10-K

                                                                               .
                                                                               .
                                                                               .

                       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:



TITLE OF EACH CLASS                                     NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------                                     -----------------------------------------
                                                  
Common Shares                                        New York, Boston, Chicago,
  (Par Value $1 Per Share)                           Philadelphia and Pacific
                                                     Stock Exchanges
Ten Year 6 3/4% Notes, due April 1, 2004
Ten Year 7 1/2% Notes, due April 1, 2004
Ten Year 7% Notes, due May 15, 2005
Twelve Year 7 1/2% Notes, due June 1, 2006
Twelve Year 7 3/4% Notes, due March 1, 2007          New York Stock Exchange
Ten Year 6% Notes due March 15, 2009
6 1/2% Notes due March 15, 2013
Thirty Year 8.35% Debentures, due January 15, 2025
Thirty Year 6 1/2% Notes due March 15, 2029



                                     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.

                                        1


     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)".

                                        2


                         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.

                                        3


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

                                        4


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

                                        5


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.

                                        6


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

                                        7


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.

                                        8


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.

                                        10


     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)



                                2003      2002       2001       2000       1999      1998       1997       1996
                               -------   -------   --------   --------   --------   -------   --------   --------
                                                                  (UNAUDITED)
                                                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                                 
RESULTS OF OPERATIONS AND
  EARNINGS PER SHARE
Revenue......................  $34,529   $37,827   $ 42,197   $ 46,850   $ 49,609   $47,287   $ 46,226   $ 45,716
Operating income.............    3,657     4,361      7,832     12,793     12,544     7,632      6,835      8,341
Income (loss) from continuing
  operations.................    1,863       963     (2,640)     9,532      6,019     4,915      4,088      5,064
INCOME (LOSS) FROM CONTINUING
  OPERATIONS
AT&T Common Stock Group:(2)
  Income.....................  $ 1,863   $   963   $     71   $  8,044   $  8,041   $ 4,915   $  4,088   $  5,064
  Earnings (loss) per basic
    share....................     2.37      1.29      (0.91)     11.54      13.04      9.18       7.65       9.60
  Earnings (loss) per diluted
    share....................     2.36      1.26      (0.91)     11.01      12.61      9.10       7.65       9.60
  Cash dividends declared per
    share....................     0.85      0.75       0.75     3.4875       4.40      4.40       4.40       4.40
Liberty Media Group:(2)
  (Loss) income..............       --        --     (2,711)     1,488     (2,022)       --         --         --
  (Loss) earnings per basic
    and diluted share........       --        --      (1.05)      0.58      (0.80)       --         --         --
ASSETS AND CAPITAL
Property, plant and
  equipment, net.............  $24,376   $25,604   $ 26,803   $ 26,083   $ 25,587   $21,780   $ 19,177   $ 16,871
Total assets -- continuing
  operations.................   47,988    55,437     62,329     90,293     89,554    40,134     41,029     38,229
Total assets.................   47,988    55,437    165,481    242,802    169,499    59,550     67,690     63,669
Long-term debt...............   13,066    18,812     24,025     13,572     13,543     5,555      7,840      8,861
Total debt...................   14,409    22,574     34,159     42,338     25,091     6,638     11,895     11,334
Shareowners' equity..........   13,956    12,312     51,680    103,198     78,927    25,522     23,678     21,092
Debt ratio(3)................     50.8%     64.7%      86.3%     122.1%      83.7%     36.7%      57.2%      61.6%
OTHER INFORMATION
Employees -- continuing
  operations(4)..............   61,600    71,000     77,700     84,800     96,500    94,500    116,800    117,100
AT&T year-end stock price per
  share......................  $ 20.30   $ 26.11   $  37.19   $  27.57   $  80.81   $ 79.88   $  65.02   $  43.91


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

(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 increased 2003 operating income by approximately $0.1 billion.

     Another significant estimate is the discount rate used in the annual
actuarial valuation of pension and postretirement benefit plan obligations. In
determining the appropriate discount rate at year end, we considered the current
yields on high quality corporate fixed-income investments with maturities
corresponding to the expected duration of the benefit obligations. As of
December 31, 2003, we reduced the discount rate 50 basis points to 6.0%. Changes
to the discount rate do not have a material impact on our results of operations,
however, the discount rate does impact the benefit obligations. Holding all
other factors constant, a 50 basis point decrease or increase in the discount
rate would increase or decrease the projected benefit obligation by
approximately $0.8 billion.

     INCOME TAXES -- Assessment of the appropriate amount and classification of
income taxes is dependent on several factors, including estimates of the timing
and probability of realization of deferred income taxes and the timing of income
tax payments. Deferred income taxes are provided for the effect of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for income tax purposes.
We measure deferred tax assets and liabilities using enacted tax rates that, if
changed, would result in either an increase or decrease in the provision for
income taxes in the period of change. A one-percentage point increase in the
enacted federal income tax rate as of December 31, 2003, would decrease net
income by approximately $0.1 billion. A valuation allowance is recorded when it
is more likely than not that a deferred tax asset will not be realized. In
assessing the likelihood of realization, management considers estimates of
future taxable income, the character of income needed to realize future tax
benefits, and all available evidence. Actual income taxes could vary from
estimated amounts due to the future impacts of various items, including changes
in income tax laws, our financial condition and results of operations in future
periods, as well as final review of our tax returns by taxing authorities,
which, as a matter of course, are regularly audited by federal, state and
foreign tax authorities.

     LEGAL CONTINGENCIES -- We are currently involved in certain legal
proceedings and have accrued amounts as appropriate that represent our estimate
of the probable outcome of these matters. The judgments we make with regard to
whether to establish a reserve are based on an evaluation of all relevant
factors by internal and external legal counsel, as well as subject matter
experts. The relevant factors analyzed include an analysis of the complaint,
documents, testimony and other materials as applicable. The damages claimed in
most legal proceedings are not a meaningful predictor of actual potential
liability because the amounts claimed generally have little or no relationship
to the actual damages suffered or sustained. In certain cases, the plaintiff may
not have asserted a specified amount of damages. Claims are continually
monitored and reevaluated as new information is obtained. We may not establish a
liability for a particular matter until long after the litigation is filed, once
a liability becomes probable and estimable. The actual settlement of such
matters could differ from the judgments made in determining how much, if any, to
accrue. In addition, we may be responsible for a portion of certain legal
proceedings associated with former affiliates pursuant to separation and
distribution agreements. Such agreements require us to share in the cost of
certain litigation (relating to matters while affiliated with AT&T) if a
judgment or settlement exceeds certain thresholds. However, in the event these
former subsidiaries are unable to meet their obligations with respect to these
liabilities due to financial difficulties, we could be held responsible for all
or a portion of these costs, irrespective of the sharing agreements.

                                        28

                          AT&T CORP. AND SUBSIDIARIES

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

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

CONSOLIDATED RESULTS OF OPERATIONS

     The comparison of 2003 results with 2002 results was impacted by the April
1, 2002 unwind of Concert, our joint venture with British Telecommunications plc
(BT). The venture's assets and customer accounts were distributed back to the
parent companies. As a result, revenue and expenses associated with these
customers and businesses are included in our results of operations for the full
year of 2003, as compared with nine months in 2002, from April 1, 2002 through
December 31, 2002. For the first quarter of 2002, our proportionate share of
Concert's earnings and related charges are included in net losses related to
other equity investments.

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

     Our consolidated financial statements reflect AT&T Broadband and AT&T
Wireless as discontinued operations. AT&T Broadband was spun-off on November 18,
2002, and AT&T Wireless was split-off on July 9, 2001. Accordingly, the revenue,
expenses and cash flows of AT&T Broadband and AT&T Wireless have been excluded
from the respective captions in the Consolidated Statements of Operations and
Consolidated Statements of Cash Flows, and have been reported through their
respective dates of separation as net (loss) from discontinued operations and as
net cash (used in) provided by discontinued operations.

  REVENUE



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
AT&T Business Services..................................   $24,992     $26,558     $27,705
AT&T Consumer Services..................................     9,484      11,527      14,843
Corporate and Other.....................................        53        (258)       (351)
                                                           -------     -------     -------
Total revenue...........................................   $34,529     $37,827     $42,197
                                                           =======     =======     =======


     Total REVENUE decreased 8.7%, or $3.3 billion, in 2003 compared with 2002,
and decreased 10.4%, or $4.4 billion, in 2002 compared with 2001. The decrease
in both years was largely driven by continued declines in stand-alone long
distance voice revenue of $4.0 billion in 2003 and $5.3 billion in 2002,
reflecting competition, which has led to lower prices and loss of market share,
as well as the impact of substitution by consumers, partially offset by strength
in business wholesale volumes. Total long distance voice volumes (including long
distance volumes sold as part of a bundled offer) increased approximately 4% for
2003 as

                                        29

                          AT&T CORP. AND SUBSIDIARIES

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

growth in lower-priced business wholesale more than offset the declines in
business retail and consumer long distance volumes. Total long distance volumes
decreased approximately 3% in 2002 due to declines in consumer long distance
coupled with slight growth in business volumes, as growth in wholesale was
largely offset by a decline in retail volumes. Also contributing to the decline
in total revenue for 2003 was lower outsourcing and professional services of
$0.5 billion and lower data services revenue of $0.4 billion in AT&T Business
Services.

     Partially offsetting the decline in total revenue was an increase in
bundled services revenue (primarily local and long distance voice) in AT&T
Consumer Services of approximately $0.9 billion in 2003 and $0.2 billion in
2002. Also positively contributing to total revenue was AT&T Business Services
local revenue, which increased $0.3 billion in 2003 and $0.1 billion in 2002 and
IP & enhanced services revenue, which increased $0.2 billion in 2003 and $0.3
billion in 2002. The 2002 variances include a positive impact attributable to
the reintegration of customers and assets from the unwind of Concert.

     In 2004, we expect total revenue to decline 7 to 10% resulting from
continued declines in stand-alone long distance voice revenue due to ongoing
competition and product substitution, partially offset by growth in our local
voice services revenue.

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

  OPERATING EXPENSES



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
Access and other connection.............................   $10,797     $10,790     $12,085
Costs of services and products..........................     7,625       8,363       8,621
Selling, general and administrative.....................     7,379       7,988       8,064
Depreciation and amortization...........................     4,870       4,888       4,559
Net restructuring and other charges.....................       201       1,437       1,036
                                                           -------     -------     -------
Total operating expenses................................   $30,872     $33,466     $34,365
                                                           =======     =======     =======
Operating income........................................   $ 3,657     $ 4,361     $ 7,832
Operating margin........................................      10.6%       11.5%       18.6%


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

     Access and other connection expenses increased 0.1%, or $7 million, in 2003
compared with 2002. Access charges for 2003 included a $0.1 billion access
expense adjustment to reflect the proper estimate of the liability relating to
access costs incurred in 2001 and 2002. See note 17 to the consolidated
financial statements
                                        30

                          AT&T CORP. AND SUBSIDIARIES

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

for additional information. Excluding this adjustment, access and other
connection expenses declined $0.1 billion driven by a decline in domestic access
charges of $0.5 billion in 2003, primarily due to more efficient network usage
and product mix aggregating $0.4 billion. In addition, the decline was due to
lower Universal Service Fund contributions of $0.2 billion resulting from the
decline in long-distance voice revenue and lower per-line charges of $0.1
billion due to a decline in customer levels. These declines in domestic access
charges were partially offset by higher costs of $0.2 billion as a result of
overall long distance volume growth. Also contributing to the decline in access
and other connection expenses were lower international connection charges of
$0.1 billion, primarily as a result of lower rates. These declines were
partially offset by an increase in local connectivity costs of $0.5 billion,
primarily due to local subscriber increases resulting from new state entries and
growth in existing markets.

     In 2004, we expect domestic access expense and international connection
costs to be lower than in 2003 due to our ongoing efforts to more efficiently
manage our network and negotiate lower rates, as well as from continued changes
in product mix, partially offset by increased local connectivity costs as we
continue to grow our local voice business.

     Access and other connection expenses decreased 10.7%, or $1.3 billion, in
2002 compared with 2001. Domestic access charges declined $1.0 billion driven by
lower Universal Service Fund contributions and per-line charges of $0.5 billion,
which were primarily driven by the decline in long distance voice revenue and
lower customer levels. In addition, domestic access charges decreased $0.5
billion primarily due to product mix and FCC mandated access rate reductions.
International connection charges decreased approximately $0.4 billion driven
primarily by lower rates and the reintegration of customers and assets from the
unwind of Concert. These reductions were partially offset by an increase in
local connectivity costs of $0.1 billion.

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

     Costs of services and products decreased $0.7 billion, or 8.8%, in 2003
compared with 2002. Approximately $0.6 billion of the decline was attributable
to the overall impact of lower revenue and related costs, including cost cutting
initiatives. Also contributing to the decline was a lower provision for
uncollectible receivables of $0.4 billion resulting from lower revenue and
improved collections as well as lower expenses of $0.1 billion resulting from
the deconsolidation of our AT&T Latin America subsidiary. These declines were
partially offset by $0.2 billion due to the impact of a weak U.S. dollar and
$0.1 billion of increased postretirement and pension costs resulting from a
lower expected long-term rate of return on plan assets and the effects of lower
actual plan assets.

     We expect that costs of services and products will continue to decline in
2004 driven both by lower expected revenue and our ongoing cost control efforts.

     In 2002, these costs decreased $0.3 billion, or 3.0%, compared with 2001.
Approximately $0.5 billion of the decrease was due to the overall impact of
lower revenue and related costs. In addition, costs decreased approximately $0.2
billion due to losses on certain long-term contracts recorded in 2001 by AT&T
Business Services. These decreases were partially offset by an increase of $0.1
billion in AT&T Business Services' provision for uncollectible receivables
primarily attributable to the weak economy. Costs of services and products also
increased as a result of the reintegration of customers and assets from the
unwind of Concert.

     SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES decreased $0.6 billion,
or 7.6%, in 2003 compared with 2002. The decline was primarily attributable to
cost control efforts throughout AT&T, as well as reduced customer care volumes
at AT&T Consumer Services resulting from a reduction in the number of
residential customers, totaling $0.6 billion. Cost control efforts included
headcount reductions, lower long distance and brand advertising and promotional
spending, and other process improvements. In addition, expenses decreased $0.1
billion in connection with the deconsolidation of AT&T Latin America. Such
declines were partially
                                        31

                          AT&T CORP. AND SUBSIDIARIES

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

offset by $0.1 billion of increased pension and postretirement costs primarily
resulting from a lower expected long-term rate of return on plan assets in 2003
and the effects of lower actual plan assets, as well as approximately $0.1
billion of increased marketing, customer care and sales expenses associated with
new local service offerings by AT&T Consumer Services.

     We expect that our SG&A expenses will continue to decline in 2004, as we
continue to focus on further cost reduction efforts.

     SG&A expenses decreased $0.1 billion, or 0.9%, in 2002 compared with 2001.
This decrease was driven by a reduction in the number of residential customers
as well as cost control efforts of $0.7 billion, and lower transaction costs of
$0.2 billion associated with the AT&T restructuring. Partially offsetting these
decreases was $0.3 billion of lower pension credits (income) primarily due to a
lower expected long-term rate of return on plan assets and the effects of lower
actual plan assets, and $0.3 billion associated with increased marketing and
sales expenses for new local consumer service offerings and increased investment
for business sales and customer care development. SG&A expenses also increased
as a result of the reintegration of customers and assets from the unwind of
Concert.

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

     In 2004, we expect depreciation and amortization expenses to remain
relatively flat compared with 2003 as lower expenses resulting from reduced
levels of capital expenditures in recent years will essentially be offset by
increased expenses associated with the shortening of lives of certain network
assets in connection with our development of an IP-based network.

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

     Total capital expenditures were $3.4 billion, $3.9 billion and $5.6 billion
for 2003, 2002 and 2001, respectively. The 2003 amount includes $0.4 billion
recorded in connection with the adoption of Financial Accounting Standards Board
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities -- an
Interpretation of Accounting Research Bulletin No. 51." The decreases in
expenditures were primarily due to less spending on infrastructure related
projects, as many projects were completed in 2002, partially offset by increased
spending on capitalized software related to process improvements and initiatives
to improve the customer experience. During 2003, approximately one-quarter of
our spending related to capitalized software. We continue to focus the majority
of our capital spending on our advanced services offerings of IP&E services and
data services, both of which included managed services, as well as local voice
services. We expect capital expenditures to be approximately $2.5 billion in
2004.

     In 2003, NET RESTRUCTURING AND OTHER CHARGES of $0.2 billion primarily
consisted of separation costs associated with our management realignment
efforts. The net charge included $0.1 billion related to AT&T Business Services,
$26 million related to AT&T Consumer Services and $38 million related to the
Corporate and Other group. The separations were involuntary and impacted
approximately 2,000 managers, more than 90% of which have exited the business as
of December 31, 2003. These activities were partially offset by the reversal of
$17 million of excess vintage employee separation liabilities. These exit plans
did not yield cash savings (net of severance benefit payouts) or a benefit to
operating income (net of the restructuring charge
                                        32

                          AT&T CORP. AND SUBSIDIARIES

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

recorded) in 2003, however, we expect to realize approximately $0.3 billion of
cash savings and benefit to operating income in subsequent years, when the exit
plan is completed.

     As we continue to evaluate our cost structure and improve processes,
further workforce reductions are anticipated to occur during 2004, and are
expected to result in the recognition of additional charges.

     In 2002, net restructuring and other charges were $1.4 billion. The net
charge included $1.2 billion related to AT&T Business Services, $0.2 billion
related to AT&T Consumer Services and $23 million related to the Corporate and
Other group.

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

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

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

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

     During 2001, net restructuring and other charges of $1.0 billion were
primarily comprised of $0.9 billion for employee separations, of which $0.4
billion related to benefits to be paid from pension assets as well as pension
and postretirement curtailment losses, and $0.2 billion for facility closings.
The restructuring and exit plans supported our cost reduction efforts through
headcount reductions across all segments of the business, primarily network
support and customer care functions in AT&T Business Services. These charges
were slightly offset by the reversal of $33 million related to business
restructuring plans announced in the fourth quarter of 1999 and the first
quarter of 2000 (of which $15 million related to employee separations and $18
million related to contract terminations). The net charge consisted of $0.6
billion related to AT&T Business Services, $31 million related to AT&T Consumer
Services and $0.4 billion related to the Corporate and Other group. The charge
covered separation costs for approximately 10,000 employees, approximately
one-half of whom were management and one-half were non-management employees.
More than 9,000 employee separations related to involuntary terminations and the
remaining 1,000 were voluntary.
                                        33

                          AT&T CORP. AND SUBSIDIARIES

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



                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                             2003        2002         2001
                                                            -------     -------     ---------
                                                                  (DOLLARS IN MILLIONS)
                                                                           
Other income (expense), net...............................   $191        $(77)       $1,327


     OTHER INCOME (EXPENSE), NET, in 2003 was income of $0.2 billion compared
with expense of $0.1 billion in 2002. The favorable variance of $0.3 billion can
primarily be attributed to $0.3 billion of lower impairment charges recorded in
2003 compared with 2002. In 2002, due to the occurrence of several airline
bankruptcies, write downs were recorded on certain aircraft leases that are
accounted for as leveraged leases. In 2003, ongoing difficulties in the airline
industry resulted in the write downs of the residual values of certain aircraft.
The lower impairment charges related to these leases and aircraft in 2003
compared with 2002 favorably impacted other income by $0.2 billion in 2003.
Also, in 2003, investment-related impairment charges declined $0.1 billion,
primarily driven by the impairment of Time Warner Telecom in 2002. Our
investment in Time Warner Telecom was subsequently sold in 2003. Further
contributing to the favorable other income variance was higher
investment-related income of $0.1 billion, largely reflecting improved market
returns on certain holdings. Partially offsetting these favorable variances were
losses of $0.1 billion on the early call and repurchase of long-term debt in
2003. This loss was comprised of $0.3 billion associated with the early call and
repurchase of long-term debt instruments, partially offset by a $0.2 billion
gain on the early retirement of exchangeable notes that were indexed to AT&T
Wireless common stock. Also offsetting the favorable variance was a decline in
settlements associated with disposed businesses, primarily reflecting
reimbursements from Comcast Corporation (Comcast) in 2002 in connection with the
debt exchange completed in conjunction with the spin-off of AT&T Broadband.

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

     Other income (expense), net, in 2002 was expense of $0.1 billion compared
with income of $1.3 billion in 2001. The unfavorable variance of $1.4 billion
was primarily due to $1.2 billion of higher net gains on sales of businesses and
investments in 2001, including gains on the sale of AT&T's retained interest in
AT&T Wireless and Japan Telecom. The unfavorable variance was also due to
impairments of $0.2 billion recorded in 2002 related to certain leases of
aircraft that are accounted for as leveraged leases, $0.2 billion of lower
income related to mark-to-market adjustments on derivative instruments and lower
investment-related income of $0.2 billion, reflecting the declines in the stock
market. Favorably impacting other income (expense), net, were lower investment
impairment charges of $0.4 billion in 2002, primarily driven by lower impairment
charges for Time Warner Telecom. In 2001 and 2002, as a result of significant
changes in the general business climate as evidenced by the severe downward
movement in the U.S. stock market, including the decline in the value of
publicly-traded industry stocks, we recorded an other-than-temporary investment
impairment on our investment in Time Warner Telecom.



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
Interest (expense)......................................   $(1,158)    $(1,448)    $(1,493)


     INTEREST EXPENSE decreased $0.3 billion, or 20.0%, in 2003 compared with
2002 and decreased $45 million, or 3.0%, in 2002 compared with 2001. The
declines in both periods are reflective of our deleveraging activities, which
included significant early debt redemptions during 2003 and virtually no net
debt issuances during both

                                        34

                          AT&T CORP. AND SUBSIDIARIES

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

2003 and 2002. Interest expense in 2002 compared with 2001 was adversely
affected by the $10 billion bond offering completed in November 2001. Further,
interest expense in 2003 was impacted by an interest rate step-up on such bonds
as a result of a long-term debt rating downgrade in 2002.

     We plan to complete additional early retirements of up to $3 billion in
debt during 2004. This, combined with the redemptions completed in 2003, will
result in the continued decline in interest expense during 2004.



                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                            ----------------------------------
                                                              2003        2002         2001
                                                            --------   ----------   ----------
                                                                  (DOLLARS IN MILLIONS)
                                                                           
(Provision) for income taxes..............................   $(816)     $(1,587)     $(2,890)
Effective tax rate........................................    30.3%        56.0%        37.7%


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

     The 2003 effective tax rate was positively impacted by approximately 5.3
percentage points due to the recognition of approximately $0.1 billion of tax
benefits associated with refund claims related to research and experimentation
tax credits generated in prior years. In addition, the 2003 effective tax rate
was positively impacted by the recognition of tax benefits in connection with
the exchange and sale of AT&T's remaining interest in AT&T Wireless common
stock.

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

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

     In 2002, we recorded a valuation allowance against the deferred tax asset
attributable to the book and tax basis difference for our investment in AT&T
Latin America. During February 2004, the subsidiaries of AT&T Latin America were
sold to Telefonos de Mexico S.A. de C.V., or Telmex, and the plan of liquidation
of AT&T Latin America became effective. As a result, we will reevaluate the need
for this valuation allowance and could record an income tax benefit of
approximately $0.3 billion in the first quarter of 2004.



                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2003    2002    2001
                                                              -----   -----   -----
                                                              (DOLLARS IN MILLIONS)
                                                                     
Minority interest income....................................   $1     $114    $131


     MINORITY INTEREST INCOME represents the net losses attributable to the
equity that minority holders have in less than 100% owned consolidated
subsidiaries of AT&T. In December 2002, the losses attributable to the minority
holders of AT&T Latin America exceeded the remaining equity of those minority
holders; therefore in 2003, losses of AT&T Latin America were no longer
allocated to the minority holders. Also in 2003, AT&T Latin America filed for
Chapter 11 bankruptcy and the AT&T appointed members of the AT&T Latin America
Board of Directors resigned. This resulted in the deconsolidation of AT&T Latin
America.

                                        35

                          AT&T CORP. AND SUBSIDIARIES

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



                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                           ----------------------------------
                                                             2003         2002         2001
                                                           --------     --------     --------
                                                                 (DOLLARS IN MILLIONS)
                                                                            
Equity (losses) from Liberty Media Group.................  $    --      $    --      $(2,711)


     EQUITY (LOSSES) FROM LMG, which are recorded net of income taxes, reflect
the results of LMG through July 31, 2001, the deemed effective date of the LMG
split-off into an independent, publicly-traded company. We redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. We did not have a controlling financial interest in LMG for
financial accounting purposes; therefore, our ownership in LMG was reflected as
an investment accounted for under the equity method.



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          --------------------------------
                                                           2003       2002         2001
                                                          ------     -------     ---------
                                                               (DOLLARS IN MILLIONS)
                                                                        
Net (losses) related to other equity investments........   $(12)      $(400)      $(4,836)


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

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



                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           ---------------------------------
                                                            2003        2002         2001
                                                           ------    ----------    ---------
                                                                 (DOLLARS IN MILLIONS)
                                                                          
Net (loss) from discontinued operations, net of income
  taxes..................................................   $(13)     $(14,513)     $(4,052)
Gain on disposition of discontinued operations...........   $ --      $  1,324      $13,503


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

                                        36

                          AT&T CORP. AND SUBSIDIARIES

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

37% of costs incurred by NCR beyond such $100 million threshold. All such
amounts are determined after reduction of any monies collected by NCR from other
parties.

     Net (loss) from discontinued operations in 2002 includes a loss of $14.5
billion from the discontinued operations of AT&T Broadband (which was primarily
comprised of the AT&T Broadband segment), which was spun-off to AT&T shareowners
on November 18, 2002. Simultaneously, AT&T Broadband combined with Comcast. The
combination was accomplished through a distribution of stock to AT&T
shareowners, who received 1.6175 shares of Comcast Class A common stock for each
share of AT&T they owned at market close on November 15, 2002, the record date.
Approximately 1.2 billion Comcast shares were issued to AT&T shareowners at a
value of approximately $31.1 billion, based on the Comcast stock price on
November 18, 2002. AT&T shareowners received a 56% economic stake and a 66%
voting interest in Comcast.

     Net (loss) from discontinued operations in 2002 also included an estimated
loss on the litigation settlement associated with the business of Lucent
Technologies Inc. (Lucent), which was spun-off from AT&T in 1996 and accounted
for as a discontinued operation. Sparks, et al. v. AT&T and Lucent et al., was a
class action lawsuit filed in 1996 in Illinois state court. On August 9, 2002, a
settlement proposal was submitted to and accepted by the court. In accordance
with the separation and distribution agreement between AT&T and Lucent, our
estimated proportionate share of the settlement and legal costs recorded in 2002
totaled $33 million after taxes ($45 million pretax). Depending upon the number
of claims submitted and accepted, the actual cost of the settlement may be
different than the amounts accrued. While similar consumer class actions are
pending in various state courts, the Illinois state court has held that the
class it certified covers claims in the other state court class actions.

     In 2001, net (loss) from discontinued operations included a loss of $4.2
billion from the discontinued operations of AT&T Broadband, and income of $0.2
billion from the discontinued operations of AT&T Wireless, which was split-off
from AT&T on July 9, 2001, as a separate, independently-traded company. All AT&T
Wireless Group tracking stock was converted into AT&T Wireless common stock on a
one-for-one basis and 1,136 million shares of AT&T Wireless common stock held by
AT&T were distributed to AT&T common shareowners on a basis of 1.609 shares of
AT&T Wireless for each AT&T share outstanding. We issued the AT&T Wireless
tracking stock in April 2000, to track the financial performance of AT&T
Wireless Group.

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

     In 2001, we realized a tax-free noncash gain on the disposition of
discontinued operations of $13.5 billion, representing the difference between
the fair value of the AT&T Wireless tracking stock at the date of the split-off
and our book value of AT&T Wireless.



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                           2003         2002          2001
                                                          ------       -------       ------
                                                                (DOLLARS IN MILLIONS)
                                                                            
Cumulative effect of accounting changes.................    $15         $(856)        $904


     When we adopt new accounting standards issued by the Financial Accounting
Standards Board, the impact of changing from the previous accounting principle
to the new accounting principle is recorded as the CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE.

                                        37

                          AT&T CORP. AND SUBSIDIARIES

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

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

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

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

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



                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                            2003         2002         2001
                                                           ------       ------       ------
                                                                (DOLLARS IN MILLIONS)
                                                                            
Dividend requirements of preferred stock.................  $  --        $  --        $(652)
Premium on exchange of AT&T Wireless tracking stock......  $  --        $  --        $ (80)


     DIVIDEND REQUIREMENTS OF PREFERRED STOCK in 2001 represented interest in
connection with convertible preferred stock issued to NTT DoCoMo in January of
2001, as well as accretion of the beneficial conversion feature associated with
this preferred stock. The beneficial conversion feature was computed upon the
issuance of the preferred stock to NTT DoCoMo and represented the excess of the
fair value of the preferred shares issued over the proceeds received. This
beneficial feature was being accreted over the time period NTT DoCoMo was
required to hold the shares. On July 9, 2001, in conjunction with the split-off
of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless
common stock. As a result, the beneficial conversion feature was fully accreted.

     In May 2001, we completed an exchange offer of AT&T common stock for AT&T
Wireless tracking stock. The PREMIUM ON THE EXCHANGE, which represented the
excess of the fair value of the AT&T Wireless tracking stock issued over the
fair value of the AT&T common stock exchanged, reduced net income available to
common shareowners.

                                        38

                          AT&T CORP. AND SUBSIDIARIES

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

SEGMENT RESULTS

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

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

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

     Our existing segments reflect certain managerial changes that were
implemented during 2003. The changes primarily include a redistribution of
property, plant and equipment from the Corporate and Other group to AT&T
Business Services and a transfer of deferred taxes from AT&T Consumer Services
to the Corporate and Other group.

     Based on a review of our management model in 2004, we plan to transfer our
remaining payphone business from the AT&T Consumer Services segment to the AT&T
Business Services segment, which will require the restatement of our segments.
Additionally, we will continue to review our management model and structure,
which may result in additional adjustments to our operating segments in the
future.

AT&T BUSINESS SERVICES

     AT&T Business Services provides a variety of global communications services
to small and medium-sized businesses, large domestic and multinational
businesses and government agencies. These services include long distance,
international, toll-free and local voice, including wholesale transport services
(sales of services to service resellers, including other long distance
companies, local service providers, wireless carriers and cable companies), as
well as data services and Internet protocol and enhanced (IP&E) services, which
includes the management of network servers and applications. Data services and
IP&E services are broad categories of services in which data (e.g., e-mail,
video or computer file) is transported from one location to another. Data
services includes bandwidth services (dedicated private line services through
high-capacity optical transport), packet services and managed data services. In
packet services, data is divided into efficiently sized components and
transported between packet switches until it reaches its final destination,
where it is reassembled. Packet services include frame relay and Asynchronous
Transfer Mode (ATM). IP&E services include all services that ride on the IP
common backbone or that use IP technology, including managed IP services, as
well as application services (e.g., hosting or security). Managed services
deliver end-to-end enterprise networking solutions by managing networks, servers
and applications. AT&T Business Services also provides outsourcing solutions and
other professional services.

                                        39

                          AT&T CORP. AND SUBSIDIARIES

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



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
Revenue(1)(2)
  Long distance voice...................................   $11,116     $12,254     $13,930
  Local voice...........................................     1,484       1,155       1,020
                                                           -------     -------     -------
Total voice.............................................    12,600      13,409      14,950
  Data services.........................................     7,882       8,260       8,128
  IP&E services.........................................     1,840       1,677       1,349
                                                           -------     -------     -------
Total data services and IP&E services...................     9,722       9,937       9,477
Outsourcing, professional services and other............     2,670       3,212       3,278
                                                           -------     -------     -------
Total revenue...........................................   $24,992     $26,558     $27,705
Operating income........................................   $ 1,888     $ 1,965     $ 3,573
Capital additions.......................................   $ 3,185     $ 3,716     $ 5,451




                                                              AT DECEMBER 31,
                                                           ---------------------
                                                             2003        2002
                                                           ---------   ---------
                                                           (DOLLARS IN MILLIONS)
                                                                 
Total assets.............................................   $34,202     $36,389


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

(1) Revenue in 2002 and 2001 includes internal revenue of $323 million and $441
    million, respectively, which represented sales to AT&T Broadband and AT&T
    Wireless through their dates of disposition. AT&T Broadband and AT&T
    Wireless were disposed of on November 18, 2002 and July 9, 2001,
    respectively. Subsequent to their dispositions, sales to AT&T Broadband, now
    Comcast, and AT&T Wireless are recorded as external revenue.

(2) Revenue includes equipment and product sales of $301 million, $379 million
    and $317 million in 2003, 2002 and 2001, respectively.

  REVENUE

     AT&T Business Services revenue decreased $1.6 billion, or 5.9%, in 2003
compared with 2002. The decline was primarily driven by a decline in long
distance voice services, decreased data services and lower outsourcing contract
revenue relating to contract terminations and renegotiations, partially offset
by growth in local voice services and IP&E services, which includes equipment
and product sales. Revenue growth in 2003 was negatively impacted by AT&T Latin
America, which was fully consolidated in 2002, but not in 2003. Total revenue in
2002 decreased $1.1 billion, or 4.1%, compared with 2001, also primarily
reflecting declines in long distance voice services, partially offset by growth
in IP&E services, data services and local voice services. Revenue growth in
2002, and to a lesser extent in 2003, was favorably impacted by the
reintegration of customers and assets from the unwind of Concert on April 1,
2002.

     Long distance voice revenue declined $1.1 billion, or 9.3%, in 2003
compared with 2002, and declined $1.7 billion, or 12.0%, in 2002 compared with
2001. The decline in both periods was driven by decreases in the average price
per minute in both the retail and wholesale businesses combined with a decline
in retail volumes, reflecting the impacts of competition and a weak economy.
Partially offsetting these declines was an increase, in both years, in
lower-priced wholesale minutes. Total long distance calling volumes grew
approximately 11% and 2%, in 2003 and 2002, respectively. The volume growth
differential in 2003 compared with 2002 is reflective of the acceleration in
2003 of wholesale minute growth.

     Data services revenue declined $0.4 billion, or 4.6%, in 2003 compared with
2002. The decline was primarily driven by competitive pricing pressure and weak
demand, primarily in data bandwidth services. The

                                        40

                          AT&T CORP. AND SUBSIDIARIES

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

decrease in data bandwidth is reflective of a rise in cancellation of private
line services, as customers continue to evaluate the overall efficiency and
effectiveness of their networks (network grooming), combined with the migration
to more cost-effective and technologically-advanced packet services and IP&E
services. Data services revenue increased $0.1 billion, or 1.6%, in 2002
compared with 2001, primarily reflecting increased sales in packet services,
partially offset by declining data bandwidth, primarily private line services.
Excluding equipment and product sales, data services revenue declined 4.4% in
2003 and increased 1.1% in 2002.

     IP&E services revenue increased $0.2 billion, or 9.7%, in 2003 compared
with 2002, and grew $0.3 billion, or 24.3%, in 2002 compared with 2001. The
increase in 2003 was primarily attributable to growth in our customer base
associated with web hosting, other advanced products such as IP-enabled frame
and E-VPN (Enhanced Virtual Private Network) and managed Internet services.
Increased equipment and product sales also contributed favorably to revenue
growth in 2003. The increase in 2002 was primarily driven by managed Internet
services. Excluding equipment and product sales, IP&E services revenue grew 8.1%
and 23.0%, in 2003 and 2002, respectively.

     Local voice services revenue grew $0.3 billion, or 28.4%, in 2003 compared
with 2002 and grew $0.1 billion, or 13.3%, in 2002 compared with 2001. The
growth in both periods reflects our continued focus on increasing the
utilization of our existing footprint. There were approximately 4.5 million, 3.6
million and 2.9 million access lines in service at the end of 2003, 2002 and
2001, respectively.

     In 2004, we expect AT&T Business Services revenue will decline 4 to 7% as
competitive pressures in long distance voice and data services continue,
combined with the ongoing shift in the retail/wholesale mix in long distance
voice services, which will be partially offset by growth in local voice and IP&E
services revenue.

  OPERATING INCOME

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

     In 2002, operating income decreased $1.6 billion, or 45.0%, compared with
2001, primarily due to the decrease in the long distance voice business
resulting from the impact of pricing pressures and a $1.0 billion impairment
charge recorded in 2002 for AT&T Latin America. These decreases were partially
offset by $0.4 billion in lower net business restructuring charges recorded in
2002 compared with 2001.

     Operating margin was 7.6%, 7.4% and 12.9% in 2003, 2002 and 2001,
respectively. The 2002 margin was negatively impacted by approximately 3.9
percentage points relating to the $1.0 billion AT&T Latin America asset
impairment charge. Adjusting 2002 for this item, the downward margin trend is
primarily reflective of the declining higher-margin long distance retail voice
business, coupled with growth of lower-margin advanced services and wholesale
services.

  OTHER ITEMS

     Capital additions were $3.2 billion, $3.7 billion and $5.5 billion for
2003, 2002 and 2001, respectively. The 2003 amount includes $0.2 billion
recorded in connection with the adoption of FIN No. 46. The declines in spending
were primarily due to less spending on infrastructure related projects, as many
projects were completed during 2002, partially offset by increased spending on
capitalized software related to process improvements and initiatives to improve
customer experience. During 2003, approximately one quarter of our spending
related to capitalized software. We continue to focus the majority of our
capital spending on our
                                        41

                          AT&T CORP. AND SUBSIDIARIES

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

advanced services offerings of IP&E services and data services, both of which
included managed services, as well as local voice services.

     Total assets decreased $2.2 billion, or 6.0%, at December 31, 2003,
compared with December 31, 2002. The decrease was primarily driven by lower net
property, plant and equipment as a result of depreciation during the period,
partially offset by capital expenditures. Also contributing to the decline was
lower accounts receivable resulting from lower revenue and improved cash
collections, and a decrease in other current assets as a result of the
deconsolidation of AT&T Latin America in the second quarter of 2003.

AT&T CONSUMER SERVICES

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



                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2003       2002        2001
                                                           --------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
Revenue
  Stand-alone long distance voice services and other.....   $7,485     $10,413     $13,973
  Bundled services.......................................    1,999       1,114         870
                                                            ------     -------     -------
Total revenue............................................   $9,484     $11,527     $14,843
Operating income.........................................   $2,062     $ 2,592     $ 4,698
Capital additions........................................   $   74     $   127     $   140




                                                              AT DECEMBER 31,
                                                           ----------------------
                                                             2003         2002
                                                           ---------   ----------
                                                           (DOLLARS IN MILLIONS)
                                                                           
Total assets.............................................   $1,062      $ 1,390


  REVENUE

     AT&T Consumer Services revenue declined $2.0 billion, or 17.7%, in 2003
compared with 2002, and declined $3.3 billion, or 22.3%, in 2002 compared with
2001. The decline in both periods was primarily due to stand-alone long distance
voice services, which decreased $2.9 billion in 2003 and declined $3.6 billion
in 2002, largely due to the impact of ongoing competition, which has led to a
loss of market share, and substitution. In addition, stand-alone long distance
voice services have been negatively impacted by the continued migration of
customers to lower priced optional calling plans and other products offered by
AT&T, such as bundled services. Partially offsetting the declines in stand-alone
long distance voice services were pricing actions taken, including a monthly fee
that we began billing in 2003 to recover costs, including certain access charges
and property taxes. Partially offsetting the overall decline was an increase in
bundled revenue, which increased $0.9 billion and $0.2 billion in 2003 and 2002,
respectively, reflecting an increase in subscribers primarily due to penetration
in existing markets, as well as the entry into new markets. We provided local
service to more than 3.9 million customers as of December 31, 2003, compared
with more than 2.4 million customers as of December 31, 2002. As of December 31,
2003, bundled local and long distance service was being offered in 24 states to
60.7 million households, compared with eight states and 32.2 million

                                        42

                          AT&T CORP. AND SUBSIDIARIES

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

households as of December 31, 2002. The increase in bundled revenue includes
amounts previously incorporated in stand-alone long distance voice revenue for
existing customers that migrated to bundled offers.

     Total long distance calling volumes (including long distance volumes sold
as part of a bundle) declined approximately 17% and 13% in 2003 and 2002,
respectively, as a result of competition and wireless and Internet substitution.
The 2002 volume decline was partially offset by an increase in prepaid card
usage.

     In 2003, approximately 6% of AT&T Consumer Services total revenue and more
than 60% of prepaid card revenue was related to a contract with Wal-Mart, Inc.,
which was renewed at the end of 2003. If this contract is not further renewed at
the next renewal date, January 31, 2005 (subject to early termination if certain
events occur), AT&T Consumer Services revenue would be adversely affected if we
are unsuccessful in selling the cards through a different channel. We expect
AT&T Consumer Services revenue to decline 15-17% in 2004 due to the ongoing
negative impacts of competition (including the continued penetration of Regional
Bell Operating Companies into the long distance market), substitution and
customer migration to lower-priced calling plans and products.

  OPERATING INCOME

     Operating income declined $0.5 billion, or 20.4%, in 2003 compared with
2002 and declined $2.1 billion, or 44.8%, in 2002 compared with 2001. Operating
margin declined to 21.7% in 2003 from 22.5% in 2002 and 31.6% in 2001. While
margins within our stand-alone long distance voice business have remained
relatively flat as a result of pricing actions and cost reduction initiatives,
stand-alone long distance has declined as a percentage of our total business.
Conversely, bundled services, which has a negative margin due to initial costs
incurred to enter new markets, has grown as a percentage of our total business.
The combination of these factors has resulted in total lower margins. The 2002
margin was also negatively impacted by an asset impairment charge related to
certain Digital Subscriber Line assets.

  OTHER ITEMS

     Total assets declined $0.3 billion to $1.1 billion at December 31, 2003,
primarily due to lower accounts receivable, reflecting lower revenue and
improved cash collections.

CORPORATE AND OTHER

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



                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           ---------------------------------
                                                             2003         2002        2001
                                                           ---------    ---------    -------
                                                                 (DOLLARS IN MILLIONS)
                                                                            
Revenue..................................................   $    53      $  (258)     $(351)
Operating (loss).........................................   $  (293)     $  (196)     $(439)
Capital additions........................................   $   223      $    63      $ 150




                                                               AT DECEMBER 31,
                                                            ---------------------
                                                              2003        2002
                                                            ---------   ---------
                                                            (DOLLARS IN MILLIONS)
                                                                           
Total assets..............................................   $12,724     $17,658


                                        43

                          AT&T CORP. AND SUBSIDIARIES

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

  REVENUE

     In 2003, Corporate and Other revenue was $0.1 billion compared with
negative $0.3 billion in 2002. The year-over-year change was primarily due to
lower eliminations of internal revenue in 2003 as a result of the spin-off of
AT&T Broadband in November 2002.

     In 2002, Corporate and Other revenue was negative $0.3 billion, compared
with negative $0.4 billion in 2001. The year-over-year change was primarily due
to lower internal revenue with AT&T Wireless due to its split-off on July 9,
2001, partially offset by an increase in internal revenue with AT&T Broadband.

  OPERATING (LOSS)

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

     Operating (loss) improved $0.2 billion to a deficit of $0.2 billion in 2002
compared with 2001. The improvement was largely due to lower business
restructuring charges, as well as lower transaction costs associated with AT&T's
restructuring announced in October of 2000, totaling $0.6 billion. These
operating (loss) improvements were partially offset by lower pension credit
(income) of $0.3 billion primarily driven by a lower long-term expected rate of
return on plan assets and the effects of lower actual plan assets.

  OTHER ITEMS

     Capital additions increased $0.2 billion in 2003 primarily due to property,
plant and equipment recorded in connection with the adoption of FIN No. 46.
Capital additions decreased $0.1 billion in 2002, primarily due to a decline in
the purchase of investments.

     Total assets decreased $4.9 billion, to $12.7 billion in 2003. The decrease
was primarily driven by a lower cash balance of $3.8 billion at December 31,
2003, primarily resulting from debt repayments during the year.

FINANCIAL CONDITION



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003        2002
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                    
Total assets................................................   $47,988     $55,437
Total liabilities...........................................   $34,032     $43,125
Total shareowners' equity...................................   $13,956     $12,312


     TOTAL ASSETS decreased $7.4 billion, or 13.4%, to $48.0 billion at December
31, 2003, compared with December 31, 2002. The decrease was largely driven by a
$3.7 billion decrease in cash and cash equivalents. The decrease was also
attributable to lower accounts receivable of $1.3 billion, primarily driven by
lower revenue and improved collections. Property, plant and equipment declined
$1.2 billion as a result of depreciation during the period, partially offset by
capital expenditures, including assets added as a result of the adoption of FIN
No. 46. In addition, other current assets declined $0.9 billion, primarily due
to the collection of income tax receivables principally as a result of losses on
our investment in AT&T Canada, the settlement of a foreign currency swap
associated with maturing debt as well as the deconsolidation of AT&T Latin
America. Other assets declined by $0.4 billion, primarily due to the disposal of
our interest in AT&T Wireless common stock, which had a carrying amount of $0.5
billion at December 31, 2002, a portion of which was used to redeem exchangeable
notes that were indexed to AT&T Wireless common stock and the remaining interest
was sold. In addition, other assets declined due to a reduction of the
intangible pension asset

                                        44

                          AT&T CORP. AND SUBSIDIARIES

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

associated with a revaluation of the minimum pension liability. These declines
in other assets were partially offset by increased mark-to-market adjustments on
foreign currency swaps, net of cash received.

     TOTAL LIABILITIES decreased $9.1 billion, or 21.1%, to $34.0 billion at
December 31, 2003, from $43.1 billion at December 31, 2002. The decrease was
primarily the result of $8.2 billion of lower debt, reflecting early retirements
of $5.9 billion in long-term debt, including exchangeable notes indexed to AT&T
Wireless common stock we owned, and $3.1 billion of scheduled repayments of
bonds, one-year notes and commercial paper. These reductions in debt were
partially offset by $0.8 billion of mark-to-market adjustments. Also
contributing to the decline in total liabilities was lower short-term and
long-term compensation and benefit-related liabilities of $0.8 billion due to a
revaluation of the minimum pension liability, as well as lower restructuring and
bonus accruals. Partially offsetting these decreases in total liabilities was an
increase in deferred taxes of $1.4 billion, primarily as a result of greater tax
deductions related to property, plant and equipment.

     TOTAL SHAREOWNERS' EQUITY increased $1.6 billion, or 13.3%, to $14.0
billion at December 31, 2003, from $12.3 billion at December 31, 2002. This
increase was primarily due to $1.9 billion of net income, partially offset by
dividends declared.

LIQUIDITY

  CASH FLOW OVERVIEW

     Cash and cash equivalents decreased $3.7 billion during 2003, to $4.4
billion, primarily reflecting over $9 billion in debt repayments, including
nearly $6 billion in early redemptions. Capital expenditures of $3.2 billion
also contributed to the cash decline. Cash generated by operating activities of
$8.5 billion partially offset this cash utilization.



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
Cash flows:
Provided by operating activities of continuing
  operations............................................   $ 8,530     $10,483     $10,005
(Used in) investing activities of continuing
  operations............................................    (3,101)     (1,429)     (4,295)
(Used in) financing activities of continuing
  operations............................................    (9,090)     (6,041)     (2,778)
(Used in) provided by discontinued operations...........        --      (5,679)      7,683
                                                           -------     -------     -------
Net (decrease) increase in cash and cash equivalents....   $(3,661)    $(2,666)    $10,615
                                                           =======     =======     =======


     Net cash provided by OPERATING ACTIVITIES of continuing operations of $8.5
billion for the year ended December 31, 2003, declined $2.0 billion, from $10.5
billion in 2002. This is reflective of the decline in our stand-alone long
distance voice and data businesses. This decline was partially offset by a $0.4
billion increase in income tax receipts and a $0.3 billion decline in interest
payments resulting from our ongoing deleveraging efforts. Our continued focus on
streamlining our processes and controlling costs also offset this decline.

     Net cash provided by operating activities of continuing operations
increased $0.5 billion during 2002 compared with 2001. Favorably impacting cash
flow in 2002 were income tax receipts of $0.8 billion compared with income tax
payments of $1.4 billion in 2001. The increase in cash generated by operating
activities was partially offset by a decrease in operating income reflective of
a declining stand-alone long distance voice business and an increase of
approximately $0.2 billion in severance and other payments associated with
separations.

     AT&T's INVESTING ACTIVITIES resulted in a net use of cash of $3.1 billion
in 2003, compared with $1.4 billion in 2002 and $4.3 billion in 2001. During
2003, we spent $3.2 billion on capital expenditures, made

                                        45

                          AT&T CORP. AND SUBSIDIARIES

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

payments of $0.2 billion to BT primarily associated with assets we assumed that
BT originally contributed to the Concert joint venture, and received $0.1
billion of proceeds from the sale of our remaining AT&T Wireless shares. During
2002, we spent $3.9 billion on capital expenditures, paid $3.4 billion to settle
the AT&T Canada obligation and received a $5.8 billion cash distribution from
AT&T Broadband in conjunction with its spin-off. In 2001, we spent $5.8 billion
on capital expenditures and received approximately $1.6 billion from the sales
of investments.

     During 2003, net cash used in FINANCING ACTIVITIES was $9.1 billion,
compared with $6.0 billion in 2002 and $2.8 billion in 2001. During 2003, we
made net payments of $9.2 billion to reduce debt, including early termination of
debt and paid dividends of $0.6 billion. Reflected as an other financing item
was the receipt of approximately $0.2 billion cash collateral related to
favorable positions of certain combined interest rate foreign currency swap
agreements, as well as $0.5 billion for the settlement of a combined interest
rate foreign currency swap agreement in conjunction with the scheduled repayment
of Euro debt in November 2003 (such repayment is included as retirement of
long-term debt).

     In 2002, we made net payments of $8.2 billion to reduce debt, paid
dividends of $0.6 billion, and received $2.7 billion from the issuance of AT&T
common stock, primarily due to the sale of 46 million shares in the second
quarter of 2002, the proceeds of which were used in October 2002 to settle a
portion of our obligation to the AT&T Canada shareholders. During 2001, we made
net debt payments of $6.5 billion, paid AT&T Wireless $5.8 billion to settle an
intercompany loan in conjunction with its split-off from AT&T, and paid
dividends of $0.5 billion. Partially offsetting these outflows in 2001 was the
receipt of $9.8 billion from the issuance of convertible preferred stock to NTT
DoCoMo.

  WORKING CAPITAL AND OTHER SOURCES OF LIQUIDITY

     At December 31, 2003, our working capital ratio (current assets divided by
current liabilities) was 1.11.

     At December 31, 2003, we had a $2.0 billion syndicated 364-day credit
facility available to us that was entered into on October 8, 2003. This credit
facility provides the option to extend the term of the agreement for an
additional 364-day period beyond October 7, 2004. Up to $0.3 billion of the
facility can be utilized for letters of credit, which reduces the amount
available. As of December 31, 2003, approximately $0.1 billion of letters of
credit were issued under the facility. Additionally, the credit facility
contains a financial covenant that requires AT&T to meet a debt-to-EBITDA ratio
(as defined in the credit agreement) not exceeding 2.25 to 1 and an
EBITDA-to-net interest expense ratio (as defined in the credit agreement) of at
least 3.50 to 1 for four consecutive quarters ending on the last day of each
fiscal quarter. At December 31, 2003, we were in compliance with these
covenants. Pursuant to the definitions in the facility, business restructuring
and asset impairment charges have no impact on the EBITDA financial covenants in
the credit facility.

     In July 2003, we renewed our AT&T Consumer Services 364-day customer
accounts receivable securitization facility and entered into a new AT&T Business
Services 364-day customer accounts receivable securitization facility. At
December 31, 2003, together the programs provided $1.65 billion of available
financing, limited by the eligible receivables balance, which varies from month
to month. In early March 2004, AT&T reduced the combined facility size to $1.45
billion, limited by the eligible receivables balance. Proceeds from the
securitizations are recorded as borrowings and included in short-term debt. At
December 31, 2003, approximately $0.2 billion was outstanding. The facilities
require AT&T to meet a debt-to-EBITDA ratio (as defined in the agreements) not
exceeding 2.25 to 1, which we were in compliance with at December 31, 2003. The
new facilities do not include a provision contained in the previous facilities
that required the outstanding balances to be paid by the collection of the
receivables in the event AT&T's ratings were downgraded below investment grade.

                                        46

                          AT&T CORP. AND SUBSIDIARIES

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

     We anticipate continuing to fund our operations in 2004 primarily with cash
and cash equivalents on hand, as well as cash from operations. If economic
conditions worsen or do not improve and/or competition and product substitution
accelerate beyond current expectations, our cash flows from operations would
decrease, negatively impacting our liquidity. However, we believe our access to
the capital markets is adequate to provide the flexibility we desire in funding
our operations. Sources of liquidity include the commercial paper market, $2.4
billion remaining under a universal shelf registration, a $1.45 billion
securitization program (limited by eligible receivables) and a $2.0 billion
credit facility. The maximum amount of commercial paper outstanding during 2003
was approximately $1.1 billion. We cannot provide any assurances that any or all
of these sources of funding will be available at the time they are needed or in
the amounts required.

  CREDIT RATINGS AND RELATED DEBT IMPLICATIONS

     During 2003, AT&T's long-term credit ratings were lowered by both Standard
& Poor's (S&P) and Fitch. As of December 31, 2003, our credit ratings were as
follows:



CREDIT RATING AGENCY                        SHORT-TERM RATING   LONG-TERM RATING   OUTLOOK
- --------------------                        -----------------   ----------------   --------
                                                                          
Standard & Poor's.........................         A-2                 BBB         Stable
Fitch.....................................         F-2                 BBB         Negative
Moody's...................................         P-2                Baa2         Negative


     Subsequent to 2003, S&P and Fitch lowered the short-term credit and
commercial paper rating to A-3 and F-3, respectively, Fitch lowered AT&T's
long-term credit rating to BBB-, and S&P changed the outlook to Negative.
Currently, none of AT&T's ratings are under review or on CreditWatch for further
downgrade.

     Our access to capital markets as well as the cost of our borrowings are
affected by our debt ratings. The rating action by S&P in July 2003, triggered a
25 basis point interest rate step-up on approximately $10 billion in notional
amount of debt ($1.3 billion of which matured in November 2003). This step-up
was effective for interest payment periods that began after November 2003,
resulting in an expected increase in interest expense of approximately $15
million in 2004. Further debt rating downgrades could require AT&T 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.

     If AT&T's debt ratings are further downgraded, AT&T's access to the capital
markets may be restricted and/or such replacement financing may be more costly
or have additional covenants than we had in connection with our debt at December
31, 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.

     The holders of certain private debt with an outstanding balance of $1.0
billion at December 31, 2003, have an annual put right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the debt holders
agreeing not to exercise their put right, in 2004, AT&T renewed a
cash-collateralized letter of credit totaling $0.5 billion now expiring in March
2005. The holders could accelerate repayment of the debt based on certain events
such as the occurrence of unfavorable local law or regulation changes in its
country of operation. AT&T also has the right to call this debt at anytime.

     AT&T Corp. is generally the obligor for debt issuances. However, we have
some instances where AT&T Corp. is not the obligor, for example, the
securitization facilities and certain capital leases. The total debt of these
entities, which are fully consolidated, is approximately $0.3 billion at
December 31, 2003, and is included within short-term and long-term debt.

                                        47

                          AT&T CORP. AND SUBSIDIARIES

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

  CASH REQUIREMENTS

     Our cash needs for 2004 will be primarily related to capital expenditures,
repayment of debt and payment of dividends. We expect our capital expenditures
for 2004 to be approximately $2.5 billion. Effective with the 2003 third quarter
dividend (paid in November 2003), AT&T's quarterly dividend was increased to
$0.2375 per share, an increase of $0.05 per share.

     In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. In connection with
the debt redemption, we unwound $250 million notional amount of
fixed-to-floating interest rate swaps. Also, AT&T offered to repurchase for cash
up to E 1 billion of its outstanding E 2 billion 6.0% Notes due November 2006,
which now carry an interest rate of 6.75%. This repurchase is expected to close
by the end of March 2004. These redemptions are part of AT&T's plan, as
announced in January 2004, to repurchase up to $3.0 billion of debt, which may
take the form of calls, tender offers or open market transactions and will be
completed subject to market conditions throughout 2004.

     AT&T anticipates contributing approximately $0.6 billion to the U.S.
postretirement benefit plans in 2004. We expect to contribute approximately $30
million to our U.S. nonqualified pension plan in 2004. No contribution is
expected for our U.S. qualified pension plans in 2004.

CONTRACTUAL CASH OBLIGATIONS

     The following summarizes AT&T's contractual cash obligations and commercial
commitments at December 31, 2003, and the effect such obligations are expected
to have on liquidity and cash flows in future periods. Included in the table
below are purchase obligations under which we have legal obligations for
payments in specific years. The minimum commitment for certain obligations is
based on termination penalties that could be paid to exit the contract. Since
termination penalties would not be paid in every year, such penalties are
excluded from the table. (See note 4 to the table.) Other long-term liabilities
were included in the table based on the year of required payment or an estimate
of the year of payment. Such estimate of payment is based on a review of past
trends for these items, as well as a forecast of future activities. Certain
items, were excluded from the table below as the year of payment is unknown and
could not be reliably estimated since past trends were not deemed an indicator
of future payment. (See note 5 to the table).



                                                              PAYMENTS DUE BY PERIOD
                                                  -----------------------------------------------
                                                            LESS THAN   2 - 3    4 - 5     AFTER
                                                   TOTAL     1 YEAR     YEARS    YEARS    5 YEARS
                                                  -------   ---------   ------   ------   -------
Contractual Obligations                                        (DOLLARS IN MILLIONS)
                                                                           
Long-term debt, including current
  maturities(1).................................  $13,456    $  423     $5,538   $  292   $7,203
Capital lease obligations.......................       96        13         11        9       63
Operating leases(2).............................    1,810       400        627      419      364
Unconditional purchase obligations(3),(4).......      994       350        241      109      294
Other long-term obligations reflected in the
  balance sheet at December 31, 2003(5),(6).....      834        --        205      155      474
                                                  -------    ------     ------   ------   ------
Total contractual cash obligations..............  $17,190    $1,186     $6,622   $  984   $8,398
                                                  =======    ======     ======   ======   ======


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

(1) In February 2004, we offered to repurchase, for cash, any and all of our
    $1.5 billion outstanding 6.5% Notes maturing in November 2006. The offer to
    early redeem these securities expired on March 3, 2004, with $1.2 billion of
    notes redeemed. These notes are included in the above table based on their
    original maturity date of 2006. Additionally, the impact of discounts and
    derivative instruments are excluded from long-term debt in the above table.
                                        48

                          AT&T CORP. AND SUBSIDIARIES

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

(2) Under certain real estate operating leases, we could be required to make
    payments to the lessors of up to $20 million at the end of the lease term in
    2007. Such amounts are excluded from the above table.

(3) AT&T has contractual obligations to utilize network facilities from local
    exchange carriers with terms greater than one year. Since the contracts have
    no minimum volume requirements, and are based on an interrelationship of
    volumes and discounted rates, we assessed our minimum commitment based on
    penalties to exit the contracts, assuming we exited the contracts on
    December 31, 2003. At December 31, 2003, the penalties AT&T would have
    incurred to exit all of these contracts would have been $2.0 billion. Such
    termination penalties decline throughout the lives of the contracts, and
    could be $1.1 billion in 2004, $0.7 billion in 2005, $0.5 billion in 2006,
    $0.2 billion in 2007 or $0.2 billion in 2008, assuming all contracts are
    exited. These termination fees are excluded from the above table as the fees
    would not be paid in every year and the timing of such payments, if any, is
    uncertain.

(4) We calculated the minimum obligation for certain agreements to purchase
    goods or services based on termination fees that can be paid to exit the
    contract. If we elect to exit these contracts, termination fees for all such
    contracts in the year of termination could be approximately $546 million in
    2004, $619 million in aggregate for 2005 and 2006, $133 million in aggregate
    for 2007 and 2008, or $34 million, in the aggregate, thereafter. These
    termination fees are excluded from the above table as the fees would not be
    paid in every year and the timing of such payments, if any, is uncertain.

(5) Other long-term liabilities of $1.5 billion and deferred income taxes of
    $5.4 billion have been excluded from the above table due to the uncertainty
    of the timing of payments, combined with the absence of historical trending
    to be used as a predictor for such payments. Also, long-term liabilities
    totaling $0.8 billion have been excluded from the above table as settlement
    of such liabilities will not require the use of cash.

(6) Certain long-term benefit-related liabilities, including pensions,
    postretirement health and welfare benefits and postemployment benefit
    obligations are appropriately recorded on the balance sheet at present
    value. The accrued liability, which is impacted by various actuarial
    assumptions, will differ from the sum of future value of estimated payments.
    Estimated payments are $1.4 billion in 2005-2006; $1.0 billion in 2007-2008
    and $5.6 billion, thereafter, and differs from the obligation recognized on
    the balance sheet by $4.6 billion. Although we provide various employee
    benefit plans, programs and arrangements to our employees, we reserve the
    right to amend, modify or terminate these plans, programs or arrangements at
    any time, subject to the terms and conditions of such plans, programs or
    arrangements and applicable law. Accordingly, these amounts have been
    excluded from the above table, as we are not legally obligated for such cash
    outflows. See notes 11 and 12 to the consolidated financial statements for
    additional information.

  OTHER COMMERCIAL COMMITMENTS

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

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

     AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT
DoCoMo. In connection with an investment NTT DoCoMo made in AT&T Wireless, AT&T
and AT&T Wireless agreed that, under certain circumstances, including if AT&T
Wireless fails to meet specific technological milestones by June 30, 2004, NTT
DoCoMo would have the right to require AT&T Wireless to repurchase its AT&T
Wireless common stock for $9.8 billion plus interest. On December 31, 2002, AT&T
Wireless and NTT DoCoMo entered into an amendment to the original agreement,
which, among other things, extended the deadline for compliance with the
technological milestones to December 31, 2004. AT&T's guarantee expires on June
30, 2004, in accordance with the terms of the original agreement. In the event
AT&T Wireless is unable to satisfy its entire obligation, AT&T is secondarily
liable for up to $3.65 billion, plus interest, or approximately $4.5 billion.

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

                                        49

                          AT&T CORP. AND SUBSIDIARIES

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

$224 million and are expected to expire as follows: $69 million in 2004; $130
million in 2005-2006; and $25 million in 2007-2008.

     The total amount of guaranteed debt at December 31, 2003 was $6 million.
Such debt guarantees relate to NCR, with the substantial portion of the debt
maturing subsequent to 2009.

OFF-BALANCE SHEET ARRANGEMENTS

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

RISK MANAGEMENT

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

     We enter into foreign currency contracts to minimize our exposure to risk
of adverse changes in currency exchange rates. We are subject to foreign
exchange risk for foreign-currency-denominated transactions, such as debt
issued, recognized payables and receivables and forecasted transactions. At
December 31, 2003, our foreign currency exposures were principally Euros,
British pound sterling, Danish krone and Swiss francs.

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

     For foreign exchange contracts outstanding at December 31, 2003 and 2002,
assuming a hypothetical 10% appreciation of the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the foreign exchange contracts (net asset) would have decreased $77 million
and $66 million, respectively. Because our foreign exchange contracts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying transactions.

     We have also entered into combined interest rate foreign currency contracts
to hedge foreign-currency-denominated debt. At December 31, 2003 and 2002,
assuming a hypothetical 10% appreciation in the U.S. dollar against foreign
currencies from the prevailing foreign currency exchange rates, the fair value
of the combined interest rate foreign currency contracts (net asset) would have
decreased $0.4 billion and $0.5 billion, respectively. Because our foreign
exchange contracts are entered into for hedging purposes, we believe that these
losses would be largely offset by gains on the underlying
foreign-currency-denominated debt.

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

     We use interest rate swaps to manage the impact of interest rate changes on
earnings and cash flows. We perform a sensitivity analysis on our interest rate
swaps to assess the risk of changes in fair value. The model to determine
sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At
December 31, 2003 and 2002, assuming a hypothetical 10% decrease in interest
rates, the fair value of interest rate swaps (net liability) would have
decreased by $8 million and $1 million, respectively.

                                        50

                          AT&T CORP. AND SUBSIDIARIES

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

     As discussed above, we have also entered into combined interest rate
foreign currency contracts to hedge foreign-currency-denominated debt. Assuming
a hypothetical 10% decrease in interest rates, the fair value of the contracts
(net asset) would have decreased by $34 million at December 31, 2003. Assuming a
hypothetical 10% increase in interest rates, the fair value of the contracts
(net asset) would have decreased by $3 million at December 31, 2002.

     The fair value of our fixed-rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains or losses in the
market value of the debt due to differences between the market interest rates
and rates at the inception of the obligation. Assuming a 10% downward shift in
interest rates at December 31, 2003 and 2002, the fair value of unhedged debt
would have increased by $0.5 billion and $0.7 billion, respectively.

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

     We use equity hedges to manage our exposure to changes in equity prices
associated with various equity awards of previously affiliated companies.
Assuming a hypothetical 10% decrease in equity prices of these companies, the
fair value of the equity hedges (net liability) would have increased by $8
million at December 31, 2003 and $9 million at December 31, 2002. Because these
contracts are entered into for hedging purposes, we believe that the increase in
fair value would be largely offset by decreases in the underlying liabilities.

     The risk of loss in fair values of all other financial instruments
resulting from a hypothetical 10% adverse change in market prices was not
significant as of December 31, 2003 and 2002.

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

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

SUBSEQUENT EVENTS

     In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. In connection with
the debt redemption, we unwound $250 million notional amount of
fixed-to-floating interest rate swaps. Also, AT&T offered to repurchase for

                                        51

                          AT&T CORP. AND SUBSIDIARIES

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

cash up to E1 billion of its outstanding E2 billion 6.0% Notes due November
2006, which now carry an interest rate of 6.75%. This repurchase is expected to
close by the end of March 2004.

     In March 2004, a U.S. Court of Appeals vacated a number of recent FCC
rulings made in connection with the Triennial Review, including the FCC's
delegation to state commissions of decisions over impairment as applied to mass
market switching and certain transport elements. If this decision is not
reversed, or unless the FCC issues new valid rules, which assure us of fair
resale prices, our current local business could be materially affected.

                                        52


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              REPORT OF MANAGEMENT

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

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

     The consolidated financial statements in this annual report have been
audited by PricewaterhouseCoopers LLP, Independent Auditors. Their audits were
conducted in accordance with generally accepted auditing standards which
includes consideration of the internal controls over financial reporting to
determine the extent of auditing procedures required. Their report follows.

                                            
DAVID W. DORMAN                                THOMAS W. HORTON
Chairman of the Board,                         Senior Executive Vice President,
Chief Executive Officer                        Chief Financial Officer



                                        53


                         REPORT OF INDEPENDENT AUDITORS

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

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in shareowners' equity
and cash flows, present fairly, in all material respects, the financial position
of AT&T Corp. and its subsidiaries (AT&T) at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     As discussed in Note 3 to the financial statements, AT&T changed the manner
in which it accounts for variable interest entities as of July 1, 2003, the
manner in which it accounts for asset retirement costs as of January 1, 2003,
the manner in which it accounts for goodwill and other intangible assets as of
January 1, 2002, and the manner in which it accounts for derivative instruments
as of January 1, 2001.

PricewaterhouseCoopers LLP

Florham Park, New Jersey
March 5, 2004

                                        54


                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                              ------------------------------------
                                                               2003           2002          2001
                                                              -------       --------       -------
                                                                  (DOLLARS IN MILLIONS, EXCEPT
                                                                       PER SHARE AMOUNTS)
                                                                                  
Revenue.....................................................  $34,529       $ 37,827       $42,197
Operating Expenses
Access and other connection.................................   10,797         10,790        12,085
Costs of services and products (excluding depreciation of
  $3,508, $3,391 and $2,954 included below).................    7,625          8,363         8,621
Selling, general and administrative.........................    7,379          7,988         8,064
Depreciation and amortization...............................    4,870          4,888         4,559
Net restructuring and other charges.........................      201          1,437         1,036
                                                              -------       --------       -------
Total operating expenses....................................   30,872         33,466        34,365
                                                              -------       --------       -------
Operating income............................................    3,657          4,361         7,832
Other income (expense), net.................................      191            (77)        1,327
Interest (expense)..........................................   (1,158)        (1,448)       (1,493)
                                                              -------       --------       -------
Income from continuing operations before income taxes,
  minority interest income and net (losses) related to
  equity investments........................................    2,690          2,836         7,666
(Provision) for income taxes................................     (816)        (1,587)       (2,890)
Minority interest income....................................        1            114           131
Equity (losses) from Liberty Media Group....................       --             --        (2,711)
Net (losses) related to other equity investments............      (12)          (400)       (4,836)
                                                              -------       --------       -------
Income (loss) from continuing operations....................    1,863            963        (2,640)
Net (loss) from discontinued operations (net of income tax
  benefits of $0, $6,014 and $3,715)........................      (13)       (14,513)       (4,052)
Gain on disposition of discontinued operations (net of
  income tax benefit of $61 in 2002)........................       --          1,324        13,503
                                                              -------       --------       -------
Income (loss) before cumulative effect of accounting
  changes...................................................    1,850        (12,226)        6,811
Cumulative effect of accounting changes (net of income taxes
  of $(9), $530 and $(578)).................................       15           (856)          904
                                                              -------       --------       -------
Net income (loss)...........................................    1,865        (13,082)        7,715
Dividend requirements of preferred stock....................       --             --          (652)
Premium on exchange of AT&T Wireless tracking stock.........       --             --           (80)
                                                              -------       --------       -------
Income (loss) attributable to common shareowners............  $ 1,865       $(13,082)      $ 6,983
                                                              =======       ========       =======
AT&T Common Stock Group -- per basic share:
Earnings (loss) from continuing operations..................  $  2.37       $   1.29       $ (0.91)
(Loss) from discontinued operations.........................    (0.02)        (19.44)        (5.60)
Gain on disposition of discontinued operations..............       --           1.77         18.53
Cumulative effect of accounting changes.....................     0.02          (1.15)         0.49
                                                              -------       --------       -------
AT&T Common Stock Group earnings (loss).....................  $  2.37       $ (17.53)      $ 12.51
                                                              =======       ========       =======
AT&T Common Stock Group -- per diluted share:
Earnings (loss) from continuing operations..................  $  2.36       $   1.26       $ (0.91)
(Loss) from discontinued operations.........................    (0.02)        (18.95)        (5.60)
Gain on disposition of discontinued operations..............       --           1.73         18.53
Cumulative effect of accounting changes.....................     0.02          (1.12)         0.49
                                                              -------       --------       -------
AT&T Common Stock Group earnings (loss).....................  $  2.36       $ (17.08)      $ 12.51
                                                              =======       ========       =======
AT&T Wireless Group -- per basic and diluted share:
Earnings....................................................  $    --       $     --       $  0.08
                                                              =======       ========       =======
Liberty Media Group -- per basic and diluted share:
(Loss) before cumulative effect of accounting changes.......  $    --       $     --       $ (1.05)
Cumulative effect of accounting changes.....................       --             --          0.21
                                                              -------       --------       -------
Liberty Media Group (loss)..................................  $    --       $     --       $ (0.84)
                                                              =======       ========       =======


    The notes are an integral part of the consolidated financial statements.
                                        55


                          AT&T CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003        2002
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                    
ASSETS
Cash and cash equivalents...................................  $  4,353    $  8,014
Accounts receivable, less allowances of $579 and $669.......     4,036       5,286
Deferred income taxes.......................................       715       1,075
Other current assets........................................       744       1,693
                                                              --------    --------
Total Current Assets........................................     9,848      16,068
Property, plant and equipment, net..........................    24,376      25,604
Goodwill....................................................     4,801       4,626
Other purchased intangible assets, net of accumulated
  amortization of $320
  and $244..................................................       499         556
Prepaid pension costs.......................................     3,861       3,596
Other assets................................................     4,603       4,987
                                                              --------    --------
Total Assets................................................  $ 47,988    $ 55,437
                                                              ========    ========


LIABILITIES
Accounts payable and accrued expenses.......................  $  3,256    $  3,819
Compensation and benefit-related liabilities................     1,783       1,949
Debt maturing within one year...............................     1,343       3,762
Other current liabilities...................................     2,501       2,924
                                                              --------    --------
Total Current Liabilities...................................     8,883      12,454
Long-term debt..............................................    13,066      18,812
Long-term compensation and benefit-related liabilities......     3,528       4,144
Deferred income taxes.......................................     5,395       3,992
Other long-term liabilities and deferred credits............     3,160       3,723
                                                              --------    --------
Total Liabilities...........................................    34,032      43,125


SHAREOWNERS' EQUITY
AT&T Common Stock, $1 par value, authorized 6,000,000,000
  shares; issued and outstanding 791,911,022 shares (net of
  172,179,303 treasury shares) at December 31, 2003 and
  783,037,580 shares (net of 171,801,716 treasury shares) at
  December 31, 2002.........................................       792         783
Additional paid-in capital..................................    27,722      28,163
Accumulated deficit.........................................   (14,707)    (16,566)
Accumulated other comprehensive income (loss)...............       149         (68)
                                                              --------    --------
Total Shareowners' Equity...................................    13,956      12,312
                                                              --------    --------
Total Liabilities and Shareowners' Equity...................  $ 47,988    $ 55,437
                                                              ========    ========


    The notes are an integral part of the consolidated financial statements.
                                        56


                          AT&T CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY



                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2003        2002        2001
                                                              ---------   ---------   ---------
                                                                    (DOLLARS IN MILLIONS)
                                                                             
AT&T Common Stock
  Balance at beginning of year..............................  $    783    $    708    $    752
  Shares issued (acquired), net:
    Under employee plans....................................         7           6           3
    For acquisitions........................................        --          --           9
    Settlement of put option................................        --          --          31
    For exchange of AT&T Wireless tracking stock............        --          --         (74)
    For funding AT&T Canada obligation......................        --          46          --
    Redemption of TCI Pacific preferred stock...............        --          10          --
    Other...................................................         2          13         (13)
                                                              --------    --------    --------
Balance at end of year......................................       792         783         708
                                                              --------    --------    --------
AT&T Wireless Group Common Stock
  Balance at beginning of year..............................        --          --         362
  Shares issued:
    Under employee plans....................................        --          --           2
    For exchange of AT&T Wireless tracking stock............        --          --         438
    Conversion of preferred stock...........................        --          --         406
AT&T Wireless Group split-off...............................        --          --      (1,208)
                                                              --------    --------    --------
Balance at end of year......................................        --          --          --
                                                              --------    --------    --------
Liberty Media Group Class A Common Stock
  Balance at beginning of year..............................        --          --       2,364
  Shares issued (acquired), net.............................        --          --          14
  Liberty Media Group split-off.............................        --          --      (2,378)
                                                              --------    --------    --------
Balance at end of year......................................        --          --          --
                                                              --------    --------    --------
Liberty Media Group Class B Common Stock
  Balance at beginning of year..............................        --          --         206
  Shares issued (acquired), net.............................        --          --           6
  Liberty Media Group split-off.............................        --          --        (212)
                                                              --------    --------    --------
Balance at end of year......................................        --          --          --
                                                              --------    --------    --------
Additional Paid-In Capital
  Balance at beginning of year..............................    28,163      54,798      93,504
  Shares issued (acquired), net:
    Under employee plans....................................       123         328         291
    For acquisitions........................................        --          --         862
    Settlement of put option................................        --          --       3,361
    For funding AT&T Canada obligation......................        --       2,485          --
    Redemption of TCI Pacific preferred stock...............        --       2,087          --
    Other*..................................................        36          31      (1,054)
  Gain on issuance of common stock by affiliates............        --          --          20
  Conversion of preferred stock.............................        --          --       9,631
  AT&T Wireless Group split-off.............................        --          --     (20,955)
  Liberty Media Group split-off.............................        --          --     (30,768)
  AT&T Broadband spin-off...................................        --     (31,032)         --
  Exchange of AT&T Wireless tracking stock..................        --          --        (284)


                            (continued on next page)
                                        57

                          AT&T CORP. AND SUBSIDIARIES

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



                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2003        2002        2001
                                                              ---------   ---------   ---------
                                                                    (DOLLARS IN MILLIONS)
                                                                             
  Beneficial conversion value of preferred stock............        --          --         295
  Dividends declared -- AT&T Common Stock Group.............      (670)       (569)       (265)
  Other.....................................................        70          35         160
                                                              --------    --------    --------
Balance at end of year......................................    27,722      28,163      54,798
                                                              --------    --------    --------
(Accumulated Deficit) Retained Earnings
  Balance at beginning of year..............................   (16,566)     (3,484)      7,408
  Net income (loss).........................................     1,865     (13,082)      7,715
  Dividends declared -- AT&T Common Stock Group.............        --          --        (275)
  Dividends accrued -- preferred stock......................        --          --        (652)
  Premium on exchange of AT&T Wireless tracking stock.......        --          --         (80)
  Treasury shares issued at less than cost..................        (6)         --          (7)
  AT&T Wireless Group split-off.............................        --          --     (17,593)
                                                              --------    --------    --------
Balance at end of year......................................   (14,707)    (16,566)     (3,484)
                                                              --------    --------    --------
Accumulated Other Comprehensive Income (Loss)
  Balance at beginning of year..............................       (68)       (342)     (1,398)
  Other comprehensive income................................       217         266       1,742
  AT&T Wireless Group split-off.............................        --          --          72
  Liberty Media Group split-off.............................        --          --        (758)
  AT&T Broadband spin-off...................................        --           8          --
                                                              --------    --------    --------
Balance at end of year......................................       149         (68)       (342)
                                                              --------    --------    --------
Total Shareowners' Equity...................................  $ 13,956    $ 12,312    $ 51,680
                                                              ========    ========    ========
Summary of Total Comprehensive Income (Loss):
  Income (loss) before cumulative effect of accounting
    changes.................................................     1,850     (12,226)      6,811
  Cumulative effect of accounting changes...................        15        (856)        904
                                                              --------    --------    --------
  Net income (loss).........................................     1,865     (13,082)      7,715
  Other comprehensive income [net of income taxes of $(134),
    $(169) and $(1,119)]....................................       217         266       1,742
                                                              --------    --------    --------
Total Comprehensive Income (Loss)...........................  $  2,082    $(12,816)   $  9,457
                                                              ========    ========    ========


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

AT&T accounts for treasury stock as retired stock. The amounts attributable to
treasury stock at December 31, 2003 and 2002, were $(17,026) million and
$(17,037) million, respectively.

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

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

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


                          AT&T CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                               2003         2002         2001
                                                              -------     --------     --------
                                                                    (DOLLARS IN MILLIONS)
                                                                              
OPERATING ACTIVITIES
Net income (loss)...........................................  $ 1,865     $(13,082)    $  7,715
Deduct:
  Loss from discontinued operations.........................      (13)     (14,513)      (4,052)
  Gain on disposition of discontinued operations............       --        1,324       13,503
  Cumulative effect of accounting changes -- net of income
    taxes...................................................       15         (856)         904
                                                              -------     --------     --------
Income (loss) from continuing operations....................    1,863          963       (2,640)
Adjustments to reconcile income (loss) from continuing
  operations to net cash
 provided by operating activities of continuing operations:
  Net gains on sales of businesses and investments..........      (53)         (30)      (1,231)
  Cost investment impairment charges........................        2          146          531
  Net restructuring and other charges.......................       93        1,418          973
  Depreciation and amortization.............................    4,870        4,888        4,559
  Provision for uncollectible receivables...................      703        1,058          884
  Deferred income taxes.....................................    1,402        2,631       (1,338)
  Net revaluation of certain financial instruments..........        7            8         (150)
  Minority interest income..................................       (1)        (114)        (131)
  Equity losses from Liberty Media Group....................       --           --        2,711
  Net (earnings) losses related to other equity
    investments.............................................      (19)         512        7,783
  Decrease in receivables...................................      600          707          888
  Decrease in accounts payable and accrued expenses.........     (494)        (175)        (508)
  Net change in other operating assets and liabilities......     (256)      (1,400)      (2,126)
  Other adjustments, net....................................     (187)        (129)        (200)
                                                              -------     --------     --------
Net Cash Provided by Operating Activities of Continuing
  Operations................................................    8,530       10,483       10,005
                                                              -------     --------     --------
INVESTING ACTIVITIES
Capital expenditures and other additions....................   (3,157)      (3,878)      (5,767)
Proceeds from sale or disposal of property, plant and
  equipment.................................................      163          468           73
Investment distributions and sales..........................      126           10        1,585
Investment contributions and purchases......................      (51)          (2)        (101)
Net (acquisitions) dispositions of businesses, net of cash
  acquired/disposed.........................................     (158)         (18)          15
Decrease in AT&T Canada obligation..........................       --       (3,449)          --
Proceeds from AT&T Broadband................................       --        5,849           --
Increase in restricted cash.................................      (57)        (442)          --
Other investing activities, net.............................       33           33         (100)
                                                              -------     --------     --------
Net Cash Used in Investing Activities of Continuing
  Operations................................................   (3,101)      (1,429)      (4,295)
                                                              -------     --------     --------
FINANCING ACTIVITIES]
Proceeds from long-term debt issuances, net of issuance
  costs.....................................................       --           79       11,392
Retirement of long-term debt, including redemption
  premiums..................................................   (8,002)      (1,091)        (725)
Decrease in short-term borrowings, net......................   (1,281)      (7,157)     (17,168)
Repayment of borrowings from AT&T Wireless..................       --           --       (5,803)
Issuance of convertible preferred securities and warrants...       --           --        9,811
Issuance of AT&T common shares..............................      118        2,684          224
Issuance of AT&T Wireless Group common shares...............       --           --           54
Net issuance of treasury shares.............................       --           --           24
Dividends paid on common stock..............................     (629)        (555)        (549)
Other financing activities, net.............................      704           (1)         (38)
                                                              -------     --------     --------
Net Cash Used in Financing Activities of Continuing
  Operations................................................   (9,090)      (6,041)      (2,778)
                                                              -------     --------     --------
Net cash (used in) provided by discontinued operations......       --       (5,679)       7,683
Net (decrease) increase in cash and cash equivalents........   (3,661)      (2,666)      10,615
Cash and cash equivalents at beginning of year..............    8,014       10,680           65
                                                              -------     --------     --------
Cash and cash equivalents at end of year....................  $ 4,353     $  8,014     $ 10,680
                                                              =======     ========     ========


    The notes are an integral part of the consolidated financial statements.
                                        59


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  CONSOLIDATION

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

  FOREIGN CURRENCY TRANSLATION

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

  USE OF ESTIMATES

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

  REVENUE RECOGNITION

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

  ADVERTISING AND PROMOTIONAL COSTS

     We expense costs of advertising and promotions as incurred.

                                        60

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  INCOME TAXES

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

  CASH EQUIVALENTS

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

  PROPERTY, PLANT AND EQUIPMENT

     We state property, plant and equipment at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized. Costs of additions and substantial improvements to
property, plant and equipment are capitalized. The costs of maintenance and
repairs of property, plant and equipment are charged to operating expense. The
useful lives of communications and network equipment range from three to 15
years. The useful lives of other equipment ranges from three to seven years. The
useful lives of buildings and improvements range from 10 to 40 years.
Depreciation is determined based upon the assets' estimated useful lives using
either the group or unit method. The group method is used for most depreciable
assets, including the majority of communications and network equipment. The unit
method is primarily used for large computer systems, buildings and support
assets. Under the group method, a specific asset group has an average life. A
depreciation rate is developed based on the average useful life for the specific
asset group. This method requires the periodic revision of depreciation rates.
Under the unit method, assets are depreciated on a straight-line basis over the
estimated useful life of the individual asset. When we sell or retire assets
depreciated using the group method, the difference between the proceeds, if any,
and the cost of the asset is charged or credited to accumulated depreciation,
without recognition of a gain or loss. When we sell assets that were depreciated
using the unit method, we include the related gains or losses in other income
(expense), net.

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

  SOFTWARE CAPITALIZATION

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

                                        61

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. Beginning January 1, 2002, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
goodwill and indefinite-lived intangible assets are no longer amortized, but
instead are tested for impairment at least annually. Intangible assets that have
finite useful lives are amortized over their useful lives, which range from five
to 15 years.

  DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

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

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

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

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

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

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

     We discontinue hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item, (2) the derivative or hedged item expires
or is sold, terminated, or exercised, (3) it is determined that the forecasted
hedged transaction will no longer occur, (4) a hedged firm commitment no longer
meets the definition of a firm commitment, or
                                        62

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) management determines that the designation of the derivative as a hedge
instrument is no longer appropriate.

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

  STOCK-BASED COMPENSATION

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

                                        63

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                    AT&T COMMON STOCK            AT&T WIRELESS
                                                         GROUP(1)                    GROUP
                                             --------------------------------   ---------------
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                             --------------------------------------------------
                                               2003        2002        2001          2001
                                             --------   ----------   --------   ---------------
                                              (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                    
Net income (loss)..........................   $1,865     $(13,082)    $9,114         $  35
ADD:
  Stock-based employee compensation
     included in reported results from
     continuing operations, net of income
     taxes.................................       75           55         71            --
  Stock-based employee compensation
     included in reported results from
     discontinued operations, net of income
     taxes.................................       --           44         14            --
DEDUCT:
  Total stock-based compensation expense
     determined under the fair value method
     for all awards relating to continuing
     operations, net of income taxes.......     (225)        (288)      (562)           --
  Total stock-based compensation expense
     determined under the fair value method
     for all awards relating to
     discontinued operations, net of income
     taxes.................................       --         (113)      (140)          (17)
                                              ------     --------     ------         -----
Pro forma net income (loss)................   $1,715     $(13,384)    $8,497         $  18
                                              ======     ========     ======         =====
Basic earnings (loss) per share............   $ 2.37     $ (17.53)    $12.51         $0.08
Pro forma basic earnings (loss) per
  share....................................   $ 2.18     $ (17.93)    $11.66         $0.04
Diluted earnings (loss) per share..........   $ 2.36     $ (17.08)    $12.51         $0.08
Pro forma diluted earnings (loss) per
  share....................................   $ 2.17     $ (17.47)    $11.66         $0.04


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

(1) AT&T Common Stock Group's results exclude amounts attributable to Liberty
    Media Group and AT&T Wireless Group tracking stocks.

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

     Pro forma earnings (loss) for AT&T Common Stock Group from continuing
operations was $1,713 million, $730 million and $(1,152) million for 2003, 2002
and 2001, respectively, and from discontinued operations was $(13) million,
$(14,582) million and $(4,213) million for 2003, 2002 and 2001, respectively.

     Pro forma earnings (loss) for AT&T Common Stock Group per basic share from
continuing operations was $2.18, $0.98 and $(1.58) for 2003, 2002 and 2001,
respectively, and from discontinued operations was $(0.02), $(19.53) and $(5.78)
for 2003, 2002 and 2001, respectively.

     Pro forma earnings (loss) for AT&T Common Stock Group per diluted share
from continuing operations was $2.17, $0.96 and $(1.58) for 2003, 2002 and 2001,
respectively, and from discontinued operations was $(0.02), $(19.04) and $(5.78)
for 2003, 2002 and 2001, respectively.

                                        64

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The pro forma effect on net loss from discontinued operations for AT&T
Common Stock Group for 2002 includes expense of $28 million due to the
accelerated vesting of AT&T stock options held by AT&T Broadband employees at
the date of spin-off. The pro forma effect on net loss from discontinued
operations for AT&T Common Stock Group for 2001 includes expense of $10 million
due to the conversion of AT&T common stock options in connection with the
split-off of AT&T Wireless, and also includes expense of $12 million due to the
accelerated vesting of AT&T Wireless stock options held by AT&T employees at the
date of the split-off.

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

  EMPLOYEE SEPARATIONS

     In accordance with SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," AT&T establishes postemployment benefit obligations for expected
terminations provided to former or inactive employees after employment but
before retirement. These benefits include severance payments, medical coverage,
and other benefits.

  ISSUANCE OF COMMON STOCK BY AFFILIATES

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

  CONCENTRATIONS

     As of December 31, 2003, other than the guarantee issued in connection with
the split-off of AT&T Wireless (see note 9), we do not have any significant
concentration of business transacted with a particular customer, supplier,
lender or former affiliate that could, if suddenly adversely impacted, severely
impact our operations. We also do not have a concentration of available sources
of labor, services or other rights that could, if suddenly eliminated, severely
impact our operations. We invest our cash with many high-quality credit
institutions.

  RECLASSIFICATIONS AND RESTATEMENTS

     We reclassified certain amounts for previous years to conform to the 2003
presentation.

2.  AT&T RESTRUCTURING AND DISCONTINUED OPERATIONS

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

     AT&T Broadband, which was spun-off from AT&T on November 18, 2002, was
accounted for as a discontinued operation pursuant to SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." AT&T Wireless, which was
split-off from AT&T on July 9, 2001, was accounted for as a discontinued
operation pursuant to APB Opinion No. 30, "Reporting Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." As
discontinued operations, the revenue, expenses and cash flows of AT&T Broadband
and AT&T Wireless are excluded from the respective captions in the Consolidated
Statements of Operations and Consolidated Statements of Cash Flows, and are
reported through their respective dates of

                                        65

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

separation as net (loss) from discontinued operations and as net cash (used in)
provided by discontinued operations.

  AT&T BROADBAND

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

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

     Revenue for AT&T's Broadband business (which included At Home Corporation
through September 2001) was $8.9 billion and $10.1 billion for 2002 and 2001,
respectively. Net (loss) from discontinued operations before income taxes was
$(20.5) billion and $(8.1) billion for 2002 and 2001, respectively, for the AT&T
Broadband business. The loss for 2002 included pretax impairment charges of
$16.5 billion ($11.8 billion after taxes) relating to goodwill and franchise
costs which were recorded in the second quarter of 2002.

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

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

  AT&T WIRELESS

     AT&T issued AT&T Wireless tracking stock in April 2000, which was intended
to track the financial performance and economic value of AT&T Wireless Group.
The shares initially tracked approximately 16% of the financial performance of
AT&T Wireless Group. On May 25, 2001, AT&T completed an exchange offer of AT&T
common stock for AT&T Wireless stock. Under the terms of the exchange offer,
AT&T issued 5.88 shares of AT&T Wireless Group tracking stock in exchange for
each share of AT&T common stock validly tendered. A total of 74.4 million shares
of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T
Wireless Group tracking stock. In conjunction with the exchange offer, AT&T
recorded an $80 million premium as a reduction to net income available to common
shareowners. The premium

                                        66

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

represented the excess of the fair value of the AT&T Wireless Group tracking
stock issued over the fair value of the AT&T common stock exchanged.

     On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. All AT&T Wireless Group tracking stock
was converted into AT&T Wireless common stock on a one-for-one basis, and 1,136
million shares of AT&T Wireless common stock held by AT&T were distributed to
AT&T common shareowners on a basis of 1.609 shares of AT&T Wireless for each
AT&T share outstanding. AT&T common shareowners received whole shares of AT&T
Wireless common stock and cash payments for fractional shares. The IRS ruled
that the transaction qualified as tax-free for AT&T and its shareowners for U.S.
federal income tax purposes, with the exception of cash received for fractional
shares. The split-off of AT&T Wireless resulted in a tax-free noncash gain on
disposition of discontinued operations of $13.5 billion, which represented the
difference between the fair value of the AT&T Wireless tracking stock at the
date of the split-off and AT&T's book value of AT&T Wireless.

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

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

  NCR CORP.

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

  LUCENT TECHNOLOGIES INC.

     Net (loss) from discontinued operations for 2002 included an estimated loss
on a litigation settlement associated with the business of Lucent Technologies
Inc. (Lucent), which was spun-off from AT&T in 1996. Sparks, et al. v. AT&T and
Lucent et al., was a class action lawsuit filed in 1996 in Illinois state court.
The complaint sought damages on behalf of present and former customers based on
a claim that the AT&T Consumer Products business (which became part of Lucent in
1996) and Lucent had defrauded and misled customers who leased telephones,
resulting in payments in excess of the cost to purchase the telephones. On
August 9, 2002, a settlement proposal was submitted to and accepted by the
court. In accordance with the
                                        67

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

separation and distribution agreement between AT&T and Lucent, AT&T's estimated
proportionate share of the settlement and legal costs totaled $45 million pretax
($33 million after taxes). Depending upon the number of claims submitted and
accepted, the actual cost of the settlement to AT&T may be different than the
amounts accrued. While similar consumer class actions are pending in various
state courts, the Illinois state court has held that the class it certified
covers claims in the other state court class actions.

  SUMMARY

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



                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                            -------------------------
                                                            2003     2002      2001
                                                            ----   --------   -------
                                                              (DOLLARS IN MILLIONS)
                                                                     
AT&T Broadband, net of income tax benefits of $6,002 and
  $3,873..................................................  $ --   $(14,480)  $(4,202)
AT&T Wireless, net of income taxes of $(158)..............    --         --       150
NCR, net of income taxes of $0............................   (13)        --        --
Lucent, net of income tax benefit of $12..................    --        (33)       --
                                                            ----   --------   -------
Net (loss) from discontinued operations, net of income
  taxes...................................................  $(13)  $(14,513)  $(4,052)
                                                            ====   ========   =======


  LIBERTY MEDIA GROUP

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

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

     Summarized results of operations for LMG were as follows:



                                                              FOR THE SEVEN MONTHS
                                                               ENDED JULY 31, 2001
                                                              ---------------------
                                                              (DOLLARS IN MILLIONS)
                                                           
Revenue.....................................................         $ 1,190
Operating (loss)............................................            (426)
(Loss) from continuing operations before cumulative effect
  of accounting change......................................          (2,711)
Cumulative effect of accounting change......................             545
Net (loss)..................................................          (2,166)


                                        68

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  IMPACTS OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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

     Effective July 1, 2003, AT&T early adopted FIN No. 46, "Consolidation of
Variable Interest Entities -- an Interpretation of Accounting Research Bulletin
No. 51." This interpretation requires the primary beneficiary to consolidate a
variable interest entity (VIE) if it has a variable interest that will absorb a
majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur, or both. Based on the new
standard, two entities that AT&T leased buildings from qualified as VIEs and,
therefore, became subject to consolidation as of July 1, 2003. AT&T had no
ownership interest in either entity, but provided guarantees of the residual
values for the leased facilities with a maximum exposure of $427 million. Upon
adoption, FIN No. 46 added approximately $433 million of assets (included in
property, plant and equipment of AT&T Business Services and Corporate and Other
group) and $477 million of liabilities (included in short-term debt) to our
consolidated balance sheet, which resulted in a charge of $27 million after
taxes ($44 million pretax) as the cumulative effect of an accounting change in
the third quarter of 2003. In November 2003, AT&T exercised its purchase option
on these leased buildings and thus repaid the associated debt. The noncash
impact of the adoption of this interpretation on the balance sheet at December
31, 2003, includes a $433 million increase in property, plant and equipment.

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

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

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

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

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

                                        69

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The table below presents the impact of SFAS No. 142 on net (loss) income
and (loss) earnings per share, had the standard been in effect on January 1,
2001:



                                                        AT&T               AT&T          LIBERTY
                                                    COMMON STOCK         WIRELESS         MEDIA
                                                       GROUP              GROUP           GROUP
                                                 ------------------   --------------   -----------
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                 -------------------------------------------------
                                                   2002      2001          2001           2001
                                                 --------   -------   --------------   -----------
                                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                           
Net (loss) income:
Reported income (loss) from continuing
  operations...................................  $    963   $    71       $  --          $(2,711)
Dividend requirements of preferred stock.......        --      (652)         --               --
Premium on exchange of AT&T Wireless tracking
  stock........................................        --       (80)         --               --
Reported income (loss) from continuing
  operations available to common shareowners...       963      (661)         --           (2,711)
Add back amortization, net of taxes:
  Goodwill.....................................        --       175          --              350
  Equity method excess basis...................        --        37          --              346
  Franchise costs..............................        --        --          --                4
Adjusted income (loss) from continuing
  operations available to common shareowners...       963      (449)         --           (2,011)
Reported (loss) income from discontinued
  operations...................................   (14,513)   (4,087)         35               --
Add back discontinued operations amortization,
  net of taxes.................................        --     1,588          36               --
Gain on disposition of discontinued
  operations...................................     1,324    13,503          --               --
Cumulative effect of accounting changes........      (856)      359          --              545
Adjusted net (loss) income available to common
  shareowners..................................  $(13,082)  $10,914       $  71          $(1,466)
Basic (loss) earnings per share:
Reported basic earnings (loss) per share from
  continuing operations........................  $   1.29   $ (0.91)      $  --          $ (1.05)
Add back amortization, net of taxes:
  Goodwill.....................................        --      0.24          --             0.14
  Equity method excess basis...................        --      0.05          --             0.13
  Franchise costs..............................        --        --          --               --
Adjusted basic earnings (loss) per share from
  continuing operations........................      1.29     (0.62)         --            (0.78)
Reported (loss) earnings from discontinued
  operations...................................    (19.44)    (5.60)       0.08               --
Add back discontinued operations amortization,
  net of taxes.................................        --      2.18        0.08               --
Gain on disposition of discontinued
  operations...................................      1.77     18.53          --               --
Cumulative effect of accounting changes........     (1.15)     0.49          --             0.21


                                        70

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



                                                        AT&T               AT&T          LIBERTY
                                                    COMMON STOCK         WIRELESS         MEDIA
                                                       GROUP              GROUP           GROUP
                                                 ------------------   --------------   -----------
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                 -------------------------------------------------
                                                   2002      2001          2001           2001
                                                 --------   -------   --------------   -----------
                                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                           
Adjusted basic (loss) earnings per share.......  $ (17.53)  $ 14.98       $0.16          $ (0.57)
Diluted (loss) earnings per share:
Reported diluted earnings (loss) per share from
  continuing operations........................  $   1.26   $ (0.91)      $  --          $ (1.05)
Add back amortization, net of taxes:
  Goodwill.....................................        --      0.24          --             0.14
  Equity method excess basis...................        --      0.05          --             0.13
  Franchise costs..............................        --        --          --               --
Adjusted diluted earnings (loss) per share from
  continuing operations........................      1.26     (0.62)         --            (0.78)
Reported (loss) earnings from discontinued
  operations...................................    (18.95)    (5.60)       0.08               --
Add back discontinued operations amortization,
  net of taxes.................................        --      2.18        0.08               --
Gain on disposition of discontinued
  operations...................................      1.73     18.53          --               --
Cumulative effect of accounting changes........     (1.12)     0.49          --             0.21
Adjusted diluted (loss) earnings per share.....  $ (17.08)  $ 14.98       $0.16          $ (0.57)


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

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

     AT&T's cumulative-effect increase to net income of $359 million, excluding
LMG, was comprised of $130 million related to continuing operations primarily
attributable to warrants held in both public and private companies, and $229
million related to discontinued operations primarily attributable to embedded
and non-embedded net purchase options related to indexed debt instruments.

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

     LMG's cumulative-effect increase to income of $545 million was primarily
attributable to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also

                                        71

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

included in the cumulative effect was $87 million previously included in
accumulated other comprehensive loss primarily related to changes in the fair
value of LMG's warrants and options to purchase certain available-for-sale
securities.

4.  SUPPLEMENTARY FINANCIAL INFORMATION

  SUPPLEMENTARY INCOME STATEMENT INFORMATION



                                                               FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                              2003   2002     2001
                                                              ----   -----   ------
                                                              (DOLLARS IN MILLIONS)
                                                                    
Included in Selling, General and Administrative Expenses:
Research and development expenses...........................  $277   $ 254   $  274
                                                              ====   =====   ======
Advertising and promotional expenses........................  $621   $ 814   $  874
                                                              ====   =====   ======
Other income (expense), net:
Investment-related income...................................  $177   $ 116   $  285
Net gains on sales of businesses and investments............    53      30    1,231
Settlements associated with businesses disposed of..........    39     107      154
Loss on early extinguishment of debt........................   (85)     --       --
Aircraft leveraged lease write-downs........................   (65)   (244)      --
Net revaluation of certain financial instruments............    (7)     (8)     150
Cost investment impairment charges..........................    (2)   (146)    (531)
Miscellaneous, net..........................................    81      68       38
                                                              ----   -----   ------
Total other income (expense), net...........................  $191   $ (77)  $1,327
                                                              ====   =====   ======


  SUPPLEMENTARY BALANCE SHEET INFORMATION



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003        2002
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                    
Property, plant and equipment:
Communications, network and other equipment.................   $49,674     $48,169
Buildings and improvements..................................     8,667       8,129
Land and improvements.......................................       335         327
                                                               -------     -------
Total property, plant and equipment.........................    58,676      56,625
Accumulated depreciation....................................    34,300      31,021
                                                               -------     -------
Property, plant and equipment, net..........................   $24,376     $25,604
                                                               =======     =======




                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                               2003           2002
                                                              -------        -------
                                                              (DOLLARS IN MILLIONS)
                                                                       
Income taxes payable........................................   $472           $362
                                                               ====           ====


                                        72

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



                                                             AT&T       AT&T
                                                           BUSINESS   CONSUMER
                                                           SERVICES   SERVICES   TOTAL
                                                           --------   --------   ------
                                                              (DOLLARS IN MILLIONS)
                                                                        
Goodwill:
Balance at January 1, 2003...............................   $4,556      $70      $4,626
Translation adjustment...................................      175       --         175
                                                            ------      ---      ------
Balance at December 31, 2003.............................   $4,731      $70      $4,801
                                                            ======      ===      ======




                                                            GROSS
                                                           CARRYING   ACCUMULATED
                                                            AMOUNT    AMORTIZATION   NET
                                                           --------   ------------   ----
                                                               (DOLLARS IN MILLIONS)
                                                                            
Amortizable Other Purchased Intangible Assets:
  Customer lists and relationships.......................    $557         $132       $425
  Other..................................................     243          112        131
                                                             ----         ----       ----
  Balance at December 31, 2002...........................    $800         $244       $556
                                                             ====         ====       ====
  Customer lists and relationships.......................    $548         $162       $386
  Other..................................................     271          158        113
                                                             ----         ----       ----
Balance at December 31, 2003.............................    $819         $320       $499
                                                             ====         ====       ====


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

  Leveraged Leases:

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



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003         2002
                                                              --------     --------
                                                              (DOLLARS IN MILLIONS)
                                                                     
Rental receivables (net of nonrecourse debt)(1).............   $ 456        $ 476
Estimated unguaranteed residual values......................     359          483
Unearned income.............................................    (153)        (211)
Allowance for credit losses.................................     (22)         (23)
                                                               -----        -----
Investment in leveraged leases (included in other assets)...     640          725
Deferred taxes..............................................     877          932
                                                               -----        -----
Net investment..............................................   $(237)       $(207)
                                                               =====        =====


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

(1) Rental receivables are net of nonrecourse debt of $1.3 billion and $1.4
    billion at December 31, 2003 and 2002, respectively.

                                        73

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION



                                                                                   ACCUMULATED
                                                    NET REVALUATION      NET          OTHER
                                      NET FOREIGN     OF CERTAIN       MINIMUM    COMPREHENSIVE
                                       CURRENCY        FINANCIAL       PENSION       INCOME
                                      TRANSLATION     INSTRUMENTS     LIABILITY      (LOSS)
                                      -----------   ---------------   ---------   -------------
                                                        (DOLLARS IN MILLIONS)
                                                                      
Accumulated other comprehensive
  income (loss):
Balance at January 1, 2002..........     $(151)          $(159)         $ (32)        $(342)
Broadband spin......................        --             (20)            28             8
Change..............................       132             319           (185)          266
                                         -----           -----          -----         -----
Balance at December 31, 2002........       (19)            140           (189)          (68)
Change..............................       219            (115)           113           217
                                         -----           -----          -----         -----
Balance at December 31, 2003........     $ 200           $  25          $ (76)        $ 149
                                         =====           =====          =====         =====




                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                              ----------------------
                                                              2003    2002     2001
                                                              -----   -----   ------
                                                              (DOLLARS IN MILLIONS)
                                                                     
Other comprehensive income (loss):
Net foreign currency translation adjustment [net of taxes of
  $(136), $(82) and $160](1)................................  $ 219   $ 132   $ (250)
Net revaluation of certain financial instruments:
  Unrealized gains (losses) [net of taxes of $(45), $340,
     and $(343)](2).........................................     72    (550)     475
  Recognition of previously unrealized (gains) losses on
     available-for-sale securities [net of taxes of $116,
     $(539) and $(950)](3)..................................   (187)    869    1,535
Net minimum pension liability adjustment [net of taxes of
  $(69), $112 and $14]......................................    113    (185)     (18)
                                                              -----   -----   ------
Total other comprehensive income............................  $ 217   $ 266   $1,742
                                                              =====   =====   ======


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

(1) Includes LMG's foreign currency translation adjustments, net of taxes of
    $149 million from January 1, 2001 through July 31, 2001.

(2) Includes LMG's unrealized gains (losses) on available-for-sale securities,
    net of taxes of $(1,286) million from January 1, 2001 through July 31, 2001.

(3) See below for a summary of recognition of previously unrealized (gains)
    losses on available-for-sale securities.

                                        74

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)



                                                     FOR THE YEARS ENDED DECEMBER 31,
                                    ------------------------------------------------------------------
                                            2003                   2002                   2001
                                    --------------------   --------------------   --------------------
                                    PRETAX   AFTER TAXES   PRETAX   AFTER TAXES   PRETAX   AFTER TAXES
                                    ------   -----------   ------   -----------   ------   -----------
                                                          (DOLLARS IN MILLIONS)
                                                                         
Summary of Recognition of
  Previously Unrealized (Gains)
  Losses on
  Available-for-Sale-Securities:
AT&T Group:
  Other income/expense, net:
     Sale/exchange of various
       securities.................  $(203)      $(125)     $   --      $ --       $ (238)    $ (147)
     Other financial instrument
       activity...................   (100)        (62)         28        17           --         --
     Other-than-temporary
       investment impairments.....     --          --         148        91          475        293
  Income from discontinued
     operations:
     Other-than-temporary
       investment impairments.....     --          --       1,232       761          510        315
     Reclassification of
       securities to "trading" in
       conjunction with the
       adoption of SFAS No.
       133(1).....................     --          --          --        --        1,154        713
  Sales of various securities.....     --          --          --        --          555        343
Liberty Media Group:
     Earnings (losses) from
       Liberty Media Group:
     Sales of various
       securities.................     --          --          --        --          173        105
     Cumulative effect of
       accounting change(1).......     --          --          --        --         (144)       (87)
                                    -----       -----      ------      ----       ------     ------
Total recognition of previously
  unrealized (gains) losses.......  $(303)      $(187)     $1,408      $869       $2,485     $1,535
                                    =====       =====      ======      ====       ======     ======


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

(1) See note 3 for a detailed discussion.

  SUPPLEMENTARY CASH FLOWS INFORMATION



                                                              FOR THE YEARS ENDED
                                                                  DECEMBER 31,
                                                           --------------------------
                                                             2003      2002     2001
                                                           --------   ------   ------
                                                             (DOLLARS IN MILLIONS)
                                                                      
Interest payments, net of capitalized interest of $35,
  $61 and $121...........................................  $  1,258   $1,532   $1,537
Income tax (receipts) payments...........................  $ (1,201)  $ (814)  $1,441


5.  EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE

     During 2001, in addition to AT&T common stock, the AT&T Wireless Group and
Liberty Media Group tracking stocks were outstanding. The tracking stocks
represented an interest in the economic performance of the net assets of each of
the respective groups. The earnings attributable to AT&T Wireless Group and
Liberty Media Group were excluded from the earnings attributable to the AT&T
Common Stock Group. On July 9 and August 10, 2001, AT&T Wireless and Liberty
Media Group, respectively, were separated from AT&T and the tracking stocks were
redeemed (see note 2).

                                        75

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Income (loss) attributable to the different classes of AT&T common stock
for the year ended December 31, 2001, is as follows:



                                                 AT&T         AT&T     LIBERTY    TOTAL
                                             COMMON STOCK   WIRELESS    MEDIA     AT&T
                                                GROUP        GROUP      GROUP     2001
                                             ------------   --------   -------   -------
                                                                     
Income (loss) from continuing operations
  before cumulative effect of accounting
  change...................................    $    71        $--      $(2,711)  $(2,640)
Dividend requirements of preferred stock...       (652)        --           --      (652)
Premium on exchange of AT&T Wireless
  tracking stock...........................        (80)        --           --       (80)
                                               -------        ---      -------   -------
Income (loss) from continuing operations
  attributable to common shareowners.......       (661)        --       (2,711)   (3,372)
(Loss) income from discontinued
  operations...............................     (4,087)        35           --    (4,052)
Gain on disposition of discontinued
  operations...............................     13,503         --           --    13,503
Cumulative effect of accounting change.....        359         --          545       904
                                               -------        ---      -------   -------
Net income (loss) attributable to common
  shareowners..............................    $ 9,114        $35      $(2,166)  $ 6,983
                                               =======        ===      =======   =======


  AT&T COMMON STOCK GROUP

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

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



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                          2003(1)    2002(1)    2001(1)(2)
                                                          --------   --------   -----------
                                                                (SHARES IN MILLIONS)
                                                                       
Weighted-average common shares..........................    788        746          729
Effect of dilutive securities:
  Stock options and restricted stock units..............      1          1           --
  Preferred stock of subsidiary.........................     --          3           --
  Convertible quarterly income preferred securities.....     --         16           --
                                                            ---        ---          ---
Weighted-average common shares and potential common
  shares................................................    789        766          729
                                                            ===        ===          ===


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

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

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

                                        76

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Preferred Stock of Subsidiary

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

  Convertible Quarterly Income Preferred Securities (Quarterly Preferred
  Securities)

     On June 16, 1999, AT&T Finance Trust I, a wholly owned subsidiary of AT&T,
completed the private sale of 100 million shares of 5.0% cumulative quarterly
income preferred securities (quarterly preferred securities) to Microsoft. Such
securities were convertible into AT&T common stock. However, in connection with
the AT&T Broadband spin-off (see note 2), Comcast assumed the quarterly
preferred securities and Microsoft agreed to convert these preferred securities
into shares of Comcast common stock. Dividends were included in net (loss) from
discontinued operations for 2002 and 2001.

  AT&T WIRELESS GROUP

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

  LIBERTY MEDIA GROUP

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

6.  NET RESTRUCTURING AND OTHER CHARGES

     Net restructuring and other charges of $201 million for the year ended
December 31, 2003, primarily consisted of separation costs associated with our
management realignment efforts (which included approximately $9 million of
pension curtailment losses). The separations were involuntary and impacted
approximately 2,000 managers, more than 90% of whom have exited the business as
of December 31, 2003. These activities were partially offset by the net reversal
of $17 million of excess vintage employee separation liabilities.

                                        77

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                               TYPE OF COST
                                              -----------------------------------------------
                                               EMPLOYEE
                                              SEPARATIONS   FACILITY CLOSINGS   OTHER   TOTAL
                                              -----------   -----------------   -----   -----
                                                              (DOLLARS IN MILLIONS)
                                                                            
Balance at January 1, 2001..................     $ 242            $174          $ 36    $ 452
  Additions.................................       474             166            12      652
  Deductions................................      (230)            (36)          (29)    (295)
                                                 -----            ----          ----    -----
Balance at December 31, 2001................       486             304            19      809
  Additions.................................       306              78            --      384
  Deductions................................      (413)            (99)          (16)    (528)
                                                 -----            ----          ----    -----
Balance at December 31, 2002................       379             283             3      665
  Additions.................................       208              --            --      208
  Deductions................................      (431)            (78)           (1)    (510)
                                                 -----            ----          ----    -----
Balance at December 31, 2003................     $ 156            $205          $  2    $ 363
                                                 =====            ====          ====    =====


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

     Deductions in 2003, 2002 and 2001, primarily reflect total cash payments of
$455 million, $410 million and $249 million, respectively. These cash payments
include cash termination benefits of $377 million, $328 million and $202
million, respectively, which were primarily funded through cash from operations.
Deductions also included reversals of excess vintage reserves of $17 million,
$109 million and $33 million in 2003, 2002 and 2001, respectively. Additionally,
in 2003, 2002 and 2001, there were reserve transfers of $38 million, $9 million
and $13 million, respectively, out of the restructuring liability to long-term
liability accounts primarily as a result of exiting managers deferring severance
payments and accelerated vesting of equity awards (mostly related to
executives). Substantially all of the employee headcount reductions associated
with the 2002 and 2003 business restructuring plans have occurred as of December
31, 2003.

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

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

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

                                        78

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

result, the assets in these areas were impaired. This charge was recorded within
our AT&T Consumer Services segment.

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

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

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

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

7.  INVESTMENTS

  EQUITY METHOD INVESTMENTS

     We have investments in various companies and partnerships that are
accounted for under the equity method of accounting and included within other
assets. Under the equity method, investments are stated at initial cost, and are
adjusted for subsequent contributions and our share of earnings, losses and
distributions as well as declines in value that are "other than temporary." At
December 31, 2003 and 2002, we had equity investments included within other
assets of $128 million and $135 million, respectively. Distributions from equity
investments totaled $14 million, $5 million and $25 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

                                        79

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                                              OTHER EQUITY
                                              AT&T CANADA(1)    CONCERT(2)   INVESTMENTS(3)
                                             ----------------   ----------   --------------
                                                    FOR THE YEARS ENDED DECEMBER 31,
                                             ----------------------------------------------
                                              2002      2001       2001           2001
                                             -------   ------   ----------   --------------
                                                         (DOLLARS IN MILLIONS)
                                                                 
Revenue....................................  $   947   $1,000    $ 6,189         $3,813
Operating (loss) income....................     (853)    (226)    (3,574)            86
(Loss) from continuing operations before
  extraordinary items and cumulative effect
  of accounting changes....................   (1,247)    (521)    (3,609)           (18)
Net (loss).................................  $(2,220)  $ (518)   $(3,609)        $  (20)




                                            AT DECEMBER 31,
                                                 2002
                                         ---------------------
                                         (DOLLARS IN MILLIONS)
                                                                           
Current assets.........................         $   386
Non-current assets.....................             496
Current liabilities....................           3,152
Non-current liabilities................              41


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

(1) The remaining interest in AT&T Canada was disposed of in February 2003;
    therefore, financial information for 2003 is not applicable.

(2) The Concert joint venture was unwound in April 2002; therefore, financial
    information for 2002 and 2003 is not applicable.

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

  Concert

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

     In 2001, the agreement to dissolve the Concert venture impacted our intent
and ability to hold our investment in Concert; therefore, we recorded a $1.8
billion after-tax impairment charge ($2.9 billion pretax) included in net
(losses) related to other equity investments. The charge related to the
difference between the fair market value of the net assets AT&T was to receive
in the transaction and the carrying value of AT&T's investment in Concert.
Certain items reserved for in 2001 were favorably settled, resulting in
after-tax reversals of $59 million and $60 million in 2003 and 2002,
respectively, which were recorded within net (losses) related to other equity
investments.

  AT&T Canada

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

                                        80

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In 2002 and 2001, AT&T recorded charges reflecting the estimated loss on
this commitment. The charges represented the difference between the fair value
of the underlying publicly owned shares of AT&T Canada and the price AT&T had
committed to pay for them, including the 4% accretion of the floor price.
After-tax charges of $0.3 billion ($0.5 billion pretax) and $1.8 billion ($3.0
billion pretax) were recorded within net (losses) related to other equity
investments for 2002 and 2001, respectively.

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

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

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

 Impairments -- Equity Investments

     Declines in value of equity method investments judged to be other than
temporary are recorded in net (losses) related to other equity investments. In
2002 and 2001, we recorded impairment charges on equity method investments of
$0.3 billion after taxes ($0.5 billion pretax), and $4.3 billion after taxes
($7.0 billion pretax), respectively. There were no material impairment charges
recorded on equity method investments in 2003.

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

  COST METHOD INVESTMENTS

     At December 31, 2003 and 2002, we had cost method investments included in
other assets of $57 million and $581 million, respectively. Approximately $0.5
billion of these investments at December 31, 2002, were indexed to certain
long-term debt instruments, which were subsequently redeemed in February 2003
(see note 8). Under the cost method, earnings are recognized only to the extent
distributions are received from the accumulated earnings of the investee.
Distributions received in excess of accumulated earnings are recognized as a
reduction of our investment balance. Cost investments are classified as
available-for-sale and are reported at fair value, with unrealized gains and
losses, net of taxes, recorded as a separate component of other comprehensive
income (loss) in shareowners' equity. As of December 31, 2003, there were no
unrealized holding losses recorded.
                                        81

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 Impairments -- Cost Method Investments

     Declines in value of available-for-sale securities, judged to be
other-than-temporary, are recorded in other income (expense), net. During 2002
and 2001, we believed that we would not recover our cost basis on certain
investments in the foreseeable future given the significant decline in stock
prices, the length of time these investments had been below market, and industry
specific issues. Accordingly, we believed the declines in value were
other-than-temporary and, as a result, recorded investment impairment charges on
such securities of $0.1 billion after taxes ($0.1 billion pretax) and $0.3
billion after taxes ($0.5 billion pretax) for 2002 and 2001, respectively. The
2002 and 2001 impairments primarily consisted of charges related to Time Warner
Telecom, which was the result of significant changes in the general business
climate, as evidenced by the severe downward movement in the U.S. stock market,
including the decline in the value of publicly-traded industry stocks. Our
investment in Time Warner Telecom was subsequently sold in 2003. In addition,
during 2002, we recorded a pretax impairment charge of $0.6 billion related to
our holdings in AT&T Wireless, which was monetized by debt indexed to the value
of the AT&T Wireless shares (see note 8). The debt contained an embedded
derivative that was designated as a cash flow hedge. At the time, we recognized
the other-than-temporary decline in the value of AT&T Wireless as an expense,
and, as permitted by SFAS No. 133, we also recognized, in earnings, the
previously unrecognized gain on the embedded derivative of $0.6 billion pretax,
resulting in no net income impact. There were no material impairment charges
recorded on cost method investments in 2003.

 AT&T Wireless Group

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

     In February 2003, AT&T redeemed exchangeable notes that were indexed to
AT&T Wireless common stock. The notes were settled with 78.6 million shares of
AT&T Wireless common stock and $152 million in cash (see note 8). Also in
February, AT&T sold its remaining investment in AT&T Wireless (approximately
12.2 million shares) for $72 million, resulting in a gain of $22 million
recorded in other income (expense), net.

  Japan Telecom Co. Ltd.

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

                                        82

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  DEBT OBLIGATIONS

  DEBT MATURING WITHIN ONE YEAR



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003        2002
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                    
Commercial paper............................................   $  753      $1,091
Short-term notes............................................      150       1,086
Currently maturing long-term debt...........................      436       1,581
Other.......................................................        4           4
                                                               ------      ------
Total debt maturing within one year.........................   $1,343      $3,762
                                                               ======      ======
Weighted-average interest rate of short-term debt(1)........      1.3%        3.4%


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

(1) Excludes currently maturing long-term debt.

  SECURITIZATIONS

     During 2003, we renewed our AT&T Consumer Services customer accounts
receivable securitization facility and entered into a new AT&T Business Services
customer accounts receivable securitization facility, both of which extend
through July 2004. Under the program, accounts receivable are sold on a
discounted, revolving basis, to special-purpose, wholly-owned and fully
consolidated subsidiaries of AT&T, which assign interests in such receivables to
unrelated third-party financing entities. Together, the programs provided $1.65
billion of available financing at December 31, 2003, limited by the eligible
receivables balance, which varies from month to month. In March 2004, AT&T
reduced the combined facility size to $1.45 billion, limited by the eligible
receivables balance. The facilities require AT&T to meet a debt-to-EBITDA ratio
(as defined in the agreements) not exceeding 2.25 to 1. At December 31, 2003, we
were in compliance with this covenant. At December 31, 2003, the available
financing was collateralized by $3.0 billion of accounts receivable.
Approximately $150 million was outstanding at December 31, 2003 and 2002, and
was included in short-term notes in the table above.

  CREDIT FACILITY

     At December 31, 2003, we had a $2.0 billion syndicated 364-day credit
facility available to us that was entered into October 8, 2003. The credit
facility contains an option to extend the term of the agreement for an
additional 364-day period beyond October 7, 2004. Up to $300 million of the
facility can be utilized for letters of credit, which reduces the amount
available. At December 31, 2003, approximately $118 million of letters of credit
were outstanding under the facility. Additionally, the credit facility contains
a financial covenant that requires AT&T to meet a debt-to-EBITDA ratio (as
defined in the credit agreement) not exceeding 2.25 to 1 and an EBITDA-to-net
interest expense ratio (as defined in the credit agreement) of at least 3.50 to
1. for four consecutive quarters ending on the last day of each fiscal quarter.
At December 31, 2003, we were in compliance with these covenants.

     Pursuant to the definitions in the credit facility and securitization
facilities, business restructuring and asset impairment charges have no impact
on the EBITDA financial covenants.

                                        83

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  LONG-TERM DEBT



                                                                           AT DECEMBER 31,
                                                                        ---------------------
                                                                         2003(1)     2002(1)
                                                                        ---------   ---------
                                                                        (DOLLARS IN MILLIONS)
DEBENTURES AND NOTES
INTEREST RATES(2)                        MATURITIES
- -----------------                        ----------
                                                                           
5.63% - 6.00%         2009   .........................................   $ 1,028     $ 1,455
6.38% - 6.50%         2013 - 2029.....................................       411       6,678
6.75% - 7.50%         2004 - 2006.....................................     4,958       2,449
7.75% - 8.85%         2004 - 2031.....................................     6,043       6,796
9.90% - 10.00%        2004   .........................................        10          13
Variable rate         2005 - 2054.....................................       980       3,012
                                                                         -------     -------
Total debentures and notes............................................    13,430      20,403
Other.................................................................        97         105
Unamortized discount, net.............................................       (25)       (115)
                                                                         -------     -------
Total long-term debt..................................................    13,502      20,393
Less: currently maturing long-term debt...............................       436       1,581
                                                                         -------     -------
Net long-term debt....................................................   $13,066     $18,812
                                                                         =======     =======


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

(1) Debt amounts are included within the range of interest rates that are
    applied at each respective balance sheet date. See below for a discussion of
    interest rate changes that occurred during 2003.

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

     The following table shows maturities at December 31, 2003, of the $13.5
billion in total long-term obligations:



2004   2005     2006    2007   2008   LATER YEARS
- ----  ------   ------   ----   ----   -----------
              (DOLLARS IN MILLIONS)
                       
$436  $1,204   $4,326   $297    $4      $7,235


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

     On September 15, 2003, AT&T completed the early retirement of $322 million
and $184 million long-term notes, both with interest rates of 8.125%, due in
January 2022 and July 2024, respectively. The notes were repurchased with cash
and resulted in a loss of $23 million recorded in other income (expense), net.

     On October 22, 2003, AT&T completed the early retirement of three long-term
notes totaling approximately $1.1 billion. The first note of $236 million, had
an interest rate of 8.625%, and was due in December 2031. The other two notes,
with $410 million and $439 million of principal amounts outstanding, bore
interest rates of 5.625% and 6.375%, respectively, and were each due in March
2004. The notes were repurchased with cash and resulted in a loss of $32 million
recorded in other income (expense), net.

     Also in 2003, we exercised our purchase option on buildings we had leased,
which were consolidated in July along with debt of approximately $477 million,
as a result of our adoption of FIN No. 46 (see note 3). A $28 million loss on
the early extinguishment of debt was recorded in other income (expense), net.

                                        84

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As a result of a long-term credit rating downgrade by Standard & Poor's in
July 2003, the interest rate on approximately $10 billion in notional amount of
debt, $1.3 billion of which matured in November 2003, increased by 25 basis
points.

     The holders of certain private debt with an outstanding balance of $1.0
billion at December 31, 2003, have an annual put right to cause AT&T to repay
the debt upon payment of an exercise fee. In exchange for the debt holders
agreeing to not exercise their put right, in 2004, AT&T renewed a
cash-collateralized letter of credit, totaling $0.5 billion now expiring in
March 2005. The $0.5 billion is considered restricted cash and is included in
other assets at December 31, 2003. The debt holders could accelerate repayment
of the debt based on certain events such as the occurrence of unfavorable local
law or regulation changes in its country of operation.

     In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. Also, we offered to
repurchase for cash up to E 1 billion of our outstanding E 2 billion 6.0% Notes
due November 2006, which now carry an interest rate of 6.75%. This repurchase is
expected to close by the end of March 2004.

  EXCHANGEABLE NOTES

     At December 31, 2002, we had long-term debt (exchangeable notes) with a
carrying value of $519 million that was indexed to 90.8 million shares of AT&T
Wireless common stock and, at AT&T's option, was mandatorily redeemable with a
number of shares of AT&T Wireless common stock that was equal to the underlying
shares multiplied by an exchange ratio, or its cash equivalent. The notes were
accounted for as indexed debt instruments, because the carrying value of the
debt was dependent upon the fair market value of the underlying securities. In
addition, the notes contained embedded derivatives, which were designated as
cash flow hedges that required separate accounting. The options hedged the
market risk of a decline in value of AT&T Wireless securities. These designated
options were carried at fair value with changes in fair value recorded, net of
income taxes, within accumulated other comprehensive income (loss), as a
component of shareowners' equity.

     In February 2003, AT&T redeemed these exchangeable notes with 78.6 million
shares of AT&T Wireless common stock and $152 million in cash. The settlement
resulted in a pretax gain of approximately $176 million recorded in other income
(expense), net. Also in February 2003, the 12.2 million remaining AT&T Wireless
shares were subsequently sold (see note 7).

9.  FINANCIAL INSTRUMENTS

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

     By their nature, all such instruments involve exposure to credit risk and
market risk. Credit risk is the risk of nonperformance by counter-parties under
the terms of the contract. We control our exposure to credit risk

                                        85

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

through credit approvals, credit limits and monitoring procedures. Our maximum
potential loss may exceed the amount recognized in our balance sheet. However,
at December 31, 2003 and 2002, in management's opinion, there was no significant
risk of loss in the event of nonperformance of the counter-parties to these
financial instruments. Market risk is the risk that the value of the instrument
may be adversely affected by changes in interest rates, currency exchange rates,
or equity prices. We continually manage this risk through monitoring procedures,
which limit the type and amount of exposure to these risks. Other than the
guarantee issued in connection with the split-off of AT&T Wireless, we do not
have any significant exposure to any individual customer or counter-party, nor
do we have any major concentration of credit risk related to any financial
instruments.

  LETTERS OF CREDIT

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

     The notional amounts outstanding at December 31, 2003 and 2002, were $1.1
billion and $0.9 billion, respectively. The letters of credit in effect at
December 31, 2003, were collateralized by restricted cash of $499 million, which
was recorded within other assets. The letters of credit in effect as of December
31, 2002 were collateralized by restricted cash of $496 million, of which $442
million was recorded in other assets and $54 million was recorded in other
current assets. The fair values of the letters of credit, based on the fees paid
to obtain the obligations, were immaterial at December 31, 2003 and 2002.

  GUARANTEES

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

     Total notional amounts of guaranteed debt at December 31, 2003 and 2002,
were $6 million and $506 million, respectively. Prior to the spin-off of AT&T
Broadband, we had guaranteed certain debt of AT&T Broadband that matured in
2038, which remained outstanding after the spin-off of AT&T Broadband. In the
fourth quarter of 2003, Comcast called this debt, which relieved AT&T of a $500
million commitment. The remaining guarantees for debt, which relate to NCR, have
expiration dates ranging from 2004 to 2020. Should the financial condition of
NCR deteriorate to the point at which it is unable to meet its obligations,
third party creditors could look to us for payment. We currently hold no
collateral for this guarantee, and have not recorded a corresponding obligation.
At December 31, 2003 and 2002, there were no quoted market prices for similar
agreements.

     AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT
DoCoMo. The amounts of the guarantee at December 31, 2003 and 2002, were $4.4
billion and $4.1 billion, respectively. On January 21, 2001, NTT DoCoMo invested
approximately $9.8 billion for shares of AT&T preferred stock that were
converted into AT&T Wireless common stock in connection with the split-off of
AT&T Wireless. Of the initial investment, AT&T retained approximately $3.6
billion, with the remainder of the proceeds allocated to AT&T Wireless. In
connection with that investment, AT&T and AT&T Wireless agreed that, under
certain circumstances, including if AT&T Wireless fails to meet specific
technological milestones by June 30, 2004, NTT DoCoMo would have the right to
require AT&T Wireless to repurchase its AT&T Wireless common stock for $9.8
billion, plus interest. In the event AT&T Wireless is unable to satisfy the
entire obligation, AT&T is secondarily liable for up to $3.65 billion, plus
accrued interest. On December 26, 2002, AT&T Wireless and NTT DoCoMo entered
into an amendment to the original agreement, which, among other things, extended
the deadline for compliance with the technological milestones to December 31,
2004. AT&T's guarantee expires on June 30, 2004, in accordance with the terms of
the original agreement. We

                                        86

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

currently hold no collateral for this guarantee, and have not recorded a
corresponding obligation. At December 31, 2003 and 2002, there were no quoted
market prices for similar agreements.

     The total notional amount of other guaranteed obligations at December 31,
2003 and 2002 was $224 million and $458 million, respectively. Prior to the
spin-off of AT&T Broadband, we guaranteed various obligations of AT&T Broadband.
In connection with the spin-off of AT&T Broadband, we continue to provide
guarantees of these obligations, including operating leases for real estate,
surety bonds, and equity hedges. These guarantees have expiration dates ranging
from 2004 through 2007. Comcast has provided full indemnification for these
guarantees as of December 31, 2003. Should the financial condition of Comcast
deteriorate to the point at which they are unable to meet their obligations,
third party creditors could look to us for payment. We currently hold no
collateral for these guarantees, and have not recorded corresponding
obligations. At December 31, 2003, there were no quoted market prices for
similar agreements.

  INTEREST RATE SWAP AGREEMENTS

     We enter into interest rate swaps to manage our exposure to changes in
interest rates. We enter into swap agreements to manage the fixed/floating mix
of our debt portfolio in order to reduce aggregate risk of interest rate
movements. Interest rate swaps allow us to raise funds at floating rates and
effectively swap them into fixed rates that are generally lower than those
available to us if fixed rate borrowings were made directly, or to swap
fixed-rate borrowings to floating rates when interest rates are expected to stay
low. These agreements involve the exchange of floating-rate for fixed-rate
payments or the exchange of fixed-rate for floating-rate payments without the
exchange of the underlying notional amount. Floating-rate payments and receipts
are primarily tied to the LIBOR (London Inter-Bank Offered Rate). In 2003, we
entered into $1.0 billion notional amount of fixed-to-floating interest rate
swaps, which we designated as fair value hedges in accordance with SFAS No. 133,
as amended. The floating-rate to fixed-rate swaps were designated as cash flow
hedges as of December 31, 2003. There was no ineffectiveness recognized in
earnings for our fair value or cash flow hedges during 2003 and 2002.

     The following table indicates the types of swaps in use at December 31,
2003 and 2002, the respective notional amounts and their weighted-average
interest rates. Average floating rates are those in effect at the reporting
date, and may change significantly over the lives of the contracts.



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003         2002
                                                              ---------     -------
                                                              (DOLLARS IN MILLIONS)
                                                                      
Fixed-rate to floating-rate swaps -- notional amount........   $1,000        $ --
  Weighted-average receipt rate.............................     4.23%         --
  Weighted-average pay rate.................................     2.67%         --
Floating-rate to fixed-rate swaps -- notional amount........   $  190        $190
  Weighted-average receipt rate.............................     1.38%       1.81%
  Weighted-average pay rate.................................     7.30%       7.30%


     In connection with debt redeemed in the first quarter of 2004 (see note 8),
we unwound $250 million notional amount of fixed-to-floating interest rate
swaps.

     In addition, we have combined interest rate foreign currency swap
agreements for foreign-currency-denominated debt, which hedge our risk to both
interest rate and currency movements, $1.8 billion of which are designated as
cash flow hedges for accounting purposes in 2003 and 2002. There was no
ineffectiveness recognized in earnings for these hedges during 2003 and 2002. At
December 31, 2003 and 2002, the notional amounts related to these contracts were
$2.5 billion and $3.8 billion, respectively. The decrease in the notional
amounts primarily related to the $1.3 billion Euro bonds contract, which matured
in the fourth quarter of 2003.
                                        87

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with the combined interest rate swap agreements, as of
December 31, 2003, we had received $232 million of cash collateral (included in
cash).

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



                                                             AT DECEMBER 31,
                                        ---------------------------------------------------------
                                                   2003                            2002
                                           CARRYING/FAIR VALUE              CARRYING/FAIR VALUE
                                        --------------------------        -----------------------
                                           ASSET         LIABILITY         ASSET        LIABILITY
                                        -----------      ---------        --------      ---------
                                                          (DOLLARS IN MILLIONS)
                                                                            
Interest rate swap agreements.........  $        --       $   41          $     --       $   23
Combined interest rate foreign
  currency swap agreements............        1,002           --               660           --


  FOREIGN EXCHANGE

     We enter into foreign currency forward contracts to manage our exposure to
changes in currency exchange rates related to foreign-currency-denominated
transactions. Although we do not designate most of our foreign exchange
contracts as accounting hedges, we have certain contracts that are designated as
foreign currency cash flow hedges in accordance with SFAS No. 133. At December
31, 2003, our foreign exchange contracts consisted principally of Euros, British
pound sterling, Danish krone and Swiss francs. At December 31, 2002, our foreign
exchange contracts consisted principally of Euros, Japanese yen, and Swiss
francs. In addition, we are subject to foreign exchange risk related to other
foreign-currency-denominated transactions. The notional amounts under contract
at December 31, 2003 and 2002, were $1.1 billion and $742 million, respectively,
$45 million and $44 million of which were designated as cash flow hedges,
respectively. There was no ineffectiveness recognized in earnings for these
hedges during 2003 and 2002. The following table summarizes the carrying and
fair values of the foreign exchange contracts at December 31, 2003 and 2002.
These foreign exchange contracts are valued using current market quotes which
were obtained from independent sources.



                                                             AT DECEMBER 31,
                                        ---------------------------------------------------------
                                                   2003                            2002
                                           CARRYING/FAIR VALUE              CARRYING/FAIR VALUE
                                        --------------------------        -----------------------
                                           ASSET         LIABILITY         ASSET        LIABILITY
                                        -----------      ---------        --------      ---------
                                                          (DOLLARS IN MILLIONS)
                                                                            
Foreign exchange contracts............  $        87       $   14          $     41       $    2


  EQUITY OPTION AND EQUITY SWAP CONTRACTS

     We enter into equity option and equity swap contracts, which are
undesignated, to manage our exposure to changes in equity prices associated with
various equity awards of previously affiliated companies (see note 12). The
notional amounts outstanding on these contracts at December 31, 2003 and 2002
were $91 million and $112 million, respectively. The following table summarizes
the carrying and fair values of these instruments at December 31, 2003 and 2002.
Fair values are based on market quotes.



                                                             AT DECEMBER 31,
                                        ---------------------------------------------------------
                                                   2003                            2002
                                           CARRYING/FAIR VALUE              CARRYING/FAIR VALUE
                                        --------------------------        -----------------------
                                           ASSET         LIABILITY         ASSET        LIABILITY
                                        -----------      ---------        --------      ---------
                                                          (DOLLARS IN MILLIONS)
                                                                            
Equity hedges.........................  $         5       $   12          $     --       $   25


                                        88

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  WARRANTS

     We may obtain warrants to purchase equity securities in private and public
companies as a result of certain transactions. Private warrants and public
warrants that provide for net share settlement (i.e. allow for cashless
exercise) are considered to be derivative instruments and recognized on our
balance sheet at fair value (in accordance with SFAS No. 133, as amended).
Warrants are not eligible to be designated as hedging instruments because there
is no underlying exposure. Instead, these are effectively investments in private
and public companies. The carrying and fair value of these warrants was not
material at December 31, 2003 and 2002.

  DEBT SECURITIES

     The carrying value of debt with an original maturity of less than one year
approximates market value. The table below summarizes the carrying and fair
values of long-term debt (including currently maturing long-term debt),
excluding capital leases, at December 31, 2003 and 2002. The fair values of
long-term debt were obtained based on quotes or rates available to us for debt
with similar terms and maturities.



                                                                 AT DECEMBER 31,
                                     ------------------------------------------------------------------------
                                                   2003                                    2002
                                           CARRYING/FAIR VALUE                     CARRYING/FAIR VALUE
                                     --------------------------------        --------------------------------
                                         ASSET            LIABILITY              ASSET            LIABILITY
                                     -------------      -------------        -------------      -------------
                                                              (DOLLARS IN MILLIONS)
                                                                                    
Long-term debt, excluding capital
  leases...........................  $      13,406      $     14,820         $      20,292      $      21,030


  DERIVATIVE IMPACTS

     The following table summarizes the activity in accumulated other
comprehensive income (loss) in shareowners' equity related to derivatives
designated as cash flow hedges during the periods January 1, 2002 through
December 31, 2003.



                                                              PRETAX    AFTER TAXES
                                                              -------   -----------
                                                              (DOLLARS IN MILLIONS)
                                                                  
Balance at January 1, 2002..................................  $  (395)    $ (244)
Unrealized gains (losses)...................................    1,420        876
Realized (gains) losses reclassified into earnings..........   (1,259)      (777)
Net amounts spun-off with AT&T Broadband....................      317        196
                                                              -------     ------
Balance at December 31, 2002................................       83         51
Unrealized gains (losses)...................................       39         25
Realized (gains) losses reclassified into earnings..........     (100)       (62)
                                                              -------     ------
Balance at December 31, 2003................................  $    22     $   14
                                                              =======     ======


     Included within the balance at December 31, 2002, were unrealized gains of
$131 million pretax ($81 million after taxes) on embedded derivatives related to
exchangeable notes that were indexed to AT&T Wireless common stock, which were
settled in February 2003.

     In connection with the planned redemption of a portion of our Euro Bonds
maturing in 2006, and the unwind of related cash flow hedges, we expect to
recognize, in the first quarter of 2004, unrealized gains currently recorded in
accumulated other comprehensive income (loss) (see note 18). The impact of this
transaction will vary based on the market and other conditions at the time of
redemption and cannot be currently estimated.

                                        89

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  EQUITY TRANSACTIONS

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

     Pursuant to the AT&T Broadband and Comcast merger agreement (see note 2),
AT&T was required to redeem the outstanding TCI Pacific Communications, Inc.
Class A Senior Cumulative Exchangeable Preferred Stock for AT&T common stock.
Each share of TCI Pacific preferred stock was exchangeable, at the option of the
holder, for 1.673 shares of AT&T common stock. During 2002, all outstanding
shares (approximately 6.2 million) of TCI Pacific preferred stock were either
exchanged or redeemed for approximately 10.4 million shares of AT&T common
stock. No gain or loss was recorded on the exchange/redemption of the TCI
Pacific preferred stock.

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

     On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,512 shares of a new class of AT&T preferred stock with a par value of $1 per
share. On July 9, 2001, in conjunction with the split-off of AT&T Wireless Group
(see note 2), these preferred shares were converted into AT&T Wireless common
stock. During 2001, we recorded dividend requirements on this preferred stock of
$652 million. The preferred stock dividend represented interest in connection
with the NTT DoCoMo preferred stock, as well as accretion of the beneficial
conversion feature associated with this preferred stock. The beneficial
conversion feature was recorded upon the issuance of the preferred stock and
represented the excess of the fair value of the preferred shares issued over the
proceeds received.

11.  PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS

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

                                        90

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  U.S. PLANS

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



                                            PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                       ---------------------------   ------------------------
                                                  FOR THE YEARS ENDED DECEMBER 31,
                                       ------------------------------------------------------
                                        2003      2002      2001      2003     2002     2001
                                       -------   -------   -------   ------   ------   ------
                                                       (DOLLARS IN MILLIONS)
                                                                     
Service cost -- benefits earned
  during the period..................  $   223   $   209   $   226   $  24    $  23    $  26
Interest cost on benefit
  obligations........................      941     1,002       938     367      365      344
Amortization of unrecognized prior
  service cost.......................      145       152       172      40       12        4
Credit for expected return on plan
  assets.............................   (1,449)   (1,526)   (1,647)   (152)    (187)    (201)
Amortization of transition asset.....       --       (34)      (89)     --       --       --
Amortization of losses (gains).......        4       (22)     (182)     81        5       --
Charges (credits) for special
  termination benefits(*)............       --       (19)      188      14       --       28
Net curtailment losses(*)............        9        --       113      --       --       59
Net settlement losses................       10         6         4      --       --       --
                                       -------   -------   -------   -----    -----    -----
Net periodic benefit (credit) cost...  $  (117)  $  (232)  $  (277)  $ 374    $ 218    $ 260
                                       =======   =======   =======   =====    =====    =====


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

(*) Primarily included in net restructuring and other charges.

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

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

                                        91

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                                      POSTRETIREMENT
                                                 PENSION BENEFITS        BENEFITS
                                                 -----------------   -----------------
                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                 -------------------------------------
                                                  2003      2002      2003      2002
                                                 -------   -------   -------   -------
                                                         (DOLLARS IN MILLIONS)
                                                                   
Change in benefit obligations:
Benefit obligations, beginning of year.........  $14,985   $13,878   $ 5,839   $ 5,277
Service cost...................................      223       209        24        23
Interest cost..................................      941     1,002       367       365
Participants' contributions....................       --        --        42         9
Plan amendments................................       24        34       173        14
Actuarial losses...............................      799     1,134       362       640
Benefit payments...............................   (1,175)   (1,221)     (547)     (489)
Special termination (credits) benefits.........       --       (19)       14        --
Settlements....................................      (29)      (32)       --        --
Curtailment gains..............................       (1)       --        --        --
                                                 -------   -------   -------   -------
Benefit obligations, end of year...............  $15,767   $14,985   $ 6,274   $ 5,839
                                                 =======   =======   =======   =======
Change in fair value of plan assets:
Fair value of plan assets, beginning of year...  $15,603   $18,449   $ 1,745   $ 2,156
Actual return on plan assets...................    3,067    (1,663)      316      (255)
Employer contributions.........................       89        70       501       324
Participants' contributions....................       --        --        42         9
Benefit payments...............................   (1,175)   (1,221)     (547)     (489)
Settlements....................................      (29)      (32)       --        --
                                                 -------   -------   -------   -------
Fair value of plan assets, end of year.........  $17,555   $15,603   $ 2,057   $ 1,745
                                                 =======   =======   =======   =======




                                                            AT DECEMBER 31,
                                                 -------------------------------------
                                                  2003      2002      2003      2002
                                                 -------   -------   -------   -------
                                                                   
Funded (unfunded) benefit obligation...........  $ 1,788   $   618   $(4,217)  $(4,094)
Unrecognized net loss..........................      882     1,715     1,807     1,684
Unrecognized prior service cost (credits)......      639       769       123       (10)
                                                 -------   -------   -------   -------
Net amount recorded............................  $ 3,309   $ 3,102   $(2,287)  $(2,420)
                                                 =======   =======   =======   =======


     On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. We are impacted by
the Act since we sponsor a postretirement health care plan that provides
prescription drug benefits. We have elected to defer recognition of the Act in
accordance with Financial Accounting Standards Board Staff Position No. FAS
106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." As a result, any
measures of the accumulated postretirement benefit obligation or net periodic
postretirement benefit cost do not reflect the effects of the Act on the plan.
Specific

                                        92

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

authoritative guidance on accounting for the federal subsidy is pending and that
guidance, when issued, could require us to change previously reported
information.

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



                                      PENSION PLAN ASSETS    POSTRETIREMENT PLAN ASSETS
                                      --------------------   --------------------------
                                                       AT DECEMBER 31,
                                      -------------------------------------------------
                                                    TARGET                      TARGET
                                      2003   2002   RANGE     2003     2002     RANGE
                                      ----   ----   ------   ------   ------   --------
                                                             
Equity securities(1)................   68%    63%   60-70%     61%      55%     60-75%
Debt securities.....................   23%    27%   20-30%     23%      28%     23-35%
Real estate.........................    9%    10%    5-15%      0%       0%         0%
Other(2)............................    0%     0%       0%     16%      17%      0-10%
                                      ----   ----             ----     ----
  Total.............................  100%   100%             100%     100%
                                      ====   ====             ====     ====


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

(1) At December 31, 2003, and 2002, our pension plan assets included $7 million
    and $13 million of AT&T common stock, respectively.

(2) Other postretirement plan assets primarily consisted of cash and cash
    equivalents at December 31, 2003 and 2002. The target range is determined
    based on anticipated cash requirements to partially fund benefit payments.
    The year-end cash level was higher than the target range due to year-end
    cash contributions made to the postretirement welfare benefit plan.
    Prospectively, company contributions to the trust are expected to be made
    periodically throughout the year.

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

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



                                                  PENSION BENEFITS        POSTRETIREMENT BENEFITS
                                                 -------------------      ------------------------
                                                                  AT DECEMBER 31,
                                                 -------------------------------------------------
                                                  2003        2002          2003           2002
                                                 ------      -------      ---------      ---------
                                                               (DOLLARS IN MILLIONS)
                                                                             
Prepaid pension cost...........................  $3,853      $ 3,596       $    --        $    --
Benefit related liabilities....................    (901)      (1,255)       (2,287)        (2,420)
Intangible asset (in other assets).............     337          456            --             --
Accumulated other comprehensive income.........      20          305            --             --
                                                 ------      -------       -------        -------
Net amount recorded............................  $3,309      $ 3,102       $(2,287)       $(2,420)
                                                 ======      =======       =======        =======


     Included in other comprehensive income was a pretax (decrease) increase in
the minimum pension liability of $(285) million, $289 million, and $(6) million,
for the years ended 2003, 2002 and 2001, respectively.

                                        93

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The accumulated benefit obligation for all defined benefit pension plans
was $15.5 billion and $14.7 billion at December 31, 2003, and 2002,
respectively. The following table provides information for pension plans with an
accumulated benefit obligation in excess of plan assets:



                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                 2003        2002
                                                              ----------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                     
Projected benefit obligation................................   $10,340      $9,811
Accumulated benefit obligation..............................    10,057       9,532
Fair value of plan assets...................................     9,157       8,279


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



                                                   BENEFIT
                                                 OBLIGATIONS           NET PERIODIC BENEFIT COST
                                               ---------------     ----------------------------------
                                               AT DECEMBER 31,      FOR THE YEARS ENDED DECEMBER 31,
                                               ---------------     ----------------------------------
                                               2003      2002        2003         2002         2001
                                               -----     -----     --------     --------     --------
                                                                              
Discount rate................................  6.00%     6.50%      6.50%        7.25%        7.50%
Rate of compensation increase................  4.00%     4.25%      4.25%        5.90%        5.90%
Expected return on plan assets...............     --        --      8.50%        9.00%        9.50%


     The assumptions in the above table were reassessed as of December 31, 2003.
The discount rate was reduced to 6% based on current yields on high quality
corporate fixed-income investments with maturities corresponding to the expected
duration of the benefit obligations. Additionally, the rate of projected
compensation increase was reduced to 4% reflecting expected inflation levels,
our actual recent experience and future outlook. We conducted an expected
long-term rate of return study on pension and postretirement benefit plan
assets. This study consisted of forward-looking projections for a risk-free rate
of return, inflation rate, and risk premiums for particular asset classes.
Historical returns were not used. The results of this study were applied to the
target asset allocation in accordance with our plan investment strategies. The
expected long-term rate of return on plan assets was determined based on the
weighted-average of projected returns on each asset class. As a result, the
expected rate of return on plan assets will remain unchanged for 2004.

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



                                                              AT DECEMBER 31,
                                                              ---------------
                                                               2003     2002
                                                              ------   ------
                                                                 
Health care cost trend rate assumed for next year...........  10.2%    10.9%
Rate to which the cost trend rate is assumed to decline
  (ultimate trend rate).....................................   5.0%     5.0%
Year that the rate reaches the ultimate trend rate..........   2008     2010


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



                                                          ONE-PERCENTAGE    ONE-PERCENTAGE
                                                          POINT INCREASE    POINT DECREASE
                                                          ---------------   ---------------
                                                                (DOLLARS IN MILLIONS)
                                                                      
Effect on total of service and interest cost............       $ 11              $ (10)
Effect on accumulated postretirement benefit
  obligation............................................        190               (166)


     We expect to contribute approximately $30 million to the nonqualified
pension plan in 2004. No contribution is expected for the qualified pension
plans in 2004 or 2005. We also expect to contribute approximately $0.6 billion
to the postretirement benefit plans in 2004.

                                        94

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     We also sponsor savings plans for the majority of our U.S. employees. The
plans allow employees to contribute a portion of their pretax and/or after-tax
income in accordance with specified guidelines. We match a percentage of the
employee contributions up to certain limits. Contributions to such U.S. saving
plans relating to continuing operations amounted to $136 million in 2003, $135
million in 2002, and $131 million in 2001.

  NON-U.S. PLANS

     Certain non-U.S. operations have varying types of retirement programs
providing benefits for substantially all of their employees. The projected
benefit obligations of the defined benefit pension plans was $634 million and
$523 million at December 31, 2003 and 2002, respectively. The fair value of plan
assets was $442 million and $324 million as of December 31, 2003 and 2002,
respectively. The benefit obligations were determined using a weighted average
discount rate of 5.40% at December 31, 2003 and December 31, 2002, and a
weighted average rate of compensation increase of 3.90% and 3.95% as of December
31, 2003 and 2002, respectively.

     Certain of these defined benefit plans had accumulated benefit obligations
of $512 million at December 31, 2003, which were in excess of the fair value of
plan assets of $386 million, resulting in total unfunded accumulated benefit
obligations of $126 million as of December 31, 2003. As a result of the
under-funded status of these plans, we recorded an additional minimum pension
liability of $103 million as a charge to other comprehensive income (loss).

12.  STOCK-BASED COMPENSATION PLANS

     Under the 1997 Long-term Incentive Program (Program), which was effective
June 1, 1997, and amended on May 19, 1999, and March 14, 2000, we grant stock
options, performance shares, restricted stock and other awards in AT&T common
stock, and also granted stock options on AT&T Wireless Group tracking stock
prior to the split-off of AT&T Wireless. The Program expires on May 31, 2004.

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

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

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

                                        95

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with the July 9, 2001, split-off of AT&T Wireless Group, all
outstanding AT&T Wireless Group tracking stock options and all AT&T common stock
options granted prior to January 1, 2001, were converted in the same manner as
common shares (see note 2). AT&T modified the terms and conditions of all
outstanding stock option grants to allow the AT&T Wireless common stock options
held by AT&T employees to immediately vest and become exercisable for their
remaining contractual term and to also allow the AT&T common stock options held
by AT&T Wireless employees to immediately vest and become exercisable for their
remaining contractual term. In 2001, AT&T recognized $3 million of compensation
expense related to these modifications.

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

     Under the AT&T 1996 Employee Stock Purchase Plan (ESPP), which was
effective July 1, 1996, and amended on May 23, 2001, we are authorized to sell
up to 21 million shares of AT&T common stock to our eligible employees through
June 30, 2006. Under the terms of the ESPP, employees may have up to 10% of
their earnings withheld to purchase AT&T's common stock. The purchase price of
the stock on the date of exercise is 85% of the average high and low sale prices
of shares on the New York Stock Exchange for that day. Under the ESPP, we sold
approximately 1.3 million, 1.3 million and 1.2 million shares to employees in
2003, 2002 and 2001, respectively. Effective May 31, 2003, we suspended employee
purchases of company stock under the ESPP.

     Effective January 1, 2003, AT&T began recording compensation expense
pursuant to SFAS No. 123 for all stock options issued subsequent to January 1,
2003. The fair value of all stock options issued subsequent to January 1, 2003
is measured on the grant date using the Black-Scholes option pricing model and
recognized in the income statement over the vesting period (see note 1).

                                        96

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                               WEIGHTED-             WEIGHTED-            WEIGHTED-
                                                AVERAGE               AVERAGE              AVERAGE
                                               EXERCISE              EXERCISE             EXERCISE
SHARES IN THOUSANDS                   2003     PRICE(1)     2002     PRICE(1)     2001    PRICE(1)
- -------------------                  -------   ---------   -------   ---------   ------   ---------
                                                                        
Outstanding at January 1,..........   98,257    $40.64      63,509    $122.90    49,805    $179.10
  Options granted..................   25,359     17.36      15,183      68.84    13,680     110.85
  AT&T Wireless split-off
     adjustments...................       --                    --                4,330
  AT&T Broadband spin-off
     adjustments...................       --                37,049                   --
  Options and SARs exercised.......     (745)    12.60        (436)     32.28    (1,044)     58.15
  Options canceled or forfeited....   (4,411)    36.10     (17,048)    125.72    (3,262)    155.35
                                     -------               -------               ------
Options outstanding at December
  31,..............................  118,460     35.99      98,257      40.64    63,509     122.90
Options exercisable at December
  31,..............................   68,825     44.18      46,770      49.88    34,289     130.25
Shares available for grant at
  December 31,.....................   19,487(2)             27,751                6,944


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

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

(2) 2,090 shares are available for grants other than stock options.

                                        97

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2003:



                                              OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                 ---------------------------------------------   --------------------------
                                     NUMBER          WEIGHTED-       WEIGHTED-       NUMBER       WEIGHTED-
                                 OUTSTANDING AT       AVERAGE         AVERAGE    EXERCISABLE AT    AVERAGE
                                  DECEMBER 31,       REMAINING       EXERCISE     DECEMBER 31,    EXERCISE
RANGE OF EXERCISE PRICES              2003        CONTRACTUAL LIFE     PRICE          2003          PRICE
- ------------------------         --------------   ----------------   ---------   --------------   ---------
                                 (IN THOUSANDS)                                  (IN THOUSANDS)
                                                                                   
$3.93 - $17.22.................         693             2.6           $10.21            693        $10.21
$17.32.........................      23,455             9.4           $17.32          1,225        $17.32
$17.47 - $23.70................       2,505             6.5           $20.39          1,505        $19.78
$23.88.........................      10,249             8.7           $23.88          4,864        $23.88
$23.94 - $28.00................       1,160             7.5           $25.75            738        $25.58
$28.03.........................      21,087             8.1           $28.03          8,586        $28.03
$28.23 - $32.54................       2,295             6.8           $30.38          1,961        $30.39
$32.63.........................       5,493             7.5           $32.63          3,551        $32.63
$32.64 - $33.66................       1,113             6.5           $33.45            889        $33.45
$33.68.........................       8,118             7.2           $33.68          5,274        $33.68
$33.77 - $38.10................       7,379             3.9           $35.74          6,846        $35.76
$38.31 - $46.73................       7,581             3.4           $41.46          7,317        $41.32
$46.91.........................       5,398             6.6           $46.91          4,451        $46.91
$47.04 - $61.45................       3,395             5.0           $55.84          3,360        $55.88
$61.54.........................       4,884             4.1           $61.54          4,884        $61.54
$61.66 - $87.01................       8,710             5.9           $71.10          8,041        $71.34
$87.51 - $90.80................       4,945             5.1           $87.52          4,640        $87.52
                                    -------                                          ------
                                    118,460             7.0           $35.99         68,825        $44.18
                                    =======                                          ======


     A summary of the AT&T Wireless Group tracking stock option transactions is
as follows:



                                                                         WEIGHTED-
                                                                          AVERAGE
                                                                          EXERCISE
                                                                2001       PRICE
                                                              --------   ----------
                                                              (SHARES IN THOUSANDS)
                                                                   
Outstanding at January 1....................................   73,626      $29.29
  Options granted...........................................    4,037      $22.57
  Options exercised.........................................       (1)     $22.03
  Options canceled or forfeited.............................   (2,711)     $29.11
  Options assumed by AT&T Wireless on July 9................  (74,951)
                                                              -------
Options outstanding at December 31..........................       --
                                                              =======


     In 2003 and 2001, AT&T granted 2.4 million and 0.7 million restricted stock
units, respectively, to key employees. These awards generally vest after three
years. In addition, in 2002, AT&T offered employees the option to cancel certain
outstanding stock options and replace them with restricted stock units.
Approximately 15 million stock options were canceled as a result of this offer,
and 2.5 million restricted stock units were granted, which vest over a
three-year period. The 2.5 million restricted stock units were restructured into
6.5 million units as a result of the spin-off of AT&T Broadband. Those options
that were eligible for cancellation but retained by the employee became variable
awards under APB Opinion No. 25, with

                                        98

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation expense adjusted for current stock price until the options are
exercised, forfeited, or expired unexercised. The cancellation of stock options
had an immaterial impact on 2003 and 2002 results of operations.

     In 2002 and 2001, AT&T granted performance share units to key employees.
These awards are based on the attainment of certain performance measures over a
three-year period. Approximately 0.9 million and 0.5 million units were granted
in 2002 and 2001, respectively.

     The weighted-average fair values at date of grant for AT&T common stock
options granted during 2003, 2002 and 2001 were $5.49, $24.49 and $39.50,
respectively, and were estimated using the Black-Scholes option-pricing model.
The 2002 and 2001 weighted-average grant-date fair values exclude the effects of
equity restructuring relating to the spin-off of AT&T Broadband and the
split-off of AT&T Wireless. The weighted-average fair values at date of grant
for AT&T Wireless Group tracking stock options granted during 2001 were $11.58
and were estimated using the Black-Scholes option-pricing model. The following
weighted average assumptions were used for stock options granted during 2003,
2002 and 2001:



                                                 AT&T COMMON          AT&T WIRELESS GROUP
                                                STOCK OPTIONS            STOCK OPTIONS
                                           ------------------------   -------------------
                                           2003      2002      2001          2001
                                           ----      ----      ----          ----
                                                          
Risk-free interest rate..................  2.53%     3.73%     4.61%         4.92%
Expected dividend yield..................  4.00%     1.17%     0.85%         0.00%
Expected volatility......................  47.9%     40.0%     36.9%         55.0%
Expected life (in years).................   5.0       4.7       4.7           4.8


13.  INCOME TAXES

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



                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                               2003        2002         2001
                                                              -------    ---------    ---------
                                                                    (DOLLARS IN MILLIONS)
                                                                             
U.S. federal statutory income tax rate......................      35%          35%          35%
Federal income tax (provision) at statutory rate............   $(942)     $  (993)     $(2,683)
Amortization of investment tax credits......................      16           16           18
State and local income tax (provision), net of federal
  income tax effect.........................................     (59)        (222)        (209)
AT&T Latin America..........................................      35         (360)          --
Foreign operations, net of tax credits......................       1         (140)        (107)
Investment dispositions, acquisitions and legal entity
  restructurings............................................      51           93           91
Research and other credits..................................      12           51           42
Research tax credit claims for prior years..................     143           --           --
Other differences, net......................................     (73)         (32)         (42)
                                                               -----      -------      -------
(Provision) for income taxes................................   $(816)     $(1,587)     $(2,890)
                                                               =====      =======      =======
Effective income tax rate...................................    30.3%        56.0%        37.7%


                                        99

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
Income (loss) from continuing operations before income
  taxes:
United States...........................................   $ 2,761     $ 2,924     $ 7,671
Foreign.................................................       (71)        (88)         (5)
                                                           -------     -------     -------
Total...................................................   $ 2,690     $ 2,836     $ 7,666
                                                           =======     =======     =======
(Provision) benefit for income taxes:
Current:
  Federal...............................................   $   342     $ 1,041     $(1,554)
  State and local.......................................       250          19        (192)
  Foreign...............................................        (6)        (95)        (98)
                                                           -------     -------     -------
                                                               586         965      (1,844)
                                                           -------     -------     -------
Deferred:
  Federal...............................................    (1,102)     (2,201)       (936)
  State and local.......................................      (341)       (360)       (129)
  Foreign...............................................        25          (7)          1
                                                           -------     -------     -------
                                                            (1,418)     (2,568)     (1,064)
Deferred investment tax credits.........................        16          16          18
                                                           -------     -------     -------
(Provision) for income taxes............................   $  (816)    $(1,587)    $(2,890)
                                                           =======     =======     =======


     We also recorded current and deferred income tax (provision) benefits that
resulted from earnings (losses) related to other equity investments in the
amounts of $(31) million in 2003, $112 million in 2002 and $2.9 billion in 2001.

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

                                       100

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred income tax liabilities and assets consist of the following:



                                                                 AT DECEMBER 31,
                                                              ----------------------
                                                                2003         2002
                                                              ---------    ---------
                                                              (DOLLARS IN MILLIONS)
                                                                     
Deferred Income Tax Assets:
  Reserves and allowances...................................   $  979       $1,237
  Employee pensions and other benefits......................      335          604
  Business restructuring....................................      163          297
  Investments...............................................       --          281
  Net operating loss, capital loss and credit
     carryforwards..........................................      425          252
  Advance payments..........................................       95          174
  Other deferred tax assets.................................      119          162
  Valuation allowance.......................................     (857)        (689)
                                                               ------       ------
Total deferred income tax assets............................    1,259        2,318
                                                               ------       ------
Deferred Income Tax Liabilities:
  Property, plant and equipment.............................    3,883        3,135
  Leveraged and capital leases..............................      937        1,059
  Capitalized software and intangible assets................      924          743
  Investments...............................................       97           --
  Other.....................................................       98          298
                                                               ------       ------
Total deferred income tax liabilities.......................    5,939        5,235
                                                               ------       ------
Net deferred income tax liability...........................   $4,680       $2,917
                                                               ======       ======


     In 2003, the valuation allowance increased $168 million, primarily
attributable to an increase in net operating and capital loss carryforwards for
state income tax purposes. In 2002, we established a valuation allowance for the
book and tax basis difference relating to our investment in AT&T Latin America.
During February 2004, the subsidiaries of AT&T Latin America were sold to
Telefonos de Mexico S.A. de C.V., or Telmex, and the plan of bankruptcy
liquidation of AT&T Latin America became effective. As a result, we will
reevaluate the need for this valuation allowance and could record an income tax
benefit of approximately $0.3 billion in the first quarter of 2004.

     At December 31, 2003, we had net operating and capital loss carryforwards
(tax effected) for federal, state and foreign income tax purposes of $5 million,
$289 million, and $3 million, respectively, expiring through 2023. In addition,
at December 31, 2003, we had state tax credit carryforwards (after federal tax
effects) of $128 million expiring through 2017.

14.  COMMITMENTS AND CONTINGENCIES

     In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2003. However, we believe
that after final disposition, any monetary liability or financial impact to us
beyond that provided for at December 31, 2003, would not be material to our
annual consolidated financial statements.

                                       101

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 on behalf of persons who purchased shares of AT&T
common stock from October 25, 1999 through May 1, 2000. These lawsuits 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 the lawsuits are without merit and 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 tracking stock initial public offering (IPO) from April 26,
2000 through May 1, 2000. These lawsuits allege that we made materially false
and misleading statements and omitted to state material facts in the IPO
prospectus about AT&T's future business prospectus. The plaintiffs seek
unspecified damages. We believe that the lawsuit is without merit and intend to
defend it vigorously.

     Recently, 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 prospectus. As a result of this purported
conduct, we are alleged to have breached our fiduciary duties to the Plan and
the Plan's participants. The plaintiffs seek unspecified damages. We believe
that the lawsuits are without merit and intend to defend them vigorously.

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

     In addition, purported class action lawsuits have been filed in California
state court on behalf of At Home shareholders against AT&T, At Home, and the
directors of At Home, Cox and Comcast. The lawsuits claim that the defendants
breached fiduciary obligations of care, candor and loyalty in connection with a
transaction announced in March 2000 in which, among other things, AT&T, Cox and
Comcast agreed to extend existing distribution agreements, the Board of
Directors of At Home was reorganized, and we agreed to give Cox and Comcast
rights to sell their At Home shares to us. These actions have been consolidated
by the court and are subject to a stay. AT&T's liability for any such suits
would be shared equally between AT&T and Comcast. In March 2002 and the summer
of 2003 purported class actions were 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 2003 lawsuit adds At Home as a defendant. We
believe that these lawsuits are without merit and intend to defend them
vigorously.

                                       102

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 filing of the bankruptcy
petition. The plaintiffs seek damages of approximately $89.6 million from AT&T
and Comcast. We believe that this action is without merit and 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. In March 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 Federal
Communications Commission (FCC) imposed universal service fund charges to our
customers and how we recoup those charges from our customers. The plaintiffs in
each lawsuit seek unspecified damages. We believe that these lawsuits are
without merit and intend to defend them vigorously.

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

     In connection with the separation of our former subsidiaries, we have
entered into a number of separation and distribution agreements that provide,
among other things, for the allocation and/or sharing of certain costs
associated with potential litigation liabilities. For example, pursuant to these
agreements, AT&T shares in the cost of certain litigation (relating to matters
while affiliated with AT&T) if the settlement exceeds certain thresholds. With
the exception of two matters already reserved for (Sparks, et al. v. AT&T and
Lucent Technologies and NCR's Fox River environmental clean-up matter, see note
2), we have assessed, as of December 31, 2003, that none of the litigation
liabilities allocated to former subsidiaries were probable of incurring costs in
excess of the threshold above which we would be required to share in the costs.
However, in the event these former subsidiaries were unable to meet their
obligations with respect to these liabilities due to financial difficulties, we
could be held responsible for all or a portion of the costs, irrespective of the
sharing agreements.

     In October 2003, the FCC found that we violated Section 203 of the
Communications Act of 1934 (Act) for refusing to transfer the customers of one
reseller to the service plans of another reseller. The actions that gave rise to
this finding were the subject of a lawsuit filed in March 1995 in the United
States District Court for the District of New Jersey by Combined Companies, Inc,
Winback & Conserve, One Stop Financial, 800 Discounts and Group Discounts, Inc.
against us. We appealed this decision, as we believe our actions were consistent
with our obligations under the Act. In addition, our liability in this matter is
subject to the plaintiff proving it sustained damages and demonstrating the
amount to which it claims to be entitled. Thus, the extent
                                       103

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of liability cannot be estimated at this time. In the original lawsuit,
plaintiff had sought an injunction requiring us to transfer customers from one
reseller to another. Plaintiff has not filed an amended complaint asserting
damages.

  LEASES AND OTHER COMMITMENTS

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

     We lease land, buildings and equipment through contracts that expire in
various years through 2051. Our rental expense, net of sublease rental income,
under operating leases was $473 million in 2003, $529 million in 2002 and $552
million in 2001. The total of minimum rentals to be received in the future under
non-cancelable operating subleases as of December 31, 2003, was $278 million. In
addition, we have liabilities recorded on the balance sheet of approximately
$0.2 billion relating to facilities that have been closed, under which we still
have operating lease commitments. These commitments are included in the table
below.

     The following table shows our future minimum commitments due under
non-cancelable operating and capital leases at December 31, 2003:



                                                              OPERATING    CAPITAL
                                                                LEASES      LEASES
                                                              ----------   --------
                                                              (DOLLARS IN MILLIONS)
                                                                     
2004........................................................    $  400       $ 18
2005........................................................       341         11
2006........................................................       286         10
2007........................................................       230          9
2008........................................................       189          8
Later years.................................................       364         85
                                                                ------       ----
Total minimum lease payments................................    $1,810       $141
                                                                ======
Less: Amount representing interest..........................                   45
                                                                             ----
Present value of net minimum lease payments.................                 $ 96
                                                                             ====


     We have contractual obligations to purchase certain goods or services from
various other parties. Such unconditional purchase obligations totaled
approximately $994 million as of December 31, 2003. Cash outflows associated
with these obligations are expected to be approximately $350 million in 2004;
$241 million in total for 2005 and 2006; $109 million in total for 2007 and
2008; and $294 million in total for years thereafter.

     Under certain real estate operating leases we could be required to make
payments to the lessors of up to $20 million at the end of the lease term in
2007.

15.  SEGMENT REPORTING

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

     Our existing segments reflect certain managerial changes that were
implemented during 2003. The changes primarily include a redistribution of
property, plant and equipment from the Corporate and Other group to AT&T
Business Services and a transfer of deferred taxes from AT&T Consumer Services
to the Corporate and Other group.

                                       104

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     AT&T Business Services provides a variety of communication services to
various sized businesses and government agencies including long distance,
international, toll-free and local voice, including wholesale transport
services, as well as data services and Internet protocol and enhanced (IP&E)
services, which includes the management of network servers and applications.
AT&T Business Services also provides outsourcing solutions and other
professional services.

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

     The balance of AT&T's continuing operations (excluding LMG) is included in
a "Corporate and Other" group. This group primarily reflects corporate staff
functions and the elimination of transactions between segments.

     LMG was not an operating segment of AT&T prior to its split-off from AT&T
because AT&T did not have a controlling financial interest in LMG for financial
accounting purposes. Therefore, we accounted for this investment under the
equity method. Additionally, LMG's results were not reviewed by the chief
operating decision-makers for purposes of determining resources to be allocated.

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

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

     Generally, AT&T accounts for inter-segment transactions at market prices.
AT&T Business Services sells services to AT&T Consumer Services at cost-based
prices, which approximate average market prices. These sales are recorded by
AT&T Business Services as contra-expense.

                                       105

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  REVENUE



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
AT&T Business Services revenue
     Long distance voice................................   $11,116     $12,254     $13,930
     Local voice........................................     1,484       1,155       1,020
                                                           -------     -------     -------
  Total voice...........................................    12,600      13,409      14,950
     Data services......................................     7,882       8,260       8,128
     IP&E services......................................     1,840       1,677       1,349
                                                           -------     -------     -------
  Total data services and IP&E services.................     9,722       9,937       9,477
  Outsourcing, professional services and other..........     2,670       3,212       3,278
                                                           -------     -------     -------
Total AT&T Business Services revenue(1).................    24,992      26,558      27,705
AT&T Consumer Services revenue
  Stand-alone long distance, transactional and other
     services...........................................     7,485      10,413      13,973
  Bundled services......................................     1,999       1,114         870
                                                           -------     -------     -------
Total AT&T Consumer Services revenue....................     9,484      11,527      14,843
                                                           -------     -------     -------
Total reportable segments...............................    34,476      38,085      42,548
                                                           -------     -------     -------
Corporate and Other.....................................        53        (258)       (351)
                                                           -------     -------     -------
Total revenue...........................................   $34,529     $37,827     $42,197
                                                           =======     =======     =======


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

(1) Revenue in 2002 and 2001 included internal revenue of $323 million and $441
    million, respectively, which represented sales to AT&T Broadband and AT&T
    Wireless through their dates of disposition. AT&T Broadband and AT&T
    Wireless were disposed of on November 18, 2002 and July 9, 2001,
    respectively. Subsequent to their disposition, sales to AT&T Broadband, now
    Comcast, and AT&T Wireless are recorded as external revenue.

  DEPRECIATION AND AMORTIZATION



                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2003        2002        2001
                                                           --------    --------    --------
                                                                (DOLLARS IN MILLIONS)
                                                                          
AT&T Business Services...................................   $4,620      $4,546      $4,234
AT&T Consumer Services...................................      142         230         200
                                                            ------      ------      ------
Total reportable segments................................    4,762       4,776       4,434
Corporate and Other......................................      108         112         125
                                                            ------      ------      ------
Total depreciation and amortization......................   $4,870      $4,888      $4,559
                                                            ======      ======      ======


                                       106

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  NET (LOSSES) RELATED TO OTHER EQUITY INVESTMENTS



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          --------------------------------
                                                           2003       2002         2001
                                                          ------     -------     ---------
                                                               (DOLLARS IN MILLIONS)
                                                                        
AT&T Business Services pretax net earnings (losses).....   $ 32       $(454)      $(6,482)
Corporate and Other pretax net (losses).................    (13)        (58)       (1,301)
                                                           ----       -----       -------
Total pretax earnings (losses)..........................     19        (512)       (7,783)
Total tax (provision) benefit...........................    (31)        112         2,947
                                                           ----       -----       -------
Total net (losses) related to other equity
  investments...........................................   $(12)      $(400)      $(4,836)
                                                           ====       =====       =======


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



                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                        --------------------------------
                                                          2003        2002        2001
                                                        --------    --------    --------
                                                             (DOLLARS IN MILLIONS)
                                                                       
AT&T Business Services operating income...............  $ 1,888     $ 1,965     $ 3,573
AT&T Consumer Services operating income...............    2,062       2,592       4,698
                                                        -------     -------     -------
Total reportable segments operating income............    3,950       4,557       8,271
Corporate and Other operating (loss)..................     (293)       (196)       (439)
                                                        -------     -------     -------
Operating income......................................    3,657       4,361       7,832
Other income (expense), net...........................      191         (77)      1,327
Interest (expense)....................................   (1,158)     (1,448)     (1,493)
                                                        -------     -------     -------
Income from continuing operations before income taxes,
  minority interest income and net (losses) related to
  other equity investments............................  $ 2,690     $ 2,836     $ 7,666
                                                        =======     =======     =======


  ASSETS



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003        2002
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                    
AT&T Business Services......................................   $34,202     $36,389
AT&T Consumer Services......................................     1,062       1,390
                                                               -------     -------
Total reportable segments...................................    35,264      37,779
Corporate and Other assets(1)...............................    12,724      17,658
                                                               -------     -------
Total assets................................................   $47,988     $55,437
                                                               =======     =======


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

(1) Includes cash of $4.0 billion for 2003 and $7.8 billion for 2002

                                       107

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  CAPITAL ADDITIONS



                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             2003        2002        2001
                                                           --------    --------    --------
                                                                (DOLLARS IN MILLIONS)
                                                                          
AT&T Business Services...................................   $3,185      $3,716      $5,451
AT&T Consumer Services...................................       74         127         140
                                                            ------      ------      ------
Total reportable segments................................    3,259       3,843       5,591
Corporate and Other......................................      223          63         150
                                                            ------      ------      ------
Total capital additions..................................   $3,482      $3,906      $5,741
                                                            ======      ======      ======


  GEOGRAPHIC INFORMATION

  Revenue(1)



                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                          ---------------------------------
                                                            2003        2002        2001
                                                          ---------   ---------   ---------
                                                                (DOLLARS IN MILLIONS)
                                                                         
United States(2)........................................   $32,952     $36,202     $40,512
International...........................................     1,577       1,625       1,685
                                                           -------     -------     -------
Total revenue...........................................   $34,529     $37,827     $42,197
                                                           =======     =======     =======


  Long-Lived Assets(3)



                                                                 AT DECEMBER 31,
                                                              ---------------------
                                                                2003        2002
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
                                                                    
United States(2)............................................   $27,758     $29,097
International...............................................     1,918       1,689
                                                               -------     -------
Total long-lived assets.....................................   $29,676     $30,786
                                                               =======     =======


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

(1) Revenue is reported in the geographic area in which it originates.

(2) Includes amounts attributable to operations in Puerto Rico and the Virgin
    Islands.

(3) Long-lived assets include property, plant and equipment, net, goodwill and
    other purchased intangibles, net.

     Based on a review of our management model, we plan to transfer our
remaining payphone business from the AT&T Consumer Services segment to the AT&T
Business Services segment, which will require the restatement of our segments in
2004. Additionally, we will continue to review our management model and
structure, which may result in additional adjustments to our operating segments
in the future.

16.  RELATED PARTY TRANSACTIONS

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

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

     Included in access and other connection expenses are charges from Concert
representing costs incurred on our behalf to connect calls made to foreign
countries (international settlements) and costs paid by AT&T

                                       108

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to Concert for distributing Concert products totaling $491 million and $2.1
billion for the years ended December 31, 2002 and 2001, respectively.

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

17.  QUARTERLY INFORMATION (UNAUDITED)

      2003



                                                   FIRST        SECOND       THIRD        FOURTH
                                                 ----------   ----------   ----------   ----------
                                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                            
Revenue........................................   $ 8,986      $ 8,795      $ 8,649      $ 8,099
Operating income...............................     1,166        1,029          829          633
Income from continuing operations..............       529          536          458          340
Net (loss) from discontinued operations
  (net of income taxes)........................        --           --          (13)          --
Income before cumulative effect of accounting
  change.......................................       529          536          445          340
Cumulative effect of accounting change
  (net of income taxes)........................        42           --          (27)          --
Net income.....................................       571          536          418          340

AT&T Common Stock Group:
Earnings (loss) per share -- basic(1):
Earnings from continuing operations............   $  0.67      $  0.68      $  0.58      $  0.43
(Loss) from discontinued operations............        --           --        (0.02)          --
Cumulative effect of accounting change.........      0.06           --        (0.03)          --
AT&T Common Stock Group earnings...............   $  0.73      $  0.68      $  0.53      $  0.43
Earnings (loss) per share -- diluted(1):
Earnings from continuing operations............   $  0.67      $  0.68      $  0.58      $  0.43
(Loss) from discontinued operations............        --           --        (0.02)          --
Cumulative effect of accounting change.........      0.06           --        (0.03)          --
AT&T Common Stock Group earnings...............   $  0.73      $  0.68      $  0.53      $  0.43

Dividends declared.............................   $0.1875      $0.1875      $0.2375      $0.2375

AT&T common stock prices(2)
  High.........................................   $ 27.89      $ 21.84      $ 23.18      $ 21.95
  Low..........................................     15.75        13.45        18.80        18.31
  Quarter-end close............................     16.20        19.25        21.55        20.30


                                       109

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

      2002



                                               FIRST      SECOND(3)     THIRD      FOURTH(4)
                                              --------   -----------   --------   -----------
                                              (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                                                      
Revenue.....................................  $ 9,548     $  9,580     $ 9,409      $ 9,290
Operating income (loss).....................    1,634        1,592       1,415         (280)
Income (loss) from continuing operations....      446          603         525         (611)
Net (loss) from discontinued operations
  (net of income taxes).....................     (565)     (13,433)       (318)        (197)
Gain on disposition of discontinued
  operations
  (net of income taxes).....................       --           --          --        1,324
(Loss) income before cumulative effect of
  accounting change.........................     (119)     (12,830)        207          516
Cumulative effect of accounting change
  (net of income taxes).....................     (856)          --          --           --
Net (loss) income...........................     (975)     (12,830)        207          516

AT&T Common Stock Group:
Earnings (loss) per share -- basic(1):
Earnings (loss) from continuing
  operations................................  $  0.63     $   0.83     $  0.68      $ (0.79)
(Loss) from discontinued operations.........    (0.80)      (18.41)      (0.41)       (0.26)
Gain on disposition of discontinued
  operations................................       --           --          --         1.71
Cumulative effect of accounting change......    (1.21)          --          --           --
AT&T Common Stock Group (loss) earnings.....  $ (1.38)    $ (17.58)    $  0.27      $  0.66
Earnings (loss) per share -- diluted(1):
Earnings (loss) from continuing
  operations................................  $  0.60     $   0.80     $  0.67      $ (0.79)
(Loss) from discontinued operations.........    (0.76)      (17.91)      (0.41)       (0.26)
Gain on disposition of discontinued
  operations................................       --           --          --         1.71
Cumulative effect of accounting change......    (1.16)          --          --           --
AT&T Common Stock Group (loss) earnings.....  $ (1.32)    $ (17.11)    $  0.26      $  0.66

Dividends declared..........................  $0.1875     $ 0.1875     $0.1875      $0.1875

AT&T common stock prices(2)
  High......................................  $ 39.47     $  32.50     $ 26.35      $ 29.42
  Low.......................................    27.62        18.64       16.81        21.43
  Quarter-end close.........................    32.19        21.94       24.62        26.11


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

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

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

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

(4) Fourth quarter 2002 net income included $1.5 billion of net restructuring
    and other charges.

     In September 2003, in conjunction with our review of accounting and
internal control systems, we determined that the liability on the balance sheet
(included in accounts payable and accrued expenses)

                                       110

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

relating to costs incurred in 2001 and 2002 pertaining to access and other
connection expenses was understated by $125 million. Since the impact to prior
years' annual financial statements was not material, we recorded an additional
expense of $125 million ($77 million after taxes) in the third quarter of 2003
to reflect the proper estimate of the liability.

     A review was conducted by outside legal counsel, under the direction of the
Audit Committee. This review found that two employees, one lower-level and one
mid-level management employee, circumvented the internal controls process,
resulting in the financial impacts noted below. We made the appropriate
personnel changes and enhanced our internal controls accordingly. The principal
focus of these enhancements included higher skill levels of those performing the
function (mid-level manager must be a Certified Public Accountant), changes in
the approval process for accruing access expense, as well as additional reviews
of such expenses and related reconciliations by higher levels of management
(Business Unit Controller and AT&T Controller). In addition, actual access
payments are reviewed quarterly to further substantiate the recorded liability.

     The expense, properly recorded in the respective periods, would have
impacted quarterly and annual income from continuing operations as follows:



                                                                             EARNINGS PER
                                                      INCOME FROM          DILUTED SHARE --
                                                 CONTINUING OPERATIONS   CONTINUING OPERATIONS
                                                 ---------------------   ---------------------
                                                          IMPACT: (DECREASE)/INCREASE
                                                 ---------------------------------------------
                                                         (DOLLARS IN MILLIONS, EXCEPT
                                                              PER SHARE AMOUNTS)
                                                                   
FOR THE THREE MONTHS ENDED:
  September 30, 2001...........................          $(33)                  $(0.04)
  December 31, 2001............................          $  1                   $ 0.01
  March 31, 2002...............................          $(64)                  $(0.08)
  June 30, 2002................................          $ 12                   $ 0.02
  September 30, 2002...........................          $ 14                   $ 0.01
  December 31, 2002............................          $ (7)                  $(0.01)
FOR THE YEAR ENDED:
  December 31, 2001............................          $(32)                  $(0.04)
  December 31, 2002............................          $(45)                  $(0.06)


18.  SUBSEQUENT EVENTS

     In February 2004, we offered to repurchase, for cash, any and all of our
$1.5 billion outstanding 6.5% Notes maturing in November 2006, which now carry
an interest rate of 7.25%. The offer to early redeem these securities expired on
March 3, 2004, with $1.2 billion of notes redeemed, which will result in a loss
of approximately $150 million in the first quarter of 2004. In connection with
the debt redemption, we unwound $250 million notional amount of
fixed-to-floating interest rate swaps. Also, we offered to repurchase for cash
up to E1 billion of our outstanding E2 billion 6.0% Notes due November 2006,
which now carry an interest rate of 6.75%. This repurchase is expected to close
by the end of March 2004.

     In March 2004, a U.S. Court of Appeals vacated a number of recent FCC
rulings made in connection with the Triennial Review, including the FCC's
delegation to state commissions of decisions over impairment as applied to mass
market switching and certain transport elements. If this decision is not
reversed, or unless the FCC issues new valid rules, which assure us of fair
resale prices, our current local business could be materially affected.

                                       111


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

     Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, we completed an
evaluation, under the supervision and with the participation of our management
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15 or 15d-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them timely to material information required to be included in our Exchange Act
filings. Other than as described below, there have not been any changes in our
internal controls over financial reporting identified in connection with the
evaluation required by Exchange Act Rules 13a-15 or 15d-15 or otherwise that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.

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

     A review was conducted by outside legal counsel, under the direction of the
Audit Committee. This review found that two employees, one lower-level and one
mid-level management employee, circumvented the internal controls process
resulting in the financial impacts noted above. The Company made the appropriate
personnel changes and enhanced its internal controls accordingly. The principal
focus of these enhancements included higher skill levels of those performing the
function (CPA required for mid-level manager), changes in the approval process
for accruing access expense, as well as additional reviews of such expense and
related reconciliations by higher levels of management (Business Unit Controller
and AT&T Controller). In addition, actual access payments are reviewed quarterly
to further substantiate the recorded liability.

                                       112


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding our executive officers and our Code of Ethics is set
forth below. The other information required by Item 10 is incorporated by
reference to our definitive proxy statement for the 2004 annual meeting of
shareowners, including information under the captions "Information About the
Meeting and Voting", "Information About Our Board and Corporate Governance" and
"Section 16(a) Beneficial Ownership Reporting Compliance". See also "What
information is available about our company?" in Item 2 above.

                      EXECUTIVE OFFICERS OF THE REGISTRANT
                             (AS OF MARCH 1, 2004)



                                                                                   BECAME AT&T
NAME                     AGE                                                   EXECUTIVE OFFICER ON
- ----                     ---                                                   --------------------
                                                                      
William J. Hannigan....  44    President                                              12-03
James W. Cicconi.......  51    Executive Vice President and General Counsel           12-98
Nicholas S. Cyprus.....  50    Vice President and Controller                          01-03
David W. Dorman........  50    Chairman of the Board and Chief Executive              12-00
                               Officer
Edward M. Dwyer........  47    Vice President and Treasurer                           01-03
Hossein Eslambolchi....  46    President, AT&T Labs, AT&T Chief Technology            01-03
                               Officer and AT&T Business Chief Information
                               Officer
Robert S. Feit.........  41    Vice President-Law and Secretary                       01-03
Mirian M. Graddick-      49    Executive Vice President, Human Resources              03-99
  Weir.................
Thomas W. Horton.......  42    Senior Executive Vice President and Chief              06-02
                               Financial Officer
John Polumbo...........  52    President and Chief Executive Officer - AT&T           10-02
                               Consumer
Constance K. Weaver....  51    Executive Vice President, Public Relations,            10-02
                               Brand & Business Marketing


     All of the above executive officers have held high level managerial
positions with AT&T or its affiliates for more than the past five years, except
Messrs. Dorman, Hannigan, Horton and Polumbo. Prior to joining AT&T in December
2000, Mr. Dorman was Chief Executive Officer of Concert, a global venture
created by AT&T and British Telecom, from 1999 to 2000; and Chairman, President
and Chief Executive Officer of PointCast, an internet-based news and information
service company, from 1998 to 1999. Prior to joining AT&T in 2003, Mr. Hannigan
was President and Chief Executive Officer of Sabre Holdings, Inc. from 1999 to
2003; and President -- Global Marketing of SBC Communications Inc. from 1998 to
1999. Prior to joining AT&T in 2002, Mr. Horton served in various high level
management positions of AMR Corporation, the parent company of American
Airlines; he was Senior Vice President and Chief Financial Officer from 2000 to
2002, and Vice President-Europe Division from 1998 to 2000. Prior to becoming an
Executive Officer of AT&T in 2002, Mr. Polumbo served as Senior Vice President
of AT&T Business Global Ventures from September 2001; as President of the Global
Services Unit of Concert from from June 1999 to September 2001 and from August
1998 to May 1999 he was President and Chief Operating Officer of Excite, Inc.

     We have adopted a Code of Ethics for the Chief Executive Officer and Senior
Financial Officers which applies to our principal executive officer, principal
accounting officer and controller, principal financial officer and persons
performing similar functions. The Code is posted at our website www.att.com/ir.
Our Board did not grant a waiver of any ethics policy for any director or
executive officer in 2003.

                                       113


ITEM 11.  EXECUTIVE COMPENSATION

     There is incorporated by reference in this Item 11 that portion of our
definitive proxy statement for the 2004 annual meeting of shareowners under the
captions "Five-Year Performance Comparison" and "Executive Compensation".

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

     There is incorporated by reference in this Item 12 that portion of our
definitive proxy statement for the 2004 annual meeting of shareowners under the
captions "Stock Ownership of Management and Directors" and "Beneficial Ownership
of More than Five Percent". Information regarding our equity compensation plans,
including both stockholder approved plans and non-stockholder approved plans, is
set forth in the section entitled "Equity Compensation Plan Information" and is
also incorporated by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is incorporated by reference in this Item 13 that portion of our
definitive proxy statement for the 2004 annual meeting of shareowners under the
caption "Certain Relationships and Related Transactions".

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     There is incorporated by reference in this Item 14 that portion of our
definitive proxy statement for the 2004 annual meeting of shareholders under the
captions "Our Independent Public Accountants" and "Report of the Audit Committee
of the Board of Directors".

                                       114


                                    PART IV

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

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

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



                                                              PAGES
                                                              -----
                                                           
Report of Management........................................     53
Report of Independent Auditors..............................     54
Statements:
  Consolidated Statements of Operations.....................     55
  Consolidated Balance Sheets...............................     56
  Consolidated Statements of Changes in Shareowners'
     Equity.................................................     57
  Consolidated Statements of Cash Flows.....................     59
  Notes to Consolidated Financial Statements................     60


     (2) Financial Statement Schedule:

                                                            
  Report of Independent Auditors............................     123
Schedule:
  II -- Valuation and Qualifying Accounts...................     124



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

     (3) Exhibits:

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

             
(3)a            Restated Certificate of Incorporation of the registrant
                filed July 17, 2003 (incorporated by reference to Form 10-Q
                for second quarter 2003, File No. 1-1105).
(3)b            By-Laws of the registrant, as amended March 20, 2003
                (incorporated by reference to Form 10-K for 2002, File No.
                1-1105).
(4)             No instrument which defines the rights of holders of long
                term debt, of the registrant and all of its consolidated
                subsidiaries, is filed herewith pursuant to Regulation S-K,
                Item 601(b)(4)(iii)(A), except for the instruments referred
                to in 4(i)(1) and 4(i)(2) below. Pursuant to this
                regulation, the registrant hereby agrees to furnish a copy
                of any such instrument not filed herewith to the SEC upon
                request.
4(i)(1)         Indenture between American Telephone and Telegraph Company
                and The Bank of New York, as trustee, dated as of September
                7, 1990 (incorporated by reference to Exhibit 4A to Form SE
                filed September 10, 1990, file no. 33-36756), as
                supplemented by First Supplemental Indenture dated October
                30, 1992 (incorporated by reference to Exhibit 4.AA to
                Current Report on Form 8-K filed December 1, 1992) and by
                Second Supplemental Indenture dated November 14, 2002
                (incorporated by reference to Exhibit 4.10 to Amendment No.
                1 to Form S-4 filed September 26, 2002, File No. 333-97953).
4(i)(2)         Indenture between AT&T Corp. and The Bank of New York, as
                trustee, dated as of November 1, 2001 (incorporated by
                reference to Exhibit 4 to Form S-4 filed May 12, 2002, File
                No. 333-87960).
(10)(i)1        Separation and Distribution Agreement by and among AT&T
                Corp., Lucent Technologies Inc. and NCR Corporation, dated
                as of February 1, 1996 and amended and restated as of March
                29, 1996 (incorporated by reference to Exhibit (10)(i)1 to
                Form 10-K for 1996, File No. 1-1105).



                                       115

             
(10)(i)2        Distribution Agreement, dated as of November 20, 1996, by
                and between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)2 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)3        Tax Sharing Agreement by and among AT&T Corp., Lucent
                Technologies Inc. and NCR Corporation, dated as of February
                1, 1996 and amended and restated as of March 29, 1996
                (incorporated by reference to Exhibit (10)(i)3 to Form 10-K
                for 1996, File No. 1-1105).
(10)(i)4        Employee Benefits Agreement by and between AT&T Corp. and
                Lucent Technologies Inc., dated as of February 1, 1996 and
                amended and restated as of March 29, 1996 (incorporated by
                reference to Exhibit (10)(i)4 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)5        Employee Benefits Agreement, dated as of November 20, 1996,
                between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)5 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)6        Separation and Distribution Agreement by and between AT&T
                Corp. and AT&T Wireless Services, Inc., dated as of June 4,
                2001 (incorporated by reference to Exhibit 10.1 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7        Amended and Restated Tax Sharing Agreement by and between
                AT&T Corp. and AT&T Wireless Services, Inc., dated as of
                June 4, 2001 (incorporated by reference to Exhibit 10.2 to
                the AT&T Wireless Services, Inc. Registration Statement on
                Form S-1/A (Commission file No. 333-59174), filed June 21,
                2001).
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).



                                       116

             
(10)(i)15       Second Amendment to Tax Sharing Agreement dated as of
                September 24, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc., and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.6 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)16       Third Amendment to Tax Sharing Agreement dated as of October
                20, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.7 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)17       Fourth Amendment to Tax Sharing Agreement dated as of
                October 28, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.8 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)18       Fifth Amendment to Tax Sharing Agreement dated as of
                December 6, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.9 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)19       Sixth Amendment to Tax Sharing Agreement dated as of
                December 10, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.10 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)20       Seventh Amendment to Tax Sharing Agreement dated as of
                December 30, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.11 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)21       Eighth Amendment to Tax Sharing Agreement dated as of July
                25, 2000, by and among AT&T Corp., Liberty Media
                Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)22       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Tax Sharing Agreement dated as
                of March 9, 1999, as amended, among The Associated Group,
                Inc., AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
(10)(i)23       First Supplement to Inter-Group Agreement dated as of May
                28, 1999, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.14 to
                the Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).



                                       117

             
(10)(i)24       Second Supplement to Inter-Group Agreement dated as of
                September 24, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.15 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)25       Third Supplement to Inter-Group Agreement dated as of
                October 20, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.16 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)26       Fourth Supplement to Inter-Group Agreement dated as of
                December 6, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.17 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)27       Fifth Supplement to Inter-Group Agreement dated as of
                December 10, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.18 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)28       Sixth Supplement to Inter-Group Agreement dated as of
                December 30, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.19 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).
(10)(i)29       Seventh Supplement to Inter-Group Agreement dated as of July
                25, 2000, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.21 to
                the Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)30       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Inter-Group Agreement dated as
                of March 9, 1999, as supplemented, between and among AT&T
                Corp., on the one hand, and Liberty Media Corporation,
                Liberty Media Group LLC and each Covered Entity listed on
                the signature pages thereof, on the other hand (incorporated
                by reference to Exhibit 10.20 to the Registration Statement
                on Form S-1/A of Liberty Media Corporation (File No.
                333-93917) as filed on February 9, 2000).
(10)(i)31       Eighth Supplement to Inter-Group Agreement dated as of
                November 20, 2000, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.24 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-66034) as filed on
                July 27, 2001).
(10)(i)32       Ninth Supplement to Inter-Group Agreement dated as of June
                14, 2001, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
                Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI,
                Inc., on the other hand (incorporated by reference to
                Exhibit 10.25 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-66034) as filed on
                July 27, 2001).



                                       118


                
(10)(i)33          Agreement and Plan of Merger dated as of December 19, 2001 among AT&T Corp., AT&T Broadband
                   Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T
                   Comcast Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on
                   Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)34          Separation and Distribution Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T
                   Broadband Corp. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form
                   S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)35          Tax Sharing Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp.
                   (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 of AT&T
                   Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)36          Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband
                   Corp. (incorporated by reference to Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105).
(10)(i)37          Amended and Restated 364-Day Revolving Credit Facility Agreement, dated as of October 8, 2003,
                   among AT&T Corp., the Lenders party hereto, JPMorgan Chase Bank and Citibank, N.A. as
                   Administrative Agents, Abn Amro Bank N.V., Bank of America, N.A. and Royal Bank of Scotland, as
                   Co-Syndication Agents, and Credit Suisse First Boston, Cayman Islands Branch, Deutsch Bank AG
                   New York Branch and Morgan Stanley Bank, as Co-Documentation Agents, with J.P. Morgan Securities
                   Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners.
                   (incorporated by reference to Form 8-K filed October 9, 2003, File No. 1-1105).
(10)(iii)(A)1      AT&T Short Term Incentive Plan as amended March, 1994 (incorporated by reference to Exhibit
                   (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2      AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (incorporated by reference to
                   Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)3      AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (incorporated
                   by reference to Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4      AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and
                   restated effective January 1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4 to Form
                   10-K for 1996, File No. 1-1105).
(10)(iii)(A)5      AT&T Senior Management Financial Counseling Program dated December 29, 1994 (incorporated by
                   reference to Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6      AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993
                   (incorporated by reference to Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)7      The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (incorporated by
                   reference to Exhibit (10)(iii)(A)7 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)8      AT&T Plan for Non-Employee Directors' Travel Accident Insurance (incorporated by reference to
                   Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9      AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996
                   (incorporated by reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105)
                   including Form of Amendment to AT&T Excess Benefit and Compensation Plan dated as of July 28,
                   2003 (incorporated by reference to Exhibit 10(iii)(A)1 to Form 10-Q for third quarter 2003, File
                   No. 1-1105).



                                       119

             
(10)(iii)(A)10  AT&T Non-Qualified Pension Plan, as amended and restated
                January 1, 1995 (incorporated by reference to Exhibit
                (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105)
                including Form of Amendment to AT&T Non-Qualified Pension
                Plan dated as of July 28, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)2 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)11  AT&T Senior Management Incentive Award Deferral Plan, as
                amended January 21, 1998 (incorporated by reference to
                Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No.
                1-1105) including Form of Amendment to AT&T Senior
                Management Incentive Award Deferral Plan dated as of July
                28, 2003 (incorporated by reference to Exhibit 10(iii)(A)3
                to Form 10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)12  AT&T Mid-Career Hire Program revised effective January 1,
                1988 (incorporated by reference to Exhibit (10)(iii)(A)4 to
                Form SE, dated March 25, 1988, File No. 1-1105) including
                AT&T Mid-Career Pension Plan, as amended and restated July
                1, 1999 (incorporated by reference to Exhibit (10)(iii)(A)12
                to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13  AT&T 1997 Long Term Incentive Program as amended through
                March 14, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14  Indemnification Agreement for Officers and Directors.
(10)(iii)(A)15  Pension Plan for AT&T Non-Employee Directors revised
                February 20, 1989 (incorporated by reference to Exhibit
                (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16  AT&T Corp. Senior Management Universal Life Insurance
                Program effective October 1, 1999 (incorporated by reference
                to Exhibit (10)(iii)(A)16 to Form 10-K for 2000, File No.
                1-1105) including Form of Amendment to AT&T Corp. Senior
                Management Universal Life Insurance Program dated as of July
                28, 2003 (incorporated by reference to Exhibit 10(iii)(A)4
                to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T
                Corp. Executive Life Insurance Program as amended and
                restated on January 1, 2004.
(10)(iii)(A)17  AT&T Benefits Protection Trust Agreement as amended and
                restated as of November 1993, including the first amendment
                thereto dated December 23, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No.
                1-1105).
(10)(iii)(A)18  AT&T Senior Officer Severance Plan effective October 9,
                1997, as amended October 30, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
                1-1105), and as amended, restated and renamed AT&T Senior
                Officer Separation Plan as of January 1, 2003 including Form
                of Amendment of Appendix A of AT&T Senior Officer Severance
                Plan dated as of July 28, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)19  Special Incentive Agreement between AT&T Corp. and Hossein
                Eslambolchi dated June 2, 2003 (incorporated by reference to
                Exhibit (10)(iii)(A)1 to Form 10-Q for second quarter 2003,
                File No. 1-1105).
(10)(iii)(A)20  Employment Agreement between AT&T Corp. and Thomas W. Horton
                dated as of June 10, 2002.
(10)(iii)(A)21  Pension Agreement between AT&T Corp. and Thomas W. Horton
                dated as of July 29, 2003.
(10)(iii)(A)22  Modification to Employment Agreement dated September 16,
                2002 to Employment Agreement between AT&T Corp. and Thomas
                W. Horton dated as of June 10, 2002.
(10)(iii)(A)23  Financial Services Agreement between AT&T Corp. and Thomas
                W. Horton dated as of July 24, 2002.
(10)(iii)(A)24  AT&T Corp. Executive Disability Plan dated February 2004
(10)(iii)(A)25  AT&T Corp. Directors' Universal Life Insurance Program
                effective June 1, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).



                                       120

             
(10)(iii)(A)26  AT&T Corp. Senior Management Universal Life Insurance
                Program for Former Executives effective October 1, 1999
                (incorporated by reference to Exhibit (10)(iii)(A)26 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Special Temporary Allowance Agreement between AT&T Corp. and
                Dave Dorman dated December 15, 2003.
(10)(iii)(A)28  Agreement between AT&T Corp. and Hossein Eslambolchi dated
                January 4, 2001 including amendment dated March 9, 2001
                (incorporated by reference to Exhibit (10)(iii)(A)28 to Form
                10-K for 2002, File No. 1-1105).
(10)(iii)(A)29  Board of Directors resolution adopted July 15, 2003 amending
                various executive and management plans as of January 1,
                2004.
(10)(iii)(A)30  Loan Agreement between AT&T Corp. and David Dorman dated
                December 21, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)31  Loan Agreement between AT&T Corp. and David Dorman dated
                December 21, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)32  AT&T Corp. board resolutions adopting change in control
                provision to various plans effective October 23, 2000
                (incorporated by reference to Exhibit (10)(iii)(A)32 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)33  Loan Agreement between AT&T Corp. and David Dorman dated
                April 13, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34  Employment Agreement between AT&T Corp. and David Dorman
                dated May 18, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105)
                including amendment dated December 31, 2002 (incorporated by
                reference to Form 10-K for 2002, File No. 1-1105) including
                amendment dated July 25, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)7 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)35  Special Equity Agreement between AT&T Corp. and Hossein
                Eslambolchi dated January 31, 2001 (incorporated by
                reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2002,
                File No. 1-1105).
(10)(iii)(A)36  Employment Agreement between AT&T Corp. and Hossein
                Eslambolchi dated December 28, 1999 including amendment
                dated January 6, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)36 to Form10-K for 2002, File No. 1-1105).
(10)(iii)(A)37  Agreement between AT&T Corp. and James W. Cicconi dated July
                29, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)37 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)38  Special Deferral Agreement between AT&T Corp. and James W.
                Cicconi dated April 2, 2001 (incorporated by reference to
                Exhibit (10)(iii)(A)38 to Form 10-K for 2002, File No.
                1-1105).
(10)(iii)(A)39  Employment Agreement between AT&T Corp. and John Polumbo
                dated September 7, 2001.
(10)(iii)(A)40  Special Temporary Allowance Agreement between AT&T Corp. and
                John Polumbo dated December 1, 2003.
(10)(iii)(A)41  Amendment dated July 29, 2003 to Employment Agreement
                between AT&T Corp. and John Polumbo dated September 7, 2001.
(10)(iii)(A)42  Amendment dated October 2002 to Exhibit A of Employment
                Agreement between AT&T Corp. and John Polumbo dated
                September 7, 2001.
(12)            Computation of Ratio of Earnings to Fixed Charges.
(14)            Code of Ethics for Chief Executive Officer and Senior
                Financial Officers
(21)            List of subsidiaries of AT&T.
(23a)           Consent of PricewaterhouseCoopers LLP.
(23b)           Consent of KPMG LLP.



                                       121

             
(23c)           Consent of PricewaterhouseCoopers LLP.
(23d)           Consent of KPMG LLP.
(24)            Powers of Attorney executed by officers and directors who
                signed this report.
(31.1)          Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)          Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)          Certification by CEO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
(32.2)          Certification by CFO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
(99.1)          AT&T Canada Inc. March 2003 and 2002 Financial Statements
(99.2)          AT&T Canada Inc. December 31, 2002, 2001 and 2000 Financial
                Statements
(99.3)          Concert B. V. December 31, 2001 and 2000 Financial
                Statements
(99.4)          Liberty Media Corporation December 2001, 2000 and 1999
                Financial Statements



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

     (b) Reports on Form 8-K:

     During the fourth quarter 2003, the following Forms 8-K were filed and/or
furnished: Form 8-K dated October 1, 2003 was filed pursuant to Item 12 (Results
of Operations and Financial Condition) on October 6, 2003, Form 8-K dated
October 8, 2003 was filed pursuant to Item 5 (Other Events) on October 9, 2003,
Form 8-K dated October 21, 2003 was filed pursuant to Item 5 (Other Events),
Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and
Item 12 (Results of Operations and Financial Condition) on October 24, 2003,
Form 8-K dated December 2, 2003 was filed pursuant to Item 5 (Other Events) and
Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) on
December 2, 2003, Form 8-K dated December 11, 2003 was filed pursuant to Item 5
(Other Events), Item 12 (Results of Operations and Financial Condition) and Item
7 (Financial Statements, Pro Forma Financial Information and Exhibits) on
December 11, 2003 and Form 8-K dated December 11, 2003 was filed pursuant to
Item 5 (Other Events) on December 17, 2003.

                                       122


                       REPORT OF INDEPENDENT AUDITORS ON
                   CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of AT&T Corp.

     Our audits of the consolidated financial statements referred to in our
report dated March 5, 2004 appearing in the 2003 Annual Report to Shareowners of
AT&T Corp. (which report and consolidated financial statements are included in
this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

Florham Park, New Jersey
March 5, 2004

                                       123


                                                                     SCHEDULE II

                                   AT&T CORP.
                       AND ITS CONSOLIDATED SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS



COLUMN A                                         COLUMN B     COLUMN C      COLUMN D
                                                BALANCE AT   CHARGED TO                     COLUMN E
                                                BEGINNING    COSTS AND                     BALANCE AT
DESCRIPTION                                     OF PERIOD     EXPENSES    DEDUCTIONS(A)   END OF PERIOD
- -----------                                     ----------   ----------   -------------   -------------
                                                                 (DOLLARS IN MILLIONS)
                                                                              
Year 2003
Allowances for doubtful accounts(b)(c)........    $  720       $  710        $  793           $637
Deferred tax asset valuation allowance........    $  689       $  208        $   40           $857
Year 2002
Allowances for doubtful accounts(b)...........    $  809       $1,058        $1,147           $720
Deferred tax asset valuation allowance(d).....    $   34       $  655        $   --           $689
Year 2001
Allowances for doubtful accounts(b)...........    $1,164       $  884        $1,239           $809
Deferred tax asset valuation allowance........    $   18       $   16        $   --           $ 34


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

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

(b) Includes allowances for doubtful accounts on long-term receivables of $58
    million, $51 million, and $55 million at December 31, 2003, 2002, and 2001,
    respectively (included in other assets in the Consolidated Balance Sheets).

(c) Amount charged to costs and expenses for 2003 included $7 million related to
    long-term receivables.

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

                                       124


                                   SIGNATURES

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

                                          AT&T CORP.

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

March 12, 2004

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



                    SIGNATURE                                     TITLE(S)                     DATE
                    ---------                                     --------                     ----
                                                                                 
               /s/ DAVID W. DORMAN                       Chairman of the Board and        March 12, 2004
    -----------------------------------------             Chief Executive Officer
                 David W. Dorman


               /s/ THOMAS W. HORTON                   Senior Executive Vice President     March 12, 2004
    -----------------------------------------           and Chief Financial Officer
                 Thomas W. Horton


              /s/ NICHOLAS S. CYPRUS                   Vice President and Controller      March 12, 2004
    -----------------------------------------
                Nicholas S. Cyprus


Directors:
William F. Aldinger*
Kenneth T. Derr*
M. Kathryn Eickhoff*
Herbert L. Henkel*
Frank C. Herringer*
Shirley Ann Jackson*
Jon C. Madonna*
Donald F. McHenry*
Tony L. White*

                                                                                 
                By: /s/ R.S. FEIT                                                         March 12, 2004
 ------------------------------------------------
                    R.S. Feit
               (Attorney-in-Fact)*



                                       125


                                 EXHIBIT INDEX

             
(3)a            Restated Certificate of Incorporation of the registrant
                filed July 17, 2003 (incorporated by reference to Form 10-Q
                for second quarter 2003, File No. 1-1105).
(3)b            By-Laws of the registrant, as amended March 20, 2003
                (incorporated by reference to Form 10-K for 2002, File No.
                1-1105).
(4)             No instrument which defines the rights of holders of long
                term debt, of the registrant and all of its consolidated
                subsidiaries, is filed herewith pursuant to Regulation S-K,
                Item 601(b)(4)(iii)(A), except for the instruments referred
                to in 4(i)(1) and 4(i)(2) below. Pursuant to this
                regulation, the registrant hereby agrees to furnish a copy
                of any such instrument not filed herewith to the SEC upon
                request.
4(i)(1)         Indenture between American Telephone and Telegraph Company
                and The Bank of New York, as trustee, dated as of September
                7, 1990 (incorporated by reference to Exhibit 4A to Form SE
                filed September 10, 1990, file no. 33-36756), as
                supplemented by First Supplemental Indenture dated October
                30, 1992 (incorporated by reference to Exhibit 4.AA to
                Current Report on Form 8-K filed December 1, 1992) and by
                Second Supplemental Indenture dated November 14, 2002
                (incorporated by reference to Exhibit 4.10 to Amendment No.
                1 to Form S-4 filed September 26, 2002, File No. 333-97953).
4(i)(2)         Indenture between AT&T Corp. and The Bank of New York, as
                trustee, dated as of November 1, 2001 (incorporated by
                reference to Exhibit 4 to Form S-4 filed May 12, 2002, File
                No. 333-87960).
(10)(i)1        Separation and Distribution Agreement by and among AT&T
                Corp., Lucent Technologies Inc. and NCR Corporation, dated
                as of February 1, 1996 and amended and restated as of March
                29, 1996 (incorporated by reference to Exhibit (10)(i)1 to
                Form 10-K for 1996, File No. 1-1105).
(10)(i)2        Distribution Agreement, dated as of November 20, 1996, by
                and between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)2 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)3        Tax Sharing Agreement by and among AT&T Corp., Lucent
                Technologies Inc. and NCR Corporation, dated as of February
                1, 1996 and amended and restated as of March 29, 1996
                (incorporated by reference to Exhibit (10)(i)3 to Form 10-K
                for 1996, File No. 1-1105).
(10)(i)4        Employee Benefits Agreement by and between AT&T Corp. and
                Lucent Technologies Inc., dated as of February 1, 1996 and
                amended and restated as of March 29, 1996 (incorporated by
                reference to Exhibit (10)(i)4 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)5        Employee Benefits Agreement, dated as of November 20, 1996,
                between AT&T Corp. and NCR Corporation (incorporated by
                reference to Exhibit (10)(i)5 to Form 10-K for 1996, File
                No. 1-1105).
(10)(i)6        Separation and Distribution Agreement by and between AT&T
                Corp. and AT&T Wireless Services, Inc., dated as of June 4,
                2001 (incorporated by reference to Exhibit 10.1 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)7        Amended and Restated Tax Sharing Agreement by and between
                AT&T Corp. and AT&T Wireless Services, Inc., dated as of
                June 4, 2001 (incorporated by reference to Exhibit 10.2 to
                the AT&T Wireless Services, Inc. Registration Statement on
                Form S-1/A (Commission file No. 333-59174), filed June 21,
                2001).
(10)(i)8        Employee Benefits Agreement by and between AT&T Corp. and
                AT&T Wireless Services, Inc., dated as of June 7, 2001
                (incorporated by reference to Exhibit 10.3 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 21, 2001).
(10)(i)9        Brand License Agreement by and between AT&T Corp. and AT&T
                Wireless Services, Inc., dated as of June 4, 2001
                (incorporated by reference to Exhibit 10.4 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).



             
(10)(i)10       Intellectual Property Agreement by and between AT&T Corp.
                and AT&T Wireless Services, Inc., effective as of July 9,
                2001 (incorporated by reference to Exhibit 10.6 to the AT&T
                Wireless Services, Inc. Registration Statement on Form S-1/A
                (Commission file No. 333-59174), filed June 11, 2001).
(10)(i)11       Inter-Group Agreement dated as of March 9, 1999, between
                AT&T Corp. and Liberty Media Corporation, Liberty Media
                Group LLC and each Covered Entity listed on the signature
                pages thereof (incorporated by reference to Exhibit 10.2 to
                the Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)12       Intercompany Agreement dated as of March 9, 1999, between
                Liberty and AT&T Corp. (incorporated by reference to Exhibit
                10.3 to the Registration Statement on Form S-4 of Liberty
                Media Corporation (File No. 333-86491) as filed on September
                3, 1999).
(10)(i)13       Tax Sharing Agreement dated as of March 9, 1999, by and
                among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)14       First Amendment to Tax Sharing Agreement dated as of May 28,
                1999, by and among AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.5 to the
                Registration Statement on Form S-4 of Liberty Media
                Corporation (File No. 333-86491) as filed on September 3,
                1999).
(10)(i)15       Second Amendment to Tax Sharing Agreement dated as of
                September 24, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc., and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.6 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)16       Third Amendment to Tax Sharing Agreement dated as of October
                20, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.7 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)17       Fourth Amendment to Tax Sharing Agreement dated as of
                October 28, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.8 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)18       Fifth Amendment to Tax Sharing Agreement dated as of
                December 6, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.9 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)19       Sixth Amendment to Tax Sharing Agreement dated as of
                December 10, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.10 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).



             
(10)(i)20       Seventh Amendment to Tax Sharing Agreement dated as of
                December 30, 1999, by and among AT&T Corp., Liberty Media
                Corporation, Tele-Communications, Inc., Liberty Ventures
                Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
                Holdings, Inc. and each Covered Entity listed on the
                signature pages thereof (incorporated by reference to
                Exhibit 10.11 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)21       Eighth Amendment to Tax Sharing Agreement dated as of July
                25, 2000, by and among AT&T Corp., Liberty Media
                Corporation, AT&T Broadband LLC, Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1 of Liberty Media
                Corporation (File No. 333-55998) as filed on February 21,
                2001).
(10)(i)22       Instrument dated January 14, 2000, adding The Associated
                Group, Inc. as a party to the Tax Sharing Agreement dated as
                of March 9, 1999, as amended, among The Associated Group,
                Inc., AT&T Corp., Liberty Media Corporation,
                Tele-Communications, Inc., Liberty Ventures Group LLC,
                Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings,
                Inc. and each Covered Entity listed on the signature pages
                thereof (incorporated by reference to Exhibit 10.12 to the
                Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
(10)(i)23       First Supplement to Inter-Group Agreement dated as of May
                28, 1999, between and among AT&T Corp., on the one hand, and
                Liberty Media Corporation, Liberty Media Group LLC and each
                Covered Entity listed on the signature pages thereof, on the
                other hand (incorporated by reference to Exhibit 10.14 to
                the Registration Statement on Form S-1/A of Liberty Media
                Corporation (File No. 333-93917) as filed on February 9,
                2000).
(10)(i)24       Second Supplement to Inter-Group Agreement dated as of
                September 24, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.15 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)25       Third Supplement to Inter-Group Agreement dated as of
                October 20, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.16 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)26       Fourth Supplement to Inter-Group Agreement dated as of
                December 6, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.17 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)27       Fifth Supplement to Inter-Group Agreement dated as of
                December 10, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.18 to the Registration Statement on Form S-1/A of
                Liberty Media Corporation (File No. 333-93917) as filed on
                February 9, 2000).
(10)(i)28       Sixth Supplement to Inter-Group Agreement dated as of
                December 30, 1999, between and among AT&T Corp., on the one
                hand, and Liberty Media Corporation, Liberty Media Group LLC
                and each Covered Entity listed on the signature pages
                thereof, on the other hand (incorporated by reference to
                Exhibit 10.19 to the Registration Statement on Form S-1 of
                Liberty Media Corporation (File No. 333-93917) as filed on
                December 30, 1999).




                
(10)(i)29          Seventh Supplement to Inter-Group Agreement dated as of July 25, 2000, between and among AT&T
                   Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered
                   Entity listed on the signature pages thereof, on the other hand (incorporated by reference to
                   Exhibit 10.21 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No.
                   333-55998) as filed on February 21, 2001).
(10)(i)30          Instrument dated January 14, 2000, adding The Associated Group, Inc. as a party to the
                   Inter-Group Agreement dated as of March 9, 1999, as supplemented, between and among AT&T Corp.,
                   on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered Entity
                   listed on the signature pages thereof, on the other hand (incorporated by reference to Exhibit
                   10.20 to the Registration Statement on Form S-1/A of Liberty Media Corporation (File No.
                   333-93917) as filed on February 9, 2000).
(10)(i)31          Eighth Supplement to Inter-Group Agreement dated as of November 20, 2000, between and among AT&T
                   Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC and each Covered
                   Entity listed on the signature pages thereof, on the other hand (incorporated by reference to
                   Exhibit 10.24 to the Registration Statement on Form S-1 of Liberty Media Corporation (File No.
                   333-66034) as filed on July 27, 2001).
(10)(i)32          Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001, between and among AT&T
                   Corp., on the one hand, and Liberty Media Corporation, Liberty Media Group LLC, AGI LLC, Liberty
                   SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc., on the other hand (incorporated by
                   reference to Exhibit 10.25 to the Registration Statement on Form S-1 of Liberty Media
                   Corporation (File No. 333-66034) as filed on July 27, 2001).
(10)(i)33          Agreement and Plan of Merger dated as of December 19, 2001 among AT&T Corp., AT&T Broadband
                   Corp., Comcast Corporation, AT&T Broadband Acquisition Corp., Comcast Acquisition Corp. and AT&T
                   Comcast Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on
                   Form S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)34          Separation and Distribution Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T
                   Broadband Corp. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form
                   S-4 of AT&T Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)35          Tax Sharing Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband Corp.
                   (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 of AT&T
                   Comcast Corporation (File No. 333-82460) as filed on February 11, 2002).
(10)(i)36          Employee Benefits Agreement dated as of December 19, 2001 between AT&T Corp. and AT&T Broadband
                   Corp. (incorporated by reference to Exhibit (10)(i)37 to Form 10-K for 2001, File No. 1-1105).
(10)(i)37          Amended and Restated 364-Day Revolving Credit Facility Agreement, dated as of October 8, 2003,
                   among AT&T Corp., the Lenders party hereto, JPMorgan Chase Bank and Citibank, N.A. as
                   Administrative Agents, Abn Amro Bank N.V., Bank of America, N.A. and Royal Bank of Scotland, as
                   Co-Syndication Agents, and Credit Suisse First Boston, Cayman Islands Branch, Deutsch Bank AG
                   New York Branch and Morgan Stanley Bank, as Co-Documentation Agents, with J.P. Morgan Securities
                   Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners.
                   (incorporated by reference to Form 8-K filed October 9, 2003, File No. 1-1105).
(10)(iii)(A)1      AT&T Short Term Incentive Plan as amended March, 1994 (incorporated by reference to Exhibit
                   (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2      AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (incorporated by reference to
                   Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105).



             
(10)(iii)(A)3   AT&T Senior Management Individual Life Insurance Program as
                amended March 3, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)4   AT&T Senior Management Long Term Disability and Survivor
                Protection Plan, as amended and restated effective January
                1, 1995 (incorporated by reference to Exhibit (10)(iii)(A)4
                to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)5   AT&T Senior Management Financial Counseling Program dated
                December 29, 1994 (incorporated by reference to Exhibit
                (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)6   AT&T Deferred Compensation Plan for Non-Employee Directors,
                as amended December 15, 1993 (incorporated by reference to
                Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No.
                1-1105).
(10)(iii)(A)7   The AT&T Directors Individual Life Insurance Program as
                amended March 2, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)7 to Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)8   AT&T Plan for Non-Employee Directors' Travel Accident
                Insurance (incorporated by reference to Exhibit
                (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105).
(10)(iii)(A)9   AT&T Excess Benefit and Compensation Plan, as amended and
                restated effective October 1, 1996 (incorporated by
                reference to Exhibit (10)(iii)(A)9 to Form 10-K for 1996,
                File No. 1-1105) including Form of Amendment to AT&T Excess
                Benefit and Compensation Plan dated as of July 28, 2003
                (incorporated by reference to Exhibit 10(iii)(A)1 to Form
                10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)10  AT&T Non-Qualified Pension Plan, as amended and restated
                January 1, 1995 (incorporated by reference to Exhibit
                (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105)
                including Form of Amendment to AT&T Non-Qualified Pension
                Plan dated as of July 28, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)2 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)11  AT&T Senior Management Incentive Award Deferral Plan, as
                amended January 21, 1998 (incorporated by reference to
                Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No.
                1-1105) including Form of Amendment to AT&T Senior
                Management Incentive Award Deferral Plan dated as of July
                28, 2003 (incorporated by reference to Exhibit 10(iii)(A)3
                to Form 10-Q for third quarter 2003, File No. 1-1105).
(10)(iii)(A)12  AT&T Mid-Career Hire Program revised effective January 1,
                1988 (incorporated by reference to Exhibit (10)(iii)(A)4 to
                Form SE, dated March 25, 1988, File No. 1-1105) including
                AT&T Mid-Career Pension Plan, as amended and restated July
                1, 1999 (incorporated by reference to Exhibit (10)(iii)(A)12
                to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)13  AT&T 1997 Long Term Incentive Program as amended through
                March 14, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)14  Indemnification Agreement for Officers and Directors.
(10)(iii)(A)15  Pension Plan for AT&T Non-Employee Directors revised
                February 20, 1989 (incorporated by reference to Exhibit
                (10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105).
(10)(iii)(A)16  AT&T Corp. Senior Management Universal Life Insurance
                Program effective October 1, 1999 (incorporated by reference
                to Exhibit (10)(iii)(A)16 to Form 10-K for 2000, File No.
                1-1105) including Form of Amendment to AT&T Corp. Senior
                Management Universal Life Insurance Program dated as of July
                28, 2003 (incorporated by reference to Exhibit 10(iii)(A)4
                to Form 10-Q for third quarter 2003, File No. 1-1105). AT&T
                Corp. Executive Life Insurance Program as amended and
                restated on January 1, 2004.
(10)(iii)(A)17  AT&T Benefits Protection Trust Agreement as amended and
                restated as of November 1993, including the first amendment
                thereto dated December 23, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No.
                1-1105).



             
(10)(iii)(A)18  AT&T Senior Officer Severance Plan effective October 9,
                1997, as amended October 30, 1997 (incorporated by reference
                to Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No.
                1-1105), and as amended, restated and renamed AT&T Senior
                Officer Separation Plan as of January 1, 2003 including Form
                of Amendment of Appendix A of AT&T Senior Officer Severance
                Plan dated as of July 28, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)5 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)19  Special Incentive Agreement between AT&T Corp. and Hossein
                Eslambolchi dated June 2, 2003 (incorporated by reference to
                Exhibit (10)(iii)(A)1 to Form 10-Q for second quarter 2003,
                File No. 1-1105).
(10)(iii)(A)20  Employment Agreement between AT&T Corp. and Thomas W. Horton
                dated as of June 10, 2002.
(10)(iii)(A)21  Pension Agreement between AT&T Corp. and Thomas W. Horton
                dated as of July 29, 2003.
(10)(iii)(A)22  Modification to Employment Agreement dated September 16,
                2002 to Employment Agreement between AT&T Corp. and Thomas
                W. Horton dated as of June 10, 2002.
(10)(iii)(A)23  Financial Services Agreement between AT&T Corp. and Thomas
                W. Horton dated as of July 24, 2002.
(10)(iii)(A)24  AT&T Corp. Executive Disability Plan dated February 2004
(10)(iii)(A)25  AT&T Corp. Directors' Universal Life Insurance Program
                effective June 1, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)25 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)26  AT&T Corp. Senior Management Universal Life Insurance
                Program for Former Executives effective October 1, 1999
                (incorporated by reference to Exhibit (10)(iii)(A)26 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)27  Special Temporary Allowance Agreement between AT&T Corp. and
                Dave Dorman dated December 15, 2003.
(10)(iii)(A)28  Agreement between AT&T Corp. and Hossein Eslambolchi dated
                January 4, 2001 including amendment dated March 9, 2001
                (incorporated by reference to Exhibit (10)(iii)(A)28 to Form
                10-K for 2002, File No. 1-1105).
(10)(iii)(A)29  Board of Directors resolution adopted July 15, 2003 amending
                various executive and management plans as of January 1,
                2004.
(10)(iii)(A)30  Loan Agreement between AT&T Corp. and David Dorman dated
                December 21, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)30 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)31  Loan Agreement between AT&T Corp. and David Dorman dated
                December 21, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)31 to Form 10-K for 2000, File No. 1-1105).
(10)(iii)(A)32  AT&T Corp. board resolutions adopting change in control
                provision to various plans effective October 23, 2000
                (incorporated by reference to Exhibit (10)(iii)(A)32 to Form
                10-K for 2000, File No. 1-1105).
(10)(iii)(A)33  Loan Agreement between AT&T Corp. and David Dorman dated
                April 13, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)33 to Form 10-K for 2001, File No. 1-1105).
(10)(iii)(A)34  Employment Agreement between AT&T Corp. and David Dorman
                dated May 18, 2001 (incorporated by reference to Exhibit
                (10)(iii)(A)35 to Form 10-K for 2001, File No. 1-1105)
                including amendment dated December 31, 2002 (incorporated by
                reference to Form 10-K for 2002, File No. 1-1105) including
                amendment dated July 25, 2003 (incorporated by reference to
                Exhibit 10(iii)(A)7 to Form 10-Q for third quarter 2003,
                File No. 1-1105).
(10)(iii)(A)35  Special Equity Agreement between AT&T Corp. and Hossein
                Eslambolchi dated January 31, 2001 (incorporated by
                reference to Exhibit (10)(iii)(A)35 to Form 10-K for 2002,
                File No. 1-1105).



             
(10)(iii)(A)36  Employment Agreement between AT&T Corp. and Hossein
                Eslambolchi dated December 28, 1999 including amendment
                dated January 6, 2000 (incorporated by reference to Exhibit
                (10)(iii)(A)36 to Form10-K for 2002, File No. 1-1105).
(10)(iii)(A)37  Agreement between AT&T Corp. and James W. Cicconi dated July
                29, 1998 (incorporated by reference to Exhibit
                (10)(iii)(A)37 to Form 10-K for 2002, File No. 1-1105).
(10)(iii)(A)38  Special Deferral Agreement between AT&T Corp. and James W.
                Cicconi dated April 2, 2001 (incorporated by reference to
                Exhibit (10)(iii)(A)38 to Form 10-K for 2002, File No.
                1-1105).
(10)(iii)(A)39  Employment Agreement between AT&T Corp. and John Polumbo
                dated September 7, 2001.
(10)(iii)(A)40  Special Temporary Allowance Agreement between AT&T Corp. and
                John Polumbo dated December 1, 2003.
(10)(iii)(A)41  Amendment dated July 29, 2003 to Employment Agreement
                between AT&T Corp. and John Polumbo dated September 7, 2001.
(10)(iii)(A)42  Amendment dated October 2002 to Exhibit A of Employment
                Agreement between AT&T Corp. and John Polumbo dated
                September 7, 2001.
(12)            Computation of Ratio of Earnings to Fixed Charges.
(14)            Code of Ethics for Chief Executive Officer and Senior
                Financial Officers
(21)            List of subsidiaries of AT&T.
(23a)           Consent of PricewaterhouseCoopers LLP.
(23b)           Consent of KPMG LLP.
(23c)           Consent of PricewaterhouseCoopers LLP.
(23d)           Consent of KPMG LLP.
(24)            Powers of Attorney executed by officers and directors who
                signed this report.
(31.1)          Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)          Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a)
                of the Securities Exchange Act of 1934, as adopted pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)          Certification by CEO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
(32.2)          Certification by CFO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
(99.1)          AT&T Canada Inc. March 2003 and 2002 Financial Statements
(99.2)          AT&T Canada Inc. December 31, 2002, 2001 and 2000 Financial
                Statements
(99.3)          Concert B. V. December 31, 2001 and 2000 Financial
                Statements
(99.4)          Liberty Media Corporation December 2001, 2000 and 1999
                Financial Statements

EX-10.III.A.14

                                                          EXHIBIT (10)(iii)(A)14

                        STANDARD FORM OF INDEMNIFICATION

         In order to induce you to serve or continue to serve as a director or
officer of AT&T Corp. (the "Corporation") or one of its subsidiaries and in
consideration of your so serving, the Corporation hereby agrees to indemnify you
according to the terms and conditions set forth below:

         1. Indemnification.

            (a) The Corporation shall indemnify you to the fullest extent
permitted by applicable law against any and all expenses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses), judgments, fines and amounts paid in settlement actually and
reasonably incurred by you (net of any related insurance proceeds received by
you or paid on your behalf) in connection with any present or future threatened,
pending or completed claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative, whether or not such claim, action, suit or
proceeding is by or in the right of the Corporation, based upon, arising from,
relating to, or by reason of the fact that you were, are, shall be or shall have
been a director or officer of the Corporation, or are or were serving, shall
serve or shall have served at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
provided that no indemnification may be made to or on your behalf if a judgment
or other final adjudication adverse to you establishes that your acts were
committed in bad faith or were the result of active and deliberate dishonesty
and were material to the cause of action so adjudicated, or that you personally
gained in fact a financial profit or other advantage to which you were not
legally entitled.

            (b) If you have been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in paragraph (a), or in the defense of any claim, issue or matter therein, you
shall be entitled to indemnification as authorized in such paragraph. Any other
indemnification under paragraph (a), unless awarded by a court, shall be made by
the Corporation only if authorized in a specific case:

                                    (i) by the Board of Directors acting by a
                        quorum of directors who are not parties to such action
                        or proceeding upon a finding that you have met the
                        standard of conduct set forth in paragraph (a); or

                                    (ii) if such a quorum is not obtainable or,
                        even if obtainable, a quorum of disinterested directors
                        so directs, (x) by the Board of Directors upon the
                        opinion in writing of independent legal counsel
                        reasonably acceptable to you and the Corporation that
                        indemnification is proper in the circumstances because
                        the applicable standard of conduct set forth in
                        paragraph (a) has been met by you, or (y) by the
                        shareholders upon a finding that you have met the
                        applicable standard of conduct set forth in paragraph
                        (a); and

                                    (iii) in addition to or in substitution for
                        (i) or (ii) above, the Corporation and you shall have
                        met any other standard, obtained any other approvals,
                        and proceeded in any other manner as may be required by
                        law.

            (c) The termination of any such civil or criminal action or
proceedings by judgment, settlement, conviction or upon a plea of nolo
contendere, or its equivalent, shall not in itself create a presumption that
your acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action or that you
personally gained in fact a financial profit or other advantage to which you
were not legally entitled.

            (d) If you are entitled to indemnification hereunder as to only a
portion of the amounts actually incurred by you in the investigation, defense,
appeal or settlement of any action, suit or proceeding but not for the total
amount thereof, the Corporation shall nevertheless indemnify you for the portion
thereof to which you are entitled.

            (e) For purposes of paragraph (a) of this Section 1, the Corporation
shall be deemed to have requested you to serve on an employee benefit plan where
your performance of your duties to the Corporation also imposes duties on, or
otherwise involve services by, you to the plan or participants or beneficiaries
of the plan; excise taxes assessed on you with respect to an employee benefit
plan pursuant to applicable law shall be considered fines; and action taken or
omitted by you with respect to an employee benefit plan and the performance of
your duties for a purpose reasonably believed by you to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Corporation.

         2. Method of Payment.

            (a) You shall, upon making a written request to the Corporation
accompanied by supporting documentation as described below, be entitled to
receive promptly from the Corporation, and the Corporation agrees to pay to you,
by check payable in next-day funds, the amount you are entitled to receive from
the Corporation pursuant to Section 1 (the "Indemnified Amounts"). In making any
such written request you shall submit to the Corporation a schedule setting
forth in reasonable detail the amount expended (or incurred and expected to be
expended) for each Indemnified Amount accompanied by a copy of the relevant
bill, agreement or other documentation.

            (b) Indemnified Amounts expended by you, or reasonably expected to
be expended by you within three months next succeeding a request by you as
described below, shall be paid by the Corporation in advance of the final
resolution of any suit, action or proceeding (an "Advanced Amount") upon your
written request, which shall include a schedule setting forth in reasonable
detail the amount expended, or reasonably expected to be expended within the
next three months, by you for any Indemnified Amount, accompanied by a copy of
the relevant bill, agreement or other documentation. You may make as many
requests for an Advanced Amount under this Section as you may deem reasonably
necessary to cover Indemnified Amounts, provided that each request shall be at
least for the sum of $1,000.

            (c) You hereby agree to repay all Advanced Amounts to the
Corporation by check payable in next-day funds promptly following the final
resolution of any action, suit or proceeding to which such Advance Amounts
relate if it is determined that you are not entitled to indemnification with
respect thereto pursuant to Section 1.

            (d) In the event that you are entitled to indemnification pursuant
to Section 1, you shall have the right to seek payment for that portion of
Indemnified Amounts which is in excess of Advanced Amounts received by you (the
"Unadvanced Indemnified Amounts") by following the procedures set forth in
paragraph (a) of this Section 2; provided that the schedule of Indemnified
Amounts shall in addition set forth each and every Advanced Amount received as
of the date of such listing in order to calculate the net Unadvanced Indemnified
Amounts. Alternatively, if you are entitled to indemnification pursuant to
Section 1 and the total of the Advanced Amounts theretofore received by you
exceeds the total amount of Indemnified Amounts, you shall pay the amount of the
difference to the Corporation by check payable in next-day funds promptly upon a
determination of the amount of such excess.

            (e) During the interval between the Corporation's receipt of your
request for indemnification under paragraph (a) of this Section 2, and the

later to occur of (i) payment in full to you of the Indemnified Amounts or (ii)
a determination (if required) pursuant to paragraph (b) of Section 1 that you
are not entitled to indemnification hereunder, the Corporation shall take all
necessary steps (whether or not such steps require expenditures to be made by
the Corporation at that time), to stay, pending a final determination of your
entitlement to indemnification (and, if you are so entitled, the payment
thereof), the execution, enforcement or collection of any judgments, penalties,
fines or any other amounts for which you may be liable (and as to which you have
requested indemnification hereunder) in order to avoid your being or becoming in
default with respect to any such amounts (such necessary steps to include, but
not be limited to, the procurement of a surety bond to achieve such stay or the
loan to you of amounts for which you may be liable and as to which a stay of
execution as aforesaid cannot be obtained), promptly after receipt of your
written request therefor, together with a written undertaking by you to repay,
promptly following receipt of a statement therefor from the Corporation, amounts
(if any) expended by the Corporation for such purpose, if it is ultimately
determined (if such determination is required) pursuant to paragraph (b) of
Section 1 hereof that you are not entitled to be indemnified against such
judgments, penalties, fines or other amounts.

         3. Procedures.

            Promptly after receipt by you of notice of the assertion of any
claim or notice of the commencement of any claim, action, suit or proceeding,
you will, if a claim in respect thereof is to be made against the Corporation
under this Agreement, notify the Corporation of the commencement thereof; but
the omission so to notify the Corporation will not relieve it from any liability
which it may have to you otherwise than under this Agreement. With respect to
any such claim, action, suit or proceeding:

                           (a) the Corporation will be entitled to participate
                  therein at its own expense; and

                           (b) except as otherwise provided below, to the extent
                  that it may wish, the Corporation jointly with any other
                  indemnifying party similarly notified will be entitled to
                  assume the defense thereof with counsel satisfactory to you.
                  After notice from the Corporation to you of its election so to
                  assume the defense thereof, the Corporation will not be liable
                  under this Agreement for any legal or other expenses
                  subsequently incurred by you in connection with the defense
                  thereof other than reasonable costs of investigation or as
                  otherwise provided below. You shall have the right to employ
                  your counsel in such claim, action, suit or proceeding but the
                  fees and expenses of such counsel incurred after notice from
                  the Corporation of its

                  assumption of the defense thereof shall be at your expense
                  unless (i) the employment of counsel by you has been
                  authorized by the Corporation, (ii) you shall have reasonably
                  concluded that there may be a conflict of interest between the
                  Corporation and you in the conduct of the defense of such
                  claim, action, suit or proceeding, or (iii) the Corporation
                  shall not in fact have employed counsel to assume the defense
                  of such claim, action, suit or proceeding in each of which
                  cases the fees and expenses of counsel shall be at the expense
                  of the Corporation. The Corporation shall not be entitled to
                  assume the defense of any claim, action, suit or proceeding
                  brought by or on behalf of the Corporation or as to which you
                  shall have made the conclusion provided for in (ii) above; and

                           (c) the Corporation shall not be liable to indemnify
                  you under this Agreement for any amounts paid in settlement of
                  any claim, action, suit or proceeding effected without its
                  written consent. The Corporation shall not settle any claim,
                  action, suit or proceeding in any manner which would impose
                  any penalty or limitation on you without your written consent.
                  Neither the Corporation nor you will unreasonably withhold
                  their consent to any proposed settlement.

         4. Enforcement of Rights Under This Agreement.

         The rights to indemnification or advances pursuant to this Agreement
shall be enforceable by you in any court of competent jurisdiction and your
expenses incurred in connection with successfully establishing your right to
indemnification or advances, in whole or in part, in any such proceedings shall
be paid by the Corporation. In any such proceeding, the Corporation shall have
the burden of proving by the preponderance of the evidence that you are not
entitled to indemnification or advances hereunder. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel or
shareholders) to have made a determination that you are entitled to
indemnification or advances in the circumstances nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel or
shareholders) that you are not so entitled shall be a defense to an action or
create a presumption that you are not so entitled.

         5. Rights to Indemnification and Advances

         Not Exclusive; Subrogation Rights, etc.

            (a) The rights to indemnification and advances hereunder shall not
be deemed exclusive of, or in limitation of, any other rights to which you

may be entitled under any law, agreement, provision of the certificate of
incorporation or by-laws of the Corporation, vote of the shareholders or
disinterested directors or otherwise, both as to action in your official
capacity and as to action in another capacity while holding such office, and
shall continue after you have ceased to be a director, officer, employee or
agent of the Corporation.

            (b) In the event you shall receive payment from any insurance
carrier or from the plaintiff in any action, suit or proceeding against you in
respect of Indemnified Amounts after payments on account of all or any part of
such Indemnified Amounts have been made by the Corporation pursuant hereto, you
shall reimburse to the Corporation the amount, if any, by which the sum of such
payment by such insurance carrier or such plaintiff and payments by the
Corporation to you exceed such Indemnified Amounts; provided that such portions,
if any, of any such insurance proceeds that are required to be reimbursed to the
insurance carrier under the terms of its insurance policy shall not be deemed to
be payments to you hereunder. In addition, upon payment of Indemnified Amounts
hereunder, the Corporation shall be subrogated to your rights (to the extent
thereof), against any insurance carrier in respect of such Indemnified Amounts
(to the extent permitted under such insurance policies). Such right of
subrogation shall be terminated upon receipt by the Corporation of the amount to
be reimbursed by you pursuant to the first sentence of this paragraph (b).

         6. Successors; Binding Agreement.

            (a) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, by agreement
in form and substance reasonably satisfactory to you, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Corporation would be required to perform if no such succession had taken
place.

            (b) This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devises and legatees. If you should die while
any amounts would still be payable to you hereunder if you had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee, or other
designee, or if there be no such designee, to your estate.

         7. Notices.

         For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by the United States
registered mail, return receipt requested, postage prepaid, as follows:

         If to you: to your address as set forth at the head of this letter

         If to the Corporation:

                                        32 Avenue of the Americas
                                        New York, New York 10013
                                        Attention: Vice President - Law
                                                   and Secretary

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

         8. Miscellaneous.

         No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
you and either the Corporation's Chairman of the Board or another officer of the
Corporation specifically designated by the Board of Directors. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
the principles of conflicts of laws thereof.

         9. Severability.

         The invalidity or unenforceability of any provision of this Agreement
shall not effect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

         10. Counterparts.

         This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.

         If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to the Secretary of the Corporation the enclosed
copy of this letter, which shall then constitute our agreement on this matter.

         This Agreement is entered into and is effective as of the date of your
election as a director or officer of AT&T Corp. .

                                         Accepted and Agreed:


                                         AT&T CORP.



                                         By:
                                            ------------------------------
                                            Chairman and Chief
                                            Executive Officer

Accepted and agreed:

[NOMINEE]

By:
   ------------------
   Name
   Title

EX-10.III.A.16

                                                                EXHIBIT(10)(A)16



                                   AT&T CORP.

                        EXECUTIVE LIFE INSURANCE PROGRAM

                 Amended and Restated Effective January 1, 2004






                                   AT&T CORP.

                        EXECUTIVE LIFE INSURANCE PROGRAM

                                TABLE OF CONTENTS
                                                                                   
SECTION 1 -  DEFINITIONS ...........................................................   1

    1.0    Administrator ...........................................................   1
    1.1    Assignee ................................................................   1
    1.2    Beneficiary .............................................................   1
    1.3    Benefit Amount ..........................................................   2
    1.4    Board ...................................................................   2
    1.5    Change in Control .......................................................   2
    1.6    Company .................................................................   2
    1.7    Director ................................................................   2
    1.8    Eligible Executive ......................................................   2
    1.9    Eligible for Retirement-Related Benefit .................................   2
    1.10   Employer ................................................................   3
    1.11   ERISA ...................................................................   3
    1.12   Insurance Policy ........................................................   3
    1.13   Insurer .................................................................   3
    1.14   Normal Termination Date .................................................   3
    1.15   Officer .................................................................   3
    1.16   Participant .............................................................   3
    1.17   Policyholder ............................................................   4
    1.18   Previous Director Program ...............................................   4
    1.19   Prior Officer Programs ..................................................   4
    1.20   Program .................................................................   4

SECTION 2 - ELIGIBILITY AND PARTICIPATION ..........................................   5

    2.0    Eligibility Conditions ..................................................   5
    2.1    Commencement and Duration of Participation ..............................   5
    2.2    Disability Prior to Normal Termination Date .............................   5
    2.3    Termination of Employment Prior to Normal Termination Date ..............   6
    2.4    Recommencement of Participation .........................................   6

SECTION 3 - PROCUREMENT OF INSURANCE POLICY ........................................   7

    3.0    Insurance Application Requirements ......................................   7
    3.1    Cooperation Requirement for Eligible Executive ..........................   7
    3.2    Cooperation Requirement for Policyholder ................................   7
    3.3    Consequences of Failure to Cooperate ....................................   8



                                     - i -                     TABLE OF CONTENTS

                   AT&T Corp. Executive Life Insurance Program

                                                                                   
SECTION 4 -  INCIDENTS OF OWNERSHIP ................................................   9

    4.0    Policy Ownership ........................................................   9
    4.1    Rights of Policyholder and Company ......................................  11
    4.2    Assignment of Insurance Policy by Policyholder ..........................  11
    4.3    Beneficiary Elections and Settlement Options ............................  11
    4.4    No Ownership Interest by the Company ....................................  11

SECTION 5 -  PAYMENT OF BENEFITS ...................................................  12

    5.0    Source of Benefits ......................................................  12
    5.1    Payment of Insurance Premiums ...........................................  12
    5.2    Benefit Amount ..........................................................  12
    5.3    Tax Adjustment ..........................................................  15
    5.4    Beneficiary Designations ................................................  15
    5.5    No Company or Employer Obligation .......................................  16
    5.6    No Affect on Other Company Benefits .....................................  16

SECTION 6 - TERMINATION OF PARTICIPATION ...........................................  17

    6.0    Events that Cause Termination of Participation ..........................  17
    6.1    Death of Participant Prior to Normal Termination Date ...................  18
    6.2    Attainment of Normal Termination Date ...................................  18
    6.3    Discontinuance of Participation Prior to Normal Termination Date ........  19

SECTION 7 - CLAIMS AND APPEALS .....................................................  20

    7.0    Claims ..................................................................  20
    7.1    Claim Decision ..........................................................  20
    7.2    Request for Review ......................................................  21
    7.3    Review of Decision ......................................................  21

SECTION 8 -  AMENDMENT  AND TERMINATION ............................................  23

    8.0    Continuation of Program .................................................  23
    8.1    Amendment or Termination ................................................  23
    8.2    Continued Maintenance of Program After Change in Control ................  23
    8.3    Prohibition on Amendments After Change in Control .......................  23

SECTION 9 -  GENERAL PROVISIONS ....................................................  25

    9.0    Named Fiduciary .........................................................  25
    9.1    Effective Date ..........................................................  25
    9.2    Calendar Year Program ...................................................  25


                                     - ii -                    TABLE OF CONTENTS


                        AT&T Corp. Executive Life Insurance Program

                                                                                   

    9.3    Notice Under Program ....................................................  25
    9.4    Binding Effect ..........................................................  25
    9.5    Welfare Plan Under ERISA ................................................  25
    9.6    Plan Document ...........................................................  26
    9.7    Governing Law ...........................................................  26
    9.8    Severability ............................................................  26
    9.9    Headings ................................................................  26
    9.10   Procedural Rules ........................................................  26
    9.11   Construction ............................................................  26



                                     - iii -                   TABLE OF CONTENTS





                                   AT&T CORP.

                        EXECUTIVE LIFE INSURANCE PROGRAM

                                     PURPOSE

The AT&T Corp. Executive Life Insurance Program was established, effective
October 1, 1999, to provide life insurance benefits for certain executives of
the Company who were classified as Officers and who contribute to the continued
growth, development, and future business of the Company. From the time of its
adoption through December 31, 2003, the AT&T Corp. Executive Life Insurance
Program was known as the "AT&T Corp. Senior Management Universal Life Insurance
Program".

Effective as of January 1, 2004, the AT&T Corp. Executive Life Insurance Program
was amended and restated to modify the normal levels of pre-retirement and
postretirement life insurance benefits provided and to expand coverage to
include certain other employees of the Company who are classified as Directors.
The name of the AT&T Corp. Senior Management Universal Life Insurance Program
was also changed to "AT&T Corp. Executive Life Insurance Program", effective as
of January 1, 2004, to reflect the broader classification of employees who are
eligible to participate in it.

                                     SECTION
                                       1.
                                   DEFINITIONS

The following words and phrases, as used in this plan document, shall have the
meanings set forth below unless a clearly different meaning is required by the
context in which the word or phrase is used.

1.0   ADMINISTRATOR. "Administrator" means the Executive Vice President - Human
      Resources of the Company (or any successor to such position) having
      responsibility for personnel matters, or his or her designee. The
      Administrator shall manage and administer the Program in accordance with
      its terms and conditions.

1.1   ASSIGNEE. "Assignee" means the person, trust, entity or organization to
      whom or to which a Policyholder makes an irrevocable assignment on or
      after October 1, 1999, of all his or her rights, title, interest, and
      incidents of ownership, both present and future, to the Insurance Policy
      and any other assignable rights to the benefits under the Program.

1.2   BENEFICIARY. "Beneficiary" means the person, trust, entity, organization
      or the estate of a Policyholder designated pursuant to Section 5.4 that is
      entitled to receive benefits from an Insurance Policy upon the death of a
      Participant whose life is insured by the Insurance Policy.



ARTICLE 1                             -1-                           DEFINITIONS




                   AT&T Corp. Executive Life Insurance Program


1.3   BENEFIT AMOUNT. "Benefit Amount" means the amount of the life insurance
      benefit under the Insurance Policy for which premiums are payable by the
      Company under the Program. The "Benefit Amount" for a Participant shall be
      determined in accordance with Section 5.2.

1.4   BOARD. "Board" means the Board of Directors of the Company.


1.5   CHANGE IN CONTROL. "Change in Control" has the same meaning assigned to
      that term under the AT&T 1997 Long Term Incentive Program, as in effect on
      October 23, 2000.

1.6   COMPANY. "Company" means AT&T Corp., a New York corporation, and any
      successors to such entity.

1.7   DIRECTOR. "Director" means a management employee of the Employer who is
      classified as a "Manager 5" in a non-banded environment, or at the salary
      grade level of "E-band", or its equivalent, in a banded environment (also
      referred to as an "Executive" from time to time).

1.8   ELIGIBLE EXECUTIVE. "Eligible Executive" means (a) an active management
      employee of the Employer who, on September 30, 1999, was an Officer and
      was covered as an insured under one or more life insurance policies that
      were subject to a collateral assignment agreement with the Company under
      one or both of the Prior Officer Programs; (b) any other active management
      employee of the Employer who, on or after October 1, 1999, is classified
      as a U.S.-based Officer and is determined by the Administrator, in his or
      her sole discretion, to be eligible for participation in the Program; (c)
      an individual (i) whose participation in the Previous Director Program
      terminates on or after December 31, 2003, (ii) who is an active management
      employee of the Employer classified as a Director immediately prior to and
      after his or her termination of participation in the Previous Director
      Program, and (iii) who is determined by the Administrator, in his or her
      sole discretion, to be eligible for participation in the Program; or (d)
      any other active management employee of the Employer who, on or after
      January 1, 2004, is classified as a U.S.-based Director and is determined
      by the Administrator, in his or her sole discretion, to be eligible for
      participation in the Program.

1.9   ELIGIBILE FOR RETIREMENT-RELATED BENEFITS. "Eligible for
      Retirement-Related Benefits" means, for purposes of this Program, that a
      Participant has satisfied the minimum age and service requirements then in
      effect to be eligible for Company-paid or retiree-paid (access only)
      postretirement medical benefits under (a) the AT&T Medical Expense Plan
      for Retired Employees (applicable to the period from October 1, 1999
      through December 31, 2000); or (b) the AT&T Corp. Postretirement Welfare
      Benefits Plan (applicable to periods beginning on or after January 1,
      2001). For purposes of this definition, a Participant's satisfaction of
      the minimum age and service




ARTICLE 1                             -2-                            DEFINITIONS

                   AT&T Corp. Executive Life Insurance Program

      requirements for postretirement medical benefits eligibility shall be
      determined without application of any "Rule of 65" eligibility provisions
      set forth in the AT&T Medical Expense Plan for Retired Employees and the
      AT&T Corp. Postretirement Welfare Benefits Plan, as applicable.

1.10  EMPLOYER. "Employer" means the Company and certain of its subsidiaries and
      affiliates, as determined by the Company in its sole discretion.

1.11  ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974,
      as amended.

1.12  INSURANCE POLICY. "Insurance Policy" means one or more life insurance
      contracts issued by the Insurer on the life of an Eligible Executive under
      this Program.

1.13  INSURER. "Insurer" means the insurance company or companies to which the
      Company shall apply for insurance on an Eligible Executive's life, and
      which issues an Insurance Policy.

1.14  NORMAL TERMINATION DATE. "Normal Termination Date" means the latest of (a)
      the date on which a Participant is Eligible for Retirement-Related
      Benefits from the Company; (b) the date on which a Participant attains age
      sixty-five (65); (c) the date as of which a Participant has been covered
      for a combined total of at least fifteen (15) years under the Program and
      either (i) the Prior Officer Programs (applicable only to an Eligible
      Executive who is an Officer and had coverage under one or both of the
      Prior Officer Programs; if the Eligible Executive had coverage under both
      of the Prior Officer Programs, this 15-year period of coverage shall be
      measured beginning from the later of his or her coverage commencement
      dates under the respective Prior Officer Programs), or (ii) the Previous
      Director Program (applicable only to an Eligible Executive who is a
      Director and had coverage under the Previous Director Program on the day
      before he or she becomes a Participant); or (d) the date as of which the
      Insurance Policy has sufficient cash value, as determined by the Company
      in its sole discretion, to provide life insurance coverage for the
      Participant's remaining life expectancy.

1.15  OFFICER. "Officer" means a management employee of the Employer who is
      classified as a "Manager 6" or higher level in a non-banded environment,
      or at a salary grade level above "E-band", or its equivalent, in a banded
      environment (also referred to as a "Senior Manager" from time to time).

1.16  PARTICIPANT. "Participant" means an Eligible Executive who has satisfied
      all of the eligibility and enrollment conditions in Section 2.0 and with
      respect to whom an application for an Insurance Policy has been approved
      by the Insurer. For purposes of this Section 1.16, "Participant" shall
      include (a) a Participant who subsequently





ARTICLE 1                             -3-                            DEFINITIONS


                   AT&T Corp. Executive Life Insurance Program

      becomes disabled and satisfies the requirements of Section 2.2; and (b) a
      Participant who terminates employment with the Employer and is then
      Eligible for Retirement-Related Benefits as provided for in Section 2.3.

1.17  POLICYHOLDER. "Policyholder" means the person, trust, entity or
      organization determined in accordance with Section 4.0 to be the owner of
      the Insurance Policy on an Eligible Executive's life.

1.18  PREVIOUS DIRECTOR PROGRAM. "Previous Director Program" means the AT&T
      Corp. Executive Basic Life Insurance Program, as in effect on December 31,
      2003.

1.19  PRIOR OFFICER PROGRAMS. "Prior Officer Programs" means the AT&T Senior
      Management Basic Life Insurance Program and the AT&T Senior Management
      Individual Life Insurance Program, as in effect on September 30, 1999. The
      Prior Officer Programs shall be terminated effective as of September 30,
      1999, and replaced by the Program.

1.20  PROGRAM. "Program" means the AT&T Corp. Executive Life Insurance Program,
      which shall be evidenced by this plan document, as amended from time to
      time. Prior to January 1, 2004, the AT&T Corp. Executive Life Insurance
      Program was known as the "AT&T Corp. Senior Management Universal Life
      Insurance Program".





ARTICLE 1                             -4-                            DEFINITIONS





                   AT&T Corp. Executive Life Insurance Program



                                     SECTION
                                       2.
                          ELIGIBILITY AND PARTICIPATION

2.0   ELIGIBILITY CONDITIONS. Upon becoming an Eligible Executive, an individual
      must satisfy all of the following conditions applicable to the Eligible
      Executive in order to become a Participant:

      (a)   The Eligible Executive shall complete, execute, and return (or cause
            his or her assignee, if any, under the Previous Director Program to
            complete, execute, and return) any and all of the documentation
            determined by the Administrator to be necessary to relinquish any
            rights the Eligible Executive or his or her assignee (if any) has
            under the life insurance policy or policies on his or her life that
            were issued to and owned by the Company under the Previous Director
            Program prior to January 1, 2004;

      (b)   The Eligible Executive shall complete, execute, and return all of
            the enrollment applications and other documents required under the
            Program in the form approved by the Administrator;

      (c)   The Eligible Executive shall cooperate with the Company in obtaining
            the Insurance Policy on his or her life as required by Sections 3.0
            and 3.1; and

      (d)   The Eligible Executive shall comply with such further conditions as
            may be established by the Administrator from time to time.

2.1   COMMENCEMENT AND DURATION OF PARTICIPATION. An Eligible Employee who has
      satisfied all of the applicable eligibility conditions in Section 2.0
      shall become a Participant on the day the Eligible Employee's application
      for the Insurance Policy on his or her life made pursuant to Section 3.0
      is approved by the Insurer. Subject to the provisions of Sections 2.2,
      2.3, 3.3, and 4.1, an Eligible Executive shall be eligible to continue to
      participate in the Program until the occurrence of any event described in
      Section 6.0 that causes the termination of his or her participation in the
      Program.

2.2   DISABILITY PRIOR TO NORMAL TERMINATION DATE. In the event that (a) a
      Participant is determined to be disabled for purposes of eligibility to
      receive long-term disability benefits under the AT&T Corp. Executive
      Disability Plan, and (b) the Participant continues to be disabled until
      his or her Normal Termination Date (without regard to whether the
      Participant continues to receive long-term disability benefit payments
      under the AT&T Corp. Executive Disability Plan through such date), the
      Participant shall be eligible to continue to participate in the Program.
      Such eligibility to participate shall continue until the earliest of (i)
      the date the Participant attains his or her Normal Termination Date; (ii)
      the date the Participant ceases to be disabled for





ARTICLE 2                             -5-                        ELIGIBILITY AND
                                                                   PARTICIPATION


                   AT&T Corp. Executive Life Insurance Program

      purposes of eligibility to receive long-term disability benefits under the
      AT&T Corp. Executive Disability Plan and does not immediately thereafter
      resume, for any reason, active employment with the Employer; or (iii) the
      occurrence of any other event described in Section 6.0 that causes
      termination of participation.

2.3   TERMINATION OF EMPLOYMENT PRIOR TO NORMAL TERMINATION DATE. In the event
      that a Participant (a) terminates employment prior to his or her Normal
      Termination Date, and (b) is Eligible for Retirement-Related Benefits from
      the Company, the Participant shall be eligible to continue to participate
      in the Program. Such eligibility to participate shall continue until the
      earlier of (i) the date the Participant attains his or her Normal
      Termination Date; or (ii) the occurrence of any other event described in
      Section 6.0 that causes termination of participation.

2.4   RECOMMENCEMENT OF PARTICIPATION. Once a Participant's participation in the
      Program has terminated as provided in Section 6.0 (other than due to the
      occurrence of an event described in Sections 6.0(a), (b), (c), (g) or
      (i)), he or she may recommence participation in the Program if he or she
      (a) is an Eligible Executive at the time participation is to recommence;
      and (b) satisfies any and all requirements for recommencement of
      participation established by the Administrator, in his or her sole
      discretion.





ARTICLE 2                             -6-                        ELIGIBILITY AND
                                                                   PARTICIPATION




                   AT&T Corp. Executive Life Insurance Program


                                     SECTION
                                       3.
                         PROCUREMENT OF INSURANCE POLICY

3.0   INSURANCE APPLICATION REQUIREMENTS. The Company shall apply to the Insurer
      for an Insurance Policy on the life of each Eligible Executive in an
      amount determined by the Company to be sufficient to provide the
      applicable Benefit Amount for the Eligible Executive.

3.1   COOPERATION REQUIREMENT FOR ELIGIBLE EXECUTIVE. An Eligible Executive
      shall reasonably cooperate with the Company in its efforts to apply for
      and obtain the Insurance Policy on his or her life by:

      (a)   Furnishing such information as the Insurer may require for
            completion of the insurance application and related forms and
            documents;

      (b)   Taking such physical examinations and supplying medical history as
            may be requested by the Insurer;

      (c)   Signing the application for the Insurance Policy as the insured; and

      (d)   Doing any other act to comply with the underwriting and policy
            issuance requirements which may reasonably be requested by the
            Insurer or the Administrator.

3.2   COOPERATION REQUIREMENT FOR POLICYHOLDER. A Policyholder shall reasonably
      cooperate with the Company in its efforts to apply for and obtain the
      Insurance Policy on the life of an Eligible Executive by:

      (a)   Furnishing such information as the Insurer may require for
            completion of the insurance application and related forms and
            documents;

      (b)   Signing the application for the Insurance Policy as the proposed
            policy owner; and

      (c)   Doing any other act to comply with the underwriting and policy
            issuance requirements which may reasonably be requested by the
            Insurer or the Administrator.




ARTICLE 3                             -7-                         PROCUREMENT OF
                                                                INSURANCE POLICY


                   AT&T Corp. Executive Life Insurance Program



3.3     CONSEQUENCES OF FAILURE TO COOPERATE. The Company shall have no
        obligation to the Eligible Executive, the Policyholder or the
        Policyholder's Beneficiary under the Program, and the Eligible
        Executive's participation in the Program shall become null, void, and of
        no force or effect if:

        (a)    The Administrator, in his or her sole discretion, determines that
               an Eligible Executive or the Policyholder has not adequately
               cooperated in the process of procuring the Insurance Policy on
               the Eligible Executive's life as required by Section 3.1 and
               Section 3.2, respectively; or

        (b)    The Company is, for any reason, unable to obtain insurance in the
               specified amount on an Eligible Executive's life at standard
               rates or rates otherwise acceptable to the Company.

ARTICLE 3                            - 8 -                        PROCUREMENT OF
                                                                INSURANCE POLICY






                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

                                     SECTION
                                       4.
                             INCIDENTS OF OWNERSHIP

4.0   POLICY OWNERSHIP. The Insurance Policy shall, at all times, be owned
      solely and absolutely by the Policyholder, except in the event of an
      assignment to an Assignee as provided for in Section 4.2. The person,
      trust, entity or organization that will be the Policyholder with respect
      to a Participant shall be determined as follows:

      (a)   Officer Who Participated in Prior Officer Programs with Single
            Policy Owner. If (i) an Eligible Executive is an Officer who becomes
            a Participant on October 1, 1999, (ii) the Eligible Executive was
            covered as an insured under one or more life insurance policies that
            are subject to a collateral assignment with the Company under one or
            both of the Prior Officer Programs on September 30, 1999, and (iii)
            all such life insurance policies were owned by a single policy owner
            (or assignee) on September 30, 1999, then such policy owner (or
            assignee) shall be the Eligible Executive's Policyholder under the
            Program.

      (b)   Officer Who Participated in Prior Officer Programs with Multiple
            Policy Owners. If (i) an Eligible Executive is an Officer who
            becomes a Participant on October 1, 1999, (ii) the Eligible
            Executive was covered as an insured under one or more life insurance
            policies that are subject to a collateral assignment agreement with
            the Company under one or both of the Prior Officer Programs on
            September 30, 1999, and (ii) all such life insurance policies were
            owned by two or more different policy owners (or assignees) on
            September 30, 1999, then the Eligible Executive's Policyholder under
            the Program shall be the person, trust, entity or organization that
            all of such policy owners or assignees (excluding the Eligible
            Executive if he or she is one of the policy owners) agree upon and
            designate as the Policyholder with respect to the Eligible
            Executive. If, for any reason, an agreement among such policy owners
            (or assignees) cannot be reached by October 1, 1999, and/or no
            designation of Policyholder is received by the Administrator by
            October 1, 1999, the Eligible Executive shall be the Policyholder
            unless the Administrator, in his or her sole discretion, determines
            that one or more other persons, trusts, entities or organizations
            should be the Policyholder with respect to the Insurance Policy on
            the Eligible Executive's life.

      (c)   Officer Who Did Not Participate in the Prior Officer Programs. If
            (i) an Eligible Executive is an Officer who becomes a Participant on
            or after October 1, 1999, and (ii) such Eligible Executive was not
            covered as an insured under one or more life insurance policies
            issued under the Prior Officer Programs on September 30, 1999, then
            the Eligible Executive's Policyholder


ARTICLE 4                            - 9 -                INCIDENTS OF OWNERSHIP

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

            under the Program shall be the person (including the Eligible
            Executive), trust, entity or organization that the Eligible
            Executive designates to be his or her Policyholder in the Eligible
            Executive's written enrollment application for participation in the
            Program. If, for any reason, an Eligible Executive described in this
            Section 4.0(c) fails to designate a Policyholder under the Program,
            then the Eligible Executive shall be the Policyholder with respect
            to the Insurance Policy on his or her life.

      (d)   Director Who Participated in Previous Director Program and Assigned
            Interest in Program or Policy. If (i) an Eligible Executive is a
            Director who becomes a Participant on or after January 1, 2004, (ii)
            the Eligible Executive was covered as an insured under a life
            insurance policy issued under the Previous Director Program on the
            day immediately preceding the day on which he or she becomes a
            Participant, and (iii) as of the date described in the immediately
            preceding item (ii), the Eligible Executive had assigned any or all
            of his or her interest in the Previous Director Program and/or the
            life insurance policy issued on his or her life thereunder to an
            assignee, then such assignee shall be the Eligible Executive's
            Policyholder under the Program.

      (e)   Director Who Participated in Previous Director Program and Did Not
            Assign Interest in Program or Policy. If (i) an Eligible Executive
            is a Director who becomes a Participant on or after January 1, 2004,
            and (ii) the Eligible Executive was covered as an insured under a
            life insurance policy issued under the Previous Director Program on
            the day immediately preceding the day on which he or she becomes a
            Participant, and (iii) as of the date described in the immediately
            preceding item (ii), the Eligible Executive had not assigned any or
            all of his or her interest in the Previous Director Program and/or
            the life insurance policy issued on his or her life thereunder to an
            assignee, then the Eligible Executive's Policyholder under the
            Program shall be the person (including the Eligible Executive),
            trust, entity or organization that the Eligible Executive designates
            to be his or her Policyholder in the Eligible Executive's written
            enrollment application for participation in the Program. If, for any
            reason, an Eligible Executive described in this Section 4.0(e) fails
            to designate a Policyholder under the Program, then the Eligible
            Executive shall be the Policyholder with respect to the Insurance
            Policy on his or her life.

      (f)   Director Who Did Not Participate in Previous Director Program. If
            (i) an Eligible Executive is a Director who becomes a Participant on
            or after January 1, 2004, (ii) the Eligible Executive was not
            covered as an insured under a life insurance policy issued under the
            Previous Director Program on the day immediately preceding the day
            on which he becomes a Participant, then the Eligible Executive's
            Policyholder under the Program shall be the person (including the
            Eligible Executive), trust, entity or organization that the Eligible


ARTICLE 4                            - 10 -               INCIDENTS OF OWNERSHIP

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

            Executive designates to be his or her Policyholder in the Eligible
            Executive's written enrollment application for participation in the
            Program. If, for any reason, an Eligible Executive described in this
            Section 4.0(f) fails to designate a Policyholder under the Program,
            then the Eligible Executive shall be the Policyholder with respect
            to the Insurance Policy on his or her life.

4.1   RIGHTS OF POLICYHOLDER AND COMPANY. Prior to a Participant's Normal
      Termination Date, the Policyholder or his or her Assignee shall control
      all incidents of ownership with respect to the Insurance Policy including
      all policy cash values and death benefits under the Insurance Policy on
      the Participant's life. However, in the event the Policyholder or his or
      her Assignee surrenders the Insurance Policy, withdraws any cash value
      from the Insurance Policy or obtains a loan from the Insurance Policy, the
      Participant's participation in the Program shall immediately cease and the
      Company will not be obligated to continue to make any further premium
      payments as otherwise provided by Section 5.1 for the Insurance Policy.

4.2   ASSIGNMENT OF INSURANCE POLICY BY POLICYHOLDER. A Policyholder shall have
      the right, at any time, to absolutely and irrevocably assign his or her
      rights, title, interest, and incidents of ownership in and to the
      Insurance Policy and any other assignable rights to benefits under this
      Program to any person, trust, entity or organization. Any assignment shall
      be subject to the consent of the Insurer. Any such assignment shall be on
      a form approved by the Insurer. No assignment by a Policyholder shall be
      effective until acknowledged in writing by the Insurer. A copy of the
      written acknowledgment shall be returned to the Policyholder and the
      Assignee. Once the assignment of the Insurance Policy has been
      acknowledged by the Insurer, the Policyholder shall have no further
      rights, title, interest or incidents of ownership, both present and
      future, in or under the Insurance Policy or to any other rights to
      benefits under the Program covered by the assignment, and the Assignee
      shall have all such assigned rights, title, interest, and incidents of
      ownership, both present and future, under the Insurance Policy and the
      Program.

4.3   BENEFICIARY ELECTIONS AND SETTLEMENT OPTIONS. A Policyholder or his or her
      Assignee, if any, may exercise (a) the right to designate or change the
      Beneficiary of life insurance proceeds under the Insurance Policy pursuant
      to Section 5.4; and (b) the right to elect any optional mode of settlement
      with respect to such life insurance proceeds. Upon request of a
      Policyholder or his or her Assignee, if any, the applicable form for any
      designation or change of Beneficiary or any election of an optional mode
      of settlement shall be sent to a Policyholder, an Assignee or a
      Beneficiary, as appropriate.

4.4   NO OWNERSHIP INTEREST BY THE COMPANY. No provision in the Program shall be
      construed or interpreted to permit or provide the Company with any rights,
      title, interest or incidents of ownership, both present or future, to the
      Insurance Policy.


ARTICLE 4                            - 11 -               INCIDENTS OF OWNERSHIP

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

                                     SECTION
                                       5.
                               PAYMENT OF BENEFITS

5.0   SOURCE OF BENEFITS. The sole benefit under the Program to a Participant
      shall be the premium payments made by the Company to the Insurer pursuant
      to Section 5.1 to maintain the Insurance Policy on his or her life and the
      tax adjustment made pursuant to Section 5.3. A Beneficiary's sole source
      of benefits under the Program shall be the Insurance Policy under which
      the Policyholder, or his or her Assignee, designates a Beneficiary to
      receive benefits payable upon the Participant's death.

5.1   PAYMENT OF INSURANCE PREMIUMS. When the Company submits an application for
      the Insurance Policy on the life of an Eligible Executive, or as soon
      thereafter as is required by the Insurer, the Company shall pay the
      initial premium on the Insurance Policy to the Insurer. Thereafter, the
      Company shall annually (or more frequently as required by the Insurer) pay
      the premiums determined to be due under the Insurance Policy. While the
      Eligible Executive is a Participant, the amount of the premiums paid by
      the Company shall be sufficient, as determined by the Company in its sole
      discretion, to maintain life insurance coverage on the life of the
      Participant equal to the Benefit Amount. The Company's determination of
      the amount of the premium payments to be made on a Participant's Insurance
      Policy shall be based on reasonable assumptions made from time to time by
      the Company in its sole discretion. Such assumptions shall be considered
      terms of the Program, the same as if fully set forth within the body of
      this Program document, and shall include, but not be limited to,
      assumptions regarding the Participant's Insurance Policy crediting rate,
      funding rate, salary growth rate, and retirement age. The Company's
      obligation to make premium payments on the Insurance Policy covering the
      life of a Participant shall cease upon the termination of the
      Participant's participation, as provided for in Section 6.0.

5.2   BENEFIT AMOUNT. The Benefit Amount for a Participant shall be determined
      in accordance with the benefit formulas set forth in Section 5.2(a) or
      Section 5.2(b), whichever is applicable to the Participant.

      (a)   Normal Benefit Amount Formulas. The Benefit Amount under the Program
            with respect to a Participant who is actively employed by the
            Employer at any time on or after January 1, 2004, shall be
            determined under the benefit formula in Section 5.2(a)(i) or (ii),
            as applicable, unless the Participant has elected, in accordance
            with Section 5.2(c), to have his or her Benefit Amount determined
            under the applicable grandfathered benefit formula in Section
            5.2(b)(i) or (ii).

            (i)   Normal Benefit Amount While Active Employee. The Benefit
                  Amount for a Participant while he or she is an active employee
                  of the Employer on or after January 1, 2004 (even if the
                  Participant has attained his or


ARTICLE 5                            - 12 -                  PAYMENT OF BENEFITS

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

                  her Normal Termination Date), shall be equal to 300 percent of
                  the Participant's annual base salary (determined based on the
                  Employer's records) paid to the Participant by the Employer,
                  rounded up to the next $1,000. Any salary increase will be
                  reflected in the Benefit Amount as soon as administratively
                  practicable after the salary increase becomes effective. The
                  Benefit Amount for any such Participant age 65 or older, while
                  he or she is an active employee of the Employer, shall be
                  equal to the Participant's Benefit Amount determined under
                  this Section 5.2(a)(i) at age 64.

            (ii)  Normal Benefit Amount After Termination of Employment. The
                  Benefit Amount for any Participant who has terminated active
                  employment with the Employer on or after January 1, 2004, and
                  is eligible for continued participation in the Program
                  thereafter pursuant to the provisions of either Section 2.1 or
                  Section 2.2 due to disability or termination of employment
                  with Eligibility for Retirement-Related Benefits, shall be
                  equal to (1) 200 percent of the Participant's final annual
                  base salary on the date of his or her disability or
                  termination of employment (determined based on the Employer's
                  records), rounded up to the next $1,000; or (2) in the event
                  the Participant was actively employed by the Employer at age
                  65 or older, 200 percent of the Participant's annual base
                  salary at age 64 (determined based on the Employer's records),
                  rounded up to the next $1,000. A Participant to whom this
                  Section 5.2(a)(ii) applies (or his or her Assignee, if any),
                  shall be expected to complete, sign, and return, within the
                  time period specified by the Administrator, any Insurance
                  Policy coverage change form required by the Insurer as a
                  condition for adjusting the coverage amount under the
                  Insurance Policy on the Participant's life to the Benefit
                  Amount determined for the Participant under the terms of this
                  Section 5.2(a)(ii).

      (b)   Grandfathered Benefit Amount Formulas. The Benefit Amount under the
            Program shall be determined under the benefit formula in Section
            5.2(b)(ii) with respect to any Participant who terminated active
            employment with the Employer prior to January 1, 2004, was an
            Officer at the time of such termination of employment, and is
            eligible for continued participation in the Program thereafter
            pursuant to the provisions of either Section 2.1 or Section 2.2 due
            to disability or termination of employment with Eligibility for
            Retirement-Related Benefits. The Benefit Amount under the Program
            with respect to any Participant who makes the one-time election
            provided for in Section 5.2(c) shall be determined under the
            applicable benefit formula in Section 5.2(b)(i) or (ii). The benefit
            formulas in Section 5.2(b)(i) and (ii) shall


ARTICLE 5                            - 13 -                  PAYMENT OF BENEFITS

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

            not be applicable in determining the Benefit Amount for any
            individual who was not a Participant in the Program on December 31,
            2003.

            (i)   Grandfathered Benefit Amount While Active Employee. The
                  Benefit Amount for a Participant who is eligible to have his
                  or her Benefit Amount determined under the provisions of this
                  Section 5.2(b)(i) (including eligibility due to election of
                  the grandfathered benefit amount formula pursuant to Section
                  5.2(c)) while he or she is an active employee of the Employer
                  (even if the Participant has attained his or her Normal
                  Termination Date), shall be equal to 250 percent of the
                  Participant's annual base salary (determined based on the
                  Employer's records) paid to the Participant by the Employer,
                  rounded up to the next $1,000. Any salary increase will be
                  reflected in the Benefit Amount as soon as administratively
                  practicable after the salary increase becomes effective. The
                  Benefit Amount for any such Participant age 65 or older, while
                  he or she is an active employee of the Employer, shall be
                  equal to the Participant's Benefit Amount determined under
                  this Section 5.2(b)(i) at age 64.

            (ii)  Grandfathered Benefit Amount After Termination of Employment.
                  The Benefit Amount for any Participant (1) who has terminated
                  active employment with the Employer, (2) who is eligible for
                  continued participation in the Program thereafter pursuant to
                  the provisions of either Section 2.1 or Section 2.2 due to
                  disability or termination of employment with Eligibility for
                  Retirement-Related Benefits, and (3) who is otherwise eligible
                  to have his or her Benefit Amount determined under the
                  provisions of this Section 5.2(b)(ii) (including eligibility
                  due to election of the grandfathered benefit amount formula
                  pursuant to Section 5.2(c)), shall be equal to (A) 250 percent
                  of the Participant's final annual base salary on the date of
                  his or her disability or termination of employment (determined
                  based on the Employer's records), rounded up to the next
                  $1,000; or (B) in the event the Participant was actively
                  employed by the Employer at age 65 or older, 250 percent of
                  the Participant's annual base salary at age 64 (determined
                  based on the Employer's records), rounded up to the next
                  $1,000.

      (c)   Option to Elect Grandfathered Benefit Amount Formulas. Any Officer
            who is an active employee of the Employer and a Participant on
            December 31, 2003 (or such other relevant date as may be established
            by the Administrator, in his or her sole discretion) shall have a
            one-time option to elect (with the written concurrence of his or her
            Assignee, if any) to have his or her Benefit Amount determined, on
            and after January 1, 2004 (or such other date as may be


ARTICLE 5                            - 14 -                  PAYMENT OF BENEFITS

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

            established by the Administrator, in his or her sole discretion),
            using the benefit formula set forth in Section 5.2(b)(i) (applicable
            while he or she is actively employed and eligible to participate in
            the Program) and the benefit formula set forth in Section 5.2(b)(ii)
            (applicable after he or she terminates employment with eligibility
            to continue to participate in the Program), in lieu of the
            applicable benefit formula set forth in Section 5.2(a)(i) or (ii). A
            Participant (or his or her Assignee, if applicable) may exercise
            this option by filing an irrevocable written election with the
            Administrator at the time, and in the form and manner, determined by
            the Administrator.

5.3   TAX ADJUSTMENT. The Company shall make a tax adjustment with respect to
      each premium payment made to the Insurer pursuant to Section 5.1 on the
      Insurance Policy covering the life of a Participant. The amount and
      frequency of each tax adjustment, as determined by the Company in its sole
      discretion, is intended to be sufficient to cover the estimated amount of
      federal income taxes and FICA taxes that will be incurred by the
      Participant on the sum of the premium payment plus the tax adjustment
      itself. Each tax adjustment shall be equal to the sum of two amounts that
      are described below and referred to herein respectively as the "tax
      withholding portion" and the "excess portion":

      (a)   Tax Withholding Portion of Tax Adjustment: The tax withholding
            portion of each tax adjustment shall be equal to the combined total
            amount of federal income taxes and FICA taxes required to be
            withheld with respect to (i) each premium payment made by the
            Company, and (ii) each corresponding tax adjustment.

      (b)   Excess Portion of Tax Adjustment: The excess portion of each tax
            adjustment shall be equal to the applicable tax adjustment, reduced
            by the related tax withholding portion of such tax adjustment
            determined under Section 5.3(a) with respect to the premium payment
            and the related tax adjustment.

      The tax withholding portion of each tax adjustment payment, as described
      in Section 5.3(a) (above), shall be paid by the Company directly to the
      applicable federal tax authorities. The excess portion of each tax
      adjustment payment, as described in Section 5.3(b) (above), shall be paid
      in cash to the Participant (or if he or she is not then living, to his or
      her estate). The Company's obligation to make tax adjustment payments with
      respect to a Participant shall cease upon the termination of the
      Participant's participation in the Program pursuant to the provisions of
      Section 6.0.

5.4   BENEFICIARY DESIGNATIONS. A Policyholder or, if the Policyholder has
      assigned the Insurance Policy pursuant to Section 4.2, the Assignee may
      designate a Beneficiary to receive life insurance proceeds under the
      Insurance Policy upon the death of the Participant, or may change an
      existing designation of the Beneficiary to receive such


ARTICLE 5                            - 15 -                  PAYMENT OF BENEFITS

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

      insurance proceeds. Any designation of Beneficiary or change in the
      designated Beneficiary shall be accomplished in accordance with the
      applicable terms of the Insurance Policy using forms approved by the
      Insurer. If, for any reason, no valid Beneficiary designation is on file
      with the Insurer at the time of the Participant's death, the life
      insurance proceeds payable under the Insurance Policy shall be paid in
      accordance with the terms of the Insurance Policy.

5.5   NO COMPANY OR EMPLOYER OBLIGATION. Neither the Company nor any other
      Employer shall have any obligation of any nature whatsoever to a
      Policyholder or his or her Assignee or Beneficiary under this Program if
      the circumstances of the Participant's death, the terms and conditions of
      this Program, or any other reason, precludes payment of life insurance
      proceeds or any other benefits under the Insurance Policy or Program.

5.6   NO AFFECT ON OTHER COMPANY BENEFITS. No portion of any premium payment on
      any Insurance Policy or any tax adjustment payment made with respect to a
      Participant as provided in this Section 5 shall be included or otherwise
      taken into consideration as pay, compensation or income for purposes of
      any other "employee welfare benefit plan" (within the meaning of Section
      3(1) of ERISA), any "employee pension benefit plan" (within the meaning of
      Section 3(2) of ERISA), or any other compensation or benefit plan, program
      or arrangement of any Employer covering the Participant, unless expressly
      provided for in such plan, program or arrangement.


ARTICLE 5                            - 16 -                  PAYMENT OF BENEFITS

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

                                    SECTION
                                       6.
                          TERMINATION OF PARTICIPATION

6.0   EVENTS THAT CAUSE TERMINATION OF PARTICIPATION. A Participant's
      participation in the Program shall terminate when the first of any of the
      following events occurs:

      (a)   The death of the Participant;

      (b)   The Participant attains his or her Normal Termination Date and is no
            longer an active employee of the Employer;

      (c)   The Board (or its delegate) terminates the Program pursuant to
            Section 8.1;

      (d)   The termination of the Participant's employment with the Employer,
            for any reason (other than death, disability as described in Section
            2.2 or termination of employment with Eligibility for
            Retirement-Related Benefits), prior to his or her Normal Termination
            Date (unless otherwise agreed to by the Employer in writing);

      (e)   Cessation of the Participant's disability prior to his or her Normal
            Termination Date under circumstances described in Section 2.2, when
            the Participant does not immediately thereafter recommence
            employment with the Employer;

      (f)   Voluntary termination of the Participant's participation in the
            Program initiated by the Participant giving written notice to the
            Administrator prior to his or her Normal Termination Date;

      (g)   The Policyholder or his or her Assignee, if any, takes any of the
            actions described in Section 4.1 (e.g., loans or withdrawals) that
            cause termination of the Participant's participation in the Program;

      (h)   Demotion of the Participant to a position that is classified or
            otherwise treated by the Employer as being a position for an
            individual who is at an employment classification below the Director
            level, as determined by the Administrator; or

      (i)   The Participant is determined by the Executive Vice President -
            Human Resources of the Company, in his or her sole discretion, to
            have engaged in any competitive activity that violates the
            provisions of the AT&T Non-Competition Guideline, as amended from
            time to time, or any other non-competition commitment of the
            Participant to the Employer.


ARTICLE 6                            - 17 -         TERMINATION OF PARTICIPATION

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

      Termination of a Participant's participation in the Program upon the
      occurrence of any of the events described in this Section 6.0 shall have
      the consequences described in Sections 6.1, 6.2 or 6.3, whichever is
      applicable.

6.1   DEATH OF PARTICIPANT PRIOR TO NORMAL TERMINATION DATE. If a Participant
      continues to participate in the Program until his or her participation
      terminates due to death (as provided in Section 6.0(a)) prior to
      attainment of his or her Normal Termination Date, then effective as of the
      date of death:

      (a)   The Company shall have no further obligation to make any premium
            payments with respect to the Insurance Policy on the Participant's
            life pursuant to Section 5.1.

      (b)   The Policyholder's Beneficiary shall be entitled to receive the life
            insurance benefit payable by the Insurer under the Insurance Policy,
            subject to any binding settlement options elected by the
            Policyholder prior to the Participant's death.

      (c)   The restrictions in Section 4.1 on the Policyholder or Assignee
            pertaining to the exercise of certain incidents of ownership of the
            Insurance Policy on the Participant's life (e.g., loans and
            withdrawals) shall no longer apply.

6.2   ATTAINMENT OF NORMAL TERMINATION DATE. If a Participant continues to
      participate in the Program until his or her participation terminates by
      reason of his or her attainment of the Normal Termination Date (as
      provided in Section 6.0(b)), then effective as of the date of termination
      of participation:

      (a)   The Company shall have no further obligation to make any premium
            payments with respect to the Insurance Policy on the Participant's
            life pursuant to Section 5.1.

      (b)   The Insurance Policy will have sufficient cash value, as determined
            using reasonable actuarial assumptions chosen by the Company in its
            sole discretion, to provide life insurance coverage throughout the
            Participant's remaining life expectancy.

      (c)   The restrictions in Section 4.1 on the Policyholder or Assignee
            pertaining to the exercise of certain incidents of ownership of the
            Insurance Policy on the Participant's life (e.g., loans and
            withdrawals) shall no longer apply.


ARTICLE 6                            - 18 -         TERMINATION OF PARTICIPATION

                   AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

6.3   DISCONTINUANCE OF PARTICIPATION PRIOR TO NORMAL TERMINATION DATE. If a
      Participant's participation in the Program terminates due to the
      occurrence of any of the events described in Section 6.0(c) through
      Section 6.0(i), inclusive, then effective as of the date of such
      termination of participation:

      (a)   The Company shall have no further obligation to make any premium
            payments with respect to the Insurance Policy on the Participant's
            life pursuant to Section 5.1.

      (b)   The Participant, Policyholder, and any Assignee shall have no
            further rights under the Program and shall only be entitled to the
            Insurance Policy cash value as of the date of the Participant's
            termination of participation in the Program. The Company shall have
            no obligation to pay additional premiums or increase the cash value
            so as to provide cash values sufficient to continue any level of
            coverage under the Insurance Policy throughout the Participant's
            remaining life expectancy. The Insurance Policy's cash value
            (whether above or below any estimates, projections or illustrations)
            shall be limited solely to the cash value of the Insurance Policy on
            the date of the Participant's termination of participation in the
            Program.

      (c)   The restrictions in Section 4.1 on the Policyholder or Assignee
            pertaining to the exercise of certain incidents of ownership of the
            Insurance Policy on the Participant's life (e.g., loans and
            withdrawals) shall no longer apply.


ARTICLE 6                            - 19 -         TERMINATION OF PARTICIPATION



                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

                                     SECTION

                                       7.

                               CLAIMS AND APPEALS

7.0   CLAIMS. A person who believes that he or she is being denied a benefit to
      which he or she is entitled under this Program (hereinafter referred to as
      a "Claimant") may file a written request for such benefit with the
      Company's Executive Human Resources Department, setting forth his or her
      claim. The request must be addressed to the Company's Executive Human
      Resources Department at its then principal place of business.
      Notwithstanding the foregoing, any Beneficiary's claim for payment of life
      insurance proceeds from an Insurance Policy on a Participant's life shall
      not be considered a claim for benefits under this Program. Any such claim
      for life insurance proceeds should be filed with the Insurer in accordance
      with the terms and provisions of the applicable Insurance Policy.

7.1   CLAIM DECISION. Upon receipt of a claim, the Company's Executive Human
      Resources Department shall review the claim and provide the Claimant with
      a written notice of its decision within a reasonable period of time, not
      to exceed ninety (90) days, after the claim is received. If the Company's
      Executive Human Resources Department determines that special circumstances
      require an extension of time beyond the initial ninety (90) day claim
      review period, the Company's Executive Human Resources Department will
      notify the Claimant in writing within the initial ninety (90) day period
      and explain the special circumstances that require the extension and state
      the date by which the Company's Executive Human Resources Department
      expects to render its decision on the claim. If this notice is provided,
      the Company's Executive Human Resources Department may take up to an
      additional ninety (90) days (for a total of one hundred eighty (180) days
      after receipt of the claim) to render its decision on the claim.

      If the claim is denied by the Company's Executive Human Resources
      Department, in whole or in part, the Company's Executive Human Resources
      Department shall provide a written decision using language calculated to
      be understood by the Claimant and setting forth: (a) the specific reason
      or reasons for such denial; (b) specific references to pertinent
      provisions of this Program on which such denial is based; (c) a
      description of any additional material or information necessary for the
      Claimant to perfect his or her claim and an explanation of why such
      material or such information is necessary; (d) a description of the
      Program's procedures for review of denied claims and the steps to be taken
      if the Claimant wishes to submit the claim for review; (e) the time limits
      for requesting a review of a denied claim under Section 7.2 and for
      conducting the review under Section 7.3; and (f) a statement of the
      Claimant's right to bring a civil action under Section 502(a) of ERISA if
      the claim is denied following review under Section 7.3.

ARTICLE 7                             - 20 -                  CLAIMS AND APPEALS

                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

7.2   REQUEST FOR REVIEW. Within sixty (60) days after the receipt by the
      Claimant of the written decision on the claim provided for in Section 7.1,
      the Claimant may request in writing that the Administrator review the
      determination of the Company's Executive Human Resources Department. Such
      request must be addressed to the Administrator at the address for giving
      notice to the Administrator designated in Section 9.3. To assist the
      Claimant in deciding whether to request a review of a denied claim or in
      preparing a request for review of a denied claim, a Claimant shall be
      provided, upon written request to the Administrator and free of charge,
      reasonable access to, and copies of, all documents, records and other
      information relevant to the claim. The Claimant or his or her duly
      authorized representative may, but need not, submit a statement of the
      issues and comments in writing, as well as other documents, records or
      other information relating to the claim for consideration by the
      Administrator. If the Claimant does not request a review of the Company's
      Executive Human Resources Department's decision by the Administrator
      within such sixty (60) day period, the Claimant shall be barred and
      estopped from challenging the determination of the Company's Executive
      Human Resources Department.

7.3   REVIEW OF DECISION. Within sixty (60) days after the Administrator's
      receipt of a request for review, the Administrator will review the
      decision of the Company's Executive Human Resources Department. If the
      Administrator determines that special circumstances require an extension
      of time beyond the initial sixty (60) day review period, the Administrator
      will notify the Claimant in writing within the initial sixty (60) day
      period and explain the special circumstances that require the extension
      and state the date by which the Administrator expects to render its
      decision on the review of the claim. If this notice is provided, the
      Administrator may take up to an additional sixty (60) days (for a total of
      one hundred twenty (120) days after receipt of the request for review) to
      render its decision on the review of the claim.

      During its review of the claim, the Administrator shall:

      (a)   Take into account all comments, documents, records, and other
            information submitted by the Claimant relating to the claim, without
            regard to whether such information was submitted or considered in
            the initial review of the claim conducted under Section 7.1;

      (b)   Follow reasonable procedures to verify that its benefit
            determination is made in accordance with the applicable Program
            documents; and

      (c)   Follow reasonable procedures to ensure that the applicable Program
            provisions are applied to the Participant to whom the claim relates
            in a manner consistent with how such provisions have been applied to
            other similarly-situated Participants.

ARTICLE 7                             - 21 -                  CLAIMS AND APPEALS

                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM


           After considering all materials presented by the Claimant, the
           Administrator will render a decision, written in a manner designed to
           be understood by the Claimant. If the Administrator denies the claim
           on review, the written decision will include (a) the specific reasons
           for the decision; (b) specific references to the pertinent provisions
           of this Program on which the decision is based; (c) a statement that
           the Claimant is entitled to receive, upon request to the
           Administrator and free of charge, reasonable access to, and copies
           of, all documents, records, and other information relevant to the
           claim; and (d) a statement of the Claimant's right to bring a civil
           action under Section 502(a) of ERISA.

           The Administrator shall serve as the final review committee under the
           Program and shall have sole and complete discretionary authority to
           determine conclusively for all parties, and in accordance with the
           terms of the documents or instruments governing the Program, any and
           all questions arising from administration of the Program and
           interpretation of all Program provisions, determination of all
           questions relating to participation of Eligible Executives and
           eligibility for benefits, determination of all relevant facts,
           determination of the documents, records, and other information that
           are relevant to a claim, the amount and type of benefits payable to
           any Participant, Assignee or Beneficiary, and the construction of all
           terms of the Program. Decisions by the Administrator shall be
           conclusive and binding on all parties and not subject to further
           review.

           In any case, a Participant may have further rights under ERISA. The
           Program provisions require that Participants pursue all claim and
           appeal rights described above before they seek any other legal
           recourse regarding claims for benefits.

ARTICLE 7                             - 22 -                  CLAIMS AND APPEALS

                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM


                                     SECTION

                                       8.

                           AMENDMENT AND TERMINATION

8.0   CONTINUATION OF PROGRAM. The Company does not guarantee the continuation
      of the Program or any benefits during employment or after termination of
      employment, nor does the Company guarantee any specific level of benefits.
      Benefits are provided under the Program at the Company's discretion and do
      not create a contract of employment. Neither the establishment nor the
      continuance of the Program shall be construed as conferring any legal
      rights upon any Eligible Executive or any other person for continuation of
      employment, nor shall such establishment or continuance interfere with the
      right of the Company to discharge any Eligible Executive without regard to
      the existence of the Program. The Company intends to continue the Program
      indefinitely; however, the Board reserves the right to amend or terminate
      the Program at any time pursuant to Section 8.1.

8.1   AMENDMENT OR TERMINATION. The Board or pursuant to delegated authority,
      the Chairman of the Board or the Executive Vice President - Human
      Resources ("Delegate"), may amend, modify, suspend or change the Program
      from time to time, and the Board (or its Delegate) may terminate the
      Program at any time. Program amendments may include, but are not limited
      to, elimination or reduction in the level or type of benefits provided to
      any class or classes of employees.

8.2   CONTINUED MAINTENANCE OF PROGRAM AFTER CHANGE IN CONTROL. Notwithstanding
      any other provision of the Program to the contrary (including, but not
      limited to the provisions of Section 8.0 and Section 8.1), if a Change in
      Control occurs, the Company (or its successor) shall continue to maintain
      the Program in accordance with its terms and conditions immediately prior
      to the occurrence of the Change in Control (including, but not limited to,
      the provisions in Section 5.1 and Section 5.3 that require the Company to
      make applicable premium payments and tax adjustment payments,
      respectively, and any amendment to such terms and conditions that was duly
      adopted prior to the occurrence of the Change in Control), without any
      material reduction in any Program benefits, features or Participant or
      Policyholder rights, for a minimum of two (2) years after the Change in
      Control occurs.

8.3   PROHIBITION ON AMENDMENTS AFTER CHANGE IN CONTROL. Notwithstanding any
      other provision of the Program to the contrary (including, but not limited
      to, the amendment provisions set forth in Section 8.0 and Section 8.1),
      unless required by applicable law, after the occurrence of a Change in
      Control, no amendment shall be made by the Board (or the successor board
      of directors), a delegate, the Company (or the successor of the Company),
      any committee, any officer, any employee of the Company (or the successor
      of the Company) or by any other party, to suspend, modify or eliminate the

ARTICLE 8                             - 23 -           AMENDMENT AND TERMINATION

                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM


      Program continuation provisions set forth in Section 8.2, or to eliminate
      the restrictions contained in this Section 8.3, and no such amendment to
      the Program made in violation of this Section 8.3 shall be effective.
      Nothing in Section 8.2 or this Section 8.3 shall be construed to preclude
      the Company (or the successor of the Company) from implementing any
      amendment to the Program that was duly adopted prior to the occurrence of
      the Change in Control, but does not become effective until after the
      Change in Control occurs.


ARTICLE 8                             - 24 -           AMENDMENT AND TERMINATION

                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM

                                     SECTION

                                       9.

                               GENERAL PROVISIONS

9.0   NAMED FIDUCIARY. The Administrator is hereby designated as the "named
      fiduciary" under this Program. The named fiduciary shall have authority to
      control and manage the operation and administration of this Program.

9.1   EFFECTIVE DATE. The effective date of this Program is October 1, 1999. The
      effective date of this amended and restated Program document is January 1,
      2004.

9.2   CALENDAR YEAR PROGRAM. All Program records shall be maintained on a
      calendar year basis, beginning January 1 and ending December 31, except
      that Program records for the year 1999 shall be maintained for the period
      beginning October 1, 1999 and ending December 31, 1999.

9.3   NOTICE UNDER PROGRAM. Any notice to be given under this Program shall be
      in writing and shall be either delivered in person or mailed by United
      States Mail, first-class postage pre-paid. If notice is to be given to the
      Administrator by mail, such notice shall be addressed as indicated below
      and mailed to the Administrator at the following address:

                      Executive Vice President - Human Resources
                      AT&T Corp.
                      One AT&T Way
                      Bedminster, NJ  07921

      If notice is to be given to a Participant, Policyholder or Assignee by
      United States Mail, such notice shall be addressed to the address shown as
      such Participant's, Policyholder's or Assignee's address then on file with
      the Company's Executive Human Resources Department. Any party may change
      the address to which notices shall be mailed by giving written notice of
      such change of address.

9.4   BINDING EFFECT. This Program shall be binding upon the Company's
      successors and assigns, and upon the Participants, the Policyholders, and
      their Assignees, Beneficiaries, heirs, executors, and administrators.

9.5   WELFARE PLAN UNDER ERISA. The Program is intended to constitute an
      "employee welfare benefit plan" within the meaning of Section 3(1) of
      ERISA, covering a select group of management or highly compensated
      employees.


ARTICLE 9                             - 25 -                  GENERAL PROVISIONS

                  AT&T CORP. EXECUTIVE LIFE INSURANCE PROGRAM


9.6   PLAN DOCUMENT. This Program document is the plan document required by
      ERISA. The information contained herein provides the final and exclusive
      statement of the terms of the Program. Unless otherwise authorized by the
      Board or its delegate, no amendment or modification to this Program shall
      be effective until reduced to writing and adopted pursuant to Section 8.1.
      This document legally governs the operation of the Program, and any claim
      of right or entitlement under the Program shall be determined solely in
      accordance with its provisions pursuant to the provisions of Section 7. To
      the extent that there are any inconsistencies between the terms of the
      Insurance Policy or any related materials and the terms of this document,
      the terms of this document shall control and govern the operation of the
      Program. No other evidence, whether written or oral, shall be taken into
      account in determining the right of an Eligible Executive, a Participant,
      a Policyholder, a Beneficiary or an Assignee, as applicable, to any
      benefit of any type provided under the Program.

9.7   GOVERNING LAW. To the extent not preempted by applicable federal law, the
      Program shall be governed by and construed and interpreted in accordance
      with the laws of the State of New Jersey (irrespective of the choice of
      laws principles of the State of New Jersey).

9.8   SEVERABILITY. If any provision of this Program or the application thereof
      to any person or circumstance shall be held by a court of competent
      jurisdiction to be invalid or unenforceable under any applicable law, such
      event shall not affect or render invalid or unenforceable the remainder of
      the Program and shall not affect the application of any provision of the
      Program to any other person or circumstance.

9.9   HEADINGS. The headings and subheadings preceding the Sections of this
      Program have been inserted solely as a matter of convenience and
      reference, and shall not, in any manner, define or limit the scope or
      intent of any provision of this Program.

9.10  PROCEDURAL RULES. The Administrator shall establish rules, forms and
      procedures for the administration of this Program from time to time.

9.11  CONSTRUCTION. The use of the singular form herein shall be deemed to
      include the plural form, and vice versa, as appropriate. All references to
      Sections contained herein refer to Sections of this Program, unless
      otherwise stated. The use of the words "hereof," "herein," "hereunder,"
      and words of similar import shall refer to this entire Program, and not to
      any particular Section, subsection, clause, paragraph or other subdivision
      of this Program, unless the context clearly indicates otherwise. The word
      "or" shall not be exclusive; "may not" is prohibitive and not permissive.

ARTICLE 9                            - 26 -                   GENERAL PROVISIONS

EX-10.III.A.20

                                                          EXHIBIT (10)(iii)(A)20

                              EMPLOYMENT AGREEMENT

            This Agreement, dated as of June 10th, 2002, by and between Thomas
W. Horton (the "Executive") and AT&T Corp., a New York corporation (the
"Company")

                                 WITNESSETH THAT

            WHEREAS, the Company has offered the Executive, and the Executive
has accepted, employment on the terms and conditions set forth in this
Agreement; and

            WHEREAS, the Company and the Executive wish to set forth such terms
and conditions in a binding written agreement;

            NOW, THEREFORE, in consideration of the mutual covenants set forth
in this Agreement, it is hereby agreed as follows:

            1. Term of Employment. The term of the Executive's employment under
this Agreement (the "Term") shall begin on June __, 2002 (the "Effective Date")
and end on June 15, 2006; provided, that the Term shall be extended by
successive periods of one (1) year, effective as of each Renewal Date (as
defined in the next sentence), unless, before any Renewal Date, the Company
shall have notified the Executive or the Executive shall have notified the
Company that no such extension shall take place (a "Notice of Nonrenewal"); and
provided, further, that the Term shall in any event end upon a Termination, as
set forth in Section 5 below. "Renewal Date" means each June 15 that occurs
during the Term, beginning with June 15, 2006.

            2. Position, Duties and Location. (a) Position. During the Term, the
Executive shall serve as Executive Vice President and Chief Financial Officer of
the Company, with the duties and responsibilities customarily assigned to that
position and such other duties and responsibilities as the Board of Directors of
the Company (the "Board") shall from time to time assign to the Executive. The
Executive shall report directly to the Chief Executive Officer.

            (a) Duties. During the Term, the Executive shall devote his full
business attention and time to the business and affairs of the Company and shall
use his reasonable best efforts to carry out such responsibilities faithfully
and efficiently. It shall not be considered a violation of the foregoing for the
Executive to serve on corporate, civic or charitable boards or committees, and
manage personal investments, so long as such activities do not materially
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement or otherwise violate
the Executive's obligations hereunder. The Executive shall be subject to the
AT&T Non-Competition Guideline, as the same may be amended from time to time,
and to any successor policy that may hereafter be adopted (such Guideline and
any successor policy thereto, the "Non-Competition Guideline"). The Executive
hereby acknowledges that he has received a copy of the Non-Competition
Guideline, and that he understands that compensation and benefits otherwise
payable to him under this Agreement may be subject to forfeiture if he violates
the Non-Competition Guideline. Notwithstanding the second sentence of this
Section 2(b), the Executive shall not serve on any corporate, civic or
chari-

table boards or committees without first disclosing such proposed service to the
Corporate Secretary of Company (the "Corporate Secretary") and obtaining the
consent of the Corporate Secretary to such service, and in any event he shall
not serve on any board or committee of an entity that is a competitor of the
Company within the meaning of the Non-Competition Guideline. The Executive
hereby represents to the Company that he has previously informed the Corporate
Secretary of the boards and committees on which he presently serves, and has
obtained the Corporate Secretary's consent to his remaining a member of such
boards and committees.

            (b) Nothing in this Agreement shall prevent the Company from
reassigning the Executive's job duties on a temporary basis during any period
during which the Executive is absent under the Company's applicable sick leave
policy or short-term disability benefits plan, until such time as the Executive
returns to work full-time.

            (c) The Executive's services shall be performed primarily at the
Company's current offices in Basking Ridge, N.J. or such other location within
35 miles thereof as the Company may hereafter determine.

            3. Compensation.

            (a) Base Salary. During the Term, the Executive shall receive a base
salary (the "Base Salary") at an annual rate of not less than six hundred
thousand dollars ($600,000), payable at such times and intervals as the Company
customarily pays the base salaries of other members of the Company's Operations
Group or any comparable successor group of senior executives (hereinafter, the
"Other Senior Executives"). During the Term, the Base Salary shall be reviewed
annually for possible increase in accordance with the Company's normal practices
for the Other Senior Executives. The Base Salary shall not be reduced after any
such increase, and the term "Base Salary" shall thereafter refer to the Base
Salary as so increased.

            (b) Annual Bonus. The Executive shall be eligible to earn an annual
bonus (the "Annual Bonus") based on individual and Company performance, under
the terms and conditions applicable to the Other Senior Executives. The
Executive's target Annual Bonus shall equal one hundred percent (100%) of the
Base Salary earned by the Executive during the fiscal year in question, subject
to review by the Compensation Committee of the Board of Directors for possible
increase. The Annual Bonus for 2002 shall be pro-rated to reflect the portion of
the Term that occurs during 2002, but if the Executive remains employed by the
Company from the Effective Date through December 31, 2002, in no event shall the
Executive's Annual Bonus for fiscal year 2002 be less than three hundred
seventy-five thousand dollars ($375,000) (the "Guaranteed Bonus Amount").

            (c) Long Term Incentive Compensation. (i) During the Term, the
Executive shall be eligible to receive awards under the Company's 1997 Long Term
Incentive Program or any successor thereto (collectively, the "LTIP") under the
terms and conditions applicable to the Other Senior Executives; provided, that
the Executive's annual LTIP awards for 2002 shall consist of stock options with
respect to three hundred fifteen thousand (315,000) shares of Company common
stock (the "2002 Options") and a performance share award with respect to
seventy-seven thousand five hundred (77,500) shares of Company common stock for
the performance cycle 2002-2004 (the "2002 Performance Share Award"), each to be
granted effective as of the

                                     - 2 -


Effective Date. Payment for the 2002 Performance Shares, if any, shall be made
during the first quarter of 2005.

            (ii) In addition, the Executive shall be granted, effective on the
Effective Date, a special one-time grant under the LTIP of stock options with
respect to two hundred ninety thousand (290,000) shares of Company common stock
(the "Special Options").

            (iii) The 2002 Options and the Special Options shall have ten-year
terms and shall each vest in four equal annual installments beginning on the
first anniversary of the date they are granted. The 2002 Options, the Special
Options and the 2002 Performance Share Award shall otherwise be subject to the
terms and conditions of the LTIP as established for the Other Senior Executives.
Notwithstanding the foregoing provisions of this Section 3(c), the number of
shares subject to the 2002 Options, the Special Options and the 2002 Performance
Share Award shall be adjusted as appropriate to reflect any event described in
Section 4(e) of the LTIP that may occur before they are granted.

            (iv) Without limiting the generality of the foregoing, the 2002
Options, the Special Options and the 2002 Performance Share Award shall be
subject to the Non-Competition Guidelines and the Company's Senior Officer
Severance Plan or any successor thereto (the "Severance Plan").

            (d) Special Signing and Retention Compensation. The Company shall
make the following cash payments to the Executive, provided that the Executive
is employed by the Company on the date of payment and subject to the provisions
of Section 5(e) below: (i) not later than thirty (30) days after the Effective
Date, one million fifty thousand dollars ($1,050,000) (the "Signing Bonus");
(ii) on December 31, 2003, three hundred seventy-five thousand dollars
($375,000); and (iii) on December 31, 2004, three hundred seventy-five thousand
dollars ($375,000) (the amounts described in clauses (ii) and (iii) being
referred to as the "Retention Bonuses").

            (e) Certain Payments Not Benefit-Bearing. The following amounts will
not be counted in the calculation of Executive's benefits under any employee
benefit plans and perquisite programs made available by the Company to its
management and senior management employees (the "Employee Benefit Plans"): (i)
the excess, if any, of the Guaranteed Bonus Amount over the amount of the Annual
Bonus for fiscal year 2002 that would be payable to the Executive, absent the
last sentence of Section 3(b); (ii) the Signing Bonus; and (iii) the Retention
Bonuses. Notwithstanding the foregoing, in the event of a conflict between this
Agreement and a particular plan or program regarding the inclusion or exclusion
of payments under this paragraph, such plan and not this Agreement shall
control.

            4. Benefits. (a) Relocation. In connection with his initial hiring,
the Executive shall be eligible for benefits under the Company's Management
Relocation Plan B, subject to the terms and conditions thereof, including
without limitation use of an approved real estate broker. The Executive hereby
acknowledges that he has received a copy of the Company's Management Relocation
Plan B. In addition, upon the Executive's purchase of a residence in New Jersey,
the Company shall pay him a lump sum equal to the difference between two million
five hundred thousand dollars ($2,500,000) and the value realized on the
disposition of his Texas

                                       -3-

residence in accordance with the Company's Management Relocation Plan B. This
payment will be made at such time to facilitate the closing of the purchase of
the New Jersey residence. This payment shall be grossed up to approximate
federal and state income tax imposed on the Executive.

            (b) Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses that he incurs during the Term in
carrying out his duties under this Agreement, provided that he complies with the
policies, practices and procedures of the Company for submission of expense
reports, receipts, or similar documentation of such expenses as in effect from
time to time.

            (c) Benefits Generally. During the Term, the Executive shall be
entitled to participate in the Employee Benefit Plans, on the same terms and
conditions as apply to the Other Senior Executives, as the same may be in effect
from time to time.

            5. Consequences of Early Termination. (a) Accrued Compensation and
Benefit Entitlements. If the Executive's employment with the Company is
terminated for any reason at or before the end of the Term, including without
limitation as a result at the end of the Term pursuant to the Executive's Notice
of Nonrenewal, by action of the Company or the Executive or by reason of the
Executive's death or Disability (as defined in Section 5(d) below) (a
"Termination"), the Term shall end on the date of the Termination, and the
Company and the Executive shall have no further obligations under this
Agreement, except as provided in this Section 5. The Executive (or, in the case
of his death, the Executive's estate and/or beneficiaries) shall be entitled
following a Termination: (i) to receive the Base Salary through the date of the
Termination and any cash payment to which the Executive is entitled pursuant to
Section 3(d), to the extent not previously paid; (ii) to the benefit of the 2002
Stock Options, the Special Stock Options, the 2002 Performance Share Award and
any other LTIP award previously granted to the Executive, to the extent and on
the terms and conditions provided in the LTIP and any agreement governing such
award; and (iii) to all other compensation and benefits that may be provided
under the terms and conditions of the Employee Benefit Plans.

            (b) Severance. Without limiting the generality of the foregoing,
upon a Termination of the Executive's employment by the Company without Cause or
by the Executive for Good Reason (as those terms are defined in the Severance
Plan, except that a termination upon the Company's Notice of Nonrenewal shall
also be considered without Cause), the Executive shall be entitled to such
severance pay and benefits, if any, upon such Termination as may be provided for
in, and subject to the terms and conditions (including the execution of any
required release or other documentation or agreement) of, the Severance Plan as
in effect at the time of the Termination (including, if applicable, any change
of control severance pay or benefits); provided, that such pay and benefits
shall not duplicate any pay or benefits provided for under Section 5(a) above.

            (c) Termination Due to Death. In the event of a Termination as a
result of the Executive's death during the Term, his estate or his
beneficiaries, as the case may be, shall be entitled to the following benefits
in addition to those provided for in Section 5(a) above: (i) a cash payment
equal to the amount of the Executive's target Annual Bonus for the year of the
Termination, pro-rated to reflect the portion of the performance year that
occurs before the Ter-

                                      -4-

mination (a "Pro-Rata Target Bonus"), payable in a single installment as soon as
practicable following the Termination; and (ii) financial counseling for one
year following the Termination, including without limitation preparation of the
Executive's final individual income tax returns, together with a grossup for any
federal income tax imposed on the Executive as a result of receiving such
counseling, calculated in accordance with Company practices applicable to Other
Senior Executives.

            (d) Termination Due to Disability. The Company shall have the right
to terminate Executive's employment as a result of his inability to perform his
duties under this Agreement by reason of any physical or mental impairment,
which inability is expected to continue for more than twelve (12) months
("Disability"). In the event that Executive's employment is terminated during
the Term due to his Disability, he shall be entitled to the following benefits
in addition to those provided for in Section 5(a) above: (i) disability benefits
in accordance with the disability program then in effect for Other Senior
Executives (and the terms of such disability program shall govern exclusively
the Executive's rights to benefits thereunder); (ii) a Pro-Rata Target Bonus,
payable in a single installment as soon as practicable following the
Termination; and (iii) financial counseling for one year following the
Termination, including without limitation preparation of the Executive's
individual income tax returns, together with a grossup for any federal income
tax imposed on the Executive as a result of receiving such counseling,
calculated in accordance with Company practices applicable to Other Senior
Executives. Nothing in this Agreement shall prevent the Company from reassigning
the Executive's job duties to another individual on a temporary basis during any
period during which Executive is receiving benefits under the Company's
applicable short-term disability benefits plan, until the Executive returns to
work full-time or is terminated as a result of Disability, and such a temporary
reassignment of duties shall not constitute "Good Reason" under the Severance
Plan.

            (e) Repayment of Signing Bonus. If the Executive terminates his
employment with the Company without Good Reason before January 1, 2004, he shall
repay seven hundred fifty thousand dollars ($750,000) of the Signing Bonus to
the Company. If the Executive terminates his employment with the Company without
Good Reason on or after January 1, 2004 and before January 1, 2005, he shall
repay three hundred seventy-five thousand dollars ($375,000) of the Signing
Bonus to the Company. The Company shall be entitled to withhold all or any
portion of such amounts that the Executive is obligated to repay from any other
cash payment that the Executive is entitled to receive from the Company,
including without limitation under the Severance Plan.

            (f) No Damages or Other Relief. In no event shall a Termination be
considered a breach of this Agreement, nor shall the Company or the Executive be
entitled to any damages, injunctive relief or other relief or compensation
beyond that set forth in this Section 5, as a result of any Termination, except
as specifically provided in Section 9.

            6. Confidentiality of Trade Secrets and Business Information. The
Executive agrees that he will not, at any time during his employment with the
Company or thereafter, disclose or use any trade secret, proprietary or
confidential information of the Company or any subsidiary or affiliate of the
Company (collectively, "Confidential Information"), obtained during the course
of such employment, except for disclosures and uses required in the course of
such employment or with the written permission of the Company or, as applicable,
any subsidiary or

                                      -5-

affiliate of the Company or as may be required by law; provided that, if the
Executive receives notice that any party will seek to compel him by process of
law to disclose any Confidential Information, he shall promptly notify the
Company and cooperate with the Company in seeking a protective order against
such disclosure.

            7. Return of Information. The Executive agrees that at the time of
any termination of his employment with the Company, whether at the instance of
the Executive or the Company, and regardless of the reasons therefore, he will
deliver to the Company, and not keep or deliver to anyone else, any and all
notes, files, memoranda, papers and, in general, any and all physical (including
electronic) matter containing Confidential Information and other information
relating to the business of the Company or any subsidiary or affiliate of the
Company which are in his possession, except as otherwise consented in writing by
the Company at the time of such termination. The foregoing shall not prevent the
Executive from retain copies of personal contact information to the extent such
copies do not contain any Confidential Information.

            8. Covenants of the Executive. (a) Noncompetition. In consideration
for the compensation payable to the Executive under this Agreement, the
Executive agrees that he will not, during his employment with the Company and
for a period of one hundred eighty (180) days after any Termination, regardless
of the reason therefor, establish a relationship with a competitor (including
but not limited to an employment or consulting relationship) or engage in any
activity which is in conflict with or adverse to the interest of the Company, as
defined on the Effective Date by the AT&T Non-Competition Guideline (hereinafter
referred to as a "Competitive Activity"). Executive recognizes that this
obligation includes, and is not limited to, an agreement that he shall not work
for a competitor of AT&T Corp. as an executive, consultant, independent
contractor or in any other capacity for a period of one hundred eighty (180)
days following any Termination, regardless of whether the Termination is at the
instance of the Company or the Executive, and regardless of whether the
Executive is entitled to severance pay as a result thereof. The foregoing shall
not prohibit the Executive from being a passive owner of not more than one
percent (1%) of the outstanding common stock, capital stock and/or equity of any
publicly traded entity so long as the Executive has no active participation in
the management of business of such firm, corporation or enterprise.

            (b) Noninterference. During the Executive's employment with the
Company and for a period of one hundred eighty (180) days following any
Termination, the Executive agrees not to directly or indirectly recruit, solicit
or induce, any employees, consultants or independent contractors of the Company
to terminate, alter or modify their employment or other relationship with the
Company. During the Executive's employment with the Company and for a period of
one hundred eighty (180) days following any Termination, the Executive agrees
not to directly or indirectly solicit any customer or business partner of the
Company to terminate, alter or modify its relationship with the Company or
interfere with the Company's relationships with any of its customers or business
partners on behalf of any enterprise that directly or indirectly competes with
the Company.

            (c) Forfeiture. Notwithstanding any other provision of this
Agreement or of any Employee Benefit Plan or other plan, policy, arrangement or
agreement, the Company may, in its discretion, determine to cause the Executive
to forfeit any and all payments and benefits from the Company and its affiliates
(except those made from Company-sponsored tax-qualified

                                       -6-

pension or welfare plans) to which Executive may otherwise be entitled, whether
under this Agreement or otherwise, if Executive violates any of his obligations
under the Non-Competition Guideline; provided, that before imposing such
forfeiture, the Company shall first given the Executive written notice of the
violation and its intent to cause such forfeiture, and an opportunity to cure
such violation; and provided, further, that no such notice shall be required if
either (i) the Company had previously notified the Executive that the conduct or
proposed conduct in question violated or would violate his obligations under the
Non-Competition Guideline, or (ii) such conduct is not capable of being cured.

            9. Enforcement. The Executive acknowledges and agrees that: (i) the
purpose of the covenants set forth in Sections 6 through 8 above is to protect
the goodwill, trade secrets and other confidential information of the Company;
(ii) because of the nature of the business in which the Company and the
Affiliated Companies are engaged and because of the nature of the Confidential
Information to which the Executive has access, it would be impractical and
excessively difficult to determine the actual damages of the Company and the
Affiliated Companies in the event the Executive breached any such covenants;
(iii) remedies at law (such as monetary damages) for any breach of the
Executive's obligations under Sections 6 through 8 would be inadequate; and (iv)
even the threat of any misuse of the Confidential Information of the Company
would be irreparably harmful because of the importance of that Confidential
Information. The Executive therefore agrees and consents that if he commits any
breach of a covenant under Sections 6 through 9 or threatens to commit any such
breach, the Company shall have the right (in addition to, and not in lieu of,
any other right or remedy that may be available to it) to temporary and
permanent injunctive relief from a court of competent jurisdiction, without
posting any bond or other security and without the necessity of proof of actual
damage. If any portion of Sections 6 through 8 is hereafter determined to be
invalid or unenforceable in any respect, such determination not affect the
remainder thereof, which shall be given the maximum effect possible and shall be
fully enforced, without regard to the invalid portions. In particular, without
limiting the generality of the foregoing, if the covenants set forth in Section
8 are found by a court or an arbitrator to be unreasonable, the Executive and
the Company agree that the maximum period, scope or geographical area that is
found to be reasonable shall be substituted for the stated period, scope or
area, and that the court or arbitrator shall revise the restrictions contained
herein to cover the maximum period, scope and area permitted by law. If any of
the covenants of Sections 6 through 8 are determined to be wholly or partially
unenforceable in any jurisdiction, such determination shall not be a bar to or
in any way diminish the Company's right to enforce any such covenant in any
other jurisdiction.

            10. Cooperation After Termination of Employment. Following the
termination of his employment for any reason, the Executive shall reasonably
cooperate with the Company with respect to the prosecution or defense by the
Company of any legal proceedings in which the Executive is or could be a
witness. The Executive's obligation to cooperate pursuant to this Section 10
shall continue until such legal proceedings are concluded or his services as a
witness or consultant are no longer required. The Company shall reimburse the
Executive for all travel and other out-of-pocket expenses required by his
obligations under this Section 10.

            11. Resolution of Disputes. Any disputes arising under or in
connection with this Agreement, other than Sections 6 through 8 above, shall
first be addressed by third-party mediation and, if such mediation fails to
resolve such dispute within sixty days, by binding arbi-

                                      -7-

tration, to be held in New Jersey. The arbitration shall be conducted according
to the rules and procedures of the American Arbitration Association. Judgment
upon the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The Company shall pay the costs of the arbitrator or the
mediator but not the attorneys' fees of the Executive; provided, however, that
the Company shall reimburse the Executive for attorneys' fees if the Executive
prevails in such arbitration on any material issue.

            12. Executive's Representations. The Executive hereby represents and
warrants that the Executive has the right to enter into this Agreement with the
Company and to grant the rights contained in this Agreement, and the provisions
of this Agreement do not violate any other contracts or agreements that the
Executive has entered into with any other individual or entity. The Executive
acknowledges that before signing this Agreement, he was given the opportunity to
read it, evaluate it and discuss it with his personal advisors and attorney and
with representatives of the Company. The Executive further acknowledges that the
Company has not provided him with any legal advice regarding this Agreement.

            13. Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed given when delivered
(a) personally, (b) by facsimile with evidence of completed transmission, or (c)
delivered by overnight courier; to the Party concerned at the address indicated
below or to such changed address as such Party may subsequently give such notice
of:

                If to the Company:

                        AT&T Corp.
                        Room 4353K2
                        295 North Maple Ave.
                        Basking Ridge, N.J.  07920
                        Attention:  Executive Vice President, Human Resources

                If to the Executive:

                        Thomas W. Horton
                        295 North Maple Ave.
                        Basking Ridge, N.J. 07920

            14. Assignment and Successors. (a) The Executive. This Agreement is
personal to the Executive and, without the prior written consent of the Company,
shall not be assignable by the Executive otherwise than by will or the laws of
descent and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.

            (b) The Company. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. The Company
specifically reserves the right to assign the terms of this Agreement to any
successor, whether the successor is the result of any sale, purchase, merger,
consolidation, asset sale, divestiture or spin-off or any form or combination
thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or
spin-off or any form or combination thereof shall be construed as a termination
of Executive's employ-

                                      -8-

ment. As used in this Agreement, "Company" shall mean both the Company as
defined above and any such successor to which this Agreement is assigned or that
assumes this Agreement by operation of law or otherwise.

            15. Governing Law Amendment. This Agreement shall be governed by,
and construed in accordance with, the laws of New Jersey, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
except by a written agreement executed by the Executive and the Company or their
respective successors and legal representatives.

            16. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement. If any provision of this Agreement shall
be held invalid or unenforceable in part, the remaining portion of such
provision, together with all other provisions of this Agreement, shall remain
valid and enforceable and continue in full force and effect to the fullest
extent consistent with law.

            17. Tax Withholding. Notwithstanding any other provision of this
Agreement, the Company may withhold from amounts payable under this Agreement
all federal, state, local and foreign taxes that are required to be withheld by
applicable laws or regulations.

            18. No Waiver. The Executive's or the Company's failure to insist
upon strict compliance with any provision of, or to assert any right under, this
Agreement shall not be deemed to be a waiver of such provision or right or of
any other provision of or right under this Agreement.

            19. Headings. The Section headings contained in this Agreement are
for convenience only and in no manner shall be construed as part of this
Agreement.

            20. Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and shall
supersede all prior agreements, whether written or oral, with respect thereto,
including without limitation any term sheet.

            21. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.

                                      -9-

            IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization of its Board of Directors, the Company has caused
this Agreement to be executed in its name on its behalf, all as of the day and
year first above written.

                            /s/  Thomas W. Horton
                            ---------------------------------
                            Thomas W. Horton

                            AT&T Corp.

                            By: /s/  Mirian M. Graddick-Weir
                                -----------------------------
                                Mirian M. Graddick-Weir
                                Executive Vice-President
                                Human Resources

                                      -10-

EX-10.III.A.21

                                                          Exhibit (10)(iii)(A)21

                                                                   July 29, 2003
Mr. Tom Horton

Dear Tom:

         This letter agreement ("the Agreement") will establish an individual
non-qualified pension arrangement ("Individual Pension"), which, subject to the
terms and conditions below, will provide you a benefit payable from AT&T Corp.
(the "Company") operating assets upon your retirement from the Company, and
supercedes all other oral and written communication on the subject. This
Individual Pension will vest on January 1, 2008 contingent upon continued
employment with the Company, provided, however, that the Individual Pension will
immediately vest for Company-initiated terminations for other than "Cause" (as
defined), for terminations due to death, disability, or Good Reason (as defined)
occurring on or after the effective date of this Agreement, or if the Company is
subject to a Change in Control ("CIC"), as defined in the AT&T 1997 Long Term
Incentive Program. Only for termination for Cause or in the event of your
voluntary termination prior to vesting will this Individual Pension be null and
void in its entirety. In addition, this Individual Pension is subject to the
provisions of the AT&T Non-Competition Guideline.

         With respect to the amount payable under this Individual Pension at
your retirement/termination, the single life annual annuity amount payable will
be determined as (a) minus (b) as set forth in the charts below:

         (a)      the single life annual pension annuity benefits calculated in
                  accordance with the table set forth below:



                                                Percentage of Final 3 Year
                                            Average Total Cash Compensation
Year of Retirement/ Termination         (Base Pay plus Actual Bonus Paid in Year)
- -------------------------------         -----------------------------------------
                                     
        2003                                                4.00%
        2004                                                6.00%
        2005                                                8.00%
        2006                                               10.00%
        2007                                               12.00%
        2008                                               14.00%
        2009                                               16.00%
        2010                                               18.00%
        2011                                               20.00%
        2012                                               22.00%
        2013                                               24.00%
        2014                                               26.00%
        2015                                               28.00%
        2016                                               30.00%
        2017                                               32.00%
        2018                                               34.00%
        2019                                               36.00%







                                     
        2020                                               38.00%
        2021                                               40.00%
        2022                                               42.00%
        2023                                               44.00%
        2024                                               46.00%
        2025                                               48.00%
        2026                                               50.00%



(b)           any single life annual annuity benefits payable from AT&T, i.e.
              pension benefits under the AT&T Management Pension Plan (AT&TMPP),
              AT&T Non Qualified Pension Plan (AT&TNQPP), AT&T Excess Benefit
              and Compensation Plan (AT&TEBCPP), minimum retirement benefits
              under the AT&T Senior Management Long Term Disability and Survivor
              Protection Plan (AT&TSMLTD&SPP) if applicable, as well as by any
              qualified and nonqualified pension benefits from prior employers.

Joint and survivor benefits on your death, whether your death occurs as an
active employee or following your termination, will be governed by the
administrative guidelines applicable to this Agreement.

         In the event of your involuntary termination within two years following
a CIC, for reasons other than for Cause or if you terminate employment for Good
Reason within two years following a CIC, your benefit under this Individual
Pension will be calculated by accelerating the Individual Pension schedule above
by adding three years to the schedule, i.e. the applicable percentage will be
that associated with the "Year of Retirement/Termination" three years from your
actual termination year. In addition, the cash compensation used in calculating
the final three year average cash compensation will not use cash compensation
for years in which you did not hold the position of Chief Financial Officer.

         For purposes of this Agreement:

         a)       "Cause" shall mean:

                  i.       your conviction (including a plea of guilty or nolo
                           contendere) of a crime including theft, fraud,
                           dishonesty or moral turpitude;

                  ii.      violation by you of the Company's Code of Conduct or
                           Non-Competition Guideline;

                  iii.     gross omission or gross dereliction of any statutory,
                           common law or other duty of loyalty to the Company or
                           any of its affiliates; or

                  iv.      repeated failure to carry out the duties of your
                           position despite specific instruction to do so.

         b)       "Good Reason" prior to a CIC shall mean the occurrence without
                  your express written consent of any of the following events:




                  i.       Your demotion to a position which is not of a rank
                           and responsibility comparable to members of the
                           current Operations Group or those of a
                           similar/replacing governance body; provided, however,
                           that the Company's decision not to continue the
                           Operations Group shall not be Good Reason, and
                           provided, further, that (1) changes in reporting
                           relationships shall not, alone, constitute Good
                           Reason and/or (2) a reduction in your business unit's
                           budget or a reduction of your business unit's head
                           count, by themselves, do not constitute Good Reason;
                           or

                  ii.      A reduction in your "Total Annual Compensation"
                           (defined as the sum of your Annual Base Salary Rate,
                           Target Annual Incentive and "Target Annual Long Term
                           Incentive Grants") for any calendar or fiscal year,
                           as applicable, to an amount that is less than the
                           Total Annual Compensation that existed in the prior
                           calendar or fiscal year, as applicable. For purposes
                           of this Paragraph (b)(ii) the dollar value of the
                           "Target Annual Long Term Incentive Grants" shall
                           exclude the value of any special one-time or periodic
                           long-term incentive grants, and shall be determined
                           by valuing Performance Shares, Stock Units,
                           Restricted Stock, Restricted Stock Units, etc., at
                           the market share price utilized in valuing the annual
                           Senior Management compensation structures in the
                           materials presented to the Compensation and Employee
                           Benefits Committee of the Company's Board of
                           Directors ("the Committee") when authorizing such
                           grants, and assuming 100% performance achievement if
                           such grants include performance criteria. Stock
                           Options and Stock Appreciation Rights will be valued
                           by the Black-Scholes methodology (and related share
                           price) as utilized in the materials presented to the
                           Committee when authorizing such grants.

         c)       "Good Reason" within two years following a CIC shall be in
                  accordance with the October 23, 2000 CIC Board Resolutions,
                  which include reduction in authority or responsibility,
                  reduction in compensation, and business relocation beyond a
                  reasonable commuting distance.

         Notwithstanding the foregoing, the Company may require you to change to
         an equivalent executive position within the Company with substantially
         similar levels of duties or responsibilities without causing Good
         Reason to occur.

         You must notify the Company within 60 days following knowledge of an
         event you believe constitutes Good Reason, or such event shall not
         constitute Good Reason hereunder.

         This agreement may not be amended or waived, unless the amendment or
waiver is in a writing signed by you and the Company's Executive Vice
President-Human Resources.

         It is understood and agreed that you will not talk about, write about,
or otherwise publicize the terms or existence of this Agreement or any fact
concerning its execution or implementation unless required by law or to enforce
the terms of this Agreement. You may, however, discuss its contents with your
spouse, legal and/or financial counselor,




provided that you advise them of your obligations of confidentiality and that
any disclosures made by any of them may be treated by the Company as disclosures
made by you for purposes of this provision.

         THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE
CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT.
THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT
("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE
THEIR EMPLOYMENT AT ANY TIME FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE
RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR
ANY REASON.

         You understand that the terms of this Agreement shall apply to the
Company and its successors. The Company specifically reserves the right to
assign the terms of this Agreement to any successor, whether the successor is
the result of a sale, purchase, merger, consolidation, asset sale, divestiture
or spin-off or any combination or form thereof. No sale, purchase, merger,
consolidation, asset sale, divestiture or spin-off or any combination or form
thereof by the Company shall be construed as a termination of your employment
and will not be considered a termination for purposes of this Agreement.

         The construction, interpretation and performance of this Agreement
shall be governed by the laws of the State of New Jersey, without regard to its
conflict of laws rule.

         In addition, all of the benefits provided under this Agreement are
subject to forfeiture if you violate the AT&T Non-Competition Guideline, a copy
of which has been previously provided to you.

         Tom, I am happy to present this special pension arrangement to you. It
recognizes the extraordinary contributions that we expect you to continue to
make to our business. If you agree with the terms and conditions detailed above,
sign and date this Agreement in the spaces provided below and return the
original executed copy to me.

                                                   Sincerely,

                                                   /s/  Mirian M. Graddick-Weir
Acknowledged and Agreed to:


/s/  Thomas W. Horton         8/4/2003
- -------------------------     -------------------
Thomas W. Horton              Date

EX-10.III.A.22

                                                          Exhibit (10)(iii)(A)22


                               September 16, 2002

Thomas W. Horton
AT&T
900 Route 202/206N
P.O. Box 752
Bedminster, NJ  07921-752

Dear Tom:

         Paragraph 5(e) of your employment agreement dated June 10, 1999
("agreement") provides that you must repay your signing bonus if you leave your
employment without Good Reason (as defined in the agreement) before January 1,
2004. We have subsequently discussed and agreed that if your termination before
January 1, 2004 is for Good Reason or due to Death or Disability, then you shall
have no obligation to repay the signing bonus.

         Please sign where indicated below to acknowledge this modification to
the agreement.

                                                     Very truly yours,



                                                     /s/  Mirian M. Graddick
                                                     Mirian M. Graddick



Acknowledged by:

/s/  Thomas W. Horton

- ---------------------------
Thomas W. Horton

EX-10.III.A.23

                                                          Exhibit (10)(iii)(A)23

(AT&T LOGO)

                                                                   July 24, 2002

Thomas W. Horton
c/o AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ  07920

Tom,

         This letter will document the discussion you have had with Rebecca
Sugalski relative to your financial counseling, tax preparation and estate
planning services. I am happy to honor your request to utilize the services of
your personal financial counselor who is employed by a firm outside of AT&T's
(the Company's) current financial counseling program for Officers.

         The Company shall provide payment for financial counseling fees from
your personal financial counselor during your employment with the Company, in
lieu of your participation in AT&T's financial counseling program. Fees subject
to payment by the Company shall be in accordance with those services provided
under AT&T's financial counseling program, and include fees for individual
financial counseling, preparation of personal federal and state income tax
returns and wills and other estate planning documents for you and your spouse.

         Dollar amounts to be paid shall be limited to the amounts the Company
provides for under its financial counseling program. The Company shall impute to
you the amount of the payments and will pay you a federal tax allowance on the
fees, calculated in accordance with Company practices applicable to other
Company executives.

         Please be sure to provide unpaid financial counseling, tax preparation
and estate planning bills directly to Noreen Fitzgerald in the Executive
Employment Contracts / Benefits Plans Team for processing.

         Tom, if you agree with the terms and conditions detailed herein, please
sign this letter in the space provided below, prior to August 5, 2002. For your
records, make a copy and then return the executed copy to Rebecca Sugalski in
the Executive Employment Contracts / Benefits Plans Team.

Sincerely,


/s/  Mirian Graddick-Weir

Mirian Graddick-Weir

/s/   Thomas W. Horton                               7/26/2002
- -----------------------------------------            ----------------------
Agreed and Accepted                                  Date
Thomas W. Horton

EX-10.III.A.24

                                                          Exhibit (10)(iii)(A)24

                                                                     (AT&T LOGO)

                       AT&T CORP. EXECUTIVE DISBILITY PLAN

                 PROGRAM SUMMARY FOR AT&T OFFICERS AND DIRECTORS

                                  FEBRUARY 2004

ABOUT THIS SUMMARY

This Summary describes key features of the AT&T Corp. Executive Disability Plan
("Plan") as they apply beginning April 1, 2004, to active employees of AT&T
Corp. ("AT&T") who are classified at either (i) a salary grade level of
"E-band", or its equivalent, in a banded environment, or a level of "Manager 5",
or its equivalent, in a non-banded environment ("Directors"); or (ii) a salary
grade level above "E-band", or its equivalent, in a banded environment, or a
level above "Manager 5", or its equivalent, in a non-banded environment, also
referred to as "Senior Managers" from time to time ("Officers").

As a summary, this document is not intended to cover all of the details of the
Plan. More details about the Plan can be found in the official Plan document and
the insurance policies (for the insured portion of the Plan), which legally
govern all aspects of the Plan. If there are any conflicts between the terms of
the Plan document and the description in this Summary, the Plan document and
insurance policies, as applicable, will control and govern the operation of the
Plan.

PRIOR DISABILITY PROGRAMS

Effective April 1, 2004, eligible Officers and Directors will no longer be
covered under the AT&T Short-Term Disability Benefit Plan for Management
Employees and the AT&T Long-Term Disability Plan for Management Employees
(including the "Additional 10% of Pay Option" or "High Option"). That coverage
is being replaced by the coverage provided under the Plan. Officers will
continue to be eligible to participate in the AT&T Senior Management Long-Term
Disability and Survivor Protection Plan with respect to certain benefits that
remain in effect under that plan.

HOW THE PLAN WORKS

COMPOSITION OF THE PLAN: The Plan is comprised of three disability benefit
programs:

         -        Short-Term Disability Benefit Program

         -        Base LTD Benefit Program, and

         -        Supplemental Disability Income Program ("SDIP")

ENROLLMENT: All Officers and Directors are automatically enrolled for coverage
under the Short-Term Disability Benefit Program and the Base LTD Benefit
Program. If you wish to enroll for coverage under the SDIP during the initial
enrollment period, you should complete and return the enrollment materials that
accompany this Summary by the indicated deadline. If you decline to



PROGRAM SUMMARY FOR OFFICERS AND DIRECTORS (02/04)                   PAGE 1 OF 3



enroll in the SDIP during the initial enrollment period, you will be able to
enroll with evidence of insurability during future annual open enrollment
periods.

SHORT-TERM DISABILITY BENEFIT PROGRAM: The Short-Term Disability Benefit Program
will provide you with weekly short-term disability benefits equal to the weekly
equivalent of 100 percent of your annual base salary. The short-term disability
benefit will commence on the eighth consecutive day of your absence from work
due to disability (as defined in the Plan document). Short-term disability
benefits will continue until the earlier of (i) the date you are no longer
considered disabled; or (ii) the last day of the 26th week after commencement of
you short-term disability benefits under the Plan. All short-term disability
benefits are reduced by certain payments made under other AT&T-sponsored benefit
plans.

BASE LTD BENEFIT PROGRAM: If, after receiving 26 weeks of short-term disability
benefits, you continue to be disabled (as defined in the Plan document),
regardless of your length of service with AT&T, you will be eligible to receive
base long-term disability ("LTD") benefits equal to 60 percent of your eligible
compensation, reduced by benefit payments from certain other AT&T benefit plans
as specified in the Plan document. This benefit entitlement arises if your
disability is due to the same physical or mental impairment for which you
received short-term disability benefits. Your base LTD benefits will continue
until the earlier of (i) the time you are no longer disabled; or (ii) your 65th
birthday.

SUPPLEMENTAL DISABILITY INCOME PROGRAM ("SDIP"): The Plan also offers
supplemental long-term disability income protection to you under the SDIP. To be
eligible for this fully-insured supplemental disability coverage, you must
enroll (as described in the enclosed materials) in one of the following coverage
options and pay the applicable premiums:

         OPTION 1:    Additional 10% of your monthly base salary (and two-year
                      average commission, if applicable)

         OPTION 2:    Up to 70% of the monthly equivalent of your two-year
                      average annual bonus

         OPTION 3:    Up to an additional 10% of your monthly base salary
                      (and two-year average commission, if applicable), plus up
                      to 70% of the monthly equivalent of your two-year average
                      annual bonus

If your disability (as defined in the SDIP insurance policy) continues more than
180 days, you will be eligible for the monthly supplemental disability income
benefits provided under your SDIP coverage option. The maximum amount of monthly
SDIP benefits you may receive under any of the three options will be the lesser
of (i) $7,500 per month; or (ii) the benefit amount which, when combined with
your base LTD benefit and any other disability coverage in force, provides you
with a disability benefit of $50,000 per month.

One of the significant advantages of the SDIP is that your insurance coverage is
"portable", i.e., you will be able to maintain the coverage after your
employment with AT&T terminates. Another advantage is that the SDIP benefits
will not be subject to offset by payments under other



PROGRAM SUMMARY FOR OFFICERS AND DIRECTORS (02/04)                   PAGE 2 OF 3


AT&T benefit programs. See the enclosed enrollment materials for more
information concerning the SDIP.

COST OF COVERAGE

AT&T pays the full cost of your coverage under the Short-Term Disability Benefit
Program and the Base LTD Benefit Program. If you enroll in the SDIP, you will
pay the applicable premiums through payroll deductions while you are employed by
AT&T, and thereafter, on a direct-pay basis with the insurer.

FUNDING AND POLICY OWNERSHIP

Under the Plan, the short-term disability and base LTD benefits will be
self-insured by AT&T. The SDIP coverage is fully-insured through a contract
underwritten by MetLife. If you enroll in the SDIP, you will receive a MetLife
policy for your coverage under that portion of the Plan.

FEDERAL INCOME TAX IMPLICATIONS

Your Short-Term Disability Benefit Program and Base LTD Benefit Program coverage
will be provided to you by AT&T on a pre-tax basis. Therefore, any short-term
disability benefits or base LTD benefits you receive under the Plan will be
considered taxable income to you (based on current federal income tax law).

If you enroll in the SDIP, all of your premium payments will be made on an
after-tax basis. Therefore, any benefits you receive under the SDIP will not be
considered taxable income to you.

CONSULTATION WITH FINANCIAL ADVISORS

You may wish to speak with your financial counselor regarding this Plan,
including your disability income replacement needs and the advisability of
enrolling in the SDIP.

INSURANCE CARRIER

Metropolitan Life Insurance Company (MetLife) is the insurance carrier that
underwrites the coverage under the SDIP and is responsible for paying the
applicable supplemental disability income benefits under the Plan.

FUTURE PROGRAM CHANGES

The Board of Directors at AT&T Corp. (or its delegate) reserves the right to
modify, suspend, change or terminate the Plan at any time. Nothing contained in
this Summary, the Plan document or any related document (including any insurance
policy) shall create a contract of employment with any employee or a
participant.

PROGRAM SUMMARY FOR OFFICERS AND DIRECTORS (02/04)                   PAGE 3 OF 3

EX-10.III.A.27

                                                          Exhibit (10)(iii)(A)27

                                                               December 15, 2003

Mr. David Dorman

Dear Dave:

         This letter will confirm the recent approval by the Compensation and
Employee Benefits Committee of the AT&T Board of Directors (the "Committee") of
special allowances to be paid by AT&T (the "Company") in connection with your
assignment as Chief Executive Officer of AT&T based in Bedminster, New Jersey
and the requirement that you relocate to the New York/New Jersey area by
December 31, 2003.

SPECIAL TEMPORARY ALLOWANCE: To temporarily mitigate the cost to you of
maintaining two homes while you market your Atlanta home, the Company will
continue to provide to you a Special Temporary Allowance (STA) during the time
you own your current Atlanta home but ending the month before the month in which
the sale occurs and, in no event, later than July 1, 2004. The STA will be
increased to $12,000 (twelve thousand dollars) per month retroactive to
September 1, 2003, the effective date of the lease on your local residence. A
lump sum payment will be made to reflect the difference between the STA
previously paid since September 1, 2003 and this new STA. Going forward, this
payment will be made on a monthly basis concurrent with your regular monthly
paycheck. These payments will be grossed-up for federal and state taxes, since
such STA payments are considered taxable income. The payments will not be
included in your pay base for calculating any employee benefits.

OTHER RELOCATION PROVISIONS: Because of security considerations and other real
estate factors, it has been determined that the Atlanta home has not been in
posture for marketing within the 90 day period prescribed by the AT&T Management
Relocation Plan (the "Plan") for Company purchase of a home. In consideration of
those factors, the Company shall extend the provision for the Company to buy the
Executive's Atlanta home under the Plan until July 1, 2004 using the $2.975
million appraised value under the Plan.

In addition, should the Executive succeed in selling his Atlanta home on his own
before July 1, 2004, the Company shall provide a special payment as specified in
the Plan (the "Incentive") to the Executive in the amount of 1% (one percent) of
the selling price of the Atlanta home as documented on form HUD-1 (Settlement
Statement). The Incentive shall be paid to the Executive at the end of the month
following the month of sale. This payment is considered taxable income and will
be subject to Federal and state income taxes. No gross-up payment will be
provided and the payment will not be included in your pay base for calculating
any employee benefits.





D. Dorman - Relo 12.03
Page 2

The STA payments with gross up, the Company purchase of the Executive's home
under the Plan and payment of the Incentive are all predicated upon your
continued employment with the Company at the time the payments are due

Please acknowledge your acceptance of the terms of this agreement by signing
below where indicated.

                                                   Sincerely,


                                                   /s/  Mirian M. Graddick-Weir

Acknowledged:


/s/  David Dorman

- --------------------
David Dorman

EX-10.III.A.29

                                                          Exhibit (10)(iii)(A)29


                  RESOLVED: that the Board hereby adopts the following
resolutions, as recommended by the Committee, amending the executive benefit
plans, programs and funding arrangements, as described below, effective January
1, 2004 (unless otherwise indicated):

                 RESOLVED:  that the following terms, when used in these
resolutions, shall have the meanings set forth below, unless the
context clearly requires a different meaning:

                EXECUTIVE: "Executive" means a management employee of a
                Participating Company (as that term is defined in the AT&T
                Management Pension Plan) classified as "Manager 5" in a
                non-banded environment, or at salary grade level of "E-band", or
                its equivalent, in a banded environment.

                SENIOR MANAGER: "Senior Manager" shall mean a management
                employee of a Participating Company classified as "Manager 6" in
                a non-banded environment, or at salary grade level above
                "E-band", or its equivalent, in a banded environment.

                RESOLVED:  that, the AT&T Senior Management Long Term
Disability and Survivor Protection Plan (the "Disability Plan") is hereby
amended, effective as soon as practicable on or after January 1, 2004, (the
"Disability Effective Date"), with respect to participants who become disabled
under the terms of the Disability Plan on or after the Disability Effective
Date:

         (a)      To provide a weekly short-term disability benefit to all
                  Executives and Senior Managers (collectively, "Participants")
                  who become "disabled" (as that term is defined in Section
                  2.01(a) of the Disability Plan) equal





                                     - 2 -


                  to the weekly equivalent of one hundred percent (100%) of such
                  Participant's annual base salary rate. The short-term
                  disability benefit will commence on the eighth consecutive day
                  of the Participant's absence from work due to his or her
                  disability, and end on the earlier of (i) the date the
                  Participant ceases to be disabled, or (ii) the last day of the
                  twenty-sixth week after commencement of the short-term
                  disability benefit, reduced by benefit payments from certain
                  other Company benefit plans as specified in the Disability
                  Plan;

         (b)      To reduce the period preceding the Participant's eligibility
                  for long-term disability benefits under the Disability Plan to
                  twenty-six (26) weeks from the date when the Participant
                  commences receiving short-term disability benefits under the
                  Disability Plan;

         (c)      To provide a long-term disability benefit for all Participants
                  in the Disability Plan who become "disabled" (as that term is
                  defined in Section 2.01(b) of the Disability Plan), regardless
                  of level or length or service, equal to sixty percent (60%) of
                  such Participant's eligible compensation as determined under
                  the terms of the Disability Plan, reduced by benefit payments
                  from certain other Company benefit plans as




                                     - 3 -


                  specified in the Disability Plan, if, after the end of the
                  twenty-six week period referred to in paragraph (a), and as a
                  result of the same physical or mental impairment resulting in
                  the payment of short-term disability benefits, the Participant
                  remains disabled. Long-term disability benefits shall commence
                  beginning with the twenty-seventh week following the date when
                  the Participant commenced receiving short-term disability
                  payments under the Disability Plan and ending on the earlier
                  of (i) the cessation of the Participant's disability, or (ii)
                  the Participant's sixty-fifth birthday;

         (d)      To provide that a Participant may, prior to becoming eligible
                  for benefits under the Disability Plan, purchase additional
                  long-term disability benefits in an amount up to a maximum of
                  ten percent (10%) of such Participant's eligible compensation
                  as determined under the terms of the Disability Plan, and up
                  to seventy percent (70%) of the average of such Participant's
                  two most recent annual short-term bonus payments, which
                  additional disability benefits shall not be subject to
                  reduction or offset by benefit payments made under any other
                  Company benefit plan; and



                                     - 4 -


                  RESOLVED: that the provisions of the AT&T Senior Management
Long Term Disability and Survivor Protection Plan (the "Disability Plan")
providing for (i) a minimum disability benefit after a Participant has attained
age 65 under Section 2.04 of the Disability Plan, (ii) a minimum retirement
benefit provided in Article 3 of the Disability Plan, (iii) a surviving spouse
benefit under Article 4 of the Disability Plan, and (iv) a death benefit under
Article 5 of the Disability Plan, shall remain in effect for Senior Managers and
shall not apply to any Executives otherwise covered under the Disability Plan;
and

                  RESOLVED:  that the AT&T Short Term Disability Benefit
Plan for Management Employees and the AT&T Long Term Disability Plan for
Management Employees are hereby amended, effective concurrently with the
Disability Effective Date as defined in the second preceding Resolution, to
terminate eligibility for all Senior Managers and Executives, provided that, as
of the day before the Disability Effective Date, such employees have not
incurred any disability that would otherwise qualify them to receive benefits
from either the AT&T Short Term Disability Benefit Plan for Management Employees
or the AT&T Long Term Disability Plan for Management Employees; and

                  RESOLVED:  that the AT&T Corp. Executive Basic Life
Insurance Program ("EBLIP") is hereby amended, effective January 1, 2004, to
provide for the orderly and efficient exchange, transfer or



                                     - 5 -


surrender of EBLIP insurance policies in order to provide replacement life
insurance coverage, under the AT&T Corp. Senior Management Universal Life
Insurance Program, to Executives whose participation in EBLIP is terminated
pursuant to the balance of this sentence, and to thereafter terminate the EBLIP
participation of any employee actively employed by AT&T Corp. or any of its
affiliates (the "Company") as soon as practicable on or after January 1, 2004.
The EBLIP shall continue to be maintained in accordance with its terms and
conditions for those participants in EBLIP who have terminated employment from
the Company on or before December 31, 2003 and for whom an EBLIP policy has been
purchased; and

                  RESOLVED: that the AT&T Corp. Executive Basic Life Insurance
Program ("EBLIP") is hereby amended, effective January 1, 2004, to provide that,
in the event of the termination of an Executive's participation in the EBLIP as
a result of the substitution or replacement of coverage under EBLIP with
coverage under another Company-sponsored executive life insurance program, such
as is provided in the following resolution, the Insurance Policy (as that term
is defined in EBLIP)



         (a)      Shall not be transferred to the Executive; and


         (b)      The Company shall have the absolute right to retain, exchange,
                  transfer or surrender the Insurance Policy as it may determine
                  in its sole and absolute discretion;



                                     - 6 -


                  RESOLVED: that the AT&T Corp. Senior Management Universal Life
Insurance Program ("SMULIP") is hereby amended, effective January 1, 2004:

         (a)      To provide that all Executives shall be eligible to
                  participate in SMULIP concurrently with the termination of
                  their participation in the AT&T Executive Basic Life Insurance
                  Program;

         (b)      To revise the existing pre-retirement death benefit provisions
                  to provide a pre-retirement death benefit for all participants
                  in SMULIP, regardless of level, equal to three times the
                  eligible employee's annual base salary rate (unless otherwise
                  elected in accordance with paragraph (d) of this resolution);

         (c)      To revise the existing post-retirement death benefit
                  provisions to provide a post-retirement death benefit for all
                  participants in SMULIP, regardless of level, equal to two
                  times the eligible employee's annual base salary rate (unless
                  otherwise elected in accordance with paragraph (d) of this
                  resolution);

         (d)      To provide to those employees who are participants in SMULIP
                  and employed by the Company as of December 31, 2003, a
                  one-time election to continue the coverage in effect under
                  SMULIP on December 31, 2003 (subject to all



                                     - 7 -


                  terms and conditions of SMULIP in effect as of December 31,
                  2003) without regard to the changes to SMULIP described in the
                  preceding paragraphs of this resolution;

         (e)      The SMULIP shall continue to be maintained in accordance with
                  its terms and conditions, including the Company's right to
                  amend, modify or terminate, for those participants in SMULIP
                  who have terminated employment with the Company on or before
                  December 31, 2003;



                  RESOLVED: that the AT&T Senior Management Incentive Award
Deferral Plan (the "Deferral Plan") is hereby amended, effective as soon as
practicable on or after January 1, 2004 the "Deferral Effective Date"), with
respect to deferrals of base salary, annual bonus and performance share and
restricted stock unit awards earned, payable or granted on or after the Deferral
Effective Date:



         (a)      To permit all Executives and Senior Managers to participate in
                  the Deferral Plan, as modified by these resolutions, and to
                  defer receipt of an amount not to exceed fifty percent (50%)
                  of their annual base salary, one hundred percent (100%) of
                  their annual bonus, and one hundred percent (100%) of their
                  annual grant of performance shares or restricted stock units
                  (collectively, "Compensation") with respect to Compensation
                  earned or payable on or after the Deferral



                                     - 8 -


                  Effective Date in accordance with procedures to be established
                  by the Executive Vice President-Human Resources, in
                  consultation with the AT&T Vice President-Taxes and Tax
                  Counsel;

         (b)      To provide that the Company shall periodically credit to each
                  participant's cash account a matching contribution, in an
                  amount equal to two-thirds of the sum of the participant's
                  base salary deferred and annual bonus deferred under the
                  Deferral Plan on or after the Deferral Effective Date,
                  provided, however, that such matching contribution shall be
                  subject to vesting provisions identical to those that exist
                  under the AT&T Long Term Savings Plan for Management Employees
                  ("LTSPME"), and such matching contributions shall not exceed
                  four percent of the sum of the participant's base salary plus
                  annual bonus (before reduction by the amount of (i) any
                  deferrals under the Deferral Plan, or (ii) elective deferrals
                  under the LTSPME, or (iii) salary reductions under any Company
                  cafeteria plan), reduced by the amount of matching
                  contributions allocated to the participant's account under the
                  LTSPME for the corresponding payroll period;

         (c)      To provide that Participant Accounts shall be credited under
                  the Deferral Plan with interest and dividend



                                     - 9 -


                  equivalent payments, in accordance with the existing interest
                  and dividend equivalent crediting provisions of the Deferral
                  Plan;

         (d)      To provide that, in accordance with procedures to be
                  established by the Executive Vice President - Human Resources,
                  in consultation with the AT&T Vice President-Taxes and Tax
                  Counsel, participants may elect to receive a distribution of
                  their Deferral Plan accounts attributable to Compensation
                  earned or payable on or after the Deferral Effective Date, by
                  choosing among the distribution options currently available
                  under the Deferral Plan, subject to the modifications to those
                  options described in the Board Presentation (i.e., in-service
                  withdrawals permitted at any age, reduction in the maximum
                  installment period to 10 years, ability to change distribution
                  elections no later than one year prior to termination of
                  employment, and distributions required to commence within one
                  year after termination);

         Existing elections under the Deferral Plan to defer receipt of
         compensation otherwise payable in calendar year 2003 shall remain
         effective, and compensation deferred pursuant to such an election, as
         well as existing deferrals in such Deferral Plan, shall continue to be
         deferred under the Deferral Plan, credited



                                     - 10 -


         with interest or earnings at the rate determined in accordance with
         current plan provisions, and distributed in accordance with the terms
         of the participants' elections and the distribution provisions of the
         Deferral Plan in effect on December 31, 2003;

                  RESOLVED: that the AT&T Management Pay Plan is hereby amended,
effective January 1, 2004, to provide that no payment with respect the lost
Company Match (the Company Matching Contribution that would have been made to
the AT&T Long Term Savings Plan for Management Employees in 2003 or any year
thereafter, but for the limitation on compensation set forth in Section
401(a)(17) of the Internal Revenue Code of 1986, as amended), shall be made with
respect to any Executive or Senior Manager; and

                  RESOLVED: that the AT&T Non-Qualified Pension Plan, the AT&T
Excess Benefit and Compensation Plan, the AT&T Mid-Career Pension Plan, and the
AT&T Senior Management Long Term Disability and Survivor Protection Plan
(collectively, the "Non-Qualified Plans") are each hereby amended, effective
January 1, 2004, to provide that the Company's right and discretionary authority
under the respective Non-Qualified Plans to direct that non-qualified benefits
payable to a participant or his or her surviving spouse, as applicable, be made
through the purchase and distribution of one or more commercial annuity
contracts shall be applicable to only the non-qualified benefits payable from
the respective Non-Qualified Plans to any



                                     - 11 -


participant (or the surviving lawful spouse of any such participant, as
applicable) who:

         (a)      Is on the active payroll of the Company (or on an approved
                  leave of absence with guaranteed right of reinstatement with
                  the Company) and classified as a Senior Manager on December
                  31, 2003, and

         (b)      Satisfies the age and service requirements (other than by
                  virtue of the "Rule of 65") in effect at the time the
                  participant terminates employment with the Company for receipt
                  of retirement-related health benefits under the AT&T Corp.
                  Postretirement Welfare Benefits Plan (or any successor to such
                  plan) (other than through a Company-sponsored employee-paid
                  health benefits access program or through the AT&T Corp.
                  Separation Medical Plan), without regard to whether or not the
                  Senior Manager has five years of service as of December 31,
                  1999;

                  RESOLVED: that Schedule 1 to the AT&T Corp. Benefits
Protection Trust (the "Trust") is hereby amended in its entirety to read as
follows:


                                    Account A

         1.       AT&T Non-Qualified Pension Plan (with respect to benefits that
                  may become payable to Senior Managers)


         2.       AT&T Mid-Career Pension Plan


         3.       AT&T Excess Benefit and Compensation Plan (with respect to
                  benefits that may become payable to Senior Managers)



                                     - 12 -



         4.       AT&T Senior Management Long Term Disability and Survivor
                  Protection Plan (with respect to benefits that may

                  become payable to Senior Managers)

                                    Account B

         1.       AT&T Senior Management Incentive Award Deferral Plan (with
                  respect to benefits that may become payable to Senior
                  Managers)

                                    Account C

         1.       AT&T Senior Management Incentive Award Deferral Plan (with
                  respect to benefits that may become payable to Executives)

         2.       AT&T Excess Benefit and Compensation Plan (with respect to
                  benefits that may become payable to Executives)

         3.       AT&T Non-Qualified Pension Plan (with respect to benefits that
                  may become payable to Executives)

         4.       AT&T Senior Management Long Term Disability and Survivor
                  Protection Plan (with respect to benefits that may become
                  payable to Executives)

                  RESOLVED: That the AT&T Non-Qualified Pension Plan is hereby
amended to provide benefits to Senior Managers and Executives in an amount
sufficient to make up for any reduction in benefits under either the AT&T
Management Pension Plan or the AT&T Excess Benefits and Compensation Plan
resulting from the Senior Manager's or Executive's election to defer
Compensation under the terms of the Deferral Plan;

                  RESOLVED: that, subject to the agreement of the Trustee of the
AT&T Corp. Benefits Protection Trust (the "Trust"), the Trust is hereby amended,
effective January 1, 2004, to provide for funding, in accordance with the terms
of the Trust, of benefits payable to Executives pursuant to the terms of the
AT&T Senior Management



                                     - 13 -


Incentive Award Deferral Plan, the AT&T Excess Benefit and Compensation Plan,
the AT&T Non-Qualified Pension Plan and the AT&T Senior Management Long Term
Disability and Survivor Protection Plan, and that contributions to the Trust
(both unallocated prior contributions and all future contributions) shall be
allocated first within the Trust to Trust Account "A"; thereafter, once Trust
Account "A" is fully funded (i.e., continually funded at the "Full Funding
Amount" as defined in the Trust), to Account "B"; thereafter, once Trust Account
"B" is fully funded (i.e., continually funded at the "Full Funding Amount" as
defined in the Trust ), to Account "C"; and

                  RESOLVED: that, the Executive Vice President - Human Resources
(or her successor or delegate), with the concurrence of the AT&T Law Division,
is authorized, without further Board approval, to (1) incorporate appropriate
language into the plans, programs, funding arrangements and perquisite documents
identified above, including changing the names of the plans, to reflect properly
the provisions and intent of the foregoing amendments and the materials
presented to the Board, and attached hereto as Exhibit 1, (2) to determine the
appropriateness of establishing separate plans with respect the benefits that
are the subject of these resolutions and to adopt such separate plans, otherwise
consistent with the foregoing resolutions and the Board Presentation, if it is
determined to be in the best interests of the Company and its Senior Managers
and Executives, (3)



                                     - 14 -


take such action and to approve such amendments to other AT&T benefit plans,
programs and funding arrangements as may be reasonably necessary or appropriate
to conform such other benefit plans, programs and funding arrangements to the
amendments made by the foregoing resolutions, (4) make administrative amendments
to such plans, programs and funding arrangements, including reviewing and, if
appropriate, modifying any funding assumptions with respect to life insurance
policies issued under SMULIP, as may be necessary or appropriate to implement
the foregoing resolutions and that are consistent with the intent of the Board
Presentation, and (5) take such further action including, but not limited to,
conducting requests for proposals for new vendors or insurance or annuity
carriers, determining whether to insure or self insure such benefits, entering
into contract arrangements with vendors, service providers, administrators
(including insurers with respect to life insurance and disability benefits), and
consultants, as she considers necessary or appropriate to implement the
foregoing resolutions and as may otherwise be necessary to comply with legal,
statutory, and regulatory requirements; and

                  RESOLVED: that, the Chairman and Chief Executive Officer of
AT&T Investment Management Corporation (or his successor or delegate), be and
hereby is, authorized and directed to (1) take such action and to approve and
execute such amendments to the AT&T Corp.



                                     - 15 -


Benefits Protection Trust (the "Trust) as may be reasonably necessary or
appropriate, and as may be acceptable to the Trustee, to implement the foregoing
resolutions, or as may otherwise be necessary to comply with legal, statutory,
and regulatory requirements, and (2) make such administrative amendments
necessary or appropriate to implement the foregoing resolutions and that are
consistent with the intent of the Board as reflected in these resolutions and
the materials presented to the Board, as attached hereto as Exhibit 1.

EX-10.III.A.39

                                                          EXHIBIT (10)(iii)(A)39

September 7, 2001



Mr. John Polumbo

Dear John,

      This letter will confirm the terms and conditions of your transfer from
Concert to AT&T Corp. (the "Company")

ASSUMPTION OF DUTIES: Effective on or about September 15, 2001 you will assume
the position of Senior Vice President-International Ventures and Enterprise
Marketing in the AT&T Business Services organization. You will report to David
Dorman. Your work location will be San Francisco, California. It is agreed and
understood that this assignment will require frequent travel to our headquarters
in New Jersey, especially during the initial six to twelve months of the
assignment.

BASE SALARY: Your initial base salary will be $395,200 per year. Specific salary
treatment will be reviewed again in March 2002.

ANNUAL BONUS: The Annual Bonus for Senior Managers in the AT&T Business Services
organization is currently based on financial measures of the unit's performance
as well as other personal achievement measures. The 2001 target (not actual)
Annual Bonus for your position will be 60% of your salary or $237,120 and will
be prorated for your time on AT&T payroll during the performance year. AT&T
cannot make any representations regarding the future format of the Annual Bonus
or the size of individual awards.

2001 CONCERT BONUS: Your 2001 prorated Concert Annual Bonus based on your
service at Concert in 2001 will be determined and payable at the time the AT&T
2001 Annual Bonus is payable in the first quarter of 2002.

AT&T LONG TERM INCENTIVES: You will be eligible to receive AT&T Long Term
Incentives for the year 2001 and for future years to the extent that this plan
is in place for Senior Managers at your level. Your target award for 2001 is
300% of base salary. Historically, the Long Term Incentive awards have been in
the form of performance shares and stock options, and for 2001, the value of the
award will be 70% in AT&T stock options and 30% in performance shares as
described below.

      AT&T PERFORMANCE SHARES: Effective on the last trading day of the month of
      your transfer, you will receive a grant of 16,200 AT&T Performance Shares
      covering the 2001-2003 performance period (payout, if any, is in the first
      quarter of 2004).

J. Polumbo

Page 2


            Assuming continued Company employment, payout of from 0% to 200% of
            such Performance Shares is made in the form of cash and AT&T shares
            at the end of the performance period based on a measures of AT&T
            financial performance as determined by the AT&T Board of Directors.
            The measures for 2001 will be AT&T Total Revenue and Total Net
            Income vs. Budget. The measures for 2002 and 2003 have yet to be
            determined.

            Dividend equivalents are paid quarterly on all undistributed
            Performance Shares.

      AT&T STOCK OPTIONS: For 2001 you will be granted options for 63,900 shares
      of AT&T Common Stock. These options will be granted on the last trading
      day of the month of your month of transfer (or on the last trading day of
      the month following your month of transfer in the event your date of
      transfer is after the 15th of the transfer month). For stock options
      granted under this paragraph the term of the stock option grant is ten
      years and the stock options will vest twenty-five percent (25%) annually
      beginning on the first anniversary of the date of grant. The stock option
      price of the grant shall be the fair market value of AT&T Common Stock on
      the date of grant.

As with the Annual Bonus, Long Term Incentives are closely linked with the
Company's strategy to meet the challenges of an ever-changing marketplace.
Accordingly, other than the initial grant, the Company cannot guarantee
continuation of the Long Term Incentive Plan in its current format, nor can it
guarantee annual grant levels to individual participants.

OTHER LONG TERM INCENTIVES: If AT&T Corp. issues a separate stock tracking the
performance of AT&T Consumer Services ("Consumer Tracking Stock"), then, to the
extent other similarly situated executives receive a special one-time equity
grant in the Consumer Tracking Stock you will be provided an award which is
consistent with awards provided other such executives.

CONCERT FOUNDERS GRANT AND LTIP RETENTION:

- -     Your Concert Founder's Grant of $593,000 will be payable by the last
      business day of February, 2002, contingent upon your continued Company
      employment through the payment date.

- -     Your Concert LTIP retention of $2,280,000 which was to be paid in cash in
      October, 2002, will be replaced by the following:

      -     Restricted Shares: The Chairman will be asked to approve a special
            one-time award of 114,000 AT&T Restricted Shares which will vest
            100% on December 31, 2002. These restricted shares will vest
            contingent upon continued Company employment (there are no
            performance criteria). Dividends are currently paid

J. Polumbo

Page 3


            each quarter as part of the normal company dividend. The Restricted
            Share agreement prohibits certain activities which are detrimental
            to the Company, including but not limited to, employment with a
            competitor, raiding of Company employees and litigation against the
            Company, both during your employment and for twenty-four (24) months
            following the termination of your employment with the Company.
            Detrimental conduct either during your employment or within
            twenty-four (24) months thereafter will result in forfeiture of the
            entire Restricted Share grant.

SPECIAL INDIVIDUAL PENSION ARRANGEMENT: The Company will honor the terms and
conditions of your Special Individual Pension Arrangement attached as Exhibit B
to your June 17, 1999 employment agreement with AT&T/Concert (Attached herein as
Exhibit A). Provided however, instead of vesting on 7/1/2004, such Special
Individual Pension Arrangement will vest on the last day of the month which
contains the six month anniversary of your date of transfer to AT&T under this
letter agreement.

BENEFITS AND SPECIAL MID-CAREER BENEFITS: You will, of course, be eligible for
the benefit programs available to all AT&T Senior Managers as indicated on
Attachment A.

FINANCIAL COUNSELING: You will not be required to use one of three AT&T approved
financial counseling firms; provided, however, all other terms of the financial
counseling program applicable to AT&T Senior Managers will apply. AT&T will pay
for financial counseling fees provide by your personal financial counselor
during employment including income tax preparation and preparation of estate
planning documents (wills and trusts). The fees will be imputed into your income
and a tax allowance will be provided in accordance with the Company's financial
counseling program.

CIC: In the event of a Change in Control (CIC) of the Company as defined in
Section 2(e) of the AT&T 1997 Long Term Incentive Program (LTIP), the vesting of
equity awards awarded under this letter will be accelerated in accordance with
Section 11 of the LTIP and subject to all other terms of that Section. Provided,
however, as approved by the AT&T Board of Directors, the consummation of all or
any portion of the separation transactions announced by the Company on October
25, 2000 and November 15, 2000, or any actions, changes or other events that may
occur in connection therewith, shall not constitute a Change in Control for
purposes of equity granted in 2001. In the event of your termination of
employment following a CIC, you will be treated under the terms and conditions
applicable to other similarly situated Senior Managers as approved the Board of
Directors on October 23, 2000.

STOCK OWNERSHIP REQUIREMENTS: You will be subject to an AT&T stock ownership
target established by the Board of Directors for Senior Managers at your level,
currently one times your base salary.

SEVERANCE BENEFIT: In the event of a Company initiated termination for other
than Cause or as a result of Long Term Disability, you will be treated under the
terms and conditions of the AT&T Senior Management Separation Plan or any
successor plan or program which is applicable at such time, including the
requirement that any benefits will

J. Polumbo

Page 4


be conditioned upon your signing (and not revoking), within 30 days of your
termination, a release and agreement not to sue the Company. Currently the AT&T
Senior Management Separation Plan provides a severance payment of three (3)
times base salary which is payable either in a lump sum or which may be deferred
for up to 5 years with up to 5 annual payouts. Some of the other current terms
provide that (a) Stock Options vest immediately and are exercisable until the
earlier of three years from termination or the expiration of the term of the
options, (b) Performance Shares continue to the end of the performance cycle;
and (c) you would receive a prorated annual bonus for the termination year based
on actual results. As part of this letter agreement, the Company agrees that in
the event of a termination as defined in this paragraph, unvested Restricted
Shares awarded as part of this letter agreement will immediately vest.

OTHER PROVISIONS: It is agreed and understood that you will not talk about,
write about or otherwise disclose the terms or existence of this letter or any
fact concerning its negotiation or implementation. You may, however, discuss the
contents of this letter with your spouse, legal and/or financial counselor.

      This letter reflects the entire agreement regarding the terms and
conditions of your employment. Accordingly, it supersedes and completely
replaces any prior oral or written communication on this subject. This letter is
not an employment contract and should not be construed or interpreted as
containing any guarantee of continued employment. The employment relationship at
AT&T is by mutual consent ("Employment-At-Will"). This means that managers have
the right to terminate their employment at any time and for any reason.
Likewise, the Company reserves the right to discontinue your employment with or
without cause at any time and for any reason.

      The incentive plans as well as the employee and Senior Management benefit
plans, programs and practices as briefly outlined in this letter, reflect their
current provisions. Payments and benefits under these plans, programs, and
practices, as well as other payments referred to in this letter, are subject to
IRS rules and regulations with respect to withholding, reporting, and taxation,
and will not be grossed-up unless specifically stated. The Company reserves the
right to discontinue or modify any such plans, programs and practices. All
payments and benefits outlined in this letter are subject to the terms of
applicable plans, programs and practices. As indicated above, a number of AT&T
incentive arrangements and non-qualified pension and benefit plans are subject
to non-competition constraints outlined in AT&T's Non-Competition Guideline,
ATTACHMENT C to this letter.

      All benefits offered to you under the terms of a benefit plan governed by
the Employee Retirement Income Security Act shall be governed exclusively by the
terms of the plan. To the extent that this letter contradicts a term of the
plan, the terms of the plan shall be deemed controlling.

      By acceptance of this offer, you agree that (1) no trade secret or
proprietary information belonging to any previous employer will be disclosed or
used by you at AT&T, and that no such information, whether in the form of
documents, memoranda,

J. Polumbo

Page 5


software, drawings, etc., will be retained by you or brought with you to AT&T,
and (2) you have brought to AT&T's attention and provided it with a copy of any
agreement which may impact your future employment at AT&T, including
non-disclosure, non-competition, invention assignment agreements or agreements
containing future work restrictions. You also understand and agree that AT&T
prohibits you from disclosing or using any confidential and proprietary
information from your prior employers in the performance of your duties for
AT&T.

      By acceptance of this offer, you further understand that these terms shall
apply to the Company and its successors. The Company specifically reserves the
right to assign the terms of this agreement to any successor, whether the
successor is the result of a sale, purchase, merger, consolidation, asset sale,
divestiture or spin-off or any combination or form thereof. No sale, purchase,
merger, consolidation, asset sale, divestiture or spin-off or any combination or
form thereof by the Company shall be construed as a termination of your
employment and will not trigger the Company's obligation to pay severance
benefits.

      John, I feel the package we have developed for you is attractive and
anticipates that you will make a critical contribution to AT&T. We look forward
to having you join us. If you have any questions, please don't hesitate to call
me.

      Your signature below affirms your agreement with the foregoing and
confirms specifically that: (i) there are no agreements or other impediments
that would prevent you from providing exclusive service to the Company,
including but not limited to any non-competition agreement with your former
employer; and (ii) you will not disclose or use any confidential and proprietary
information from your previous employers in the performance of your duties for
AT&T.

      If you agree to the terms and conditions of this offer, please sign as
indicated below and return the original to me by September 11, 2001.

                                          Sincerely,


                                          /s/  Mirian M. Graddick-Weir



/s/  John Polumbo                          9/11/2001
- -------------------------------           ------------
John Polumbo                                  Date

Attachments

J. Polumbo

Page 6


                                    Exhibit A

              SPECIAL INDIVIDUAL PENSION ARRANGEMENT FOR J. POLUMBO


GENERAL TERMS AND CONDITIONS

- -     AT&T/BT/JV (collectively, the Company) will establish an individual
      non-qualified pension arrangement (hereinafter Individual Pension) which,
      subject to the terms and conditions below, will provide you with a benefit
      payable from AT&T/BT/JV operating assets upon your retirement

- -     Individual Pension applicable during employment by AT&T, JV, or BT

- -     For departures prior to 7/1/2004 (other than death) and for termination
      for "cause" (defined), this Individual Pension will be null and void in
      its entirety.

- -     In the event of a termination for "disability" (as defined, the Individual
      Pension accrued to the date of such Termination will be payable in
      accordance with the terms and conditions set forth below in the
      "Individual Pension Formula."

- -     In the event of your death as an active employee after this Agreement is
      signed by both you and the Company, your surviving spouse or other
      designated beneficiary will be eligible for a pension under this
      Individual Pension calculated as provided below.

INDIVIDUAL PENSION FORMULA

- -     With respect to the amount payable under this Individual Pension at your
      retirement/Termination, the amount payable will be determined as (a) minus
      (b) below.

            (a)   the pension benefits calculated in accordance with the table
                  set forth below:



                                 Percentage of Final 5 Year Average
                                 Total Cash Compensation (Base Pay
                                 Plus Actual annual bonus Paid in
Date of Retirement/Termination   Year)*
                              
Prior to 7/1/2002                10.25
7/1/2002-6/30/2003               12.30
7/1/2003-6/30/2004               14.35
7/1/2004-6/30/2005               16.40


J. Polumbo

Page 7


                              
7/1/2005-6/30/2006               18.45
7/1/2006-6/30/2007               20.50
7/1/2007-6/30/2008               22.55
7/1/2008-6/30/2009               24.60
7/1/2009-6/30/2010               26.65
7/1/2010-6/30/2011               28.70
7/1/2011-6/30/2012               30.75
7/1/2012-6/30/2013               32.80
7/1/2013-6/30/2014               35.00
7/1/2014-6/30/2015               35.00
7/1/2015 or later                35.00



      * For purposes of this Individual Pension Formula, Total Cash Compensation
      for years prior to actual Company service and for the first year of
      employment is assumed to be $520,000 annually, e.g. calculation of this
      formula at 7/1/99 will be determined as .1025 multiplied by $520,000 or a
      single life annuity of $53,300 per year

      (b)   any pension benefits payable from AT&T/JV/BT, i.e., pension benefits
            under the AT&T Management Pension Plan (AT&TMPP), AT&T Non Qualified
            Pension Plan (AT&TNQPP), AT&T Excess Benefit and Compensation
            Pension Plan (AT&TEBCPP), AT&T Senior Management Long Term
            Disability and Survivor Protection Plan (AT&TSMLTD&SPP), and any
            other pension benefits payable under any JV or BT retirement plans

- -     The payment form for you under this Individual Pension will be the same as
      the payment form (e.g., single life annuity, joint and 50% annuity, etc.)
      under the AT&TEBCP based on your actual NCS. Upon your death following
      your termination, your spouse's or other designated beneficiary's
      entitlement to a survivor annuity benefit under the Individual Pension
      will be in accordance with your election under the AT&TMPP and the
      reduction factor applicable to your Individual Pension amount for the
      survivor annuity under this Individual Pension will be in accordance with
      the election you made for your AT&T MPP benefit

DEATH AS ACTIVE EMPLOYEE

- -     In the event of your death as an active employee, your surviving spouse
      will be entitled to a survivor benefit under this Individual Pension. The
      terms and conditions of such benefit shall be in accordance with the terms
      and conditions set forth in the AT&TNQPP assuming you were eligible to
      voluntarily terminate under this Individual Pension; such benefit will be
      offset by any pension payments payable from AT&T under the AT&TMPP,

J. Polumbo

Page 8


      AT&TEBCPP, AT&TNQPP, AT&TMCPP, and AT&TSMLTD&SPP and any JV and BT pension
      payments which may be applicable

DEFINITIONS

- -     For purposes of this Agreement,

- -     "Cause" shall be defined as follows: (1) conviction (including a plea of
      guilty or nolo contendere) of a felony or any crime or theft, dishonesty
      or moral turpitude; or (2) gross omission or gross dereliction of any
      statutory or common-law duty of loyalty to the Company or (3) violation of
      AT&T's Code of Conduct.

- -     "Disability" shall mean termination of your employment with AT&T, BT or
      the Company with eligibility to receive a disability benefit/allowance
      under any long-term disability plan of AT&T, BT or the Company.

EX-10.III.A.40

                                                          EXHIBIT (10)(iii)(A)40

                                                December 1, 2003

Mr. John Polumbo

Dear John:

      This letter will confirm the recent approval by the Compensation and
Employee Benefits Committee of the AT&T Board of Directors (the Committee) of
special allowances that you are receiving from AT&T (the Company) in connection
with your assignment as President, AT&T Consumer based in Morristown, New
Jersey.

SPECIAL TEMPORARY ALLOWANCE: In lieu of relocation benefits, at this time, under
the AT&T Management Relocation Plan (the Plan) the Company will continue to
provide to you a Special Temporary Allowance (STA) of $3,000 per month until
December 31, 2004. This monthly payment will be grossed-up for federal and state
taxes, since such STA payments are considered taxable income. These STA and tax
gross-up payments are predicated upon your continued employment with the Company
and your work location remaining in New Jersey and will not be included in your
pay base for calculating any employee benefits.

In the event that you commence a formal relocation to New Jersey under the Plan
you will not be entitled to an Exploratory Trip and Interim Living Allowance.

In the event that you permanently relocate to the New Jersey area prior to
December 31, 2004, the STA will be paid through the end of the month prior to
the month of relocation.

USE OF COMPANY AIRCRAFT FOR COMMUTATION: The Committee has also approved your
continued use of Company aircraft for commutation between CA and New Jersey
until December 31, 2004, for an average of no more than five (5) one-way trips
per month. The use of Company aircraft between your residence state and your
work state is considered commutation and therefore will result in imputed
taxable income to you. The Company will provide to you federal and state tax
gross-up payments to offset the taxes payable on the imputed income resulting
from such use of the Company aircraft during both 2003 and 2004. Any such
imputed income and tax gross-up payments will not be included in your pay base
for calculating any employee benefits.

Please acknowledge your acceptance of the terms of this agreement by signing
below where indicated.

                                                Sincerely,

                                                /s/  Mirian M. Graddick-Weir

Acknowledged:


/s/  John Polumbo
- --------------------
John Polumbo

EX-10.III.A.41

                                                          EXHIBIT (10)(iii)(A)41

                                                                   July 29, 2003

Mr. John Polumbo

Dear John:

      This letter agreement ("the Agreement") is an amendment to your transfer
letter dated September 7, 2001 detailing your special individual pension
arrangement (as amended by Board resolutions in October 2002), and supercedes
all other oral and written communication on the subject.

      This Agreement will establish an individual non-qualified pension
arrangement ("Individual Pension"), which, subject to the terms and conditions
below, will provide you a benefit payable from AT&T Corp. (the "Company")
operating assets upon your retirement from the Company. This Individual Pension
will be immediately vested and only for termination for "Cause" (as defined)
will this Individual Pension be null and void in its entirety. In addition, this
Individual Pension is subject to the provisions of the AT&T Non-Competition
Guideline.

      With respect to the amount payable under this Individual Pension at your
retirement/termination, the single life annual annuity amount payable will be
determined as (a) minus (b) as set forth in the charts below:

      (a)   the single life annual pension annuity benefits calculated in
            accordance with the table set forth below:



                                  Percentage of Final 3 Year Average
                                  Total Cash Compensation (Base Pay
Year of Retirement/Termination     plus Actual Bonus Paid in Year)
- ------------------------------     -------------------------------
                               
           2003                                17.25%
           2004                                19.30%
           2005                                21.35%
           2006                                23.40%
           2007                                25.45%
           2008                                27.50%
           2009                                29.55%
           2010                                31.60%
           2011                                33.65%
           2012                                36.40%
           2013                                39.15%
           2014                                41.90%
           2015                                44.65%
           2016                                47.40%
           2017                                50.00%


      (b)   any single life annual annuity benefits payable from AT&T, i.e.
            pension benefits under the AT&T Management Pension Plan (AT&TMPP),
            AT&T Non Qualified Pension Plan (AT&TNQPP), AT&T Excess Benefit and

            Compensation Plan (AT&TEBCPP), minimum retirement benefits under the
            AT&T Senior Management Long Term Disability and Survivor Protection
            Plan (AT&TSMLTD&SPP) if applicable, as well as by any qualified and
            nonqualified pension benefits from prior employers.

Joint and survivor benefits on your death, whether your death occurs as an
active employee or following your termination, will be governed by the
administrative guidelines applicable to this Agreement.

      In the event of your termination within two years following a Change in
Control ("CIC"), as defined in the AT&T 1997 Long Term Incentive Program, for
reasons other than for Cause or if you terminate employment for Good Reason (as
defined) within two years following a CIC, your benefit under this Individual
Pension will be calculated by accelerating the Individual Pension schedule above
by adding three years to the schedule, i.e. the applicable percentage will be
that associated with the "Year of Retirement/Termination" three years from your
actual termination year. In addition, the cash compensation used in calculating
the final three year average cash compensation will not use cash compensation
for years in which you did not hold the position of CEO- Consumer.

      For purposes of this Agreement:

      a) "Cause" shall mean:

            i.    your conviction (including a plea of guilty or nolo
                  contendere) of a crime including theft, fraud, dishonesty or
                  moral turpitude;

            ii.   violation by you of the Company's Code of Conduct or
                  Non-Competition Guideline;

            iii.  gross omission or gross dereliction of any statutory, common
                  law or other duty of loyalty to the Company or any of its
                  affiliates; or

            iv.   repeated failure to carry out the duties of your position
                  despite specific instruction to do so.

      b)    "Good Reason" prior to a CIC shall mean the occurrence without your
            express written consent of any of the following events:

            i.    Your demotion to a position which is not of a rank and
                  responsibility comparable to members of the current Operations
                  Group or those of a similar/replacing governance body;
                  provided, however, that the Company's decision not to continue
                  the Operations Group shall not be Good Reason, and provided,
                  further, that (1) changes in reporting relationships shall
                  not, alone, constitute Good Reason and/or (2) a reduction in
                  your business unit's budget or a reduction of your business
                  unit's head count, by themselves, do not constitute Good
                  Reason; or

            ii.   A reduction in your "Total Annual Compensation" (defined as
                  the sum of your Annual Base Salary Rate, Target Annual
                  Incentive and "Target

                  Annual Long Term Incentive Grants") for any calendar or fiscal
                  year, as applicable, to an amount that is less than the Total
                  Annual Compensation that existed in the prior calendar or
                  fiscal year, as applicable. For purposes of this Paragraph
                  (b)(ii) the dollar value of the "Target Annual Long Term
                  Incentive Grants" shall exclude the value of any special
                  one-time or periodic long-term incentive grants, and shall be
                  determined by valuing Performance Shares, Stock Units,
                  Restricted Stock, Restricted Stock Units, etc., at the market
                  share price utilized in valuing the annual Senior Management
                  compensation structures in the materials presented to the
                  Compensation and Employee Benefits Committee of the Company's
                  Board of Directors ("the Committee") when authorizing such
                  grants, and assuming 100% performance achievement if such
                  grants include performance criteria. Stock Options and Stock
                  Appreciation Rights will be valued by the Black-Scholes
                  methodology (and related share price) as utilized in the
                  materials presented to the Committee when authorizing such
                  grants.

      c)    "Good Reason" within two years following a CIC shall be in
            accordance with the October 23, 2000 CIC Board Resolutions, which
            include reduction in authority or responsibility, reduction in
            compensation, and business relocation beyond a reasonable commuting
            distance.

      Notwithstanding the foregoing, the Company may require you to change to an
      equivalent executive position within the Company with substantially
      similar levels of duties or responsibilities without causing Good Reason
      to occur.

      You must notify the Company within 60 days following knowledge of an event
      you believe constitutes Good Reason, or such event shall not constitute
      Good Reason hereunder.

      This agreement may not be amended or waived, unless the amendment or
waiver is in a writing signed by you and the Company's Executive Vice
President-Human Resources.

      It is understood and agreed that you will not talk about, write about, or
otherwise publicize the terms or existence of this Agreement or any fact
concerning its execution or implementation unless required by law or to enforce
the terms of this Agreement. You may, however, discuss its contents with your
spouse, legal and/or financial counselor, provided that you advise them of your
obligations of confidentiality and that any disclosures made by any of them may
be treated by the Company as disclosures made by you for purposes of this
provision.

      THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED
OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE
EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT
("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE
THEIR EMPLOYMENT AT ANY TIME FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE
RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR
ANY REASON.

      You understand that the terms of this Agreement shall apply to the Company
and its successors. The Company specifically reserves the right to assign the
terms of this Agreement to any successor, whether the successor is the result of
a sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or
any combination or form thereof. No sale, purchase, merger, consolidation, asset
sale, divestiture or spin-off or any combination or form thereof by the Company
shall be construed as a termination of your employment and will not be
considered a termination for purposes of this Agreement.

      The construction, interpretation and performance of this Agreement shall
be governed by the laws of the State of New Jersey, without regard to its
conflict of laws rule.

      In addition, all of the benefits provided under this Agreement are subject
to forfeiture if you violate the AT&T Non-Competition Guideline, a copy of which
has been previously provided to you.

      John, I am happy to present this special pension arrangement to you. It
recognizes the extraordinary contributions that we expect you to continue to
make to our business. If you agree with the terms and conditions detailed above,
sign and date this Agreement in the spaces provided below and return the
original executed copy to me.

                                       
                                          Sincerely,

                                          /s/  Mirian M. Graddick-Weir

Acknowledged and Agreed to:


/s/  John Polumbo                              7/30/2003
- -------------------------                 -------------------
John Polumbo                                     Date

EX-10.III.A.42

                                                          Exhibit (10)(iii)(A)42

              SPECIAL INDIVIDUAL PENSION ARRANGEMENT FOR J. POLUMBO
        AS AMENDED BY TRANSFER LETTER OF 9/7/01 AND BOARD APPROVAL 10/02

GENERAL TERMS AND CONDITIONS

- -     AT&T (the Company) has established an individual non-qualified pension
      arrangement (hereinafter Individual Pension) which, subject to the terms
      and conditions below, will provide you with a benefit payable from AT&T
      operating assets upon your retirement

- -     Individual Pension was applicable during your employment by AT&T and the
      joint venture know as Concert

- -     This pension became vested as per the transfer letter of 9/7/01 on the
      last day of the month which contained the six month anniversary of the
      date of transfer from Concert to AT&T or on 3/31/02. Only for termination
      for "cause" (as defined) will this Individual Pension will be null and
      void in its entirety. IN ADDITION, THIS PENSION IS SUBJECT TO THE
      PROVISIONS OF THE AT&T NON-COMPETITION GUIDELINE.

- -     In the event of a termination for "disability" (as defined) the Individual
      Pension accrued to the date of such Termination will be payable in
      accordance with the terms and conditions set forth below in the
      "Individual Pension Formula."

- -     In the event of your death as an active employee AFTER THIS AGREEMENT IS
      SIGNED BY BOTH YOU AND THE COMPANY, your surviving spouse or other
      designated beneficiary will be eligible for a pension under this
      Individual Pension calculated as provided below.

INDIVIDUAL PENSION FORMULA

- -     With respect to the amount payable under this Individual Pension at your
      retirement/Termination, the amount payable will be determined as (a) minus
      (b) below.

            (a)   the pension benefits calculated in accordance with the table
                  set forth below:



                                            Percentage of Final 5 Year Average Total Cash
                                           Compensation (Base Pay Plus Actual annual bonus
Date of Retirement/Termination                             Paid in Year)*
- ------------------------------                             --------------
                                        
Prior to 7/1/2002                                             10.25
7/1/2002-09/30/2002                                           12.30
10/1/2002-6/30/2003                                           15.20
7/1/2003-6/30/2004                                            17.25
7/1/2004-6/30/2005                                            19.30
7/1/2005-6/30/2006                                            21.35
7/1/2006-6/30/2007                                            23.40
7/1/2007-6/30/2008                                            25.45
7/1/2008-6/30/2009                                            27.50
7/1/2009-6/30/2010                                            29.55



                                                           
7/1/2010-6/30/2011                                            31.60
7/1/2011-6/30/2012                                            33.65
7/1/2012-6/30/2013                                            35.00
7/1/2013-6/30/2014                                            35.00
7/1/2014-6/30/2015                                            35.00
7/1/2015 or later                                             35.00



            * For purposes of this Individual Pension Formula, Total Cash
            Compensation for years prior to actual Company service and for the
            first year of employment is assumed to be $520,000 annually, e.g.
            calculation of this formula at 7/1/99 will be determined as .1025
            multiplied by $520,000 or a single life annuity of $53,300 per year

            (b)   any pension benefits payable from AT&T, i.e., pension benefits
                  under the AT&T Management Pension Plan (AT&TMPP), AT&T Non
                  Qualified Pension Plan (AT&TNQPP), AT&T Excess Benefit and
                  Compensation Pension Plan (AT&TEBCPP), AT&T Senior Management
                  Long Term Disability and Survivor Protection Plan
                  (AT&TSMLTD&SPP)

      -     The payment form for you under this Individual Pension will be the
            same as the payment form (e.g., single life annuity, joint and 50%
            annuity, etc.) under the AT&TEBCP based on your actual NCS. Upon
            your death following your termination, your spouse's or other
            designated beneficiary's entitlement to a survivor annuity benefit
            under the Individual Pension will be in accordance with your
            election under the AT&TMPP and the reduction factor applicable to
            your Individual Pension amount for the survivor annuity under this
            Individual Pension will be in accordance with the election you made
            for your AT&T MPP benefit

DEATH AS ACTIVE EMPLOYEE

- -     In the event of your death as an active employee, your surviving spouse
      will be entitled to a survivor benefit under this Individual Pension. The
      terms and conditions of such benefit shall be in accordance with the terms
      and conditions set forth in the AT&TNQPP assuming you were eligible to
      voluntarily terminate under this Individual Pension; such benefit will be
      offset by any pension payments payable from AT&T under the AT&TMPP,
      AT&TEBCPP, AT&TNQPP, AT&TMCPP, and AT&TSMLTD&SPP

DEFINITIONS

- -     For purposes of this Agreement,

- -     "Cause" shall be defined as follows: (1) conviction (including a plea of
      guilty or nolo contendere) of a felony or any crime or theft, dishonesty
      or moral turpitude; or (2) gross omission or gross dereliction of any
      statutory or common-law duty of loyalty to the Company or (3) violation of
      AT&T's Code of Conduct.

- -     "Disability" shall mean termination of your employment with the Company
      with eligibility to receive a disability benefit/allowance under any
      long-term disability plan of the Company.

EX-12

                                                                               .
                                                                               .
                                                                               .
                                                                      EXHIBIT 12

                                   AT&T CORP.
               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                                   (UNAUDITED)



FOR THE YEARS ENDED DECEMBER 31,      2003     2002     2001     2000      1999
                                     ------   ------   ------   -------   -------
                                                (DOLLARS IN MILLIONS)
                                                           
Income from continuing operations
  before income taxes                $2,690   $2,836   $7,666   $12,480   $12,545
Add distributions of less
  than 50% owned affiliates               6        1        5        11        11
Add fixed charges, excluding
  capitalized interest                1,319    1,624    1,677     1,697       958
Total earnings from continuing
  operations before income taxes     ------   ------   ------   -------   -------
  and fixed charges                  $4,015   $4,461   $9,348   $14,188   $13,514
                                     ======   ======   ======   =======   =======

Fixed Charges:
Total interest expense                1,158    1,448    1,493     1,503       774
Capitalized interest                     35       61      121       143       123
Interest portion of rental
  expense                               161      176      184       194       184
                                     ------   ------   ------   -------   -------
Total fixed charges                  $1,354   $1,685   $1,798   $ 1,840   $ 1,081
                                     ======   ======   ======   =======   =======
Ratio of earnings to fixed charges      3.0      2.6      5.2       7.7      12.5

EX-14

                                                                      EXHIBIT 14

                                   AT&T CORP.

        CODE OF ETHICS FOR CHIEF EXECUTIVE AND SENIOR FINANCIAL OFFICERS

      AT&T's Code of Conduct includes "Our Common Bond", a set of business
values which guide all of our decisions and behavior. One of our values is that
all employees are held to the highest standards of integrity. We are honest and
ethical in all our business dealings, starting with how we treat each other. We
keep our promises and admit our mistakes. Our personal conduct ensures that
AT&T's name is always worthy of trust.

      The Company's Code of Conduct applies to all directors and employees of
the Company, including the Chief Executive, the Chief Financial Officer, the
Principal Accounting Officer and other senior financial officers. In addition to
being bound by the Code of Conduct's provisions about ethical conduct, conflicts
of interest and compliance with law, we have adopted the following Code of
Ethics specifically for our Chief Executive and senior financial officers.

      1.    You are responsible for full, fair, accurate, timely and
            understandable financial disclosure in reports and documents filed
            by the Company with the Securities and Exchange Commission and in
            other public communications made by the Company. The Company's
            accounting records must be maintained in accordance with all
            applicable laws, must be proper, supported and classified, and must
            not contain any false or misleading entries.

      2.    You are responsible for the Company's system of internal financial
            controls. You shall promptly bring to the attention of the General
            Counsel and the Audit Committee any information you may have
            concerning (a) significant deficiencies in the design or operation
            of internal controls which could adversely affect the Company's
            ability to record, process, summarize and report financial data, or
            (b) any fraud, whether or not material, that involves management or
            other employees who have a significant role in the Company's
            financial reporting, disclosures or internal controls.

      3.    You may not compete with the Company and may never let business
            dealings on behalf of the Company be influenced - or even appear to
            be influenced - by personal or family interests. You shall promptly
            bring to the attention of the General Counsel and the Audit
            Committee any information you may have concerning any actual or
            apparent conflicts of interest between personal and professional
            relationships, involving any management or other employees who have
            a significant role in the Company's financial reporting, disclosures
            or internal controls.

      4.    The Company is committed to complying with both the letter and the
            spirit of all applicable laws, rules and regulations. You shall
            promptly bring to the attention of the General Counsel and the Audit
            Committee any information you may have concerning evidence of a
            material violation of the securities or other laws, rules or
            regulations applicable to the Company or its employees or agents.
            You shall promptly bring to the attention of the General Counsel and
            the Audit Committee any information you may have concerning any
            violation of this Code of Ethics. The Board of Directors may
            determine, or

            designate appropriate persons to determine, appropriate additional
            disciplinary or other actions to be taken in the event of violations
            of this Code of Ethics by the Company's Chief Executive or senior
            financial officers and a procedure for granting any waivers of this
            Code of Ethics.

EX-21

                                                                               .
                                                                               .
                                                                               .

                                                                    Exhibit 21

                               Subsidiary List
                      List of Subsidiaries of AT&T Corp.
                                 As of 3/1/04



                                                               Jurisdiction of
                                                                Incorporation
                                                                -------------
                                                            
ACC Corp.................................................         Delaware
Alascom, Inc.............................................         Alaska
AT&T Capital Holdings, Inc. .............................         Delaware
AT&T Credit Holdings, Inc. ..............................         Delaware
AT&T Communications, Inc.................................         Delaware
AT&T Communications of California, Inc...................         California
AT&T Communications of Delaware, LLC.....................         Delaware
AT&T Communications of Hawaii, Inc.......................         Hawaii
AT&T Communications of Illinois, Inc.....................         Illinois
AT&T Communications of Indiana, Inc......................         Indiana
AT&T Communications of Maryland, LLC.....................         Delaware
AT&T Communications of Michigan, Inc.....................         Michigan
AT&T Communications of the Midwest, Inc..................         Iowa
AT&T Communications of the Mountain States, Inc..........         Colorado
AT&T Communications of Nevada, Inc.......................         Nevada
AT&T Communications of New England, Inc..................         New York
AT&T Communications of New Hampshire, Inc................         New Hampshire
AT&T New Jersey Holdings, LLC............................         Delaware
AT&T Communications of New York, Inc.....................         New York
AT&T Communications of Ohio, Inc.........................         Ohio
AT&T Communications of the Pacific Northwest, Inc........         Washington
AT&T Communications of Pennsylvania, LLC.................         Delaware
AT&T Communications of the South Central States, LLC.....         Delaware
AT&T Communications of the Southern States, LLC..........         Delaware
AT&T Communications of the Southwest, Inc................         Delaware
AT&T Communications of Virginia, LLC.....................         Virginia
AT&T Communications of Washington D.C., LLC..............         Delaware
AT&T Communications of West Virginia, Inc................         West Virginia
AT&T Communications Holdings of Wisconsin, LLC...........         Delaware
AT&T Communications Services International Inc...........         Delaware
AT&T Global Communications Services Inc..................         Delaware
AT&T Communications Services of Jamaica LLC..............         Delaware
AT&T Solutions Inc.......................................         Delaware
AT&T Global Network Services Group LLC...................         Delaware
AT&T of Puerto Rico, Inc.................................         New York
AT&T of the Virgin Islands, Inc..........................         Delaware
Cuban American Telephone & Telegraph Company ............         Cuba
Global Card Holdings Inc.................................         Delaware
Teleport Communications Group Inc........................         Delaware

EX-23.A

                                                                   EXHIBIT 23(a)

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock
Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term
Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the AT&T
Long Term Savings Plan for Management Employees (Registration Nos. 33-34264,
33-34264-1, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and
Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable
Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program
(Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long
Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8
for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan
(Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8
Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee
Stock Purchase Plan and Form S-8 for the AT&T 1996 Amended Employee Stock
Purchase Plan (Registration No. 333-104166), Form S-8 for the AT&T Shares for
Growth Program (Registration No. 333-47255), Forms S-8 for the AT&T 1997 Long
Term Incentive Program (Registration Nos. 333-43440 and 33-28665), Form S-3 for
the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No.
33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase
Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares
(Registration No. 33-57745), Post-Effective Amendment Nos. 1, 2, 3, 4 and 5 on
Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the
McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan
(Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987
Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular
Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03), the
McCaw Cellular Communications, Inc. 1992 Stock Option Plan for Non-Employee
Directors (Registration No. 33-52119-04) and the McCaw Cellular Communications,
Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively,
Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN
Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment
Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement
(Registration No. 333-49419) for the Teleport Communications Group Inc. 1993
Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group
Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp.
Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp.
Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and
ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and in
Post-Effective Amendment Nos. 1 and 2 on Form S-8 to Form S-4 Registration
Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998
Incentive Plan, the Tele-Communications, Inc. 1996

Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995
Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications,
Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications,
Inc. 1994 Non-employee Director Stock Option Plan, the Tele-Communications
International, Inc. 1996 Non-employee Director Stock Option Plan, the
Tele-Communications International, Inc. 1995 Stock Incentive Plan (Registration
No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock
Plan (Registration No. 333-70279-02), Form S-4 for Vanguard Cellular Systems,
Inc. (Registration No. 333-75083), Form S-4 for MediaOne Group (Registration No.
333-86019), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration
Statement for the MediaOne Group 1999 Supplemental Stock Plan and the Amended
MediaOne Group 1994 Stock Plan (Registration No. 333-86019-1), Post Effective
Amendment No. 2 on Form S-8 to Form S-4 Registration Statement for MediaOne
Group 401(K) Savings Plan (Registration No. 333-86019-2), Form S-8 for the AT&T
Broadband Deferred Compensation Plan (Registration No. 333-53134), Post
Effective Amendment No. 1 to Form S-8 for AT&T Senior Management Incentive Award
Deferral Plan and AT&T Deferred Compensation Plan for Non-Employee Directors
(Registration No. 333-61676-1), Form S-8 for AT&T Senior Management Incentive
Award Deferral Plan and AT&T Deferred Compensation Plan for Non-Employee
Directors (Registration No. 333-61676), Form S-3 for the Redemption of TCI
Preferred Securities (Registration No. 333-73120-01), Amendment No. 1 to Form
S-3 for the Redemption of TCI Preferred Securities (Registration No.
333-73120-02), Amendment No. 2 to Form S-3 for the Redemption of TCI Preferred
Securities (Registration No. 333-73120-03), Amendment No. 3 to Form S-3 for the
Redemption of TCI Preferred Securities (Registration No. 333-73120-04), Form S-3
for the AT&T Universal Shelf Registration (Registration No. 333-83174, which
supercedes Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase
Debt Securities 333-71167), and Amendment No. 1 to the Form S-3 for the AT&T
Universal Shelf Registration (Registration No. 333-83174-01) of our report dated
March 5, 2004, relating to the consolidated financial statements of AT&T Corp.
and its subsidiaries, which appears in this Annual Report on Form 10-K, for the
year ended December 31, 2003. We also consent to the incorporation by reference
of our report dated March 5, 2004, relating to the consolidated financial
statement schedule, which appears in this Form 10-K.




PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 12, 2004

EX-23.B

                                                                   EXHIBIT 23(b)

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
AT&T Canada Inc.

We consent to the incorporation by reference in the following AT&T Corp.
registration statements of our report to the Board of Directors dated January
31, 2003, except as to notes 1, 8 and 25, which are as of February 25, 2003,
relating to the consolidated balance sheet of AT&T Canada Inc. ("the Company")
as of December 31, 2001, and the related consolidated statements of operations
and deficit and cash flows for the year then ended, which appears as an exhibit
to the AT&T Corp. 2003 Annual Report on Form 10-K:

Registration Statements on Form S-3 for the Shareowner Dividend Reinvestment and
Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long
Term Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the
AT&T Long Term Savings Plan for Management Employees (Registration Nos.
33-34264, 33-34264-1, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement
Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares
Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive
Program (Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc.
Long Term Savings Plan for Management Employees (Registration No. 33-50819),
Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan
(Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8
Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee
Stock Purchase Plan and Form S-8 for the AT&T 1996 Amended Employee Stock
Purchase Plan (Registration No. 333-104166), Form S-8 for the AT&T Shares for
Growth Program (Registration No. 333-47255), Forms S-8 for the AT&T 1997 Long
Term Incentive Program (Registration Nos. 333-43440 and 33-28665), Form S-3 for
the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No.
33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase
Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares
(Registration No. 33-57745), Post-Effective Amendment Nos. 1, 2, 3, 4 and 5 on
Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the
McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan
(Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987
Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular
Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03), the
McCaw Cellular Communications, Inc. 1992 Stock Option Plan for Non-Employee
Directors (Registration No. 33-52119-04) and the McCaw Cellular Communications,
Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively,
Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN
Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment
Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement
(Registration No. 333-49419) for the Teleport Communications Group Inc. 1993
Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group
Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp.
Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp.
Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and
ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and in
Post-Effective Amendment Nos. 1 and 2 on Form S-8 to Form S-4 Registration
Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998
Incentive Plan, the Tele-Communications, Inc. 1996 Incentive Plan (Amended and
Restated), the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan
(Amended and Restated), the Tele-Communications, Inc. 1994 Stock Incentive Plan
(Amended and Restated), the Tele-Communications, Inc. 1994 Non-employee Director
Stock Option Plan, the Tele-Communications International, Inc. 1996 Non-employee
Director Stock Option Plan, the Tele-Communications International, Inc. 1995
Stock Incentive Plan (Registration No. 333-70279-01), the Liberty Media 401(K)
Savings Plan, the TCI 401(K) Stock Plan (Registration No. 333-70279-02), Form
S-4 for Vanguard Cellular Systems, Inc. (Registration No. 333-75083), Form S-4
for MediaOne Group (Registration No. 333-86019), Post Effective Amendment No. 1
on Form S-8 to Form S-4 Registration Statement for the MediaOne Group 1999
Supplemental Stock Plan and the Amended MediaOne Group 1994 Stock Plan
(Registration No. 333-86019-1), Post Effective Amendment No. 2 on Form S-8 to
Form S-4 Registration Statement for MediaOne Group 401(K) Savings

Plan (Registration No. 333-86019-2), Form S-8 for the AT&T Broadband Deferred
Compensation Plan (Registration No. 333-53134), Post Effective Amendment No. 1
to Form S-8 for AT&T Senior Management Incentive Award Deferral Plan and AT&T
Deferred Compensation Plan for Non-Employee Directors (Registration No.
333-61676-1), Form S-8 for AT&T Senior Management Incentive Award Deferral Plan
and AT&T Deferred Compensation Plan for Non-Employee Directors (Registration No.
333-61676), Form S-3 for the Redemption of TCI Preferred Securities
(Registration No. 333-73120-01), Amendment No. 1 to Form S-3 for the Redemption
of TCI Preferred Securities (Registration No. 333-73120-02), Amendment No. 2 to
Form S-3 for the Redemption of TCI Preferred Securities (Registration No.
333-73120-03), Amendment No. 3 to Form S-3 for the Redemption of TCI Preferred
Securities (Registration No. 333-73120-04), Form S-3 for the AT&T Universal
Shelf Registration (Registration No. 333-83174, which supercedes Form S-3 for
the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities
333-71167), and Amendment No. 1 to the Form S-3 for the AT&T Universal Shelf
Registration (Registration No. 333-83174-01).

Our report contains Comments by the Auditors for U.S. Readers on Canada - U.S.
Reporting Differences which states that in the United States, reporting
standards for auditors require the addition of an explanatory paragraph
(following the opinion paragraph) when the financial statements are affected by
conditions and events that cast substantial doubt on the Company's ability to
continue as a going concern such as those described in note 1 to the
consolidated financial statements. Our report to the Board of Directors is
expressed in accordance with Canadian reporting standards, which do not permit a
reference to such conditions and events in the auditors' report when these are
adequately disclosed in the financial statements.

In addition, in the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
there is a change in accounting principles that has a material effect on the
comparability of the Company's financial statements, such as the change
described in note 2(e) to the consolidated financial statements. Our report to
the Board of Directors is expressed in accordance with Canadian reporting
standards, which do not require a reference to such a change in accounting
principles in the auditors' report when the change is properly accounted for and
adequately disclosed in the financial statements.

KPMG LLP

Toronto, Canada
March 12, 2004

EX-23.C

                                                                   Exhibit 23(c)

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock
Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term
Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the AT&T
Long Term Savings Plan for Management Employees (Registration Nos. 33-34264,
33-34264-1, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and
Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable
Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program
(Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long
Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8
for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan
(Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8
Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee
Stock Purchase Plan and Form S-8 for the AT&T 1996 Amended Employee Stock
Purchase Plan (Registration No. 333-104166), Form S-8 for the AT&T Shares for
Growth Program (Registration No. 333-47255), Forms S-8 for the AT&T 1997 Long
Term Incentive Program (Registration Nos. 333-43440 and 33-28665), Form S-3 for
the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No.
33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase
Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares
(Registration No. 33-57745), Post-Effective Amendment Nos. 1, 2, 3, 4 and 5 on
Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the
McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan
(Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987
Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular
Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03), the
McCaw Cellular Communications, Inc. 1992 Stock Option Plan for Non-Employee
Directors (Registration No. 33-52119-04) and the McCaw Cellular Communications,
Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively,
Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN
Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment
Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement
(Registration No. 333-49419) for the Teleport Communications Group Inc. 1993
Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group
Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC Corp.
Employee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp.
Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and
ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and in
Post-Effective Amendment Nos. 1 and 2 on Form S-8 to Form S-4 Registration
Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998
Incentive Plan, the Tele-Communications, Inc. 1996

Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995
Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications,
Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications,
Inc. 1994 Non-employee Director Stock Option Plan, the Tele-Communications
International, Inc. 1996 Non-employee Director Stock Option Plan, the
Tele-Communications International, Inc. 1995 Stock Incentive Plan (Registration
No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock
Plan (Registration No. 333-70279-02), Form S-4 for Vanguard Cellular Systems,
Inc. (Registration No. 333-75083), Form S-4 for MediaOne Group (Registration No.
333-86019), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration
Statement for the MediaOne Group 1999 Supplemental Stock Plan and the Amended
MediaOne Group 1994 Stock Plan (Registration No. 333-86019-1), Post Effective
Amendment No. 2 on Form S-8 to Form S-4 Registration Statement for MediaOne
Group 401(K) Savings Plan (Registration No. 333-86019-2), Form S-8 for the AT&T
Broadband Deferred Compensation Plan (Registration No. 333-53134), Post
Effective Amendment No. 1 to Form S-8 for AT&T Senior Management Incentive Award
Deferral Plan and AT&T Deferred Compensation Plan for Non-Employee Directors
(Registration No. 333-61676-1), Form S-8 for AT&T Senior Management Incentive
Award Deferral Plan and AT&T Deferred Compensation Plan for Non-Employee
Directors (Registration No. 333-61676), Form S-3 for the Redemption of TCI
Preferred Securities (Registration No. 333-73120-01), Amendment No. 1 to Form
S-3 for the Redemption of TCI Preferred Securities (Registration No.
333-73120-02), Amendment No. 2 to Form S-3 for the Redemption of TCI Preferred
Securities (Registration No. 333-73120-03), Amendment No. 3 to Form S-3 for the
Redemption of TCI Preferred Securities (Registration No. 333-73120-04), Form S-3
for the AT&T Universal Shelf Registration (Registration No. 333-83174, which
supercedes Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase
Debt Securities 333-71167), and Amendment No. 1 to the Form S-3 for the AT&T
Universal Shelf Registration (Registration No. 333-83174-01) of our report dated
May 1, 2002, relating to the consolidated financial statements of Concert B.V.,
and its subsidiaries, which appears in AT&T Corp.'s Annual Report on Form 10-K,
for the year ended December 31, 2003.


PricewaterhouseCoopers LLP
McLean, Virginia
March 12, 2004

EX-23.D

                                                                     Exhibit 23d

                         Consent of Independent Auditors

The Board of Directors and Stockholders
Liberty Media Corporation:


We consent to the incorporation by reference in the following registration
statements of AT&T Corp. of our report dated March 8, 2002, with respect to the
consolidated balance sheets of Liberty Media Corporation and subsidiaries ("New
Liberty" or "Successor") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive earnings, stockholders'
equity, and cash flows for the years ended December 31, 2001 and 2000 and the
period from March 1, 1999 to December 31, 1999 (Successor periods) and from
January 1, 1999 to February 28, 1999 (Predecessor period), which report appears
as an exhibit to the AT&T Corp. 2003 Annual Report on Form 10-K.



Form        Registration Statement No.           Description
- ----        --------------------------           -----------
                                           

S-3         333-00573                            Shareowner Dividend Reinvestment and Stock Purchase Plan

S-8         333-47257                            AT&T Long Term Savings and Security Plan

S-8         33-34264, 33-34264-1, 33-29256,      AT&T Long Term Savings Plan for Management Employees
            33-21937

S-8         33-39708                             AT&T Retirement Savings and Profit Sharing Plan

S-8         333-47251                            Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long
                                                 Term Incentive Program

S-8         33-50819                             AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management
                                                 Employees

S-8         33-50817                             AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan

S-8         33-54797 (Post-Effective Amendment   AT&T 1996 Employee Stock Purchase Plan
            No. 1)

S-8         333-104166                           AT&T 1996 Amended Employee Stock Purchase Plan

S-8         333-47255                            AT&T Shares for Growth Program

S-8         333-43440 and 33-28665               AT&T 1997 Long Term Incentive Program

S-3         33-49589                             AT&T $2,600,000,000 Notes and Warrants to Purchase Notes

S-3         33-59495                             AT&T $3,000,000,000 Notes and Warrants to Purchase Notes

S-4         33-57745                             AT&T 5,000,000 Common Shares


                                           

S-8         33-52119 (Post-Effective Amendment   McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option
            No. 1 to Form S-4,                   Plan
            (33-52119-01))

S-8         33-52119 (Post-Effective Amendment   McCaw Cellular Communications, Inc. 1987 Stock Option Plan
            No. 2 to Form S-4,
            (33-52119-02))

S-8         33-52119 (Post-Effective Amendment   McCaw Cellular Communications, Inc. Equity Purchase Plan
            No. 3 to Form S-4,
            (33-52119-03))

S-8         33-52119 (Post-Effective Amendment   McCaw Cellular Communications, Inc. 1992 Stock Option Plan for
            No. 4 to Form S-4,                   Non-Employee Directors
            (33-52119-04))

S-8         33-52119 (Post-Effective Amendment   McCaw Cellular Communications, Inc. Employee Stock Purchase Plan
            No. 5 to Form S-4,
            (33-52119-05))

S-8         33-63195                             AT&T Amended and Restated 1969 Stock Option Plan for LIN
                                                 Broadcasting Corp.

S-8         333-49419 (Post-Effective Amendment  Teleport Communications Group Inc. 1993 Stock Option Plan
            No. 1 to Form S-4, (333-49419-01))

S-8         333-49419 (Post-Effective Amendment  Teleport Communications Group Inc. 1996 Equity Incentive Plan
            No. 2 to Form S-4, (333-49419-02))

S-8         333-49419 (Post-Effective Amendment  ACC Corp. Employee Long Term Incentive Plan
            No. 3 to Form S-4, (333-49419-03))



                                                 
S-8         333-49419 (Post-Effective Amendment        ACC Corp. Non-Employee Directors' Stock Option Plan
            No. 4 to Form S-4, (333-49419-04))

S-8         333-49419 (Post-Effective Amendment        ACC Corp. 1996 UK Sharesave Scheme
            No. 5 to Form S-4, (333-49419-05))

S-8         333-70279 (Post-Effective Amendment        Tele-Communications, Inc. 1998 Incentive Plan
            No. 1, (333-70279-01))
                                                       Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated)

                                                       Tele-Communications, Inc. 1995 Employee Stock Incentive Plan
                                                       (Amended and Restated)

                                                       Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and
                                                       Restated)

                                                       Tele-Communications, Inc. 1994 Non-Employee Director Stock Option
                                                       Plan

                                                       Tele-Communications International, Inc. 1996 Non-Employee Director
                                                       Stock Option Plan

                                                       Tele-Communications International, Inc. 1995 Stock Incentive Plan

S-8         333-70279 (Post-Effective Amendment        Liberty Media 401(K) Savings Plan
            No. 2, (333-70279-02))                     TCI 401(K) Stock Plan

S-4         333-75083                                  Vanguard Cellular Systems, Inc.

S-4         333-86019                                  MediaOne Group

S-8         333-86019 (Post-Effective Amendment        MediaOne Group 1999 Supplemental Stock Plan
            No. 1 to Form S-4 (333-86019-1))
                                                       Amended MediaOne Group 1994 Stock Plan

S-8         333-86019 (Post-Effective Amendment        MediaOne Group 401(K) Savings Plan
            No. 2 to Form S-4 (333-86019-2))

S-8         333-53134                                  AT&T Broadband Deferred Compensation Plan

S-8         333-61676 and (Post-Effective              AT&T Senior Management Incentive Award Deferral Plan
            Amendment No.1 to Form S-8 (333-61676-1))  AT&T Deferred Compensation Plan for Non-Employee Directors



                                                
S-3         333-73120 (Amendment Nos. 1, 2, 3 and 4)  Redemption of TCI Preferred Securities

S-3         333-83174 (which supercedes               AT&T Universal Shelf Registration
            Form S-3 for the $13,080,000
            Debt Securities and Warrants to
            Purchase Debt Securities 333-71167)

S-3         333-83174-01 (Amendment No. 1)            AT&T Universal Shelf Registration






As discussed in notes 3 and 8 to the aforementioned consolidated financial
statements, the Company changed its method of accounting for derivative
instruments and hedging activities in 2001.

As discussed in note 1 to the aforementioned consolidated financial statements,
effective March 9, 1999, AT&T Corp., the former parent company of New Liberty,
acquired Tele-Communications, Inc., the former parent company of Liberty Media
Corporation, in a business combination accounted for as a purchase. As a result
of the acquisition, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.






                                                              KPMG LLP

Denver, Colorado
March 12, 2004

EX-24

                                                                      EXHIBIT 24

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                        /s/  William F. Aldinger
                                        ---------------------------
                                        William F. Aldinger
                                        Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                    /s/  Kenneth T. Derr
                                    ---------------------------
                                    Kenneth T. Derr
                                    Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                       /s/  M. Kathryn Eickhoff
                                       ---------------------------
                                       M. Kathryn Eickhoff
                                       Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                        /s/  Herbert L. Henkel
                                        ---------------------------
                                        Herbert L. Henkel
                                        Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                      /s/  Frank C. Herringer
                                      ---------------------------
                                      Frank C. Herringer
                                      Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                          /s/  Shirley Ann Jackson
                                          ---------------------------
                                          Shirley Ann Jackson
                                          Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                         /s/  Jon C. Madonna
                                         ---------------------------
                                         Jon C. Madonna
                                         Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                     /s/  Donald F. McHenry
                                     ---------------------------
                                     Donald F. McHenry
                                     Director

                                POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:


      WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K; and

      WHEREAS, the undersigned is a director of the Company:

      NOW, THEREFORE, the undersigned hereby constitutes and appoints R.S. FEIT
and N.S. CYPRUS and each of them, as attorneys for him or her and in his or her
name, place and stead, and in his or her capacity as a director of the Company,
to execute and file such annual report, and thereafter to execute and file any
amendments or amendments thereto, hereby giving and granting to said attorneys,
and each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as he or she might or could do
if personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.

      IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March, 2004.

                                       /s/  Tony L. White
                                       ---------------------------
                                       Tony L. White
                                       Director

EX-31.1

                                                                    EXHIBIT 31.1

                                 CERTIFICATION

I, David W. Dorman, certify that:

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

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

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

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

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

      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

      c) Disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter (the registrant's fourth fiscal quarter in the
      case of an annual report) that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

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

      a) All significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

Date:  March 10, 2004

                                            /s/ David W. Dorman
                                          -------------------------
                                           Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Thomas W. Horton, certify that:

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

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

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

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

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

      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

      c) Disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter (the registrant's fourth fiscal quarter in the
      case of an annual report) that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

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

      a) All significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

      Date: March 10, 2004

                                                       /s/ Thomas W. Horton
                                                      -----------------------
                                                       Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                   CERTIFICATION OF PERIODIC FINANCIAL REPORTS

I, David W. Dorman, Chairman of the Board and Chief Executive Officer of AT&T
Corp., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Annual Report on Form 10-K for the fiscal year ended December 31, 2003
      (the "Periodic Report") which this statement accompanies, fully complies
      with the requirements of Section 13(a) or 15(d) of the Securities Exchange
      Act of 1934 (15 U.S.C. 78m or 78o(d)) and

(2)   Information contained in the Periodic Report fairly presents, in all
      material respects, the financial condition and results of operations of
      AT&T Corp.


Dated: March 10, 2004

                                               /s/ David W. Dorman
                                               ------------------------------
                                               Chief Executive Officer

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

EX-32.2

                                                                    EXHIBIT 32.2

                   CERTIFICATION OF PERIODIC FINANCIAL REPORTS

I, Thomas W. Horton, Senior Executive Vice President, Chief Financial Officer of
AT&T Corp., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

(1)   The Annual Report on Form 10-K for the fiscal year ended December 31, 2003
      (the "Periodic Report") which this statement accompanies, fully complies
      with the requirements of Section 13(a) or 15(d) of the Securities Exchange
      Act of 1934 (15 U.S.C. 78m or 78o(d)) and

(2)   Information contained in the Periodic Report fairly presents, in all
      material respects, the financial condition and results of operations of
      AT&T Corp.

Dated: March 10, 2004
                                                  /s/ Thomas W. Horton
                                                  ----------------------------
                                                  Chief Financial Officer

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

EX-99.1

                                                                    Exhibit 99.1

















                                AT&T CANADA INC.

                   CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002


                                   (UNAUDITED)
                       (in thousands of Canadian dollars)




























                                       1

                                AT&T CANADA INC.
                           CONSOLIDATED BALANCE SHEETS
                            (in thousands of dollars)
                                   (unaudited)




                                                                     APRIL 1,          MARCH 31,          DECEMBER 31,
                                                                      2003               2003                 2002
                                                                      ----               ----                 ----
                                                               Implementation Date
                                                               (notes 1 and 9(a))
                                                                                                 
ASSETS
Current assets:
      Cash and cash equivalents                                   $   175,230         $   175,230         $   420,542
      Cash held in escrow (note 1)                                         --             233,022                  --
                                                                  -----------         -----------         -----------
      CASH AND CASH EQUIVALENTS                                       175,230             408,252             420,542
      Accounts receivable                                             153,994             153,994             166,434
      Other current assets                                             28,695              28,695              23,045
                                                                  -----------         -----------         -----------
                                                                      357,919             590,941             610,021

Capital assets                                                        574,730             927,072             952,699
Other intangible assets                                                    --               6,410               7,565
Deferred pension asset                                                     --              67,437              60,430
Other assets, net                                                      14,402              55,323              56,985
                                                                  -----------         -----------         -----------
                                                                  $   947,051         $ 1,647,183         $ 1,687,700
                                                                  ===========         ===========         ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
      Accounts payable                                            $    30,961         $    31,326         $    45,802
      Accrued liabilities                                             148,742             184,388             234,549
      Income taxes payable                                                472                 472               7,056
      Current portion of capital lease obligations                      4,255               4,255               3,952
      Liabilities subject to compromise (note 3)                           --           4,528,426           4,719,591
                                                                  -----------         -----------         -----------
                                                                      184,430           4,748,867           5,010,950

Long term portion of capital lease obligations                         16,602              16,602              16,601
Other long-term liabilities                                            44,843              46,917              47,547
Deferred pension liability                                            120,176                  --                  --
Deferred foreign exchange                                                  --              99,158             106,617

Shareholders' equity (deficit)
      Common shares                                                        --           1,393,844           1,393,994
      New Class A Voting and Class B Limited Voting shares            581,000                  --                  --
      Warrants                                                             --                 496                 496
      Deficit                                                              --          (4,658,701)         (4,888,505)
                                                                  -----------         -----------         -----------
                                                                      581,000          (3,264,361)         (3,494,015)
                                                                  -----------         -----------         -----------
                                                                  $   947,051         $ 1,647,183         $ 1,687,700
                                                                  ===========         ===========         ===========



Reorganization proceedings and basis of presentation (note 1)

Other commitments and contingencies (note 8)

Subsequent Events (note 9)

     See accompanying Notes to Consolidated Condensed Financial Statements

                                       2

                                AT&T CANADA INC.
               CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
              (in thousands of dollars, except per share amounts)
                                  (unaudited)





                                                                               THREE MONTHS ENDED
                                                                                    MARCH 31,
                                                                          2003                 2002
                                                                          ----                 ----
                                                                                     
Revenue                                                                $   353,325         $   383,830

Expenses:
      Service costs                                                        216,061             255,169
      Selling, general and administrative                                   70,970              90,636
      Workforce reduction costs and provision for restructuring
      (note 5)                                                             (11,822)                 --
      Depreciation and amortization                                         41,625              91,026
                                                                       -----------         -----------
Income (Loss) from operations                                               36,491             (53,001)

Other income (expense):
      Interest income                                                           29               2,271
      Interest expense                                                    (104,566)           (106,138)
      Foreign exchange gain                                                324,076               1,292
      Reorganization expenses (note 6)                                     (26,250)                 --
      Other income (expense)                                                    24                (357)
                                                                       -----------         -----------
Income (Loss) before provision for income taxes                            229,804            (155,933)
Provision for income taxes                                                      --              (1,686)
                                                                       -----------         -----------

Income (Loss) for the period                                               229,804            (157,619)

Deficit, beginning of period, as previously reported                    (4,888,505)         (1,513,805)
Adjustment related to change in accounting policy for foreign
exchange                                                                        --             (12,274)
                                                                       -----------         -----------
Deficit, beginning of period, restated                                  (4,888,505)         (1,526,079)
Deficit, end of period                                                 $(4,658,701)        $(1,683,698)
                                                                       ===========         ===========

Basic & Diluted income (loss) per common share (note 4(b))             $      2.14         $     (1.57)
                                                                       ===========         ===========
Weighted average number of common shares
outstanding (in thousands)                                                 107,216             100,099
                                                                       ===========         ===========



     See accompanying Notes to Consolidated Condensed Financial Statements


                                       3

                                AT&T CANADA INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)
                                   (unaudited)



                                                                         THREE MONTHS ENDED
                                                                             MARCH 31
                                                                     2003              2002
                                                                     ----              ----
                                                                               
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
   Income (Loss) for the period                                    $ 229,804         $(157,619)

   Adjustments required to reconcile loss to cash flows
   from operating activities:
      Depreciation and amortization                                   41,625            91,026
      Accretion of senior discount note interest                      34,220            39,908
      Amortization of debt issuance costs                              1,893             2,542
      Amortization of deferred gain on termination of cross
      currency swaps and forward contracts                            (7,459)           (1,671)
      Deferred pension charges                                         7,752             1,212
      Foreign exchange (gain) loss                                  (318,530)              496
      Other                                                              (98)               --
                                                                   ---------         ---------
                                                                     (10,793)          (24,106)
      Changes in non-cash working capital                             32,139          (144,738)
                                                                   ---------         ---------
   Net cash generated by (used in) operating activities               21,346          (168,844)

INVESTING ACTIVITIES:
   Additions to property, plant and equipment                        (33,227)          (68,781)
   (Additions) dispositions to other assets                              (16)               54
                                                                   ---------         ---------
   Net cash used in investing activities                             (33,243)          (68,727)

FINANCING ACTIVITIES:

   Issue of share capital, net of issue costs                             --            12,256
   Share repurchase cost                                                (150)               --
   Repayment of credit facility                                           --            30,000
   Debt issue and credit facility costs                                   --               (72)
   Decrease in other long term liabilities                                --              (133)
                                                                   ---------         ---------
   Net cash generated by (used in) financing activities                 (150)           42,051

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                 (243)               10
                                                                   ---------         ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND
  CASH HELD IN ESCROW                                                (12,290)         (195,510)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       420,542           537,294
                                                                   ---------         ---------
CASH AND CASH EQUIVALENTS AND CASH HELD IN ESCROW,
  END OF PERIOD                                                    $ 408,252         $ 341,784
                                                                   =========         =========



     See accompanying Notes to Consolidated Condensed Financial Statements



Supplemental Information:

                               
Income taxes paid        $750        $  1,823
Interest paid            $ --        $106,687





                                       4

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)

(Dollar amounts are stated in thousands of Canadian dollars except where
otherwise noted)

AT&T Canada Inc. (the "Company") is a holding company that engages in the
telecommunications business through its subsidiaries, consisting primarily of
the provision of local and data services, Internet and IT services and long
distance services to businesses in Canada.

On April 1, 2003, the Company implemented the Consolidated Plan of Arrangement
and Reorganization (the "Plan") and emerged from protection under the Companies'
Creditors Arrangement Act (Canada) ("CCAA"). Pursuant to the Plan, a new parent
company ("New AT&T Canada Inc.") was incorporated under the Canada Business
Corporations Act (the "Act") and pursuant to Articles of Reorganization dated
April 1, 2003 (the "Articles of Reorganization") became the sole shareholder of
AT&T Canada Limited, which prior to April 1 was called AT&T Canada Inc.

1.     REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION:

       On October 15, 2002 the Company and certain of its subsidiaries, namely
       AT&T Canada Corp., AT&T Canada Telecom Services Company, AT&T Canada
       Fibre Company, MetroNet Fibre US Inc., MetroNet Fibre Washington Inc. and
       Netcom Canada Inc. (collectively, the "AT&T Canada Companies"),
       voluntarily filed an application for creditor protection under the CCAA
       with the Ontario Superior Court of Justice, Toronto, Ontario, Canada (the
       "Court") and obtained an order from the Bankruptcy Court in the Southern
       District of New York (the "U.S. Court") under Section 304 of the U.S.
       Bankruptcy Code to recognize the CCAA proceedings in the United States.

       On January 22, 2003, the AT&T Canada Companies filed the Plan and related
       Management Information Circular with the Court. On February 20, 2003, the
       Plan was approved by the holders of the senior notes and senior discount
       notes (the "Senior Notes") and other affected creditors. On February 25,
       2003, the Court issued an order sanctioning the Plan and the U.S. Court
       issued an order recognizing and enforcing the Court's sanction order.

       The purpose of the Plan was to restructure the balance sheet and equity
       of the AT&T Canada Companies, provide for the compromise, settlement and
       payment of liabilities of certain creditors of the AT&T Canada Companies
       and to simplify the operating corporate structure of the AT&T Canada
       Companies. The AT&T Canada Companies emerged from CCAA protection and the
       Plan was implemented on April 1, 2003 (the "Implementation Date").


                                       5

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)


1.    REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED):

      The significant steps in the implementation of the Plan were:

      (i)   the formation of New AT&T Canada Inc and the acquisition of shares
            of the Company by New AT&T Canada Inc.;

      (ii)  the exchange and compromise of all of the then existing $4.6 billion
            of the Senior Notes and certain other affected claims by the holders
            of such Senior Notes and other Affected Claims (the "Affected
            Creditors"), in exchange for $233 million in cash, and 100% of the
            equity of New AT&T Canada Inc.;

      (iii) the amalgamation of certain wholly-owned subsidiaries of the Company
            to form a new operating company that continued under the name of
            AT&T Canada Corp.;

      (iv)  the cancellation of all of the then outstanding equity, including
            warrants and share purchase options of the Company for no
            consideration;

      (v)   the cancellation of all outstanding equity of AT&T Canada Corp. that
            was not owned by the Company;

      (vi)  establishment of a new Board of Directors; and

      (vii) the establishment of a new management incentive plan ("Management
            Incentive Plan") and the cancellation of the then existing incentive
            plans without compensation.

      In anticipation of Plan Implementation, on March 28, 2003, $233 million
      was held in escrow by CIBC Mellon Trust Company, as escrow agent for the
      behalf of the Affected Creditors, to be paid out upon the Implementation
      Date. While this amount was subject to the Plan, there were no
      restrictions on these funds as at March 31, 2003.

      Pursuant to the Plan, there was realignment in equity interest and capital
      structure of the Company on April 1, 2003. The Company's preliminary
      balance sheet at April 1, 2003 has been prepared under the provisions of
      The Canadian Institute of Chartered Accountants ("CICA") Handbook Section
      ("HB") 1625, "Comprehensive Revaluation of Assets and Liabilities" ("fresh
      start accounting"). Under fresh start accounting, the Company's assets and
      liabilities are recorded at management's best estimates of their fair
      values, the deficit is eliminated and new Class A Voting


                                       6

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)


Shares and Class B Limited Voting Shares will be recorded as issued at an
aggregate stated capital amount of $581.0 million (see note 9(a)).

2. SIGNIFICANT ACCOUNTING POLICIES:

      The accompanying interim consolidated financial statements are prepared in
      accordance with accounting principles generally accepted in Canada.

      Certain information and note disclosures normally included in the annual
      financial statements prepared in accordance with generally accepted
      accounting principles have been condensed to include the notes related to
      elements which have significantly changed in the interim period. As a
      result, these interim consolidated financial statements do not contain all
      disclosures required to be included in the annual financial statements and
      should be read in conjunction with the audited consolidated financial
      statements and notes thereto for the year ended December 31, 2002.

      The financial information included herein reflects all adjustments
      (consisting only of normal recurring adjustments) which are, in the
      opinion of management, necessary for a fair presentation of the results
      for the interim periods presented. The results of operations for the three
      month period ended March 31, 2003 are not necessarily indicative of the
      results to be expected for the full year.

      These consolidated condensed financial statements are prepared following
      accounting policies consistent with the Company's audited consolidated
      financial statements and notes thereto for the year ended December 31,
      2002, except for the following change in accounting policy:

      (i)   Effective January 1, 2003, the Company adopted Accounting Guideline
            ("AcG") AcG-14, "Disclosure of Guarantees," which requires a
            guarantor to disclose significant information about guarantees it
            has provided, without regard to whether it will have to make any
            payments under the guarantees and in addition to the accounting and
            disclosure requirements of HB 3290, "Contingencies." The Guideline
            is generally consistent with disclosure requirements for guarantees
            in the United States (Financial Accounting Standard Board ("FASB")
            FASB Interpretation No. 45) but, unlike the FASB's guidance, does
            not apply to product warranties and does not encompass recognition
            and measurement requirements. The Company has evaluated the impact
            of adoption of AcG-14 and the disclosures are included in note
            8(b)(ii).


                                       7

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)



3. LIABILITIES SUBJECT TO COMPROMISE:



                                                                        March 31, 2003           December 31, 2002
                                                                        --------------           -----------------
                                                 Effective
                                               interest rate           Cdn.         U.S.          Cdn.         U.S.
                                               -------------           ----         ----          ----         ----
                                                                                             
        12% unsecured Senior Notes,
           maturing August 15, 2007                              $   331,535    $ 225,872    $   356,237    $ 225,810
        10.75% unsecured Senior
           Discount Notes, maturing
           November 1, 2007                        11.04%            249,527      170,001        268,193      170,001
        9.95% unsecured Senior Discount
           Notes, maturing June 15, 2008           11.24%          1,373,683      935,879      1,440,761      913,262
        10.625% unsecured Senior Notes,
           maturing November 1, 2008                                 330,255      225,000        354,960      225,000
        7.65% unsecured Senior Notes,
           maturing September 15, 2006                             1,461,897      995,978      1,571,255      995,978
        7.15% unsecured Senior Notes,
           maturing September 23, 2004                               142,850           -         142,850           -
        7.625% unsecured Senior Notes,
           maturing March 15, 2005                                   355,941      242,500        382,568      242,500
                                               -------------     -----------    ---------    -----------    ---------
                                                                   4,245,688                   4,516,824

        Accrued interest payable                                     229,345                     175,778
        Accrued liabilities                                           13,387                       8,220
        Other liabilities                                             40,006                      18,769
                                               -------------     -----------    ---------    -----------    ---------
                                                                 $ 4,528,426                 $ 4,719,591
                                               =============     ===========    =========    ===========    =========


        Under the CCAA proceedings and the Plan, all of the Company's
        liabilities to creditors under the Senior Notes, including accrued
        interest thereon, and certain other Affected Claims at the Commencement
        Date, were compromised subject to the implementation of the Plan. Such
        liabilities whose treatment and satisfaction were dependent on the
        outcome of the CCAA proceedings have been segregated and classified as
        liabilities subject to compromise in the consolidated financial
        statements.


                                       8

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)



3.    LIABILITIES SUBJECT TO COMPROMISE (CONTINUED):

      As of April 25, 2003, 87 claims have been received from Affected Creditors
      excluding Noteholders. For distribution purposes, as of the same date, 32
      Claims have been disallowed in their entirety and 47 Claims, totalling $43
      million, have been allowed by the Company. The remaining 8 Claims,
      totalling $14.4 million, are in dispute, and will be resolved pursuant to
      the mechanism established by the Court claims procedure. The aggregate
      distribution to be made by the Company to all eligible creditors will
      remain unchanged as a result of the resolution of these disputed claims.
      Upon implementation of the Plan, claims of Affected Creditors were
      compromised and settled. Claims of Affected Creditors are satisfied out of
      the cash pool and share pool established pursuant to the Plan, which are
      held in escrow by CIBC Mellon Trust Company, as escrow agent for the
      benefit of such Affected Creditors.

      The CCAA proceedings did not allow for principal and interest payments to
      be made on Senior Notes of the Company without Court approval or until the
      Plan has been implemented. Accordingly, the interest that might otherwise
      accrue subsequent to the Commencement Date did not accrue to Noteholders
      and other Affected Creditors as the Plan was implemented. However, the
      Company continued to accrue for interest expense on the Senior Notes until
      the Plan was implemented and classified the amount within liabilities
      subject to compromise. As at March 31, 2003 interest expense on Senior
      Notes accrued but not paid for the period from October 15, 2002 to March
      31, 2003 was $229.3 million.

4.    SHARE PURCHASE OPTIONS AND DILUTED INCOME (LOSS) PER SHARE

      a)    Effective upon the Plan Implementation Date, the Company's stock
            option plans and all options and other entitlements granted
            thereunder were cancelled without payment of any consideration. No
            stock options were granted during the quarter ended March 31, 2003.

            As permitted by HB 3870, the Company did not adopt the fair value
            method of accounting for its employee stock option awards. The
            standard requires the disclosure of pro forma income for the quarter
            per share as if the Company had accounted for employee stock options
            under the fair value method. Had the Company adopted the fair value
            method for employee stock options using the fair value method,
            income per share would have decreased for the periods as indicated
            below:



                                       9

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)




                                                                          Three months ended
                                                                   March 31, 2003     March 31,2002
                                                                   --------------     -------------
                                                                                
      Income attributable to common shareholders - as reported        $ 229,804         $(157,619)
      Stock-based compensation expense                                   (3,354)           (5,604)
                                                                      ---------         ---------
      Income attributable to common shareholders - pro forma          $ 226,450         $(163,223)
                                                                      =========         =========

      Basic and diluted income per common share - as reported         $    2.14         $   (1.57)
      Basic and diluted income per common share - pro forma                2.11             (1.63)

                                                                      =========         =========

      Weighted average number of shares
         outstanding (in thousands)                                     107,216           100,099
                                                                      =========         =========




      No stock options were granted during the first quarter of 2003. For
      purposes of the above pro forma disclosures, in the first quarter of 2002,
      428,900 options with a weighted average fair value of $14.64 per share
      were granted and valued using the Black-Scholes option pricing model with
      the following weighted average assumptions:



                                     March 31,2002
                                     -------------
                                  
      Risk-free interest rate (%)         4.6%
      Expected volatility (%)            31.2%
      Expected life (in years)              5
      Expected dividends                   --


      The Black-Scholes option pricing model was developed for use in estimating
      the fair value of traded options that have no vesting restrictions and are
      fully transferable. Option pricing models also require estimates, which
      are highly subjective, including expected volatility of the underlying
      stock. The Company bases estimates of volatility on historical stock
      prices. Changes in assumptions can materially affect estimates of fair
      values.

(b)   Diluted income (loss) per share:


      The impact of dilutive warrants as at March 31, 2003 is to increase the
      weighted average number of shares outstanding by 123,344 shares, using the
      treasury stock method. The inclusion of these additional shares has no
      impact on diluted income per share.


                                       10

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)


      As of March 31, 2002, stock options outstanding of 1,692,785 have been
      excluded from the calculation of diluted loss per share as to do so would
      be anti-dilutive. As a result of losses for the quarter ended March 31,
      2002, the effect of converting stock options and warrants has not been
      included in the calculation of diluted loss per share as to do so would be
      anti-dilutive.

5.    WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING:

      2002:



                                                  PROVISION
                                                 DECEMBER 31,                                       PROVISION
                                                    2002            DRAWDOWN       ADJUSTMENTS    MARCH 31, 2003
                                                    ----            --------       -----------    --------------
                                                                                      
      Workforce Reduction                          $ 22,525         $ (9,074)        $ (2,692)        $10,759
      Facilities Consolidation                     $ 12,792         $ (1,024)        $ (3,749)        $ 8,019
                                                   --------         --------         --------         -------
                                                   $ 35,317         $(10,098)        $ (6,441)        $18,778
      Facilities Consolidation (included in
      "Liabilities subject to compromise")         $ 18,769         $     --         $ (5,381)        $13,388
                                                   --------         --------         --------         -------
                                                   $ 54,086         $(10,098)        $(11,822)        $32,166
                                                   --------         --------         --------         -------


      In 2002, the Company implemented a cost reduction initiative to bring the
      Company's cost structure in line with its current and projected revenue
      base, and to allocate resources to further enhance services provided to
      its established customer base. As a result, the Company recorded a
      provision of $87.0 million related to these activities. As at December 31,
      2002, there was remaining liability balance of $22.5 million and $12.8
      million relating to employee severance and facilities consolidation costs,
      respectively.

      Employee severance costs were the result of a reduction in workforce of
      approximately 1,250 personnel, achieved through terminations, attrition
      and non-renewal of contract personnel. These personnel were from various
      areas across the Company, including network services, customer service,
      marketing, sales and administration. During the first quarter of 2003,
      $9.1 million was drawn down related to employee severance payments and
      related pension curtailment charges. The remaining liability balance of
      $10.8 million at March 31, 2003 represents salary continuance payments in
      accordance with employee severance agreements and/or statutory minimum
      severance requirements. As at March 31, 2003, 1,165 workforce reductions
      had been completed.

      During the first quarter of 2003, the provision was reduced by $11.8
      million, comprised of a revision in the Company's estimated liability
      pursuant to a negotiated settlement agreement with certain landlords of
      $5.4 million included in liabilities subject to compromise; a reversal of
      facility


                                       11

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)


      costs based on management's decision not to exit certain properties of
      $3.7 million; and a reversal of employee severance of $2.7 million due to
      the attrition of approximately 170 personnel.

6.    REORGANIZATION EXPENSES:

      The Company incurred the following pre-tax charges for expenses associated
      with its reorganization under the Plan, as described in note 1:




                                                 March 31,         March 31,
                                                   2003              2002
                                                   ----              ----
                                                            
      Professional fees and other costs          $ 29,013         $       --
      Interest earned on cash accumulated
         during CCAA proceedings                   (2,763)                --
                                                 --------         ----------
                                                 $ 26,250         $       --
                                                 ========         ==========



      Professional fees and other costs include legal, financial advisory,
      accounting and consulting fees incurred subsequent to the filing of the
      application for creditor protection under the CCAA.

      The Company paid success fees to certain financial advisors at the end of
      the first quarter of 2003. These fees consisted of: (a) a fixed
      restructuring transaction fee of U.S. $10.0 million and (b) a transaction
      fee, equal to 0.75% of the fair market value of all cash and/or other
      securities received by the Noteholders pursuant to the Plan. The total
      amount of these success fees were reduced by the monthly payments made to
      these financial advisors from April 2002 to March 31, 2003.



                                       12

7.    SEGMENTED INFORMATION:

      The Company currently operates in one operating segment, the
      telecommunications industry in Canada. The Company offers a number of
      products, delivered through its integrated fibre optics networks, sold by
      a national sales force, agents and telemarketers and provisioned by one
      operations group. The Company makes decisions and evaluates financial
      performance primarily based on product revenue.

      Revenue by product is as follows:




                                         Three months ended
                                              March 31,
                                        2003            2002
                                        ----            ----
                                                
      Data                            $112,256        $115,568
      Local                             56,912          59,669
      Internet and IT Services          46,179          48,980
      Other                              4,111           5,313
                                      --------        --------
                                       219,458         229,530

      Long distance                    133,867         154,300
                                      --------        --------
                                      $353,325        $383,830
                                      ========        ========



      During the three months ended March 31, 2003 and 2002, no customer of the
      Company individually represented more than 10% of the Company's revenues.


                                       13

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)



8.    COMMITMENTS AND CONTINGENCIES:

      (a)   Contractual commitments:

      Under the terms of its operating lease agreements for fibre optics
      maintenance, operating facilities, equipment rentals and minimum purchase
      commitments under supply contracts and customer contracts, the Company is
      committed to make payments as follows:

                     
      2003              $115,819
      2004                93,673
      2005                76,162
      2006                53,015
      2007                44,667
      Thereafter         279,880
                        --------
                        $663,216
                        ========



      (b)  Contingent liabilities:

            (i)   Litigation:


                  In the normal course of operations, the Company may be subject
                  to litigation and claims from customers, suppliers and former
                  employees. Management believes that adequate provisions have
                  been recorded in the accounts where required.


                                       14

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)


8.    COMMITMENTS AND CONTINGENCIES (CONTINUED):

      (b)   Contingent liabilities (continued):

            (ii)  In addition to the above commitments and contingencies, the
                  Company has also provided routine indemnifications, whose
                  terms range in duration and often are not explicitly defined.
                  These indemnifications relate to adverse effects due to
                  changes in tax laws, infringements by third parties related to
                  intellectual property, and under certain supplier agreements,
                  losses arising from claims by third parties against suppliers,
                  including customers, in connection with the use of services
                  and related equipment by the third party. The maximum amounts
                  from these indemnifications cannot be reasonably estimated.
                  Historically, the Company has not made significant payments
                  related to these indemnifications. The Company has also
                  indemnified a third party in connection with a marketing
                  agreement, and has determined that the potential maximum loss
                  is not significant to the consolidated financial statements.
                  The Company has also indemnified certain financial advisors
                  regarding liability they may incur as a result of their
                  activity as advisors to the Company or to the holders of
                  Senior Notes. There is no maximum limitation to such
                  indemnification.

                  The Company continues to monitor the conditions that are
                  subject to guarantees and/or indemnifications to identify
                  whether it is probable that a loss has occurred, and would
                  recognize any such losses under any guarantees and
                  indemnifications when those losses are estimable.

      (c)   Letters of credit:

            In the normal course of business, the Company issues letters of
            credit in compliance with its right-of-way agreements with various
            municipalities and utility companies. In general, the terms of the
            letter of credit permit the municipality or the utility company to
            draw on the letter of credit to recover any losses incurred under
            the right-of-way agreement, as defined. As at March 31, 2003, the
            Company had letters of credit outstanding of $1.3 million with nil
            drawn.

      (d)   Collective bargaining agreement:

             As at March 31, 2003, approximately 21% or 847 employees of the
             Company were union members covered by collective bargaining
             agreements. The union employees of the Company are currently
             represented by two unions, the Canadian Auto Workers ("CAW") Local
             2000 and the United Steelworkers of America ("UWSA") TC Local 1976.
             The collective bargaining agreements are effective from January 1,
             2001 to December 31, 2003. In 2003, the Company will need to
             negotiate new collective agreements with its union partners.


                                       15

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2003
                                   (UNAUDITED)


9.    SUBSEQUENT EVENTS:

      (a)   On April 1, 2003, the Company implemented the Plan and emerged from
            CCAA protection. Due to significant changes in ownership and capital
            structure, the Company has adopted fresh start accounting. Under
            fresh start accounting, the Company was required to determine its
            enterprise value ("Equity Value"). The Equity Value of the Company
            was determined with the assistance of independent financial advisors
            appointed by the Company to assist in effecting the Plan, utilizing
            three different going concern valuation approaches: discounted cash
            flow approach, market multiple approach and comparative transaction
            approach. The methodologies employed estimated an Equity Value range
            of approximately $531.3 million to $631.3 million with a midpoint of
            $581.0 million. The Equity Value was then allocated on a preliminary
            basis to the Company's assets and liabilities based on their fair
            values, its accumulated deficit was eliminated and new equity was
            issued in accordance with the Plan. The Company adjusted the
            historical carrying value of its assets and liabilities to fair
            value reflecting the allocation of the Company's Equity Value of
            approximately $581.0 million.

            The consolidated balance sheet as at April 1, 2003 of AT&T Canada
            Inc. depicts the preliminary application of "Fresh Start" accounting
            and adjustments resulting from the approval and implementation of
            the Plan. These amounts are subject to change as the Company
            finalizes its allocation of the Equity Value to the fair value of
            its recorded and unrecorded assets and liabilities. The Company has
            hired an independent valuations expert to assist management in
            determining the fair value of capital assets.

            Due to the significant changes in the financial structure of the
            Company, the application of "Fresh Start" accounting, as explained
            in note 1(b), and as a result of the confirmation and implementation
            of the Plan as at April 1, 2003, the consolidated financial and
            other information of the Company issued subsequent to the Plan
            implementation are not comparable with the consolidated financial
            and other information issued by the predecessor company prior to the
            implementation of the Plan.


                                       16

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                           FOR THE THREE MONTHS ENDED
                                 MARCH 31, 2003
                                   (UNAUDITED)

The following table summarizes the adjustments recorded to implement the Plan
and to reflect the adoption of fresh start accounting



                                                                              PRELIMINARY ADJUSTMENTS
                                                                              -----------------------
                                                     MARCH 31, 2003                                                APRIL 1, 2003
                                                       BALANCE                                                        BALANCE
                                                       PRIOR TO                                FRESH START             AFTER
                                                  PLAN IMPLEMENTATION      THE PLAN            ACCOUNTING        PLAN IMPLEMENTATION
                                                  -------------------      --------            ----------        -------------------
                                                      (UNAUDITED)                                   (6)              (UNAUDITED)
                                                                                                                    (Preliminary)
                                                                                                     
ASSETS
Current assets:
      Cash and cash equivalents                     $   175,230                  --                     --             175,230
      Cash held in escrow                               233,022            (233,022)(2)                 --                  --
                                                    -----------         -----------            -----------            --------
      CASH AND CASH EQUIVALENTS                         408,252            (233,022)                    --             175,230
      Accounts receivable                               153,994                  --                                    153,994
      Other current assets                               28,695                  --                                     28,695
                                                    -----------         -----------            -----------            --------
                                                        590,941            (233,022)                    --             357,919

Property, plant and equipment                           927,072                  --               (352,342)            574,730
Other intangible assets                                   6,410                  --                 (6,410)                 --
Deferred pension asset                                   67,437                  --                (67,437)                 --
Other assets, net                                        55,323             (37,381)(3)             (3,540)             14,402
                                                    -----------         -----------            -----------            --------
                                                    $ 1,647,183         $  (270,403)           $  (429,729)           $947,051
                                                    ===========         ===========            ===========            ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Liabilities not subject to compromise:
      Accounts payable                              $    31,326         $        --            $      (365)           $ 30,961
      Accrued liabilities                               184,388             (29,834)(4)             (5,812)            148,742
      Income taxes payable                                  472                  --                     --                 472
      Current portion of capital
      lease obligations                                   4,255                  --                     --               4,255
   Liabilities subject to compromise                  4,528,426             157,895(1)                  --                  --
                                                                         (4,686,321)(2)                 --
                                                    -----------         -----------            -----------            --------
                                                      4,748,867          (4,558,260)                (6,177)            184,430


Long-term portion of capital lease obligations           16,602                                                         16,602
Deferred pension liability                                   --                                    120,176             120,176
Other long-term liabilities                              46,917                                     (2,074)             44,843
Deferred foreign exchange                                99,158             (99,158)(4)                                     --
Shareholders' equity (deficit)
      Old Common shares                               1,393,844          (1,393,844)(5)                 --                  --
      New Class A Voting and Class B
      Limited shares                                         --             581,000(2)                  --             581,000
      Warrants                                              496                (496)(5)                 --                  --
      Deficit                                        (4,658,701)          5,200,355               (541,654)                 --
                                                    -----------         -----------            -----------            --------
                                                     (3,264,361)          4,387,015               (541,654)            581,000
                                                    -----------         -----------            -----------            --------
                                                    $ 1,647,183         $  (270,403)           $  (429,729)           $947,051
                                                    -----------         -----------            -----------            --------



                                       17

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                           FOR THE THREE MONTHS ENDED
                                 MARCH 31, 2003
                                   (UNAUDITED)



      Summary of adjustments:

      Plan of Arrangement Adjustments

      (1)   Reflects a reversal of accrued interest and the foreign exchange
            translation impact on the Senior Notes from October 15, 2002 to
            March 31, 2003. The negotiated amounts were subject to Plan
            implementation.

      (2)   In accordance with the provisions of the Plan, the Affected
            Creditors received a cash distribution of $233 million and 100% of
            the equity of the New AT&T Canada Inc., consisting of Class A Voting
            Shares and Class B Limited Voting Shares. The equity value of $581
            million was determined by independent financial advisors, using a
            going concern valuation approach.

      (3)   Reflects elimination on settlement of the unamortized balance of
            debt issuance costs related to the Senior Notes.

      (4)   Reflects elimination on settlement of deferred gains on foreign
            currency derivative contracts related to the Senior Notes.

      (5)   Under the Plan, the existing Class A Voting Shares, Class B
            Non-Voting Shares and Preferred Shares of the Company and all issued
            and outstanding warrants and options were cancelled without payment
            or consideration.

      (6)   Fresh Start Adjustments

            Pursuant to the Plan, there was a realignment of the equity interest
            and capital structure of the Company on April 1, 2003. The Company
            is required to perform a comprehensive revaluation of its balance
            sheet under the provisions of the CICA HB 1625, "Comprehensive
            Revaluation of Assets and Liabilities" ("Fresh Start Accounting").
            Under fresh start accounting, the Company is required to assess the
            fair value of its recorded and unrecorded assets and liabilities and
            prepare a "fresh start accounting" balance sheet upon emergence from
            CCAA. As required by HB 1625, the Equity Value of $581.0 million has
            been allocated on a preliminary basis to the assets and liabilities
            of the Company based on management's best estimates of their fair
            values.

(b)   On May 6, 2003, New AT&T Canada Inc. announced that it has reached an
      agreement to sell its subsidiaries, Contour Telecom Inc. and Argos Telecom
      Inc., to YAK Communications (Canada). The transaction is consistent with
      New AT&T Canada Inc.'s corporate strategy to focus on its core businesses.
      New AT&T Canada Inc. will receive cash with respect to the transaction,
      which is expected to close on July 2, 2003, subject to the satisfaction of
      certain conditions.


                                       18

EX-99.2

                                                                    Exhibit 99.2

                      Consolidated Financial Statements
                      (Expressed in Canadian dollars)


                      AT&T CANADA INC.

                      Years ended December 31, 2002, 2001 and 2000

TO THE BOARD OF DIRECTORS
AT&T CANADA INC.

We have audited the consolidated balance sheets of AT&T Canada Inc. as at
December 31, 2002 and 2001 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three-year period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

With respect to the consolidated financial statements for the years ended
December 31, 2002 and 2000, we conducted our audits in accordance with Canadian
generally accepted auditing standards. With respect to the consolidated
financial statements for the year ended December 31, 2001, we conducted our
audit in accordance with Canadian generally accepted auditing standards and
United States generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.

KPMG LLP
Chartered Accountants

Toronto, Canada

January 31, 2003, except as
to notes 1, 8 and 25, which are
as of February 25, 2003

COMMENTS BY THE AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described
in note 1 to the consolidated financial statements. Our report to the board of
directors, dated January 31, 2003, except as to notes 1, 8 and 25, which are as
of February 25, 2003, is expressed in accordance with Canadian reporting
standards, which do not permit a reference to such conditions and events in the
auditors' report when these are adequately disclosed in the financial
statements.

In addition, in the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph) when
there is a change in accounting principles that has a material effect on the
comparability of the Company's financial statements, such as the change
described in note 2(e) to the consolidated financial statements. Our report to
the board of directors dated January 31, 2003, except as to notes 1, 8 and 25,
which are as of February 25, 2003, is expressed in accordance with Canadian
reporting standards, which do not require a reference to such a change in
accounting principles in the auditors' report when the change is properly
accounted for and adequately disclosed in the financial statements.

KPMG LLP
Chartered Accountants

Toronto, Canada

January 31, 2003, except as
to notes 1, 8 and 25, which are
as of February 25, 2003

AT&T CANADA INC.
Consolidated Balance Sheets
(In thousands of Canadian dollars)

December 31, 2002 and 2001
- --------------------------------------------------------------------------------



                                                                          2002               2001
                                                                          ----               ----
                                                                                          (Restated -
                                                                                           note 2(g))
                                                                                    
ASSETS

Current assets:
     Cash and cash equivalents (note 4)                               $   420,542         $   537,294
     Accounts receivable (note 7(b))                                      166,434              70,640
     Other current assets                                                  23,045              14,154
                                                                      -----------         -----------

                                                                          610,021             622,088

Property, plant and equipment (note 5)                                    952,699           2,180,773
Goodwill (note 6)                                                              --           1,639,065
Other intangible assets (note 6)                                            7,565              14,531
Deferred pension asset (note 16)                                           60,430              45,174
Deferred foreign exchange                                                      --             144,287
Other assets, net (note 7)                                                 56,985             117,707
                                                                      -----------         -----------

                                                                      $ 1,687,700         $ 4,763,625
                                                                      ===========         ===========

LIABILITIES AND SHAREHOLDERS' DEFICIENCY

Current liabilities:
     Liabilities not subject to compromise:
         Accounts payable                                             $    45,802         $    63,291
         Accrued liabilities                                              234,549             267,229
         Accrued interest payable                                              --              70,004
         Income taxes payable                                               7,056               5,584
         Current portion of capital lease obligations (note 9)              3,952               1,930
     Liabilities subject to compromise (note 8)                         4,719,591                  --
                                                                      -----------         -----------
                                                                        5,010,950             408,038

Long-term debt (note 8)                                                        --           4,655,077
Long-term portion of capital lease obligations (note 9)                    16,601              17,661
Other long-term liabilities                                                47,547              45,110
Deferred foreign exchange (note 17(b))                                    106,617              29,445

Shareholders' deficiency (note 10):

     Common shares                                                      1,393,994           1,133,664
     Warrants                                                                 496                 709
     Deficit                                                           (4,888,505)         (1,526,079)
                                                                      -----------         -----------
                                                                       (3,494,015)           (391,706)
                                                                      -----------         -----------

                                                                      $ 1,687,700         $ 4,763,625
                                                                      ===========         ===========



Reorganization proceedings and basis of presentation (note 1)
Reconciliation to accounting principles generally accepted in the United States
(note 23) Commitments and contingencies (note 24) Subsequent events (note 25)

See accompanying notes to consolidated financial statements.

On behalf of the Board:

                                                                                            
                                             Director                                             Director
- -------------------------------------------            ------------------------------------------
Purdy Crawford                                         James J. Meenan




                                       1

AT&T CANADA INC.
Consolidated Statements of Operations and Deficit
(In thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------



                                                                    2002               2001                 2000
                                                                    ----               ----                 ----
                                                                                   (Restated -
                                                                                    note 2(g))
                                                                                               
Revenue                                                         $ 1,488,145         $ 1,544,721         $ 1,505,378

Expenses:
     Service costs                                                  931,949           1,005,790           1,034,860
     Selling, general and administrative                            333,004             385,966             411,947
     Workforce reduction and provision for restructuring
       (note 12)                                                     87,069              21,901             (10,249)
     Write-down of property, plant and equipment
       and goodwill (notes 5 and 6)                               1,203,196                  --                  --
     Depreciation and amortization                                  273,142             465,600             402,551
                                                                -----------         -----------         -----------
                                                                  2,828,360           1,879,257           1,839,109
                                                                -----------         -----------         -----------

Loss from operations                                             (1,340,215)           (334,536)           (333,731)

Other income (expense):
     Interest income                                                  9,193              19,134              17,243
     Interest expense                                              (431,625)           (401,114)           (319,046)
     Foreign exchange loss                                          (41,126)            (10,097)                 --
     Reorganization expenses (note 14)                               (7,065)                 --                  --
     Write-down of long-term investments and
       other assets (note 7(c))                                     (11,855)                 --                  --
     Other (note 13)                                                 (2,225)            (10,797)             13,739
                                                                -----------         -----------         -----------
                                                                   (484,703)           (402,874)           (288,064)
                                                                -----------         -----------         -----------

Loss before minority interest and income taxes                   (1,824,918)           (737,410)           (621,795)

Minority interest                                                        --                  --             104,274

Income taxes (note 15)                                                6,741               7,965               5,686
                                                                -----------         -----------         -----------

Loss for the year                                                (1,831,659)           (745,375)           (523,207)

Deficit, beginning of year:
     As previously reported                                      (1,513,805)           (780,704)           (257,497)
     Adjustment for change in accounting policy
       for foreign exchange (note 2(g))                             (12,274)                 --                  --
                                                                -----------         -----------         -----------
     As restated                                                 (1,526,079)           (780,704)           (257,497)

Adjustment for change in accounting policy for goodwill
   (note 2(e))                                                   (1,530,767)                 --                  --
                                                                -----------         -----------         -----------
Deficit, end of year                                            $(4,888,505)        $(1,526,079)        $  (780,704)
                                                                ===========         ===========         ===========

Basic and diluted loss per common share (note 2(j))             $    (17.95)        $     (7.57)        $     (5.48)
                                                                ===========         ===========         ===========

Weighted average number of common shares
   outstanding (in thousands)                                       102,047              98,406              95,561
                                                                ===========         ===========         ===========


See accompanying notes to consolidated financial statements.


                                       2

AT&T CANADA INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------



                                                                      2002                2001             2000
                                                                      ----                ----             ----
                                                                                       (Restated -
                                                                                        note 2(g))
                                                                                               
Cash provided by (used in):

Operating activities:
     Loss for the year                                            $(1,831,659)        $(745,375)        $(523,207)
     Adjustments required to reconcile loss to
       cash flows from operating activities:
         Depreciation and amortization                                273,142           465,600           402,551
         Write-down of property, plant and
           equipment and goodwill (notes 5 and 6)                   1,203,196                --                --
         Write-down of long-term investments
           and other assets (note 7(c))                                11,855                --                --
         Accretion of Senior Discount Note interest                   156,855           145,148           125,916
         Amortization of debt issuance costs                           10,807            15,661            16,248
         Amortization of deferred gain on termination of
           cross-currency swaps and forward contracts
           (note 17(b))                                               (16,232)           (4,264)               --
         Loss (gain) on sale of investments                             1,502             8,894           (13,011)
         Minority interest                                                 --                --          (104,274)
         Deferred pension charge (note 16(a))                           8,661             5,074             2,690
         Change in pension plan valuation
           allowance (note 16(a))                                          --           (31,934)            2,937
         Unrealized foreign exchange loss                              59,844            12,275                --
         Other                                                         (1,422)            3,577             2,012
                                                                  -----------         ---------         ---------
                                                                     (123,451)         (125,344)          (88,138)
     Change in non-cash working capital (note 20)                     (24,308)          183,636           (80,411)
                                                                  -----------         ---------         ---------
     Net cash generated by (used in)
       operating activities                                          (147,759)           58,292          (168,549)

Investing activities:
     Acquisitions, net of cash or bank indebtedness
       acquired                                                            --           (43,410)         (197,867)
     Dispositions of investments, net of disposition costs              2,200             3,580            17,656
     Additions to property, plant and equipment                      (143,865)         (419,173)         (560,404)
     Reductions (additions) to other assets                             1,355               236            (1,164)
     Decrease to restricted investments                                    --                --            42,429
                                                                  -----------         ---------         ---------
     Net cash used in investing activities                           (140,310)         (458,767)         (699,350)

Financing activities:
     Issue of share capital, net of issuance costs                    259,022            48,243            35,206
     Termination of cross-currency swaps and
       forward contracts (note 17(b))                                  85,504           150,664                --
     Draw from (repayment of) credit facility, net                   (170,000)         (100,000)          270,000
     Issues of long-term debt                                              --           781,959           355,912
     Debt issue and credit facility costs                              (1,304)           (6,230)           (5,234)
     Decrease in other long-term liabilities                           (1,694)           (5,054)           (5,935)
     Repayment of capital lease                                          (279)           (1,695)           (2,981)
                                                                  -----------         ---------         ---------
     Net cash generated by financing activities                       171,249           867,887           646,968

Effect of exchange rate changes on cash                                    68             1,295               187
                                                                  -----------         ---------         ---------
Increase (decrease) in cash and cash equivalents                     (116,752)          468,707          (220,744)

Cash and cash equivalents, beginning of year                          537,294            68,587           289,331
                                                                  -----------         ---------         ---------
Cash and cash equivalents, end of year                            $   420,542         $ 537,294         $  68,587
                                                                  ===========         =========         =========


Supplemental cash flow information (note 21)

See accompanying notes to consolidated financial statements.


                                       3

AT&T CANADA INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


AT&T Canada Inc. (the "Company") is a holding company, which engages in the
telecommunications business in Canada through its subsidiaries, the most
significant of which is its 69% owned operating subsidiary, AT&T Canada Corp.
The Company's activities in the telecommunications business consist primarily of
the development and construction of telecommunications networks for the
provision of local and data services, internet and IT services and long-distance
services to businesses in Canada.

On October 8, 2002, all of the Company's Class A Voting Shares and Class B
Non-Voting Shares, not already owned by AT&T Corp., were purchased by Brascan
Financial Corporation and CIBC Financial Partners (the "Back-end"). As a result,
the publicly traded Class B Deposit Receipts were de-listed by The Toronto Stock
Exchange (the "TSX") and NASDAQ and are no longer publicly traded.

1.       REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION:

         (a)      Reorganization proceedings:

                  On October 15, 2002 (the "Commencement Date"), the Company and
                  certain of its subsidiaries, namely AT&T Canada Corp., AT&T
                  Canada Telecom Services Company, AT&T Canada Fibre Canada
                  Company, MetroNet Fibre US Inc., MetroNet Fibre Washington
                  Inc. and Netcom Canada Inc. (collectively, the "AT&T Canada
                  Companies"), voluntarily filed an application for creditor
                  protection under the Companies' Creditors Arrangement Act
                  ("CCAA") with the Ontario Superior Court of Justice, Toronto,
                  Ontario, Canada (the "Court") and obtained an order from the
                  Bankruptcy Court in the Southern District of New York (the
                  "U.S. Court") under Section 304 of the U.S. Bankruptcy Code to
                  recognize the CCAA proceedings in the United States. On
                  January 22, 2003, the AT&T Canada Companies filed a
                  Consolidated Plan of Arrangement and Reorganization (the
                  "Plan") and related Management Information Circular with the
                  Court. The purpose of the Plan is to restructure the balance
                  sheet and equity of the AT&T Canada Companies, provide for the
                  compromise, settlement and payment of liabilities of certain
                  creditors of the AT&T Canada Companies and to simplify the
                  operating corporate structure of the AT&T Canada Companies.
                  The Plan provides for, amongst other things:

                  (i)      transactions that will result in a corporate
                           structure with a new parent company ("New AT&T
                           Canada"), which will own the existing holding
                           company, AT&T Canada Inc. and a wholly owned
                           operating subsidiary ("New OpCo"), which will be
                           created as a consequence of the amalgamation of
                           certain of the existing subsidiaries of AT&T Canada
                           Inc.;


                                       4

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


1.       REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED):

           (ii)       the cancellation of all existing outstanding equity,
                      including warrants and share purchase options of AT&T
                      Canada Inc. and AT&T Canada Corp. for no consideration
                      (notes 10 and 11); and

           (iii)      the exchange and compromise of the senior notes of the
                      Company (the "Senior Notes") and certain other affected
                      claims ("Affected Creditors") for a combination of cash,
                      which will not be less than $200 million, and 100% of the
                      equity of New AT&T Canada upon emergence from CCAA.

           On February 20, 2003, the Plan was approved by the holders of the
           Senior Notes ("Noteholders"), and other affected creditors. On
           February 25, 2003, the Court issued an order sanctioning the Plan and
           the U.S. Court issued an order recognizing and enforcing the Court's
           sanction order.

           As a wholly owned subsidiary of AT&T Canada Inc., New OpCo will carry
           on the businesses formerly conducted by each of the Canadian AT&T
           Canada Companies. In effect, after the reorganization under the Plan,
           AT&T Canada Inc. will operate through one Canadian subsidiary instead
           of seven Canadian operating subsidiaries and AT&T Canada Inc. will
           become the wholly owned subsidiary of New AT&T Canada, whose
           principal asset consists of its ownership of all of the common shares
           of AT&T Canada Inc. Following the implementation of the Plan, the
           business and operations of AT&T Canada Inc. will not undergo any
           change as a result of New AT&T Canada becoming the top company in the
           corporate structure.

           The completion of the Plan and emergence from the CCAA proceedings
           ("Plan Implementation Date") is subject to a number of conditions,
           including that an appeal period of the Court's approval has expired
           with either no appeal commenced or a final determination made by the
           Court, and the receipt of certain exemption orders from securities
           regulatory authorities in Canada to provide that the shares of New
           AT&T Canada (the "New Shares") issued under the Plan will be freely
           tradeable, and the listing of the New Shares on the TSX.

           Two of the Company's wholly owned subsidiaries, Contour Telecom Inc.
           and Montage.DMC eBusiness Services, Inc., were excluded from the CCAA
           proceedings. Together, these entities generated less than 5% of
           consolidated revenues in 2002 and 2001 (2000 - 5%), and were an
           insignificant component of consolidated net loss and the Company's
           financial position for each of the years presented.


                                       5

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


1.       REORGANIZATION PROCEEDINGS AND BASIS OF PRESENTATION (CONTINUED):

         (b)      Basis of presentation:

         The consolidated financial statements have been prepared on a going
         concern basis in accordance with Canadian generally accepted accounting
         principles ("GAAP"). The going concern basis of presentation assumes
         that the Company will continue in operation for the foreseeable future
         and will be able to realize its assets and discharge its liabilities
         and commitments in the normal course of business. There is doubt about
         the appropriateness of the use of the going concern assumption in the
         preparation of the consolidated financial statements because of the
         circumstances of the CCAA reorganization proceedings and circumstances
         giving rise to this event, including the Company's long-term debt which
         is in default. There can be no assurances that the Plan will be
         implemented as contemplated and that the Company will emerge from the
         CCCA proceedings. Also, there can be no assurances that even if the
         Plan is implemented, the Company will be a going concern
         post-emergence.

         The consolidated financial statements do not reflect significant
         adjustments that would be necessary in the carrying amount of assets
         and liabilities, the reported revenue and expenses, and the balance
         sheet classifications used if the going concern basis was not
         appropriate. The appropriateness of the going concern basis is
         dependent upon, among other things, implementation of the Plan, future
         profitable operations and the Company's ability to generate sufficient
         cash from operations and from financing arrangements to meet its
         obligations.

         If the Plan is implemented, New AT&T Canada will be required to perform
         a comprehensive revaluation of its balance sheet under the provisions
         of The Canadian Institute of Chartered Accountants ("CICA") Handbook
         Section ("HB") 1625, "Comprehensive Revaluation of Assets and
         Liabilities" ("fresh start accounting"). Under fresh start accounting,
         the Company's assets and liabilities will be recorded at management's
         best estimate of their fair values. The reported amounts in the
         accompanying consolidated financial statements could materially change,
         because they do not give effect to adjustments to the carrying amount
         of assets and liabilities that may ultimately result from the adoption
         of fresh start accounting to reflect assets and liabilities at their
         fair values. In particular, it is expected that there will be
         significant differences (either positive or negative) between the fair
         value and carrying amount as a result of fresh start accounting in the
         following areas: capital assets, deferred pension asset and long-term
         liabilities.


                                       6

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES:

         The accompanying consolidated financial statements are prepared in
         accordance with accounting principles generally accepted in Canada
         which, in the case of the Company, conform, in all material respects,
         with those in the United States, except as outlined in note 23.

         The consolidated financial statements include all assets and
         liabilities of the Company and its majority-owned subsidiaries. All
         intercompany transactions and balances have been eliminated on
         consolidation.

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenue
         and expenses during the year. Actual results could differ from those
         estimates.

         Significant estimates are used in determining, but not limited to, the
         recoverability of capital assets, allowance for doubtful accounts,
         provisions for workforce reduction and restructuring, provisions for
         contingent liabilities, liabilities subject to compromise, and income
         tax valuation allowances. Assessments of the recoverability of capital
         assets require estimates of useful lives, future cash flows, discount
         rates and terminal values. Management develops cash flow projections
         using assumptions that reflect the Company's planned courses of action
         and management's best estimate of the most probable set of economic
         conditions. When assessing the reasonableness of the assumptions,
         current information, currently prevailing economic conditions and
         trends are considered. Liabilities subject to compromise under the CCAA
         proceedings have been estimated based upon the Court-approved process
         to prove, administer and adjudicate claims. The claims of Noteholders
         have been determined in accordance with such process. Claims of other
         affected creditors and the amount recorded as liabilities have been
         estimated using the information provided by the Affected Creditors and
         management's assessment of the merits of the claims. Actual results may
         be materially different from assumptions used.

         The Company's significant accounting policies are as follows:

         (a)      Cash and cash equivalents:

                  Cash equivalents consist of investments in money market
                  instruments with a maturity at the date of purchase of less
                  than three months. Cash and cash equivalents are recorded at
                  cost, which approximates current market value.


                                       7

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (b)      Revenue recognition:

                  The Company derives its revenue primarily from data, local,
                  internet and IT services and long-distance products and
                  services. Products and services are sold either standalone or
                  together as a multiple service arrangement or bundled
                  solution. Components of multiple service arrangements are
                  separately accounted for provided the elements have standalone
                  value to the customer and the fair value of any undelivered
                  elements can be reliably determined. The Company recognizes
                  revenue once evidence of an arrangement exists, delivery has
                  occurred, fees are fixed or determinable and collectability is
                  probable.

                  Revenue on long-distance and other usage-based products and
                  services is recognized based upon minutes of traffic carried.
                  Revenue on local, data, internet, IT services and other
                  products and services is recognized as the services are
                  provided in accordance with contract terms, including any
                  customer acceptance provisions. Revenue from technical support
                  and maintenance is recognized over the term of the contract
                  during which the services are provided.

         (c)      Accounts receivable securitization:

                  The Company accounts for the transfer of receivables according
                  to Accounting Guideline ("AcG") AcG-12, "Transfer of
                  Receivables." The Company recognizes gains or losses on the
                  transfer of receivables that qualify as sales and retains a
                  subordinated retained interest in the accounts receivable
                  transferred and ongoing servicing responsibilities. Losses on
                  the sale of accounts receivable are recorded in the
                  consolidated statements of operations and deficit at the date
                  of sale.

                  The amount of the losses depends in part on the carrying
                  amount of the accounts receivable involved in the transfer,
                  allocated between the accounts receivable sold and the
                  Company's retained interest based on their relative fair value
                  at the date of the transfer. The Company measures fair value
                  based on the expected future cash receipts to be realized
                  using management's best estimates of key assumptions for
                  credit and dilution losses, collection term of the accounts
                  receivable and the trust's contracted return.

                  Any subsequent decline in the value of the retained interest
                  other than a temporary decline, will be recorded in income.


                                       8

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (d)      Property, plant and equipment:

                  Property, plant and equipment are recorded at cost. Included
                  in telecommunications facilities and equipment are costs
                  incurred in developing new networks or expanding existing
                  networks, such as costs of acquiring rights-of-way and network
                  design. Construction costs related to telecommunications
                  facilities and equipment that are installed on rights-of-way
                  granted by others are capitalized and depreciated over the
                  lives of the rights-of-way. Interest is capitalized on assets
                  under construction for more than three months at the Company's
                  weighted average cost of debt. Telecommunications facilities
                  and equipment are depreciated once the network is put in
                  service.

                  Depreciation is computed using the straight-line method over
                  the estimated useful lives of the assets as follows:

                                                                
                  Telecommunications facilities and equipment           3 - 20 years
                  Buildings                                            13 - 40 years
                  Other capital assets                                  4 - 40 years
                  Equipment under capital leases                        3 - 15 years
                  Application software                                   1 - 7 years
                  Leasehold improvements                               Term of lease



                  The carrying amount of property, plant and equipment is
                  reviewed for impairment on an ongoing basis whenever events or
                  changes in circumstances indicate that the carrying amount may
                  not be recoverable. If the total of the expected future
                  undiscounted cash flows is less than the carrying amount of
                  the asset, a loss is recognized for the difference between the
                  expected future undiscounted cash flows and carrying amount of
                  the asset.


                                       9

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (e)      Business combinations, goodwill and other intangible assets:

                  Effective January 1, 2002, the Company adopted HB 3062,
                  "Goodwill and Other Intangible Assets," and HB 1581, "Business
                  Combinations." The new standards mandate the purchase method
                  of accounting for business combinations and require that
                  goodwill and indefinite-life intangible assets no longer be
                  amortized but tested for impairment at least annually. The
                  standards also specify criteria that intangible assets must
                  meet to be recognized and reported apart from goodwill.

                  The Company has adopted these new standards as at January 1,
                  2002 and discontinued amortization of all existing goodwill.
                  Goodwill is allocated to reporting units and any potential
                  goodwill impairment is identified by comparing the carrying
                  value of a reporting unit with its fair value. If any
                  potential impairment is indicated, then it is quantified by
                  comparing the carrying value of goodwill to its fair value,
                  based on the fair value of the assets and liabilities of the
                  reporting unit. HB 3062 requires completion of a transitional
                  goodwill impairment evaluation within six months of adoption.

                  Under HB 3062, any transitional impairment loss is recognized
                  as a charge to opening deficit at January 1, 2002. In 2002,
                  the Company completed its transitional goodwill impairment
                  test and determined that unamortized goodwill of $1,530.8
                  million, as at January 1, 2002, was impaired under the fair
                  value approach. This amount was charged to opening deficit
                  with a corresponding reduction in goodwill (note 6).

                  Intangible assets that have definite lives are amortized over
                  their estimated useful lives. Intangible assets are tested for
                  impairment whenever events or changes in circumstances
                  indicate that the carrying amount may not be recoverable. If
                  the total of the expected future undiscounted cash flows is
                  less than the carrying amount of the asset, a loss is
                  recognized for the difference between the expected future
                  undiscounted cash flows and the carrying amount of the asset.


                                       10

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         The following presents the effects on the year ended December 31, 2001
         and 2000 as if the Company had retroactively adopted the change in
         accounting policy for non-amortization of goodwill discussed above:



                                                              2001                 2000
                                                              ----                 ----
                                                                        
         Reported loss for the year                       $  (745,375)        $  (523,207)
         Add back:  goodwill amortization                     109,186              94,427
                                                          -----------         -----------
         Adjusted loss for the year                       $  (636,189)        $  (428,780)
                                                          ===========         ===========

         Reported basic and diluted loss per share        $     (7.57)        $     (5.48)
         Add back:  goodwill amortization                        1.11                0.99
                                                          -----------         -----------
         Adjusted basic and diluted loss per share        $     (6.46)        $     (4.49)
                                                          ===========         ===========


         Prior to the adoption of HB 3062, goodwill and other intangible assets
         recorded at the date of acquisition were amortized on a straight-line
         basis over their estimated useful lives of 5 to 25 years. Goodwill and
         other intangible assets were reviewed for impairment whenever events or
         changes in circumstances indicated that the carrying amount may not be
         recoverable. If the total of the expected future undiscounted cash
         flows was less than the carrying amount of the asset, a loss was
         recognized for the difference between the expected future undiscounted
         cash flows and the carrying amount of the asset.

(f)      Debt issuance costs:

         Debt issuance costs are amortized on a straight-line basis over the
         terms of the related debt financing.

(g)      Foreign currency translation and hedging relationships:

         Foreign currency-denominated monetary items are translated into
         Canadian dollars at the exchange rate prevailing at the balance sheet
         date. Foreign currency-denominated non-monetary items are translated at
         the historical exchange rate. Transactions included in operations are
         translated at the average exchange rate for the period. Translation
         gains or losses are reflected in the consolidated statements of
         operations in the period in which they occur.


                                       11

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):


         Effective January 1, 2002, the Company adopted amended HB 1650,
         "Foreign Currency Translation," which eliminates the deferral and
         amortization of foreign currency translation gains and losses on
         long-term monetary items with a fixed or ascertainable life. Exchange
         gains and losses on long-term monetary items are included in income.

         At December 31, 2001, the Company had approximately $12.3 million (2000
         - nil) of unamortized foreign exchange losses related to long-term
         debt. Upon adoption, deferred foreign exchange has been reduced by this
         amount, with a corresponding increase in opening deficit as of January
         1, 2002. HB 1650 also requires restatement of prior periods, the effect
         of which was to increase the reported loss and loss per share for the
         year ended December 31, 2001 by $12.3 million (2000 - nil) and $(0.12)
         (2000 - nil), respectively.

         The Company hedges its exposure to foreign currency exchange rate risk
         on long-term debt from time to time, by designating existing foreign
         currency-denominated monetary assets as hedge instruments and, through
         the purchase of currency options, cross-currency swaps and forward
         exchange contracts. The Company accounts for these financial
         instruments as hedges and, as a result, foreign exchange gains and
         losses on hedge instruments are recorded in the same period as the
         corresponding gains and losses on the related long-term debt. Premiums
         paid to acquire currency options, cross-currency swaps and forward
         exchange contracts are deferred and amortized on a straight-line basis
         over the terms of the instruments. Changes in fair values of derivative
         instruments not designated as hedging instruments and ineffective
         portion of hedges, if any, are recognized in earnings in the current
         year.

         The Company's policy is to formally designate each derivative financial
         instrument as a hedge of a specifically identified debt instrument. The
         Company believes the derivative financial instruments are effective as
         hedges, both at inception and over the term of the instrument.

         Gains and losses on terminations of foreign currency derivative
         agreements are deferred under other current, or non-current, assets or
         liabilities on the balance sheet and amortized to foreign exchange gain
         (loss) over the remaining term of the underlying debt for which these
         derivative instruments were designated as cash flow hedges. In the
         event of early extinguishment of the related debt obligation, any
         realized or unrealized gain or loss from the derivative would be
         recognized in the consolidated statements of operations at the time of
         extinguishment.


                                       12

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (h)      Employee benefit plans:

                  (i)      Retirement benefits:

                           The Company recognizes the costs of retirement
                           benefits and post-employment benefits over the period
                           in which employees render services in return for the
                           benefits. The costs of defined benefit pensions and
                           other retirement benefits earned by employees are
                           actuarially determined using the projected benefit
                           method prorated on credited service and management's
                           best estimate of expected plan investment
                           performance, salary escalation and retirement ages of
                           employees. Changes in these assumptions could impact
                           future pension expense. For the purpose of
                           calculating the expected return on plan assets, those
                           assets are valued using a market-related value. Past
                           service costs from plan amendments are amortized on a
                           straight-line basis over the average remaining
                           service period of employees active at the date of
                           amendment, except for amendments to the
                           post-retirement medical and dental benefits programs.
                           The average remaining life expectancy of former
                           employees is used for the post-retirement medical and
                           dental benefits programs as no new members are
                           allowed to join these plans. The excess of the
                           cumulative unrecognized net gains (loss) over 10% of
                           the greater of the benefit obligation and the
                           market-related value of plan assets is amortized over
                           the average remaining service period of active
                           employees, except for the post-retirement medical and
                           dental benefits programs where the average remaining
                           life expectancy of former employees is used in the
                           determination of the amortization period.

                           When the restructuring of a benefit plan gives rise
                           to both a curtailment and a settlement of
                           obligations, the curtailment is accounted for prior
                           to the settlement.


                                       13

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (ii)     Stock-based compensation:

                  Effective January 1, 2002, the Company adopted HB 3870,
                  "Stock-based Compensation and Other Stock-based Payments,"
                  which requires that a fair value-based method of accounting be
                  applied to all stock-based payments to non-employees and to
                  employee awards that are direct awards of stock, awards that
                  call for settlement in cash or other assets, or are stock
                  appreciation rights that call for settlement by the issuance
                  of equity instruments. HB 3870 permits the Company to continue
                  its existing policy of treating all other employee and
                  director stock options as capital transactions (the settlement
                  method), but requires pro forma disclosure of net earnings and
                  per share information as if the Company had accounted for
                  these stock options under the fair value method (note 11).

                  HB 3870 requires disclosure of the pro forma effect of awards
                  granted after January 1, 2002. The Company has elected to
                  include the pro forma effect of awards granted prior to
                  January 1, 2002 in its disclosures. The fair value of stock
                  options issued in the period is determined using the
                  Black-Scholes option-pricing model for purposes of the
                  pro-forma disclosures, and is allocated to compensation cost
                  on a straight-line basis over the vesting period of the award.
                  The adoption of the new section did not impact the
                  consolidated financial statements.

         (iii)    Employee Share Ownership Plan:

                  Compensation expense is recognized for the Company's
                  contributions to the Employee Share Ownership Plan. The
                  Company's contributions are made through the issuance of Class
                  B Non-Voting Shares from treasury.


                                       14

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (i)      Income taxes:

                  The Company uses the liability method of accounting for income
                  taxes. Future income tax assets and liabilities are recognized
                  for the estimated future tax consequences attributable to
                  differences between the financial statement carrying amounts
                  of existing assets and liabilities and their respective tax
                  bases. When necessary, a valuation allowance is recorded to
                  reduce future income tax assets to an amount where realization
                  is more likely than not. Future income tax assets and
                  liabilities are measured using enacted or substantively
                  enacted tax laws and rates in effect for the year in which
                  those temporary differences are expected to be recovered or
                  settled. The effect on future income tax assets and
                  liabilities of a change in tax laws and rates is recognized as
                  part of the provision for income taxes in the period that
                  includes the enactment date (or the period in which the
                  changes in rates are substantively enacted).

         (j)      Loss per common share:

                  Effective January 1, 2001, the Company adopted retroactively
                  the treasury stock method of calculating diluted earnings per
                  share in accordance with HB 3500. The treasury stock method
                  includes only those unexercised options and warrants where the
                  average market price of the common shares during the period
                  exceeds the exercise price of the options and warrants. In
                  addition, this method assumes that the proceeds would be used
                  to purchase common shares at the average market price during
                  the period.

                  The change in the method of calculation of loss per share did
                  not impact basic and diluted loss per share for 2001 and 2000.

                  As a result of net losses for the years ended December 31,
                  2002, 2001 and 2000, respectively, the effect of converting
                  stock options and warrants has not been included in the
                  calculation of diluted loss per common share because to do so
                  would be anti-dilutive.


                                       15

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


2.       SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

         (k)      Recent pronouncements:

                  (i)      Effective January 1, 2003, the Company will adopt
                           AcG-14, "Disclosure of Guarantees," which requires a
                           guarantor to disclose significant information about
                           guarantees it has provided, without regard to whether
                           it will have to make any payments under the
                           guarantees and in addition to the accounting and
                           disclosure requirements of HB 3290, "Contingencies."
                           The Guideline is generally consistent with disclosure
                           requirements for guarantees in the United States
                           (Financial Accounting Standard Board ("FASB")
                           Interpretation No. 45) but, unlike the FASB's
                           guidance, does not apply to product warranties and
                           does not encompass recognition and measurement
                           requirements. The Company has evaluated the impact of
                           adoption of AcG-14 and the disclosures are included
                           in note 23(b)(ii).

                  (ii)     In December 2002, the CICA issued HB 3063,
                           "Impairment or Disposal of Long-Lived Assets" and
                           revised HB 3475, "Disposal of Long-Lived Assets and
                           Discontinued Operations." These sections supersede
                           the write-down and disposal provisions of HB 3061,
                           "Property, Plant and Equipment" and HB 3475,
                           "Discontinued Operations." The new standards are
                           consistent with U.S. GAAP. HB 3063 establishes
                           standards for recognizing, measuring and disclosing
                           impairment of long-lived assets held-for-use. An
                           impairment is recognized when the carrying amount of
                           an asset to be held and used, exceeds the projected
                           future net cash flows expected from its use and
                           disposal, and is measured as the amount by which the
                           carrying amount of the asset exceeds its fair value.
                           HB 3475 provides specific criteria for and requires
                           separate classification for assets held-for-sale and
                           for these assets to be measured at the lower of their
                           carrying amounts or fair value, less costs to sell.
                           HB 3475 also broadens the definition of discontinued
                           operations to include all distinguishable components
                           of an entity that will be eliminated from operations.
                           HB 3063 is effective for the Company's 2004 fiscal
                           year, however, early application is permitted.
                           Revised HB 3475 is applicable to disposal activities
                           committed to by the Company after May 1, 2003,
                           however, early application is permitted. The Company
                           is currently evaluating the effect of the adoption of
                           these standards on its financial position, results of
                           operations and cash flows.


                                       16

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


3.       ACQUISITIONS AND DISPOSITIONS:

         Details of business acquisitions during 2001 and 2000 are as follows.
         Consideration was satisfied in cash unless otherwise noted below.



                                     2001                          2000
                                  -------      ----------------------------------------------
                                  MONTAGE      Contour       Brak        Netcom         DMC
                                    (b)          (c)          (d)          (e)          (f)
                                                                       
         Current assets           $15,493      $10,373      $ 4,044      $ 6,192      $ 3,993
         Capital assets             4,717        7,093          548           --          501
         Other assets                  --          694          990        5,545           --
         Goodwill                  51,029       70,032       29,554       66,892       92,309
                                  -------      -------      -------      -------      -------
                                   71,239       88,192       35,136       78,629       96,803

         Current liabilities       11,869       11,337        4,708       11,157        1,308
         Long-term debt                --        6,875          202           --           --
                                  -------      -------      -------      -------      -------
                                   11,869       18,212        4,910       11,157        1,308
                                  -------      -------      -------      -------      -------
         Purchase price           $59,370      $69,980      $30,226      $67,472      $95,495
                                  =======      =======      =======      =======      =======


         (a)      On May 1, 2001, the Company disposed of certain call centres.
                  Proceeds on disposition were $3.6 million in cash. The
                  disposition generated a loss on sale of $8.9 million.

         (b)      Acquisition of MONTAGE eIntegration Inc.:

                  On June 1, 2001, the Company acquired all of the issued and
                  outstanding shares of MONTAGE eIntegration Inc. ("MONTAGE").
                  MONTAGE is a Canadian E-Business solutions integrator focused
                  on transforming traditional organizations into connected
                  enterprises through internet technologies. Consideration of
                  $58.4 million was paid on closing, comprised of $13.7 million
                  in cash and $44.7 million, represented by 967,355 Class B
                  Non-Voting Shares of the Company. In addition, acquisition
                  costs of $1.0 million were incurred. The vendors had the
                  potential to earn up to an additional $30.0 million contingent
                  upon the attainment by June 30, 2002 of certain specified
                  performance targets. As determined at June 30, 2002, no
                  additional consideration was earned.


                                       17

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):


         (c)      Acquisition of Contour Telecom Inc. (Canada) (formerly
                  TigerTel Inc.):

                  On January 6, 2000, the Company acquired all of the issued and
                  outstanding shares of Contour Telecom Inc. (Canada) (formerly
                  TigerTel Inc. ("Contour")), a Canadian business
                  telecommunications provider.

         (d)      Acquisition of Brak Systems Inc.:

                  On March 20, 2000, the Company acquired all of the issued and
                  outstanding shares of Brak Systems Inc. ("Brak"), a Canadian
                  internet security company.

         (e)      Acquisition of Netcom Canada Holding Inc.:

                  On April 10, 2000, the Company exercised its right to acquire
                  the remaining 49% of issued and outstanding shares, not
                  previously owned by the Company, of Netcom Canada Holding Inc.
                  ("Netcom"), an internet service provider for U.S. $46.2
                  million (Cdn. $67.5 million) in cash.

         (f)      Acquisition of DMC Inc.:

                  On May 31, 2000, the Company acquired all of the issued and
                  outstanding shares of DMC Inc. ("DMC"), a Canadian business
                  specializing in the deployment of business-focused internet
                  and E-Business strategies and solutions. Purchase
                  consideration of $95.5 million, recorded at the date of
                  acquisition, was funded by a combination of the issuance of
                  769,231 Class B Non-Voting Shares priced at market on date of
                  acquisition and $50 million in cash.

         (g)      Shared Technologies of Canada:

                  On July 18, 2000, the Company reduced its ownership in Shared
                  Technologies of Canada ("STOC") from 70% to 15%. Proceeds on
                  disposition were $16.5 million: $13.6 million received in cash
                  and a receivable of $2.9 million. STOC also repaid
                  intercompany loans owing of $4.5 million. The disposition
                  generated a gain on sale of $13.0 million before income taxes.
                  During 2002, the Company disposed of its remaining 15%
                  investment in STOC for net proceeds of $2.2 million (note
                  7(d)).


                                       18

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


3.       ACQUISITIONS AND DISPOSITIONS (CONTINUED):


         Unaudited pro forma consolidated financial information:

         The following unaudited pro forma consolidated financial information
         reflects the acquisitions of Contour, Brak, Netcom, DMC and MONTAGE as
         if these transactions had occurred on January 1, 2000:



                                                                  2001                 2000
                                                                  ----                 ----
                                                              (Restated -
                                                               note 2(g))
                                                                            
        Revenue                                               $ 1,568,655         $ 1,560,729

        Expenses:
             Service costs                                      1,020,851           1,068,704
             Selling, general and administrative
               expenses                                           395,208             430,368

        Integration costs, provision for restructuring
           and workforce reduction                                 21,901             (10,249)

        Depreciation and amortization                             470,309             422,780
                                                              -----------         -----------

        Loss from operations                                     (339,614)           (350,874)

        Other income (expense):
             Interest expense, net                               (382,094)           (302,064)
             Foreign exchange loss                                (10,097)                 --
             Other income (expense)                                (6,989)             13,874
                                                              -----------         -----------
                                                                 (399,180)           (288,190)
                                                              -----------         -----------

        Loss before minority interest and income taxes           (738,794)           (639,064)

        Minority interest                                              --             101,983

        Income taxes                                                9,580               6,073
                                                              -----------         -----------

        Loss for the year                                     $  (748,374)        $  (543,154)
                                                              ===========         ===========

        Basic and diluted loss per common share               $     (7.60)        $     (5.68)
                                                              ===========         ===========


         This financial information has not been adjusted to give effect to the
         dispositions of STOC and certain call centres on July 18, 2000 and May
         1, 2001, respectively. The pro forma consolidated financial information
         has been provided for information purposes only and is not necessarily
         indicative of the results of operations that actually would have been
         achieved if the acquisitions had been completed on January 1, 2000, or
         that may be reported in the future.


                                       19

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


4.       CASH AND CASH EQUIVALENTS:



                                                               2002            2001
                                                               ----            ----
                                                                       
         Cash on deposit:
             Canadian dollar                                 $ 78,551        $ 10,139
             U.S. dollar                                        4,827             214
         Short-term investments, at rates of interest
            varying between 1.25% and 3.08%:
             Canadian dollar                                  309,436         481,434
             U.S. dollar                                       27,728          45,507
                                                             --------        --------
                                                             $420,542        $537,294
                                                             ========        ========


5.       PROPERTY, PLANT AND EQUIPMENT:



                                                                Accumulated         Net book
         2002                                    Cost           depreciation          value
         ----                                    ----           ------------          -----
                                                                          
         Telecommunications facilities
           and equipment                       $2,015,809        $1,326,781        $  689,028
         Land and buildings                       147,554            96,257            51,297
         Other capital assets                     608,561           472,890           135,671
         Equipment under capital leases            31,018            20,751            10,267
         Application software                     173,577           118,697            54,880
         Leasehold improvements                    31,317            19,761            11,556
                                               ----------        ----------        ----------
                                               $3,007,836        $2,055,137        $  952,699
                                               ==========        ==========        ==========




                                                                Accumulated         Net book
         2001                                    Cost           depreciation          value
         ----                                    ----           ------------          -----
                                                                          
         Telecommunications facilities
           and equipment                       $2,060,341        $  483,964        $1,576,377
         Land and buildings                       169,516            41,601           127,915
         Other capital assets                     600,911           254,104           346,807
         Equipment under capital leases            28,542             6,430            22,112
         Application software                     163,253            73,965            89,288
         Leasehold improvements                    31,115            12,841            18,274
                                               ----------        ----------        ----------
                                               $3,053,678        $  872,905        $2,180,773
                                               ==========        ==========        ==========



                                       20

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


5.       PROPERTY, PLANT AND EQUIPMENT (CONTINUED):

         As of December 31, 2002, property, plant and equipment include $5.9
         million (2001 - $16.9 million) of property, plant and equipment under
         construction that are not in service and, accordingly, have not been
         depreciated. Interest capitalized to property, plant and equipment
         during 2002 amounted to $0.3 million (2001 - $0.9 million) and has been
         calculated using the Company's weighted average cost of debt of 11.5%
         (2001 - 11.5%) applied to the monthly amount expended in networks in
         progress that are not in service.

         In the second quarter of 2002, the Company assessed the carrying
         amounts of its long-lived assets for impairment. The assessment was
         performed due to regulatory decisions issued in the first half of 2002
         affecting the Company's business plan, the deterioration of the
         economic environment and the substantial decline in market value of
         companies in the telecommunications services sector.

         An impairment was assessed based on a comparison of the net recoverable
         amount, using projected future undiscounted cash flows, to the carrying
         amount of the long-lived assets. The impairment charge of $1,095.0
         million for certain property, plant and equipment, predominately
         telecommunication facilities and equipment, was measured as the
         deficiency between the carrying amount and the net recoverable amount,
         and has been recorded as a charge to earnings and an increase in
         accumulated depreciation.

         An additional assessment for impairment of the carrying values of the
         Company's long-lived assets was performed due to the brand transition
         and changes in ownership as contemplated in the Plan in the fourth
         quarter of 2002. It was determined based on this assessment that
         projected future undiscounted cash flows exceeded the carrying amount
         of the Company's property, plant and equipment, and there was no
         further impairment.


                                       21

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


6.       GOODWILL AND OTHER INTANGIBLE ASSETS:

         (a)      Goodwill:

                  The change in the carrying amount of goodwill for the year
                  ended December 31, 2002 is shown below:



                                    Balance,                                                           Balance,
                                December 31,        Transitional        Impairment                 December 31,
                                        2001          impairment           in 2002       Other             2002
                                        ----          ----------           -------       -----             ----
                                                                                    
                  Goodwill        $1,639,065         $(1,530,767)        $(108,228)        $(70)           $ --
                                  ==========         ===========         =========         ====            ====


                  Net goodwill as at December 31, 2001 consisted of cost of
                  $1,913.2 million less accumulated amortization of $274.1
                  million.

                  In the second quarter of 2002, the Company completed its
                  transitional goodwill impairment test as a result of adopting
                  HB 3062, and determined that unamortized goodwill of $1,530.8
                  million as at January 1, 2002, was impaired under the fair
                  value approach. The one-time transitional adjustment for the
                  impairment assessment was charged to opening deficit with a
                  corresponding reduction in goodwill. During the second quarter
                  of 2002, the Company also performed an assessment for
                  impairment of the carrying amount of its remaining goodwill
                  due to the circumstances described in note 5. It was
                  determined that the remaining unamortized goodwill of $108.2
                  million was also impaired under the fair value approach.

         (b)      Other intangible assets:


                  The following table summarizes the Company's other intangible
                  assets for the year ended December 31:



                                                              Accumulated     Net book
                  2002                             Cost       amortization      value
                  ----                             ----       ------------      -----
                                                                     
                  Customer lists                 $ 4,025        $ 2,547        $1,478
                  Right-of-way agreements            702            148           554
                  Ghz licenses                     7,904          2,371         5,533
                  Non-compete agreements          33,633         33,633            --
                                                 -------        -------        ------
                                                 $46,264        $38,699        $7,565
                                                 =======        =======        ======



                                       22

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


6.       GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED):



                                                              Accumulated      Net book
                  2001                             Cost       amortization      value
                  ----                             ----       ------------      -----
                                                                      
                  Customer lists                 $ 4,016        $   937        $ 3,079
                  Right-of-way agreements            702            111            591
                  Ghz licenses                     7,904          1,581          6,323
                  Non-compete agreements          33,633         29,095          4,538
                                                 -------        -------        -------
                                                 $46,255        $31,724        $14,531
                                                 =======        =======        =======


                  Aggregate amortization expense for intangible assets with
                  definite lives for the year ended December 31, 2002 was $6.7
                  million. The weighted average amortization period is six
                  years, with estimated amortization expense for the next five
                  years, as follows:

                                                                      
                  2003                                                   $2,440
                  2004                                                      827
                  2005                                                      827
                  2006                                                      827
                  2007                                                      827



                  The Company did not have any intangible assets with an
                  indefinite life as at December 31, 2002 and 2001.

7.       OTHER ASSETS:



                                                                     Accumulated      Net book
                  2002                                    Cost       amortization       value
                  ----                                    ----       ------------       -----
                                                                             
                  Debt issuance costs (note 7(e))        $79,303        $39,840        $39,463
                  Long-term investments, at cost,
                    less write-downs (note 7(c))             470             --            470
                  Restricted cash (note 7(a))             13,500             --         13,500
                  Other (note 7(c))                        3,848            296          3,552
                                                         -------        -------        -------
                                                         $97,121        $40,136        $56,985
                                                         =======        =======        =======



                                       23

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


7.       OTHER ASSETS (CONTINUED):



                                                                               Accumulated       Net book
                  2001                                             Cost        amortization        value
                  ----                                             ----        ------------        -----
                                                                                        
                  Debt issuance costs                            $ 78,926        $ 27,602        $ 51,324
                  Retained interest on accounts
                    receivable securitization (note 7(b))          49,829              --          49,829
                  Long-term investments, at cost                   10,745              --          10,745
                  Other                                             6,652             843           5,809
                                                                  --------        --------        --------
                                                                  $146,152        $ 28,445        $117,707
                                                                  ========        ========        ========


                  (a)      As at December 31, 2002, the Company has restricted
                           cash comprising cash held in trust of $13.5 million,
                           which represents further protection for the directors
                           and officers of the Company with respect to their
                           potential personal liability for certain statutory
                           liabilities. The restrictions will terminate upon the
                           earlier of (i) December 31, 2008 and (ii) three years
                           from the date of the last claim being conclusively
                           resolved.

                  (b)      In 2001, the Company sold accounts receivable under a
                           securitization program with a special purpose trust
                           for initial proceeds of $100 million and recorded a
                           loss of $0.4 million, representing the cost relating
                           to establishing the agreement at the date of the
                           sale. Under the terms of the securitization
                           agreement, the Company had the ability to sell
                           certain of its accounts receivable on a revolving
                           basis through securitization transactions at varying
                           monthly limits. The maximum cash proceeds that could
                           be funded under the program were $150 million. The
                           accounts receivable pool consisted of the Company's
                           trade accounts receivable for telecommunications
                           products and services rendered. On February 20, 2002,
                           the Company repurchased, for approximately $100
                           million, all of the outstanding accounts receivable
                           sold under their securitization program.

                           The securitization agreement included the requirement
                           that the Company maintain an investment grade credit
                           rating from both Moody's Investor Services Inc. and
                           Standard & Poor's Rating Services.

                  (c)      In 2002, the Company determined there was an other
                           than temporary decline in the value of its long-term
                           investments and other assets, and recorded a
                           write-down of $8.8 million and $3.1 million,
                           respectively. The determination was based on recent
                           market valuations.


                                       24


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


7.    OTHER ASSETS (CONTINUED):

      (d)   In the second quarter of 2002, the Company sold its remaining
            interest in STOC for net proceeds of $2.2 million.

      (e)   The Company recorded a write-off of $2.3 million of unamortized debt
            issuance costs related to the senior credit facility which was
            terminated on October 9, 2002 (see note 8(c)).


8.    LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT:

      The liabilities subject to compromise as at December 31, 2002 and
      long-term debt as of December 31, 2001 are as follows:



                                                            Liabilities
                                                             subject to                    Long-term
                                                             compromise                       debt
                                                             ----------                       ----
                                      Effective                 2002                          2001
                                    interest rate        Cdn.           U.S.           Cdn.            U.S.
                                    -------------        ----           ----           ----            ----
                                                                                     
12% unsecured Senior Notes,
  maturing August 15, 2007                            $  356,237      $225,810      $  395,988      $  248,600
10.75% unsecured Senior
  Discount Notes, maturing
  November 1, 2007                      11.04%           268,193       170,001         248,227         155,800
9.95% unsecured Senior Discount
  Notes, maturing June 15, 2008         11.24%         1,440,761       913,262       1,341,482         842,200
10.625% unsecured Senior Notes,
  maturing November 1, 2008                              354,960       225,000         358,380         225,000
7.65% unsecured Senior Notes,
  maturing September 15, 2006                          1,571,255       995,978       1,592,800       1,000,000
7.15% unsecured Senior Notes,
  maturing September 23, 2004                            142,850            --         150,000              --
7.625% unsecured Senior Notes,
  maturing March 15, 2005                                382,568       242,500         398,200         250,000
Senior Credit Facility                                        --            --         170,000              --
                                        -----         ----------      --------      ----------      ----------
                                                       4,516,824                     4,655,077

Accrued interest payable                                 175,778                            --
Accrued liabilities                                        8,220                            --
Other liabilities                                         18,769                            --
                                        -----         ----------      --------      ----------      ----------
                                                      $4,719,591                    $4,655,077
                                        =====         ==========      ========      ==========      ==========



                                       25

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


8.    LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED):


      (a)   Liabilities subject to compromise under CCAA proceedings:


            Under the CCAA proceedings and the Plan, all of the Company's
            liabilities to creditors under the Senior Notes, including accrued
            interest thereon, and certain other affected claims at the
            Commencement Date, will be compromised subject to the implementation
            of the Plan. Such liabilities whose treatment and satisfaction are
            dependent on the outcome of the CCAA proceedings have been
            segregated and classified as liabilities subject to compromise in
            the consolidated financial statements.

            The Company has followed a court-approved process to prove,
            administer and adjudicate claims. Notices of claims were mailed to
            Affected Creditors in November 2002. The last date by which claims
            against the Company had to be filed with the court-appointed
            monitor, if the claimants wished to receive any distribution under
            the CCAA proceedings, was December 23, 2002 ("Claims Bar Date"). If
            a notice disputing the claim ("Dispute of Claim") had not been
            received by the Claims Bar Date, the Affected Creditor was deemed to
            have accepted the claim for both voting and distribution purposes
            under the Plan. Unknown creditors were also permitted to file a
            proof of claim by the Claims Bar Date. Separate claims procedures
            for Affected Creditors other than Noteholders have been established
            that differentiate claims for voting purposes and distribution
            purposes under the Plan.

            In connection with establishing claims by Noteholders, the Company
            sent notices to the indenture trustees of each series of Senior
            Notes, stating the aggregate accrued amount owing under the relevant
            series up to the Commencement Date. The indenture trustees confirmed
            the amounts owing under each series. As such, the claims of the
            Noteholders have been established for voting and distribution
            purposes pending implementation of the Plan.

            Pursuant to the CCAA proceedings, proofs of claim and Disputes of
            Claims ("Claims") were filed against the Company with the monitor.
            The Company either accepted the Claims or issued a notice of
            revision or disallowance for Claims that differ in nature,
            classification or amount from the Company's records. Where
            resolution cannot be reached with the Affected Creditor, the claims
            procedure provides for the adjudication of any disputes by the Court
            or a Court approved claims officer at the option of the Company. The
            decision of the Court or claims officer is final and binding pending
            implementation of the Plan.


                                       26

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


8.    LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED):


            The amounts in total may vary from the stated amount of Claims that
            have been provided to the Company and may be subject to future
            adjustments depending on the resolution of Claims and/or
            determinations by the court. Additional claim amounts may also
            arise.

            As of February 25, 2003, 82 claims have been received from Affected
            Creditors excluding Noteholders. For distribution purposes, as of
            the same date, 27 Claims have been disallowed in their entirety and
            35 Claims, totaling $15.9 million, have been allowed by the Company.
            The remaining 20 Claims, totaling $106.6 million, are being
            disputed. In addition, the Company has received five proofs of claim
            from certain warrant holders which are for unliquidated amounts.
            These claims have been disallowed by the Company.

            Upon implementation of the Plan, claims of Affected Creditors will
            be compromised and distributed. The determination and ultimate
            amount of distribution or settlement is subject to an implemented
            Plan and, therefore, is not currently determinable.

            The CCAA proceedings do not allow for principal and interest
            payments to be made on pre-filing Senior Notes of the Company
            without Court approval or until the Plan has been implemented.
            Accordingly, the interest generated subsequent to the Commencement
            Date no longer accrues to Noteholders and other Affected Creditors
            if the Plan is implemented. However, the Company has continued to
            accrue for interest expense on the pre-filing Senior Notes until the
            Plan is implemented and has classified the amount within liabilities
            subject to compromise. As at December 31, 2002, interest expense on
            pre-filing Senior Notes accrued but not paid for the period from
            October 15, 2002 to December 31, 2002 was $87.1 million.


                                       27

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


8.    LIABILITIES SUBJECT TO COMPROMISE AND LONG-TERM DEBT (CONTINUED):


      (b)   Long-term debt:


            On October 15, 2002, the Company elected not to make interest
            payments on the Senior Notes totaling approximately U.S. $47.8
            million, due on September 15, 2002, and approximately $5.4 million,
            due on September 23, 2002, related to its 7.65% Senior Notes and
            7.15% Senior Notes, respectively, within 30 days from the scheduled
            interest payment date of the 7.65% Senior Notes. Accordingly, as of
            October 15, 2002, the Company was in default under the 7.65% Senior
            Notes and due to cross default provisions in all other series of
            Senior Notes, the Company has defaulted on all of its outstanding
            long-term debt. As a result, all of the outstanding long-term debt
            has either been accelerated or could be accelerated under the terms
            of the indentures governing these Senior Notes and thus declared due
            and payable.

            On September 24, 2002, the Company unwound all remaining outstanding
            swaptions and cross-currency swaps as provided for in the agreement,
            resulting in the Company receiving approximately Cdn. $84.9 million
            principal amount of certain of its outstanding Senior Notes in
            satisfaction of the counterparty's settlement obligation to the
            Company rather than receiving cash (note 17(b)). These Senior Notes
            are currently being held by the Company and have been recognized as
            a reduction to the long-term debt outstanding.

      (c)   Senior Credit Facility (the "Facility"):


            On May 24, 2002, the Facility was amended reducing the total
            facility from $600 million to $400 million. Subsequently, on August
            15, 2002, the Facility was amended reducing the total facility from
            $400 million to approximately $200 million.

            On October 9, 2002, the Facility agreement was terminated and the
            Company repaid the approximately $200 million of outstanding draws,
            of which $30 million was drawn under the Facility in 2002.


                                       28

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


9.    CAPITAL LEASE OBLIGATIONS:

      The following is a schedule, by year, of the future minimum lease payments
      for capital leases, together with the balance of the obligation, as at
      December 31, 2002:

                                                                   
      2003                                                            $    4,819
      2004                                                                 2,176
      2005                                                                 1,881
      2006                                                                 1,850
      2007                                                                 1,850
      2008 and thereafter                                                 18,500
                                                                      ----------
      Total minimum lease payments                                        31,076

      Less imputed interest at rates varying from 7.5% to 11.8%           10,523
                                                                      ----------
      Balance of the obligations                                          20,553

      Less current portion                                                 3,952
                                                                      ----------
                                                                      $   16,601
                                                                      ==========



10.   SHARE CAPITAL:

      On October 8, 2002, Brascan Financial Corporation and CIBC Capital
      Partners completed the purchase of all of the outstanding shares of the
      Company that AT&T Corp. did not previously own for Cdn. $51.21 per share,
      in cash (the "Back-end"). Upon completion of the Back-end, 1519888 Ontario
      Limited, a wholly owned subsidiary of Tricap Investments Corp., itself a
      wholly owned subsidiary of Brascan Financial Corp., had approximately a
      63% equity interest and a 50% voting interest in the Company, and 1520034
      Ontario Limited, a wholly owned subsidiary of CIBC Capital Partners
      ("CIBC") had approximately a 6% equity interest and approximately a 27%
      voting interest in the Company. AT&T Corp. retained the balance of its
      ownership of the Company, which represents approximately a 31% equity
      interest and a 23% voting interest, and has a call right on CIBC's voting
      shares. Subsequent to the closing of the Back-end, one of the Company's
      warrant holders exercised warrants that resulted in the issuance of
      approximately 17,000 Class B Non-Voting Shares.

      Following the closing of the Back-end on October 8, 2002 the Company's
      Class B Deposit Receipts were de-listed by the TSX and NASDAQ.


                                       29

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


10.   SHARE CAPITAL (CONTINUED):

      (a)   Authorized:

            Common:     Unlimited number of convertible Class A Voting Shares
                        without nominal or par value, each Class A Share has one
                        vote, and unlimited number of Class B Non-Voting Shares
                        without nominal or par value. Other than with respect to
                        voting rights and conversion rights, the two classes of
                        common shares have identical rights. Each Class A Voting
                        Share may, under certain circumstances at the option of
                        the holder, be converted into one Class B Non-Voting
                        Share. Each Class B Non-Voting Share may, under certain
                        circumstances at the option of the holder, be converted
                        into one Class A Voting Share. The holders of Common
                        Shares are entitled to receive dividends, as determined
                        by the Board of Directors, subject to the rights of the
                        holders of the Preferred Shares. The holders of Common
                        Shares are also entitled to participate equally in the
                        event of liquidation of the Company, subject to the
                        rights of the holders of the Preferred Shares.


            Preferred:  Unlimited number of Non-Voting Preferred Shares without
                        nominal or par value. The Preferred Shares may be issued
                        in one or more series. The Board of Directors of the
                        Company may fix the number of shares in each series and
                        designate rights, privileges, restrictions, conditions
                        and other provisions. The Preferred Shares shall be
                        entitled to preference over any other shares of the
                        Company with respect to the payment of dividends and in
                        the event of liquidation of the Company.

            Upon all the restrictions of the foreign ownership of voting shares
            being removed by an amendment to the Telecommunications Act, the
            Class B Non-Voting Shares will be converted into Class A Voting
            Shares on a one-for-one basis.


                                       30

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


10.   SHARE CAPITAL (CONTINUED):

      (b)   Outstanding:


            Common shares:



                                                 Number of shares (000's)
                                           Voting       Non-Voting
                                           Class A        Class B         Total
                                           -------        -------         -----
                                                              
Balances, December 31, 1999                    310         93,561         93,871
Issued - options (note 11)                      --          1,959          1,959
Issued for acquisitions (note 3(f))             --            769            769
Issued - warrants (note 10(c))                  --            155            155
Issued - ESOP (note 11)                         --             40             40
                                           -------      ---------      ---------
Balances, December 31, 2000                    310         96,484         96,794
Issued - options (note 11)                      --          2,097          2,097
Issued for acquisitions (note 3(b))             --            967            967
Issued - warrants (note 10(c))                  --            121            121
Issued - ESOP (note 11)                         --             27             27
                                           -------      ---------      ---------
Balances, December 31, 2001                    310         99,696        100,006
Issued - options (note 11)                      --          7,133          7,133
Issued - warrants (note 10(c))                  --             53             53
Issued - ESOP (note 11)                         --             24             24
                                           -------      ---------      ---------
Balances, December 31, 2002                    310        106,906        107,216
                                           =======      =========      =========



                                       31

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


10.   SHARE CAPITAL (CONTINUED):

            Common shares:



Class                                     Voting A      Non-Voting B       Total
- -----                                     --------      ------------       -----
                                                                
Balances, December 31, 1999              $      416      $  956,281      $  956,697
Issued - options (note 11)                       --          33,629          33,629
Issued for acquisitions (note 3(f))              --          45,385          45,385
Issued - warrants (note 10(c))                   --             620             620
Issued - ESOP (note 11)                          --           2,734           2,734
                                         ----------      ----------      ----------
Balances, December 31, 2000                     416       1,038,649       1,039,065
Issued - options (note 11)                       --          48,244          48,244
Issued for acquisitions (note 3(b))              --          44,666          44,666
Issued - warrants (note 10(c))                   --             483             483
Issued - ESOP (note 11)                          --           1,206           1,206
                                         ----------      ----------      ----------
Balances, December 31, 2001                     416       1,133,248       1,133,664
Issued - options (note 11)                       --         259,022         259,022
Issued - warrants (note 10(c))                   --             213             213
Issued - ESOP (note 11)                          --           1,095           1,095
                                         ----------      ----------      ----------
Balances, December 31, 2002              $      416      $1,393,578      $1,393,994
                                         ==========      ==========      ==========


            The Plan contemplates the cancellation of all outstanding classes of
            shares without compensation as of the Plan Implementation Date (note
            1).


                                       32

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


10.   SHARE CAPITAL (CONTINUED):

      (c)   Warrants:



                                    Number         Amount
                                    (000's)
                                    -------      ---------
                                           
Balances, December 31,1999             132       $   1,812
Exercised for shares                   (45)           (620)
                                    -------      ---------
Balances, December 31, 2000             87           1,192
Exercised for shares                   (35)           (483)
                                    -------      ---------
Balances, December 31, 2001             52             709
Exercised for shares                   (16)           (213)
                                    -------      ---------
Balances, December 31, 2002             36       $     496
                                    =======      =========


            Warrants entitle the holder thereof to acquire 3.429 Class B
            Non-Voting Shares at an exercise price of U.S. $0.01, expiring
            August 15, 2007. The warrants were issued as part of the issue of
            the 12% Senior Notes described in note 8.

            The Plan contemplates the cancellation of all warrants as of the
            Plan Implementation Date (note 1).

11.   SHARE PURCHASE OPTIONS:

      The Board of Directors established two stock option plans under which
      options to purchase Class B Non-Voting Shares are granted to directors,
      officers and employees of the Company. Pursuant to the stock option plans,
      17.5 million Class B Non-Voting Shares have been reserved for options.
      These options were granted at exercise prices estimated to be at least
      equal to the fair value of Class B Non-Voting Shares, vest over a
      three-year period and generally expire five years from the date of grant.


                                       33

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


11.   SHARE PURCHASE OPTIONS (CONTINUED):


      In accordance with the Company's stock option plans, all unvested
      outstanding stock options became vested and exercisable on September 28,
      2002 as a result of the Back-end. The Company received $225.4 million in
      proceeds on October 8, 2002 when 5.8 million of employee options were
      exercised. Subsequent to the Back-end, no more options were issued under
      these plans.



                                     Number of          Exercise           Weighted
                                      options            prices             average
                                     (000' s)           per share        exercise price
                                     --------           ---------        --------------
                                                                
Outstanding, December 31, 1999         10,019      $   2.25 - $ 58.25      $   28.17
Granted                                 3,760         42.70 -   90.00          56.28
Cancelled                              (1,342)         2.25 -   90.00          47.97
Exercised                              (1,959)         0.50 -   45.10          17.19
                                     --------      ------------------      ---------
Outstanding, December 31, 2000         10,478          2.25 -   90.00          37.80
Granted                                   996         44.20 -   47.96          45.67
Cancelled                                (587)        14.00 -   90.00          49.42
Exercised                              (2,097)         2.25 -   45.10          22.79
                                     --------      ------------------      ---------
Outstanding, December 31, 2001          8,790          2.25 -   90.00          41.39
Granted                                   846         37.99 -   48.05          43.38
Cancelled                                (810)        14.00 -   90.00          53.29
Exercised                              (7,133)         2.25 -   51.00          36.28
                                     --------      ------------------      ---------
Outstanding, December 31, 2002          1,693         17.25 -   90.00          58.10
                                     ========      ==================      =========


      At December 31, 2002, 1.7 million options (2001 - 4.9 million; 2000 - 4.2
      million) were exercisable at a weighted average exercise price of $58.10
      per share (2001 - $35.80; 2000 - $22.83).

      The Plan contemplates the termination of all unexercised options under
      these plans as of the Plan Implementation Date, without compensation (note
      1).


                                       34

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


11.   SHARE PURCHASE OPTIONS (CONTINUED):

      The following table summarizes information concerning options outstanding
      and exercisable at December 31, 2002:



                           Options outstanding and exercisable
                           -----------------------------------
                                       Weighted
                                        average
                                       remaining          Weighted
Range of               Number         contractual         average
exercise             outstanding         life             exercise
prices                 (000's)          (years)            price
- ------                 -------          -------            -----
                                                 
$17.00 - $45.00                9              1.8         $  37.40
$45.01 - $54.00              717              2.2            53.28
$54.01 - $63.00              495              2.4            56.27
$63.01 - $72.00              408              2.2            65.50
$72.01 - $81.00               21              2.2            74.73
$81.01 - $90.00               43              2.2            85.49
- ---------------            -----           ------         --------
                           1,693              2.2            58.10
                           =====           ======         ========


      As permitted by HB 3870, the Company did not adopt the fair value method
      of accounting for its employee stock option awards. The standard requires
      the disclosure of pro forma loss for the year and loss per share as if the
      Company had accounted for employee stock options under the fair value
      method. Had the Company adopted the fair value method for employee stock
      options using the fair value method described in note 2(h), loss for the
      year and loss per share would have increased for the year ended December
      31, 2002 as indicated below:


                                                         
Loss attributable to common shareholders - as reported      $(1,831,659)
Stock-based compensation expense                                (24,677)
                                                            -----------
Loss attributable to common shareholders - pro forma        $(1,856,336)
                                                            ===========
Basic and diluted loss per common share - as reported       $    (17.95)
Basic and diluted loss per common share - pro forma              (18.19)
                                                            ===========
Weighted average number of shares
  outstanding (in thousands)                                    102,047
                                                            ===========




      The pro forma stock-based compensation expense recorded during the year
      related to grants issued subsequent to January 1, 2002 totalled $1.5
      million or ($0.02) per share.


                                       35

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


11.   SHARE PURCHASE OPTIONS (CONTINUED):

      For purposes of the above pro forma disclosures, options granted were
      valued using the Black-Scholes option pricing model with the following
      weighted average assumptions:



                                    2002          2001          2000
                                    ----          ----          ----
                                                       
Risk-free interest rate (%)          4.8%          5.1%          6.2%
Expected volatility (%)             31.3%         35.7%          5.4%
Expected life (in years)            1.23             5             5
Expected dividends                    --            --            --
                                    ----          ----          ----


      The Black-Scholes option pricing model was developed for use in estimating
      the fair value of traded options that have no vesting restrictions and are
      fully transferable. Option pricing models also require estimates, which
      are highly subjective, including expected volatility of the underlying
      stock. The Company bases estimates of volatility on historical stock
      prices. Changes in assumptions can materially affect estimates of fair
      values.

      Options granted during the year had a weighted average fair value of $7.21
      (2001 - $18.33; 2000 - $15.16).

      Employee Share Ownership Plan ("ESOP"):

      The ESOP offered all full-time permanent employees the opportunity to
      purchase securities of the Company. Employees were able to contribute
      between 1% and 5% of their salary to buy units in a single stock mutual
      fund, the Company's Stock Fund, which in turn held only Class B Non-Voting
      Shares. The Company contributed the equivalent of 25% of participant
      contributions per quarter. The Company's contributions were made through
      the issuance of Class B Non-Voting Shares from treasury. 200,000 Class B
      Non-Voting Shares have been authorized for issuance for this purpose. In
      2002, the Company issued 23,396 shares (2001 - 26,592; 2000 - 40,253)
      under the plan and recorded compensation expense of $1.1 million (2001 -
      $1.2 million; 2000 - $2.7 million). Effective August 31, 2002, the plan
      was terminated.


                                       36

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------

12.   WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING:

      (a)   2002:



                                                                                      Provision,
                                          Net            Cash                        December 31,
                                       provision       drawdown   Reclassifications     2002
                                       ---------       --------   -----------------     ----
                                                                         
Provision for restructuring:
     2002 Workforce reduction costs     $ 52,925       $(30,400)      $     --          $22,525
     2002 Facilities consolidation        34,144         (3,167)       (18,185)          12,792
                                        --------       --------       --------          -------
                                        $ 87,069       $(33,567)      $(18,185)         $35,317
                                        ========       ========       ========          =======


            In 2002, the Company implemented a cost reduction initiative to
            bring the Company's cost structure in line with its current and
            projected revenue base, and to allocate resources to further enhance
            services provided to its established customer base. As a result, the
            Company recorded a provision of $87.0 million related to these
            activities.

            The charge of $87.0 million is comprised of $52.9 million for
            employee severance and $34.1 million related to facilities
            consolidation. Employee severance costs are the result of a
            reduction in workforce of approximately 1,250 personnel, achieved
            through terminations, attrition and non-renewal of contract
            personnel. These personnel were from various areas across the
            Company, including network services, customer service, marketing,
            sales and administration. As at December 31, 2002, 1,217 workforce
            reductions had been completed and $30.4 million of the employee
            severance costs have been paid. The remaining liability balance of
            $22.5 million at December 31, 2002 represents salary continuance
            payments in accordance with employee severance agreements and/or
            statutory minimum severance requirements.


                                       37

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


12.   WORKFORCE REDUCTION AND PROVISION FOR RESTRUCTURING (CONTINUED):


            The provision for facilities consolidation of $34.1 million
            comprised an initial provision of $34.4 million which was reduced by
            $0.3 million as certain facilities were subleased earlier than
            planned. The provision for facilities consolidation represents
            management's best estimate of the deficiency of expected sublease
            recoveries over costs associated with certain leased premises being
            exited as a result of the restructuring plan. These facility leases
            will expire between 2002 and 2012. The provision will be drawn down
            over the remaining term of the leases. As at December 31, 2002, the
            provision was drawn down by $3.2 million. Pursuant to the CCAA
            proceedings described in note 1, the liabilities related to certain
            unused leased premises will be compromised and $18.2 million of the
            provision for facility consolidation costs has been reclassified to
            liabilities subject to compromise (note 8(a)). Of the remaining
            provision, $5.0 million has been included in other long-term
            liabilities.

      (b)   2001:

            During 2001, management approved and carried out a workforce
            reduction plan and recorded a provision of $21.9 million for
            severance and benefits related to the termination of approximately
            650 personnel, achieved through terminations, attrition and
            non-renewal of contract personnel. The personnel terminated were
            from various areas across the Company, including marketing, network
            services, customer service, internet and IT services and
            administration. The Company had substantially completed the
            terminations as at December 31, 2001. During 2002, the remaining
            provision of $6.3 million was drawn down.

      (c)   2000:

            In 2000, the Company adjusted charges recorded in 1999 as a result
            of negotiation of lower expenditures than originally anticipated and
            the impact of changes in the real estate market that made it
            uneconomical to exit certain properties and recorded a reversal of
            previously recorded charges of $10.2 million. In 2001, the remaining
            balance of the 1999 charge was drawn down through payments related
            to lease contract penalties and settlement of lawsuits. The related
            activities have been completed.


                                       38

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


13.   OTHER INCOME (EXPENSE):



                                           2002           2001          2000
                                           ----           ----          ----
                                                              
Gain (loss) on disposition of STOC
  (note 7(d))                            $ (1,502)      $     --       $13,011
Loss on disposition of certain call
  centres  (note 3(a))                         --         (8,894)           --
Other                                        (723)        (1,903)          728
                                         --------       --------       -------
                                         $ (2,225)      $(10,797)      $13,739
                                         ========       ========       =======


14.   REORGANIZATION EXPENSES:

      The Company incurred the following pretax charges for expenses associated
      with its reorganization under the Plan, as described in note 1:



                                           2002
                                           ----
                                      
Professional fees and other costs        $ 7,440
Interest earned on cash accumulated
  during CCAA proceedings                   (375)
                                         -------
                                         $ 7,065
                                         =======


      Professional fees and other costs include legal, financial advisory,
      accounting and consulting fees incurred subsequent to the filing of the
      application for creditor protection under the CCAA.


                                       39

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


15.   INCOME TAXES:

      The Company uses the liability method of accounting for income taxes. The
      tax effects of temporary differences that give rise to significant
      portions of future income tax assets and liabilities are as follows:



                                                      2002            2001
                                                      ----            ----
                                                              
Future tax assets:
    Future income tax deductions                  $    93,172       $  56,244
    Operating loss carryforwards                      755,624         794,172
    Deferred foreign exchange                          65,569          28,774
    Accounting depreciation booked in excess
       of amount claimed for tax                      409,945              --
                                                  -----------       ---------
    Total future tax assets                         1,324,310         879,190

Future tax liabilities:
    Deferred pension asset                            (21,997)        (14,748)
    Debt and share issue costs                         (9,847)         (6,717)
    Tax depreciation claimed in excess of
       depreciation booked                                 --        (119,926)
                                                  -----------       ---------
    Total future tax liabilities                      (31,844)       (141,391)
                                                  -----------       ---------
                                                    1,292,466         737,799

Valuation allowance                                (1,292,466)       (737,799)
                                                  -----------       ---------
Net future income tax assets                      $        --       $      --
                                                  ===========       =========



                                       40

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


15.   INCOME TAXES (CONTINUED):

      The reconciliation of the tax provision for income taxes, which consists
      only of current taxes, to amounts computed by applying federal and
      provincial tax rates to loss before minority interest and provision for
      income taxes is as follows:



                                                  2002                     2001                      2000
                                                  ----                     ----                      ----
                                                                                         
Computed at combined statutory rate       $(702,593)    38.5%       $(308,238)    41.8%       $(270,481)    43.5%
Tax effect of:
    Expenses not deductible for
       income tax purposes                   15,293     (0.8)%          4,210     (0.5)%          1,639     (0.3)%
    Write-off and amortization
       of non-deductible goodwill            41,697     (2.3)%         46,117     (6.3)%         41,419     (6.6)%
    Income not taxable for
       income tax purposes                   (3,128)     0.2%            (891)     0.1%          (1,867)     0.3%
    Large Corporations Tax                    6,741     (0.4)%          7,965     (1.1)%          5,686     (0.9)%
    Reduction in tax assets as a
       result of loss expiry                  5,253     (0.3)%        149,809    (20.3)%        153,670    (24.7)%
    Effect of reduction in tax rates         90,073     (5.0)%        149,317    (20.2)%        149,917    (24.1)%
    Change in valuation allowance           554,667    (30.4)%        (51,180)     6.9%        (126,568)    20.3%
    Other                                    (1,262)     0.1%          10,856     (1.5)%         52,271     (8.4)%
                                          ---------    -----        ---------    -----        ---------    -----
                                          $   6,741     (0.4)%      $   7,965     (1.1)%      $   5,686     (0.9)%
                                          =========    =====        =========    =====        =========    =====


      At December 31, 2002, the Company has non-capital losses of approximately
      $2.252 billion, available to reduce future years' taxable income,
      including any gain on the settlement of liabilities subject to compromise,
      which expire as follows:

       
2003      $  190,900
2004         172,100
2005         308,300
2006         169,300
2007         586,700
2008         519,400
2009         255,900
2010          49,900
          ----------
          $2,252,500
          ==========



      Certain amendments to tax filings may be made to avoid the expiry of
      losses that would otherwise expire in 2003.


                                       41

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


16.   EMPLOYEE BENEFITS:

      The Company provides a number of retirement benefits, including defined
      benefit plans, providing pension, other retirement and post-employment
      benefits to most of its employees.

      (a)   The total expense (income) for the Company's defined benefit plans
            is as follows:



                                       2002          2001         2000
                                                        
Plans providing pension benefits      $8,661      $(26,860)      $5,627
Plans providing other benefits           952           505          474
                                      ======      ========       ======


            The average remaining service periods of the active employees
            covered by the pension plans range from 11 to 13 years (2001 - 10 to
            14 years; 2000 - 10 to 12 years).

            The average remaining service period of the active employees covered
            by the post-retirement life insurance program is 13 years (2001 - 13
            years; 2000 - 13 years).


                                       42

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


16.   EMPLOYEE BENEFITS (CONTINUED):

            The average remaining life expectancy of the former employees
            covered by the post-retirement medical and dental insurance programs
            is 15 years (2001 - n/a; 2000 - n/a).

            Information about the Company's defined benefit and other retirement
            benefit plans as at December 31, 2002, 2001 and 2000, in aggregate,
            is as follows:



                                           2002                          2001                          2000
                                           ----                          ----                          ----
                                 Pension         Other          Pension         Other         Pension         Other
                                 benefit        benefit         benefit        benefit        benefit        benefit
                                  plans          plans           plans          plans          plans          plans
                                  -----          -----           -----          -----          -----          -----
                                                                                           
Accrued benefit
   obligation:
     Balance, beginning
       of year                  $ 535,475       $  6,152       $ 477,665       $ 5,390       $ 443,824       $ 5,965
     Interest cost                 34,260            728          34,158           379          33,218           353
     Actuarial loss (gain)            134           (335)         46,514           374          32,146        (1,012)
     Current service cost           7,069            173           7,543           227           6,769           213
     Employees'
       contributions                2,826             --           2,867            --           2,397            --
     Plan amendments                   --          5,638           4,711            --           1,031            --
     Benefits paid                (48,521)          (416)        (38,349)         (192)        (37,320)         (129)
     Settlements                       --             --              --            --          (4,400)           --
     Curtailment loss
       (gain)                         120           (263)            366           (26)             --            --
                                ---------       --------       ---------       -------       ---------       -------
Balance, end of year            $ 531,363       $ 11,677       $ 535,475       $ 6,152       $ 477,665       $ 5,390
                                =========       ========       =========       =======       =========       =======

Plan assets:
     Fair value,
       beginning
       of year                  $ 488,727       $     --       $ 541,237       $    --       $ 528,069       $    --
     Actual return
       on plan assets             (43,975)            --         (24,716)           --          44,953            --
     Employer
       contributions               18,824            416           7,688           192           7,538           129
     Accrued employer
       contributions                5,093             --              --            --              --            --
     Employees'
       contributions                2,826             --           2,867            --           2,397            --
     Benefits paid                (48,521)          (416)        (38,349)         (192)        (37,320)         (129)
     Settlements                       --             --              --            --          (4,400)           --
                                ---------       --------       ---------       -------       ---------       -------
Fair value, end of year         $ 422,974       $     --       $ 488,727       $    --       $ 541,237       $    --
                                =========       ========       =========       =======       =========       =======



                                       43

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


16.    EMPLOYEE BENEFITS (CONTINUED):



                                          2002                          2001                        2000
                                          ----                          ----                        ----
                                 Pension         Other         Pension        Other        Pension         Other
                                 benefit        benefit        benefit       benefit       benefit        benefit
                                  plans          plans          plans         plans         plans          plans
                                  -----          -----          -----         -----         -----          -----
                                                                                        
Funded status -
   plan surplus (deficit)      $(108,389)      $(11,677)      $(46,748)      $(6,152)      $ 63,572       $(5,390)
Unrecognized
   actuarial loss (gain)         165,491         (1,334)        87,110        (1,061)       (21,940)       (1,510)
Unrecognized prior
   service costs                   3,328          5,262          4,812            --            928            --
                               ---------       --------       --------       -------       --------       -------
Accrued benefit
   asset (liability)              60,430         (7,749)        45,174        (7,213)        42,560        (6,900)
Valuation allowance
   (note 16(b))                       --             --             --            --        (31,934)           --
                               ---------       --------       --------       -------       --------       -------
Accrued benefit asset
   (liability), net of
   valuation allowance         $  60,430       $ (7,749)      $ 45,174       $(7,213)      $ 10,626       $(6,900)
                               =========       ========       ========       =======       ========       =======


            The accrued benefit liability for other benefit plans is included in
            other long-term liabilities.

            The significant actuarial assumptions adopted in measuring the
            Company's accrued benefit obligations are as follows (weighted
            average assumptions as of December 31, 2002, 2001 and 2000):



                                                 2002                       2001                    2000
                                  Pension        Other        Pension        Other        Pension        Other
                                  benefit       benefit       benefit       benefit       benefit       benefit
                                   plans         plans         plans         plans         plans         plans
                                   -----         -----         -----         -----         -----         -----
                                                                                     
Discount rate                        6.5%          6.5%          6.5%          6.5%          7.0%          7.0%
Expected long-term rate
   of return on plan assets         7.75%           --           8.0%           --           8.0%           --
Rate of compensation
   increase                          3.5%           --           3.5%           --           3.5%           --
                                   =====         =====         =====         =====         =====         =====



                                       44

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


16.   EMPLOYEE BENEFITS (CONTINUED):

            The Company's net benefit plan expense for the year ended December
            31, 2002, 2001 and 2000 is as follows:



                                            2002                       2001                      2000
                                            ----                       ----                      ----
                                    Pension       Other        Pension       Other       Pension       Other
                                    benefit      benefit       benefit      benefit      benefit      benefit
                                     plans        plans         plans        plans        plans        plans
                                     -----        -----         -----        -----        -----        -----
                                                                                    
Current service cost               $  7,069       $ 173       $  7,543       $ 227       $  6,769       $ 213
Interest cost                        34,260         728         34,158         379         33,218         353
Expected return on
   plan assets                      (38,335)         --        (38,711)         --        (37,397)         --
Prior service costs
   amortization                         475         376            574          --            103          --
Valuation allowance
   (reversed) provided
   against accrued
   benefit asset (note 16(b))            --          --        (31,934)         --          2,937          --
Actuarial loss (gain)
   recognized                         2,363         (62)           (24)        (75)            (3)        (92)
Curtailment loss                      2,829        (263)         1,534         (26)            --          --
                                   --------       -----       --------       -----       --------       -----
Net benefit plan expense
   (income)                        $  8,661       $ 952       $(26,860)      $ 505       $  5,627       $ 474
                                   ========       =====       ========       =====       ========       =====


      (b)   Change in valuation allowance:

            An accrued benefit asset arises when the accumulated cash
            contributions to a pension plan exceed the accumulated pension
            expense. The accrued benefit asset on an employer's books is
            comprised of two components:

            (i)   plan surplus (i.e., the excess of the fair value of the plan
                  assets over the accrued benefit obligation of the plan); and

            (ii)  net unrecognized (gains) losses (i.e., the sum of the
                  unamortized past service costs, actuarial (gains) and losses
                  and any transitional (asset) or transitional obligation).


                                       45

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


16.   EMPLOYEE BENEFITS (CONTINUED):

            The expected future benefit from a surplus is generally the present
            value of employer contribution holidays expected in future years.
            However, if there is a net unrecognized loss, the accrued benefit
            asset will be expected to decrease over time due to the amortization
            of the net unrecognized loss. As a result, the accrued benefit asset
            on an employer's books cannot exceed the sum of the expected
            employer future benefit and any net unrecognized losses. When the
            accrued benefit asset first exceeds the limit, a valuation allowance
            is established in order to keep the accrued benefit asset on an
            employer's books at the limit. In future accounting periods, any
            change in the valuation allowance is recorded through the
            consolidated statements of operations.

            At December 31, 2000, the accrued benefit asset relating to the
            Company's defined benefit pension plans was affected by the limit
            and contained a cumulative valuation allowance of $31.9 million. The
            impact of negative returns on plan assets in the Company's defined
            benefit pension plans was an elimination of the pension surplus and
            generation of unamortized losses at December 31, 2001. Under
            generally accepted accounting principles, the limit on the accrued
            benefit asset is required to be increased by the amount of the
            losses that will be charged as an expense in future years, resulting
            in a reduction in the valuation allowance and a credit to the
            pension expense amount of the Company. The impact of the above is
            that the valuation allowance of $31.9 million was no longer required
            and was recognized in income in 2001.

            At December 31, 2002, the Company had unfunded solvency deficits
            under its defined benefit pension plans of approximately $135
            million. The Company is required to fund this deficit over a
            five-year period.

17.   FINANCIAL INSTRUMENTS:

      (a)   Fair values of financial assets and liabilities:

            The fair values of cash and cash equivalents, accounts receivable,
            accounts payable, accrued liabilities and accrued interest payable
            approximate their carrying values due to the short-term nature of
            these instruments. The settlement amount of liabilities subject to
            compromise is not determinable and will be subject to the Plan
            approved by the Court (note 8).

            The fair value of the Senior Notes, including the attached warrants,
            at December 31, 2002, was approximately $743.0 million (2001 -
            $3,022.1 million), based on current trading values.


                                       46

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


17.    FINANCIAL INSTRUMENTS (CONTINUED):

            Certain foreign currency financial instruments were unwound in the
            second quarter of 2002 and the remaining foreign currency financial
            instruments were unwound on September 24, 2002.

      (b)   Foreign currency risk:

            The Company is exposed to foreign currency fluctuations on its U.S.
            dollar-denominated debt, cash and cash equivalents.

            As described below, in May and September 2002, the Company monetized
            all remaining outstanding swaptions, cross-currency swaps and
            forward contracts. The deferred gains are being recognized in income
            over the remaining original contractual term to maturity of the
            underlying debt for which these derivatives were designated as cash
            flow hedges.

            On September 24, 2002, the Company received approximately Cdn. $84.9
            million in face value of its outstanding Senior Notes in
            satisfaction of the counterparty's settlement obligation to the
            Company. The Senior Notes are currently being held by the Company
            and have been recognized as a reduction to the long-term debt
            outstanding (note 8(b)).

            In 2001, the Company monetized certain foreign currency options,
            cross-currency swaps and a forward contract. The net deferred gain
            is being recognized in earnings over the remaining original
            contractual term to maturity of the underlying debt for which the
            derivatives were designated as cash flow hedges.

            The above transactions are summarized as follows:



                                                                             Deferred         Amount        Deferred
                              Notional                         Loss         gain (loss)     recognized     gain (loss)
                               value       Proceeds on        (gain)        December 31,      during       December 31,
                           (U.S.dollars)   monetization      on unwind          2001           2002           2002
                           -------------   ------------      ---------          ----           ----           ----
                                                                                         
2001:
  May                        $1,208,401      $ 123,964       $ (33,708)      $ 29,529       $  (6,687)      $  22,842
  November                      207,040         26,700              84            (84)              8             (76)
                             ----------      ---------       ---------       --------       ---------       ---------
                             $1,415,441      $ 150,664       $ (33,624)      $ 29,445          (6,679)         22,766
                             ==========      =========       =========

2002:
  May                        $1,784,500      $  85,504       $ (46,899)            --          (5,751)         41,148
  September                     994,581         84,866         (76,340)            --          (3,802)         72,538
                             ----------      ---------       ---------       --------       ---------       ---------
                             $2,779,081      $ 170,370       $(123,239)        29,445       $ (16,232)        136,452
                             ==========      =========       =========                      =========

Less current portion of
  deferred foreign
  exchange gains                                                                   --                          29,835
                             ----------      ---------       ---------       --------       ---------       ---------
Deferred foreign
  exchange gain                                                              $ 29,445                       $ 106,617
                             ==========      =========       =========       ========       =========       =========



                                       47

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


17.   FINANCIAL INSTRUMENTS (CONTINUED):

            As at December 31, 2001, the Company held the following financial
            instruments to hedge the following financings:



                              Foreign                         Foreign       Canadian
                             currency                         exchange     equivalent
             Financial      obligation                         rates      interest rate       Fair
Debt        instruments      notional        Maturity         weighted       weighted        market
instrument     type           value            date            average        average         value
- ----------     ----           -----            ----            -------        -------         -----
                          (In millions)                                                    (In millions)
                                                                         
10.75%          Cross-
  Notes       currency                      November 1,      Cdn. $1.5702
                 swaps      U.S. $170.0            2007     to U.S. $1.00         11.24%       $(2.8)

9.95%           Cross-
  Notes       currency                         June 15,      Cdn. $1.5276
                 swaps     U.S. $970.0             2008     to U.S. $1.00          9.73%       $ 71.5

7.65%           Cross-
  Notes       currency                    September 15,      Cdn. $1.4977
                 swaps     U.S. $500.0             2006     to U.S. $1.00          7.72%       $ 47.4

7.625%          Cross-
  Notes       currency                        March 15,      Cdn. $1.5489
                 swaps     U.S. $250.0             2005     to U.S. $1.00          7.87%       $  5.7

12%            Forward
  Notes       exchange                     February 28,      Cdn. $1.5532
              contract     U.S. $250.0             2002     to U.S. $1.00            n/a       $ 10.1

10.625%        Forward
  Notes       exchange                     February 28,      Cdn. $1.5532
              contract     U.S. $225.0             2002     to U.S. $1.00            n/a       $  9.0
                                                                                               ------
                                                                                               $140.9
                                                                                               ======


            In addition to the financial instruments above, the Company held
            foreign currency options with a fair value of ($2.1) million,
            comprising assets of $28.1 million offset by liabilities of $30.2
            million.


                                       48

AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------


17.   FINANCIAL INSTRUMENTS (CONTINUED):

      (c)   Interest rate risk:

            The following table summarizes the Company's exposure to interest
            rate risk.



                                                  Fixed interest rate maturing within
                                                  -----------------------------------
                                Floating                                         After        Non-interest
2002                              rate           1 year       1 - 5 years       5 years         bearing
- ----                              ----           ------       -----------       -------         -------
                                                                               
FINANCIAL ASSETS:
Cash and cash equivalents      $  420,542      $       --      $       --      $       --      $       --
Accounts receivable                    --              --              --              --         166,434

FINANCIAL LIABILITIES:
Current liabilities                    --           3,952              --              --         287,407
Capital leases                         --              --          16,601              --
Liabilities subject to
   compromise                          --              --       2,721,103       1,795,721         202,767
                               ==========      ==========      ==========      ==========      ==========

                                                  Fixed interest rate maturing within
                                                  -----------------------------------
                                Floating                                         After        Non-interest
2001                              rate           1 year       1 - 5 years       5 years         bearing
- ----                              ----           ------       -----------       -------         -------
                                                                               
FINANCIAL ASSETS:
Cash and cash equivalents      $  537,294      $       --      $       --      $       --      $       --
Accounts receivable                    --              --              --              --          70,640

FINANCIAL LIABILITIES:
Current liabilities                    --              --              --              --         406,108
Capital leases                         --           1,930          17,661              --              --
Long-term debt                    170,000              --       2,127,672       2,357,404              --
                               ==========      ==========      ==========      ==========      ==========



                                       49




AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

17.    FINANCIAL INSTRUMENTS (CONTINUED):

       (d) Credit risk:


           The Company's financial instruments that are exposed to credit risk
           are cash and cash equivalents, accounts receivable and financial
           instruments used for hedging purposes. Cash and cash equivalents,
           which consist of investments in highly liquid, highly secure money
           market instruments, are on deposit at major financial institutions.
           Credit risk with respect to accounts receivable is limited due to the
           large number of customers to which the Company provides services.

18.    SEGMENTED INFORMATION:

       The Company currently operates in one operating segment, the
       telecommunications industry in Canada. The Company offers a number of
       products, delivered through its integrated fibre optics networks, sold by
       a national sales force, agents and telemarketers and provisioned by one
       operations group. The Company makes decisions and evaluates financial
       performance primarily based on product revenue.

       Revenue by product is as follows:



- ---------------------------------------------------------------------
                                  2002           2001           2000
- ---------------------------------------------------------------------
                                                  
Data                         $  457,962     $  485,031     $  465,407
Local                           235,095        209,207        177,424
Internet and IT Services        195,600        171,852        129,865
Other                            26,693         20,843         32,643
- ---------------------------------------------------------------------
                                915,350        886,933        805,339

Long distance                   572,795        657,788        700,039
- ---------------------------------------------------------------------
                             $1,488,145     $1,544,721     $1,505,378
=====================================================================


       During the years ended December 31, 2002, 2001 and 2000, no customers of
the Company individually represented more than 10% of the Company's revenue.


                                       50


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------


19.    RELATED PARTY TRANSACTIONS:

       Services are exchanged between the Company and its shareholders and
       certain of their subsidiaries. These transactions are in the normal
       course of operations and are measured at the exchange amounts being the
       amounts agreed to by the parties.

       Transactions with the above related parties were as follows:



- -----------------------------------------------
                 2002         2001         2000
- -----------------------------------------------
                              
Revenue      $162,153     $146,759     $114,278
Expenses       95,999      100,900      117,173
===============================================


       Amounts due from and to the above related parties are as follows:



- -------------------------------------------
                           2002        2001
- -------------------------------------------
                              
Accounts receivable     $23,672     $14,958
Accounts payable         17,399      22,297
===========================================


20.    CHANGE IN NON-CASH WORKING CAPITAL:



- -----------------------------------------------------------------------
                                     2002           2001           2000
- -----------------------------------------------------------------------
                                                     
Accounts receivable             $ (45,965)     $ 184,114      $  10,469
Other current assets               (8,891)          (986)         1,734
Other assets                      (13,500)          --             --
Accounts payable                  (16,249)       (20,663)      (110,155)
Accrued liabilities               (48,070)        (1,576)        18,977
Accrued interest payable          104,778         21,544          3,349
Income taxes payable                1,472            438         (4,785)
Other long-term liabilities         2,117            765           --
- ------------------------------------------------------------------------
                                $ (24,308)     $ 183,636      $ (80,411)
========================================================================



                                       51


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

21.    SUPPLEMENTAL CASH FLOW INFORMATION:



- ----------------------------------------------------------------------------------------------
                                                            2002           2001           2000
- ----------------------------------------------------------------------------------------------
                                                                            
Supplemental cash flow information:

    Interest paid                                      $ 157,931      $ 213,890      $ 165,362
    Income taxes paid                                      9,258          6,241          7,148

Supplemental disclosures of changes
    in non-cash investing and financing
    activities:
           Accrued liabilities and accounts
              payable incurred for the acquisition
              of property, plant and equipment           (10,461)       (15,476)       (60,291)
           Extinguishment of bonds on
              termination of swaps (note 17(b))           84,866           --             --
           Capital lease obligations incurred
              for the purchase of networks
              and equipment                                 --             --              560
           Class B Non-Voting Shares issued
              for acquisitions                              --           44,666         45,385
           Class B Non-Voting Shares issued
              for conversion of warrants                     213            483            620
           Class B Non-Voting Shares issued
              for the Company's contributions to
              the Employee Share Ownership Plan            1,096          1,206          2,734
==============================================================================================



22.    RECLASSIFICATION OF PRIOR PERIODS AMOUNTS:


       Certain amounts presented in 2001 and 2000 have been reclassified to
conform with the presentation adopted for 2002.


                                       52


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------


23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES:

       The Company's consolidated financial statements have been prepared in
       accordance with accounting principles generally accepted in Canada
       ("Canadian GAAP") which, in the case of the Company, conform in all
       material respects with those in the United States ("U.S. GAAP"), except
       as outlined below:

       (a) Consolidated statements of operations, consolidated statements of
           comprehensive loss and consolidated balance sheets:

           The application of U.S. GAAP would have the following effect on loss
           for the year, deficit, basic and diluted loss per common share as
           reported:



- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                       2002             2001             2000
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                      (as restated
                                                                                                        note 2(g))
                                                                                                            
Loss for the year, Canadian GAAP                                                   $(1,831,659)     $  (745,375)     $  (523,207)
Stock-based compensation
   expense (note 23(a)(ii))                                                               (330)         (15,023)          (4,364)
Depreciation and amortization (note 23(a)(vi))                                          10,899             --               --
Impairment of property, plant and
   equipment (note 23(a)(vi))                                                         (161,000)            --               --
Gain (loss) on derivative instruments
   (note 23(a)(iii))                                                                    22,519          (12,034)            --
Change in valuation allowance
   (note 23(a)(iv))                                                                       --            (31,934)            --
- ---------------------------------------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP
   before accounting changes                                                        (1,959,571)        (804,366)        (527,571)

Cumulative effect of accounting change,
   adoption of SFAS 133 (note 23(a)(iii))                                                 --              4,028             --
Cumulative effect of accounting change,
   adoption of SFAS 142 (note 23(a)(v))                                             (1,530,767)            --               --
- ---------------------------------------------------------------------------------------------------------------------------------
Loss for the year, U.S. GAAP                                                        (3,490,338)        (800,338)        (527,571)

Opening deficit, U.S. GAAP                                                          (1,594,518)        (794,180)        (266,609)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending deficit, U.S. GAAP                                                          $(5,084,856)     $(1,594,518)     $  (794,180)
=================================================================================================================================

Basic and diluted loss per common
   share under U.S. GAAP:
     Before accounting change                                                      $    (19.20)     $     (8.17)     $     (5.52)
     Cumulative effect of accounting
       change                                                                           (15.00)            0.04             --
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                   $    (34.20)     $     (8.13)     $     (5.52)
=================================================================================================================================
Weighted average number of common
   shares outstanding (in thousands)                                                   102,047           98,406           95,561
=================================================================================================================================



                                       53


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------


23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):


       U.S. GAAP also requires disclosure of a statement of comprehensive income
       (loss). Comprehensive income (loss) generally encompasses all changes in
       shareholders' equity, except those arising from transactions with
       shareholders:



- --------------------------------------------------------------------------------------
                                            2002             2001             2000
- --------------------------------------------------------------------------------------
                                                                 
Loss for the year, U.S. GAAP            $(3,490,338)     $  (800,338)     $  (527,571)
Other comprehensive income,
   net of tax of nil:
   Cumulative effect of accounting
     change on adoption of SFAS 133
     (note 23(a)(iii))                         --             21,990             --
   Unrealized gain on derivative
     instruments (note 23(a)(iii))           90,055           10,397             --
   Minimum pension liability
     (note 23(a)(iv))                      (112,354)            --               --
- --------------------------------------------------------------------------------------
Comprehensive loss, U.S. GAAP           $(3,512,637)     $  (767,951)     $  (527,571)
======================================================================================


       The following table indicates the differences between the amounts of
       consolidated balance sheet items determined in accordance with Canadian
       and U.S. GAAP:



- -------------------------------------------------------------------------------------------------------------------------------
                                                                     2002                                                2001
- -------------------------------------------------------------------------------------------------------------------------------
                                    U.S.          Canadian                           U.S.          Canadian
                                   GAAP             GAAP         Difference          GAAP             GAAP           Difference
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
ASSETS

Financial derivatives         $      --        $      --        $      --        $   138,773      $      --        $   138,773

Property, plant and
   equipment                      802,598          952,699         (150,101)       2,180,773        2,180,773             --
Deferred pension
   asset (liability)              (83,858)          60,430         (144,288)          13,240           45,174          (31,934)
Deferred foreign exchange            --               --               --               --            144,287         (144,287)

LIABILITIES AND
   SHAREHOLDERS'
   DEFICIENCY

Accrued liabilities               204,210          234,549           30,339          266,778          267,229              451
Deferred foreign
   exchange                          --            106,617          106,617             --             29,445           29,445
Common shares and
   additional capital           1,422,824        1,393,994          (28,830)       1,162,164        1,133,664          (28,500)
Accumulated other
   comprehensive
   income                          10,088             --            (10,088)          32,387             --            (32,387)
Deficit                        (5,084,856)      (4,888,505)         196,351       (1,594,518)      (1,526,079)          68,439
===============================================================================================================================



                                       54


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------


23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

           (i)  Consolidated statements of cash flows:


                Canadian GAAP permits the disclosure of a subtotal of the amount
                of funds provided by (used in) operations before changes in
                non-cash working capital items in the consolidated statements of
                cash flows. U.S. GAAP does not permit this subtotal to be
                included.

           (ii) Stock-based compensation expense:

                For U.S. GAAP purposes, the Company has chosen to account for
                stock-based compensation using the intrinsic value method
                prescribed in Accounting Principles Board Opinion ("APB") No.
                25, "Accounting for Stock Issued to Employees," and related
                interpretive guidance. Accordingly, compensation expense for
                U.S. GAAP purposes has been recognized at the date of share
                purchases or option grants at the amount by which the quoted
                market price of the stock exceeds the amount an employee must
                pay to acquire the stock.

                During the year, the Company recorded stock compensation expense
                of $0.3 million (2001 - $1.4 million; 2000 - $4.4 million) as a
                result of accelerating the vesting period of certain employee
                stock option awards that would have otherwise expired
                unexercisable pursuant to their original terms. In addition, the
                Company recorded nil (2001 - $13.6 million; 2000 - nil) in stock
                compensation expense as a result of extending the expiry date of
                certain employee stock option awards.

                U.S. GAAP also requires that pro forma net loss and loss per
                share information be reported annually as if the Company had
                adopted the fair value approach under the Statement of Financial
                Accounting Standard ("SFAS") No. 123.


                                       55


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

              Had the Company determined compensation expense costs based on the
              fair value at the date of grant for stock options under SFAS No.
              123, loss attributable to common shareholders and basic loss per
              share would have increased as indicated below.



- ----------------------------------------------------------------------------------
                                         2002             2001             2000
- ----------------------------------------------------------------------------------
                                                             
Loss attributable to common
  shareholders, U.S. GAAP -
  as reported                       $(3,490,338)     $  (800,338)     $  (527,571)
Add stock-based employee
  compensation expense
  included in reported net loss             330           15,023            4,364
Deduct total stock-based
  employee compensation
  expense determined under
  fair value-based method
  for all rewards                       (24,677)         (56,158)         (54,993)
- ----------------------------------------------------------------------------------
Loss attributable to common
  shareholders, U.S. GAAP -
  pro forma                         $(3,514,685)     $  (841,473)     $  (578,200)
==================================================================================
Loss per common share -
  as reported                       $    (34.20)     $     (8.13)     $     (5.52)
Loss per common share -
  pro forma                              (34.44)           (8.55)           (6.05)
==================================================================================
Weighted average number of
  common shares outstanding
  (in thousands)                        102,047           98,406           95,561
==================================================================================


              In 2002, 846,000 (2001 - 996,939; 2000 - 3,760,500) options with a
              weighted average fair value of $7.21 (2001 - $18.33; 2000 -
              $15.16) were granted, and valued for pro forma disclosure purposes
              using the following weighted average assumptions:



- ------------------------------------------------------------------
                                      2002        2001        2000
- ------------------------------------------------------------------
                                                     
Risk-free interest rate (%)           4.8%        5.1%        6.2%
Expected volatility (%)              31.3%       35.7%        5.4%
Expected life (in years)             1.23           5           5
Expected dividends                     --          --          --
==================================================================



                                       56


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------


23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

         (iii)  Gain (loss) on derivative instruments:

                For U.S. GAAP reporting purposes, the Company adopted SFAS No.
                133, "Accounting for Derivative Instruments and Hedging
                Activities," as amended by SFAS No. 137 and SFAS No. 138 ("SFAS
                No. 133") on January 1, 2001. SFAS 133 establishes accounting
                and reporting standards for derivative instruments, including
                certain derivative instruments embedded in other contracts and
                for hedging activities. All derivatives, whether designated in
                hedging relationships or not, are required to be recorded on the
                balance sheet at fair value. If the derivative is designated as
                a fair value hedge, the changes in the fair value of the
                derivative and of the hedged item attributable to the hedged
                risk are recognized in earnings. If the derivative is designated
                as a cash flow hedge, the effective portions of changes in the
                fair value of the derivative are recorded in accumulated other
                comprehensive income ("AOCI") and are recognized in the income
                statement when the hedged item affects earnings. Changes in fair
                values of derivative instruments not designated as hedging
                instruments and ineffective portion of hedges, if any, are
                recognized in earnings in the current year.

                On adoption, the Company recognized a one-time transition gain
                of $26.0 million, which represented the net effect of
                recognizing the market value of the Company's derivative
                portfolio of $84.5 million (consisting of assets of $98.2
                million and liabilities of $13.7 million), the derecognition of
                the unamortized balance of swaption premiums of $17.6 million
                and the derecognition of deferred foreign exchange losses of
                $40.9 million as at December 31, 2000. The portion of the
                one-time transition gain that relates to derivatives designated
                and qualifying as cash flow hedges, totaling $22.0 million, was
                recognized in the AOCI account and will be reclassified into
                earnings over the life of the underlying hedged items, of which
                the last expires in June 2008. The portion of the one-time
                transition gain related to derivatives not designated as hedges,
                totaling $4.0 million, was recognized in earnings as the
                cumulative effect of the accounting change on adoption of SFAS
                No. 133.


                                       57


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

                For the year ended December 31, 2002, as a result of SFAS No.
                133 relative to Canadian GAAP, the Company realized a net gain
                of $22.5 million (2001 - loss of $12.0 million) due to the net
                effect of foreign exchange gains on debt not hedged under U.S.
                GAAP of $20.1 million, the favourable net change in time value
                of the swaptions of $4.7 million, offset by the unfavourable net
                change in the fair market value of derivatives not designated as
                hedging instruments of $(0.4) million, and the net difference
                between the amortization of deferred gains on unwound swaps
                under U.S. and Canadian GAAP of $(1.9) million.

                For the year ended December 31, 2001, as a result of SFAS No.
                133 relative to Canadian GAAP, the Company realized a net loss
                of $12.0 million due to the unfavourable change in time value of
                the swaptions of $12.1 million, the net gain in the fair market
                value of foreign exchange forward contracts not designated as
                hedging instruments of $(39.4) million, the effect of foreign
                exchange losses on the related debt of $44.3 million, the
                reversal of amortization of option premiums recorded under
                Canadian GAAP of $(5.4) million and recognition of $(3.9)
                million of a deferred gain relating to unwound swaps, offset by
                the reversal of the amortization of the deferred gain under
                Canadian GAAP of $4.3 million.

                Foreign currency risk:


                As at December 31, 2002, as a result of the transactions
                described below, the Company held no derivative financial
                instruments.

                As at December 31, 2001, the Company had designated derivatives
                with a net notional value of U.S. $1,890 million (composed of
                derivatives to purchase U.S. $2,097 million and derivatives to
                sell U.S. $207 million) as cash flow hedges which hedged the
                foreign currency risk of cash flows relating to U.S.
                dollar-denominated debt with a face value of the same amount.
                These cash flow hedges were highly effective in hedging foreign
                currency rate risk. The fair value of the derivatives designated
                as cash flow hedges was $119.7 million, consisting of assets of
                $159.9 million and liabilities of $40.2 million.


                                       58


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

                Other derivatives:

                In addition, at December 31, 2001, the Company held foreign
                exchange forward contracts with a notional value totaling U.S.
                $475 million that were not eligible to be designated as
                effective hedges, since the term of the contracts did not match
                the underlying debt being hedged and, therefore, the changes in
                their market value were recorded in earnings. As at December 31,
                2001, the fair value of the foreign exchange contracts was $19.1
                million.

                Termination of derivative contracts:

                In May 2002, the Company unwound certain swaptions,
                cross-currency swaps and forward contracts with notional value
                totaling U.S. $1,784.5 million for proceeds of $85.5 million
                (note 17(b)). The related AOCI balances of the derivatives
                unwound represented a gain of $37.5 million. This gain is being
                recognized in earnings over the remaining original contractual
                term to maturity of the underlying debt for which these
                derivatives were designated as cash flow hedges.

                On September 24, 2002, the Company unwound all remaining
                outstanding swaptions and cross-currency swaps with a notional
                value of U.S. $994.6 million, and in accordance with their
                terms, the Company received approximately Cdn. $84.9 million in
                face value of its outstanding Senior Notes in satisfaction of
                the counterparties' obligations to the Company. The Senior Notes
                are currently being held by the Company. The related AOCI
                balances of the derivatives unwound represented a gain of $76.4
                million. The gain of $76.4 million is being recognized in
                earnings over the remaining original contractual term to
                maturity of the underlying debt for which these derivatives were
                designated as cash flow hedges. The termination of these hedges
                resulted in an increase in the Company's overall foreign
                currency exposure.

                In May 2001, the Company unwound certain swaptions,
                cross-currency swaps and a forward contract. The related AOCI
                balances of the derivatives unwound represented a deferred gain
                of $29.6. This gain is being recognized in earnings over the
                remaining original contractual term to maturity of the
                underlying debt for which these derivatives were designated as
                cash flow hedges.


                                       59


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

              The gains to be recognized related to the above monetizations in
              future periods are as follows:


                -------------------------------------------------------
                                                           
                2003                                          $  27,418
                2004                                             27,418
                2005                                             23,872
                2006                                             21,092
                2007                                             16,232
                2008 and thereafter                               6,410
                -------------------------------------------------------
                                                              $ 122,442
                =======================================================


         (iv)   Benefit plan:


                In 2001, the Company recognized a gain under Canadian GAAP of
                $31.9 million from the reversal of the valuation allowance on
                the accrued benefit asset relating to its defined benefit
                pension plan. The reversal of the valuation allowance is not
                permitted under U.S. GAAP and, accordingly, the gain has been
                reversed in the consolidated statements of operations for U.S.
                GAAP reporting purposes.

                Under U.S. GAAP, SFAS No. 87, "Employers Accounting for
                Pensions," the Company is required to record an additional
                minimum pension liability when the benefit plans' accumulated
                benefit obligation exceeds the plans' assets by more than the
                amounts previously accrued for as pension costs. Under U.S.
                GAAP, these charges are recorded as a reduction to shareholders'
                equity, as a component of accumulated other comprehensive loss.
                In 2002, the Company recorded a minimum liability of $112.4
                million (2001 and 2000 - nil).

         (v)    Business combinations, goodwill and other intangible assets:

                Effective January 1, 2002, the Company adopted SFAS No. 141,
                "Business Combinations," and SFAS No. 142, "Goodwill and Other
                Intangible Assets," issued by the Financial Accounting Standards
                Board ("FASB") in July 2001, which are substantially consistent
                with equivalent Canadian HB 1581, "Business Combinations," and
                HB 3062, "Goodwill and Other Intangible Assets," except that
                under U.S. GAAP, any transitional impairment charge is
                recognized in earnings as a cumulative effect of a change in
                accounting principles. The accounting policy is described in
                note 2(e).


                                       60


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

       (vi)     Accounting for the impairment or disposal of long-lived assets:

                Effective January 1, 2002, the Company adopted SFAS No. 144,
                "Accounting for the Impairment or Disposal of Long-Lived
                Assets." The statement supersedes SFAS No. 121, "Accounting for
                the Impairment of Long-Lived Assets and for Long-Lived Assets to
                Be Disposed Of," and the accounting and reporting provisions of
                APB Opinion No. 30, "Reporting the Results of Operations -
                Reporting the Effects of Disposal of a Segment of a Business,
                and Extraordinary, Unusual and Infrequently Occurring Events and
                Transactions" ("Opinion 30"), for the disposal of a segment of a
                business (as previously defined in that Opinion). SFAS No. 144
                retains the fundamental provisions in SFAS No. 121 for
                recognizing and measuring impairment losses on long-lived assets
                held for use and long-lived assets to be disposed of by sale. It
                also provides guidance on how a long-lived asset that is used as
                part of a group should be evaluated for impairment, establishes
                criteria for when a long-lived asset is held for sale, and
                prescribes the accounting for a long-lived asset that will be
                disposed of other than by sale. SFAS No. 144 retains the basic
                provisions of Opinion 30 on how to present discontinued
                operations in the income statement but broadens that
                presentation to include a component of an entity (rather than a
                segment of a business). There was no effect on adoption of SFAS
                No. 144, effective January 1, 2002, on the Company's results of
                operations and financial position. In June 30, 2002, a
                write-down of property, plant and equipment was recorded (note
                5) and resulted in a U.S. GAAP difference as described below.

                SFAS No. 144 requires the measurement of an impairment charge to
                be based on the excess of the carrying value over the fair value
                of the assets, while Canadian GAAP measures the impairment as
                the excess of the carrying value over the net recoverable amount
                of the assets. The Company assessed the fair value of the
                affected asset group based on the market price for similar
                functionality and changes in the intended use of the asset group
                and asset group's remaining life given changes to the Company's
                strategy. The difference in the basis of measurement resulted in
                an additional impairment charge of $161 million under U.S. GAAP
                recorded in the second quarter of 2002. For the year ended
                December 31, 2002, depreciation expense is $10.9 million less
                under U.S. GAAP as a result of the difference in measuring the
                impairment charge.


                                       61


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):


       (b) Other disclosures:


           (i) Accounts receivable are net of an allowance for doubtful accounts
               of $20.2 million (2001 - $24.3 million) at December 31, 2002.

          (ii) In addition to the commitments and contingencies described in
               note 24, the Company has also provided routine indemnifications,
               whose terms range in duration and often are not explicitly
               defined. These indemnifications relate to adverse effects due to
               changes in tax laws, infringements by third parties related to
               intellectual property, and under certain supplier agreements,
               losses arising from claims by third parties against suppliers,
               including customers, in connection with the use of services and
               related equipment by the third party. The maximum amounts from
               these indemnifications cannot be reasonably estimated.
               Historically, the Company has not made significant payments
               related to these indemnifications. The Company has also
               indemnified a third party in connection with a marketing
               agreement, and has determined that the potential maximum loss is
               not significant. The Company has also indemnified certain
               financial advisors regarding liability they may incur as a
               result of their activity as advisors to the Company or the
               Company's Noteholders.

               The Company continues to monitor the conditions that are subject
               to guarantees and/or indemnifications to identify whether it is
               probable that a loss has occurred, and would recognize any such
               losses under any guarantees and indemnifications when those
               losses are estimable.


                                       62


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

       (iii)    Recently issued accounting standards:

                In June 2001, FASB issued SFAS No. 143, "Accounting for Asset
                Retirement Obligations." SFAS No. 143 requires the Company to
                record the fair value of an asset retirement obligation as a
                liability in the period in which it incurs a legal obligation
                associated with the retirement of tangible long-lived assets
                that result from the acquisition, construction, development
                and/or normal use of the assets. The Company also records a
                corresponding asset that is depreciated over the life of the
                asset. Subsequent to the initial measurement of the asset
                retirement obligation, the obligation will be adjusted at the
                end of each period to reflect the passage of time and changes in
                the estimated future cash flows underlying the obligation. The
                Company is required to adopt SFAS No. 143 on January 1, 2003.
                The Company is currently evaluating the impact of adoption on
                the consolidated financial statements.

                In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
                Statements Nos. 4, 44 and 64, Amendment of FASB Statement No.
                13, and Technical Corrections." SFAS No. 145 amends existing
                guidance on reporting gains and losses on the extinguishment of
                debt to prohibit the classification of the gain or loss as
                extraordinary, as the use of such extinguishments have become
                part of the risk management strategy of many companies. SFAS No.
                145 also amends SFAS No. 13 to require sale-leaseback accounting
                for certain lease modifications that have economic effects
                similar to sale-leaseback transactions. The provisions of the
                Statement related to the rescission of Statement No. 4 is
                applied in fiscal years beginning after May 15, 2002. Earlier
                application of these provisions is encouraged. The provisions of
                the Statement related to Statement No. 13 were effective for
                transactions occurring after May 15, 2002, with early
                application encouraged. The Company is currently evaluating the
                impact of adoption on the consolidated financial statements.

                In July 2002, the FASB issued SFAS No. 146, "Accounting for
                Costs Associated with Exit or Disposal Activities," which
                requires companies to recognize costs associated with exit or
                disposal activities when they are incurred rather than at the
                date of a commitment to an exit or disposal plan. SFAS No. 146
                is to be applied prospectively to exit or disposal activities
                initiated after December 31, 2002. There was no effect on
                adoption of SFAS No. 146 on the Company's results of operations
                and financial position for 2002 and prior years.


                                       63


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

                In November 2002, the FASB issued Interpretation No. 45,
                "Guarantor's Accounting and Disclosure Requirements for
                Guarantees, Including Indirect Guarantees of Indebtedness of
                Others" ("FIN 45"), which requires certain disclosures of
                obligations under guarantees. The disclosure requirements of FIN
                45 are effective for the Company's year ended December 31, 2002
                and are included in note 23(b)(ii) to these consolidated
                financial statements. Effective for 2003, FIN 45 also requires
                the recognition of a liability by a guarantor at the inception
                of certain guarantees entered into or modified after December
                31, 2002, based on the fair value of the guarantee. The Company
                has not determined the impact of the measurement requirements of
                FIN 45.

                In November 2002, the Emerging Issues Task Force reached a
                consensus on Issue 00-21, addressing how to account for
                arrangements that involve the delivery or performance of
                multiple products, services, and/or rights to use assets.
                Revenue arrangements with multiple deliverables are divided into
                separate units of accounting if the deliverables in the
                arrangement meet the following criteria: (a) the delivered item
                has value to the customer on a standalone basis; (b) there is
                objective and reliable evidence of the fair value of undelivered
                items; and (c) delivery of any undelivered item is probable.
                Arrangement consideration should be allocated among the separate
                units of accounting based on their relative fair values, with
                the amount allocated to the delivered item being limited to the
                amount that is not contingent on the delivery of additional
                items or meeting other specified performance conditions. The
                final consensus will be applicable to agreements entered into in
                fiscal periods beginning after June 15, 2003 with early adoption
                permitted. The Company is currently evaluating the impact of
                adoption on the consolidated financial statements.

                In December 2002, the FASB issued SFAS No. 148, "Accounting for
                Stock-Based Compensation - Transition and Disclosure, an
                amendment of FASB Statement No. 123." This Statement amends FASB
                Statement No. 123, "Accounting for Stock-Based Compensation," to
                provide alternative methods of transition for a voluntary change
                to the fair value method of accounting for stock-based employee
                compensation. In addition, this Statement amends the disclosure
                requirements of Statement No. 123 to require prominent
                disclosures in both annual and interim financial statements.
                Certain of the disclosure modifications are required for fiscal
                years ending after December 15, 2002 and are included in the
                notes to these consolidated financial statements.


                                       64


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

23.    RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
       STATES (CONTINUED):

              In January 2003, the FASB issued Interpretation No. 46,
              "Consolidation of Variable Interest Entities, an interpretation of
              ARB No. 51." This Interpretation addresses the consolidation by
              business enterprises of variable interest entities as defined in
              the Interpretation. The Interpretation applies immediately to
              variable interests in variable interest entities created after
              January 31, 2003, and to variable interests in variable interest
              entities obtained after January 31, 2003. The Interpretation
              requires certain disclosures in financial statements issued after
              January 31, 2003 if it is reasonably possible that the Company
              will consolidate or disclose information about variable interest
              entities when the Interpretation becomes effective. The
              application of this Interpretation will not have a material effect
              on the Company's financial statements.

24.    COMMITMENTS AND CONTINGENCIES:

       (a) Contractual commitments:


           Under the terms of its operating lease agreements for fibre optics
           maintenance, operating facilities, equipment rentals and minimum
           purchase commitments under supply contracts and customer contracts,
           the Company is committed to make the following payments for the years
           ending December 31, as follows:


           -----------------------------------------------------------------
                                                               
           2003                                                   $  159,883
           2004                                                      106,891
           2005                                                       90,570
           2006                                                       47,881
           2007                                                       37,944
           Thereafter                                                252,316
           -----------------------------------------------------------------
                                                                  $  695,485
           =================================================================



                                       65


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

24.    OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED):

       (b) Contingent liabilities:


           (i)  Professional fees:

                Upon successful completion of the Plan, the Company is required
                to pay success fees to certain financial advisors. These fees
                will consist of: (a) a fixed restructuring transaction fee of
                U.S. $10.0 million, and (b) a transaction fee, equal to 0.75% of
                the fair market value of all cash and/or other securities
                received by the Noteholders pursuant to the Plan. The total
                amount of these fees due upon successful implementation of the
                Plan will be reduced by the monthly payments made to these
                financial advisors during 2002 to emergence from CCAA. These
                success fees have not been accrued as at December 31, 2002
                because payment is contingent on successful implementation of
                the Plan.

           (ii) Litigation:

                As a result of the Company's CCAA filing, virtually all pending
                pre-petition litigation against the Company is currently stayed.
                A significant portion of the Company's pending pre-petition
                litigation will be dealt with during the CCAA proceedings as
                described in note 8.

                In the normal course of operations, the Company may be subject
                to litigation and claims from customers, suppliers and former
                employees. Management believes that adequate provisions have
                been recorded in the accounts where required. Although it is not
                possible to estimate the extent of potential costs, if any,
                management believes that the ultimate resolution of such
                contingencies would not have a material adverse effect on the
                financial position of the Company.

       (c) Letters of credit:

           In the normal course of business, the Company issues letters of
           credit in compliance with its right-of-way agreements with various
           municipalities and utility companies. In general, the terms of the
           letter of credit permit the municipality or the utility company to
           draw on the letter of credit to recover any losses incurred under the
           right-of-way agreement, as defined. As at December 31, 2002, the
           Company had letters of credit outstanding of $1.3 million with nil
           drawn.


                                       66


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

24.    OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED):

       (d) Collective bargaining agreement:

           As at December 31, 2002, approximately 21% or 847 employees of the
           Company were union members covered by collective bargaining
           agreements. The union employees of the Company are currently
           represented by two unions, the Canadian Auto Workers ("CAW") Local
           2000 and the United Steelworkers of America ("UWSA") TC Local 1976.
           The collective bargaining agreements are effective from January 1,
           2001 to December 31, 2003. In 2003, the Company will need to
           negotiate new collective agreements with its union partners.

25.    SUBSEQUENT EVENTS:

       In order to facilitate the reorganization pursuant to the Plan, on
       January 16, 2003, AT&T Canada entered into the Sale and Call Agreement
       with New OpCo, Canada Corp., AT&T Corp., AT&T Canada Holdings Limited
       Partnership ("AT&T LP"), Brascan Financial Corporation, Tricap
       Investments Corporation and 1519888 Ontario Limited ("BCo"), whereby AT&T
       LP agreed to sell all of its direct and indirect ownership interests in
       both AT&T Canada and Canada Corp. to BCo. BCo has granted a call option
       (the "Option") to New OpCo to buy the shares it acquires from AT&T LP
       representing a direct and indirect ownership interest in Canada Corp.
       (other than the shares of AT&T Canada) for a purchase price of $0.15
       million. The Option is exercisable on or at any time after March 15,
       2003. In the event that New OpCo does not exercise the Option before the
       implementation of the Plan, New OpCo has agreed to pay $0.15 million to
       BCo upon implementation of the Plan. On February 17, 2003 AT&T Corp. sold
       all of its direct and indirect ownership interest in Canada Corp. to BCo.

       On January 17, 2003, the Company announced it had established a new
       commercial agreement with AT&T Corp. The new commercial agreements among
       other things, require AT&T Canada to launch a new brand name by September
       9, 2003, and to cease use of the AT&T brand by no later than December 31,
       2003. In addition, these agreements provide a timeframe for continuity of
       the Company's global connectivity, technology platform and product suite,
       and maintain network ties between the two companies for the benefit of
       customers. These agreements enable AT&T Canada and AT&T Corp. to continue
       working together on a non-exclusive basis, and provide the Company the
       ability to forge additional supplier relationships that will enhance its
       connectivity and product offerings. Also, these arrangements recognize
       AT&T Corp.'s ability to serve Canadian customers directly, including
       competing with AT&T Canada.


                                       67


AT&T CANADA INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------

25.    SUBSEQUENT EVENTS (CONTINUED):

       On February 20, 2003, the Plan was approved by the Company's Noteholders
       and its other Affected Creditors.

       On February 25, 2003, the Court issued an order sanctioning the Plan and
       the U.S. Court issued an order recognizing and enforcing the Court's
       sanction order.


                                       68

EX-99.3

                                                                    EXHIBIT 99.3





                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareowners' of Concert B.V.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareowners' equity and comprehensive
loss and cash flows present fairly, in all material respects, the financial
position of Concert, B.V. and its subsidiaries (the "Company") at December 31,
2001, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.






PricewaterhouseCoopers LLP
McLean, Virginia
May 1, 2002


                                  CONCERT, B.V.
                           CONSOLIDATED BALANCE SHEETS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)



                                     ASSETS
                                                                                         AT DECEMBER 31,
                                                                                     -------------------------
                                                                                                   (UNAUDITED)
                                                                                       2001           2000
                                                                                     --------      -----------
                                                                                             
Current assets:
  Cash and cash equivalents                                                          $   105       $   127
  Accounts receivable:
         Trade third parties, less allowances of $146 and
            $36 (unaudited)                                                            2,539         1,825
         Trade related parties                                                           768         1,670
         Other third parties, less allowance of $4 and $1
            (unaudited)                                                                   80           222
         Other related parties                                                            54           444
  Loans and interest due from related parties                                            159           328
  Prepaid expenses and other                                                              39            36
                                                                                     -------       -------
           Total current assets                                                        3,744         4,652
  Property and equipment, net                                                          1,744         3,753
  Intangible and other assets, net                                                        14           949
                                                                                     -------       -------
           Total assets                                                              $ 5,502       $ 9,354
                                                                                     =======       =======

                       LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
  Trade accounts payable and accrued expenses:
         Third parties                                                               $ 2,694       $ 2,450
         Related parties                                                               1,076         1,942
  Accrued employee related costs                                                         361           107
  Capital lease obligation                                                                15            15
  Deferred revenue                                                                        81            47
  Income and value added taxes payable                                                    69           116
                                                                                     -------       -------
           Total current liabilities                                                   4,296         4,677
  Accrued employee related costs, net of current portion                                  --            68
  Capital lease obligation, net of current portion                                        29            41
  Deferred revenue, net of current portion                                                46            39
  Deferred income taxes                                                                    1             9
  Long-term debt related parties                                                          --         1,950
                                                                                     -------       -------
           Total liabilities                                                           4,372         6,784
                                                                                     -------       -------

Commitments and contingencies (Note 10)

Shareowners' equity:
   Class A ordinary shares, par value 100 NLG; 300,000 shares authorized;
     125,101 shares issued and outstanding at December 31, 2001; 125,100 shares
     issued and outstanding at December 31, 2000
     (unaudited)                                                                           6             6
   Class B ordinary shares, par value 400 NLG; 300,000
     shares authorized; 125,101 shares issued and outstanding at December 31,
     2001; 125,100 shares issued and outstanding at December 31, 2000
     (unaudited)                                                                          24            24
  Additional paid-in capital                                                           5,476         3,355
  Accumulated deficit                                                                 (4,425)         (816)
  Contribution receivable                                                                 --           (22)
  Accumulated comprehensive income                                                        49            23
                                                                                     -------       -------
           Total shareowners' equity                                                   1,130         2,570
                                                                                     -------       -------
           Total liabilities and shareowners' equity                                 $ 5,502       $ 9,354
                                                                                     =======       =======


   The accompanying notes are an integral part of these financial statements.

                                       1

                                  CONCERT, B.V.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                              (DOLLARS IN MILLIONS)



                                                   FOR THE YEARS ENDED
                                                        DECEMBER 31,
                                                        ------------
                                                              (UNAUDITED)
                                                    2001         2000
                                                    ----         ----
                                                        
Net revenue                                       $ 6,189       $ 7,748

Operating expenses:
  Access, interconnection and network               5,128         5,836
  Selling, general and administrative               1,345         1,058
  Asset write-offs                                  2,625            --
  Depreciation and amortization                       665           525
                                                  -------       -------

      Total operating expenses                      9,763         7,419
                                                  -------       -------

Operating loss                                     (3,574)          329

Other income (expense):
  Interest income                                      19            36
  Interest expense, net                               (76)         (106)
  Loss on foreign currency transactions, net          (50)          (90)
  Other (expense) income                              (28)           34
                                                  -------       -------

      Total other expense                            (135)         (126)
                                                  -------       -------

(Loss) income before income taxes                  (3,709)          203

Income tax benefit (provision)                         76           (98)

Minority interest                                      24            (2)
                                                  -------       -------

      Net (loss) income                           $(3,609)      $   103
                                                  =======       =======


   The accompanying notes are an integral part of these financial statements.

                                       2

                                  CONCERT, B.V.
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY AND
                           COMPREHENSIVE (LOSS) INCOME
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)




                                                                                      FOR THE YEARS ENDED
                                                                                          DECEMBER 31,
                                                                                          ------------
                                                                                                 (UNAUDITED)
                                                                                      2001          2000
                                                                                      ----          ----
                                                                                           
Class A ordinary shares:
   Balance at beginning of year                                                      $     6       $    --
      125,100 shares issued to AT&T in connection with the formation of the
      Global Venture (Note 3)                                                             --             6
      1 share issued to AT&T in connection with the conversion of the AT&T Term
      Loan to equity (Note 3)                                                             --            --
                                                                                     -------       -------
Balance at end of year                                                                     6             6
                                                                                     -------       -------

Class B ordinary shares:
    Balance at beginning of year (125,100 shares)                                         24            24
      1 share issued in connection with the conversion of the BT Term Loan to
      equity (Note 3)                                                                     --            --
                                                                                     -------       -------
Balance at end of year                                                                    24            24
                                                                                     -------       -------

Additional paid-in capital:
    Balance at beginning of year                                                       3,355         1,360
      Shares issued in connection with the formation of the Global Venture
      (Note 3)                                                                            --         1,726
         Cash contributions (Note 3)                                                      --           256
         Other non-cash contributions from shareowners (Note 3)                           --            43
         Contribution receivable from shareowner (Note 3)                                 --            22
       Estimated income taxes paid on behalf of shareowners (Note 3)                      --           (52)
      Conversion of AT&T and BT Term Loans to equity (Note 3)                          2,121            --
                                                                                     -------       -------
Balance at end of year                                                                 5,476         3,355
                                                                                     -------       -------

Accumulated deficit:
    Balance at beginning of year                                                        (816)         (919)
        Net (loss) income                                                             (3,609)          103
                                                                                     -------       -------
Balance at end of year                                                                (4,425)         (816)
                                                                                     -------       -------

Contribution receivable:
   Balance at beginning of year                                                          (22)           --
      Cash contribution receivable from shareowner                                        --           (22)
      Cash contribution received from shareowner                                          22            --
                                                                                     -------       -------
Balance at end of year                                                                    --           (22)
                                                                                     -------       -------

Accumulated comprehensive income:
   Balance at beginning of year                                                           23            37
       Foreign currency translation adjustment                                            26           (14)
                                                                                     -------       -------
Balance at end of year                                                                    49            23
                                                                                     -------       -------
Total shareowners' equity                                                            $ 1,130       $ 2,570
                                                                                     =======       =======

Comprehensive (loss) income:
   Net (loss) income                                                                 $(3,609)      $   103
   Foreign currency translation adjustment, less income taxes of $8 and $(4)
   (unaudited), respectively                                                              18           (10)
                                                                                     -------       -------
 Total comprehensive (loss) income                                                   $(3,591)      $    93
                                                                                     =======       =======


   The accompanying notes are an integral part of these financial statements.

                                       3

                                  CONCERT, B.V.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)



                                                                                                 FOR THE YEARS ENDED
                                                                                                     DECEMBER 31,
                                                                                                     ------------
                                                                                                            (UNAUDITED)
                                                                                                  2001          2000
                                                                                                  ----          ----
                                                                                                      
Cash flows from operating activities:
  Net (loss) income                                                                             $(3,609)      $   103
  Adjustments to reconcile net (loss) income to net cash provided by operating activities:
   Depreciation and amortization                                                                    665           525
   Bad debt expense                                                                                  85            40
   Unrealized foreign exchange losses, net                                                           43            91
   Deferred taxes                                                                                    (8)            1
   Minority interest share of net (loss) income                                                     (24)            2
   Asset write-offs                                                                               2,625            --
   Other non-cash items                                                                              23             9
   Changes in operating assets and liabilities:
     Accounts receivable:
      Trade third parties                                                                          (838)       (1,758)
      Trade related parties                                                                         902            43
      Other third parties                                                                           142          (202)
      Other related parties                                                                         390          (420)
     Interest due from related parties                                                                9            10
     Prepaid expenses and other                                                                      (1)           55
     Trade accounts payable and accrued expenses:
      Third parties                                                                                 332         1,152
      Related parties                                                                              (629)        1,140
     Accrued employee related costs                                                                 188           244
     Income and value added taxes payable                                                           (18)           84
     Deferred revenue                                                                                41            86
     Other  assets and liabilities                                                                   19            12
                                                                                                -------       -------
        Net cash provided by operating activities                                                   337         1,217
                                                                                                -------       -------

Cash flows from investing activities:
  Acquisition of property and equipment                                                            (438)       (1,108)
  Loans to related parties                                                                       (1,015)         (437)
  Repayments of loans due from related parties                                                    1,163           130
  Other investing activities                                                                        (20)          (78)
                                                                                                -------       -------
        Net cash used in investing activities                                                      (310)       (1,493)
                                                                                                -------       -------

Cash flows from financing activities:
  Proceeds from issuance of long-term debt related parties                                           --         1,000
  Principal payments on long-term debt related parties                                               --          (906)
  Proceeds from capital contributions from related party                                             22           308
  Proceeds from the issuance of notes payable                                                       217            --
  Payments on accrued interest to related party                                                    (217)           --
  Cash overdraft                                                                                    (46)           48
  Estimated income taxes paid on behalf of shareowners                                               --           (52)
  Payments on capital lease obligation                                                              (13)           (3)
  Other financing activities                                                                        (11)           --
                                                                                                -------       -------
        Net cash (used) provided by financing activities                                            (48)          395
                                                                                                -------       -------

Net effects of foreign currency on cash                                                              (1)           --
                                                                                                -------       -------

Net decrease in cash and cash equivalents for the year                                              (22)          119
Cash and cash equivalents, beginning of year                                                        127             8
                                                                                                -------       -------
Cash and cash equivalents, end of year                                                          $   105       $   127
                                                                                                =======       =======


   The accompanying notes are an integral part of these financial statements.

                                       4

                                  CONCERT, B.V.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)



                                                                                                 FOR THE YEARS ENDED
                                                                                                     DECEMBER 31,
                                                                                                     ------------
                                                                                                           (UNAUDITED)
                                                                                                  2001        2000
                                                                                                  ----        ----
                                                                                                     
Supplemental disclosure of cash flow information:
  Cash paid for interest, including  interest capitalized                                        $  217      $    6
  Cash paid for income taxes, including amounts paid on behalf of shareowners of $0 and $52
   (unaudited), respectively                                                                     $   25      $   70

Non-cash investing and financing activities:
  Payment due for the purchase of assets from related parties                                    $   11      $   23
  Equipment acquired under capital lease                                                         $   --      $   59
  Non-cash contributions by related parties                                                      $   --      $   43
  Non-cash contributions in connection with the formation of the Global Venture                  $   --      $1,680
  Conversion of long-term debt and related accrued interest - related parties                    $2,121      $   --


   The accompanying notes are an integral part of these financial statements.

                                       5

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

1.   ORGANIZATION

     DESCRIPTION OF THE BUSINESS

     Concert B.V., a private limited liability company established in Amsterdam,
     the Netherlands, on October 20, 1998, through the Concert global group of
     companies (collectively, "Concert" or the "Company"), provides global
     communications services to multi-national companies, traditional and
     emerging carriers, wholesalers and Internet service providers. Concert's
     core business offering and products include the sale of International
     Direct Dial (IDD), Select, Wholesale, Transit and other voice services,
     International Bandwidth, Data, IP and domestic services to multi-national
     customers. The ultimate parent company from inception to January 4, 2000
     was British Telecommunications plc. ("BT"). On January 5, 2000, the Company
     became jointly owned by AT&T, Corp. ("AT&T") and BT, pursuant to the
     provisions of the Framework and Closing Agreements dated October 23, 1998
     and November 22, 1999, respectively, as amended and effective for purposes
     of forming a joint venture ("The Global Venture" or "GV") on January 5,
     2000.

     As part of the GV formation, as discussed further in Note 3, BT and AT&T
     (collectively, "the Parents") contributed certain assets, liabilities and
     economic benefits and risks of certain contracts. The contribution of
     assets, liabilities and contract rights was accounted for using the
     Parents' cost basis at January 5, 2000.

     Concert's operations are separated into the following business units:
     Global Accounts ("GA"), Global Markets ("GM"), International Carrier
     Services ("ICS"), Global Products ("GP"), and Networks & Systems ("N&S").

     GA provides a named set of approximately 270 multinational corporations
     ("MNC") with global telecommunication sales and service. Customers are
     primarily in the finance, petrochemical, pharmaceutical, and information
     technology industry sectors. Global Accounts' customers have a single point
     of contact with responsibility for everything from service procurement to
     problem resolution, through a Global Account Manager with a full support
     team of service network designers, field engineers and billing specialists.

     GM provides international communications services through a network of over
     50 distributors, (including the Parents) to multinational companies, and
     other business customers and institutions worldwide. Products include a
     range of Bandwidth (international private line), Data (international frame
     relay, packet and ATM services), Voice (freephone, virtual network
     services, global software-defined networks) and value-added IP ("Internet
     Protocol") services.

                                       6

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     ICS is responsible for international voice traffic management and
     correspondent carrier relations for the Parents. In addition, ICS offers
     telecommunications services to traditional and emerging carriers,
     wholesalers and internet service providers worldwide. The unit manages the
     profit and loss of a wholesale voice cross-border service portfolio that
     includes international wholesale product platforms as well as switched
     transit and hubbing services.

     GP develops and manages the Concert portfolio of retail services sold by
     GA, the Parents, and other distributors. This organization creates
     innovative solutions in network-based corporate communication services.
     Emphasis is on the delivery of leading edge international services and
     applications. The functional areas in this organization include product
     management, service, marketing and strategy.

     N&S is responsible for designing, building, managing and maintaining
     Concert's global network, as well as delivering all aspects of customer
     service. The N&S unit is the interface with in-country domestic suppliers
     for access, whether with AT&T or BT in their home markets, or with local
     network providers in other countries. N&S is also responsible for the
     integration of networks, technical platforms and systems (including
     development), along with their associated processes.

     TERMINATION OF THE GV

     On October 15, 2001, AT&T, BT and Concert entered into binding agreements
     (collectively the "Termination Agreements"), which, upon closing, resulted
     in Concert's acquisition of 100% of AT&T's equity interest ("AT&T Shares")
     in Concert, in exchange for certain assets, liabilities, contracts,
     customers and other items of Concert ("Transferred Assets"). After
     completion of certain conditions, closing occurred on April 1, 2002
     ("Close" or "Closing"). Upon Closing, as consideration for the AT&T Shares,
     a portion of the assets, liabilities, contracts, customers and other
     operational items transferred to AT&T. The Transferred Assets consisted
     primarily of those items that were contributed by AT&T in connection with
     the formation of the GV, in addition to certain assets and obligations that
     were purchased, generated or developed during the operation of the GV. The
     remaining business is now wholly owned by BT.

     As a result of the April 1, 2002 transaction described above, the financial
     position, results of operations and cash flows included in these financial
     statements are not representative of the remaining Concert business from
     April 1, 2002 forward.

                                       7

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     CONTINUING OPERATIONS

     In order for Concert to continue its global operations, Concert has entered
     into commercial arrangements with AT&T at Closing. The purpose of these
     arrangements is to provide Concert the ability to offer telecommunication
     services in geographic regions where Concert will no longer have the
     operating assets as a result of the movement of the Transferred Assets to
     AT&T.

     LIQUIDITY

     In accordance with the Termination Agreements, a funding plan for
     supporting the operations of the Company between October 15, 2001 and the
     Close and a series of Transition Projects that will continue post Close was
     established. With minimal exceptions, this funding plan requires the
     Parents to equally fund operations through Close and the completion of the
     Transition Projects.

     Post Close, BT confirmed that sufficient funding will be available for
     Concert to meet its financial obligations up to and through March 31, 2003.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CONSOLIDATION

     The consolidated financial statements have been prepared in accordance with
     generally accepted accounting principles in the United States (U.S.) and
     include the accounts of Concert and its majority-owned subsidiaries. All
     material inter-company accounts and transactions have been eliminated in
     the consolidated financial statements. Certain balances in the prior year
     have been reclassified to conform to the presentation adopted in the
     current year.

     The unaudited Consolidated Balance Sheet as of December 31, 2000, the
     unaudited Statement of Operations, Shareowners' Equity and Comprehensive
     (Loss) Income and Cash Flows for the year ended December 31, 2000 have been
     prepared in accordance with generally accepted accounting principles. In
     the opinion of management, all adjustments (consisting of only normal
     recurring adjustments) considered necessary for a fair presentation have
     been included.

                                       8

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amount of assets and liabilities,
     disclosure of contingent assets and liabilities at the date of the
     financial statements and reported amounts of revenues and expenses during
     the reporting period. Actual results could differ from these estimates.

     FOREIGN CURRENCY TRANSLATION

     Concert maintains its consolidated financial statements in U.S. dollars.
     Income statement amounts are translated at average exchange rates for the
     year and assets and liabilities are translated at year-end exchange rates
     for operations that prepare financial statements in currencies other than
     the U.S. dollar. These translation adjustments are presented as a component
     of accumulated other comprehensive (loss) income within shareowners'
     equity. Gains and losses from foreign currency transactions are included in
     net (loss) income.

     REVENUE RECOGNITION

     Concert records net revenue in accordance with Staff Accounting Bulletin
     ("SAB") No. 101, "Revenue Recognition in Financial Statements," and
     Emerging Issues Task Force No. 99-19, "Reporting Revenue Gross as a
     Principal versus Net as an Agent", which provide guidance on the
     recognition, presentation and disclosure of revenue in financial
     statements.

     Prior to October 15, 2001, the Company reported revenue generated from MNC
     Domestic services on a gross basis. This was based upon a number of key
     facts including customer ownership, economic risk, price control and the
     Company's intent to migrate the contractual relationship from the Parents
     direct to Concert. In connection with the decision to unwind the GV, a
     number of these factors changed and the Company has concluded the
     appropriate presentation for MNC domestic sales, post October 15, 2001
     should be on a net basis.

     This change in presentation resulted in a reduction in net revenue,
     accounts receivable, operating expenses and accounts payable related party
     for the year ended December 31, 2001 of $299.

     Concert recognizes revenue from the sale of International Direct Dial
     (IDD), Select, Wholesale, Transit and other Voice services, International
     Bandwidth, Data, MNC Domestic and IP services when persuasive evidence of
     an arrangement exists, delivery has occurred or services are provided,
     prices are fixed and determinable and collection is reasonably assured.
     Revenue is recognized as services are provided net of amounts that will be
     neither billed nor

                                       9

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     collected. Amounts invoiced to customers, including sub-sea capacity, prior
     to the relevant criteria for revenue recognition being satisfied, are
     included in deferred revenue which is included in the accompanying
     consolidated balance sheet.

     ADVERTISING

     Costs of advertising and promotions, excluding cash incentives used to
     acquire customers, are expensed as incurred. Advertising and promotional
     expenses were $45 and $38 (unaudited) for the years ended December 31, 2001
     and 2000, respectively.

     CASH AND CASH EQUIVALENTS

     Concert considers all highly liquid investments having original maturities
     of ninety days or less at the date of acquisition to be cash equivalents.
     The carrying value of cash equivalents approximates fair value.

     PROPERTY AND EQUIPMENT

     Property and equipment, which includes capitalized leases, are stated at
     cost, net of depreciation and amortization. Expenditures for improvements
     that significantly add to productive capacity or extend the useful life of
     an asset are capitalized, while expenditures for repairs and maintenance
     are expensed as incurred.

     Expenditures for construction of network systems and other projects prior
     to the asset being ready for its intended use are reflected as construction
     in progress. Capitalized costs include costs incurred under the
     construction contracts, labor and interest. Total interest cost incurred
     for the years ended December 31, 2001 and 2000 were $99 and $133
     (unaudited), respectively. Interest capitalized on construction in progress
     for the years ended December 31, 2001 and 2000 were $23 and $27
     (unaudited), respectively. Costs incurred relating to the evaluation of new
     projects, prior to the date the development of the project becomes
     probable, are expensed as incurred.

     Depreciation is recorded on a straight-line basis over the estimated useful
     lives of the assets, with the exception of leasehold improvements and
     assets acquired through capital leases, which are depreciated over the
     lesser of the estimated useful lives of the asset or the term of the lease.
     The following are Concert's depreciable asset categories and their
     estimated useful lives:

                                       10

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                                              
         Network and other equipment                             3 to 20 years

         Software developed for internal use                     3 years

         Buildings and leasehold improvements                    5 to 40 years

         Administrative Assets                                   1 to 7 years



     When assets are sold or retired, the cost and related accumulated
     depreciation are eliminated from the accounts and the resultant, gain or
     loss is included in other income (expense).

     INTANGIBLE ASSETS

     Intangible assets include goodwill, and customer lists. Amounts contributed
     by the shareowners' as goodwill is the excess of the purchase price over
     the fair value of net assets acquired in a business combination accounted
     for under the purchase method. Concert amortizes goodwill on a
     straight-line basis over 20 years. Customer lists are amortized over 5
     years. In accordance with Accounting Principles Board Opinion No. 17,
     "Intangible Assets", Concert continues to evaluate the amortization periods
     of the Company's intangible assets to determine whether events or
     circumstances warrant revised amortization periods.

     SOFTWARE DEVELOPED FOR INTERNAL USE

     Certain development costs, including external direct costs of materials and
     services and payroll costs for employees devoting time to the projects
     associated with internal-use software are capitalized in accordance with
     Statement of Position No. 98-1, "Accounting for the Costs of Computer
     Software Development or Obtained for Internal Use". These costs are
     included within property and equipment and are amortized over a period of
     three years beginning when the asset is ready for its intended use. Costs
     incurred prior to technological feasibility, as well as maintenance and
     training costs are expensed as incurred. For the years ended December 31,
     2001 and 2000, Concert capitalized costs of $198 and $117 (unaudited),
     respectively, related to software development.

     Research and development costs are expensed as incurred. Concert recorded
     $154 and $83 (unaudited) as research and development costs for the years
     ended December 31, 2001 and 2000, respectively.

                                       11

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     LONG-LIVED ASSETS

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
     121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
     Assets to be Disposed of", long-lived assets, identifiable intangibles and
     goodwill related to those assets, are reviewed for impairment whenever
     events or changes in circumstances indicate that the carrying amount may
     not be recoverable. If the total of the expected future undiscounted cash
     flows is less than the carrying amount of the long-lived assets, related
     intangible assets and goodwill, then a loss is recognized for the
     difference between the fair value and carrying amount of the identifiable
     tangible, intangible assets and goodwill being evaluated. See note 4 for a
     discussion on asset impairments for the year ended December 31, 2001.

     SUB-SEA CABLE CAPACITY

     In connection with the formation of the GV, the Parents contributed sub-sea
     cable assets to Concert. These amounts have been recorded as Property and
     Equipment and are being depreciated over their remaining useful lives.

     In the normal course of business, Concert enters into transactions to
     acquire the right to use sub-sea cable assets or services. Dependent on the
     nature of the assets or services received, Concert accounts for the
     transaction as either a service contract or as a lease arrangement. If the
     services received do not meet the criteria of a lease, Concert accounts for
     the services received in accordance with accepted service contract
     accounting by recognizing the cost of the service offering over the term of
     the arrangement. If the assets received meet the criteria of a lease,
     Concert accounts for the arrangement in accordance with SFAS No. 13,
     "Accounting For Leases" (see note 10).

     DERIVATIVE FINANCIAL INSTRUMENTS

     Concert enters into foreign currency forward contracts to manage the risk
     of foreign currency exchange rate fluctuations. All foreign currency
     contracts are marked-to-market on a current basis with respective gains or
     losses recognized in other income (expense). The gains or losses on foreign
     currency contracts serve to offset (partially, or completely, depending on
     the nature of the instruments entered into in relation to the underlying
     assets) the impact of the revaluation of the underlying assets or
     liabilities (receivables or payables) that are recorded within Concert's
     financial statements in currencies other than U.S dollars.

                                       12

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject Concert to concentration of
     credit risk consist principally of cash and cash equivalents, and accounts
     receivable. Concert maintains its cash and cash equivalents with
     high-quality financial institutions which, at times, may exceed federally
     insured limits.

     Concert has accounts receivable and loans receivable from its Parents,
     which exceed 10% of the December 31, 2001 and 2000 accounts receivable and
     loans receivable balances. Receivable balances due from the Parents at
     December 31, 2001 and 2000 are $2,247 and $3,470 (unaudited), respectively.

     No other customers represented more than 10% of accounts receivable at
     December 31, 2001 and 2000.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of Concert's financial instruments, including cash and
     cash equivalents, accounts receivable, loans and interest receivable,
     accounts payable and accrued expenses are carried at cost which
     approximates fair value due to the relative short maturities of these
     instruments.

     The fair value of Concert's long-term debt due to the Parents at December
     31, 2000 is $1,812 (unaudited).

     INCOME TAXES

     Concert, B.V. is recognized as a partnership for U.S. income tax purposes,
     therefore Concert has not recorded current or deferred income taxes in the
     accompanying financial statements related to its U.S. operations. Concert's
     foreign subsidiaries recognize current and deferred income taxes using tax
     laws enacted in each local jurisdiction. Deferred taxes are recognized
     using the asset and liability approach in accordance with SFAS No. 109,
     "Accounting for Income Taxes". Under the asset and liability method,
     deferred income taxes are recognized for differences between the carrying
     amounts and tax basis of assets and liabilities at enacted statutory tax
     rates in effect for the years in which the differences are expected to
     reverse. Concert establishes a valuation allowance on net deferred tax
     assets when it is more likely than not that such assets will not be
     realized.

                                       13

                                  CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

     RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards (SFAS) No. 141, "Business
     Combinations" which supercedes Accounting Principles Board (APB) Opinion
     No. 16. SFAS No. 141 requires all business combinations initiated after
     June 30, 2001, to be accounted for under the purchase method. In addition,
     SFAS No. 141 establishes criteria for the recognition of intangible assets
     separately from goodwill. Management is in the process of evaluating what
     impact the adoption of SFAS No. 141 will have on the Company's financial
     statements.

     Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
     Intangible Assets" which supercedes APB Opinion No. 17. Under SFAS No. 142,
     goodwill and indefinite-lived intangible assets will no longer be
     amortized, but rather will be tested for impairment upon adoption of the
     standard and at least annually thereafter. In addition, the amortization
     period of intangible assets with finite lives will no longer be limited to
     40 years. SFAS No. 142 is effective for the Company as of January 1, 2002.
     Management is in the process of evaluating the effect that this statement
     will have on the Company's financial statements.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
     Retirement Obligations". This standard requires that obligations associated
     with the retirement of tangible long-lived assets be recorded as
     liabilities when those obligations are incurred, with the amount of the
     liability initially measured at fair value. Upon initially recognizing a
     liability for an asset retirement obligation, an entity must capitalize the
     cost by recognizing an increase in the carrying amount of the related
     long-lived asset. Over time, this liability is accreted to its present
     value, and the capitalized cost is depreciated over the useful life of the
     related asset. Upon settlement of the liability, an entity either settles
     the obligation for its recorded amount or incurs a gain or loss upon
     settlement. SFAS No. 143 is effective for financial statements issued for
     fiscal years beginning after June 15, 2002. Management is in the process of
     evaluating the effect that this statement will have on the Company's
     financial statements.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121,
     "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets,
     including discontinued operations, and amends APB opinion No. 30,
     "Reporting the Results of Operations-Reporting the Effects of Disposal of a
     Segment of a Business, and Extraordinary, Unusual and Infrequently
     Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144
     develops one accounting model for long-lived assets that are to be disposed
     of by sale, as well as addresses the principal

                                       14

                                 CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (Dollars in millions, except share data)
                                    ________

     implementation issues. SFAS No. 144 requires that long-lived assets that
     are to be disposed of by sale be measured at the lower of book value or
     fair value less cost to sell. Additionally, SFAS No. 144 expands the scope
     of discontinued operations to include all components of an entity with
     operations that (1) can be distinguished from the rest of the entity and
     (2) will be eliminated from the ongoing operations of the entity in a
     disposal transaction. SFAS No. 144 also amends Accounting Research Bulletin
     (ARB) No. 51, "Consolidated Financial Statements" to eliminate the
     exception to consolidation for a subsidiary for which control is likely to
     be temporary. SFAS No. 144 is effective for Concert as of January 1, 2002.
     Management is in the process of evaluating the effect that this statement
     will have on the Company's financial statements.


3.   RELATED PARTY TRANSACTIONS

     A substantial portion of Concert's business is transacted between the
     Company and its Parents. The majority of the terms and conditions,
     including renewal periods and renegotiation rights applicable to those
     business transactions, have been contractually agreed between the Parents.
     Below is a summary of the transactions between Concert and its Parents and
     the amounts included from those transactions in the Consolidated Statement
     of Operations for the years ended December 31, 2001 and 2000:



                                  (Unaudited)
                         2001        2000
                         ----        ----
                            
Net revenue             $2,522      $3,274
Operating expenses       2,491       2,340
Other expense               81          94


     Revenue earned from the Parents includes the sale of IDD, Wholesale, and
     other Voice services, International Bandwidth, Data, and IP services.

     Operating expenses relate to the cost of inland domestic services, network
     service, system support, maintenance and provisioning, international
     termination charges, US and UK domestic backhaul, billing and customer
     care, certain employee related costs and other general services inclusive
     of all related tax and regulatory charges.

     Other expenses include interest income and interest expense relating to the
     Parental loans and other commercial arrangements and settlements between
     Concert and BT.

                                       15

                                 CONCERT, B.V.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (Dollars in millions, except share data)
                                    ________

     As part of Concert's formation, provisions were included in the framework
     and closing agreement which required the Parents to reimburse Concert for
     certain costs under their commercial arrangements. During the years ended
     December 31, 2001 and 2000, Concert was to be reimbursed $30 and $346
     (unaudited), respectively. These amounts are recorded as a reduction of
     operating and other expenses.


     Balances included in the Consolidated Balance Sheets at December 31, 2001
     and 2000 for transactions with each Parent are as follows:



                                                           (Unaudited)
                                                  2001        2000
                                                  ----        ----
                                                     
Accounts receivable, net                         $  768      $1,670
Other related party receivables                      54         444
Loans and interest due from related parties         159         328

Accounts payable and accrued expenses             1,076       1,942
Long-term debt                                       --       1,950


     Included within trade-third parties accounts receivable balance at December
     31, 2001 are amounts due from the Parents as part of their role as
     Concert's billing and collection service provider. In this role, the
     Parents bill and collect certain revenue streams on Concert's behalf. These
     revenues and receivables are not generated from the sale of product or
     services to the Parents and therefore, they have been classified as third
     party accounts receivable. Amounts included in the Consolidated Balance
     Sheet for such items at December 31, 2001 and 2000 are $1,266 and $1,028
     (unaudited), respectively.

     Excluded from related party trade accounts payable and accrued expenses are
     amounts due to the Parents for payments, which the Parents make to
     unrelated third parties on Concert's behalf. Such payments consist
     primarily of property and equipment purchases and net settlement payments
     to third party carriers. At December 31, 2001 and 2000, $775 and $690
     (unaudited), respectively, is included in trade third party accounts
     payables and accrued expenses for these items.

                                       16

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



CONTRIBUTIONS UPON FORMATION

As discussed in Note 1, in connection with the GV formation, the Parents
contributed certain assets, liabilities and the economic benefits and risks of
certain contracts. The initial contributions to the GV have been accounted for
using predecessor or carryover basis.

The January 5, 2000 contributions of the Parents, including minority interest of
$44 (unaudited), are summarized below:



                                                               (Unaudited)

                                                            
         Cash and cash equivalents                               $     52
         Accounts receivable, net                                      44
         Prepaid expenses and other                                     2

         Property and equipment                                     1,785
         Intangible and other assets                                   67
                                                                 --------
         Total assets                                            $  1,950
                                                                 ========

         Accounts payable and accrued expenses                   $    172
         Income and value added taxes payable                           2
                                                                 --------
         Total liabilities                                       $    174
                                                                 ========

         Net Assets                                              $  1,776
                                                                 ========


Under the Framework Agreement, Concert receives the economic benefit and risk
associated with contracts assigned to the GV by AT&T and BT. Property and
equipment contributed by the Parents consists primarily of Trans-Atlantic and
Trans-Pacific sub-sea cable assets and related telecommunications network
equipment.

Included in the intangible and other assets contributed by the Parents is $65
(unaudited) related to rights to acquire capacity on a cable system in the Asia
Pacific region. At December 31, 2001, Concert has activated $30 of this capacity
and reclassified the balance to property and equipment, and is amortizing this
amount over 15 years. The Company has reviewed the carrying value of the
remaining cable capacity rights of $35, which will revert back to AT&T, as set
forth in the Termination Agreements (Note 1) and concluded that neither the
Company nor AT&T intends to activate this capacity. Therefore, the Company has
written off the remaining carrying value of the capacity rights and has included
the write-off within the Consolidated Statements of Operations in operating
expenses.

                                       17

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



LOANS DUE FROM RELATED PARTIES

On December 15, 2000, Concert extended a loan facility ("BT Loan Receivable") to
BT. The BT Loan Receivable facility expires on December 15, 2003. Any
outstanding principal balance is repayable on the expiration date of the
facility. Interest is accrued monthly, based on a 365 day year, at the rate of a
three month London Inter-bank Offered Rate ("LIBOR") plus 40 basis points, which
is measured at the beginning of each quarter, or 4.94% and 6.58% (unaudited) at
December 31, 2001 and 2000, respectively. The principal balance of the BT Loan
Receivable was $67 and $181 (unaudited) at December 31, 2001 and 2000,
respectively. Interest accrued during the facility period is payable on the
first business day of the following calendar year. During 2001, BT made
principal payments of $399 and took advances of $297. Accrued interest at
December 31, 2001 and interest income recorded during 2001 was $9 and $9,
respectively. Interest income accrued for 2000 was immaterial. Subsequent to
December 31, 2001, all amounts due under the BT Loan Receivable were paid to
Concert.

On August 30, 2000, Concert extended a loan facility ("AT&T Loan Receivable") to
AT&T. The AT&T Loan Receivable facility expires on August 30, 2003. Any
outstanding principal balance is repayable on the expiration date of the
facility. Interest is accrued monthly, based on a 360 day year, at the rate of a
three month LIBOR (on USD deposits) plus 40 basis points, which is calculated at
the beginning of each quarter, or 3.0% and 7.20% (unaudited) at December 31,
2001 and 2000, respectively. Interest accrued during the facility period is
payable on the first business day of the following calendar year. Accrued
interest at December 31, 2001 and 2000 was $3 and $2 (unaudited), respectively.
Interest income recorded during 2001 and 2000 was $5 and $6 (unaudited),
respectively. The principal balance of the AT&T Loan Receivable was $80 and $126
(unaudited) at December 31, 2001 and 2000, respectively. During 2001, AT&T made
principal payments of $764 and took advances of $718. Subsequent to December 31,
2001, all amounts due under the AT&T Loan Receivable were paid to Concert.

LOANS DUE TO RELATED PARTIES

On November 29, 2001, in connection with the Termination Agreement, through a
series of transactions AT&T and BT converted to equity the outstanding amounts
of the AT&T Term Loan, BT Term Loan and amounts equal to the related accrued
interest of $1,113 and $1,008, respectively. Prior to the conversion, accrued
interest of $113 and $104 on the AT&T and BT Term Loans, respectively was paid.
Subsequent to this transaction, the AT&T and BT Term Loans were cancelled and
terminated.

                                       18

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



During January 2000, Concert renewed a $904 term loan facility ("BT Term Loan")
with BT. The BT Term Loan, as amended, will expire on January 18, 2003. Interest
accrues daily on the basis of the actual number of days elapsed and a 365 day
year, at the rate of the three month LIBOR plus 40 basis points, which is
measured at the beginning of each quarter, or 4.94% and 6.58% (unaudited) at
December 31, 2001 and 2000, respectively. Accrued interest payable at December
31, 2001 and 2000 was zero and $60 (unaudited), respectively. Interest expense
recorded during the years ended December 31, 2001 and 2000 on the BT Term Loan
was $49 and $60 (unaudited), respectively.

During January 2000, Concert entered into a $1,000 term loan facility ("AT&T
Term Loan") with a wholly owned subsidiary of AT&T. The AT&T Term Loan was drawn
down during January and February 2000, in separate advances totaling $1,000. The
AT&T Term Loan, as amended, will expire on January 18, 2003. Interest is accrued
daily on the basis of the actual number of days elapsed and a 360 day year, at
the rate of a three month LIBOR plus 40 basis points, which is calculated at the
beginning of each quarter, or 3.00% and 7.20% (unaudited) at December 31, 2001
and 2000, respectively. Accrued interest payable at December 31, 2001 and 2000
was zero and $67 (unaudited), respectively. Interest expense recorded during the
years ended December 31, 2001 and 2000 on the AT&T Term Loan was $46 and $67
(unaudited), respectively.

The AT&T Term Loan is denominated in a currency other than the Company's
functional currency. Accordingly, the carrying value of the loan is subject to
foreign exchange rate risk. Concert recorded an unrealized foreign currency loss
on the AT&T Term Loan in the amount of $47 and $92 (unaudited) for the years
ended December 31, 2001 and 2000, respectively, which is included in loss on
foreign currency transactions, net on the Consolidated Statements of Operations.

OTHER TRANSACTIONS WITH OR ON BEHALF OF THE PARENTS

During the year ended December 31, 2000, the Parents made additional
contributions of buildings in the amount of $41 (unaudited), cash and
contribution receivable in the amount of $278 (unaudited) and other assets of $2
(unaudited). Concert also paid $52 (unaudited) of estimated income taxes on
behalf of its Parents in accordance with applicable tax laws and regulations.

On July 1, 2000, Concert acquired certain assets and assumed certain liabilities
of AT&T Global Markets Europe ("GME") for $72 (unaudited). Of the purchase
price, $50 (unaudited) was paid during 2000 with the balance paid in 2001 and
2002. This transaction resulted in Concert acquiring the customer base, customer
lists, related receivables and


                                       19

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



         obligations for the data and voice services provided to third parties
         by GME. The Company recorded liabilities of approximately $163
         (unaudited), accounts receivable and other assets of approximately $147
         (unaudited) and an intangible asset for the customer base of
         approximately $88 (unaudited). The Company is amortizing the
         identifiable intangible asset over five years.

         In December 2001, the Company completed negotiations to settle certain
         receivables and payables, which arose post GV formation, in dispute
         with the Parents. Against the total net unresolved disputes registered
         at December 31, 2001, Concert reserved $141 as an estimated loss in the
         accompanying Consolidated Balance Sheets and Consolidated Statements of
         Operations. The final resolution of this issue has concluded that the
         reserves were sufficient to close all parental disputes at December 31,
         2001.

4.       PROPERTY AND EQUIPMENT

         As of December 31, 2001 and 2000, property and equipment consists of
         the following:



                                                                     (Unaudited)
                                                            2001        2000
                                                           -------     -------
                                                                 
         Network and other equipment                       $ 2,016     $ 2,656
         Construction in progress                              222       1,162
         Software developed for internal use                   345         256
         Administrative assets                                 233         149
                                                           -------     -------
                                                             2,816       4,223
         Less accumulated depreciation and amortization     (1,072)       (470)
                                                           -------     -------
         Property and equipment, net                       $ 1,744     $ 3,753
                                                           =======     =======


         Property and equipment under capital lease is $59 at December 31, 2001
         and 2000 (unaudited) and consist primarily of sub-sea cable assets and
         related equipment. Accumulated depreciation at December 31, 2001 and
         2000, related to property and equipment under capital lease, was $4 and
         zero (unaudited), respectively. These assets are being amortized over
         the shorter of their estimated useful lives or the related lease term.

         Depreciation and amortization expense related to property and equipment
         for the years ended December 31, 2001 and 2000 amounted to $602 and
         $470 (unaudited), respectively.

         In connection with the execution of the Termination Agreements
         discussed in Note 1, it has been determined that certain of the
         Company's development projects will no longer be


                                       20

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



     continued. Accordingly, certain development assets have been abandoned. A
     charge of $35 was recorded for these projects during 2001 and is included
     in operating expenses on the Consolidated Statement of Operations.
     Additionally, as a result of the decision to unwind the GV, certain assets
     have been identified which remain functional, and are required in the GV's
     operations, but which will not be required by either Parent after Close. As
     of October 15, 2001, the date of the Termination Agreements, management has
     accelerated the depreciation on these assets such that they will be fully
     depreciated at Close. Accelerated depreciation of approximately $22 was
     recorded during the year ended December 31, 2001.

     During 2001, events and circumstances within the telecommunications
     industry occurred, including the October 15, 2001 announcement by AT&T and
     BT to terminate the GV, which indicated that the carrying amount of the
     Company's long-lived assets and related intangible assets may not be
     recoverable. Accordingly, the Company prepared an undiscounted cash flow
     analysis to determine if an impairment existed at the balance sheet date.

     The analysis was prepared assuming Concert would continue in existence as
     constituted before the signing of the Termination Agreement dated October
     15, 2001. The cash flows used in this hypothetical model assumed the assets
     were to be held and used and was provided by former Concert B.V. employees,
     now working for either AT&T or BT and may not be realized by the Company,
     AT&T or BT.

     The total future undiscounted cash flows in this analysis were less than
     the carrying amount included in the accompanying Consolidated Balance Sheet
     of the underlying long-lived assets and intangible assets at December 31,
     2001. Accordingly, an impairment loss of $2,535 was recorded in the
     Consolidated Statements of Operations. This loss represents the amount by
     which the carrying amount of the long-lived assets, related intangible
     assets and goodwill being evaluated exceeded the fair value of the
     underlying assets. The estimated fair value of the long-lived assets at
     December 31, 2001 was determined through the use of discounted cash flow
     analysis.

     Given the nature of the Company's assets and operations, the cash flow
     analysis was prepared at the entity level, which is the asset level for
     which the lowest level of cash flows was identifiable.

     As a result, the Company has written off goodwill prior to making any
     reduction of the carrying amounts of the impaired long-lived assets and
     other identifiable intangible assets. As the impairment loss exceeds the
     carrying amount of goodwill, at December 31, 2001, goodwill totaling $690
     has been fully written off. The remaining portion of the impairment


                                       21

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------


     loss, has been allocated to customer lists and then among the Company's
     property and equipment, $56 and $1,789, respectively.

5.   INTANGIBLE ASSETS

     As of December 31, 2001 and 2000, Concert's intangible assets consisted of
     the following:



                                                             (Unaudited)
                                                  2001           2000
                                                  -----          -----
                                                           
         Goodwill                                 $  --          $ 795
         Customer lists and other                    --             86
                                                  -----          -----
                                                     --            881
         Less accumulated amortization               --            (51)
                                                  -----          -----
         Intangible assets, net                   $  --          $ 830
                                                  =====          =====


     Amortization related to intangible assets for the years ended December 31,
     2001 and 2000 amounted to $63 and $55 (unaudited), respectively.

     As described in Note 4, the Company recorded an impairment loss during the
     year ended December 31, 2001 which resulted in the reduction of the
     intangible asset values to zero.

     During 2000, the Company purchased $20 (unaudited) of prepaid capacity
     rights for cash included in Intangible and other assets on the Consolidated
     Balance Sheets. During 2001, the financial conditions of the provider
     indicated probable non-performance of the commitment by the provider. The
     Company wrote-off the prepayment of $20 and included the result in
     operating expenses on the Consolidated Statements of Operations for the
     year ended December 31, 2001.

6.   SHAREOWNERS' EQUITY

     The authorized share capital amounts of the Company as of December 31, 2001
     and 2000 consists of 300,000 of each Class A and Class B ordinary shares
     with an authorized par value of NLG 150. Class A ordinary share issued
     capital amounts to $6 and consists of 125,101 ordinary shares with a par
     value of NLG 100 per share. Class B ordinary share issued capital amounts
     to $24 and consists of 125,101 ordinary shares with a par value of NLG 400
     per share. Notwithstanding the difference in par value, the Class A shares
     and the Class B shares have identical rights.

                                       22

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



     On November 29, 2001, in connection with the Termination Agreements, the
     Company issued one Class A share, with a par value of NLG 100 to AT&T in
     consideration for the outstanding AT&T Term Loan and related accrued
     interest (as described in Note 3) of $1,113. The Company also issued one
     Class B share, with a par value of NLG 400 to BT in consideration for the
     outstanding BT Term Loan and related accrued interest (as described in Note
     3) of $1,008.

     On January 5, 2000, in connection with the formation of the GV, Concert
     B.V. became the ultimate parent company of the Global Venture. Concurrent
     with the formation of the GV, BT retained their ownership of 125,100 Class
     B shares, and 125,100 Class A shares were issued to AT&T for its
     contribution.

7.   EMPLOYEE BENEFIT PLANS

     401(k) PLAN

     Concert maintains a defined contribution retirement savings plan under
     Section 401(k) of the United States of America Internal Revenue Code. This
     plan, covering substantially all US-based employees meeting the minimum age
     and service requirements, allows participants to defer a portion of their
     annual compensation on a pre and post-tax basis. Under the plan, Concert
     will match 66.7% of every dollar the employee contributes up to a maximum
     of 6% of the employee's annual base salary. The company matches both
     employee pre and after-tax contributions. Concert contributions to the plan
     for the years ended December 31, 2001 and 2000 totaled $11 and $11
     (unaudited), respectively.

     PENSION PLAN

     Concert maintains a non-contributory defined benefit pension plan ("Cash
     Balance") covering the majority of its US-based employees. Concert also
     maintains a Supplemental Executive Retirement Plan (the "SERP"). The Plans
     were effective January 5, 2000.

     The Cash Balance plan is a non-contributory defined benefit pension plan.
     Employees are eligible to participate in the Cash Balance plan if they are
     compensated by salary or commission or by a combination of both. Retirement
     benefits are normally payable upon reaching age 65. Pension trust
     contributions are made to trust funds held for the sole benefit of plan
     participants. Each participant is assigned a nominal cash balance account
     that grows by pay credits and interest credits. Benefits are paid in either
     a lump sum or annuity form of payment based upon the election of the
     employee.

                                       23

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



     The following table shows the change in benefit obligation, change in plan
     assets, funded status, accrued benefit cost, and components of the net
     periodic benefit cost for the Cash Balance and SERP included in the
     accompanying financial statements for the years ended December 31, 2001 and
     2000:



                                                                                             (Unaudited)
                                                                            2001                 2000
                                                                          --------             --------
                                                                                         
      CHANGE IN BENEFIT OBLIGATION
           Benefit obligation at beginning of year                        $      8             $     --
           Service cost                                                          9                    6
           Interest cost                                                        --                   --
           Actuarial loss                                                        2                    2
           Benefits paid                                                        (1)                  --
           Additional benefit based on estimated future salary
           levels                                                               --                   --
           Curtailment                                                           2                   --
                                                                          --------             --------
           Benefit obligation at end of year                              $     20             $      8
                                                                          ========             ========

         CHANGE IN PLAN ASSETS

           Fair value of plan assets at beginning of year                 $     --             $     --
           Actual return on plan assets                                         --                   --
           Employer contribution                                                 9                   --
           Benefits paid                                                        (1)                  --
                                                                          --------             --------
           Fair value of plan assets at end of year                       $      8             $     --
                                                                          ========             ========

         FUNDED STATUS, AT DECEMBER 31                                    $    (12)            $     (8)
         UNRECOGNISED NET LOSS, AT DECEMBER 31                                   3                    2
                                                                          --------             --------
         ACCRUED BENEFIT COST, AT DECEMBER 31                             $     (9)            $     (6)
                                                                          ========             ========

         COMPONENTS OF NET PERIODIC BENEFIT COST

           Service cost                                                   $      9             $      6
           Interest cost                                                        --                   --
           Expected return on plan assets                                       --                   --
           Amortisation of net loss                                             --                   --
           Curtailment charge                                                    2                   --
                                                                          --------             --------
         Net periodic benefit cost                                        $     11             $      6
                                                                          ========             ========


                                       24

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



     The following rates and assumptions were used in the measurement of the
     pension benefit obligations at December 31, 2001 and 2000:



                                                                (Unaudited)
                                                   2001             2000
                                                   ----             ----
                                                          
         Weighted average discount rate            7.25%            7.50%
         Expected return on plan assets            9.00%            9.00%
         Rate of compensation increase             5.50%            6.00%


     In connection with Concert's Reduction in Force Programs (see Note 8),
     curtailment accounting was applied as of December 31, 2001 with respect to
     the 743 participants scheduled to terminate service with a vested benefit
     during 2002 as part of the Reduction in Force Program. The resultant
     increase in the projected benefit obligation is treated as a curtailment
     loss and recognized immediately as a component of 2001 expense.

     Certain Concert employees previously employed by BT or AT&T continue to
     participate in their respective parent's cash balance pension plans. These
     employees are not eligible to participate in the Concert cash balance plan,
     and Concert makes payments to the parents on behalf of these employees.
     These payments are included in operating expenses on the Consolidated
     Statement of Operations.

8.   EMPLOYEE TERMINATION CHARGES

     On April 5, 2001, Concert announced a Reduction in Force program. As a
     result of this program, Concert terminated 389 employees across various
     levels throughout the Company. In connection with the Termination
     Agreements described in Note 1, Concert announced an additional Reduction
     in Force program. This program called for the termination of 1,770
     employees to be effected in three phases. All employees effected by the
     reduction in force program were notified of their termination date and were
     advised of the amount of their termination benefits on or before December
     31, 2001. The Company recorded a charge for employee termination benefits
     of $172 in 2001 related to these activities. This amount is included in
     operating expenses in the Consolidated Statements of Operations.

     At December 31, 2001, the Company had $136 included in accrued employee
     related costs on the Consolidated Balance Sheet related to employee
     termination benefits and expects to pay these amounts through 2002.

                                       25

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



9.   INCOME TAXES

     The provision for (benefit from) income taxes for the years ended December
     31, 2001 and 2000 are comprised of the following:



                                                                  (Unaudited)
                                                   2001               2000
                                                   ----               ----
                                                                
         Current                                   $(68)              $ 97
         Deferred                                    (8)                 1
                                                   ----               ----
         Income tax (benefit) expense              $(76)              $ 98
                                                   ====               ====


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

     The following is a summary of the significant U.S. and foreign items giving
     rise to components of Concert's deferred tax assets and liabilities at
     December 31, 2001 and 2000:



                                                                     (Unaudited)
                                                     2001                2000
                                                   --------            --------
                                                                 
         Assets:
            Deductible items                       $     75            $     87
            Less: valuation allowance                   (75)                (42)
                                                   --------            --------
            Net deferred tax asset                       --                  45

         Liabilities:
            Depreciation                                 (1)                (54)
                                                   --------            --------

         Total deferred tax liability              $     (1)           $     (9)
                                                   ========            ========


     At December 31, 2001 and 2000, Concert had net operating loss carryforwards
     of $14 and $200 (unaudited), respectively, generated primarily in the
     United Kingdom. Due to UK net operating loss carryover statutory
     provisions, it is unlikely the Company will recognize the benefit of these
     losses.

     The change in valuation allowance reflects the determination that a tax
     benefit related to the net operating losses will not be recognized.

                                       26

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



     A reconciliation between the statutory federal income tax rate and the
     effective rate of income taxes for the years ended December 31, 2001 and
     2000 is as follows:



                                                                     (Unaudited)
                                                             2001       2000
                                                             -----      ----
                                                                
         United States federal statutory income tax rate      35.0%     35.0%
         Benefit of United States partnership status          (8.1)%   (10.5)%
         Non-United States net income                        (23.3)%    (5.5)%
         Non-deductible charges                               (0.7)%    26.7%
         Other                                                (0.9)%     2.6%
                                                             -----      ----
         Effective income tax rate                             2.0%     48.3%
                                                             =====      ====


10.  COMMITMENTS AND CONTINGENCIES

     In the normal course of business, Concert is subject to proceedings,
     lawsuits and other claims. Such matters are subject to many uncertainties,
     and outcomes are not predictable with assurance. Consequently, Concert is
     unable to ascertain the ultimate aggregate amount of monetary liability or
     financial impact which may exist with respect to these matters at December
     31, 2001. Concert believes that after final disposition, any monetary
     liability or financial impact beyond that provided for at December 31, 2001
     will not be material to Concert's operations, financial position or cash
     flows.

     Concert leases office facilities, network facilities, airplanes, and copier
     equipment under operating leases that expire in various years through 2013.
     In addition, Concert leases capacity on telecommunication cables classified
     as capital leases. Future minimum annual payments under capital leases and
     non-cancelable operating leases with initial terms of one year or more
     consist of the following at December 31, 2001:

                                       27

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------





                                                           Capital       Operating
                  Years ending December 31,                 Leases        Leases
                                                         ----------    ------------
                                                                 
     2002                                                $       16    $         34
     2003                                                        16              28
     2004                                                        14              23
     2005                                                         -              18
     2006                                                         -              15
     Thereafter                                                   -              51
                                                         ----------    ------------
     Total minimum lease payments                                46    $        169
                                                                       ============
     Less amount reported as interest                            (2)
     Less current portion                                       (15)
                                                         ----------
     Capital lease obligations, net of current portion   $       29
                                                         ==========


     Expenses for operating leases, including month to month leases, amounted to
     $118 and $111 (unaudited) for the years ended December 31, 2001 and 2000,
     respectively. Concert also incurs costs with its Parents for accommodation
     expenses, under separate commercial agreements. Rent expense, under these
     agreements amounted to $44 and $42 (unaudited) for the years ended December
     31, 2001 and 2000, respectively. In addition, Concert has month to month
     lease agreements for shared network accommodations with third parties. Rent
     expense for the years ended December 31, 2001 and 2000 under these
     agreements was $26 and $49 (unaudited), respectively.

11.  DERIVATIVE FINANCIAL INSTRUMENTS

     In the normal course of business, Concert uses derivative financial
     instruments for purposes other than trading. Concert does not use
     derivative financial instruments for speculative purposes. These
     instruments are limited to foreign currency exchange contracts. Foreign
     currency exchange contracts are used to manage Concert's exposure to
     changes in currency exchange rates related to foreign-currency-denominated
     transactions. In 2001, this consisted principally of British pounds
     sterling, European Union currency ("EURO") and Japanese Yen contracts
     related to international carrier settlements, intercompany loans and
     reimbursement from European distribution channels. Concert has established
     policies and procedures for risk assessment and the approval, reporting and
     monitoring of derivative financial instrument activities.

     By their nature, derivative instruments involve risk, including the credit
     risk of non-performance by counterparties. At December 31, 2001, it is
     management's opinion that there is no significant risk of loss in the event
     of non-performance of the counterparties to these


                                       28

                                  CONCERT, B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

                                    --------



     financial instruments. Concert controls its exposure to credit risk through
     credit approvals, credit limits and monitoring procedures. Concert does not
     have any significant exposure to any individual counter-party, nor any
     major concentration of credit risk related to any derivative financial
     instruments.

     Foreign currency forward contracts amounted to $324 and $157 (unaudited) to
     purchase foreign currencies and $247 and $63 (unaudited) to sell foreign
     currencies at December 31, 2001 and 2000, respectively, resulting in net
     unrealized gains of $4 and $2 (unaudited) for the years ended December 31,
     2001 and 2000, respectively. All of these contracts mature in 2002. Gains
     and losses on these contracts are recorded in earnings in other income
     (expense), net and offset gains and losses from the revaluation of the
     underlying assets and liabilities recorded in currencies other than the
     Company's functional currency.

                                       29

EX-99.4

                                                                    Exhibit 99.4

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholder
Liberty Media Corporation:


We have audited the accompanying consolidated balance sheets of Liberty Media
Corporation and subsidiaries ("New Liberty" or "Successor") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
comprehensive earnings, stockholders' equity, and cash flows for the years ended
December 31, 2001 and 2000 and the period from March 1, 1999 to December 31,
1999 (Successor periods) and from January 1, 1999 to February 28, 1999
(Predecessor period). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the aforementioned Successor consolidated financial statements
present fairly, in all material respects, the financial position of New Liberty
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the Successor periods, in conformity with accounting principles
generally accepted in the United States of America. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the results of their operations and their cash flows for
the Predecessor period, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in notes 3 and 8 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.

As discussed in note 1 to the consolidated financial statements, effective March
9, 1999, AT&T Corp., the former parent company of New Liberty, acquired
Tele-Communications, Inc., the former parent company of Liberty Media
Corporation, in a business combination accounted for as a purchase. As a result
of the acquisition, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.


                                                                        KPMG LLP

Denver, Colorado
March 8, 2002








                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           December 31, 2001 and 2000



                                                                 2001            2000 *
                                                               --------         ------
                                                                  amounts in millions
                                                                          
Assets
Current assets:
           Cash and cash equivalents                           $  2,077          1,295
           Short-term investments                                   397            500
           Trade and other receivables, net                         356            307
           Prepaid expenses and program rights                      352            283
           Deferred income tax assets (note 9)                      311            242
           Other current assets                                      38             73
                                                               --------         ------
                     Total current assets                         3,531          2,700
                                                               --------         ------

Investments in affiliates, accounted for using
the equity method, and related
receivables (note 5)                                             10,076         20,464

Investments in available-for-sale securities and
 other cost investments (note 6)                                 23,544         19,035

Property and equipment, at cost                                   1,190            976
Accumulated depreciation                                           (249)          (131)
                                                               --------         ------
                                                                    941            845
                                                               --------         ------
Intangible assets:
           Excess cost over acquired net assets                  10,752         10,896
           Franchise costs                                          190            190
                                                               --------         ------
                                                                 10,942         11,086
           Accumulated amortization                              (1,588)          (998)
                                                               --------         ------
                                                                  9,354         10,088
                                                               --------         ------
Other assets, at cost, net of accumulated amortization            1,093          1,136
                                                               --------         ------
                     Total assets                              $ 48,539         54,268
                                                               ========         ======


                                                                     (continued)





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS

                           December 31, 2001 and 2000



                                                                                       2001            2000 *
                                                                                     --------         ------
                                                                                         amounts in millions
                                                                                                
Liabilities and Stockholders' Equity
Current liabilities:
           Accounts payable                                                          $    127            148
           Accrued interest payable                                                       159            105
           Other accrued liabilities                                                      278            401
           Accrued stock compensation (note 11)                                           833          1,216
           Program rights payable                                                         240            179
           Current portion of debt                                                      1,143          1,094
                                                                                     --------         ------
                     Total current liabilities                                          2,780          3,143
                                                                                     --------         ------

Long-term debt (note 8)                                                                 4,764          5,269
Call option obligations (note 8)                                                        1,320             --
Deferred income tax liabilities (note 9)                                                8,977         11,337
Other liabilities                                                                         442             62
                                                                                     --------         ------
                     Total liabilities                                                 18,283         19,811
                                                                                     --------         ------

Minority interests in equity of subsidiaries                                              133            348

Stockholders' equity (note 10):

           Preferred stock, $.01 par value Authorized 50,000,000 shares;
             no shares issued and outstanding                                              --             --

           Series A common stock $.01 par value Authorized 4,000,000,000 shares;
             issued and outstanding 2,378,127,544 shares at December 31, 2001              24             --

           Series B common stock $.01 par value. Authorized 400,000,000 shares;
             issued and outstanding 212,045,288 shares at December 31, 2001                 2             --

           Additional paid-in capital                                                  35,996         35,042
           Accumulated other comprehensive earnings
           (loss), net of taxes (note 13)                                                 840           (397)

           Accumulated deficit                                                         (6,739)          (536)
                                                                                     --------         ------
                     Total stockholders' equity                                        30,123         34,109
                                                                                     --------         ------

Commitments and contingencies (note 14)
                     Total liabilities and stockholders' equity                      $ 48,539         54,268
                                                                                     ========         ======


- ---------------------
* as restated, see note 2

See accompanying notes to consolidated financial statements.







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                                     New Liberty                     Old Liberty
                                                                     ------------------------------------------      ------------
                                                                        Year            Year          Ten months     Two months
                                                                       ended           ended            ended          ended
                                                                     December 31,    December 31,     December 31,   February 28,
                                                                        2001            2000 *           1999 *        1999
                                                                     ------------    ------------     ------------   ------------
                                                                                           amounts in millions
                                                                                                         
Revenue:                                                                                       (note 2)
           Unaffiliated parties                                       $  1,849          1,283            549            192
           Related parties (note 10)                                       210            243            180             43
                                                                      --------          -----         ------            ---
                                                                         2,059          1,526            729            235
                                                                      --------          -----         ------            ---
Operating costs and expenses:
           Operating                                                     1,089            801            343             95
           Selling, general and administrative ("SG&A")                    573            348            229             87
           Charges from related parties (note 10)                           20             37             24              6
           Stock compensation-SG&A (note 11)                               132           (950)         1,785            183
           Depreciation                                                    209            122             19              7
           Amortization                                                    775            732            543             15
           Impairment of long-lived assets (note 3)                        388             --             --             --
                                                                      --------          -----         ------            ---
                                                                         3,186          1,090          2,943            393
                                                                      --------          -----         ------            ---

                     Operating income (loss)                            (1,127)           436         (2,214)          (158)

Other income (expense):
           Interest expense                                               (525)          (399)          (135)           (26)
           Dividend and interest income                                    272            301            242             10
           Share of losses of affiliates, net (note 5)                  (4,906)        (3,485)          (904)           (66)

           Nontemporary declines in fair value of investments
            (note 6)                                                    (4,101)        (1,463)            --             --

           Realized and unrealized gains (losses) on financial
            instruments, net (note 3)                                     (174)           223           (153)            --

           Gains (losses) on dispositions, net (notes 5 and 6)            (310)         7,340              4             14

           Other, net                                                      (11)             3             (4)           363
                                                                      --------          -----         ------            ---
                                                                        (9,755)         2,520           (950)           295
                                                                      --------          -----         ------            ---
                     Earnings (loss) before income taxes and
                      minority interest                                 (10,882)         2,956         (3,164)           137

Income tax benefit (expense) (note 9)                                    3,908         (1,534)         1,097           (211)
Minority interests in losses of subsidiaries                               226             63             46              4
                                                                      --------          -----         ------            ---
                     Earnings (loss) before cumulative effect of
                      accounting change                                (6,748)         1,485         (2,021)           (70)

Cumulative effect of accounting change, net of taxes (notes 3
  and 8)                                                                   545             --             --             --
                                                                      --------          -----         ------            ---
                     Net earnings (loss)                              $ (6,203)         1,485         (2,021)           (70)
                                                                      ========          =====         ======          ======

Pro forma earnings (loss) per common share (note 3):
           Pro forma basic and diluted earnings (loss) before
            cumulative effect of accounting change                    $  (2.61)           .57           (.78)          (.03)
           Cumulative effect of accounting change, net of taxes            .21             --             --             --
                                                                      --------          -----         ------            ---
           Pro forma basic and diluted net earnings (loss)            $  (2.40)           .57           (.78)          (.03)
                                                                      ========          =====         ======          ======
           Pro forma number of common shares outstanding
                                                                         2,588          2,588          2,588          2,588
                                                                      ========          =====         ======          ======


- --------
* as restated, see note 2

See accompanying notes to consolidated financial statements.





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS




                                                                                      New Liberty                    Old Liberty
                                                                     ------------------------------------------      ------------
                                                                        Year            Year          Ten months     Two months
                                                                       ended           ended            ended          ended
                                                                     December 31,    December 31,     December 31,   February 28,
                                                                        2001            2000 *           1999 *        1999
                                                                     ------------    ------------     ------------   ------------
                                                                                           amounts in millions

                                                                                                         
Net earnings (loss)                                                    $(6,203)          1,485         (2,021)          (70)
                                                                       --------         -------        -------         ------

Other comprehensive earnings, net of taxes (note 13):
           Foreign currency translation adjustments                       (359)           (202)            60           (15)
           Unrealized holding gains (losses) arising during the
            period                                                      (1,013)         (6,115)         6,488           885
           Recognition of previously unrealized losses (gains)
            on available-for-sale securities, net                        2,696            (635)             7            --
           Cumulative effect of accounting change (notes 3 and 8)
                                                                           (87)             --             --            --
                                                                       --------         -------        -------         ------
           Other comprehensive (loss) earnings                           1,237          (6,952)         6,555           870
                                                                       --------         -------        -------         ------

Comprehensive earnings (loss)                                          $(4,966)         (5,467)         4,534           800
                                                                       ========         =======        =======         ======


- --------------------
* as restated, see note 2

See accompanying notes to consolidated financial statements.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY







                                                                                           Common stock           Additional
                                                                          Preferred     ---------------------      paid-in
                                                                            stock       Series A     Series B      capital
                                                                          ---------     --------     --------     -----------
                                                                                           amounts in millions
                                                                                                      
Balance at January 1, 1999                                                 $ --           --           --          4,682
           Net loss                                                          --           --           --             --
           Other comprehensive earnings                                      --           --           --             --
           Other transfers from related parties, net                         --           --           --            430
                                                                          ---------     --------     --------     -----------
Balance on February 28, 1999                                               $ --           --           --          5,112
                                                                          =========     ========     ========     ==========


Balance at March 1, 1999 (as restated, see note 2)                         $ --           --           --         33,500
           Net loss                                                          --           --           --             --
           Other comprehensive earnings                                      --           --           --             --
           Transfer from related party for redemption of debentures          --           --           --            354
           Gains in connection with issuances of stock of
            affiliates and subsidiaries, net of taxes (note 10)              --           --           --            108
           Utilization of net operating losses of
            Liberty by AT&T (note 9)                                         --           --           --            (88)
                                                                          ---------     --------     --------     -----------
Balance at December 31, 1999                                                 --           --           --         33,874
                                                                          ---------     --------     --------     -----------
           Net earnings                                                      --           --           --             --
           Other comprehensive loss                                          --           --           --             --
           Issuance of AT&T Class A Liberty Media
            Group common stock for acquisitions (note 7)                     --           --           --          1,064
           Gains in connection with issuances of
           stock by affiliates and subsidiaries,
            net of taxes (note 10)                                           --           --           --            355
           Utilization of net operating
            losses of Liberty by AT&T (note 9)                               --           --           --            (38)
           Other transfers to related parties, net                           --           --           --           (213)
                                                                          ---------     --------     --------     -----------
Balance at December 31, 2000                                                 --           --           --         35,042
                                                                          ---------     --------     --------     -----------
           Net loss                                                          --           --           --             --
           Other comprehensive earnings                                      --           --           --             --
           Issuance of common stock upon consummation
            of Split Off Transaction (note 2)                                --           24            2            (26)
           Contribution from AT&T upon consummation
            of Split Off Transaction (note 2)                                --           --           --            803
           Accrual of amounts due to AT&T for
            taxes on deferred intercompany gains (note 2)                    --           --           --           (115)
           Losses in connection with issuances
            of stock by subsidiaries and affiliates,
            net of taxes (note 10)                                           --           --           --             (8)
           Utilization of net operating losses
            of Liberty by AT&T prior to Split
            Off Transaction (note 9)                                         --           --           --             (2)
           Stock option exercises and
            issuance of restricted stock prior to Split
            Off Transaction                                                  --           --           --            302
                                                                          ---------     --------     --------     -----------
Balance at December 31, 2001                                               $ --           24            2         35,996
                                                                          =========     ========     ========     ==========










                                                                        Accumulated
                                                                          other
                                                                       comprehensive              Accumulated            Total
                                                                         earnings,                 (deficit)          stockholders'
                                                                        net of taxes               earnings              equity
                                                                        ------------              -----------         ------------
                                                                                           amounts in millions
                                                                                                             
Balance at January 1, 1999                                                  3,186                   952                   8,820
           Net loss                                                         --                      (70)                  (70)
           Other comprehensive earnings                                     870                     --                    870
           Other transfers from related parties, net                        --                      --                    430
                                                                        ------------              -----------         ------------
Balance on February 28, 1999                                                4,056                   882                   10,050
                                                                        ============              ===========         ============


Balance at March 1, 1999 (as restated, see note 2)                          --                      --                    33,500
           Net loss                                                         --                      (2,021)               (2,021)
           Other comprehensive earnings                                     6,555                   --                    6,555
           Transfer from related party for redemption of debentures         --                      --                    354
           Gains in connection with issuances of stock of
            affiliates and subsidiaries, net of taxes (note 10)             --                      --                    108
           Utilization of net operating losses of
            Liberty by AT&T (note 9)                                        --                      --                    (88)
                                                                        ------------              -----------         ------------
Balance at December 31, 1999                                                6,555                   (2,021)               38,408
                                                                        ------------              -----------         ------------
           Net earnings                                                     --                      1,485                 1,485
           Other comprehensive loss                                         (6,952)                 --                    (6,952)
           Issuance of AT&T Class A Liberty Media
            Group common stock for acquisitions (note 7)                    --                      --                    1,064
           Gains in connection with issuances of
           stock by affiliates and subsidiaries,
            net of taxes (note 10)                                          --                      --                    355
           Utilization of net operating
            losses of Liberty by AT&T (note 9)                              --                      --                    (38)
           Other transfers to related parties, net                          --                      --                    (213)
                                                                        ------------              -----------         ------------
Balance at December 31, 2000                                                (397)                   (536)                 34,109
                                                                        ------------              -----------         ------------
           Net loss                                                         --                      (6,203)               (6,203)
           Other comprehensive earnings                                     1,237                   --                    1,237
           Issuance of common stock upon consummation
            of Split Off Transaction (note 2)                               --                      --                    --
           Contribution from AT&T upon consummation
            of Split Off Transaction (note 2)                               --                      --                    803
           Accrual of amounts due to AT&T for
            taxes on deferred intercompany gains (note 2)                   --                      --                    (115)
           Losses in connection with issuances
            of stock by subsidiaries and affiliates,
            net of taxes (note 10)                                          --                      --                    (8)
           Utilization of net operating losses
            of Liberty by AT&T prior to Split
            Off Transaction (note 9)                                        --                      --                    (2)
           Stock option exercises and
            issuance of restricted stock prior to Split
            Off Transaction                                                 --                      --                    302
                                                                        ------------              -----------         ------------
Balance at December 31, 2001                                                840                     (6,739)               30,123
                                                                        ============              ===========         ============



See accompanying notes to consolidated financial statements.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                       New Liberty                    Old Liberty
                                                                      ------------------------------------------      -----------
                                                                           Year            Year       Ten months       Two months
                                                                          ended           ended          ended           ended
                                                                        December 31,    December 31,   December 31,    February 28,
                                                                            2001            2000 *        1999 *          1999
                                                                      ------------    ------------     ------------   ------------
                                                                                           amounts in millions
                                                                                                          
Cash flows from operating activities:                                                          (note 4)
  Net earnings (loss)                                                   $(6,203)         1,485         (2,021)           (70)
  Adjustments to reconcile net earnings
     (loss) to net cash provided
     (used) by operating activities:
     Cumulative effect of accounting change, net of taxes                  (545)            --             --             --
     Depreciation and amortization                                          984            854            562             22
     Impairment of long-lived assets                                        388             --             --             --
     Stock compensation                                                     132           (950)         1,785            183
     Payments of stock compensation                                        (244)          (319)          (111)          (126)
     Share of losses of affiliates, net                                   4,906          3,485            904             66
     Nontemporary decline in fair value of investments                    4,101          1,463             --             --
     Realized and unrealized losses (gains) on financial
      instruments, net                                                      174           (223)           153             --
     Losses (gains) on disposition of assets, net                           310         (7,340)            (4)           (14)
     Minority interests in losses of subsidiaries                          (226)           (63)           (46)            (4)
     Deferred income tax expense (benefit)                               (3,613)         1,821         (1,025)           212
     Intergroup tax allocation                                             (222)          (294)           (75)            (1)
     Payments from AT&T pursuant to tax sharing agreement                   166            414              1             --

     Other noncash charges (income)                                          40             15              3           (354)
     Changes in operating assets and liabilities, net of the
      effect of acquisitions and dispositions:
          Receivables                                                        30           (116)             7             33
          Prepaid expenses and program rights                              (148)          (121)          (119)           (23)
          Payables and other current liabilities                             (4)            88            119            (31)
                                                                      ------------    ------------     ------------   ------------
            Net cash provided (used) by operating
              activities                                                     26            199            133           (107)
                                                                      ------------    ------------     ------------   ------------
Cash flows from investing activities:
     Cash paid for acquisitions                                            (113)          (735)          (109)            --
     Capital expended for property and equipment                           (358)          (221)           (40)           (15)
     Investments in and loans to equity affiliates                       (1,031)        (1,568)        (1,090)           (30)
     Investments in and loans to cost investments                        (1,548)        (1,791)        (1,506)           (21)
     Purchases of marketable securities                                    (269)          (848)        (7,757)            (3)
     Sales and maturities of marketable securities                          615          1,820          5,725              9
     Cash proceeds from dispositions                                        471            456            130             43
     Other investing activities, net                                         (5)            21            (11)           (62)
                                                                      ------------    ------------     ------------   ------------
                 Net cash used by investing activities                   (2,238)        (2,866)        (4,658)           (79)
                                                                      ------------    ------------     ------------   ------------
Cash flows from financing activities:
     Borrowings of debt                                                   1,639          4,597          3,187            155
     Proceeds attributed to call option obligations upon issuance of
      senior exchangeable debentures                                      1,028             --             --             --
     Repayments of debt                                                  (1,048)        (2,156)        (2,211)          (145)
     Net proceeds from issuance of stock by subsidiaries                     --            121            123             --
     Premium proceeds from financial instruments                            383             --             --             --
     Proceeds from settlement of financial instruments, net                 366             --             --             --
     Payment from AT&T related to Split Off Transaction                     803             --             --             --
     Cash transfers (to) from related parties                              (157)          (286)          (159)            31
     Other financing activities, net                                        (20)           (28)           (20)           (52)
                                                                      ------------    ------------     ------------   ------------
                 Net cash provided (used) by financing activities         2,994          2,248            920            (11)
                                                                      ------------    ------------     ------------   ------------
                         Net increase (decrease) in cash and cash
                           equivalents                                      782           (419)        (3,605)          (197)
                         Cash and cash equivalents at beginning
                           of period                                      1,295          1,714          5,319            228
                                                                      ------------    ------------     ------------   ------------
                         Cash and cash equivalents at end of period     $ 2,077          1,295          1,714             31
                                                                      ============    ============     ============   ============


- -------
* as restated, see note 2

See accompanying notes to consolidated financial statements.








                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

December 31, 2001, 2000 and 1999

(1)  Basis of Presentation

          The accompanying consolidated financial statements include the
     accounts of Liberty Media Corporation ("Liberty" or the "Company") and
     those of all majority-owned and controlled subsidiaries. ALL significant
     intercompany accounts and transactions have been eliminated in
     consolidation.

          Liberty's domestic subsidiaries generally operate or hold interests in
     businesses which provide programming services including production,
     acquisition and distribution through all available formats and media of
     branded entertainment, educational and informational programming and
     software. In addition, certain of Liberty's subsidiaries hold interests in
     businesses engaged in wireless telephony, electronic retailing, direct
     marketing and advertising sales relating to programming services,
     infomercials and transaction processing. Liberty also has significant
     interests in foreign affiliates which operate in cable television,
     programming and satellite distribution.

(2)  AT&T Ownership of Liberty

          On March 9, 1999, AT&T Corp. ("AT&T") acquired Tele-Communications,
     Inc. ("TCI"), the former parent company of Liberty, in a merger transaction
     (the "AT&T Merger"). As a result of the AT&T Merger, each series of TCI
     common stock was converted into a class of AT&T common stock subject to
     applicable exchange ratios. The AT&T Merger was accounted for using the
     purchase method. Accordingly, at the time of the AT&T Merger, Liberty's
     assets and liabilities were recorded at their respective fair values
     resulting in a new cost basis. For financial reporting purposes the AT&T
     Merger is deemed to have occurred on March 1, 1999. Accordingly, for
     periods prior to March 1, 1999 the assets and liabilities of Liberty and
     the related consolidated financial statements are sometimes referred to
     herein as "Old Liberty," and for periods subsequent to February 28, 1999
     the assets and liabilities of Liberty and the related consolidated
     financial statements are sometimes referred to herein as "New Liberty." The
     "Company" and "Liberty" refer to both New Liberty and Old Liberty.









                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

The following table represents the summary balance sheet of Old Liberty at
February 28, 1999, prior to the AT&T Merger and the opening summary balance
sheet of New Liberty subsequent to the AT&T Merger. Certain pre-merger
transactions occurring between March 1, 1999, and March 9, 1999, that affected
Old Liberty's equity, gains on issuance of equity securities by affiliates and
subsidiaries, and stock compensation have been reflected in the two-month period
ended February 28, 1999.



                                                         New Liberty   Old Liberty
                                                         -----------   -----------
                                                           amounts in millions

                                                                 
Assets:
Cash and cash equivalents                                  $ 5,319         31
Other current assets                                           434      1,011
Investments in affiliates                                   17,116      3,971
Investments in available-for-sale securities                13,094     11,974
Property and equipment, net                                    125        111
Intangibles and other assets                                11,159        389
                                                           -------     ------
                                                           $47,247     17,487
                                                           =======     ======
Liabilities and Equity:
Current liabilities                                        $ 1,872      1,051
Long-term debt                                               1,845      2,087
Deferred income taxes                                        9,972      4,147
Other liabilities                                               19         90
                                                           -------     ------
           Total liabilities                                13,708      7,375
                                                           -------     ------
Minority interests in equity of subsidiaries                    39         62
Stockholder's equity                                        33,500     10,050
                                                           -------     ------
                                                           $47,247     17,487
                                                           =======     ======


From March 9, 1999 through August 9, 2001, AT&T owned 100% of the outstanding
common stock of Liberty. During such time, the AT&T Class A Liberty Media Group
common stock and the AT&T Class B Liberty Media Group common stock (together,
the AT&T Liberty Media Group tracking stock) were tracking stocks of AT&T
designed to reflect the economic performance of the businesses and assets of
AT&T attributed to the Liberty Media Group. Liberty was included in the Liberty
Media Group.

On May 7, 2001, AT&T contributed to Liberty assets that were attributed to the
Liberty Media Group but not previously owned by Liberty (the "Contributed
Assets"). These assets included (i) preferred stock and common stock interests
in a subsidiary of IDT Corporation, a multinational telecommunications services
provider and (ii) an approximate 8% indirect common equity interest in Liberty
Digital, Inc. ("Liberty Digital"). Subsequent to these contributions, the
businesses and assets of Liberty and its subsidiaries constituted all of the
businesses and assets of the Liberty Media Group. The contributions have been
accounted for in a manner similar to a pooling of interests and, accordingly,
the financial statements of Liberty for periods prior to the contributions have
been restated to include the financial position and results of operations of the
Contributed Assets.

Effective August 10, 2001, AT&T effected the split-off of Liberty pursuant to
which Liberty's common stock was recapitalized, and each outstanding share of
AT&T Class A Liberty Media Group tracking stock was redeemed for one share of
Liberty Series A common stock and each outstanding share of AT&T Class B Liberty
Media Group tracking stock was redeemed for one share of Liberty Series B common
stock (the "Split Off Transaction"). Subsequent to the Split Off Transaction,
Liberty is no longer a subsidiary of AT&T and no shares of AT&T Liberty Media
Group tracking stock remain outstanding. The Split Off Transaction has been
accounted for at historical cost.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           In connection with the Split Off Transaction, Liberty has also been
           deconsolidated from AT&T for federal income tax purposes. As a
           result, AT&T was required to pay Liberty an amount equal to 35% of
           the amount of the net operating loss carryforward reflected in TCI's
           final federal income tax return that has not been used as an offset
           to Liberty's obligations under the AT&T Tax Sharing Agreement and
           that has been, or is reasonably expected to be, utilized by AT&T. The
           $803 million payment was received by Liberty prior to the Split Off
           Transaction and has been reflected as an increase to additional
           paid-in-capital in the accompanying consolidated statement of
           stockholders' equity. In addition, certain deferred intercompany
           gains will be includible in AT&T's taxable income as a result of the
           Split Off Transaction, and AT&T will be entitled to reimbursement
           from Liberty for the resulting tax liability of approximately $115
           million. Such tax liability has been accrued as of December 31, 2001
           and has been reflected as a reduction in additional paid-in-capital
           in the accompanying consolidated statement of stockholders' equity.

(3)        Summary of Significant Accounting Policies

           Cash and Cash Equivalents

           Cash equivalents consist of investments which are readily convertible
           into cash and have maturities of three months or less at the time of
           acquisition.

           Receivables

           Receivables are reflected net of an allowance for doubtful accounts.
           Such allowance at December 31, 2001 and 2000 was not material.

           Program Rights

           Prepaid program rights are amortized on a film-by-film basis over the
           anticipated number of exhibitions. Committed program rights and
           program rights payable are recorded at the estimated cost of the
           programs when the film is available for airing less prepayments.
           These amounts are amortized on a film-by-film basis over the
           anticipated number of exhibitions.

           Investments

           All marketable equity and debt securities held by the Company are
           classified as available-for-sale and are carried at fair value.
           Unrealized holding gains and losses on securities that are classified
           as available-for-sale ("AFS Securities") and are hedged with a
           derivative financial instrument that qualifies as a fair value hedge
           under Statement of Financial Accounting Standards No. 133 "Accounting
           for Derivative Instruments and Hedging Activities" ("Statement 133")
           are recognized in the Company's consolidated statement of operations.
           Unrealized holding gains and losses of AFS Securities that are not
           hedged pursuant to Statement 133 are carried net of taxes as a
           component of accumulated other comprehensive earnings in
           stockholder's equity. Realized gains and losses are determined on an
           average cost basis. Other investments in which the Company's
           ownership interest is less than 20% and are not considered marketable
           securities are carried at the lower of cost or net realizable value.

           For those investments in affiliates in which the Company has the
           ability to exercise significant influence, the equity method of
           accounting is used. Under this method, the investment, originally
           recorded at cost, is adjusted to recognize the Company's share of net
           earnings or losses of the affiliates as they occur rather then as
           dividends or other distributions are received, limited to the extent
           of the Company's investment in, advances to and commitments for the
           investee. The Company's share of net earnings or losses of affiliates
           includes the amortization of the difference between the Company's
           investment and its share of the net assets of the investee and also
           includes any nontemporary declines in fair value recognized during
           the period.





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Subsequent to the AT&T Merger, changes in the Company's proportionate
           share of the underlying equity of a subsidiary or equity method
           investee, which result from the issuance of additional equity
           securities by such subsidiary or equity investee, are recognized as
           increases or decreases in the Company's consolidated statements of
           stockholders' equity.

         The Company continually reviews its investments to determine whether a
         decline in fair value below the cost basis is other than temporary
         ("nontemporary"). The Company considers a number of factors in its
         determination including (i) the financial condition, operating
         performance and near term prospects of the investee; (ii) the reason
         for the decline in fair value, be it general market conditions,
         industry specific or investee specific; (iii) analysts' ratings and
         estimates of 12 month share price targets for the investee; (iv) the
         length of time that the fair value of the investment is below the
         Company's carrying value; and (v) the Company's intent and ability to
         hold the investment for a period of time sufficient to allow for a
         recovery in fair value. If the decline in fair value is deemed to be
         other than temporary, the cost basis of the security is written down to
         fair value. In situations where the fair value of an investment is not
         evident due to a lack of a public market price or other factors, the
         Company uses its best estimates and assumptions to arrive at the
         estimated fair value of such investment. The Company's assessment of
         the foregoing factors involves a high degree of judgment and
         accordingly, actual results may differ materially from the Company's
         estimates and judgments. Writedowns for cost investments and AFS
         Securities are included in the consolidated statements of operations as
         nontemporary declines in fair values of investments. Writedowns for
         equity method investments are included in share of losses of
         affiliates.

           Property and Equipment

           Property and equipment, including significant improvements, is stated
           at cost. Depreciation is computed using the straight-line method
           using estimated useful lives of 3 to 20 years for support equipment
           and 10 to 40 years for buildings and improvements.

           Excess Cost Over Acquired Net Assets

           Excess cost over acquired net assets consists of the difference
           between the cost of acquiring non-cable entities and amounts assigned
           to their tangible assets. Such amounts are amortized using the
           straight-line method over periods ranging from 5 to 20 years.

           Franchise Costs

           Franchise costs generally include the difference between the cost of
           acquiring cable companies and amounts allocated to their tangible
           assets. Such amounts are amortized using the straight-line method
           over 20 years.

           Impairment of Long-lived Assets

           The Company periodically reviews the carrying amounts of its property
           and equipment and its intangible assets to determine whether current
           events or circumstances indicate that such carrying amounts may not
           be recoverable. If the carrying amount of the asset is greater than
           the expected undiscounted cash flows to be generated by such asset,
           an impairment adjustment is to be recognized. Such adjustment is
           measured by the amount that the carrying value of such assets exceeds
           their fair value. The Company generally measures fair value by
           considering sale prices for similar assets or by discounting
           estimated future cash flows using an appropriate discount rate.
           Considerable management judgment is necessary to estimate the fair
           value of assets, accordingly, actual results could vary significantly
           from such estimates. Assets to be disposed of are carried at the
           lower of their financial statement carrying amount or fair value less
           costs to sell.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           As a result of the weakness in the economy in 2001 certain
           subsidiaries of the Company did not meet their 2001 operating
           objectives and have reduced their 2002 expectations. Accordingly, the
           subsidiaries assessed the recoverability of their property and
           equipment and intangible assets and determined that impairment
           adjustments were necessary. In addition, in the fourth quarter, a
           subsidiary made the decision to consolidate certain of its operations
           and close certain facilities. In connection with these initiatives,
           the subsidiary recorded a restructuring charge related to lease
           cancellation fees and an additional impairment charge related to its
           property and equipment. All of the foregoing charges are included in
           impairment of long-lived assets in the Company's statement of
           operations.

           Minority Interests

           Recognition of minority interests' share of losses of subsidiaries is
           generally limited to the amount of such minority interests' allocable
           portion of the common equity of those subsidiaries. Further, the
           minority interests' share of losses is not recognized if the minority
           holders of common equity of subsidiaries have the right to cause the
           Company to repurchase such holders' common equity.

           Preferred stock (and accumulated dividends thereon) of subsidiaries
           are included in minority interests in equity of subsidiaries.
           Dividend requirements on such preferred stocks are reflected as
           minority interests in earnings of subsidiaries in the accompanying
           consolidated statements of operations and comprehensive earnings.

           Foreign Currency Translation

           The functional currency of the Company is the United States ("U.S.")
           dollar. The functional currency of the Company's foreign operations
           generally is the applicable local currency for each foreign
           subsidiary and foreign equity method investee. Assets and liabilities
           of foreign subsidiaries and foreign equity investees are translated
           at the spot rate in effect at the applicable reporting date, and the
           consolidated statements of operations and the Company's share of the
           results of operations of its foreign equity affiliates are translated
           at the average exchange rates in effect during the applicable period.
           The resulting unrealized cumulative translation adjustment, net of
           applicable income taxes, is recorded as a component of accumulated
           other comprehensive earnings in stockholder's equity.

           Transactions denominated in currencies other than the functional
           currency are recorded based on exchange rates at the time such
           transactions arise. Subsequent changes in exchange rates result in
           transaction gains and losses which are reflected in the accompanying
           consolidated statements of operations and comprehensive earnings as
           unrealized (based on the applicable period end exchange rate) or
           realized upon settlement of the transactions.

           Unless otherwise indicated, convenience translations of foreign
           currencies into U.S. dollars are calculated using the applicable spot
           rate at December 31, 2001, as published in The Wall Street Journal.

           Derivative Instruments and Hedging Activities

           The Company uses various derivative instruments including equity
           collars, put spread collars, bond swaps and foreign exchange
           contracts to manage fair value and cash flow risk associated with
           many of its investments, some of its variable rate debt and
           forecasted transactions to be denominated in foreign currencies. Each
           of these derivative instruments is executed with a counterparty,
           generally well known major financial institutions. While Liberty
           believes these derivative instruments effectively manage the risks
           highlighted above, they are subject to counterparty credit risk.
           Counterparty credit risk is the risk that the counterparty is unable
           to perform under the terms of the derivative instrument upon
           settlement of the derivative





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           instrument. To protect itself against credit risk associated with
           these counterparties the Company:

           - Executes its derivative instruments with several different
             counterparties, and

           - Executes derivative instrument agreements which contain a provision
             that requires the counterparty to post the "in the money" portion
             of the derivative instrument into a cash collateral account for the
             Company's benefit, if the respective counterparty's credit rating
             were to reach certain levels, generally a rating that is below
             Standard & Poor's rating of A- or Moody's rating of A3.

           Due to the importance of these derivative instruments to its risk
           management strategy, Liberty actively monitors the creditworthiness
           of each of these counterparties. Based on its analysis, the Company
           considers nonperformance by any of its counterparties to be unlikely.

           Effective January 1, 2001, Liberty adopted Statement 133, which
           establishes accounting and reporting standards for derivative
           instruments, including certain derivative instruments embedded in
           other contracts, and for hedging activities. All derivatives, whether
           designated in hedging relationships or not, are required to be
           recorded on the balance sheet at fair value. If the derivative is
           designated as a fair value hedge, the changes in the fair value of
           the derivative and of the hedged item attributable to the hedged risk
           are recognized in earnings. If the derivative is designated as a cash
           flow hedge, the effective portions of changes in the fair value of
           the derivative are recorded in other comprehensive earnings and are
           recognized in the statement of operations when the hedged item
           affects earnings. Ineffective portions of changes in the fair value
           of cash flow hedges are recognized in earnings. If the derivative is
           not designated as a hedge, changes in the fair value of the
           derivative are recognized in earnings. Currently, the only
           instruments designated as hedges are the Company's equity collars,
           which are designated as fair value hedges.

           The fair value of derivative instruments is estimated using the
           Black-Scholes model. The Black-Scholes model incorporates a number of
           variables in determining such fair values, including expected
           volatility of the underlying security and an appropriate discount
           rate. The Company selects a volatility rate at the inception of the
           derivative instrument based on the historical volatility of the
           underlying security and on the term of the derivative instrument. The
           volatility assumption is generally not changed during the term of the
           derivative instrument unless there is an indication that the
           historical volatility is no longer appropriate. Considerable
           management judgment is required in estimating the Black-Scholes
           variables. Actual results upon settlement or unwinding of derivative
           instruments may differ materially from these estimates.

           Derivative gains and losses included in other comprehensive earnings
           are reclassified into earnings at the time the sale of the hedged
           item or transaction is recognized.

           Prior to the adoption of Statement 133, changes in the fair value of
           the Company's equity collars were reported as a component of
           comprehensive earnings (in unrealized gains) along with changes in
           the fair value of the underlying securities. Changes in the fair
           value of put spread collars were recorded as unrealized gains
           (losses) on financial instruments in the consolidated statements of
           operations.

           The adoption of Statement 133 on January 1, 2001, resulted in a
           cumulative increase in net earnings of $545 million, or $0.21 per
           common share, (after tax expense of $356 million) and an increase in
           other comprehensive loss of $87 million. The increase in net earnings
           was mostly attributable to separately recording the fair value of the
           embedded call option obligations associated with the Company's senior
           exchangeable debentures. The increase in other comprehensive loss
           relates primarily to changes in the fair value of the Company's
           warrants and options to purchase certain available-for-sale
           securities.







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           The Company assesses the effectiveness of equity collars by comparing
           changes in the intrinsic value of the equity collar to changes in the
           fair value of the underlying security. For derivatives designated as
           fair value hedges, changes in the time value of the derivatives,
           which are excluded from the assessment of hedge effectiveness, are
           recognized currently in earnings as a component of realized and
           unrealized gains (losses) on financial instruments. Hedge
           ineffectiveness, determined in accordance with Statement 133, had no
           impact on earnings for the year ended December 31, 2001.

           For the year ended December 31, 2001, realized and unrealized gains
           on financial instruments included a $167 million unrealized gain
           related to call option obligations, a $616 million unrealized net
           loss for changes in the fair value of derivative instruments related
           to available-for-sale securities and other derivatives not designed
           as hedging instruments, and a $275 million unrealized net gain for
           changes in the time value of options for fair value hedges. During
           the year ended December 31, 2001, the Company received cash proceeds
           of $329 million as a result of unwinding certain of its equity
           collars. Pursuant to Statement 133, the proceeds received less the
           offsetting impact of hedge accounting on the underlying securities
           resulted in $162 million of realized and unrealized gains on
           financial instruments in the consolidated statement of operations for
           the year ended December 31, 2001.

           Revenue Recognition

           Programming revenue is recognized in the period during which
           programming is provided, pursuant to affiliation agreements.
           Advertising revenue is recognized, net of agency commissions, in the
           period during which underlying advertisements are broadcast. Revenue
           from post-production services is recognized in the period the
           services are rendered. Cable and other distribution revenue is
           recognized in the period that services are rendered. Cable
           installation revenue is recognized in the period the related services
           are provided to the extent of direct selling costs. Any remaining
           amount is deferred and recognized over the estimated average period
           that customers are expected to remain connected to the cable
           distribution system.

           Advertising Costs

           Advertising costs generally are expensed as incurred. Advertising
           expense aggregated $43 million, $35 million, $18 million and $4
           million for the years ended December 31, 2001 and 2000, the ten
           months ended December 31, 1999 and the two months ended February 28,
           1999, respectively.

           Stock Based Compensation

           Statement of Financial Accounting Standards No. 123, Accounting for
           Stock-Based Compensation ("Statement 123"), establishes financial
           accounting and reporting standards for stock-based employee
           compensation plans as well as transactions in which an entity issues
           its equity instruments to acquire goods or services from
           non-employees. As allowed by Statement 123, Liberty continues to
           account for stock-based compensation pursuant to Accounting
           Principles Board Opinion No. 25 ("APB Opinion No. 25").

           Agreements that may require Liberty to reacquire interests in
           subsidiaries held by officers and employees in the future are
           marked-to-market at the end of each reporting period with
           corresponding adjustments being recorded to stock compensation
           expense.

           Pro Forma Earnings (Loss) Per Common Share

           Pro forma basic earnings (loss) per common share is computed by
           dividing net earnings (loss) by the pro forma number of common shares
           outstanding. The pro forma number of outstanding common shares for
           periods prior to the Split Off Transaction is based upon the number
           of shares of Series A and Series B Liberty common stock issued upon
           consummation of the Split Off





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Transaction. Pro forma diluted earnings (loss) per common share
           presents the dilutive effect on a per share basis of potential common
           shares as if they had been converted at the beginning of the periods
           presented. Excluded from diluted earnings per share for the year
           ended December 31, 2001, are 76 million potential common shares
           because their inclusion would be anti-dilutive.

           Reclassifications

           Certain prior period amounts have been reclassified for comparability
           with the 2001 presentation.

           Estimates

           The preparation of financial statements in conformity with generally
           accepted accounting principles requires management to make estimates
           and assumptions that affect the reported amounts of assets and
           liabilities at the date of the financial statements and the reported
           amounts of revenue and expenses during the reporting period. Actual
           results could differ from those estimates.

           Recent Accounting Pronouncements

           In June 2001, the Financial Accounting Standards Board (the "FASB")
           issued Statement No. 141, Business Combinations ("Statement 141"),
           and Statement No. 142, Goodwill and Other Intangible Assets
           ("Statement 142"). Statement 141 requires that the purchase method of
           accounting be used for all business combinations. Statement 141 also
           specifies criteria that intangible assets acquired in a purchase
           method business combination must meet to be recognized and reported
           apart from goodwill. Statement 142 will require that goodwill and
           intangible assets with indefinite useful lives no longer be
           amortized, but instead tested for impairment at least annually in
           accordance with the provisions of Statement 142. Statement 142 will
           also require that intangible assets with estimable useful lives be
           amortized over their respective estimated useful lives to their
           estimated residual values, and reviewed for impairment in accordance
           with SFAS Statement No. 121, Accounting for the Impairment of
           Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

           The Company adopted the provisions of Statement 141 effective July 1,
           2001, and is required to adopt Statement 142 effective January 1,
           2002.

           Statement 141 requires upon adoption of Statement 142, that the
           Company evaluate its existing intangible assets and goodwill that
           were acquired in prior purchase business combinations, and make any
           necessary reclassifications in order to conform with the new criteria
           in Statement 141 for recognition apart from goodwill. Upon adoption
           of Statement 142, the Company will be required to reassess the useful
           lives and residual values of all intangible assets acquired, and make
           any necessary amortization period adjustments by the end of the first
           interim period after adoption. In addition, to the extent an
           intangible asset is identified as having an indefinite useful life,
           the company will be required to test the intangible asset for
           impairment in accordance with the provisions of Statement 142 within
           the first interim period. Any impairment loss will be measured as of
           the date of adoption and recognized as the cumulative effect of a
           change in accounting principle in the first interim period.

           In connection with Statement 142's transitional goodwill impairment
           evaluation, Statement 142 will require the Company to perform an
           assessment of whether there is an indication that goodwill and
           equity-method goodwill is impaired as of the date of adoption. To
           accomplish this, the Company must identify its reporting units and
           determine the carrying value of each reporting unit by assigning the
           assets and liabilities, including the existing goodwill and
           intangible assets, to those reporting units as of the date of
           adoption. The Company will then have up to six months from the date
           of adoption to determine the fair value of each reporting unit and
           compare it to the reporting unit's carrying amount. To the extent a
           reporting unit's carrying amount exceeds its fair value, an
           indication exists that the reporting unit's goodwill may be impaired
           and the






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Company must perform the second step of the transitional impairment
           test. In the second step, the Company must compare the implied fair
           value of the reporting unit's goodwill, determined by allocating the
           reporting unit's fair value to all of its assets (recognized and
           unrecognized) and liabilities in a manner similar to a purchase price
           allocation in accordance with Statement 141, to its carrying amount,
           both of which would be measured as of the date of adoption. This
           second step is required to be completed as soon as possible, but no
           later than the end of the year of adoption. Any transitional
           impairment loss will be recognized as the cumulative effect of a
           change in accounting principle in the Company's statement of
           earnings.

           As of the date of adoption, the Company will have unamortized
           goodwill in the amount of $9,191 million, unamortized identifiable
           intangible assets in the amount of $831 million, and unamortized
           equity-method excess costs in the amount of $7,766 million, all of
           which will be subject to the transition provisions of Statements 141
           and 142. Amortization expense related to goodwill was $617 million
           and $587 million for the years ended December 31, 2001 and 2000,
           respectively; and amortization of equity-method excess costs
           (included in share of losses of affiliates) aggregated $798 million
           and $1,058 million for the years ended December 31, 2001 and 2000,
           respectively. The Company currently estimates that upon adoption of
           Statement 142, it will be required to recognize a $1.5 - $2.0 billion
           transitional impairment loss as the cumulative effect of a change in
           accounting principle. The foregoing estimate does not include an
           adjustment for the Company's proportionate share of any transition
           adjustments that its equity method affiliates may record, as the
           Company is currently unable to estimate the amount of such
           adjustment.

           In August 2001, the FASB issued Statement of Financial Accounting
           Standards No. 144 "Accounting for the Impairment or Disposal of
           Long-Lived Assets," which addresses financial accounting and
           reporting for the impairment or disposal of long-lived assets. This
           statement supercedes prior statements that address the disposal of a
           segment of a business, and eliminates the exception to consolidation
           for subsidiaries for which control is likely to be temporary. This
           statement retains the prior statement's fundamental provisions for
           the recognition and measurement of impairment of long-lived assets to
           be held and used, as well as the measurement of long-lived assets to
           be disposed of by sale. The statement is effective for fiscal years
           beginning after December 15, 2001. The Company has not determined the
           impact that adoption of this statement will have on its financial
           position, results of operations or cash flow.

(4)        Supplemental Disclosures to Consolidated Statements of Cash Flows



                                                                New Liberty                            Old Liberty
                                                   ----------------------------------------------     -------------
                                                       Year             Year          Ten months        Two months
                                                      ended            ended            ended             ended
                                                   December 31,      December 31,     December 31,      February 28,
                                                      2001             2000              1999             1999
                                                   ------------      ------------     ------------      ------------
                                                                        amounts in millions
                                                                                            
Cash paid for acquisitions:
  Fair value of assets acquired                     $  264            3,733              122               --
  Net liabilities assumed                             (136)          (1,208)             (13)              --
  Deferred tax liability                                (7)            (281)              --               --
  Minority interest                                     (8)            (445)              --               --
  Contribution to equity for acquisitions               --           (1,064)              --               --
                                                   ------------      ------------     ------------      ------------
      Cash paid for acquisitions                    $  113              735              109               --
                                                   ============      ============     ============      ============
Cash paid for interest                              $  451              335               93               32
                                                   ============      ============     ============      ============
Cash paid for income taxes                          $    9                2                1               --
                                                   ============      ============     ============      ============







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           During the ten months ended December 31, 1999, certain subsidiaries
           with a carrying value of $135 million were exchanged for a cost
           method investment in an online music venture.

         The following table reflects the change in cash and cash equivalents
         resulting from the AT&T Merger and related restructuring transactions
         (amounts in millions):

                                                                       
Cash and cash equivalents prior to the AT&T Merger                        $     31
   Cash contribution in connection with the AT&T Merger                      5,464
   Cash paid to TCI for certain warrants                                      (176)
                                                                          --------
Cash and cash equivalents subsequent to the AT&T Merger                   $  5,319
                                                                          ========



(5)        Investments in Affiliates Accounted for Using the Equity Method

           Liberty has various investments accounted for using the equity
           method. The following table includes Liberty's carrying amount and
           percentage ownership of the more significant investments in
           affiliates at December 31, 2001 and the carrying amount at December
           31, 2000:



                                                                    December 31,                 December 31,
                                                                       2001                          2000
                                                                   ------------                 ------------
                                                            Percentage       Carrying              Carrying
                                                            Ownership          Amount               Amount
                                                            ----------       --------              --------
                                                                             dollar amounts in millions

                                                                                           
Discovery Communications, Inc. ("Discovery")                    50%           $  2,900               3,133
QVC, Inc. ("QVC")                                               42%              2,543               2,508
USA Networks, Inc. ("USAI") and related investments             20%              2,857               2,824
UnitedGlobalCom, Inc. ("UnitedGlobalCom")                       20%               (418)                314
Telewest Communications plc ("Telewest")                        25%                 97               2,712
Jupiter Telecommunications Co., Ltd. ("Jupiter")                35%                407                 575
Gemstar-TV Guide International, Inc. ("Gemstar")                N/A                 --               5,855
Other                                                           various          1,690               2,543
                                                                              --------              ------
                                                                              $ 10,076              20,464
                                                                              ========              ======







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           The following table reflects Liberty's share of earnings (losses) of
           affiliates including excess basis amortization and nontemporary
           declines in value:



                                                                New Liberty                            Old Liberty
                                                   ----------------------------------------------     -------------
                                                       Year             Year          Ten months        Two months
                                                      ended            ended            ended             ended
                                                   December 31,      December 31,     December 31,      February 28,
                                                      2001             2000              1999             1999
                                                   ------------      ------------     ------------      ------------
                                                                        amounts in millions
                                                                                            

Discovery                                           $      (293)            (293)             (269)               (8)
QVC                                                          36              (12)              (11)               13
USAI and related investments                                 35              (36)              (20)               10
UnitedGlobalCom                                            (751)            (211)               23                --
Telewest                                                 (2,538)            (441)             (222)              (38)
Jupiter                                                     (90)            (114)              (54)               (7)
Cablevision S.A. ("Cablevision")                           (476)             (49)              (28)               (3)
ASTROLINK International LLC ("Astrolink")                  (417)              (8)               --                --
Teligent, Inc. ("Teligent                                   (85)          (1,269)               --                --
Gemstar                                                    (133)            (254)               --                --
Other                                                      (194)            (798)             (323)              (33)
                                                   ------------      ------------     ------------      ------------
                                                      $  (4,906)          (3,485)             (904)              (66)
                                                   ============      ============     ============      ============



           At December 31, 2001, the aggregate carrying amount of Liberty's
           investments in its affiliates exceeded Liberty's proportionate share
           of its affiliates' net assets by $7,766 million. Such excess is being
           amortized over estimated useful lives of up to 20 years. Such
           amortization was $798 million, $1,058 million, $463 million and $9
           million for the years ended December 31, 2001 and 2000, the ten
           months ended December 31, 1999 and the two months ended February 28,
           1999, respectively, and is included in share of losses of affiliates.

           Certain of Liberty's affiliates are general partnerships and, as
           such, Liberty is liable as a matter of partnership law for all debts
           (other than non-recourse debts) of that partnership in the event
           liabilities of that partnership were to exceed its assets.

           USAI

           USAI owns and operates businesses in network and television
           production, electronic retailing, ticketing operations, and internet
           services. At December 31, 2001, Liberty held 74.4 million shares of
           USAI's common stock. In addition, at December 31, 2001, Liberty held
           shares and other equity interests in certain subsidiaries of USAI
           that are exchangeable for an aggregate of 79.0 million shares of USAI
           common stock. The exchange of such shares and interests is subject to
           certain conditions including that Liberty's ownership of USAI's
           common stock issuable upon such exchange not being restricted by
           Federal Communications Commission ("FCC") regulations. On August 28,
           2001, USAI gave Liberty notice that on August 21, 2001 USAI had sold
           its television broadcast stations and associated broadcast licenses
           and as a result of such sale, FCC regulations no longer restricted
           Liberty's ownership of shares of USAI's common stock issuable upon
           such exchange and, accordingly, that USAI was exercising its right to
           require that Liberty exchange such stock and other interests of such
           subsidiaries for shares of USAI common stock (the "USAI Exchange").

           If the USAI Exchange had been completed at December 31, 2001, Liberty
           would have owned 153.4 million shares or approximately 20% (on a
           fully-diluted basis) of USAI common stock. The closing price of
           USAI's common stock on December 31, 2001 was $27.31 per share.







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


           In December 2001, Liberty entered into an agreement with USAI and
           Vivendi Universal, S.A. ("Vivendi"), pursuant to which USAI will
           contribute substantially all of its entertainment assets to a
           partnership controlled by Vivendi. In connection with the
           transaction, Liberty entered into a separate agreement with Vivendi,
           pursuant to which Vivendi will acquire from Liberty 25 million shares
           of common stock of USAI, approximately 38.7 millions shares of USANi
           LLC, which are exchangeable, on a one-for-one basis, for shares of
           USAI common stock, and all of its approximate 30% interest in
           multiThematiques S.A., together with certain liabilities with respect
           thereto, in exchange for ADSs representing approximately 37.4 million
           Vivendi ordinary shares, subject to adjustment. The closing of
           Liberty's transaction with Vivendi and the closing of Vivendi's
           transaction with USAI are conditioned on one another. Subsequent to
           the Vivendi transaction with USAI, USAI will be renamed USA
           Interactive. The Company anticipates that the Vivendi transaction
           will be consummated in the second quarter of 2002. Upon completion
           Liberty will own approximately 3% of Vivendi and 20% of USA
           Interactive.

           UnitedGlobalCom

           UnitedGlobalCom is a global broadband communications provider of
           video, voice and data services with operations in over 25 countries
           throughout the world. At December 31, 2001, Liberty owned an
           approximate 20% economic ownership interest representing an
           approximate 40% voting interest in UnitedGlobalCom. Liberty owns 9.9
           million shares of UnitedGlobalCom Class B common stock and 13.1
           million shares of UnitedGlobalCom Class A common stock. The
           UnitedGlobalCom Class B common stock is convertible, on a one -
           for-one basis, into UnitedGlobalCom Class A common stock. The closing
           price of UnitedGlobalCom's Class A common stock on December 31, 2001
           was $5.00 per share.

           On January 30, 2002, the Company and UnitedGlobalCom completed a
           transaction (the "New United Transaction") pursuant to which a new
           holding company ("New United") was formed to own UnitedGlobalCom, and
           all shares of UnitedGlobalCom common stock were exchanged for shares
           of common stock of New United. In addition, the Company contributed
           (i) cash consideration of $200 million; (ii) a note receivable from
           Belmarken Holding B.V., a subsidiary of UnitedGlobalCom, with an
           accreted value of $892 million and (iii) Senior Notes and Senior
           Discount Notes of United-Pan Europe Communications N.V., a subsidiary
           of UnitedGlobalCom, comprised of U.S. dollar denominated notes with a
           face amount of $1,435 million and euro denominated notes with a face
           amount of euro 263 million to New United in exchange for 281.3
           million shares of Class C common stock of New United. Upon
           consummation of the New United Transaction, Liberty owns an
           approximate 72% economic interest and a 94% voting interest in New
           United. Pursuant to certain voting and standstill arrangements
           entered into at the time of closing, Liberty is unable to exercise
           control of New United, and accordingly, Liberty will continue to use
           the equity method of accounting for its investment. Due to the
           Company's commitment to increase its investment in UnitedGlobalCom,
           as evidenced by the New United Transaction, the Company recognized
           its share of UnitedGlobalCom's losses such that its investment in
           UnitedGlobalCom was less than zero at December 31, 2001. As the
           Company's investment in United Pan-Europe Communications, N.V., a
           subsidiary of UnitedGlobalCom, has a carrying value of $718 million
           at December 31, 2001, the Company continues to include the negative
           carrying value of its UnitedGlobalCom investment in investments
           accounted for using the equity method.

           Also on January 30, 2002, New United acquired from Liberty its debt
           and equity interests in IDT United, Inc. and $751 million principal
           amount at maturity of UnitedGlobalCom's $1,375 million 10-3/4% senior
           secured discount notes due 2008 (the "2008 Notes"), which had been
           distributed to Liberty in redemption of a portion of its interest in
           IDT United. IDT United was formed as an indirect subsidiary of IDT
           Corporation for purposes of effecting a tender offer for all
           outstanding 2008 Notes at a purchase price of $400 per $1,000
           principal amount at maturity, which tender offer expired on February
           1, 2002. The aggregate purchase price for the Company's interest in
           IDT United of approximately $449 million was equal to the aggregate
           amount Liberty had invested in IDT United, plus interest.
           Approximately $305 million of the purchase paid was paid by the
           assumption by New United of






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           debt owed by Liberty to a subsidiary of UnitedGlobalCom, and the
           remainder was credited against the $200 million cash contribution by
           Liberty to New United described above. In connection with the New
           United Transaction, a subsidiary of Liberty agreed to loan to a
           subsidiary of New United up to $105 million. As of February 28, 2002,
           such subsidiary of New United has borrowed $103 million from the
           Liberty subsidiary to acquire additional shares of preferred stock
           and promissory notes issued by IDT United. The 2008 Notes owned by
           IDT United, together with 2008 Notes acquired by New United directly
           from Liberty referred to above, all of which remain outstanding,
           represent approximately 98.2% of the outstanding 2008 Notes.

           Telewest

           Telewest currently operates and constructs cable television and
           telephone systems in the UK. In April 2000, Telewest acquired
           Flextech p.l.c. ("Flextech") which develops and sells a variety of
           television programming in the UK. Prior to the acquisition, Liberty
           owned an approximate 37% equity interest in Flextech and a 22% equity
           interest in Telewest. As a result of the acquisition, Liberty owns an
           approximate 25% equity interest in Telewest. Liberty recognized a
           $649 million gain (excluding related tax expense of $227 million) on
           the acquisition based on the difference between the carrying value of
           Liberty's interest in Flextech and the fair value of the Telewest
           shares received. At December 31, 2001 Liberty indirectly owned 744.4
           million of the issued and outstanding Telewest ordinary shares. The
           closing price of Telewest's ordinary shares on December 31, 2001 was
           $0.94 per share.

           During the year ended December 31, 2001, Liberty determined that its
           investment in Telewest experienced a nontemporary decline in value.
           As a result, the carrying value of Telewest was adjusted to its
           estimated fair value, and the Company recorded a charge of $1,801
           million. Such charge is included in share of losses of affiliates.
           Summarized financial information for Telewest is as follows:



                                                                   December 31,
                                                               -------------------
                                                                 2001         2000
                                                               ------      ------
                                                               amounts in millions
                                                                     
        Financial Position
           Investments                                         $  795         377
           Property and equipment, net                          5,051       5,078
           Intangibles, net                                     2,752       4,666
           Other assets, net                                      611         586
                                                               ------      ------
             Total assets                                      $9,209      10,707
                                                               ======      ======

           Debt                                                $7,122       6,360
           Other liabilities                                    1,431       1,080
           Owners' equity                                         656       3,267
                                                               ------      ------
             Total liabilities and equity                      $9,209      10,707
                                                               ======      ======





                                                                 Years ended December 31,
                                                              ---------------------------------
                                                              2001          2000           1999
                                                            -------        ------         ------
                                                                    amounts in millions
                                                                                 
        Results of Operations
           Revenue                                          $ 1,811         1,623         1,064
           Operating expenses                                (1,380)       (1,293)         (777)
                                                            -------        ------         ------
           Operating cash flow (as defined by Liberty)          431           330           287
           Depreciation and amortization                       (941)         (863)         (475)
           Impairment of long-lived assets                   (1,112)           --            --
           Interest expense                                    (681)         (585)         (350)
           Other, net                                          (217)          (27)         (155)
                                                             -------        ------         ------
              Net loss                                      $(2,520)       (1,145)         (693)
                                                            =======        ======          ======









                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Gemstar

           Gemstar is a global technology and media company focused on consumer
           entertainment. The common stock of Gemstar is publicly traded. On
           July 12, 2000, Gemstar acquired TV Guide, Inc. ("TV Guide"). TV Guide
           shareholders received .6573 shares of Gemstar common stock in
           exchange for each share of TV Guide. As a result of this transaction,
           133 million shares of TV Guide held by Liberty were exchanged for
           87.5 million shares or 21% of Gemstar common stock. Liberty
           recognized a $4,391 million gain (before deferred tax expense of
           $1,737 million) on such transaction during the third quarter of 2000
           based on the difference between the carrying value of Liberty's
           interest in TV Guide and the fair value of the Gemstar securities
           received.

           In May 2001, Liberty consummated a transaction ("Exchange
           Transaction") with The News Corporation Limited ("News Corp.")
           whereby Liberty exchanged 70.7 million shares of Gemstar for 121.5
           million News Corp. American Depository Shares ("ADSs") representing
           preferred, limited voting, ordinary shares of News Corp. Liberty
           recorded a loss of $764 million in connection with the Exchange
           Transaction as the fair value of the securities received by Liberty
           was less than the carrying value of the Gemstar shares. In December
           2001, Liberty exchanged its remaining Gemstar shares for 28.8 million
           additional News Corp. ADSs and recorded an additional loss of $201
           million.

           Cablevision

           Cablevision provides cable television and high speed data services in
           Argentina. At December 31, 2001, the Company has a 50% ownership in
           Cablevision. The Argentine government has historically maintained an
           exchange rate of one Argentine peso to one U.S. dollar (the "peg
           rate"). Due to deteriorating economic and political conditions in
           Argentina in late 2001, the Argentine government eliminated the peg
           rate effective January 11, 2002. The value of the Argentine peso
           dropped significantly on the day the peg rate was eliminated. In
           addition, the Argentine government placed restrictions on the payment
           of obligations to foreign creditors. As a result of the devaluation
           of the Argentine peso, Cablevision recorded foreign currency
           translation losses of $393 million in the fourth quarter of 2001. At
           December 31, 2001, the Company determined that its investment in
           Cablevision had experienced a nontemporary decline in value, and
           accordingly, recorded an impairment charge of $195 million. Such
           charge is included in share of losses of affiliates. The Company's
           share of losses in 2001, when combined with foreign currency
           translation losses recorded in other comprehensive loss at December
           31, 2001, reduced the carrying value of its investment in Cablevision
           to zero as of December 31, 2001. Included in accumulated other
           comprehensive earnings at December 31, 2001 is $257 million of
           unrealized foreign currency translation losses related to the
           Company's investment in Cablevision.

           Astrolink

           Astrolink, a developmental stage entity, originally intended to build
           a global telecom network using Ka-band geostationary satellites to
           provide broadband data communications services. Astrolink's original
           business plan required significant additional financing over the next
           several years. During the fourth quarter of 2001, two of the members
           of Astrolink informed Astrolink that they do not intend to provide
           any of Astrolink's required financing. In light of this decision,
           Astrolink is considering several alternatives with respect to its
           proposed business plan, including, but not limited to, seeking
           alternative funding sources, scaling back their proposed business
           plan, and liquidating the venture entirely. There can be no assurance
           that Astrolink will be able to obtain the necessary financing on
           acceptable terms, or that it will be able to fulfill the business
           plan as originally proposed, or at all.

           During the second quarter of 2001, the Company determined that its
           investment in Astrolink experienced a nontemporary decline in value.
           Accordingly, the carrying amount of such investment was adjusted to
           its then estimated fair value resulting in a recognized loss of $155
           million. Such loss is included in share of losses of affiliates.
           Based on a fourth quarter 2001






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           assessment of Astrolink's remaining sources of liquidity and
           Astrolink's inability to obtain financing for its business plan, the
           Company concluded that the carrying value of its investment in
           Astrolink should be further reduced to reflect a fair value that
           assumes the liquidation of Astrolink. Accordingly, the Company
           wrote-off all of its remaining investment in Astrolink during the
           fourth quarter of 2001. The aggregate amount required to reduce its
           investment in Astrolink to zero was $250 million. Including such
           fourth quarter amount, the Company recorded losses and charges
           relating to its investment in Astrolink aggregating $417 million
           during the year ended December 31, 2001.

           Teligent

           In January 2000, the Company acquired a 40% equity interest in
           Teligent, a full-service facilities based communications company.
           During the nine months ended September 30, 2000, the Company
           determined that its investment in Teligent experienced a nontemporary
           decline in value. As a result, the carrying amount of this investment
           was adjusted to its estimated fair value resulting in a charge of
           $839 million. This impairment charge is included in share of losses
           of affiliates. In April 2001, the Company exchanged its investment in
           Teligent for shares of IDT Investments, Inc., a subsidiary of IDT
           Corporation. As the fair value of the consideration received in the
           exchange approximated the carrying value of the Company's investment
           in Teligent, no gain or loss was recognized on the transaction. The
           Company accounts for its investment in IDT Investments, Inc. using
           the cost method.

           Summarized unaudited combined financial information for affiliates
           other than Telewest is as follows:



                                                            December 31,
                                                        -------------------
                                                          2001         2000
                                                       -------       ------
                                                        amounts in millions
                                                               
           Combined Financial Position
           Investments                                 $   872        1,776
           Property and equipment, net                   7,060        8,294
           Intangibles, net                             15,183       26,763
           Other assets, net                            10,837       11,603
                                                       -------       ------
              Total assets                             $33,952       48,436
                                                       =======       ======

           Debt                                        $17,262       18,351
           Other liabilities                            14,075       15,904
           Owners' equity                                2,615       14,181
                                                       -------       ------
              Total liabilities and equity             $33,952       48,436
                                                       =======       ======




                                                         Years ended December 31,
                                                  --------------------------------------
                                                    2001            2000           1999
                                                  --------         ------         ------
                                                          amounts in millions
                                                                         
           Combined Operations
           Revenue                                $ 15,132         14,626         10,787
           Operating expenses                      (13,381)       (13,511)        (9,401)
           Depreciation and amortization            (2,703)        (2,718)        (1,087)
           Impairment charges                       (1,426)            --             --
                                                  --------         ------         ------
                     Operating income (loss)        (2,378)        (1,603)           299
           Interest expense                         (1,639)        (1,616)          (599)
           Other, net                                 (685)           174            (75)
                                                  --------         ------         ------
                     Net loss                     $ (4,702)        (3,045)          (375)
                                                  ========         ======         ======







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


(6)        Investments in Available-for-Sale Securities and Other Cost
           Investments

           Investments in available-for-sale securities and other cost
           investments are summarized as follows:



                                                                           December 31,
                                                                       -------------------
                                                                      2001           2000
                                                                    --------        ------
                                                                       amounts in millions

                                                                                
           Sprint Corporation ("Sprint")                            $  5,697          5,192
           AOL Time Warner Inc. ("AOL Time Warner")                    6,236             --
           News Corp.                                                  6,118          2,342
           Motorola, Inc. ("Motorola")                                 1,773          1,982
           Viacom, Inc. ("Viacom")                                       670             --
           United Pan-Europe Communications N.V. ("UPC")                 718            203
           Time Warner Inc. ("Time Warner")                               --          6,325
           Other available-for-sale securities                         2,386          2,989
           Other investments, at cost, and related receivables           343            502
                                                                    --------         ------
                                                                      23,941         19,535
             Less short-term investments                                (397)          (500)
                                                                    --------         ------
                                                                    $ 23,544         19,035
                                                                    ========         ======


           Sprint PCS

           Liberty and certain of its consolidated subsidiaries collectively are
           the beneficial owners of approximately 197 million shares of Sprint
           PCS Group Stock and certain other instruments convertible into such
           securities (the "Sprint Securities"). The Sprint PCS Group Stock is a
           tracking stock intended to reflect the performance of Sprint's
           domestic wireless PCS operations. Liberty accounts for its investment
           in the Sprint Securities as an available-for-sale security.

         Pursuant to a final judgment (the "Final Judgment") agreed to by
         Liberty, AT&T and the United States Department of Justice (the "DOJ")
         on December 31, 1998, Liberty transferred all of its beneficially owned
         Sprint Securities to a trustee (the "Trustee") prior to the AT&T
         Merger. The Final Judgment, which was entered by the United States
         District Court of the District of Columbia on August 23, 1999, requires
         the Trustee, on or before May 23, 2002, to dispose of a portion of the
         Sprint Securities sufficient to cause Liberty to beneficially own no
         more than 10% of the outstanding Sprint PCS Group common stock - Series
         1 on a fully diluted basis on such date. On or before May 23, 2004, the
         Trustee must divest the remainder of the Sprint Securities beneficially
         owned by Liberty. As of December 31, 2001, Liberty beneficially owned
         approximately 19% of Sprint PCS Group common stock - Series 2.

           The Final Judgment requires that the Trustee vote the Sprint
           Securities beneficially owned by Liberty and its consolidated
           subsidiaries in the same proportion as other holders of Sprint
           Securities so long as such securities are held by the trust. The
           Final Judgment also prohibits the acquisition by Liberty of
           additional Sprint Securities, with certain exceptions, without the
           prior written consent of the DOJ. At Liberty's request, the
           Department of Justice has joined Liberty and AT&T in a joint motion
           to terminate the Final Judgment which was filed in the District Court
           in February 2002. Under the terms of the Final Judgment, the
           obligation of the trustee to dispose of the first tranche of shares
           by May 23, 2002 will be stayed while the District Court considers the
           joint motion. Liberty is also seeking the approval of the Federal
           Communications Commission to the stay of the trustee's obligation to
           dispose of the first tranche of shares pending the District Court's
           determination of the joint motion.







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


           AOL Time Warner

         On January 11, 2001, America Online, Inc. completed its merger with
         Time Warner to form AOL Time Warner. In connection with the merger,
         each share of Time Warner common stock held by Liberty was converted
         into 1.5 shares of an identical series of AOL Time Warner stock. Upon
         completion of this transaction, Liberty holds a total of 171 million
         shares in AOL Time Warner. Liberty recognized a $253 million gain
         (before deferred tax expense of $100 million) based upon the difference
         between the carrying value of Liberty's interest in Time Warner and the
         fair value of the AOL Time Warner securities received.

           News Corp.

           In May and December of 2001, Liberty acquired an aggregate of 154
           million News Corp. ADSs in exchange for its shares of Gemstar common
           stock and another equity investment. Liberty recorded a loss of $965
           million in connection with these exchanges based on the difference
           between the fair value of the News Corp. ADSs received and the
           carrying value of the Gemstar investment. In connection with this
           transaction, the Company agreed to restrictions on its ability to
           transfer certain of the ADSs prior to May 2003. Liberty had
           previously acquired 51.8 million News Corp. ADSs in 1999 in exchange
           for Liberty's 50% interest in Fox/Liberty Networks, and had acquired
           28.1 million ADSs for $695 million in cash. Liberty recognized a $13
           million gain on the 1999 exchange. At December 31, 2001, Liberty
           owned 236 million ADSs or approximately 18% of the outstanding equity
           of News Corp. Liberty accounts for its investment in News Corp. as an
           available-for-sale security.

           Motorola

           On January 5, 2000, Motorola acquired General Instrument Corporation
           ("General Instrument"). In connection with such acquisition, Liberty
           received 54 million shares of Motorola common stock and warrants to
           purchase an additional 37 million shares in exchange for its holdings
           in General Instrument. Liberty recognized a $2,233 million gain
           (before deferred tax expense of $883 million) on such transaction
           during the first quarter of 2000 based on the difference between the
           carrying value of Liberty's interest in General Instrument and the
           fair value of the Motorola securities received. At December 31, 2001
           Liberty holds approximately 71 million shares of Motorola common
           stock and vested warrants to purchase an additional 18 million shares
           of such common stock at $8.26 per share. Such warrants expire on June
           30, 2002.

           Viacom

           On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by
           Viacom in exchange for shares of Class B common stock of Viacom. As a
           result of the merger, Liberty received 15.2 million shares of
           Viacom's Class B common stock (less than 1% of Viacom's common
           equity) in exchange for its 35% ownership interest in BET, which
           investment had been accounted for using the equity method. Liberty
           accounts for its investment in Viacom as an available-for-sale
           security. Liberty recognized a gain of $559 million (before deferred
           tax expense of $221 million) in the first quarter of 2001 based upon
           the difference between the carrying value of Liberty's interest in
           BET and the value of the Viacom securities received.

           UPC

           In May 2001, the Company entered into a loan agreement with UPC and
           Belmarken Holding B.V. ("Belmarken"), a subsidiary of UPC, pursuant
           to which the Company loaned Belmarken $857 million, which represented
           a 30% discount to the face amount of the loan of $1,225 million (the
           "Belmarken Loan"). UPC is a consolidated subsidiary of
           UnitedGlobalCom. The loan accrues interest at 6% per annum, and all
           principal and interest are due in May 2007. After May 29, 2002, the
           loan is exchangeable, at the option of the Company, into shares of
           ordinary common stock of UPC at a rate of $6.85 per share. At
           inception, Liberty recorded the conversion feature of the loan at its
           estimated fair value of $420 million, and the $437 million remaining
           balance as a





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           loan receivable. Liberty accounts for the convertible feature of the
           Belmarken Loan as a derivative security under Statement 133, and
           records the convertible feature at fair value with periodic market
           adjustments recorded in the statement of operations as unrealized
           gains or losses. The discounted loan receivable is being accreted up
           to the $1,225 million face amount over its term. Such accretion,
           which includes the stated interest of 6%, is being recognized in
           interest income over the term of the loan. Upon consummation of the
           New United Transaction, the Company contributed the Belmarken Loan to
           New United in exchange for Class C shares of New United. Liberty had
           previously purchased exchangeable preferred stock and warrants of UPC
           in December 2000 for $203 million.

           During 2001, the Company acquired certain outstanding senior notes
           and senior discount notes of UPC. Liberty acquired approximately
           $1,435 million face amount of U.S. dollar denominated notes and euro
           263 million face amount of euro denominated notes for an aggregate
           purchase price of $358 million. Such notes were contributed to New
           United in connection with the New United Transaction on January 30,
           2002.

           Nontemporary Decline in Fair Value of Investments

           During the years ended December 31, 2001 and 2001, Liberty determined
           that certain of its AFS Securities and cost investments experienced
           nontemporary declines in value. As a result, the cost bases of such
           investments were adjusted to their respective fair values based
           primarily on recent quoted market prices. These adjustments are
           reflected as nontemporary declines in fair value of investments in
           the consolidated statements of operations. The following table
           identifies the realized losses attributable to each of the individual
           investments as follows:



                                        Year ended
                                        December 31,
                                    -------------------
                                     2001         2000
                                    ------       -----
                                           
           Investments              amounts in millions

           AOL Time Warner          $2,052          --
           News Corp.                  915          --
           Viacom                      201          --
           UPC preferred stock         195          --
           Antec Corporation           127          --
           Motorola                    232       1,276
           Primedia                     --         103
           Others                      379          84
                                    ------       -----
                                    $4,101       1,463
                                    ======       =====


           Equity Collars and Put Spread Collars

           The Company has entered into equity collars, put spread collars and
           other financial instruments to manage market risk associated with its
           investments in certain marketable securities. These instruments are
           recorded at fair value based on option pricing models. Equity collars
           provide the Company with a put option that gives the Company the
           right to require the counterparty to purchase a specified number of
           shares of the underlying security at a specified price (the "Company
           Put Price") at a specified date in the future. Equity collars also
           provide the counterparty with a call option that gives the
           counterparty the right to purchase the same securities at a specified
           price at a specified date in the future. The put option and the call
           option generally are equally priced at the time of origination
           resulting in no cash receipts or payments. The Company's equity
           collars are accounted for as fair value hedges.

           Put spread collars provide the Company and the counterparty with put
           and call options similar to equity collars. In addition, put spread
           collars provide the counterparty with a put option that gives it the
           right to require the Company to purchase the underlying securities at
           a price that is lower than the Company Put Price. The inclusion of
           the secondary put option allows the





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Company to secure a higher call option price while maintaining net
           zero cost to enter into the collar. The Company's put spread collars
           have not been designated as fair value hedges.

           Investments in available-for-sale securities at December 31, 2001 and
           2000 are summarized as follows:



                                                                     December 31, 2001
                                                   -------------------------------------------------------------------
                                                                                     Put
                                                     Equity          Equity         spread         Debt
                                                   securities        collars        collars     securities      Total
                                                   ----------        -------        -------     ----------     -------
                                                                           amounts in millions
                                                                                                 
           Cost basis                               $ 19,310             --            --         1,457         20,767
           Gross gains recognized in earnings             84          1,800           263            --          2,147
           Gross losses recognized in earnings        (1,542)            --            --            --         (1,542)
           Gross unrealized holding gains              2,185             --            --            94          2,279
           Gross unrealized holding losses              (500)            --            --           (46)          (546)
                                                   ----------        -------        -------     ----------      -------
                 Fair value                         $ 19,537          1,800           263         1,505         23,105
                                                   ==========        =======        =======     ==========      ======




                                                                     December 31, 2000
                                                   -------------------------------------------------------------------
                                                                                     Put
                                                     Equity          Equity         spread         Debt
                                                   securities        collars        collars     securities      Total
                                                   ----------        -------        -------     ----------     -------
                                                                           amounts in millions
                                                                                                
           Cost basis                              $ 17,640             --            --         1,533         19,173
           Gross gains recognized in earnings            --             --           188            --            188
           Gross unrealized holding gains             1,003          1,080            --            86          2,169
           Gross unrealized holding losses           (2,636)            --            --           (64)        (2,700)
                                                   ----------        -------        -------     ----------      -------
                                Fair value         $ 16,007          1,080           188         1,555         18,830
                                                   ==========        =======        =======     ==========      ======


         Management estimates that the fair market value of all of its
         investments in available-for-sale securities and others aggregated
         $23,760 million and $19,664 million at December 31, 2001 and December
         31, 2000, respectively. Management calculates market values using a
         variety of approaches including multiple of cash flow, per subscriber
         value, a value of comparable public or private businesses or publicly
         quoted market prices. No independent appraisals were conducted for
         those assets.

           Forward Foreign Exchange Contracts

           The Company does not hedge the majority of its foreign currency
           exchange risk because of the long term nature of its interests in
           foreign affiliates. During 2001, the Company entered into a
           definitive agreement to acquire six regional cable television systems
           in Germany. A portion of the consideration for such acquisition was
           to be denominated in euros. In order to reduce its exposure to
           changes in the euro exchange rate, Liberty had entered into forward
           purchase contracts with respect to euro 3,243 million as of December
           31, 2001. Such contracts generally have terms ranging from 90 to 120
           days and can be renewed at their expiration at Liberty's option.
           Liberty is not accounting for the forward purchase contracts as
           hedges. At December 31, 2001, the Company had recorded a liability of
           $24 million representing unrealized losses related to these contracts
           due to a decrease in the value of the euro compared to the U.S.
           dollar.

           Total Return Debt Swaps

           From time to time the Company enters into total return debt swaps in
           connection with its purchase of its own or third-party public and
           private indebtedness. Under these arrangements, Liberty directs a
           counterparty to purchase a specified amount of the underlying debt
           security for the benefit of the Company. The Company posts collateral
           with the counterparty equal to 10% of the value of the purchased
           securities. The Company earns interest income based upon the face
           amount and stated interest rate of the debentures, and






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           pays interest expense at market rates on the amount funded by the
           counterparty. In the event the fair value of the underlying
           debentures declines, the Company is required to post cash collateral
           for the decline, and the Company records an unrealized loss on
           financial instruments. Liberty has the contractual right to net
           settle the total return debt swaps, and currently, intends to do so.
           Accordingly, Liberty records the net asset related to the total
           return debt swaps.

           At December 31, 2001, the aggregate purchase price of debt securities
           underlying Liberty's total return debt swap arrangements was $118
           million. As of such date, the Company had posted cash collateral
           equal to $59 million. In the event the fair value of the purchased
           debt securities were to fall to zero, the Company would be required
           to post additional cash collateral of $59 million.

(7)        Acquisitions and Dispositions

           2000

           Associated Group, Inc. ("Associated Group")

           On January 14, 2000, Liberty completed its acquisition of Associated
           Group pursuant to a merger agreement among AT&T, Liberty and
           Associated Group. Under the merger agreement, each share of
           Associated Group's Class A common stock and Class B common stock was
           converted into 0.49634 shares of AT&T common stock and 2.41422 shares
           of AT&T Class A Liberty Media Group common stock. Prior to the
           merger, Associated Group's primary assets were (1) 19.7 million
           shares of AT&T common stock, (2) 46.8 million shares of AT&T Class A
           Liberty Media Group common stock, (3) 10.6 million shares of AT&T
           Class B Liberty Media Group common stock, (4) 21.4 million shares of
           common stock of Teligent, and (5) all of the outstanding shares of
           common stock of TruePosition, Inc., which provides location services
           for wireless carriers and users designed to determine the location of
           any wireless transmitter, including cellular and PCS telephones.
           Immediately following the completion of the merger, all of the assets
           and businesses of Associated Group were transferred to Liberty. All
           of the shares of AT&T common stock, AT&T Class A Liberty Media Group
           common stock and AT&T Class B Liberty Media Group common stock
           previously held by Associated Group were retired by AT&T.

           The acquisition of Associated Group was accounted for as a purchase,
           and the $17 million excess of the fair value of the net assets
           acquired over the purchase price is being amortized over ten years.
           As a result of the issuance of AT&T Class A Liberty Media Group
           common stock, net of the shares of AT&T Class A Liberty Media Group
           common stock acquired in this transaction, Liberty recorded a $778
           million increase to additional paid-in-capital, which represents the
           total purchase price of this acquisition.

           Liberty Satellite & Technology, Inc.

           On March 16, 2000, Liberty purchased shares of preferred stock in TCI
           Satellite Entertainment, Inc. in exchange for Liberty's economic
           interest in approximately 5 million shares of Sprint PCS Group stock,
           which had a fair value of $300 million. During the third quarter of
           2000, TCI Satellite Entertainment, Inc. changed its name to Liberty
           Satellite & Technology, Inc. ("LSAT"). Liberty received 150,000
           shares of LSAT Series A 12% Cumulative Preferred Stock and 150,000
           shares of LSAT Series B 8% Cumulative Convertible Voting Preferred
           Stock. The Series A preferred stock does not have voting rights,
           while the Series B preferred stock gives Liberty approximately 85% of
           the voting power of LSAT. In connection with this transaction,
           Liberty realized a $211 million gain (before related tax expense of
           $84 million) based on the difference between the cost basis and fair
           value of the economic interest in the Sprint PCS Group stock
           exchanged.

           Ascent Entertainment Group, Inc. ("Ascent")

           On March 28, 2000, Liberty completed its cash tender offer for the
           outstanding common stock of Ascent at a price of $15.25 per share.
           Approximately 85% of the outstanding shares of common





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           stock of Ascent were tendered in the offer and Liberty paid
           approximately $385 million. On June 8, 2000, Liberty completed its
           acquisition of 100% of Ascent for an additional $67 million. The
           total purchase price for the acquisition was $452 million. Such
           transaction was accounted for as a purchase, and the $228 million
           excess of the purchase price over the fair value of the net assets
           acquired is being amortized over five years.

           Liberty Livewire Corporation ("Liberty Livewire")

           On April 10, 2000, Liberty acquired all of the outstanding common
           stock of Four Media Company ("Four Media") for total consideration of
           $462 million comprised of $123 million in cash, $194 million of
           assumed debt, 6.4 million shares of AT&T Class A Liberty Media Group
           common stock and a warrant to purchase approximately 700,000 shares
           of AT&T Class A Liberty Media Group common stock at an exercise price
           of $23 per share. Four Media provides technical and creative services
           to owners, producers and distributors of television programming,
           feature films and other entertainment products both domestically and
           internationally.

           On June 9, 2000, Liberty acquired a controlling interest in The
           Todd-AO Corporation ("Todd-AO"), in exchange for approximately 5.4
           million shares of AT&T Class A Liberty Media Group common stock
           valued at $106 million. Todd-AO provides sound, video and ancillary
           post production and distribution services to the motion picture and
           television industries in the United States and Europe.

           Immediately following the closing of such transaction, Liberty
           contributed to Todd-AO 100% of the capital stock of Four Media, in
           exchange for approximately 16.6 million shares of the Class B Common
           Stock of Todd-AO increasing Liberty's ownership interest in Todd-AO
           to approximately 84% of the equity and approximately 98% of the
           voting power. Following Liberty's acquisition of Todd-AO, and the
           contribution by Liberty to Todd-AO of Liberty's ownership in Four
           Media, Todd-AO changed its name to Liberty Livewire.

           On July 19, 2000, Liberty purchased all of the assets relating to the
           post production, content and sound editorial businesses of SounDelux
           Entertainment Group for $90 million in cash, and contributed such
           assets to Liberty Livewire in exchange for approximately 8.2 million
           additional shares of Liberty Livewire Class B Common Stock. Following
           this contribution, Liberty's ownership in Liberty Livewire increased
           to approximately 88% of the equity and approximately 99% of the
           voting power of Liberty Livewire.

           Each of the foregoing acquisitions was accounted for as a purchase.
           In connection therewith, Liberty recorded an aggregate increase to
           additional paid-in-capital of $251 million. The $452 million excess
           purchase price over the fair value of the net assets acquired is
           being amortized over 20 years.

           1999

           TV Guide

           On March 1, 1999, United Video Satellite Group, Inc. ("UVSG"), a
           consolidated subsidiary of Liberty, and News Corp. completed a
           transaction whereby UVSG acquired News Corp.'s TV Guide properties
           and UVSG was renamed TV Guide. Upon completion of this transaction,
           and another transaction completed by TV Guide on the same date,
           Liberty owned an economic interest of approximately 44% and
           controlled approximately 49% of the voting power of TV Guide. In
           connection with the increase in TV Guide's equity, net of dilution of
           Liberty's ownership interest in TV Guide, Liberty recognized a gain
           of $372 million (before deducting deferred income taxes of $147
           million). Upon consummation, Liberty began accounting for its
           interest in TV Guide under the equity method of accounting.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Pro Forma Information

           The following unaudited pro forma information for the year ended
           December 31, 2000 was prepared assuming the 2000 acquisitions
           discussed above occurred on January 1, 2000. These pro forma amounts
           are not necessarily indicative of operating results that would have
           occurred if the acquisitions discussed above had occurred on January
           1, 2000.

                                                       
                      Revenue                             $   1,769
                      Net earnings                        $   1,413
                      Pro forma basic and diluted
                       earnings per common share          $   0.55



(8)        Long-Term Debt

           Debt is summarized as follows:




                                                               Weighted
                                                               average
                                                               interest        December 31,
                                                                 rate      -------------------
                                                                 2001       2001           2000
                                                                 ----       ----           ----
                                                                      amounts in millions
                                                                                
           Parent company debt:
                      Senior notes                               7.8%    $   982           742
                      Senior debentures                          8.3%      1,486         1,486
                      Senior exchangeable debentures             3.7%        858         1,679
                      Bank credit facilities                     2.6%        675           475
                      Other debt                                 8.0%        288           580
                                                                         -------         -----
                                                                           4,289         4,962
                      Debt of subsidiaries:
                      Bank credit facilities                     4.3%      1,310         1,129
                      Senior notes                               N/A          --           179
                      Other debt, at varying rates                           308            93
                                                                         -------         -----
                                                                           1,618         1,401
                                                                         -------         -----
                      Total debt                                           5,907         6,363
           Less current maturities                               4.5%     (1,143)       (1,094)
                                                                         -------         -----
                      Total long-term debt                               $ 4,764         5,269
                                                                         =======         =====


           Senior Notes and Debentures

           In July 1999, Liberty issued $750 million of 7-7/8% Senior Notes due
           2009 and issued $500 million of 8-1/2% Senior Debentures due 2029 for
           aggregate cash proceeds of $741 million and $494 million,
           respectively. Interest on both issuances is payable on January 15 and
           July 15 of each year.

           In February 2000, Liberty issued $1 billion of 8-1/4% Senior
           Debentures due 2030 for aggregate cash proceeds of $983 million.
           Interest on these debentures is payable on February 1 and August 1 of
           each year.

           In December 2001, the Company issued $237.8 million of 7-3/4% Senior
           Notes due 2009 for cash proceeds of $238.4 million. Interest on these
           notes is payable on January 15 and July 15 of each year.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           The senior notes and debentures are stated net of an aggregate
           unamortized discount of $19 million and $22 million at December 31,
           2001 and 2000, respectively, which is being amortized to interest
           expense in the consolidated statements of operations.

           Senior Exchangeable Debentures

           In November 1999, Liberty issued $869 million of 4% Senior
           Exchangeable Debentures due 2029. Interest is payable on May 15 and
           November 15 of each year. Each $1,000 debenture is exchangeable at
           the holder's option for the value of 22.9486 shares of Sprint PCS
           Group stock. After the later of December 31, 2001 or the date
           Liberty's ownership level in the Sprint PCS Group falls below a
           specified level, Liberty may, at its election, pay the exchange value
           in cash, Sprint PCS Group stock or a combination thereof. Prior to
           such time, the exchange value must be paid in cash.

           In February and March 2000, Liberty issued an aggregate of $810
           million of 3-3/4% Senior Exchangeable Debentures due 2030. Interest
           is payable on February 15 and August 15 of each year. Each $1,000
           debenture is exchangeable at the holder's option for the value of
           16.7764 shares of Sprint PCS Group stock. After the later of February
           15, 2002 or the date Liberty's ownership level in the Sprint PCS
           Group falls below a specified level, Liberty may, at its election,
           pay the exchange value in cash, Sprint PCS Group stock or a
           combination thereof. Prior to such time, the exchange value must be
           paid in cash.

         In January 2001, Liberty issued $600 million of 3-1/2% Senior
         Exchangeable Debentures due 2031. Interest is payable on January 15 and
         July 15 of each year. Each $1,000 debenture is exchangeable at the
         holder's option for the value of 36.8189 shares of Motorola common
         stock. Such exchange value is payable, at Liberty's option, in cash,
         Motorola stock or a combination thereof. On or after January 15, 2006,
         Liberty, at its option, may redeem the debentures for cash.

           In March 2001, Liberty issued $817.7 million of 3-1/4% Senior
           Exchangeable Debentures due 2031. Interest is payable on March 15 and
           September 15 of each year. Each $1,000 debenture is exchangeable at
           the holder's option for the value of 18.5666 shares of Viacom Class B
           common stock. After January 23, 2003, such exchange value is payable
           at Liberty's option in cash, Viacom stock or a combination thereof.
           Prior to such date, the exchange value must be paid in cash. On or
           after March 15, 2006, Liberty, at its option, may redeem the
           debentures for cash.

         Prior to the adoption of Statement 133, the carrying amount of the
         senior exchangeable debentures was adjusted based on the fair value of
         the underlying security. Increases or decreases in the value of the
         underlying security above the principal amount of the senior
         exchangeable debentures were recorded as unrealized gains or losses on
         financial instruments in the consolidated statements of operations. If
         the value of the underlying security decreased below the principal
         amount of the senior exchangeable debentures there was no effect on the
         principal amount of the debentures.

             Upon adoption of Statement 133, the call option feature of the
             exchangeable debentures is reported separately in the consolidated
             balance sheet at fair value. Accordingly, at January 1, 2001,
             Liberty recorded a transition adjustment to reflect the call option
             obligations at fair value ($459 million) and to recognize in net
             earnings the difference between the fair value of the call option
             obligations at issuance and the fair value of the call option
             obligations at January 1, 2001. Such adjustment to net earnings
             aggregated $757 million (before tax expense of $299 million) and is
             included in cumulative effect of accounting change. Changes in the
             fair value of the call option obligations subsequent to January 1,
             2001 are recognized as unrealized gains (losses) on financial
             instruments in Liberty's consolidated statements of operations.
             During the year ended December 31, 2001, Liberty recorded
             unrealized gains of $167 million related to the call option
             obligations.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

             Under Statement 133, the reported amount of the long-term debt
             portion of the exchangeable debentures is calculated as the
             difference between the face amount of the debentures and the fair
             value of the call option feature on the date of issuance. The fair
             value of the call option obligations related to the $1,418 million
             of exchangeable debentures issued during the year ended December
             31, 2001, aggregated $1,028 million on the date of issuance.
             Accordingly, the long-term debt portion was recorded at $390
             million. The long-term debt is accreted to its face amount over the
             term of the debenture using the effective interest method. Such
             accretion aggregated $6 million during the year ended December 31,
             2001, and is included in interest expense. The transition
             adjustment noted above resulted in a decrease in the carrying value
             of the long-term debt portion of the senior exchangeable debentures
             of $1,216 million on January 1, 2001.

           Bank Credit Facilities

           At December 31, 2001, Liberty and its subsidiaries had approximately
           $217 million in unused lines of credit under their respective bank
           credit facilities. The bank credit facilities generally contain
           restrictive covenants which require, among other things, the
           maintenance of certain financial ratios, and include limitations on
           indebtedness, liens, encumbrances, acquisitions, dispositions,
           guarantees and dividends. The borrowers were in compliance with their
           debt covenants at December 31, 2001. Additionally, the bank credit
           facilities require the payment of fees ranging from .15% to .375% per
           annum on the average unborrowed portions of the total commitments.

           The U.S. dollar equivalent of the annual maturities of Liberty's debt
           for each of the next five years are as follows (amounts in millions):

                                                  
                       2002                          $ 1,143
                       2003                              211
                       2004                              121
                       2005                              435
                       2006                              589



           Liberty estimates the fair value of its debt based on the quoted
           market prices for the same or similar issues or on the current rate
           offered to Liberty for debt of the same remaining maturities. The
           fair value of Liberty's publicly traded debt at December 31, 2001 is
           as follows (amounts in millions):

                                                                             
                       Senior notes of parent company                           $1,024
                       Senior debentures of parent company                       1,438
                       Senior exchangeable debentures of parent
                        company, including call option liability                 2,323



           Liberty believes that the carrying amount of the remainder of its
           debt, which is comprised primarily of variable rate debt,
           approximated its fair value at December 31, 2001.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           A reconciliation of the carrying value of the Company's debt to the
           face amount at maturity is as follows (amounts in millions):

                                                                                          
                   Carrying value at December 31, 2001                                       $    5,907
                   Add:
                              Unamortized issue discount on Senior Notes and Debentures              19
                              Unamortized discount attributable to call
                               option feature of exchangeable debentures                          2,238
                                                                                             ----------
                               Face amount at maturity                                       $    8,164
                                                                                             ==========



(9)        Income Taxes

           During the period from March 9, 1999 to August 10, 2001, Liberty was
           included in the consolidated federal income tax return of AT&T and
           was a party to a tax sharing agreement with AT&T (the "AT&T Tax
           Sharing Agreement"). Liberty calculated its respective tax liability
           on a separate return basis. The income tax provision for Liberty was
           calculated based on the increase or decrease in the tax liability of
           the AT&T consolidated group resulting from the inclusion of those
           items in the consolidated tax return of AT&T which were attributable
           to Liberty.

           Under the AT&T Tax Sharing Agreement, Liberty received a cash payment
           from AT&T in periods when it generated taxable losses and such
           taxable losses were utilized by AT&T to reduce the consolidated
           income tax liability. This utilization of taxable losses was
           accounted for by Liberty as a current federal intercompany income tax
           benefit. To the extent such losses were not utilized by AT&T, such
           amounts were available to reduce federal taxable income generated by
           Liberty in future periods, similar to a net operating loss
           carryforward, and were accounted for as a deferred federal income tax
           benefit.

           In periods when Liberty generated federal taxable income, AT&T agreed
           to satisfy such tax liability on Liberty's behalf up to a certain
           amount. Thereafter, Liberty was required to make cash payments to
           AT&T for federal tax liabilities of Liberty. The reduction of such
           computed tax liabilities was accounted for by Liberty as an increase
           to additional paid-in-capital.

           To the extent AT&T utilized existing net operating losses of Liberty,
           such amounts were accounted for by Liberty as a reduction of
           additional paid-in-capital. Net operating losses of Liberty with a
           tax effected carrying value of $2 million, $38 million and $88
           million were recorded as a reduction to additional paid-in-capital
           during the seven months ended July 31, 2001, the year ended December
           31, 2000 and the ten months ended December 31, 1999, respectively.

           Liberty generally made cash payments to AT&T related to states where
           it generated taxable income and received cash payments from AT&T in
           states where it generates taxable losses.

           Prior to the AT&T Merger, Liberty was included in TCI's consolidated
           tax return and was a party to the TCI tax sharing agreements.







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Income tax benefit (expense) consists of:



                                                                            New Liberty                            Old Liberty
                                                               ----------------------------------------------     -------------
                                                                   Year             Year          Ten months        Two months
                                                                  ended            ended            ended             ended
                                                               December 31,      December 31,     December 31,      February 28,
                                                                  2001             2000              1999             1999
                                                               ------------      ------------     ------------      ------------
                                                                                    amounts in millions
                                                                                                       
            Current:
              Federal                                          $  297                277             75                   1
              State and local                                      (2)                10             (3)                 --
                                                               ------------      ------------     ------------      ------------
                                                                  295                287             72                   1
                                                               ------------      ------------     ------------      ------------

            Deferred:
              Federal                                           3,166              (1,490)           873               (168)
              State and local                                     447                (331)           152                (44)
                                                               ------------      ------------     ------------      ------------
                                                                3,613              (1,821)         1,025               (212)
                                                               ------------      ------------     ------------      ------------

            Income tax benefit (expense)                       $3,908              (1,534)         1,097               (211)
                                                               ============      ============     ============      ============


           Income tax benefit (expense) differs from the amounts computed by
           applying the U.S. federal income tax rate of 35% as a result of the
           following:



                                                                            New Liberty                            Old Liberty
                                                               ----------------------------------------------     -------------
                                                                   Year             Year          Ten months        Two months
                                                                  ended            ended            ended             ended
                                                               December 31,      December 31,     December 31,      February 28,
                                                                  2001             2000              1999             1999
                                                               ------------      ------------     ------------      ------------
                                                                                    amounts in millions
                                                                                                       
             Computed expected tax benefit (expense)               $ 3,809           (1,035)           1,107              (49)
             Dividends excluded for income tax purposes                 18               22               11                2
             Amortization not deductible for income
              tax purposes                                            (260)            (187)            (122)              (4)
             State and local income taxes, net of federal
              income taxes                                             289             (204)             102              (29)
             Recognition of difference in income tax basis of
              investments in subsidiaries                               21              (69)              --             (130)
             Effect of change in estimated state tax rate               91               --               --               --
             Change in valuation allowance                             (71)             (50)              --               --
             Other, net                                                 11              (11)              (1)              (1)
                                                               ------------      ------------     ------------      ------------
                                                                   $ 3,908           (1,534)           1,097             (211)
                                                               ============      ============     ============      ============









                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           The tax effects of temporary differences that give rise to
           significant portions of the deferred tax assets and deferred tax
           liabilities at December 31, 2001 and 2000 are presented below:



                                                                              December 31,
                                                                          -------------------
                                                                          2001           2000
                                                                        -------        ------
                                                                          amounts in millions
                                                                                 
           Deferred tax assets:
                      Net operating and capital loss carryforwards      $   370           363
                      Accrued stock compensation                            296           247
                      Other future deductible amounts                        31            --
                                                                        -------        ------
                      Deferred tax assets                                   697           610
                        Valuation allowance                                (273)         (202)
                                                                        -------        ------
                      Net deferred tax assets                               424           408
                                                                        -------        ------
           Deferred tax liabilities:
                      Investments                                         8,422        11,255
                      Intangible assets                                     164           218
                      Discount on exchangeable debentures                   455            --
                      Other                                                  49            30
                                                                        -------        ------
                      Deferred tax liabilities                            9,090        11,503
                                                                        -------        ------

           Net deferred tax liabilities                                 $ 8,666        11,095
                                                                        =======        ======



           At December 31, 2001, Liberty had net operating and capital loss
           carryforwards for income tax purposes aggregating approximately
           $1,016 million which, if not utilized to reduce taxable income in
           future periods, will expire as follows: 2004: $1 million; 2005: $16
           million; 2006: $14 million; 2007: $16 million; 2008: $12 million;
           2009: $27 million; 2010: $6 million; and beyond 2010: $924 million.
           These net operating losses are subject to certain rules limiting
           their usage.

           AT&T, as the successor to TCI, is the subject of an Internal Revenue
           Service ("IRS") audit for the 1993-1995 tax years. The IRS has
           notified AT&T and Liberty that it is considering proposing income
           adjustments and assessing certain penalties in connection with TCI's
           1994 tax return. The IRS's position could result in recognition of up
           to approximately $305 million of additional income, resulting in as
           much as $107 million of additional tax liability, plus interest. In
           addition, the IRS may assert certain penalties. AT&T and Liberty do
           not agree with the IRS's proposed adjustments and penalties, and AT&T
           and Liberty intend to vigorously defend their position. Pursuant to
           the AT&T Tax Sharing Agreement, Liberty may be obligated to reimburse
           AT&T for any tax that AT&T is ultimately assessed as a result of this
           audit. Liberty is currently unable to estimate a range of any such
           reimbursement, but believes that any such reimbursement would not be
           material to its financial position.

(10)       Stockholder's Equity

           Preferred Stock

           The Preferred Stock is issuable, from time to time, with such
           designations, preferences and relative participating, option or other
           special rights, qualifications, limitations or restrictions thereof,
           as shall be stated and expressed in a resolution or resolutions
           providing for the issue of such Preferred Stock adopted by the Board.
           As of December 31, 2001, no shares of preferred stock were issued.

           Common Stock

           Prior to the Split Off Transaction, Liberty had 1,000 shares of each
           of Class A, Class B and Class C common stock outstanding. In
           connection with the Split Off Transaction, the Class A and Class B
           common stock were reclassified into Series A common stock and the
           Class C common







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


           stock was reclassified into Series B common stock. The Series A
           common stock has one vote per share, and the Series B common stock
           has ten votes per share. Each share of the Series B common stock is
           exchangeable at the option of the holder for one share of Series A
           common stock.

           As of December 31, 2001, there were 75 million shares of Liberty
           Series A common stock reserved for issuance under exercise privileges
           of outstanding stock options.

           Stock Issuances of Subsidiaries and Equity Affiliates

           Certain consolidated subsidiaries and equity affiliates of Liberty
           have issued shares of common stock in connection with acquisitions
           and the exercise of employee stock options. In connection with the
           increase in the issuers' equity, net of the dilution of Liberty's
           ownership interest, that resulted from such stock issuances, Liberty
           recorded increases (decreases) to additional paid-in-capital as
           follows:



                                                                                      Ten months
                                                     Year ended      Year ended         ended
                                                     December 31,    December 31,     December 31,
                                                        2001            2000            1999
                                                     ------------    ------------     ------------
                                                                 amounts in millions
                                                                             
           Stock issuances by consolidated
             subsidiaries                                $  (8)           212           107
           Stock issuances by equity affiliates
             (net of deferred income taxes of $75
             million and $1 million, respectively)          --            143             1
                                                     ------------    ------------     ------------
                                                         $  (8)           355           108
                                                     ============    ============     ============


           Transactions with Officers and Directors

           During the second quarter of 2001, Liberty purchased 2,245,155 shares
           of common stock of On Command Corporation ("On Command"), a
           consolidated subsidiary of Liberty, from an executive officer and
           director of On Command, who is also a director of Liberty, for
           aggregate cash consideration of $25.2 million. Such purchase price
           represents a per share price of $11.22. The closing market price for
           On Command common stock on the day the transaction was signed was
           $7.77. The Company has included the difference between the aggregate
           market value of the shares purchased and the cash consideration paid
           in selling, general and administrative expenses in the accompanying
           consolidated statement of operations.

           In November 2000, Liberty granted certain officers, a director of
           Liberty (the "Liberty Director"), and a board member of Liberty
           Livewire an aggregate 4.0725% common stock interest in Liberty LWR,
           Inc. ("LWR"), which owned a direct interest in Liberty Livewire. The
           common stock interest granted to these individuals had a value of
           approximately $400,000. LWR also awarded the Liberty Director a
           deferred bonus in the initial total amount of approximately $3.4
           million, which amount will decrease by an amount equal to any
           increase over the five-year period from the date of the award in the
           value of certain of the common shares granted to the Liberty
           Director. Liberty and the individuals entered into a stockholders'
           agreement in which the individuals could require Liberty to
           repurchase, after five years, all or part of their common stock
           interest in exchange for Series A Liberty stock at its then fair
           market value. In addition, Liberty has the right to repurchase, in
           exchange for Series A Liberty common stock, the common stock
           interests held by the individuals at fair market value at any time.

           In July 2001, LWR formed Liberty Livewire Holdings, Inc. ("Livewire
           Holdings") as a wholly owned subsidiary. LWR then sold to certain
           officers and the Liberty Director an aggregate 19.872% common stock
           interest in Livewire Holdings with an aggregate value of $600.
           Liberty, LWR and






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           these individuals entered into a stockholders agreement pursuant to
           which the individuals can require Liberty to purchase, after five
           years, all or part of their common stock interest in Livewire
           Holdings, in exchange for Liberty common stock, at its then-fair
           market value. In addition, Liberty has the right to purchase, in
           exchange for its common stock, their common stock interests in
           Livewire Holdings for fair market value at any time.

           In August 2001, in connection with the termination of Liberty
           Livewire's director and chief executive officer, LWR purchased his
           common stock interest in LWR. In October 2001, LWR purchased from the
           Liberty officers and the Liberty Director their respective common
           stock interests in LWR. In connection with the purchase of his common
           stock interest in LWR, the Liberty Director waived the right to
           receive his deferred bonus. Upon the completion of these purchases,
           LWR became a wholly owned subsidiary of the Company.

           In October 2000, Liberty restructured its ownership interests in
           certain assets into a new consolidated subsidiary. Liberty then sold
           a preferred interest in such subsidiary to Liberty's Chairman of the
           Board of Directors in exchange for approximately 540,000 shares of
           LSAT Series A common stock, approximately 3.3 million shares of LSAT
           Series B common stock and cash consideration of approximately $88
           million. No gain or loss was recognized due to the related party
           nature of such transaction. The preferred interest has a liquidation
           value of $106 million and accrues dividends at 9% per annum payable
           quarterly in cash.

           In September 2000, certain officers of Liberty purchased a 6% common
           stock interest in a subsidiary for $1.3 million. Such subsidiary owns
           an indirect interest in an entity that holds certain of Liberty's
           investments in satellite and technology related assets. Liberty and
           the officers entered into a shareholders agreement in which the
           officers could require Liberty to purchase, after five years, all or
           part of their common stock interest in exchange for Series A Liberty
           stock at the then fair market value. In addition, Liberty has the
           right to purchase, in exchange for Series A Liberty common stock, the
           common stock interests held by the officers at fair market value at
           any time. During 2001, two of the officers resigned their positions
           with the Company, and the Company purchased their respective
           interests in the subsidiary for the original purchase price plus 6%
           interest.

           In August 2000, a subsidiary of Liberty sold shares of such
           subsidiary's Series A Convertible Participating Preferred Stock (the
           "Preferred Shares") to a director of Liberty, who was also the
           Chairman and Chief Executive Officer of such subsidiary, for a $21
           million note. The Preferred Shares are convertible into 1.4 million
           shares of the subsidiary's common stock. The note is secured by the
           Preferred Shares or the proceeds from the sale of such shares and the
           director's personal obligations under such loan are limited. The
           note, which matures on August 1, 2005, may not be prepaid and
           interest on the note accrues at a rate of 7% per annum.

           In May 2000, Liberty's President and Chief Executive Officer, certain
           officers of a subsidiary and another individual purchased an
           aggregate 20% common stock interest in a subsidiary for $800,000.
           This subsidiary owns a 7% interest in Jupiter Telecommunications Co.,
           Inc. Liberty and the individuals entered into a shareholders
           agreement in which the individuals could require Liberty to purchase,
           after five years, all or part of their common stock interest in
           exchange for Series A Liberty common stock at its then fair market
           value. In addition, Liberty has the right to purchase, in exchange
           for Series A Liberty common stock, the common stock interests held by
           the officers at fair market value at any time. Liberty recognized $ 4
           million and $3 million of compensation expense related to changes in
           the market value of its contingent liability to reacquire the common
           stock interests held by these officers during the years ended
           December 31, 2001 and 2000, respectively.

           In connection with the AT&T Merger, Liberty paid two of its directors
           and one other individual, all three of whom were directors of TCI, an
           aggregate of $12 million for services rendered in connection with the
           AT&T Merger. Such amount is included in operating, selling, general
           and administrative expenses for the two months ended February 28,
           1999 in the accompanying consolidated statements of operations.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Liberty is party to a call agreement with certain shareholders of
           Series B Liberty common stock, including the Chairman of the Board of
           Directors, which grants Liberty a right to acquire all of the Series
           B Liberty common stock held by such shareholders in certain
           circumstances. The price of acquiring such shares is generally
           limited to the market price of the Series A Liberty common stock,
           plus a 10% premium.

           Transactions with AT&T and Other Related Parties

           Certain subsidiaries of Liberty produce and/or distribute programming
           and other services to cable distribution operators (including AT&T)
           and others pursuant to long term affiliation agreements. Charges to
           AT&T are based upon customary rates charged to others. Amounts
           included in revenue for services provided to AT&T were $210 million,
           $243 million, $180 million and $43 million for the seven months ended
           July 31, 2001, the year ended December 31, 2000, the ten months ended
           December 31, 1999 and the two months ended February 28, 1999,
           respectively.

           Prior to the Split Off Transaction, AT&T allocated certain corporate
           general and administrative costs to Liberty pursuant to an intergroup
           agreement. Management believes such allocation methods were
           reasonable and materially approximated the amount that Liberty would
           have incurred on a stand-alone basis. In addition, there are
           arrangements between subsidiaries of Liberty and AT&T and its other
           subsidiaries for satellite transponder services, marketing support,
           programming, and hosting services. These expenses aggregated $20
           million, $37 million, $24 million and $6 million during the seven
           months ended July 31, 2001 (the period immediately prior to the Split
           Off Transaction), the year ended December 31, 2000, the ten months
           ended December 31, 1999 and the two months ended February 28, 1999,
           respectively.

           On April 8, 1999, Liberty redeemed all of its outstanding 4-1/2%
           convertible subordinated debentures. The debentures were convertible
           into shares of AT&T Liberty Media Group Class A common stock at a
           conversion price of $11.77, or 84.96 shares per $1,000 principal
           amount. Certain holders of the debentures had exercised their rights
           to convert their debentures and 29.2 million shares of AT&T Liberty
           Media Group tracking stock were issued to such holders. In connection
           with such issuance of AT&T Liberty Media Group tracking stock,
           Liberty recorded an increase to additional paid-in-capital of $354
           million.

(11)       Stock Options and Stock Appreciation Rights

           Liberty

           Effective with the Split Off Transaction, Liberty assumed from AT&T
           the Amended and Restated AT&T Corp. Liberty Media Group 2000
           Incentive Plan and renamed it the Liberty Media Corporation 2000
           Incentive Plan (the "Liberty Incentive Plan"). Grants by TCI of
           options and options with tandem stock appreciation rights ("SARs")
           with respect to shares of Liberty Media Group stock prior to 1999
           were assumed by Liberty under the Liberty Incentive Plan. Grants of
           free standing SARs made under the Plan in 2000 and in 2001 prior to
           the Split Off Transaction were converted into options upon assumption
           by Liberty.

           The Liberty Incentive Plan provides for awards to be made in respect
           of a maximum of 160 million shares of common stock of Liberty. Awards
           may be made as grants of stock options, SARs, restricted shares,
           stock units, cash or any combination thereof.

           Effective February 28, 2001 (the "Effective Date"), the Company
           restructured the options and options with tandem SARs to purchase
           AT&T common stock and AT&T Liberty Media Group tracking stock
           (collectively the "Restructured Options") held by certain executive
           officers of the Company. Pursuant to such restructuring, all
           Restructured Options became exercisable on the Effective Date, and
           each executive officer was given the choice to exercise all of his
           Restructured






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           Options. Each executive officer who opted to exercise his
           Restructured Options received consideration equal to the excess of
           the closing price of the subject securities on the Effective Date
           over the exercise price. The exercising officers received (i) a
           combination of cash and AT&T Liberty Media Group tracking stock for
           Restructured Options that were vested prior to the Effective Date and
           (ii) cash for Restructured Options that were previously unvested. The
           executive officers used the cash proceeds from the previously
           unvested options to purchase restricted shares of AT&T Liberty Media
           Group tracking stock. Such restricted shares are subject to
           forfeiture upon termination of employment. The forfeiture obligation
           will lapse according to a schedule that corresponds to the vesting
           schedule applicable to the previously unvested options.

           In addition, each executive officer was granted free-standing SARs
           equal to the total number of Restructured Options exercised. The
           free-standing SARs were tied to the value of AT&T Liberty Media Group
           tracking stock and will vest as to 30% in year one and 17.5% in years
           two through five. The free-standing SARs have an exercise price of
           $14.70 and had a fair value of $9.56 on the date of the grant. Upon
           completion of the Split Off Transaction, the free-standing SARs
           automatically converted to options to purchase Liberty Series A
           common stock. Prior to the Effective Date, the Restructured Options
           were accounted for using variable plan accounting pursuant to APB
           Opinion No. 25. Accordingly, the above-described transaction did not
           have a significant impact on Liberty's results of operations.

           The following table presents the number and weighted average exercise
           price ( "WAEP ") of certain options and options with tandem SARs to
           purchase Liberty Series A common stock granted to certain officers
           and other key employees of the Company.



                                                                       Liberty
                                                                       Series A
                                                                       common
                                                                       stock       WAEP
                                                                       -----       ----
                                                                       amounts in thousands,
                                                                        except for WAEP


                                                                           
           Outstanding at January 1, 1999                              78,158    $ 23.19
                      Granted                                           1,244      18.43
                      Exercised                                        (7,510)      5.02
                      Adjustment for transfer of employees             (1,158)      6.70
                                                                       ------
           Outstanding at December 31, 1999                            70,734       6.97
                      Granted                                           2,341      21.73
                      Exercised                                        (7,214)      5.69
                      Canceled                                           (479)      9.45
                      Options issued in mergers                        12,134       4.75
                                                                       ------
           Outstanding at December 31, 2000                            77,516       7.20
                      Granted                                          49,087      14.72
                      Exercised                                       (50,315)      7.62
                      Canceled                                         (1,167)     16.88
                                                                       ------
           Outstanding at December 31, 2001                            75,121      11.69
                                                                       ======

           Exercisable at December 31, 1999                            14,341
                                                                       ======
           Exercisable at December 31, 2000                            52,856
                                                                       ======
           Exercisable at December 31, 2001                            23,494
                                                                       ======

           Vesting period                                              5 yrs







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           The following table provides certain information about the Company's
           outstanding options at December 31, 2001.





                       No. of                                             Weighted          No. of        WAEP
                     outstanding       Range of            WAEP of         average       exercisable       of
                      options         exercise           outstanding      remaining        options     exercisable
                      (000's)          prices              options          life           (000's)       options
                     -----------   ----------------      ----------        -------       -----------   ------------
                                                                                     
                     17,566        $ 1.08 - $ 5.00        $  2.04           4.0 yrs         17,534       $  2.04
                      1,180        $ 6.30 - $ 9.95        $  7.05           5.1 yrs          1,043       $  7.00
                     53,336        $ 10.81 -$ 14.75       $ 14.47           8.9 yrs          4,126       $  12.25
                      3,039        $ 16.35 -$ 28.40       $ 20.59           8.6 yrs            791       $  20.11
                     ------                                                                ------
                     75,121                                                                23,494
                     ======                                                                ======


         As permitted by Statement 123, the Company accounts for stock-based
         compensation pursuant to the intrinsic value method prescribed by APB
         Opinion No. 25 and its interpretations. In accordance with APB Opinion
         No. 25, Liberty accounts for stock options with tandem SARs granted to
         its employees as variable plan awards. Liabilities and the related
         compensation expense under these awards are subject to future
         adjustment based upon vesting provisions and the market value of the
         underlying security and, ultimately, on the final determination of
         market value when the rights are exercised. The Company accounts for
         stand-alone options as fixed plan awards, and accordingly, no
         compensation is recognized for these awards. If the Company had
         determined compensation expense based upon the grant-date fair value
         method pursuant to Statement 123, the Company's 2001 net loss and pro
         forma net loss per common share would have been $6,335 million and
         $2.45, respectively. The Company's net earnings (loss) and pro forma
         net earnings (loss) per share for 2000 and 1999 would not have been
         significantly different from what has been reflected in the
         accompanying consolidated financial statements as substantially all of
         Liberty's stock option awards had tandem SARs in 2000 and 1999.

           In addition to the SARs issued in the aforementioned option
           restructuring, during 2001 and pursuant to the Liberty Incentive
           Plan, Liberty awarded 2,104,000 options to purchase Liberty Series A
           common stock to certain officers and key employees of the Company.
           Such options have exercise prices ranging from $12.40 to $16.35, vest
           as to 25% in each of years 2 through 5 after the date of grant, and
           had a weighted-average grant date fair value of $9.40.

           The estimated fair values of the options noted above are based on the
           Black-Scholes model and are stated in current annualized dollars on a
           present value basis. The key assumptions used in the model for
           purposes of these calculations generally include the following: (a) a
           discount rate equal to the 10-year Treasury rate on the date of
           grant; (b) a 45% volatility factor, (c) the 10-year option term; (d)
           the closing price of the respective common stock on the date of
           grant; and (e) an expected dividend rate of zero.

           Liberty Digital, Inc.

           Deferred Compensation and Stock Option Plan. On September 8, 1999,
           Liberty Digital adopted the Deferred Compensation and Stock
           Appreciation Rights Plan for key executives. This plan is comprised
           of a deferred compensation component and SARs grants. The deferred
           compensation component provides participants with the right to
           receive an aggregate of nine and one half percent of the appreciation
           in the Liberty Digital Series A common stock market price over $2.46
           subject to a maximum amount of $19.125. The SARs provide participants
           with the appreciation in the market price of the Liberty Digital
           Series A common stock above the maximum amount payable under the
           deferred compensation component. Obligations to the executives under
           both the deferred compensation and SAR elements of this plan are
           accounted for as variable award plans.







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           There are 19,295,193 shares subject to this plan all of which were
           granted in 1999 at an effective exercise price of $2.46 and a
           weighted average remaining life of 3 years at year end. The deferred
           compensation and SARs components vest 20% annually beginning with the
           first vesting date of December 15, 1999. Fully vested unexercised
           SARs total 3,046,188 at year-end. During the year ended December 31,
           1999, there were no exercises, cancellations or expirations. During
           2000 there were 3,859,038 options exercised, and 3,251,401 options
           cancelled. This plan terminates on December 15, 2003.

           Subsequent to December 31, 2001, Liberty effected a short form merger
           with Liberty Digital whereby Liberty Digital shareholders received
           0.25 shares of Liberty Series A common stock for each share of
           Liberty Digital Series A common stock held. Subsequent to this merger
           Liberty owns 100% of Liberty Digital. In connection with this merger,
           all outstanding Liberty Digital SARs were converted to Liberty SARs
           at the rate of 0.25 for 1. In addition, all amounts accrued under the
           deferred compensation plan were paid, and the deferred compensation
           plan was terminated.

           During the first quarter of 2000, an executive officer of Liberty
           Digital elected to exercise certain of his SARs that had been granted
           by Liberty Digital. In order to satisfy Liberty Digital's obligations
           under the stock option agreement, LDIG and Liberty offered to issue,
           and the executive agreed to accept, a combination of cash and AT&T
           Liberty Media Group tracking stock in lieu of a cash payment.
           Accordingly, Liberty paid cash of $50 million and issued 5.8 million
           shares to the executive officer in the first quarter of 2001.

           STARZ ENCORE GROUP

           Starz Encore Group Phantom Stock Appreciation Rights Plan. During
           2000 and 1999 Starz Encore Group granted Phantom Stock Appreciation
           Rights (PSARS) to certain of its officers under this plan. PSARS
           granted under the plan generally vest over a five year period.
           Compensation under the PSARS is computed based upon a formula derived
           from the appraised fair value of the net assets of Starz Encore
           Group. All amounts earned under the plan are payable in cash.

           OTHER

         Certain of the Company's subsidiaries have stock based compensation
         plans under which employees and non-employees are granted options or
         similar stock based awards. Awards made under these plans vest and
         become exercisable over various terms. The awards and compensation
         recorded, if any, under these plans is not significant to Liberty.

(12)       Employee Benefit Plans

           Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
           "Liberty 401(k) Plan"), which provides employees an opportunity for
           ownership in the Company and creates a retirement fund. The Liberty
           401(k) Plan provides for employees to contribute up to 10% of their
           compensation to a trust for investment in Liberty common stock, as
           well as several mutual funds. The Company, by annual resolution of
           the Board, generally contributes up to 100% of the amount contributed
           by employees. Certain of the Company's subsidiaries have their own
           employee benefit plans. Contributions to all plans aggregated $10
           million, $7 million, $3 million and $1 million for the years ended
           December 31, 2001 and 2000, the ten months ended December 31, 1999
           and the two months ended February 28, 1999, respectively.

(13)       Other Comprehensive Earnings

           Accumulated other comprehensive earnings included in Liberty's
           consolidated balance sheets and consolidated statements of
           stockholder's equity reflect the aggregate of foreign currency





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


           translation adjustments and unrealized holding gains and losses on
           securities classified as available-for-sale. The change in the
           components of accumulated other comprehensive earnings, net of taxes,
           is summarized as follows:



                                                                                           Accumulated
                                                           Foreign                           other
                                                          currency      Unrealized       comprehensive
                                                         translation    gains on       earnings (loss), net
                                                         adjustments    securities        of taxes
                                                         -----------    ----------     --------------------
                                                                       amounts in millions
                                                                              
           Balance at January 1, 1999                   $    5            3,181            3,186
           Other comprehensive earnings (loss)             (15)             885              870
                                                        ------            -----            -----
           Balance at February 28, 1999                 $  (10)           4,066            4,056
                                                        ======            =====            =====
           -------------------------------------------------------------------------------------------------

           Balance at March 1, 1999                     $   --               --               --
           Other comprehensive earnings                     60            6,495            6,555
                                                        ------            -----            -----
           Balance at December 31, 1999                     60            6,495            6,555

           Other comprehensive loss                       (202)          (6,750)          (6,952)
                                                        ------            -----            -----
           Balance at December 31, 2000                   (142)            (255)            (397)

           Other comprehensive loss                       (359)           1,596            1,237
                                                        ======            =====            =====
           Balance at December 31, 2001                 $ (501)           1,341              840
                                                        ======            =====            =====








                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


           The components of other comprehensive earnings are reflected in
           Liberty's consolidated statements of comprehensive earnings, net of
           taxes. The following table summarizes the tax effects related to each
           component of other comprehensive earnings.




                                                                                                         Tax
                                                                                    Before-tax        (expense)         Net-of-tax
                                                                                     amount            benefit           amount
                                                                                    ----------        ---------         ----------
                                                                                               amounts in millions
                                                                                                               
           Year ended December 31, 2001:
           -----------------------------
           Foreign currency translation adjustments                                $   (588)               229               (359)
           Unrealized holding losses on securities
            arising during period                                                    (1,661)               648             (1,013)
           Reclassification adjustment for losses realized in net loss                4,420             (1,724)             2,696
           Cumulative effect of accounting change                                      (143)                56                (87)
                                                                                   --------              -----             ------
           Other comprehensive earnings                                            $  2,028               (791)             1,237
                                                                                   ========              =====             ======

           Year ended December 31, 2000:
           -----------------------------
           Foreign currency translation adjustments                                $   (334)               132               (202)
           Unrealized holding losses on securities
            arising during period                                                   (10,116)             4,001             (6,115)

           Reclassification adjustment for
             gains realized in net earnings                                          (1,050)               415               (635)
                                                                                   --------              -----             ------
           Other comprehensive loss                                                $(11,500)             4,548             (6,952)
                                                                                   ========              =====             ======


           Ten months ended December 31, 1999:
           -----------------------------------
           Foreign currency translation adjustments                                $     99                (39)                60
           Unrealized holding gains on securities
            arising during period                                                     10,733             (4,245)             6,488
           Reclassification adjustment for losses realized in net loss                   12                 (5)                 7
                                                                                   --------              -----             ------
           Other comprehensive earnings                                            $ 10,844             (4,289)             6,555
                                                                                   ========              =====             ======
           ----------------------------------------------------------------------------------------------------------------------
           Two months ended February 28, 1999:
           Foreign currency translation adjustments                                $    (25)                10                (15)
           Unrealized holding gains arising during period                             1,464               (579)               885
                                                                                   --------              -----             ------
           Other comprehensive earnings                                            $  1,439               (569)               870
                                                                                   ========              =====             ======


(14)       Commitments and Contingencies

           Starz Encore Group LLC, a wholly owned subsidiary of Liberty,
           provides premium programming distributed by cable, direct satellite,
           TVRO and other distributors throughout the United States. Starz
           Encore Group is obligated to pay fees for the rights to exhibit
           certain films that are released by various producers through 2014
           (the "Film Licensing Obligations"). The aggregate amount of the Film
           Licensing Obligations under these license agreements is not currently
           estimable because such amount is dependent upon the number of
           qualifying films released theatrically by certain motion picture
           studios as well as the domestic theatrical exhibition receipts upon
           the release of such qualifying films. Nevertheless, required
           aggregate payments under the Film Licensing Obligations could prove
           to be significant. Starz Encore Group's estimate, based on customer
           levels at December 31, 2001, of the future minimum obligation related
           to the Film Licensing Obligations for the five years after 2001 and
           thereafter are as follows (amounts in millions):

                                                 
                           2002                     $ 405
                           2003                       224
                           2004                       154
                           2005                       88
                           2006                       103
                           Thereafter                 388







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued


           Liberty has guaranteed $619 million of the bank debt of Jupiter, an
           equity affiliate that provides broadband services in Japan.
           Approximately $343 million of such guaranteed amount is due and
           payable by Jupiter during the first quarter of 2002. Jupiter is
           currently negotiating the refinancing of substantially all of its
           long-term and short-term debt. Liberty anticipates that it and the
           other Jupiter shareholders will make equity contributions to Jupiter
           in connection with such refinancing, and that Liberty's share of such
           equity contributions will be approximately $450 million. Upon such
           refinancing, Liberty anticipates that its guarantee of Jupiter debt
           would be cancelled.

           Liberty has also guaranteed various loans, notes payable, letters of
           credit and other obligations (the "Guaranteed Obligations") of
           certain other affiliates. At December 31, 2001, the Guaranteed
           Obligations aggregated approximately $170 million. Currently, Liberty
           is not certain of the likelihood of being required to perform under
           such guarantees.

           Liberty leases business offices, has entered into pole rental and
           transponder lease agreements and uses certain equipment under lease
           arrangements. Rental expense under such arrangements amounts to $76
           million, $50 million, $30 million and $9 million for the years ended
           December 31, 2001 and 2000, for the ten months ended December 31,
           1999 and the two months ended February 28, 1999, respectively.

           A summary of future minimum lease payments under noncancelable
           operating leases as of December 31, 2001 follows (amounts in
           millions):



                      Years ending December 31:
                                                   
                                2002                  $  70
                                2003                     63
                                2004                     52
                                2005                     40
                                2006                     31
                                Thereafter              115


           It is expected that in the normal course of business, leases that
           expire generally will be renewed or replaced by leases on other
           properties; thus, it is anticipated that future minimum lease
           commitments will not be less than the amount shown for 2001.

           Starz Encore Group LLC v. AT&T Broadband LLC and Satellite Services,
           Inc. Starz Encore Group entered into a 25-year affiliation agreement
           in 1997 with TCI. TCI cable systems subsequently acquired by AT&T in
           the TCI merger operate under the name AT&T Broadband. Starz Encore
           Group receives fixed monthly payments in exchange for unlimited
           access to all of the existing Encore and STARZ! services. The payment
           from AT&T Broadband can be adjusted if AT&T acquires or disposes of
           cable systems. The affiliation agreement further provides that to the
           extent Starz Encore Group's programming costs increase above or
           decrease below amounts specified in the agreement, then AT&T
           Broadband's payments under the affiliation agreement will be
           increased or decreased in an amount equal to a proportion of the
           excess or shortfall. Starz Encore Group requested payment from AT&T
           Broadband of its proportionate share of excess programming costs
           during the first quarter of 2001 (which amount aggregated
           approximately $32 million for the year 2001). Excess programming
           costs payable by AT&T Broadband could be significantly larger in
           future years.

           By letter dated May 29, 2001, AT&T Broadband has disputed the
           enforceability of the excess programming costs pass through
           provisions of the affiliation agreement and questioned whether the
           affiliation agreement, as a whole, is "voidable." In addition, AT&T
           Broadband raised certain issues concerning interpretations of the
           contractual requirements associated with the treatment of
           acquisitions and dispositions. Starz Encore Group believes the
           position expressed by AT&T Broadband to be without merit. On July 10,
           2001, Starz Encore Group initiated a lawsuit against







                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

           AT&T Broadband and Satellite Services, Inc., a subsidiary of AT&T
           Broadband that is also a party to the affiliation agreement, in
           Arapahoe County District Court, Colorado for breach of contract.
           Starz Encore Group is seeking a judgment of specific performance of
           the contract, damages and costs.

           On October 19, 2001, Starz Encore Group entered into a standstill and
           tolling agreement whereby the parties agreed to move the court to
           stay the lawsuit until August 31, 2002 to permit the parties an
           opportunity to resolve their dispute. This agreement provides that
           either party may unilaterally petition the court to lift the stay
           after April 30, 2002 and proceed with the litigation. The court
           granted the stay on October 30, 2001. In conjunction with this
           agreement, AT&T Broadband and the Company entered into various
           agreements whereby Starz Encore Group will indirectly receive payment
           for AT&T Broadband's proportionate share of the programming costs
           pass through for 2001.

           Liberty has contingent liabilities related to legal proceedings and
           other matters arising in the ordinary course of business. Although it
           is reasonably possible Liberty may incur losses upon conclusion of
           such matters, an estimate of any loss or range of loss cannot be
           made. In the opinion of management, it is expected that amounts, if
           any, which may be required to satisfy such contingencies will not be
           material in relation to the accompanying consolidated financial
           statements.

(15)       Information about Liberty's Operating Segments

           Liberty is a holding company with a variety of subsidiaries and
           investments operating in the media, communications and entertainment
           industries. Each of these businesses is separately managed. Liberty
           identifies its reportable segments as those consolidated subsidiaries
           that represent 10% or more of its combined revenue and those equity
           method affiliates whose share of earnings or losses represent 10% or
           more of its pre-tax earnings or loss. Subsidiaries and affiliates not
           meeting this threshold are aggregated together for segment reporting
           purposes. The segment presentation for prior periods has been
           conformed to the current period segment presentation.

           For the year ended December 31, 2001, Liberty had five operating
           segments: Starz Encore Group, Liberty Livewire, On Command
           Corporation ("On Command"), Telewest and Other. Starz Encore Group
           provides premium programming distributed by cable, direct-to-home
           satellite and other distribution media throughout the United States
           and is wholly owned and consolidated by Liberty. Liberty Livewire
           provides sound, video and ancillary post production and distribution
           services to the motion picture and television industries in the
           United States and Europe and is majority owned and consolidated by
           Liberty. On Command provides in-room, on-demand video entertainment
           and information services to hotels, motels and resorts primarily in
           the United States and is majority owned and consolidated by Liberty.
           Telewest, an equity method affiliate, operates and constructs cable
           television and telephone systems in the UK. Other includes Liberty's
           non-consolidated investments, corporate and other consolidated
           businesses not representing separately reportable segments.

           The accounting policies of the segments that are also consolidated
           subsidiaries are the same as those described in the summary of
           significant accounting policies. Liberty evaluates performance based
           on the measures of revenue and operating cash flow (as defined by
           Liberty), appreciation in stock price and non-financial measures such
           as average prime time rating, prime time audience delivery,
           subscriber growth and penetration, as appropriate. Liberty believes
           operating cash flow is a widely used financial indicator of companies
           similar to Liberty and its affiliates, which should be considered in
           addition to, but not as a substitute for, operating income, net
           income, cash flow provided by operating activities and other measures
           of financial performance prepared in accordance with generally
           accepted accounting principles. Liberty generally accounts for
           intersegment sales and transfers as if the sales or transfers were to
           third parties, that is, at current prices.






                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, continued

         Liberty's reportable segments are strategic business units that offer
         different products and services. They are managed separately because
         each segment requires different technology, distribution channels and
         marketing strategies.

           Liberty utilizes the following financial information for purposes of
           making decisions about allocating resources to a segment and
           assessing a segment's performance:



                                                Consolidated Subsidiaries
                                                ----------------------------
                                                                                              Equity
                                                                                              method
                                                Starz                                       affiliate
                                                Encore   Liberty        On                  ---------
                                                Group    Livewire     Command    Other       Telewest     Eliminations     Total
                                                -----    --------     -------    -----       --------     ------------     -----
                                                                           amounts in millions
                                                                                                      
Performance Measures:

Year ended December 31, 2001
           Revenue                            $   863         593        239         364        1,811        (1,811)        2,059
           Operating cash flow                    313          89         44         (69)         431          (431)          377

Year ended December 31, 2000
           Revenue                                733         295        200         298        1,623        (1,623)        1,526
           Operating cash flow                    235          44         49          12          330          (330)          340

Ten months ended December 31, 1999
           Revenue                                539          --         --         190          857          (857)          729
           Operating cash flow                    124          --         --           9          235          (235)          133

Two months ended February 28, 1999
           Revenue                                101          --         --         134          207          (207)          235
           Operating cash flow                     41          --         --           6           52           (52)           47

Balance Sheet Information:

As of December 31, 2001
           Total assets                         2,861         915        433      44,330        9,209        (9,209)       48,539
           Investments in affiliates              138          --         --       9,938          795          (795)       10,076

As of December 31, 2000
           Total assets                         2,754       1,141        439      49,934       10,707       (10,707)       54,268
           Investments in affiliates              155           8          2      20,299          377          (377)       20,464





                   LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, continued

           The following table provides a reconciliation of segment operating
           cash flow to earnings before income taxes:



                                                                New Liberty                            Old Liberty
                                                   ----------------------------------------------     -------------
                                                       Year             Year          Ten months        Two months
                                                      ended            ended            ended             ended
                                                   December 31,      December 31,     December 31,      February 28,
                                                      2001             2000              1999             1999
                                                   ------------      ------------     ------------      ------------
                                                                        amounts in millions
                                                                                            

           Segment operating cash flow              $    377              340              133              47
           Stock compensation                           (132)             950           (1,785)           (183)
           Depreciation and amortization                (984)            (854)            (562)            (22)
           Impairment of long-lived assets              (388)              --               --              --
           Interest expense                             (525)            (399)            (135)            (26)
           Share of losses of affiliates              (4,906)          (3,485)            (904)            (66)
           Nontemporary declines in fair
             value of investments                     (4,101)          (1,463)              --              --
           Gains (losses) on dispositions, net
                                                        (310)           7,340                4              14
           Other, net                                     87              527               85             373
                                                    --------           ------           ------            ----
           Earnings (loss) before income
             taxes and minority interest            $(10,882)           2,956           (3,164)            137
                                                    ========           ======           ======            ====


           During the year ended December 31, 2001, Liberty derived 13.6% its
           total revenue from a single customer. Such revenue is attributable to
           the Starz Encore Group segment and the Other segment.

(16)       Quarterly Financial Information (Unaudited)



                                                      1st              2nd             3rd               4th
                                                    Quarter          Quarter         Quarter            Quarter
                                                    -------          -------         -------            -------
                                                                        amounts in millions
           2001:

                                                                                           
             Revenue                                $  504              513              521              521
                                                    =======          =======         =======            =======
             Operating loss                         $ (207)            (195)             (51)            (674)
                                                    =======          =======         =======            =======
             Loss before cumulative effect
              of accounting change                  $ (697)          (2,125)            (215)          (3,711)
                                                    =======          =======         =======            =======
             Net loss                               $ (152)          (2,125)            (215)          (3,711)
                                                    =======          =======         =======            =======
             Pro forma basic and diluted
              loss before cumulative
              effect of accounting change
              per common share                      $ (.27)            (.82)            (.08)           (1.43)
                                                    =======          =======         =======            =======
             Pro forma basic and diluted
              net loss per common share             $ (.06)            (.82)            (.08)           (1.43)
                                                    =======          =======         =======            =======

          2000:

             Revenue                                $  235              382              436              473
                                                    =======          =======         =======            =======
             Operating income (loss)                $  (83)              67              147              305
                                                    =======          =======         =======            =======
             Net earnings (loss)                    $  939              267            1,756           (1,477)
                                                    =======          =======         =======            =======
             Pro forma basic and diluted
              net earnings (loss)
              per common share                      $  .36              .10              .68             (.57)
                                                    =======          =======         =======            =======