EX-99 2 exh99eightk4qearningsrelease.txt EXH 99.1, AT&T PRESS RELEASE DATED 01/20/2005 [AT&T LOGO OMITTED] News Release -------------------------------------------------------------------------------- FOR RELEASE THURSDAY, JANUARY 20, 2005 AT&T Announces Fourth-Quarter Results o Fourth-quarter earnings per diluted share of $0.78 o Revenue for the fourth quarter of $7.3 billion o Fourth-quarter operating income of $1.2 billion BEDMINSTER, N.J. -- AT&T (NYSE: T) today reported its fourth-quarter and full-year 2004 results. The company reported net income of $625 million, or earnings per diluted share of $0.78, for the fourth quarter of 2004. The company's current quarter net income included an after-tax depreciation benefit from its third-quarter 2004 asset impairment charges of $337 million, or $0.42 per diluted share. The company's current-quarter net income compares to net income of $340 million, or earnings per diluted share of $0.43, in the fourth quarter of 2003. "AT&T's results reflect the solid progress we've made in transforming this company for the long-term, and the considerable momentum we've established entering 2005," said AT&T Chairman and Chief Executive Officer David W. Dorman. "While the pricing environment in our industry remains challenging, we're encouraged by the strengthening of AT&T's competitive position in the enterprise market in recent quarters." AT&T reported fourth-quarter 2004 consolidated revenue of $7.3 billion, which included $5.5 billion from AT&T Business and $1.8 billion from AT&T Consumer. Consolidated revenue declined 10.2 percent versus the fourth quarter of 2003, primarily due to continued declines in long-distance (LD) voice and data revenue, partially offset by an increase in bundled services revenue and solid growth in key services in the enterprise market, such as Internet Protocol & Enhanced services (IP&E-services). AT&T's fourth-quarter 2004 consolidated operating income was $1.2 billion, resulting in a consolidated operating margin of 16.0 percent. The company reported consolidated EBITDA, excluding net restructuring and other charges, of $1.8 billion in the fourth quarter of 2004 for a margin of 25.2 percent. This compares to consolidated EBITDA of $2.0 billion and a margin of 24.2 percent in the prior-year fourth quarter, on the same basis. The company reported that success in cutting costs, including savings from ongoing headcount reduction efforts and strategic reductions in marketing expenses, contributed to strong margins for the quarter. Full-Year 2004 Results For the full year, AT&T reported a net loss of $6.1 billion, or loss per diluted share of $7.68. The company's net loss included significant non-cash asset impairment charges, as well as net restructuring and other charges, the majority of which were taken during the third quarter. This compares to net income of $1.9 billion, or earnings per diluted share of $2.36 in 2003. Excluding the asset impairment and net restructuring and other charges taken during 2004, and their associated tax benefits, adjusted net income for the year was $1.8 billion, or adjusted earnings per diluted share of $2.25. In addition, due to the asset impairment, the company received an after-tax benefit from lower depreciation of $669 million, or $0.85 per diluted share. A reconciliation of reported earnings per diluted share to adjusted earnings per diluted share is provided in the appendices on page 12 of this document. AT&T reported full-year 2004 consolidated revenue of $30.5 billion, which included $22.6 billion from AT&T Business and $7.9 billion from AT&T Consumer. This represents a consolidated revenue decline of 11.6 percent versus 2003, primarily due to continued declines in LD voice and data revenue, partially offset by an increase in bundled services revenue and growth in key services in the enterprise market, such as IP&E-services. AT&T's 2004 consolidated operating loss was $9.5 billion, including $12.8 billion in asset impairment and net restructuring and other charges taken in 2004, as well as a depreciation benefit of $1.1 billion due to the asset impairment charges taken in the third quarter of 2004. The company reported full-year consolidated EBITDA, excluding asset impairment and net restructuring and other charges, of $7.0 billion and a margin of 22.9 percent. This compares to consolidated EBITDA of $8.7 billion and a margin of 25.3 percent in 2003, on the same basis. 2005 OUTLOOK AT&T also announced its full-year 2005 expectations: o Consolidated revenue between $25 billion and $26 billion o Year-over-year decline of several hundred million dollars in small business revenue, primarily reflected within AT&T Business local voice, as a result of changes in the regulatory environment o Consolidated operating income margin in the low double-digits, excluding any net restructuring and other charges o Total capital expenditures of approximately $1.5 billion o Up to $200 million of incremental expenses in the "Corporate & Other" group, excluding any net restructuring and other charges, primarily related to higher pension plan costs AT&T UNIT HIGHLIGHTS AT&T Business o Revenue was $5.5 billion, a decline of 7.4 percent from the prior-year fourth quarter. Pricing pressure and continued declines in retail volumes negatively affected revenue performance. Partially offsetting these declines was a reciprocal compensation settlement as well as strength in IP&E-services. Full-year revenue declined by 9.9 percent to $22.6 billion. o Long-distance voice revenue decreased 13.5 percent from the prior-year fourth quarter, driven by continued pricing pressure in both the retail and wholesale businesses, as well as a continued decline in retail volumes. Total volumes were down slightly versus the prior-year fourth quarter. Full-year LD voice revenue declined 15.0 percent compared to 2003, while volumes were essentially flat. o Local voice revenue grew 26.6 percent for the fourth quarter and 12.7 percent for the full year versus the same prior-year periods. Revenue was positively impacted by a reciprocal compensation settlement that increased revenue by approximately $97 million. Local access lines totaled nearly 4.7 million at the end of the current period, representing an increase of approximately 11,000 lines compared with the third quarter of 2004. o Data revenue declined 13.7 percent from the prior-year fourth quarter. Revenue was negatively affected by pricing pressure and technology migration. On a full-year basis, data revenue decreased by 12.2 percent from the prior year. o IP&E-services revenue grew 13.0 percent over the prior-year fourth quarter. The year-over-year growth was primarily driven by strength in Enhanced Virtual Private Network and IP-enabled frame. Full-year revenue grew by 11.0 percent over the prior year. o Outsourcing, professional services and other revenue declined 3.1 percent from the prior-year fourth quarter due to terminating outsourcing contracts and customers reducing scope, partially offset by strength in equipment sales. Full-year revenue declined by 11.6 percent from the prior year. o Fourth-quarter operating income was $781 million, yielding a margin of 14.3 percent. The fourth-quarter operating income reflects a net depreciation benefit of $0.5 billion as a result of the third-quarter asset impairment charges. The full-year 2004 operating loss was $10.1 billion, including asset impairment and net restructuring and other charges of $12.0 billion, as well as a net depreciation benefit of $1.0 billion realized in the second half of 2004 due to the asset impairment charges. o Fourth-quarter EBITDA was $1.4 billion, excluding net restructuring and other charges, yielding a margin of 25.6 percent. o During the fourth quarter, a number of sizable customer wins and contract extensions were signed with companies including Fireman's Fund Insurance Company, The Thomson Corporation, CVS, Raytheon and Sun Microsystems, among many others. AT&T Consumer o Revenue was $1.8 billion for the fourth quarter of 2004 and $7.9 billion for the full year, representing declines of 17.9 percent and 15.9 percent, respectively, versus the same prior-year periods. Declines were driven by lower standalone LD voice revenue as a result of the continued impact of competition, wireless and Internet substitution and customer migration to lower-priced products, partially offset by targeted price increases. Also offsetting these declines was an increase in bundled services revenue. o Fourth-quarter operating income was $493 million, yielding an operating margin of 27.3 percent. The fourth-quarter operating income reflects a benefit of $38 million as a result of the third-quarter asset impairment charges. Full-year 2004 operating income was $1.4 billion and included asset impairment and net restructuring and other charges of $0.2 billion, as well as a benefit of $0.1 billion due to the asset impairment charges. o At the end of 2004, AT&T Consumer offered its residential VoIP AT&T CallVantageSM Service in over 170 major markets in the U.S. covering 39 states and Washington, D.C. The company also announced more retail distribution partnerships with retail outlets such as Office Depot, Buy.com and TigerDirect.com. o At the end of the fourth quarter, AT&T Consumer had over 24 million standalone LD and bundled customers. OTHER CONSOLIDATED FINANCIAL HIGHLIGHTS o As a result of a reciprocal compensation settlement, operating income for AT&T Business increased by approximately $77 million and operating income for AT&T Consumer increased by $28 million in the fourth quarter, resulting in a net benefit of approximately $105 million to consolidated operating income. This benefit had a positive impact of approximately $0.08 per diluted share. o AT&T recorded net restructuring and other charges of $36 million in the fourth quarter, primarily for facility closings as a result of ongoing real estate consolidation efforts due to employee separations, which had a negative impact of approximately $0.03 per diluted share. o AT&T repurchased $131 million of U.S. dollar- and Euro-denominated debt during the fourth quarter, which resulted in a loss of $13 million recorded in other income (expense). o Free cash flow was $1.1 billion for the fourth quarter. Free cash flow is defined as cash flows provided by operating activities of $1.5 billion less cash used for capital expenditures and other additions of $0.4 billion. For the full year, free cash flow was $3.7 billion, resulting from cash flows provided by operating activities of $5.5 billion less cash used for capital expenditures and other additions of $1.8 billion. o AT&T ended the year with net debt of $6.0 billion, a $1.0 billion decrease from the end of the third quarter of 2004 and a $2.8 billion decrease from the end of the prior year. Net debt is defined as total debt of $10.7 billion less cash of $3.7 billion, restricted cash of $0.5 billion and net foreign debt fluctuations of $0.5 billion. o During the fourth quarter of 2004, AT&T generated EBITDA less capital expenditures (excluding asset impairment and net restructuring and other charges) of $1.4 billion, bringing the full-year 2004 total to $5.2 billion. o Capital expenditures for the quarter were $396 million and $1.8 billion for the full year, as AT&T continued to prudently invest in upgrading its network and integrating its systems in order to further rationalize its cost structure and support growth in next-generation services. DEFINITIONS and NOTES AT&T Business LD Voice - includes all of AT&T's domestic and international LD revenue, including Intralata toll when purchased as part of an LD calling plan. Local Voice - includes all local calling and feature revenue, Intralata toll when purchased as part of a local calling plan, as well as Inter-carrier local revenue. Data Services - includes bandwidth services (dedicated private line services through high-capacity optical transport), frame relay and asynchronous transfer mode (ATM) revenue for LD and local, as well as revenue for managed data services. Internet Protocol & Enhanced Services (IP&E-services) - includes 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, security). Outsourcing, Professional Services & Other - includes complex bundled solutions primarily in the wide area/local area network space, AT&T's professional services revenue associated with the company's federal government customers, as well as all other Business revenue (and eliminations) not previously defined. Data, IP&E-Services - Percent Managed - managed services refers to AT&T's management of a client's network or network and applications including applications that extend to the customer premise equipment. Data, IP&E-Services - Percent International - a data service that either originates or terminates outside of the United States, or an IP&E-service installed or wholly delivered outside the United States. AT&T Consumer Bundled Services - includes any customer with a local relationship as a starting point, and all other AT&T subscription-based voice products provided to that customer. Standalone LD, Transactional & Other Services - includes any customer with solely a long-distance relationship, non-voice products, or a non subscription-based relationship. Other Definitions and Notes EBITDA - Earnings before interest, taxes, depreciation and amortization is calculated as operating income plus depreciation and amortization. Restricted cash - $0.5 billion of cash that collateralizes a portion of private debt and is included in "other current assets" on the balance sheet. Foreign currency fluctuations - represents mark-to-market adjustments, net of cash collateral collected, that increased the debt balance by approximately $0.5 billion at December 31, 2004, on non-U.S. denominated debt of about $1.4 billion. AT&T has entered into foreign exchange hedges that substantially offset the fluctuations in the debt balance. The offsetting mark-to-market adjustments of the hedges are included in "other current assets" and "other assets" on the balance sheet. Note to Financial Media: AT&T executives will discuss the company's performance in a two-way conference call for financial analysts at 8:15 a.m. ET today. Reporters are invited to listen to the call. U.S. callers should dial 888-428-4478 to access the call. Callers outside the U.S. should dial + 1-612-332-0530. In addition, Internet rebroadcasts of the call will be available on the AT&T web site beginning later today. The web site address is www.att.com/ir. An audio rebroadcast of the conference call will also be available beginning at 12:40PM on Thursday, January 20 through 11:59PM on Sunday, January 30. To access the audio rebroadcast, U.S. callers can dial 800-475-6701, access code 763281. Callers outside the U.S. should dial +1-320-365-3844, access code 763281. The foregoing contains "forward-looking statements" which are based on management's beliefs as well as on a number of assumptions concerning future events made by and information currently available to management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside AT&T's control, that could cause actual results to differ materially from such statements. These risk factors include the impact of increasing competition, continued capacity oversupply, regulatory uncertainty and the effects of technological substitution, among other risks. For a more detailed description of the factors that could cause such a difference, please see AT&T's 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission. AT&T disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results of AT&T. # # #

AT&T Corp. Consolidated Statements of Operations (Unaudited) Dollars in millions (except per share amounts) Three Months Ended Years Ended December 31, December 31, 2004 2003 2004 2003 REVENUE (1) AT&T Business $ 5,454 $ 5,887 $22,582 $25,075 AT&T Consumer 1,806 2,198 7,904 9,400 Corporate and Other 13 14 51 54 -------------------------- -------------------------- Total Revenue 7,273 8,099 30,537 34,529 OPERATING EXPENSES Access and other connection 2,371 2,606 9,901 10,797 Costs of services and products 1,668 1,702 7,074 7,625 Selling, general and administrative 1,397 1,828 6,557 7,379 Depreciation and amortization 640 1,263 3,768 4,870 Asset impairment and net restructuring and other charges 36 67 12,772 201 -------------------------- -------------------------- Total operating expenses 6,112 7,466 40,072 30,872 Operating income (loss) 1,161 633 (9,535) 3,657 Other income (expense), net 28 102 (144) 191 Interest (expense) (192) (241) (803) (1,158) -------------------------- -------------------------- Income (loss) from continuing operations before income taxes, minority interest income and net earnings (losses) related to equity investments 997 494 (10,482) 2,690 (Provision) benefit for income taxes (375) (139) 4,366 (816) Minority interest income - - 1 1 Net earnings (losses) related to equity investments 3 (15) 5 (12) -------------------------- -------------------------- Income (loss) from continuing operations 625 340 (6,110) 1,863 (Loss) from discontinued operations - net of income taxes - - - (13) -------------------------- -------------------------- Income (loss) before cumulative effect of accounting change 625 340 (6,110) 1,850 Cumulative effect of accounting change - net of income taxes - - - 15 -------------------------- -------------------------- Net income (loss) $ 625 $ 340 $(6,110) $ 1,865 ========================== ========================== Weighted-average common shares (millions) 797 791 795 788 Weighted-average common shares and potential common shares (millions) 803 793 795 789 PER BASIC SHARE: Earnings (loss) from continuing operations $ 0.78 $ 0.43 $ (7.68) $ 2.37 (Loss) from discontinued operations $ - $ - $ - $ (0.02) Cumulative effect of accounting change $ - $ - $ - $ 0.02 -------------------------- -------------------------- Earnings (loss) per basic share $ 0.78 $ 0.43 $ (7.68) $ 2.37 ========================== ========================== PER DILUTED SHARE: Earnings (loss) from continuing operations $ 0.78 $ 0.43 $ (7.68) $ 2.36 (Loss) from discontinued operations $ - $ - $ - $ (0.02) Cumulative effect of accounting change $ - $ - $ - $ 0.02 -------------------------- -------------------------- Earnings (loss) per diluted share $ 0.78 $ 0.43 $ (7.68) $ 2.36 ========================== ========================== Dividends declared per share $0.2375 $0.2375 $0.9500 $0.8500 (1) Prior period amounts have been restated to reflect the transfer of the remaining payphone business from AT&T Consumer to AT&T Business.

AT&T Corp. Consolidated Statements of Operations (Unaudited) Dollars in millions (except per share amounts) 4Q04 3Q04 2Q04 1Q04 2004 4Q03 3Q03 2Q03 1Q03 2003 REVENUE (1) AT&T Business $ 5,454 $ 5,645 $ 5,611 $ 5,872 $ 22,582 $ 5,887 $ 6,301 $ 6,428 $ 6,459 $25,075 AT&T Consumer 1,806 1,980 2,011 2,107 7,904 2,198 2,334 2,354 2,514 9,400 Corporate and Other 13 13 14 11 51 14 14 13 13 54 Total revenue 7,273 7,638 7,636 7,990 30,537 8,099 8,649 8,795 8,986 34,529 OPERATING EXPENSES Access and other connection 2,371 2,411 2,481 2,638 9,901 2,606 2,785 2,708 2,698 10,797 Costs of services and products 1,668 1,783 1,759 1,864 7,074 1,702 1,954 1,958 2,011 7,625 Selling, general and administrative 1,397 1,653 1,763 1,744 6,557 1,828 1,793 1,837 1,921 7,379 Depreciation and amortization 640 647 1,231 1,250 3,768 1,263 1,224 1,197 1,186 4,870 Asset impairment and net restructuring and other charges 36 12,469 54 213 12,772 67 64 66 4 201 Total operating expenses 6,112 18,963 7,288 7,709 40,072 7,466 7,820 7,766 7,820 30,872 Operating income (loss) 1,161 (11,325) 348 281 (9,535) 633 829 1,029 1,166 3,657 Other income (expense), net 28 (34) 36 (174) (144) 102 (7) 86 10 191 Interest (expense) (192) (192) (191) (228) (803) (241) (289) (296) (332) (1,158) Income (loss) from continuing operations before income taxes, minority interest income and net earnings (losses) related to equity investments 997 (11,551) 193 (121) (10,482) 494 533 819 844 2,690 (Provision) benefit for income taxes (375) 4,402 (87) 426 4,366 (139) (72) (308) (297) (816) Minority interest income - - 1 - 1 - - - 1 1 Net earnings (losses) related to equity investments 3 2 1 (1) 5 (15) (3) 25 (19) (12) Income (loss) from continuing operations 625 (7,147) 108 304 (6,110) 340 458 536 529 1,863 (Loss) from discontinued operations - net of income taxes - - - - - - (13) - - (13) Income (loss) before cumulative effect of accounting changes 625 (7,147) 108 304 (6,110) 340 445 536 529 1,850 Cumulative effect of accounting changes, net of income taxes - - - - - - (27) - 42 15 Net income (loss) $ 625 $(7,147) $ 108 $ 304 $(6,110) $ 340 $ 418 $ 536 $ 571 $ 1,865 Weighted-average common shares (millions) 797 795 794 793 795 791 789 787 784 788 Weighted-average common shares and potential common shares (millions) 803 795 797 796 795 793 791 787 785 789 PER BASIC SHARE: Earnings (loss) from continuing operations $ 0.78 $ (8.99) $ 0.14 $ 0.38 $ (7.68) $ 0.43 $ 0.58 $ 0.68 $ 0.67 $ 2.37 (Loss) from discontinued operations - - - - - - (0.02) - - (0.02) Cumulative effect of accounting changes - - - - - - (0.03) - 0.06 0.02 Earnings (loss) per basic share $ 0.78 $ (8.99) $ 0.14 $ 0.38 $ (7.68) $ 0.43 $ 0.53 $ 0.68 $ 0.73 $ 2.37 PER DILUTED SHARE: Earnings (loss) from continuing operations $ 0.78 $ (8.99) $ 0.14 $ 0.38 $ (7.68) $ 0.43 $ 0.58 $ 0.68 $ 0.67 $ 2.36 (Loss) from discontinued operations - - - - - - (0.02) - - (0.02) Cumulative effect of accounting changes - - - - - - (0.03) - 0.06 0.02 Earnings (loss) per diluted share $ 0.78 $ (8.99) $ 0.14 $ 0.38 $ (7.68) $ 0.43 $ 0.53 $ 0.68 $ 0.73 $ 2.36 (1) Prior period amounts have been restated to reflect the transfer of the remaining payphone business from AT&T Consumer to AT&T Business.

AT&T Corp. Historical Segment Data (Unaudited) Dollars in millions 4Q04 3Q04 2Q04 1Q04 2004 4Q03 3Q03 2Q03 1Q03 2003 AT&T Business (1) LD Voice $ 2,163 $ 2,364 $ 2,386 $ 2,613 $ 9,526 $ 2,501 $ 2,820 $ 2,895 $ 2,983 $ 11,199 Local Voice 490 390 404 389 1,673 386 379 384 335 1,484 Total Voice 2,653 2,754 2,790 3,002 11,199 2,887 3,199 3,279 3,318 12,683 Data Services (2) 1,595 1,693 1,690 1,715 6,693 1,846 1,875 1,943 1,956 7,620 IP&E-Services (2) 625 587 565 553 2,330 554 550 509 489 2,102 Total Data and IP&E-Services 2,220 2,280 2,255 2,268 9,023 2,400 2,425 2,452 2,445 9,722 Outsourcing, Professional Services & Other 581 611 566 602 2,360 600 677 697 696 2,670 Total revenue 5,454 5,645 5,611 5,872 22,582 5,887 6,301 6,428 6,459 25,075 Operating income (loss)(3) (7) 781 (11,095) 152 83 (10,079) 282 413 601 599 1,895 Operating margin 14.3% (196.5%) 2.7% 1.4% (44.6%) 4.8% 6.6% 9.3% 9.3% 7.6% Capital expenditures(8) 377 391 463 470 1,701 740 995 763 636 3,134 Depreciation & amortization (7) 607 610 1,176 1,192 3,585 1,200 1,162 1,133 1,126 4,621 Total Data and IP&E-Services - % managed (2) 33% 32% 32% 32% 32% 32% 32% 31% 30% 31% Total Data and IP&E-Services - % international 16% 15% 15% 15% 15% 14% 14% 14% 14% 14% LD volume growth - yr/yr -2% -2% 0% 2% 0% 7% 15% 12% 12% 11% LD volume % wholesale 57% 56% 54% 54% 55% 53% 51% 47% 45% 50% ------------------------------------------------------------------------------------------------------------------------------------ AT&T Consumer (1) Standalone LD, Transactional and Other Services $1,116 $1,256 $1,327 $1,462 $5,161 $1,604 $1,813 $1,894 $2,090 $7,401 Bundled Services 690 724 684 645 2,743 594 521 460 424 1,999 Total revenue 1,806 1,980 2,011 2,107 7,904 2,198 2,334 2,354 2,514 9,400 Operating income(4) (7) 493 281 240 371 1,385 435 503 485 633 2,056 Operating margin 27.3% 14.2% 11.9% 17.6% 17.5% 19.8% 21.6% 20.6% 25.2% 21.9% Capital expenditures 5 9 15 13 42 19 14 19 22 74 Depreciation & amortization (7) 13 15 33 32 93 35 35 36 35 141 Local customers (in thousands) 4,156 4,477 4,677 4,364 4,156 3,950 3,547 3,130 2,778 3,950 ------------------------------------------------------------------------------------------------------------------------------------ Corporate and Other (1) Revenue $ 13 $ 13 $ 14 $ 11 $ 51 $ 14 $ 14 $ 13 $ 13 $ 54 Operating (loss)(5) (113) (511) (44) (173) (841) (84) (87) (57) (66) (294) Capital expenditures(8) 14 6 2 2 24 13 198 8 4 223 Depreciation & amortization 20 22 22 26 90 28 27 28 25 108 ------------------------------------------------------------------------------------------------------------------------------------ Total AT&T Revenue $ 7,273 $ 7,638 $ 7,636 $ 7,990 $30,537 $ 8,099 $ 8,649 $ 8,795 $ 8,986 $ 34,529 Operating income (loss)(6) 1,161 (11,325) 348 281 (9,535) 633 829 1,029 1,166 3,657 Operating margin 16.0% (148.3%) 4.6% 3.5% (31.2%) 7.8% 9.6% 11.7% 13.0% 10.6% Capital expenditures(8) 396 406 480 485 1,767 772 1,207 790 662 3,431 Depreciation & amortization (7) 640 647 1,231 1,250 3,768 1,263 1,224 1,197 1,186 4,870 (1) Prior period amounts have been restated to reflect the transfer of the remaining payphone business from AT&T Consumer to AT&T Business. (2) Prior period amounts have been restated to reflect the division of international managed services revenue into Data Services and IP&E-Services, consistent with the classifications of domestic managed services. This reclassification had no impact on "Total Data and IP&E-Services revenue," or total revenue. (3) Includes asset impairment and net restructuring and other (charges) of ($9M) in 4Q04, ($11,859M) in 3Q04, ($52M) in 2Q04 and ($91M) in 1Q04, totaling ($12,011M) in 2004; ($33M) in 4Q03, ($53M) in 3Q03, ($47M) in 2Q03 and ($4M) in 1Q03, totaling ($137M) in 2003. (4) Includes asset impairment and net restructuring and other (charges) of ($188M) in 3Q04 and ($1M) in 1Q04, totaling ($189M) in 2004; ($17M) in 4Q03, ($4M) in 3Q03 and ($5M) in 2Q03, totaling ($26M) in 2003. (5) Includes asset impairment and net restructuring and other (charges) of ($27M) in 4Q04, ($422M) in 3Q04, ($2M) in 2Q04 and ($121M) in 1Q04, totaling ($572M) in 2004; ($17M) in 4Q03, ($7M) in 3Q03 and ($14M) in 2Q03, totaling ($38M) in 2003. (6) Includes asset impairment and net restructuring and other (charges) of ($36M) in 4Q04, ($12,469M) in 3Q04, ($54M) in 2Q04 and ($213M) in 1Q04, totaling ($12,772M) in 2004; ($67M) in 4Q03, ($64M) in 3Q03, ($66M) in 2Q03 and ($4M) in 1Q03, totaling ($201M) in 2003. (7) As a result of the third-quarter 2004 asset impairment charge, third-quarter 2004 and fourth-quarter 2004 depreciation and amortization expense decreased by $527 million and $538 million, respectively, for AT&T Business and $10 million and $8 million, respectively, for AT&T Consumer. In addition, as a result of the transport service arrangement between AT&T Business and AT&T Consumer, network-related charges from AT&T Business (recorded as contra-expense) to AT&T Consumer were reduced by $28 million in the third quarter and $30 million in the fourth quarter as a result of the lower depreciation and amortization expense recorded by AT&T Business. This resulted in a reduction in AT&T Business' operating income and an increase in AT&T Consumer's operating income. (8) Includes $433M in 3Q03 related to the adoption of FIN 46 of which $241M is included in Business and $192M is included in Corporate and Other.

AT&T Corp. Consolidated Balance Sheets (Unaudited) Dollars in millions December 31, December 31, 2004 2003 ASSETS Cash and cash equivalents $ 3,698 $ 4,353 Accounts receivable, less allowances of $523 and $579 3,195 4,036 Deferred income taxes 980 715 Other current assets 1,383 744 ------------------------------------------ Total Current Assets 9,256 9,848 Property, plant and equipment, net of accumulated depreciation of $1,588 and $34,300 11,509 24,376 Goodwill 4,888 4,801 Other purchased intangible assets, net of accumulated amortization of $428 and $320 375 499 Prepaid pension costs 3,991 3,861 Other assets 2,654 4,603 ------------------------------------------ TOTAL ASSETS $ 32,673 $ 47,988 ========================================== LIABILITIES Accounts payable and accrued expenses $ 2,505 $ 3,256 Compensation and benefit-related liabilities 2,193 1,783 Debt maturing within one year 1,886 1,343 Other current liabilities 2,293 2,501 ------------------------------------------ Total Current Liabilities 8,877 8,883 Long-term debt 8,779 13,066 Long-term compensation and benefit-related liabilities 3,322 3,528 Deferred income taxes 1,419 5,395 Other long-term liabilities and deferred credits 2,897 3,160 ------------------------------------------ Total Liabilities 25,294 34,032 ------------------------------------------ SHAREOWNERS' EQUITY Common Stock, $1 par value, authorized 2,500,000,000 shares; issued and outstanding 798,570,623 shares (net of 171,983,367 treasury shares) at December 31, 2004 and 791,911,022 shares (net of 172,179,303 treasury shares) at December 31, 2003 799 792 Additional paid-in capital 27,170 27,722 Accumulated deficit (20,821) (14,707) Accumulated other comprehensive income 231 149 ------------------------------------------ Total Shareowners' Equity 7,379 13,956 ------------------------------------------ TOTAL LIABILITIES & SHAREOWNERS' EQUITY $ 32,673 $ 47,988 ==========================================

AT&T Corp. Consolidated Statements of Cash Flows (Unaudited) Dollars in millions Year Ended December 31, 2004 2003 Operating Activities Net (loss) income $ (6,110) $ 1,865 Deduct: Loss from discontinued operations - net of income taxes - (13) Cumulative effect of accounting change - net of income taxes - 15 ---------------------------- (Loss) income before cumulative effect of accounting change (6,110) 1,863 Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities: Net gains on sales of businesses and investments (23) (53) Loss on early extinguishment of debt 314 85 Asset impairment, net restructuring and other charges 12,448 93 Depreciation and amortization 3,768 4,870 Provision for uncollectible receivables 437 703 Deferred income taxes (4,306) 1,402 Net pretax losses related to equity investments (9) (19) Decrease in receivables 431 600 (Decrease) in accounts payable and accrued expenses (591) (494) Net change in other operating assets and liabilities (735) (310) Other adjustments, net (112) (210) ---------------------------- Net Cash Provided by Operating Activities of Continuing Operations 5,512 8,530 ---------------------------- Investing Activities Capital expenditures and other additions (1,836) (3,157) Proceeds from sale or disposal of property, plant and equipment 95 163 Investment distributions and sales 37 126 Net dispositions (acquisitions) of businesses, net of cash disposed/acquired 8 (158) (Increase) in restricted cash (47) (57) Other investing activities, net 39 (18) ---------------------------- Net Cash (Used in) Investing Activities of Continuing Operations (1,704) (3,101) ---------------------------- Financing Activities Retirement of long-term debt, including redemption premiums (3,914) (8,002) (Decrease) in short-term borrowings, net (300) (1,281) Issuance of AT&T common shares 79 118 Dividends paid on common stock (754) (629) Other financing activities, net 426 704 ---------------------------- Net Cash (Used in) Financing Activities of Continuing Operations (4,463) (9,090) ---------------------------- Net (decrease) in cash and cash equivalents (655) (3,661) Cash and cash equivalents at beginning of year 4,353 8,014 ---------------------------- Cash and Cash Equivalents at End of Period $ 3,698 $ 4,353 ============================

AT&T Corp. Reconciliation of Non-GAAP Measures AT&T is providing information on net debt, EBITDA and related margins, EBITDA less capital expenditures and free cash flows because these measures are commonly used by the investment community for evaluation purposes. AT&T is providing information on adjusted net income and adjusted earnings per share due to the magnitude of the asset impairment and net restructuring and other charges taken during the year and the distortion they have on reported results and trends. Net debt, adjusted net income, adjusted earnings per share, EBITDA, EBITDA less capital expenditures and free cash flows should be considered in addition to, but not in lieu of, other measures of liquidity, profitability and cash flows reported in accordance with generally accepted accounting principles. Additionally, they may not be comparable to similarly captioned measures reported by other companies.

Net (Loss) Income and Earnings Per Share ------------------------------------------------------------------------------------------------------------------------------------ (dollars in millions, except per share amounts) For the year ended December 31, 2004 Net (loss) income EPS Reported (loss) ($6,110) ($7.68) Add: Assset impairment and net restructuring and other charges 7,896 9.93 ------------ ------------- Adjusted earnings $1,786 $2.25 ============ ============= ------------------------------------------------------------------------------------------------------------------------------------

EBITDA, Excluding Asset Impairment and Net Restructuring and Other Charges, to Net Income ------------------------------------------------------------------------------------------------------------------------------------ (dollars in millions) For the three months ended For the year ended December 31, December 31, December 31, December 31, 2004 2003 2004 2003 EBITDA margin (1) 25.2% 24.2% 22.9% 25.3% EBITDA (1) $1,837 $1,963 $7,005 $8,728 Depreciation and amortization (640) (1,263) (3,768) (4,870) Asset impairment and net restructuring and other charges (36) (67) (12,772) (201) ---------- ---------- ---------- ---------- Subtotal operating income (loss) $1,161 $633 ($9,535) $3,657 ---------- ---------- ---------- ---------- Other income (expense), net 28 102 (144) 191 Interest (expense) (192) (241) (803) (1,158) (Provision) benefit for income taxes (375) (139) 4,366 (816) Minority interest income - - 1 1 Net income (losses) related to equity investments 3 (15) 5 (12) ---------- ---------- ---------- ---------- Net income (loss) from continuing operations $625 $340 ($6,110) $1,863 ---------- ---------- ---------- ---------- Net (loss) from discontinued operations - - - (13) Cumulative effect of accounting change - - - 15 ---------- ---------- ---------- ---------- Net income (loss) $625 $340 ($6,110) $1,865 ========== ========== ========== ========== (1) Excluding asset impairment and net restructuring and other charges. ------------------------------------------------------------------------------------------------------------------------------------

AT&T Corp. Reconciliation of Non-GAAP Measures, continued AT&T Business EBITDA, Excluding Net Restructuring and Other Charges, to Operating Income ---------------------------------------------------------------------------------------------------- (dollars in millions) For the three months ended December 31, 2004 EBITDA and margin (1) $1,397 25.6% Depreciation and amortization (607) Net restructuring and other charges (9) ------------- Operating income and margin $781 14.3% ============= ---------------------------------------------------------------------------------------------------- (1) Excluding net restructuring and other charges.

EBITDA, Excluding Asset Impairment and Net Restructuring and Other Charges, Less Capital Expenditures to Cash Provided by Operating Activities: ----------------------------------------------------------------------------------------------------------------------- For the three months ended For the year (dollars in millions) ended ended December 31, 2004 December 31, 2004 EBITDA (1) less capital expenditures $1,441 $5,238 Add capital expenditures 396 1,767 ------------------------ ------------------------ EBITDA (1) $1,837 $7,005 Other cash (expenses) receipts (2) (612) (1,143) Changes in working capital and other operating assets & liabilities 276 (350) ------------------------ ------------------------ Cash provided by operating activities $1,501 $5,512 ======================== ======================== ----------------------------------------------------------------------------------------------------------------------- (1) Excluding asset impairment and net restructuring and other charges. (2) Other cash expenses primarily include taxes, interest expense and net restructuring and other charges payments.

AT&T Corp. Reconciliation of Non-GAAP Measures, continued Net Debt -------------------------------------------------------------------------------------------------------- Net debt is defined as total debt, less cash, restricted cash and net foreign debt fluctuations: (dollars in millions) December 31, 2004 Total debt $10,665 Less: Cash 3,698 Restricted cash 546 Foreign debt fluctuations 462 ------------------------ Net debt $5,959 ======================== --------------------------------------------------------------------------------------------------------