine the amount of depreciation
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 for each individual asset
as would be utilized under the unit method. The estimated life of the group
changes as the composition of the group of assets changes and their related
lives. Such estimated life of the group is based on historical experience with
similar assets, as well as taking into account anticipated technological or
other changes. If technological changes were to occur more rapidly than
anticipated or in a
26

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

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 expected, the life of the
group could be extended based on the life assigned to new assets added to the
group. This could result in a reduction of depreciation 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 $0.6 billion and $0.4 billion, respectively. We review these types
of assets for impairment whenever events or circumstances indicate that the
carrying amount may 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."

ACCESS AND LOCAL CONNECTIVITY COSTS -- We use various estimates and
assumptions to determine the amount of access and local connectivity costs
recognized during any reporting period. Switched access costs are accrued
utilizing estimated rates by product, formulated from historical data and
adjusted for known rate changes and volume levels, which are estimated for
certain products and known for other products. Such estimates are adjusted
monthly to reflect newly available information, such as rate changes and new
contractual agreements. Bills reflecting actual incurred information are
generally not received until three months subsequent to the end of the reporting
period, at which point a final adjustment is made to the accrued switched access
expense. Dedicated access costs are estimated based on the number of circuits
and the average projected circuit costs, based on historical data adjusted for
rate changes. These costs are adjusted to reflect actual expenses over the three
months following the end of the reporting period as bills are received. As of
December 31, 2003, approximately $0.7 billion was accrued relating to our
estimated switched and dedicated access costs.

RECOVERY OF GOODWILL -- In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," we review goodwill for impairment annually, or more
frequently if an event occurs or circumstances change that would more likely
than not reduce the fair value of our business enterprise below its carrying
value. The impairment test requires us to estimate the fair value of our overall
business enterprise down to the reporting unit level. We estimate fair value
using both a discounted cash flows model, as well as an approach using market
comparables, both of which are weighted equally to determine fair value. Under
the discounted cash flows method, we utilize estimated long-term revenue and
cash flows forecasts developed as part of our planning process, as well as
assumptions of terminal value, together with an applicable discount rate, to
determine fair value. Under the market approach, fair value is determined by
comparing us to similar businesses (or guideline companies). Selection of
guideline companies and market ratios require management's judgment. The use of
different assumptions within our discounted cash flows model or within our
market approach model when determining fair value could result in different
valuations for goodwill. As a result of our annual testing for this year, no
impairment of goodwill was indicated.

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 2003, we used an expected long-term rate of return of 8.5%; this rate
remains unchanged for 2004. In determining this 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. The actual average return on pension plan assets
over the last 10 and 15 years has been 11.2% and 11.4% per annum, respectively.
The expected return on plan assets is determined by applying the expected
long-term rate of return to the market-related value of plan assets. Asset gains
and losses resulting from actual returns that differ from our expected returns
are recognized in the market-related value
27

AT&T CORP. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)

of assets 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,
2003, was approximately $19.5 billion, about $0.1 billion lower than the related
fair value of plan assets. The expected return on assets of the pension and
postretirement benefit plans included in 2003 operating income was income of
$1.6 billion. Holding all other factors constant, a 50 basis point decrease or
increase in the expected long-term rate of return on plan assets would have
decreased or increase