AT&T CORP
8-K, 1998-03-02
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
Previous: AMERICAN NATIONAL INCOME FUND INC, NSAR-B, 1998-03-02
Next: ARROW ELECTRONICS INC, 8-A12B/A, 1998-03-02



<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION


                              Washington, DC 20549


                                    Form 8-K


                                 CURRENT REPORT



                         Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


                          Date of Report: March 2, 1998



                                   AT&T CORP.

 A New York                     Commission File                  I.R.S. Employer
Corporation                       No. 1-1105                     No.13-4924710



            32 Avenue of the Americas, New York, New York 10013-3412


                         Telephone Number (212) 387-5400

<PAGE>
Form 8-K                                                              AT&T Corp.
March 2, 1998


Item 5.  Other Events.

AT&T is making available its audited consolidated  financial results and certain
other  information for the year ended December 31, 1997.  Filed as Exhibit 99 to
this 8-K is the following information:

1.  Management's Discussion and Analysis.

2.  Seven-Year Summary of Selected Financial Data.

3.  Report of Independent Accountants.

4.  Consolidated  Statements  of Income for the Years Ended  December  31, 1997,
    1996, and 1995.

5.  Consolidated Balance Sheets at December 31, 1997, and 1996.

6.  Consolidated  Statements of Changes in Shareowners'  Equity for the Years
    Ended December 31, 1997, 1996, and 1995.

7.  Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
    1996, and 1995.

8.  Notes to Consolidated Financial Statements.



Item 7.  Financial Statements and Exhibits.

         (c)         Exhibits.

Exhibit 23           Consent of Coopers & Lybrand L.L.P.

Exhibit 99           AT&T Corp. consolidated financial results and certain other
                     information for the year ended December 31, 1997.


<PAGE>
Form 8-K                                                              AT&T Corp.
March 2, 1998


                                   SIGNATURES


  Pursuant to the  requirements  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.




                               /s/  M. B. Tart
                               ---------------------
                               By:  M. B. Tart
                                    Vice President and Controller

February 27, 1998


                       CONSENT OF INDEPENDENT ACCOUNTANTS
     We consent to the incorporation by reference in the registration statements
of AT&T Corp. ("AT&T" or the "Company") 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. 33-34265),  Form
S-8 for the AT&T Long Term Savings Plan for Management  Employees  (Registration
Nos. 33-34264,  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 Nos. 33-56643,  33-49465 and 33-20276),  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),  and Post-Effective
Amendment No. 1 on Form S-8 to Form S-8 Registration Statement (Registration No.
33-54797) for the AT&T 1996 Employee Stock Purchase Plan,  Form S-8 for the AT&T
Shares for Growth Program  (Registration  No.  33-49089),  Form S-8 for the AT&T
1997 Long Term Incentive Program  (Registration No. 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),  and in Post-Effective Amendment Nos. 1, 2 and 3 on
Form S-8 to Form S-4 Registration Statement  (Registration No. 33-42150) for the
NCR Corporation 1989 Stock Compensation Plan (Registration No. 33-42150-01), the
NCR Corporation 1984 Stock Option Plan  (Registration  No.  33-42150-02) and the
NCR  Corporation  1976  Stock  Option  Plan   (Registration  No.   33-42150-03),
respectively, and the Post-Effective Amendment Nos. 1, 2, 3 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)   and  the  McCaw   Cellular
Communications,   Inc.   Employee   Stock   Purchase  Plan   (Registration   No.
33-52119-05),  respectively,  and Post-Effective  Amendment No. 1 on Form S-8 to
Form S-4  Registration  Statement  (Registration  No. 33-45302) for the Teradata
Corporation  1987  Incentive  and Other  Stock  Option  Plan  (Registration  No.
33-45302-01),  Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan
for LIN  Broadcasting  Corp.  (Registration  No.  33-63195)  of our report dated
January 26, 1998, on our audits of the consolidated  financial statements of the
Company and its  subsidiaries  at December 31, 1997 and 1996,  and for the years
ended December 31, 1997, 1996 and 1995, which report is included in this Current
Report on Form 8-K.


COOPERS & LYBRAND L.L.P.

1301 Avenue of the Americas
New York, New York
March 2, 1998




<PAGE>
March 2, 1998                                                         Exhibit 99

1997 Annual Report - Financial Review
AT&T Corp. and Subsidiaries (AT&T)

WHAT IT ALL MEANS:
In reporting our 1997 operating results we employed certain conventions in order
to assist readers in  understanding  the key drivers of our business.  First, in
order to distinguish the performance of AT&T's  established  businesses from the
dilutive  impacts of  investments  in new  business  areas,  we present  certain
information in terms of "core"  businesses and  "initiatives."  Core  businesses
include:  business and consumer long-distance services,  wireless voice services
in existing  850 MHz  markets,  messaging,  air-to-ground  services and wireless
product sales.  Initiatives include: local service;  wireless service in new 1.9
GHz markets; wireless data services; online services such as AT&T WorldNet*; the
AT&T Solutions outsourcing,  consulting and networking integration  professional
services business, and international markets (excluding bilateral traffic). Note
that all financial data presented on a "core" and "initiatives"  basis should be
considered  approximate.  Data on  initiatives  include costs and expenses on an
incremental  basis and require certain estimates and allocations that management
believes provide a reasonable basis on which to present such information.

  Also, as required by generally accepted accounting  principles,  our financial
statements  include only the results of "continuing  operations." The results of
certain  businesses  AT&T has divested and AT&T Universal  Card  Services,  Inc.
(UCS), which in the fourth quarter we agreed to sell to Citicorp (Citibank), are
represented as "Income from discontinued  operations" (net of applicable taxes),
"Net  assets of  discontinued  operations,"  and "Net cash used in  discontinued
operations." In 1997  discontinued  operations  included the results of UCS. The
results of AT&T's former submarine systems business,  sold to Tyco International
Ltd. in July,  are also included in  discontinued  operations.  In 1996 and 1995
discontinued operations included Lucent Technologies Inc. (Lucent), AT&T Capital
Corporation (AT&T Capital), NCR Corporation (NCR) and other businesses.

Financial Section Index
 6 Management's Discussion and Analysis
38 Seven-Year  Summary of Selected  Financial  Data
40 Report of  Management
41 Report  of  Independent  Accountants
42 Consolidated  Statements  of Income
43 Consolidated   Balance   Sheets
44 Consolidated   Statements  of  Changes  in Shareowners'  Equity
45 Consolidated  Statements  of Cash  Flows
46 Notes to Consolidated Financial Statements
* (registered trademark of AT&T)


<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
January 1, 1997,  marked a beginning for AT&T.  The challenge of completing  the
"trivestiture" was behind us and we entered the new year as a new company -- one
better  focused and prepared to face the  increasingly  competitive  and dynamic
telecommunications industry. As our experience in 1997 proved, however, the most
challenging  period in this  company's  history  did not end with  trivestiture.
Rather,  we had just begun the work needed to position  ourselves  strategically
and financially in order to grow profitably in the years to come.

  Change  and  complexity  characterized  the  industry  in 1997.  New  services
continued  to emerge --  services  like voice  over the  Internet  and  Internet
Protocol(IP)  networks.   Digital  technology  continued  to  revolutionize  the
wireless communications business.  Demand for data transmission services such as
frame relay multiplied,  and corporations demanded help managing their ever more
complex,  more global  telecommunications  needs. The maze of regulatory  issues
impacting our business grew more and more intricate.  Even the very structure of
the  industry  changed as companies  from all parts of the  industry  looked for
partners   to  help   them   become   providers   of   complete   offerings   of
telecommunications services.

  As if all this wasn't challenging enough in 1997,  competition  intensified in
our  long-distance  and wireless  businesses where we faced some of the stiffest
competitive  conditions  around.   Aggressive  industry  pricing  practices  put
pressure  on  our  margins  in  long-distance   services  for  businesses.   The
competition  used price and innumerable  other tactics to attack our residential
base and new  competitors  entered  wireless  markets all over the country  with
aggressive offers.

  Our mission for 1997 was to take the critical  actions  needed to prepare AT&T
for the future.  Our ultimate ability to deliver shareowner value depends on the
strategic position and the financial strength and flexibility that we create for
ourselves  today.  But we also  understand  the need to balance  concern for the
future with our investors'  expectations for solid financial  performance in the
present.


<PAGE>
  So in 1997,  we did invest for the future.  We  invested in our local  service
initiative  which reduced  earnings before interest and taxes (EBIT),  including
other income, and earnings before interest, taxes, depreciation and amortization
(EBITDA), including other income, by over $900 million each and reduced earnings
per  share  by  about  $0.37.  We did not  get  the  return  we  wanted  on this
investment,  so we made the  important  economic  decision  to  discontinue  our
efforts  to sell local  service to  residential  customers  on a total  services
resale basis. We remain  committed to providing local service to our residential
customers,  but  only  when an  economically  viable  means  of  doing so can be
developed.  On the business side, we accelerated our local entry in January 1998
when we executed a merger  agreement with Teleport  Communications  Group,  Inc.
(TCG), the largest competitive local exchange carrier.  TCG brings to AT&T local
facilities in 66 of the top U.S. markets, along with the management expertise we
need to win in the  business  local  market.  The TCG deal,  valued at about $11
billion,  is expected to generate over $1 billion in synergies in 1999,  growing
to $2.2 - $2.5 billion in 2002.  Under the  agreement  each share of TCG will be
exchanged  for .943 of an AT&T  share.  The  merger,  which  remains  subject to
regulatory  approval and certain other  conditions,  is expected to close in the
second half of 1998.

  We also  continued to develop  businesses  that are important to our long-term
success.  These businesses include  international  markets (excluding  bilateral
traffic),   AT&T  Solutions  --  our  outsourcing,   consulting  and  networking
integration professional services business; AT&T WorldNet -- our Internet access
service for homes and businesses,  and wireless  service in new 1.9 GHz markets.
We invested  heavily in these  businesses in 1997;  they further  reduced AT&T's
EBIT by over $1.5  billion,  EBITDA by more than $1.2  billion and  earnings per
share by about $0.58 for the year.


<PAGE>
<TABLE>
<CAPTION>
A chart appears containing the following  information:  AT&T Two-year EPS* Trend
+: Core EPS in dollars #:  Total EPS in  dollars @:  Initiatives  EPS in dollars
<S>            <C>          <C>        <C>       <C>       <C>        <C>       <C>       <C>
Dollars 1.20



                             +
                                                                                           +
                                        +
                +
                             #                    +
                                                            +                    +
                #
                                        #
                                                                                           #
0.80                                                                   +
                                                  #

                                                                                 #
                                                            #

                                                                       #

0.40



0
                @
                             @                    @
                                        @

                                                                       @         @
                                                                                           @
                                                            @

(0.40)

                1Q96         2Q96       3Q96      4Q96      1Q97       2Q97      3Q97      4Q97



                        Year   Core   Inits   Total
                        1996   4.04   (0.59)   3.45
                        1997   3.69   (0.95)   2.74
<FN>
*All earnings per share information in this discussion is presented on a diluted
basis,  meaning that the share balance used in the  calculation  includes shares
outstanding  plus  shares  that may be  issued as a result  of the  exercise  of
options.
</FN>
</TABLE>



<PAGE>
  We continued to invest in our core  long-distance  business as well.  The AT&T
network  handled a record  volume of traffic in 1997,  including  a new  one-day
record of 319  million  calls on the Monday  after  Thanksgiving.  Approximately
99.96% of these calls were completed on the first try. In order to maintain this
level of  capacity  and  reliability,  as well as  respond  to new  demands,  we
invested  the  majority  of our capital  spending  in 1997 in the  long-distance
network,  deploying  Synchronous Optical Network (SONET) technology rings across
the country and increasing the capacity of our data networks.

<TABLE>
<CAPTION>
A chart appears containing the following information:

Number of Calls on the Network

#: Number of calls on the Network.



<S>               <C>    <C>         <C>         <C>

80 Billion
                                                 #
                  70
                                     #
                         #
                  60

                  50

                  40

                  30

                  20

                  10

                   0

                         1995        1996         1997
</TABLE>




  All this investment, plus the effects of competition on our core long-distance
and wireless businesses, put a strain on our financial performance. As a result,
our 1997  earnings  were down from the prior  year,  as  explained  below in the
discussion of our financial  results for the year.  But again,  we recognize the
need to balance  investment with current earnings and to have maximum  financial
flexibility in this growing industry.  Therefore, we moved aggressively to shore
up our financial  position and  stabilize  our earnings.  We continued to divest
assets and


<PAGE>
businesses  not critical to our  long-term  strategy.  We completed the sales of
AT&T Tridom,  AT&T Skynet,  our submarine systems business and our investment in
DirecTV.  We reached  agreements to sell UCS, AT&T Solutions  Customer Care, and
our holdings of LIN  Television  Corporation  and  WOOD-TV.  We also reduced our
strategic  investment  in SmarTone  Communications.  All told,  we expect  these
transactions  to generate  about $6.7  billion in cash for AT&T  (pretax).  As a
result, our already solid balance sheet will become even stronger.

  In order to deliver  on the  earnings  expectations  of our  investors  and to
position  ourselves for the future, we attacked our cost structure  aggressively
in 1997 and intend to do a lot more in 1998 and beyond.  As a result of our cost
reduction  efforts,  our selling,  general and  administrative  (SG&A)  expenses
declined  in the  fourth  quarter  of 1997.  Our  earnings,  after  hitting  the
low-water mark in the second quarter, showed sequential improvement in the third
and fourth quarters. EBITDA also trended upward in the second half, as the chart
below shows.  Further,  we expect to reduce SG&A by $1.6 billion in 1998 and our
goal is to achieve a level of SG&A expenses  equal to 22% of revenues by the end
of 1999.

  On January 26, 1998, we announced a voluntary  retirement incentive program to
be  offered  to  managers  during  the  second  quarter  of 1998.  The  expected
acceptance  rate of 10,000  to 11,000  employees  for the  voluntary  retirement
incentive offer may impact the  utilization of the remaining 1995  restructuring
reserve  balance.  Another  5,000  to  7,000  employees  will  leave  through  a
combination of managed attrition and previously announced workforce reductions.























<PAGE>

<TABLE>
<CAPTION>
A chart appears containing the following information: AT&T Two-year EBITDA Trend
+: Core EBITDA in dollars #: Total  EBITDA in dollars @:  Initiatives  EBITDA in
dollars AT&T Two-year EBITDA Trend Dollars in Millions
      <S>          <C>        <C>        <C>        <C>        <C>        <C>         <C>        <C>

      4,000
                                                                                                  +
      3,500
                               +
                                          +
                                                                                       +
                    +
                                                                +
                    #
                                                                                                  #
                                                     +
                                          #
                               #
                                                                            +
      3,000
                                                                                       #
                                                                #
                                                     #
      2,500
                                                                            #
      2,000
      1,500
      1,000
        500
          0
                    @
                                         @
                              @
                                                     @
      (500)
                                                                                       @
                                                                @
                                                                            @
                                                                                                  @

    (1,000)
                    1Q96      2Q96       3Q96        4Q96       1Q97        2Q97       3Q97       4Q97
</TABLE>





<PAGE>
  Shareowners  recognized our efforts in 1997. AT&T was the top performing stock
in the Dow Jones  Industrial  Average (DJIA) for the six months ending  December
31, 1997, and had the seventh-highest  appreciation among the Dow stocks for the
full year. Our stock generated a total return,  including dividends, of over 53%
in 1997.  We hope to  continue  to  produce a high  return in 1998 and beyond by
delivering earnings growth.
<TABLE>
<CAPTION>
A chart appears containing the following information:

@: AT&T performance vs DJIA in 1997

#:  The DJIA performance in 1997
     <S>    <C>    <C>    <C>    <C>    <C>    <C>   <C>    <C>    <C>    <C>    <C>    <C>    <C>

     155%

     145%
                                                                                                @
     135%

     125%                                                    #                           @
                                                      #             #      #             #      #
     115%                                                                         #
                                        #      #                                  @
     105%          #      #
            @#                   #                                         @
      95%
                   @      @                                         @
      85%
                                 @      @      @      @      @
      75%

      65%
            12/     1/     2/     3/     4/     5/     6/     7/     8/     9/    10/    11/    12/
            31/    31/    28/    31/    30/    30/    30/    31/    29/    30/    31/    28/    31/
             96     97     97     97     97     97     97     97     97     97     97     97     97

</TABLE>



<PAGE>
OPERATING RESULTS
Our income from continuing  operations  decreased  $1,101 million,  or 19.8%, in
1997 and increased $506 million, or 10.0%, in 1996. Lower earnings from the core
business and increased  dilution  from  investment  in  initiatives  contributed
almost equally to the decline in earnings in 1997.  Core earnings were lower due
primarily to higher  depreciation  and  amortization  expenses  driven by higher
levels of capital investment.  In 1997 we invested $7.2 billion in capital,  the
majority of which was directed toward  increasing the capacity and technology of
our  long-distance  and wireless  networks,  including the installation of SONET
facilities.  We expect to complete our SONET  program in 1998 with a total of 52
rings providing coast-to-coast  connectivity.  Our local service efforts and our
expansion into new wireless  markets were the primary drivers of the increase in
dilution from initiatives in 1997.

  In 1995 our core  business  recorded  pretax  charges  of  $3,023  million  of
restructuring  and  other  charges.   The  charges  covered   consolidating  and
reorganizing numerous corporate and business units over several years. The total
pretax  charge was recorded as $844 million in network and other  communications
services expenses,  $934 million in depreciation and amortization  expenses, and
$1,245 million in selling,  general and administrative expenses. The tax benefit
associated  with the charges was $991  million.  The total impact on income from
continuing  operations  was $2,032  million,  or $1.28 per share.  The impact on
income from discontinued  operations was $3,321 million, or $2.08 per share. The
impact on net income was $5,353 million, or $3.36 per share.
Discussions presented here exclude the impact of these charges unless noted.


Dollars in Millions
For the Years Ended December 31          1997     1996     1995*
Income from Continuing Operations      $4,472   $5,573    $5,067
Income from Discontinued Operations       100      173       425
Gain on Sale of Discontinued
  Operations                               66      162         -
Net Income                             $4,638   $5,908    $5,492

Earnings Per Share - Diluted:
Income from Continuing Operations      $ 2.74   $ 3.45    $ 3.19
Income from Discontinued Operations      0.06     0.11      0.26
Gain on Sale of Discontinued
  Operations                             0.04     0.10         -
Net Income                             $ 2.84   $ 3.66    $ 3.45

Earnings Per Share - Diluted:
Core                                   $ 3.69   $ 4.04    $ 3.40
Initiatives                             (0.95)   (0.59)    (0.21)
Total Continuing Operations            $ 2.74   $ 3.45    $ 3.19
*Excludes restructuring and other charges
<PAGE>
  Income related to discontinued  operations,  including gains on disposals, was
$166 million in 1997 and $335 million in 1996.  As of December 31, 1997,  UCS is
the only business remaining in discontinued operations. We completed the sale of
our  submarine  systems  business in the third  quarter of 1997,  and in 1996 we
successfully divested Lucent, NCR, AT&T Capital and other businesses.

REVENUES
We  reported  our  1997  revenues  in five  categories:  business  and  consumer
long-distance  services,  wireless services,  local and other  initiatives,  and
other and eliminations.  Total revenues grew $773 million,  or 1.5%, in 1997 and
$2,101 million, or 4.3%, in 1996.

Dollars in Millions
For the Years Ended December 31          1997      1996     1995
Business long-distance services       $22,212   $21,591  $20,496
Consumer long-distance services        23,962    24,650   24,299
Wireless services                       4,337     3,931    3,368
Local and other initiatives             2,226     1,569    1,393
Other and eliminations                 (1,418)   (1,195)  (1,111)
Total revenues                        $51,319   $50,546  $48,445

A pie chart appears containing the following information:

AT&T 1997 External Revenue by Category
As percentage of total revenue

47%   Consumer long-distance services

41%   Business long-distance services

 8%   Wireless services

 4%   Local and other initiatives

Business long-distance services revenue, made up primarily of revenue from voice
and data services,  and related products sales, increased $621 million, or 2.9%,
in 1997 and $1,095  million,  or 5.4%,  in 1996.  Adjusted for the sales of AT&T
Skynet and AT&T Tridom,  business  revenue grew 3.5% in 1997.  Strong  growth in
revenue from data services -- frame relay and other emerging services as well as
private  line -- drove the  increase in business  revenue.  Revenue  growth from
voice  services  was  hampered  by  pricing  pressure  brought on by a number of
factors.  Many  voice  service  contracts  were  renegotiated  during  the year,
encouraged  by  uncertainty   surrounding   the   possibility  of   detariffing.
Competitive  pressure caused many of these contracts to be renegotiated at lower
rates. Also,  reductions in access costs were passed to customers in the form of
lower rates,


<PAGE>
further  pressuring  revenue  growth.  Revenue growth in 1996 was fueled by both
strong  growth in business  inbound  (toll-free  800 and 888  services) and data
services.

Calling volume, or billed minutes,  in business  long-distance  services grew in
the mid-teens in both 1997 and 1996, both led by strong volume growth in inbound
services as well as growth in outbound services and government markets.  Despite
very competitive  conditions,  we held our market position in business  services
with such major contract wins as American  Express,  Prudential,  CVS,  American
Home  Products  and the State of Florida.  Again,  lower  price  levels on voice
contracts  substantially  offset the growth in calling volume though the pricing
environment began to show signs of stabilization in the fourth quarter of 1997.

  Consumer  long-distance  services revenue  declined $688 million,  or 2.8%, in
1997 and increased  $351 million,  or 1.4%, in 1996.  However,  our 1997 revenue
growth  was  impacted  by a number of  strategic  choices  intended  to  improve
profitability.  For  instance,  we  accelerated  the  use of free  minutes  as a
customer incentive in 1997,  increasingly  using them in place of checks.  Since
free  minutes are  presented as  contra-revenue  on the income  statement  while
checks are classified as expense,  our move toward free minutes served to reduce
revenue  growth.  This shift,  plus the effects of flowing  savings  from access
reform  through  to  customers  resulting  in  lower  prices,  accounted  for  2
percentage  points of the 2.8%  decline in revenue.  The  remaining  decline was
primarily due to another move designed to improve long-term profitability -- the
migration of customers to more favorable  optional calling plans.  This is a key
element in our  strategy  to retain  our most  profitable  customers.  Partially
offsetting  the  declines  was  growth in  intraLATA,  or  local-toll  services.
Presubscription  processes  allowing customers to choose AT&T as their preferred
local-toll  carrier  helped revenue from these  services grow  substantially  in
1997.  In 1996 the  increase in consumer  revenue was driven by price  increases
instituted throughout the year.



<PAGE>
  Another  element in our  strategy  to attract  and retain the most  profitable
residential customers and to improve our bottom line was to refine our marketing
efforts in the second half of the year so that the customer base we targeted for
acquisition  would not include customers who are not profitable to us. While not
having a material  impact on consumer  revenue or volume for the full year 1997,
this strategic shift may cause further pressure on these measures in the future.

  Consumer  calling volume  increased by a  low-single-digit  percentage in 1997
compared with a decrease of a similar magnitude in 1996. The increase was due to
strong  growth  in  intraLATA  volume,  again  as  a  result  of  capturing  the
opportunity  offered by  local-toll  presubscription,  while in 1996 declines in
domestic volumes were partially offset by growth in international volumes.

  Total long-distance  services revenues -- the sum of the business and consumer
categories  -- was  $46,174  million in 1997,  essentially  flat  compared  with
$46,241  million  in  1996.   Volume  increased  8.7%  for  the  year.  In  1996
long-distance  revenues increased $1,446 million,  or 3.2%, on a volume increase
of 5.9%.  The gap between  volume and revenue growth widened to 8.8% in 1997 due
to the revenue factors  mentioned  above,  including the  flow-through of access
charge reductions,  and also due to the growth in lower-priced  services such as
intraLATA. The 1996 gap reflected the impact of promotional discounts, increased
movement of customers to optimal calling plans and increased  discounts given to
large  accounts.  In  addition,  international  volumes  increased in 1996 while
international revenue remained relatively flat.

  Wireless services revenue,  which includes wireless voice and data, messaging,
air-to-ground  services and product sales,  increased $406 million, or 10.3%, in
1997.  Revenue  from  AT&T's new 1.9 GHz  markets is  included  in this  figure,
although  its impact on the annual  growth rate was  minimal.  Adjusted  for the
impact of wireless  properties  disposed of in December  1996,  the 1997 revenue
growth rate would have been 12.9%. The revenue growth was driven by consolidated
subscriber growth of 15.7%


<PAGE>
(18.3%  adjusted) in 1997. In 1996 wireless revenue  increased $563 million,  or
16.7%,  on a 31.7% increase in  subscribers.  The slower rates of growth in 1997
reflect the increased  competition that  characterized  the wireless industry in
1997.  Competition was particularly fierce in the southwestern and western areas
of the U.S. where the introductory  offers of new market entrants were often met
with equally competitive offers from incumbent cellular  competitors.  The lower
growth  rates  also  reflect  the fact  that  while new  competitors  have had a
significant  impact  in many of our  cellular  (850  MHz)  markets,  we are just
beginning to penetrate  new markets with AT&T Digital PCS service on the 1.9 GHz
spectrum.  Finally, similar to our consumer strategy,  toward the end of 1997 we
began  focusing  our efforts on  targeting  high-value  wireless  customers  and
reducing sales to lower-end subscribers. While this strategic move impacted both
revenue and  subscriber  growth rates in 1997, and will continue to impact these
growth  rates in 1998,  it is  designed  to  improve  the  profitability  of the
wireless business.

[MAP] MAP OF THE UNITED STATES DISPLAYING AT&T WIRELESS SERVICES LICENSES
      FOOTPRINT BY CELLULAR MARKET, PCS MARKET AND PARTNERSHIP MARKET

  This strategic shift, if successful, will help support our average revenue per
user (ARPU) over time. In 1997 the impact of industry-wide  competitive  pricing
pressure,  along with increased "convenience" usage of wireless phones, overcame
any benefit from our high-value strategy.  ARPU in our existing cellular markets
fell to $54 per month from approximately $60 in 1996 and $69 in 1995.

  Wireless  customers,  or  subscribers,  in markets  where AT&T owns a majority
interest (consolidated markets), stood at 6.0 million at December 31, 1997. This
included over sixty thousand  subscribers  in our new 1.9 GHz markets.  Cellular
subscribers  at December  31,  1996,  and 1995 were 5.2 million and 3.9 million,
respectively.  Cellular  subscribers  in  markets  in  which  we have or share a
controlling  interest  were 8.2 million at December 31, 1997,  up 14.7% from 7.1
million at December 31, 1996.  Cellular customers on this basis were 5.5 million
at December 31, 1995.

  Revenue for local and other initiatives  increased $657 million,  or 42.0%, in
1997 and $176 million,  or 12.6%, in 1996. The 1997 increase resulted  primarily
from increases in outsourcing revenue at AT&T Solutions, as well as revenue from
international markets, AT&T WorldNet and local service.  Outsourcing revenue and
revenue from AT&T  WorldNet  drove the increase in 1996,  partially  offset by a
decline in revenue from international markets.



<PAGE>
  Other and eliminations  revenue primarily reflects the elimination of revenues
for services  sold between  categories  (e.g.,  sales of business  long-distance
services to other AT&T units).

OPERATING EXPENSES
For the year,  operating  expenses totaled $44,351 million,  an increase of 6.1%
from  $41,783  million in 1996.  In 1996  expenses  increased  3.8% from $40,238
million.

Dollars in Millions
For the Years Ended December 31        1997      1996      1995
Access and other interconnection    $16,306   $16,332   $17,618

Access and other interconnection expenses are the charges that we pay to connect
calls on the  facilities of local exchange  carriers and other domestic  service
providers,  and fees that we pay foreign  telephone  companies  (settlements) to
connect  calls made to and from foreign  countries on our behalf.  These charges
are designed to reimburse these carriers for the common and dedicated facilities
and  switching  equipment  used to connect our network with theirs.  These costs
remained  essentially flat in 1997 as lower per-minute  access costs were offset
by  solid  volume  growth  and  a  beneficial  second  quarter  1996  accounting
adjustment of previously estimated accruals to reflect actual billing. The lower
per-minute  access costs are primarily  the result of declines in  international
settlement rates and access charge reform mandated by the Federal Communications
Commission  (FCC)  effective  for  the  second  half  of  1997.  Interstate  and
intrastate tariff  reductions,  changes in traffic mix and network planning also
contributed to the lower per-minute access costs.



<PAGE>
  In 1996 access costs  declined  $1,286  million,  or 7.3%,  again due to lower
per-minute  access  costs.  This  resulted  from  changes  in the  price-setting
methodology  approved by the FCC effective in the second half of 1995,  and also
from improvements in our  infrastructure and reduced  international  settlements
payments.  The beneficial accounting adjustment mentioned above also contributed
to the reduction.

  Access and other  interconnection  expenses  were 31.8% of  revenues  in 1997,
32.3% in 1996 and 36.4% in 1995.  We  expect  this  percentage  to  continue  to
decline over time as we realize synergies from our pending merger with TCG.

Dollars in Millions
For the Years Ended December 31         1997      1996     1995*
Network and other
  communications services             $9,316    $7,918    $6,913

*Excludes restructuring and other charges of $844

Network  and  other  communications  services  expenses  include  the  costs  of
operating and maintaining our network,  operator services,  nonincome taxes, the
provision for uncollectible  receivables and compensation to payphone operators.
More than half of the  $1,398  million,  or 17.6%,  increase  in 1997 was due to
higher costs for  initiatives,  particularly  AT&T Solutions,  AT&T WorldNet and
local  service.  The  remaining  increase was primarily  driven by  FCC-mandated
compensation  to  payphone  operators  and higher  expenses  for  operating  and
maintaining  our network.  Expenses for  operating and  maintaining  our network
increased due to higher costs for purchases  from Lucent at retail and otherwise
remained  essentially  unchanged  despite  increased  calling  volumes  and  the
increased complexity of our service offerings.

  Growth in payphone compensation expense decelerated in the fourth quarter when
the FCC agreed to a reduction in the per-call  rate from $0.350 to $0.284.  As a
result of this action,  AT&T was able to reverse some of the expense  previously
accrued in 1997. We are currently asking for further relief from this expense as
we  believe  that the  $0.284 per call rate  remains  above the  actual  cost to
payphone operators of providing services.



<PAGE>
  Network and other  communications  services expenses increased $1,005 million,
or 14.5%,  in 1996.  The increase was due to increased  costs from our expansion
into new initiatives, enhancements made in customer care facilities and a higher
provision for uncollectibles.

Dollars in Millions
For the Years Ended December 31         1997       1996      1995*
Depreciation and amortization         $3,827     $2,740     $2,586
*Excludes restructuring and other charges of $934

Depreciation and amortization  expenses  increased $1,087 million,  or 39.6%, in
1997.  The increase was driven by higher  levels of capital  expenditures  which
totaled $3.0 billion in the fourth  quarter of 1996 and $7.2 billion in 1997. In
addition to higher  volumes of  purchases,  the impact of  purchasing  assets at
retail from Lucent also contributed to the higher level of capital spending. The
1997 expenditures  were primarily for our  long-distance and wireless  networks,
including the  deployment  of SONET.  We also  invested  substantial  capital in
building  our  capability  for  local  and  WorldNet  services.   These  capital
investments were required to provide for growth in calling volumes,  to increase
capability, to introduce new technology,  to enhance reliability,  to expand our
wireless footprint and to establish a local presence. We expect depreciation and
amortization  expenses to increase  further in 1998 as we continue to expand and
enhance our network.

  Depreciation  and amortization  increased $154 million,  or 6.0%, in 1996. The
increase was primarily the result of investment in the network  partially offset
by the impact of asset write-downs at the end of 1995.

Dollars in Millions
For the Years Ended December 31           1997       1996      1995*
Selling, general and administrative    $14,902    $14,793    $13,121
*Excludes restructuring and other charges of $1,245

Selling, general and administrative expenses increased $109 million, or 0.7%, in
1997.  SG&A expenses were 29.0% of revenues in 1997,  29.3% in 1996 and 27.1% in
1995. While investment in initiatives and


<PAGE>
spending on transitory projects, such as preparation of our systems for the year
2000 ($113  million),  put upward  pressure on SG&A expenses in 1997,  core SG&A
spending  declined  for  the  year as a  result  of our  efforts  to  achieve  a
competitive  cost  structure.  The decline in core SG&A expenses came  primarily
from lower advertising  expenses across the company,  lower acquisition costs in
consumer  markets  --  primarily  a  reduction  in the use of checks to  acquire
customers,  and lower marketing and sales expenses in business  markets.  As the
chart shows, our year-over-year growth in SG&A declined each quarter in 1997.
<TABLE>
<CAPTION>
A chart appears containing the following information:

SG&A Expenses Year-over-Year Growth

#: SG&A Expenses Year-over-Year Growth Rate Percentages
<S>                                   <C>                   <C>                   <C>                   <C>

7.00%

                                       #
6.00%


5.00%


4.00%


3.00%


2.00%


1.00%

                                                            #
0.00%


(1.00%)                                                                           #


(2.00%)

                                                                                                        #
(3.00%)
                                       1Q97                 2Q97                  3Q97                  4Q97
</TABLE>

 Partially offsetting our savings were higher retention and acquisition costs in
wireless markets. AT&T Wireless Services invested heavily in migrating customers
to digital service in 1997,  which lowers costs over time. These migration costs
plus the costs of


<PAGE>
servicing a growing  customer base caused the increase in overall customer costs
in wireless. However, cost per customer acquisition in cellular markets was 6.1%
lower  in 1997  than  in  1996  as a  result  of our  focus  on  less  expensive
distribution channels.

  Selling,  general and  administrative  expenses  increased $1,672 million,  or
12.7%, in 1996 due to expenditures  for new  initiatives,  higher  marketing and
sales expenses,  and enhancements to customer care  facilities.  Our initiatives
represented about 30% of our increase in 1996.

  We have established  processes for evaluating and managing the risks and costs
associated with preparing our systems,  global networks and applications for the
year 2000. We expect to incur  internal  staff costs as well as  consulting  and
other  expenses  related to the  conversion  and testing of our systems,  global
networks  and   applications.   We  expect  the  cost  of  this  project  to  be
approximately  $350  million  in 1998.  Slightly  more than half of these  costs
represent internal  information  technology  resources that have been redeployed
from  other  projects  and  are  expected  to  return  to  these  projects  upon
completion.  We plan on having substantially all modifications  completed by the
end of 1998, leaving a full year for testing.  We are still assessing the impact
to us, if any, in 1999.

  Also  included  in SG&A  expenses  were $829  million,  $822  million and $732
million  of  research  and   development   expenses  in  1997,  1996  and  1995,
respectively.  Research  and  development  expenditures  are  mainly for work on
advanced  communications  services  and  projects  aimed at IP  services.  These
expenses included $6 million of restructuring and other charges in 1995.

Dollars in Millions
For the Years Ended December 31          1997      1996       1995
Other income - net                       $416      $390       $284

Other  income - net in 1997  included  the gain on the sale of AT&T  Skynet ($97
million),  gains and losses on sales of cellular  investments,  increases in the
value of  corporate-owned  life  insurance  policies  on  officers,  net  equity
earnings from investments and other  miscellaneous  transactions,  none of which
are individually significant.

  In  1996  other  income  -  net  included  sales  and  exchanges  of  cellular
properties, increases in the value of corporate-owned life insurance policies on
officers,   net  equity  earnings  from  investments  and  other   miscellaneous
transactions.  In  addition,  other  income  for  1996  included  a loss  on our
investment in Novell, Inc.


<PAGE>
Dollars in Millions
EBIT
For the Years Ended December 31         1997        1996        1995
Total AT&T*                           $7,384      $9,153      $8,491
Wireless services                       $271        $600        $406
*Excludes restructuring and other charges of $3,023 in 1995

EBIT  decreased  $1,769  million,  or 19.3%,  in 1997  primarily  as a result of
increases in network and other communications services expenses and depreciation
and amortization  expenses partially offset by increased revenues.  As discussed
above, the higher  depreciation  expense relates primarily to our core business,
while  investment  in  initiatives   drove  the  increased   network  and  other
communications  services expenses.  The $662 million,  or 7.8%, increase in 1996
was  primarily due to an increase in revenues and a decrease in access and other
interconnection expenses partially offset by increases in both SG&A expenses and
network and other communications services expenses.

  Wireless  services  EBIT in 1997  contained a $160 million  charge to exit the
two-way  messaging   business  as  well  as  increased  dilution  from  wireless
initiatives.  EBIT  for  wireless  services  for  1996  contained  a gain on the
exchange of several wireless properties.

Dollars in Millions
For the Years Ended December 31         1997       1996        1995
Interest expense                        $191       $343        $490

Interest expense  decreased $152 million,  or 44.1%, in 1997 due to lower levels
of average debt and a higher  proportion of capitalized  interest.  Average debt
was  higher  in 1996 due to the  additional  debt  associated  with  Lucent.  We
capitalized a greater  proportion of our interest  expense in 1997 primarily due
to higher qualifying assets for our local initiative.

  Interest expense decreased $147 million,  or 30.1%, in 1996 compared with 1995
due to lower levels of average debt,  which were primarily  attributable  to the
assignment of debt to Lucent and the  application  of the proceeds from the sale
of AT&T Capital.

Dollars in Millions
For the Years Ended December 31         1997         1996       1995*
Provision for income taxes            $2,721       $3,237      $2,934
*Excludes restructuring and other charges of $991

The effective  income tax rate is the provision for income taxes as a percentage
of income from continuing  operations  before income taxes. The effective income
tax rate was 37.8% in 1997 and 36.7% in both 1996 and 1995.  The  effective  tax
rate in 1997 was impacted by investment dispositions announced in 1997. The 1996
effective  income tax rate was reduced by tax benefits  associated  with various
legal entity restructurings while the 1995 rate was favorably impacted


<PAGE>
by lower state tax rates and higher  research  credits.  The 1995  effective tax
rate including restructuring and other charges was 39.0%.

GROWTH INITIATIVES
We have  undertaken  a number of  initiatives  in order to ensure that we have a
complete  portfolio of services that customers  demand.  While these initiatives
currently  have a  dilutive  impact  on  our  earnings,  they  are  expected  to
contribute  significantly  to  our  future  earnings  and  revenue  growth.  The
following are summaries of these  initiatives  and their impacts on our earnings
for the last three years.  Data on initiatives  include costs and expenses on an
incremental  basis and require certain estimates and allocations that management
believes  provide  a  reasonable  basis on which to  present  such  information.
Accordingly, all data presented represent approximate amounts.

[PHOTOGRAPH] PHOTOGRAPH OF AN AT&T WIRELESS PHONE

Dollars in Millions
Local Services Initiative
For the Years Ended December 31         1997      1996      1995
EBIT                                   $(987)    $(467)    $(155)
EBITDA                                 $(916)    $(457)    $(155)
Capital Expenditures                   $ 853     $ 775     $ 353

We  continue  to work to provide  local  service  to  business  and  residential
customers  across the  country.  In 1997 we  introduced  AT&T Digital Link local
service for medium- and large-sized businesses.  At the end of 1997 AT&T Digital
Link  service was  available in 49 states for outbound  local  calling.  Inbound
capability,  however,  was and  remains  delayed  by the  lack of  local  number
portability and other factors. Our pending merger with TCG is an aggressive move
to expand our reach and propel  our entry  into the  market for  business  local
service and dedicated access.

  In  residential  markets at the end of 1997 we offered resold local service in
seven  states.  However,  in spite of strong  demand,  in the fourth  quarter we
stopped  actively  marketing  resold  local  service  to  residential  and small
business  customers  in most of these areas  because of the  limitations  on the
local exchange  carriers' ability to handle  anticipated  demand and because the
discounts  we  receive  from the local  exchange  carriers  on the sale of these
services are  insufficient to make resale a viable  long-term method of offering
service. The economic conditions of the total services resale approach simply do
not allow us to provide local service profitably.
Nevertheless, despite the difficulty of the regulatory environment, local


<PAGE>
service  is a key growth  opportunity  and we will  continue  to work to develop
alternative methods of local entry.

Dollars in Millions
Wireless Initiatives
For the Years Ended December 31         1997      1996      1995
EBIT                                   $(432)    $ (95)    $   -
EBITDA                                 $(310)    $ (76)    $   -
Capital Expenditures                   $ 823     $ 659     $   -

Our wireless initiatives include wireless service in new markets,  wireless data
services and  international  expansion.  Our primary  wireless  initiative is to
provide  services in new markets on the 1.9 GHz spectrum  purchased in the FCC's
"A and B  Block"  auction  in  1996.  During  1997 we  activated  nine  systems:
Phoenix/Tucson in the second quarter;  Atlanta and Chicago in the third quarter,
and Philadelphia, Washington D.C./Baltimore, Cleveland, Charlotte, St. Louis and
Detroit in the fourth quarter. In addition, we activated our system in Boston in
January 1998.  These markets extend the  availability of AT&T Digital PCS, which
has already been  introduced in AT&T's 850 MHz markets,  and extends into Canada
through  our  partnership  with  Cantel.  Also,  in order to extend the reach of
AT&T's digital  wireless  services,  we have announced a number of  partnerships
with other wireless carriers.  Through February 1998 we had announced agreements
with Triton PCS, Telecorp,  and Cincinnati Bell, as well as an  interoperability
agreement with Dobson Communications.  These agreements will allow us to achieve
a build-out of certain license areas with minimal capital investment.

  The  increased  EBIT  dilution from  wireless  initiatives  in 1997  primarily
relates to a $160 million charge to exit the two-way messaging business, as well
as expenses related to the activation of the new 1.9 GHz markets.

Dollars in Millions
Other Initiatives
For the Years Ended December 31         1997      1996      1995
EBIT                                 $(1,097)    $(975)    $(392)
EBITDA                               $  (917)    $(888)    $(283)
Capital Expenditures                 $   308     $ 245     $ 159

[PHOTOGRAPH] PHOTOGRAPH OF INSIDE AN AT&T SOLUTIONS FACILITY

Other initiatives include AT&T Solutions, AT&T WorldNet and


<PAGE>
other online services,  and international markets (excluding bilateral traffic).
AT&T  Solutions  continued  to grow and made  progress in 1997 toward  achieving
profitability. We expect AT&T Solutions to turn profitable in 1998. In 1997 AT&T
Solutions  won contracts  with such  companies as  1-800-FLOWERS,  Bear Stearns,
Hallmark, Royal Bank of Canada, Chung Hwa Telecommunications, PT Telkom, Norwest
Bank, Best Buy and United Airlines.  EBIT dilution from AT&T Solutions decreased
53% in 1997 and increased 4% in 1996.

[IMAGE] IMAGE OF THE AT&T WORLDNET HOMEPAGE

  In 1997 we  continued  to develop  our  presence  in the  Internet  access and
electronic commerce businesses through our online services such as AT&T WorldNet
and electronic  commerce  businesses.  AT&T WorldNet signed up its one-millionth
customer in the fourth  quarter of 1997 and  finished the year with 1.01 million
Internet access  customers.  This represents an increase of 443,000  subscribers
for the year. As AT&T WorldNet's initial promotional activity began to expire in
1997,  subscriber  growth slowed as many  customers who were  receiving the free
promotion  deactivated  service.  We  continue  to explore  ways of growing  the
Internet  access  business  and  realizing  synergies  between it and other AT&T
businesses.  For example,  in January 1998 we  announced a  long-distance  offer
targeting  Internet  access  customers.  Beginning  in March 1998 AT&T  WorldNet
customers can sign up for long-distance services via AT&T's Web site and receive
a rate of nine cents per minute.

  Globally,  we focused our strategy on serving  multinational  corporations and
global  travelers  and  expanding  our North  American  franchise  in Canada and
Mexico.  Alestra,  our Mexican joint venture with Grupo Alfa and  VISA-Bancomer,
had over one  million  lines  presubscribed  in 1997,  leading  all of the other
carriers competing against the former monopoly carrier,  TelMex. However, equity
losses from Alestra exceeded our expectations in 1997. In 1997 we also announced
a proposed alliance with Telecom Italia that we believe will enhance our ability
to serve  multinational  customers in Europe and Latin  America.  Telecom Italia
will join the  AT&T-Unisource  joint venture in Europe. In addition,  we plan to
form a joint venture with Telecom Italia to serve customers in Latin America.



<PAGE>
CASH FLOWS

Dollars in Millions
EBITDA
For the Years Ended December 31       1997        1996          1995
Total AT&T*                        $11,277     $11,955       $11,127
Wireless services                   $1,237      $1,332          $971
*Excludes restructuring and other charges of $2,089 in 1995

EBITDA  is a  measure  of our  ability  to  generate  cash  flow and  should  be
considered  in  addition  to, but not as a  substitute  for,  other  measures of
financial  performance reported in accordance with generally accepted accounting
principles.  The decrease of $678 million, or 5.7%, in 1997 was due primarily to
an increase  in network and other  communications  services  expenses  partially
offset by increased  revenues.  The 1996 increase of $828 million,  or 7.4%, was
primarily  due to an  increase  in  revenues  and a decrease in access and other
interconnection expenses partially offset by increases in both SG&A expenses and
network and other communications services expenses.
  Wireless  services  EBITDA in 1997 contained an $80 million charge to exit the
two-way  messaging   business  and  also  reflected   increased   dilution  from
initiatives.  EBITDA for  wireless  services  for 1996  contained  a gain on the
exchange of several wireless properties.

  All cash flow discussions pertain to cash flows from continuing operations.

Dollars in Millions
For the Years Ended December 31           1997      1996     1995
Cash flows from operating activities    $8,437    $7,875   $8,198

Cash flow from operations increased $562 million, or 7.1%, in 1997 and decreased
$323  million,  or 3.9%, in 1996. A number of factors drove the increase in 1997
including the collection of employee-benefit-related  receivables from Lucent in
1997 and improved  customer cash  collections  across the company.  In addition,
1996 cash flow from operations included a $500 million prepayment to Lucent.

  The  decrease  in  1996  related   mainly  to  required   cash   payments  for
restructuring and other charges amounting to $471 million.

Dollars in Millions
For the Years Ended December 31          1997     1996      1995
Cash flows used in
  investing activities                $(6,407)  $ (975)  $(8,163)




<PAGE>
<TABLE>
<CAPTION>
A chart appears containing the following information:
1997 Capital Expenditures by Business

#: Business Long-distance
@: Consumer Long-distance
^: Traditional Wireless
&: Wireless Initiatives
+: Local Service
>: Other Initiatives

<S>            <C>            <C>            <C>                <C>             <C>                   <C>
dollars in
billions

   4




3.5             #




   3




2.5




   2




1.5




   1
                                                                                +
                                                                &
                              @              ^

  .5

                                                                                                      >


   0
                Business      Consumer       Traditional        Wireless        Local                 Other
                Long-         Long-          Wireless           Initiatives     Service               Initiatives
                distance      distance
</TABLE>

[PHOTOGRAPH] PHOTOGRAPH OF AT&T'S WORLDWIDE NETWORK OPERATIONS CENTER

Included in 1997 investing  activities  were net capital  expenditures,  the net
funding  requirements  for UCS,  acquisitions of licenses and proceeds  received
from  divestments.  While we have  agreed to sell UCS,  we  continue to fund its
operations. Our assets, therefore, include short- and long-term notes receivable
from UCS, and our debt  includes  external  debt used to fund UCS. In accordance
with the  purchase  agreement,  at the time of sale in 1998 we will receive cash
from  Citibank  for the  notes  receivable  from  UCS.  Cash  used in  investing
activities  increased  significantly  in 1997 compared with 1996  primarily as a
result of the lower level of credit card receivables  securitized in 1997 by UCS
($1 billion)  versus  receivables  securitized in 1996 ($3 billion).  Due to the
significant cash generated from the 1996  securitizations,  UCS lowered its debt
requirements and subsequently  repaid $3,360 million of its notes payable to us.
In 1997, with reduced securitizations and a growing portfolio, UCS increased its
notes payable to us.

[PHOTOGRAPH] PHOTOGRAPH OF AN AT&T UNIVERSAL CARD SERVICES CREDIT CARD

  Capital  expenditures,  acquisitions of  investments,  licenses and businesses
amounted to $7,648 million in 1997, $7,183 million in 1996 and $9,888 million in
1995.  This resulted in net cash outlays for these  categories in 1997, 1996 and
1995 of $7,578 million, $6,741 million and $9,981 million, respectively.

  We expect our 1998 capital  expenditures to be about $7 billion;  in addition,
TCG  anticipates  1998 capital  expenditures of $1 billion.  These  expenditures
include the completion of our three-year  program of SONET deployment as well as
additional capital to meet our customers' needs for new technology and increased
capacity in long-distance, wireless, WorldNet and local services.


<PAGE>
Dollars in Millions
For the Years Ended December 31       1997        1996       1995
Cash flows from
  financing activities             $(1,801)    $(5,380)    $1,457

In  1997 we  raised  all  necessary  external  financing  through  issuances  of
commercial paper. We expect to be able to arrange any necessary future financing
using issuances of commercial paper,  long-term debt and equity, with the timing
of issue,  principal  amount and form  depending on our needs and the prevailing
market  and  economic  conditions.  We do not  anticipate  requiring  additional
external financing in 1998 to fund capital expenditures and dividend payments.

  During 1997 we retired long-term debt of $662 million and increased short-term
borrowings by $1,114 million.  The increase in short-term debt was primarily due
to increased funding requirements of UCS.

  In 1996 we retired  long-term debt of $1,236 million and decreased  short-term
debt by $5,301  million.  The changes in debt  reflected the use of  alternative
sources of funding,  such as securitization,  as well as Lucent's use of its own
external  financing  in  1996.  Additionally,  the cash  collection  of the $2.0
billion in accounts receivable retained by AT&T continuing operations as part of
the  restructuring  plan and the  proceeds of $1.8 billion from the sale of AT&T
Capital were used to pay down our debt. During 1995 we retired $2,137 million of
long-term debt, but borrowed an additional  $2,392 million of long-term debt and
$1,976 million of short-term debt.

  In 1997 we  obtained  substantially  all of the stock for our  shareowner  and
employee  benefit  stock-ownership  plans in the open market rather than issuing
new shares.  This  required us to use the cash  received  from  shareowners  and
employees to purchase the shares,  resulting in a cash payment of $163  million.
In  1996  and  1995  the  stock  used in our  shareowner  and  employee  benefit
stock-ownership plans was issued from unissued or treasury shares.  Accordingly,
during  those  years we kept the more than $1.2  billion of cash  received  from
shareowners  and  employees for the  issuances of shares.  We paid  dividends of
$2,142 million in 1997, $2,122 million in 1996 and $2,088 million in 1995. As we
issue shares in 1998, as in

<PAGE>
connection  with the TCG merger and a  proposed  cross-shareholding  arrangement
with  Telecom  Italia,  dividend  payments  will  increase,  assuming  that  the
company's  dividend policy remains the same. To support  potential future needs,
our Board of  Directors  has  proposed an  increase in the number of  authorized
shares from 2 billion to 6 billion.

RISK MANAGEMENT
We are exposed to market  risk from  changes in  interest  and foreign  exchange
rates.  On a  limited  basis we use  certain  derivative  financial  instruments
including interest rate swaps, options,  forwards 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 use  interest  rate swaps to manage the impact of interest  rate changes on
earnings  and cash  flows  and also to lower our  overall  borrowing  costs.  We
monitor our interest rate risk on the basis of changes in fair value. Assuming a
10% downward shift in interest rates at December 31, 1997, the potential loss in
the net  change in the fair  value of  interest  rate  swaps and the  underlying
hedged  debt  would  have been $3  million.  Assuming  a 10%  downward  shift in
interest  rates at December 31, 1997,  the  potential  loss in the net change in
fair value of unhedged debt would have been $311 million.

  We use  forward  and option  contracts  to reduce our  exposure to the risk of
adverse changes in currency  exchange rates. We are subject to foreign  exchange
risk related to reimbursements to foreign telephone  companies for their portion
of the  revenues  billed  by AT&T for  calls  placed  in the U.S.  to a  foreign
country.  In addition,  we are also subject to foreign  exchange risk related to
other foreign-currency-denominated  transactions. As of December 31, 1997, there
was a net unrealized loss on forward contracts of $30 million,  calculated based
on the difference  between the contract rate and the rate available to terminate
the contracts. We monitor our foreign exchange rate risk on the



<PAGE>
basis of  changes in fair  value.  Additional  potential  losses in the net fair
value of these  contracts,  assuming a 10%  appreciation  in the U.S.  dollar at
December  31,  1997,  would have been $6 million.  Because  these  contacts  are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying firmly committed or anticipated transactions.

  The estimated  potential losses, as discussed above,  assume the occurrence of
certain adverse market conditions.  They do not consider the potential effect of
favorable  changes in market  factors 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.  Our management does not foresee any
significant  changes  in the  strategies  used to manage  interest  rate risk or
foreign currency rate risk in the near future.

FINANCIAL CONDITION

Dollars in Millions
At December 31                               1997         1996
Total assets                              $58,635      $55,382
Total assets from continuing operations   $57,534      $53,872

Total assets from continuing  operations  increased $3,662 million,  or 6.8%, in
1997  primarily due to increases in property,  plant and equipment and long-term
receivables,  partially  offset by decreases in other  receivables  and accounts
receivable.  The  increase  in  property,  plant  and  equipment  resulted  from
investment in the network,  while both the increase in long-term receivables and
the decrease in other receivables are related to notes receivable from UCS. As a
result  of  UCS  becoming  a  discontinued  operation,  our  balance  sheet  for
continuing  operations now reflects the receivable  from UCS that is expected to
be paid by Citibank as well as the external debt  associated with procuring debt
on behalf of UCS. In total, the receivable from UCS increased $441 million.  The
decrease  in  accounts   receivable   was   primarily  a  result  of  our  lower
fourth-quarter consumer revenue.



<PAGE>
Dollars in Millions
At December 31                           1997         1996
Total liabilities                     $35,988      $35,087

Total liabilities increased $901 million, or 2.6%, in 1997 primarily as a result
of  increases in both  deferred  income taxes and total  outstanding  debt.  The
increase in deferred  income taxes was mainly a result of the difference in book
and tax basis for our property, plant and equipment, while debt increased due to
increased funding requirements for UCS.

Dollars in Millions
At December 31                           1997         1996
Total shareowners' equity             $22,647      $20,295

Shareowners'  equity increased  $2,352 million,  or 11.6%, in 1997. The increase
was driven by net income, partially offset by 1997 dividends.

At December 31                           1997         1996
Debt ratio                               32.3%        33.7%

Our debt ratio  declined  slightly in 1997 due to the  increase in  shareowners'
equity as discussed  above. In 1998 we expect our debt ratio to decrease further
as we utilize  expected cash proceeds  from our pending  asset  dispositions  to
retire a certain amount of outstanding debt.


<PAGE>
<TABLE>
<CAPTION>
A chart appears containing the following information:

AT&T Capitalization

#: Debt in dollars
@: Equity in dollars
+: Debt Ratio


dollars in
billions                                                                                                               percent
<S>          <C>      <C>         <C>    <C>          <C>     <C>       <C>            <C>       <C>            <C>    <C>

$25 Billion                                                                                                            60%
                                                                                                  @

                       #                  +
                                                               @                                                       50%
              20
                                   @
                                                                                                                       40%

              15                                                         +
                                                                                        #                       +
                                                      #                                                                30%

             10

                                                                                                                       20%

              5

                                                                                                                       10%

              0                                                                                                         0%
                         1995                1996              1997

                      Debt               Equity          Debt Ratio
1995              20,709              17,274             54.5%
1996              10,332              20,295             33.7%
1997              10,824              22,647             32.3%
</TABLE>

<PAGE>
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The  Telecommunications  Act of 1996  was  designed  to  foster  local  exchange
competition  by  establishing a regulatory  framework to govern new  competitive
entry   in   local   and   long-distance    telecommunications   services.   The
Telecommunications Act also permits Regional Bell Operating Companies (RBOCs) to
provide  interexchange  services  originating  in any state in its region  after
demonstrating  to the FCC that such  provision  is in the  public  interest  and
satisfying the conditions for developing  local  competition  established by the
Telecommunications Act.

  A number of court  decisions have severely  restricted  implementation  of the
Telecommunications  Act and delayed local service competition.  In July 1997 the
United States Court of Appeals for the Eighth Circuit  vacated the pricing rules
that the FCC had adopted to  implement  the  sections  of the local  competition
provisions of the  Telecommunications  Act  applicable to  interconnection  with
local  exchange  carrier  (LEC)  networks and the purchase of unbundled  network
elements and wholesale  services  from LECs. In October 1997 the Eighth  Circuit
vacated an FCC Rule that had prohibited  incumbent LECs from separating  network
elements  that are combined in the LECs'  network,  except at the request of the
competitor purchasing the elements. These decisions increased the difficulty and
costs of  providing  competitive  local  service  through  resale  or the use of
unbundled network elements purchased from the incumbent LECs.

  On January 26,  1998,  the United  States  Supreme  Court agreed to review the
aforementioned  decisions  of the Eighth  Circuit  Court of  Appeals.  Under the
normal  procedures  of the Court,  arguments are expected to be heard in October
1998 and a decision is expected sometime in the first half of 1999.

  On December 31, 1997,  the U.S.  District  Court for the Northern  District of
Texas issued a memorandum opinion and order holding that the  Telecommunications
Act's restrictions on the provision of in-region, interLATA service by the RBOCs
are unconstitutional. AT&T and other carriers (collectively, "Intervenors") have
filed an appeal with the United  States Court of Appeals for the Fifth  Circuit,
and the FCC is expected to do the same. On February 11, 1998, the District Court
suspended  the  effectiveness  of its December 31  memorandum  opinion and order
pending appeal. If the memorandum opinion and order is permitted to take effect,
the  Telecommunications  Act's  restrictions  on the  provisions  of  in-region,
interLATA  services  will no longer  apply to the  plaintiffs  in the case,  SBC
Communications, Inc., US West, Inc. and Bell Atlantic Corporation.



<PAGE>
COMPETITION
AT&T  currently  faces  significant  competition  and expects  that the level of
competition will continue to increase.  The Telecommunications Act permits RBOCs
to provide interLATA  interexchange services after demonstrating to the FCC that
such  provision is in the public  interest and  satisfying  the  conditions  for
developing local competition  established by the  Telecommunications  Act. Three
RBOCs have petitioned the FCC for permission to provide interLATA  interexchange
services in one or more states within their home market; to date the FCC has not
granted  any such  petition.  To the  extent  that the  RBOCs  obtain  in-region
interLATA authority before the Telecommunications  Act's checklist of conditions
have been fully or  satisfactorily  implemented  and  adequate  facilities-based
local exchange  competition  exists,  there is a substantial  risk that AT&T and
other interexchange service providers would be at a disadvantage to the RBOCs in
providing both local service and combined service packages. Because it is widely
anticipated  that substantial  numbers of  long-distance  customers will 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 is likely to
adversely  affect  AT&T's  future  revenues  and  earnings.  In  addition,   the
simultaneous entrance of numerous new competitors for interexchange and combined
service packages is likely to adversely affect AT&T's long-distance revenues and
could adversely affect earnings.

RECENT PRONOUNCEMENTS
Effective  with the first  quarter  1998  reporting  we will adopt  Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS  No.  130   establishes   the  standards   for  reporting  and   displaying
comprehensive income and its components (revenues,  expenses,  gains and losses)
as part of a full set of financial statements.  This statement requires that all
elements of  comprehensive  income be reported in a financial  statement that is
displayed with the same  prominence as other  financial  statements.  Since this
standard applies only to the presentation of comprehensive  income,  it will not
have any impact on AT&T's  results of  operations,  financial  position  or cash
flows.


<PAGE>
 Beginning  with the  1998  annual  report  we will  also  adopt  SFAS No.  131,
"Disclosures about Segments of an Enterprise and Related  Information." SFAS No.
131  establishes  the standards for the manner in which public  enterprises  are
required to report financial and descriptive  information  about their operating
segments. The standard defines operating segments as components of an enterprise
for which separate financial information is available and evaluated regularly as
a means for assessing segment performance and allocating  resources to segments.
A measure of profit or loss,  total  assets and other  related  information  are
required to be disclosed for each operating segment. In addition,  this standard
requires the annual disclosure of: information  concerning revenues derived from
the enterprise's  products or services;  countries in which it earns revenues or
holds assets, and major customers.

FORWARD LOOKING STATEMENTS
Except  for  the  historical   statements  and  discussions   contained  herein,
statements  contained in this report  constitute  "forward  looking  statements"
within the meaning of Section  27A of the  Securities  Exchange  Act of 1933 and
Section  21E of the  Securities  Exchange  Act of 1934.  These  forward  looking
statements  rely on a number of assumptions  concerning  future events,  and are
subject  to a number  of  uncertainties  and  other  factors,  many of which are
outside our control,  that could cause actual results to differ  materially from
such statements.

  Readers  are  cautioned  not to put undue  reliance  on such  forward  looking
statements. These factors and uncertainties include the adoption of balanced and
effective rules and  regulations by the state public  regulatory  agencies,  our
ability to achieve a  significant  market  penetration  in new  markets  and the
related costs  thereof,  and  competitive  pressures.  Shareowners  may view our
reports filed with the  Securities  and Exchange  Commission for a more detailed
description  of the  uncertainties  and other  factors  that could cause  actual
results to differ materially from such forward looking  statements.  We disclaim
any  intention or  obligation to update or revise  forward  looking  statements,
whether as a result of new information, future events or otherwise.

<PAGE>
<TABLE>
<CAPTION>
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)



                                                1997        1996        1995*       1994        1993*       1992       1991*
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>        <C>
RESULTS OF OPERATIONS

Revenues                                     $51,319     $50,546     $48,445     $46,000     $43,780     $42,960    $41,842
Operating income                               6,968       8,763       5,184       7,409       6,577       6,246      2,681
Income from continuing operations
  before cumulative effects of
  accounting changes                           4,472       5,573       3,035       4,260       3,786       3,233      1,199
Income before cumulative
  effects of accounting changes                4,638       5,908         139       4,710       3,702       3,442        171
Net income(loss)                               4,638       5,908         139       4,710      (5,906)      3,442        171

Earnings per common share-basic:
  Income from continuing
    operations before cumulative
    effects of accounting changes               2.75        3.46        1.92        2.74        2.46        2.14       0.82
  Income before cumulative
    effects of accounting changes               2.85        3.67        0.09        3.03        2.41        2.28       0.12
  Net income(loss)                              2.85        3.67        0.09        3.03       (3.84)       2.28       0.12

Earnings per common share-diluted:
  Income from continuing
    operations before cumulative
    effects of accounting changes               2.74        3.45        1.91        2.72        2.45        2.13       0.81
  Income before cumulative
    effects of accounting changes               2.84        3.66        0.09        3.01        2.39        2.27       0.12
  Net income(loss)                              2.84        3.66        0.09        3.01       (3.82)       2.27       0.12

Dividends declared per
  common share                                  1.32        1.32        1.32        1.32        1.32        1.32       1.32

</TABLE>








<PAGE>
<TABLE>
<CAPTION>
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
AT&T Corp. and Subsidiaries
Dollars in millions (except per share amounts)



                                     1997          1996      1995*          1994            1993*         1992           1991*
<S>                               <C>         <C>          <C>          <C>            <C>             <C>            <C>

ASSETS AND CAPITAL
Property, plant and
  equipment-net                   $22,710     $19,736      $16,021      $14,377        $13,653         $13,590        $13,058
Total assets-
  continuing operations            57,534      53,872       53,726       47,439         41,353          40,124         37,172
Total assets                       58,635      55,382       62,228       57,330         50,023          50,521         48,695
Long-term debt                      6,826       7,883        8,545        8,938         10,287          12,210         12,167
Total debt                         10,824      10,332       20,709       18,492         18,185          17,120         16,756
Shareowners' equity                22,647      20,295       17,274       17,921         13,374          20,313         17,973
Gross capital expenditures          7,213       6,776        4,504        3,361          2,537           2,293          2,424
Employees-continuing
 operations                       127,800     126,600      124,600      115,300        118,100         118,200        115,300

OTHER INFORMATION
Operating income as a
  percentage of revenues            13.6%        17.3%       10.7%        16.1%           15.0%          14.5%           6.4%
Income from continuing
  operations as a percentage
  of revenues                        8.7%        11.0%        6.3%         9.3%            8.6%           7.5%           2.9%
Return on average common
  equity                            21.5%        28.0%        0.7%        29.5%         (47.1)%          17.6%           0.9%
Data at year-end:
Stock price per share**            $61.31       $41.31      $44.40       $34.46          $36.00         $34.97         $26.83
Book value per
  common share                     $13.94       $12.50      $10.82       $11.42           $8.65         $13.31         $12.05
Debt ratio                          32.3%        33.7%       54.5%        50.8%           57.6%          45.7%          48.2%

<FN>
*  1995  continuing  operations  data  reflect  $3.0  billion of pretax business
   restructuring  and other  charges.  1993 net income  reflects a  $9.6 billion
   net charge for three  accounting  changes.
   1991  continuing  operations  data  reflect $3.5 billion of  pretax  business
   restructuring and other charges.
** Stock  prices for 1991-1996 have  been restated  to reflect  the spin-offs of
   Lucent and NCR.
</FN>
</TABLE>


<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity  of the
consolidated financial statements  and all other financial  information included
in  this report. Management is  also responsible  for  maintaining  a  system of
internal controls as a fundamental requirement for the operational and financial
integrity of results.
  The  financial  statements,  which reflect the  consolidated  accounts of AT&T
Corp.  and  subsidiaries  (AT&T) and other  financial  information  shown,  were
prepared in conformity with generally accepted accounting principles.  Estimates
included  in the  financial  statements  were based on  judgments  of  qualified
personnel.
  To maintain its system of internal controls,  management carefully selects key
personnel and establishes the organizational structure to provide an appropriate
division  of  responsibility.  We believe it is  essential  to conduct  business
affairs in  accordance  with the highest  ethical  standards as set forth in the
AT&T Code of Conduct.  These  guidelines  and other  informational  programs are
designed and used to ensure that policies,  standards and managerial authorities
are  understood  throughout  the  organization.  Our internal  auditors  monitor
compliance  with the system of  internal  controls by means of an annual plan of
internal  audits.  On an ongoing  basis,  the  system of  internal  controls  is
reviewed, evaluated and revised as necessary in light of the results of constant
management  oversight,  internal  and  independent  audits,  changes  in  AT&T's
business and other conditions.
  Management  believes that the system of internal  controls,  taken as a whole,
provides reasonable assurance that (1) financial records are adequate and can be
relied upon to permit the preparation of financial statements in conformity with
generally accepted accounting principles and (2) access to assets occurs only in
accordance with management's authorizations.
  The Audit Committee of the Board of Directors,  which is composed of directors
who are not employees, meets periodically with management, the internal auditors
and the  independent  accountants  to review the manner in which these groups of
individuals  are performing  their  responsibilities  and to carry out the Audit
Committee's  oversight  role with  respect to  auditing,  internal  controls and
financial  reporting matters.  Periodically,  both the internal auditors and the
independent   accountants  meet  privately  with  the  Audit  Committee.   These
accountants  also have access to the Audit Committee and its individual  members
at any time.





<PAGE>
  The consolidated  financial statements in this annual report have been audited
by  Coopers  &  Lybrand  L.L.P.,  Independent  Accountants.  Their  audits  were
conducted in accordance with generally  accepted auditing  standards and include
an  assessment  of  the  internal  control  structure  and  selective  tests  of
transactions. Their report follows.



Daniel E. Somers                    C. Michael Armstrong
Senior Executive Vice President,    Chairman of the Board,
Chief Financial Officer             Chief Executive Officer


REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of AT&T Corp.:
  We have audited the consolidated balance sheets of AT&T Corp.
and subsidiaries (AT&T) at December 31, 1997 and 1996, and the
related  consolidated  statements of income,  changes in shareowners' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of AT&T's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
  We  conducted  our  audits in  accordance  with  generally  accepted  auditing
standards.  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 financial statements referred to above present fairly, in
all material respects,  the consolidated  financial position of AT&T at December
31, 1997 and 1996, and the  consolidated  results of their  operations and their
cash flows for the years ended  December 31, 1997,  1996 and 1995, in conformity
with generally accepted accounting principles.



Coopers & Lybrand L.L.P.


1301 Avenue of the Americas
New York, New York
January 26, 1998


<PAGE>
CONSOLIDATED STATEMENTS OF INCOME                   AT&T CORP. AND SUBSIDIARIES
                         For the Years Ended December 31
Dollars in millions (except per share amounts)    1997       1996          1995

Revenues...................................    $51,319    $50,546       $48,445

Operating Expenses
Access and other interconnection...........     16,306     16,332        17,618
Network and other communications services..      9,316      7,918         7,757
Depreciation and amortization..............      3,827      2,740         3,520
Selling, general and administrative........     14,902     14,793        14,366

Total operating expenses...................     44,351     41,783        43,261

Operating income...........................      6,968      8,763         5,184
Other income-net...........................        416        390           284
Interest expense...........................        191        343           490
Income from continuing operations before
  income taxes.............................      7,193      8,810         4,978
Provision for income taxes.................      2,721      3,237         1,943
Income from continuing operations..........      4,472      5,573         3,035

Discontinued Operations
Income(loss) from discontinued operations
  (net of taxes of $50 in 1997, $(353)
  in 1996 and $(1,147) in 1995)............        100        173        (2,896)
Gain on sale of discontinued operations
  (net of taxes of $43 in 1997 and
  $138 in 1996)............................         66        162             -
Net income ................................    $ 4,638    $ 5,908       $   139

Weighted-average common shares and
  potential common shares (millions)*......      1,630      1,616         1,592

Per Common Share-Basic:
Income from continuing operations..........    $  2.75    $  3.46       $  1.92
Income(loss) from discontinued operations..       0.06       0.11         (1.83)
Gain on sale of discontinued operations....       0.04       0.10             -
Net income.................................    $  2.85    $  3.67       $  0.09

Per Common Share-Diluted:
Income from continuing operations..........    $  2.74    $  3.45       $  1.91
Income(loss) from discontinued operations..       0.06       0.11         (1.82)
Gain on sale of discontinued operations....       0.04       0.10             -
Net income.................................    $  2.84    $  3.66       $  0.09

* Amounts  represent  the  weighted-average  shares  assuming  dilution from the
potential  exercise  of  outstanding  stock  options.  Amounts  are reduced by 5
million,  6 million and 8 million shares for 1997, 1996 and 1995,  respectively,
assuming no dilution.



The  notes on pages  46  through  71 are an  integral  part of the  consolidated
financial statements.


<PAGE>
CONSOLIDATED BALANCE SHEETS                         AT&T CORP. AND SUBSIDIARIES
                                                            At December 31

Dollars in millions                                         1997      1996

ASSETS
Cash and cash equivalents                                $   145   $     -
Receivables, less allowances of $977 and $942
  Accounts receivable                                      8,573     8,969
  Other receivables                                        5,684     6,140
Deferred income taxes                                      1,252     1,266
Other current assets                                         525       698
TOTAL CURRENT ASSETS                                      16,179    17,073

Property, plant and equipment-net                         22,710    19,736
Licensing costs, net of accumulated
  amortization of $1,076 and $913                          8,329     8,071
Investments                                                3,857     3,875
Long-term receivables                                      1,794       872
Prepaid pension costs                                      2,156     1,933
Other assets                                               2,509     2,312
Net assets of discontinued operations                      1,101     1,510
TOTAL ASSETS                                             $58,635   $55,382

LIABILITIES
Accounts payable                                         $ 6,243   $ 6,157
Payroll and benefit-related liabilities                    2,348     2,614
Debt maturing within one year                              3,998     2,449
Dividends payable                                            538       536
Other current liabilities                                  3,815     4,395
TOTAL CURRENT LIABILITIES                                 16,942    16,151

Long-term debt                                             6,826     7,883
Long-term benefit-related liabilities                      3,142     3,037
Deferred income taxes                                      5,711     4,827
Other long-term liabilities and
  deferred credits                                         3,367     3,189
TOTAL LIABILITIES                                         35,988    35,087

SHAREOWNERS' EQUITY
Common shares, par value $1 per share                      1,624     1,623
  Authorized shares: 2,000,000,000
  Outstanding shares: 1,624,213,505 at December 31, 1997;
                      1,623,487,646 at December 31, 1996
Additional paid-in capital                                15,751    15,697
Guaranteed ESOP obligation                                   (70)      (96)
Foreign currency translation adjustments                     (28)       (7)
Retained earnings                                          5,370     3,078
TOTAL SHAREOWNERS' EQUITY                                 22,647    20,295

TOTAL LIABILITIES AND SHAREOWNERS' EQUITY                $58,635   $55,382


The  notes on pages  46  through  71 are an  integral  part of the  consolidated
financial statements.


<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

                           AT&T CORP. AND SUBSIDIARIES
                         For the Years Ended December 31
Dollars in millions                              1997        1996       1995

Common Shares
  Balance at beginning of year                $ 1,623     $ 1,596    $ 1,569
  Shares issued, net:
    Under employee plans                            1          19         13
    Under shareowner plans                          -           8         13
    Other                                           -           -          1
Balance at end of year                          1,624       1,623      1,596
  Additional Paid-In Capital
  Balance at beginning of year                 15,697      16,614     15,825
  Shares issued(acquired), net:
    Under employee plans                          (24)        975        598
    Under shareowner plans                          9         434        687
    Other                                          69           -         31
  Dividends declared                                -           -       (527)
  Spin-offs of Lucent and NCR                       -      (2,326)         -
Balance at end of year                         15,751      15,697     16,614
Guaranteed ESOP Obligation
  Balance at beginning of year                    (96)       (254)      (305)
  Amortization                                     26          52         51
  Assumption by Lucent                              -         106          -
Balance at end of year                            (70)        (96)      (254)
Foreign Currency Translation Adjustments
  Balance at beginning of year                     (7)          5        145
  Translation adjustments                         (21)        (33)      (140)
  Spin-offs of Lucent and NCR                       -          21          -
Balance at end of year                            (28)         (7)         5
Retained Earnings(Deficit)
  Balance at beginning of year                  3,078        (687)       687
Net income                                      4,638       5,908        139
  Dividends declared                           (2,145)     (2,132)    (1,570)
    Treasury shares issued at less than cost     (187)          -          -
    Other changes                                 (14)        (11)        57
Balance at end of year                          5,370       3,078       (687)
Total Shareowners' Equity                     $22,647     $20,295    $17,274

  In March 1990 we issued 13.4 million new shares of common stock in  connection
with the establishment of an ESOP feature for the  non-management  savings plan.
The shares are being allocated to plan participants over ten years commencing in
July 1990 as contributions are made to the plan.
  We have 100 million  authorized  shares of preferred stock at $1 par value. No
preferred stock is currently issued or outstanding.

The  notes on pages  46  through  71 are an  integral  part of the  consolidated
financial statements.


<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS              AT&T CORP. AND SUBSIDIARIES
                                                 For the Years Ended December 31
Dollars in millions                                  1997       1996      1995

OPERATING ACTIVITIES
Net income                                        $ 4,638    $ 5,908   $   139
Add:(Income)loss from discontinued operations        (100)      (173)    2,896
    Gain on sale of discontinued operations           (66)      (162)        -
Income from continuing operations                   4,472      5,573     3,035
Adjustments to reconcile net income to net cash
  provided by operating activities of continuing
  operations:
    Restructuring and other charges                     -          -     3,023
    Depreciation and amortization                   3,827      2,740     2,586
    Provision for uncollectibles                    1,957      1,938     1,613
    Increase in accounts receivable                (1,431)    (2,165)   (2,220)
    Increase in accounts payable                       16        513       872
    Net increase in other operating
      assets and liabilities                         (787)    (1,079)      (87)
    Other adjustments for noncash items-net           383        355      (624)
NET CASH PROVIDED BY OPERATING ACTIVITIES
  OF CONTINUING OPERATIONS                          8,437      7,875     8,198

INVESTING ACTIVITIES
Capital expenditures                               (7,143)    (6,334)   (4,597)
Proceeds from sale or disposal of property,
  plant and equipment                                 169        145       204
(Increase)decrease in finance assets                 (465)     3,499     1,845
Acquisitions of licenses                             (435)      (267)   (1,978)
Net decrease(increase) in investments                 109       (140)        9
Dispositions(acquisitions), net of
  cash acquired                                     1,513      2,145    (3,406)
Other investing activities-net                       (155)       (23)     (240)
NET CASH USED IN INVESTING ACTIVITIES OF
  CONTINUING OPERATIONS                            (6,407)      (975)   (8,163)

FINANCING ACTIVITIES
Proceeds from long-term debt issuances                  -          -     2,392
Retirements of long-term debt                        (662)    (1,236)   (2,137)
(Acquisition) issuance of common shares              (163)     1,293     1,214
Dividends paid                                     (2,142)    (2,122)   (2,088)
Increase(decrease) in short-term
  borrowings-net                                    1,114     (5,301)    1,976
Other financing activities-net                         52      1,986       100
NET CASH (USED IN)PROVIDED BY FINANCING
  ACTIVITIES OF CONTINUING OPERATIONS              (1,801)    (5,380)    1,457

Net cash used in discontinued operations              (84)    (1,595)   (1,544)
Net increase(decrease) in cash and cash
  equivalents                                         145        (75)      (52)
Cash and cash equivalents at beginning
  of year                                               -         75       127
Cash and cash equivalents at end of year          $   145    $     -   $    75

The  notes on pages  46  through  71 are an  integral  part of the  consolidated
financial statements.



<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT&T CORP. AND SUBSIDIARIES (AT&T)
(Dollars in millions unless otherwise noted, except per share amounts)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION
The consolidated  financial statements include all majority-owned  subsidiaries.
Investments  in which we  exercise  significant  influence  but  which we do not
control  (generally a 20% - 50% ownership  interest) are accounted for under the
equity method of accounting.  This  represents the majority of our  investments.
Generally,  investments in which we have less than a 20% ownership  interest are
accounted for under the cost method of accounting.

CURRENCY TRANSLATION
For  operations  outside  of the  U.S.  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 separate
component of shareowners' equity.

REVENUE RECOGNITION
We  recognize  wireline  and  wireless  services  revenue  based upon minutes of
traffic  processed and contracted  fees.  Generally,  we recognize  products and
other services revenue in accordance with contract terms.

ADVERTISING AND PROMOTIONAL COSTS
We expense costs of advertising and promotions, including checks used to acquire
customers, as incurred. Advertising and promotional expenses were $1,985, $2,526
and $2,148 in 1997, 1996 and 1995, respectively.

INVESTMENT TAX CREDITS
We amortize  investment  tax credits as a reduction to the  provision for income
taxes over the useful lives of the property that produced the credits.

EARNINGS PER SHARE
We  calculate  earnings  per share in  accordance  with  Statement  of Financial
Accounting   Standard  (SFAS)  No.  128,   "Earnings  Per  Share."  We  use  the
weighted-average  number of common  shares  outstanding  during  each  period to
compute basic earnings per common share.  Diluted earnings per share is computed
using the weighted-average number of common shares and dilutive potential common
shares  outstanding.  Dilutive  potential  common shares are  additional  common
shares assumed to be exercised.



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

PROPERTY, PLANT AND EQUIPMENT
We state property,  plant and equipment at cost, unless impaired,  and determine
depreciation  based upon the assets'  estimated  useful  lives using  either the
group or unit method. The group method is used for most depreciable assets. When
we sell or retire assets that were depreciated using the group method, we deduct
the cost from property,  plant and equipment and accumulated  depreciation.  The
unit method is used  primarily for large  computer  systems and support  assets.
When we sell assets that were depreciated  using the unit method, we include the
related gains or losses in operating results.
  We use accelerated  depreciation  methods primarily for digital equipment used
in the  telecommunications  network,  except for switching  equipment  placed in
service before 1989 and certain high technology computer  processing  equipment.
All other plant and equipment, including capitalized software, is depreciated on
a straight-line basis.
  Long-lived  assets are reviewed for impairment  whenever  events or changes in
circumstances  indicate that the carrying amount may not be recoverable.  If the
sum of the  expected  future  undiscounted  cash flows is less than the carrying
amount of the asset, a loss is recognized  for the  difference  between the fair
value and carrying value of the asset.

LICENSING COSTS
Licensing  costs are costs  incurred  to develop or acquire  cellular,  personal
communications  services (PCS) and messaging licenses.  Generally,  amortization
begins with the  commencement  of service to customers and is computed using the
straight-line method over a period of 40 years.

GOODWILL
Goodwill is the excess of the  purchase  price over the fair value of net assets
acquired  in  business  combinations  accounted  for as  purchases.  We amortize
goodwill on a straight-line  basis over the periods  benefited ranging from five
to 40 years.  Goodwill is reviewed for impairment annually or whenever events or
changes  in  circumstances   indicate  that  the  carrying  amount  may  not  be
recoverable.  If the sum of the expected future  undiscounted cash flows is less
than the carrying  amount,  a loss is recognized for the difference  between the
fair value and carrying value of the asset.


<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
We  use  various   financial   instruments,   including   derivative   financial
instruments, for purposes other than trading. We do not use derivative financial
instruments  for  speculative  purposes.  Derivatives,  used as part of our risk
management strategy, must be designated at inception as a hedge and measured for
effectiveness  both at  inception  and on an  ongoing  basis.  Gains and  losses
related to qualifying  hedges of foreign  currency firm commitments are deferred
in  other  assets  or  liabilities  and  recognized  as part  of the  underlying
transactions as they occur. All other foreign  exchange  contracts are marked to
market on a current basis and the  respective  gains or losses are recognized in
other  income-net.  Interest rate  differentials  associated  with interest rate
swaps used to hedge AT&T's debt  obligations  are recorded as an  adjustment  to
interest payable or receivable with the offset to interest expense over the life
of the swaps. If we terminate an interest rate swap agreement,  the gain or loss
is recorded as an adjustment to the basis of the  underlying  asset or liability
and amortized over the remaining life. Cash flows from financial instruments are
classified  in  the  Consolidated  Statements  of  Cash  Flows  under  the  same
categories as the cash flows from the related assets, liabilities or anticipated
transactions.

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
revenues and expenses  during the period  reported.  Actual results could differ
from those estimates.  Estimates are used when accounting for certain items such
as long-term  contracts,  allowance  for  doubtful  accounts,  depreciation  and
amortization,   employee  benefit  plans,  taxes,   restructuring  reserves  and
contingencies.

CONCENTRATIONS
As of  December  31,  1997,  we do not have  any  significant  concentration  of
business transacted with a particular  customer,  supplier or lender that could,
if suddenly  eliminated,  severely impact our operations.  We also do not have a
concentration  of  available  sources of labor,  services,  or licenses or other
rights that could, if suddenly eliminated, severely impact our operations.

RECLASSIFICATIONS
We  reclassified  certain  amounts for  previous  years to conform with the 1997
presentation.


<PAGE>
2. DISCONTINUED OPERATIONS

On September 20, 1995, AT&T announced a plan, subject to certain conditions,  to
separate into three independent, publicly held, global companies: communications
services (AT&T),  communications  systems and technologies  (Lucent Technologies
Inc., "Lucent") and transaction-intensive computing (NCR Corporation, "NCR"). In
April 1996 Lucent sold 112 million  shares of common stock in an initial  public
offering  (IPO),  representing  17.6% of the Lucent  common  stock  outstanding.
Because of AT&T's plan to spin off its remaining  82.4% interest in Lucent,  the
sale of the Lucent stock was recorded as an equity transaction,  resulting in an
increase  in  AT&T's  additional  paid-in  capital  at the time of the  IPO.  In
addition,  in connection with the restructuring,  Lucent assumed $3.7 billion of
AT&T debt in 1996. On September 30, 1996, AT&T  distributed to AT&T  shareowners
of record as of September 17, 1996,  the  remaining  Lucent common stock held by
AT&T.  The shares were  distributed on the basis of .324084 of a share of Lucent
for each AT&T share outstanding.
  On October 1, 1996,  AT&T sold its  remaining  interest  in AT&T  Capital  for
approximately  $1.8  billion,  resulting  in a gain of $162,  or $.10 per share,
after taxes.
  On December 31, 1996,  AT&T also  distributed  all of the  outstanding  common
stock of NCR to AT&T  shareowners  of record as of December 13, 1996. The shares
were  distributed  on the basis of .0625 of a share of NCR for each  AT&T  share
outstanding on the record date. As a result of the Lucent and NCR distributions,
AT&T's shareowners' equity was reduced by $2.2 billion. The distributions of the
Lucent  and NCR  common  stock to AT&T  shareowners  were  noncash  transactions
totaling $4.8 billion which did not affect AT&T's results of operations.
    On July 1, 1997,  AT&T sold its  submarine  systems  business  (SSI) to Tyco
International  Ltd. for  approximately  $850,  resulting in an after-tax gain of
$66, or $.04 per share.


<PAGE>
    On October 20, 1997,  AT&T  announced its plans to sell AT&T  Universal Card
Services,  Inc. (UCS). On December 17, 1997, AT&T entered into an agreement with
Citicorp  to sell UCS for  approximately  $3.5  billion.  In  addition,  the two
companies signed a 10-year co-branding and joint-marketing  agreement.  The sale
is subject to regulatory  approval and is expected to be completed by the second
quarter of 1998.
  The  consolidated  financial  statements of AT&T have been restated to reflect
the dispositions of Lucent, NCR, AT&T Capital,  SSI and other businesses as well
as the  pending  sale  of  UCS  as  discontinued  operations.  Accordingly,  the
revenues,  costs and expenses,  assets and liabilities,  and cash flows of these
discontinued  operations have been excluded from the respective  captions in the
Consolidated Statements of Income,  Consolidated Balance Sheets and Consolidated
Statements  of  Cash  Flows,  and  have  been  reported  through  the  dates  of
disposition as "Income(loss)  from  discontinued  operations," net of applicable
income taxes; as "Net assets of discontinued  operations," and as "Net cash used
in discontinued operations" for all periods presented.
    In 1997 we adopted SFAS No. 125,  "Accounting for Transfers and Servicing of
Financial Assets and  Extinguishments  of Liabilities."  Among other provisions,
this standard requires that in connection with the transfer of financial assets,
liabilities  incurred  should be measured at fair value and  retained  interests
should  be  recorded  as a  portion  of  the  original  carrying  amount  of the
transferred  financial assets. This standard applies only to UCS and resulted in
a substantial benefit to income from discontinued operations for the year.
 Summarized financial information for the discontinued operations is as follows:

                                           1997       1996       1995
          Revenues                       $1,942    $23,979    $31,164
          Income(loss) before
            income taxes                    150       (180)    (4,043)
          Net income(loss)                  100        173     (2,896)
          Current assets                  7,734      7,590
          Total assets                    7,808      7,979
          Current liabilities*            5,602      6,190
          Total liabilities*              6,707      6,469
          Net assets of discontinued
            operations                   $1,101    $ 1,510

*Current  liabilities include $5,224 and $5,706 of debt maturing within one year
and total liabilities include an additional $1,093 and $170 of long-term debt at
December 31, 1997, and December 31, 1996, respectively, all of which are payable
to AT&T.


<PAGE>
  The income(loss)  before income taxes includes  allocated  interest expense of
$45 and $134 in 1996 and 1995,  respectively.  Interest expense was allocated to
discontinued  operations  based  on  a  ratio  of  net  assets  of  discontinued
operations to total AT&T consolidated  assets. No interest expense was allocated
to  discontinued  operations  in 1997 due to the  immateriality  of the amounts;
however,  UCS recorded direct  interest  expense of $297, $383 and $626 in 1997,
1996 and 1995, respectively, primarily related to the amounts payable to AT&T.


3. NEW ACCOUNTING PRONOUNCEMENTS

Effective  with the first  quarter  1998 we will adopt SFAS No. 130,  "Reporting
Comprehensive  Income." SFAS No. 130 establishes the standards for reporting and
displaying  comprehensive income and its components (revenues,  expenses,  gains
and  losses)  as part of a full  set of  financial  statements.  This  statement
requires  that all elements of  comprehensive  income be reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.   Since  this  standard   applies  only  to  the   presentation   of
comprehensive  income,  it will  not  have  any  impact  on  AT&T's  results  of
operations, financial position or cash flows.
  Beginning  with the 1998  annual  report  we will  also  adopt  SFAS No.  131,
"Disclosures about Segments of an Enterprise and Related  Information." SFAS No.
131  establishes  the standards for the manner in which public  enterprises  are
required to report financial and descriptive  information  about their operating
segments.   This  standard  defines  operating  segments  as  components  of  an
enterprise for which separate  financial  information is available and evaluated
regularly as a means for assessing segment performance and allocating  resources
to  segments.  A measure  of  profit or loss,  total  assets  and other  related
information  are  required  to be  disclosed  for  each  operating  segment.  In
addition,   this  standard  requires  the  annual  disclosure  of:   information
concerning  revenues  derived  from  the  enterprise's   products  or  services;
countries in which it earns revenue or holds assets, and major customers.

4. LIN BROADCASTING

In 1995 we acquired the remaining 48% of LIN Broadcasting  Corporation (LIN) for
approximately  $3.3 billion.  The purchase price was allocated to the fair value
of assets acquired of $4.0 billion and the fair value of liabilities  assumed of
$.7 billion.


<PAGE>
    On August 12,  1997,  AT&T  entered into an agreement to sell its 45% common
share  interest  in  LIN  Television  Corporation,  a  subsidiary  of  LIN,  for
approximately $641 to Hicks,  Muse, Tate and Furst Incorporated  ("Hicks Muse").
Subsequently, in response to a competitive offer, Hicks Muse increased their bid
to $742. The sale is subject to various  conditions,  including  approval by the
Federal Communications Commission. If approved, the sale is expected to close in
early 1998. In a separate agreement, AT&T agreed to sell WOOD-TV, its television
station in Grand Rapids,  Michigan,  for approximately  $123, subject to certain
adjustments, upon the completion of the sale of its interest in LIN.


5. SUPPLEMENTARY FINANCIAL INFORMATION

SUPPLEMENTARY INCOME STATEMENT INFORMATION

For the Years Ended December 31               1997     1996      1995
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of licensing costs               $163     $170      $133
Amortization of goodwill                        51       52        74

INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE
Research and development expenses             $829     $822      $732

OTHER INCOME-NET
Interest income                               $ 28     $ 18      $ 38
Minority interests in earnings
  of subsidiaries                              (12)     (15)      (17)
Net equity earnings from investments            35       67       103
Officers' life insurance                        68       74        73
Sale/exchange of cellular investments           75      158        64
Gain on sale of Skynet                          97        -         -
Miscellaneous-net                              125       88        23
Total other income-net                        $416     $390      $284


DEDUCTED FROM INTEREST EXPENSE
Capitalized interest                          $254     $193      $107


<PAGE>
SUPPLEMENTARY BALANCE SHEET INFORMATION

At December 31                                1997     1996
PROPERTY, PLANT AND EQUIPMENT
Machinery, electronic and other equipment $ 37,433 $ 32,761
Buildings and improvements                   6,744    6,251
Land and improvements                          386      373
Total property, plant and equipment         44,563   39,385
Accumulated depreciation                   (21,853) (19,649)
Property, plant and equipment-net         $ 22,710 $ 19,736

OTHER ASSETS
Unamortized goodwill                      $  1,277 $  1,325
Deferred charges                               724      477
Other                                          508      510
Total other assets                        $  2,509 $  2,312

SUPPLEMENTARY CASH FLOW INFORMATION

For the Years Ended December 31               1997     1996      1995
Interest payments net of
  amounts capitalized                       $  207   $  364    $  436
Income tax payments                          2,414    2,136     2,016




<PAGE>
6. BUSINESS RESTRUCTURING AND OTHER CHARGES

 In the fourth  quarter of 1995 we  recorded a pretax  charge of $3,023 to cover
restructuring  costs of $2,301 and asset  impairments and other charges of $722.
This charge  included  plans to exit certain  proprietary  network and messaging
services; restructure customer service organizations; consolidate call servicing
centers; exit certain satellite services; reorganize corporate support functions
such as  information  systems,  human  resources and financial  operations,  and
restructure certain international operations.
  As  part of our  plan  to  sell  certain  businesses  and to  restructure  our
operations,  restructuring  liabilities  of $1,712 were  recorded  for  employee
separation costs, costs associated with early termination of building leases and
other items. In addition,  asset impairments of $567 (which directly reduced the
carrying  value of the related  asset  balances)  and $22 of benefit plan losses
were recorded.
  The 1995  restructure  charge of $2,301 included  separation  costs for nearly
17,000  employees,  which  included  approximately  12,000  management and 5,000
occupational employees. As of December 31, 1997,  approximately 6,800 management
employees and 2,300  occupational  employees have been  separated.  Of the 6,800
management   separations,   approximately  4,300  accepted  voluntary  severance
packages.
  During 1996 and 1997 we completed the restructuring of our proprietary network
and  messaging  services  business,   closed  several  call  servicing  centers,
consolidated customer care centers,  sold certain  international  operations and
reorganized  certain corporate support functions.  The implementation of certain
restructuring activities are occurring at a slower pace than planned. There have
been delays in exiting certain  businesses and  reorganizing  corporate  support
functions,  in part to  ensure  customer  satisfaction  during  this  transition
period.  However,  certain  facility costs have payment terms  extending  beyond
1998. We believe that the balance is adequate to complete these plans.
  On January 26, 1998, we announced a voluntary  retirement incentive program to
be  offered  to  managers  during  the  second  quarter  of 1998.  The  expected
acceptance  rate of 10,000  to 11,000  employees  for the  voluntary  retirement
incentive offer may impact the  utilization of the remaining 1995  restructuring
reserve  balance.  Another  5,000  to  7,000  employees  will  leave  through  a
combination of managed attrition and previously announced workforce reductions.
  The following  table  displays a rollforward of the  liabilities  for business
restructuring from December 31, 1995, to December 31, 1997:


<PAGE>
                                                  1996
                                       --------------------------
           Dec. 31,                                      Dec. 31,
                     1995                        Amounts           1996
Type of Cost      Balance     Additions         Utilized        Balance

Employee
 separations       $  925           $ -            $(319)        $  606
Facility closings     761             -             (233)           528
Other                 406             -             (152)           254

Total              $2,092           $ -            $(704)        $1,388
- ---------------------------------------------------------------------------

                                         1997
                              --------------------------
                 Dec. 31,                                      Dec. 31,
                     1996                        Amounts           1997
Type of Cost      Balance     Additions         Utilized        Balance

Employee
 separations       $  606           $ -            $(193)          $413
Facility closings     528             -              (94)           434
Other                 254             -             (194)            60

Total              $1,388           $ -            $(481)          $907
- ---------------------------------------------------------------------------

1997 utilization  includes $100 reversal of pre-1995 reserves.  1996 utilization
includes $112 of net transfers to Lucent and NCR.

  The balance at December 31, 1997,  includes $180 of pre-1995 charges primarily
related to excess space in various leased facilities and is expected to be fully
utilized over the remaining terms of the leases.
  The 1995 charge of $722 for asset  impairments and other charges included $668
for writing down certain impaired assets,  including the write-down in the value
of some unnecessary network facilities, the write-down of non-strategic wireless
assets and the reduction in value of some  investments.  There were no assets to
be disposed of or sold included in these  write-downs.  The charge also included
$54 of other items, none of which individually exceed 1% of the total charge.
  The total pretax charge of $3,023 for 1995 was recorded as $844 in network and
other  communications  services expenses;  $934 in depreciation and amortization
expenses, and $1,245 in selling,  general and administrative expenses. If viewed
by type of cost, the combined charges reflect $950 for employee  separations and
other related items; $1,235 for asset write-downs; $497 for closing, selling and
consolidating  facilities;  and $341 for other items.  The total charge  reduced
income from continuing  operations by $2,032,  or diluted  earnings per share by
$1.28 in 1995.


<PAGE>
  In addition, charges of $1,172 (net of taxes) in the third quarter of 1995 and
$2,149 (net of taxes) in the fourth  quarter of 1995 are  reflected  in the loss
from  discontinued  operations.  These charges reduced income from  discontinued
operations by a total of $3,321, or diluted earnings per share by $2.08 in 1995.

7. INCOME TAXES

The following table shows the principal  reasons for the difference  between the
effective  income tax rate and the United States  federal  statutory  income tax
rate:

For the Years Ended December 31              1997     1996     1995
U.S. federal statutory income tax rate        35%      35%      35%
Federal income tax at statutory rate       $2,517   $3,084   $1,743
Amortization of investment tax credits        (14)     (21)     (35)
State and local income taxes, net of
  federal income tax effect                   182      272      179
Amortization of intangibles                    20       13       62
Foreign rate differential                     117      131      (11)
Taxes on repatriated and accumulated
  foreign income, net of tax credits          (32)      19       17
Legal entity restructuring                      -     (195)       -
Research credits                              (63)     (13)     (24)
Other differences-net                         (6)     (53)      12
Provision for income taxes                 $2,721   $3,237   $1,943
Effective income tax rate                   37.8%    36.7%    39.0%

  The U.S.  and  foreign  components  of  income  before  income  taxes  and the
provision for income taxes are presented in this table:

For the Years Ended December 31              1997     1996     1995
INCOME BEFORE INCOME TAXES
United States                              $7,311   $9,013   $5,465
Foreign                                      (118)    (203)    (487)
Total                                      $7,193   $8,810   $4,978

PROVISION FOR INCOME TAXES
CURRENT
Federal                                    $1,561   $2,291   $1,922
State and local                               192      397      383
Foreign                                        49       25        1
                                           $1,802   $2,713   $2,306
DEFERRED
Federal                                    $  851   $  511   $ (221)
State and local                                89       23     (108)
Foreign                                        (5)      11        1
                                           $  935   $  545   $ (328)
Deferred investment tax credits               (16)     (21)     (35)
Provision for income taxes                 $2,721   $3,237   $1,943


<PAGE>
  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 bases of certain assets and liabilities.
  Deferred income tax liabilities and assets consist of the following:

At December 31                                        1997     1996
LONG-TERM DEFERRED INCOME TAX LIABILITIES
  Property, plant and equipment                     $6,204   $5,302
  Investments                                          319       96
  Other                                              1,185    1,403
Total long-term deferred income tax liabilities     $7,708   $6,801

LONG-TERM DEFERRED INCOME TAX ASSETS
  Business restructuring                            $  162   $  195
  Net operating loss/credit carryforwards              273      220
  Employee pensions and other benefits-net          1,026    1,298
  Reserves and allowances                               93      120
  Other                                                654      305
  Valuation allowance                                 (211)    (164)

Total net long-term deferred income tax assets      $1,997   $1,974
Net long-term deferred income tax liabilities       $5,711   $4,827

CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities       $  175   $  117

CURRENT DEFERRED INCOME TAX ASSETS
  Business restructuring                            $  225   $  249
  Net operating loss/credit carryforwards                5        3
  Employee pensions and other benefits                 304      523
  Reserves and allowances                              629      594
  Other                                                264       14


Total net current deferred income tax assets        $1,427   $1,383
Net current deferred income tax assets              $1,252   $1,266

  At December 31, 1997, we had net operating loss  carryforwards  (tax-effected)
for federal and state income tax purposes of $32 and $76, respectively, expiring
through   2012.   We  also  had  foreign  net   operating   loss   carryforwards
(tax-effected)  of $140, of which $130 has no expiration  date, with the balance
expiring  by the year 2002 as well as federal  tax credit  carryforwards  of $30
which are not  subject to  expiration.  We  recorded a  valuation  allowance  to
reflect the estimated amount of deferred tax assets which, more likely than not,
will not be realized.



<PAGE>
8. POSTRETIREMENT BENEFITS

Our benefit plans for retirees include health care benefits, life
insurance coverage and telephone  concessions.  Postretirement  contributions to
trust funds are determined using the attained-age-normal  cost method for health
care benefits and the aggregate cost method for life insurance plans.
  Immediately  following  the spin-off of Lucent on September  30, 1996,  Lucent
established  separate   postretirement   benefit  plans,  and  a  share  of  the
postretirement  benefit  obligations and  postretirement  benefit assets held in
trust were transferred from AT&T to Lucent based on methods and assumptions that
were  agreed to by both  companies.  Adjustments  to the  estimated  assets  and
postretirement  benefit  obligations  that were  transferred  to Lucent were not
material  in 1997.  Subsequent  adjustments,  if any,  are also  expected  to be
immaterial.
  This table shows the components of the net postretirement benefit cost:

For the Years Ended December 31                      1997     1996     1995
Service cost-benefits earned during the period     $  56     $ 53     $ 40
Interest cost on accumulated postretirement
  benefit obligation                                 278      263      258
Expected return on plan assets*                     (120)     (99)     (78)
Amortization of unrecognized prior service costs      39       39       23
Amortization of net loss(gain)                         -        3       (3)
Net postretirement benefit cost                    $ 253     $259     $240

* The actual  return on plan  assets was $358 in 1997,  $313 in 1996 and $256 in
1995.  The  expected  long-term  rate of return on plan assets was 9.0% in 1997,
1996 and 1995.

  Prior service costs are amortized  primarily on a straight-line basis over the
average  remaining  service  period of active  employees.  We had  approximately
40,400,  37,900 and 34,500  retirees as of December  31, 1997,  1996,  and 1995,
respectively.


<PAGE>
  Our plan assets consist primarily of listed stocks, corporate and governmental
debt, cash and cash  equivalents,  and life insurance  contracts.  The following
table shows the funded status of our  postretirement  benefit  plans  reconciled
with the amounts recognized in the Consolidated Balance Sheets:

At December 31                                         1997      1996
Accumulated postretirement benefit obligation:
  Retirees                                           $2,655    $2,244
  Fully eligible active plan participants               651       453
  Other active plan participants                      1,050     1,042
Total accumulated postretirement benefit obligation   4,356     3,739
Plan assets at fair value                             1,969     1,566
Unfunded postretirement obligation                    2,387     2,173
Less:
  Unrecognized prior service costs                      166       206
  Unrecognized net gain                                (227)     (510)
Accrued postretirement benefit obligation            $2,448    $2,477

  We made these assumptions in valuing our postretirement  benefit obligation at
December 31:
                                                       1997      1996
Weighted-average discount rate                         7.0%      7.5%
Assumed rate of increase in the per
  capita cost of covered health care benefits           5.3%      5.6%

  We assumed that the growth in the per capita cost of covered health
care  benefits (the health care cost trend rate) would  gradually  decline after
1997 to 4.8% by the year 2008 and then remain  level.  This  assumption  greatly
affects the amounts reported.  To illustrate,  increasing the assumed trend rate
by 1% in each year would raise our accumulated postretirement benefit obligation
at December 31, 1997, by $218 and our 1997 postretirement benefit costs by $18.

9. EMPLOYEE BENEFIT PLANS

PENSION PLANS
We sponsor  noncontributory  defined  benefit plans covering the majority of our
employees.   Benefits  for  management   employees  are  principally   based  on
career-average pay. Benefits for occupational employees are not directly related
to pay.  Pension  contributions  are principally  determined using the aggregate
cost method and are  primarily  made to trust funds held for the sole benefit of
plan participants.
  Immediately  following  the spin-off of Lucent on September  30, 1996,  Lucent
established  separate  defined  benefit  plans,  and  a  share  of  the  pension
obligations  and  pension  assets  held in trust were  transferred  from AT&T to
Lucent based on methods and  assumptions  that were agreed to by both companies.
Adjustments  to the  estimated  asset and pension  obligation  amounts that were
transferred to Lucent were not material in 1997. Subsequent adjustments, if any,
are also expected to be immaterial.


<PAGE>
  We compute  pension cost using the projected  unit credit method and assumed a
long-term rate of return on plan assets of 9.0% in 1997, 1996 and 1995.
  Pension cost includes the following components:

For the Years Ended December 31              1997     1996     1995
Service cost-benefits earned during
  the period                              $   305  $   295  $   200
Interest cost on projected benefit
  obligation                                  946      861      747
Amortization of unrecognized prior
  service costs                               114       99       90
Credit for expected return on plan
  assets*                                  (1,371)  (1,195)  (1,043)
Amortization of transition asset             (181)    (183)    (193)
Charges for special pension benefits            5        -       58
Net pension credit                        $  (182) $  (123) $  (141)

*The actual return on plan assets was $3,464 in 1997,  $2,981 in 1996 and $1,044
in 1995.

  The net  pension  credit in 1995  includes a one-time  charge of $58 for early
retirement options and curtailments.

  This table shows the funded status of the defined benefit plans:

At December 31                                           1997     1996
Actuarial present value of accumulated
  benefit obligation, including vested benefits
  of $13,123 and $10,083                              $14,150  $11,520

Plan assets at fair value                             $20,513  $17,680
Less: Actuarial present value of projected
  benefit obligation                                   14,481   12,380

Excess of assets over projected benefit obligation      6,032    5,300
Unrecognized prior service costs                          904      766
Unrecognized transition asset                            (708)    (889)
Unrecognized net gain                                  (4,130)  (3,303)
Net minimum liability of nonqualified plans              (103)     (51)
Prepaid pension costs                                 $ 1,995  $ 1,823


<PAGE>
  We used  these  rates and  assumptions  to  calculate  the  projected  benefit
obligation:

At December 31                                           1997     1996
Weighted-average discount rate                           7.0%     7.5%
Rate of increase in future
  compensation levels                                     4.5%     5.0%

  The prepaid pension costs shown above are net of pension liabilities for plans
where accumulated plan benefits exceed assets.  Such  liabilities,  that are not
material, are included in other liabilities in the Consolidated Balance Sheets.
  We are amortizing over 15.9 years the unrecognized transition asset related to
our 1986  adoption of SFAS No. 87,  "Employers'  Accounting  for  Pensions."  We
amortize prior service costs primarily on a straight-line basis over the average
remaining service period of active employees.  Our plan assets consist primarily
of listed  stocks  (including  $75 and $56 of AT&T common  stock at December 31,
1997, and 1996,  respectively),  corporate and  governmental  debt,  real estate
investments and cash and cash equivalents.

SAVINGS PLANS
We sponsor  savings  plans for the  majority of our  employees.  The plans allow
employees to  contribute a portion of their pretax  and/or  after-tax  income in
accordance  with  specified  guidelines.  We match a percentage  of the employee
contributions up to certain limits. Our contributions  amounted to $197 in 1997,
$178 in 1996 and $156 in 1995.


<PAGE>
10. STOCK-BASED COMPENSATION PLANS

Under the 1997 Long-Term Incentive Program, which was effective June 1, 1997, we
grant stock  options,  performance  shares,  restricted  stock and other awards.
There are 100 million shares of common stock  available for grant with a maximum
of 15  million  common  shares  that may be used 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 years and are
exercisable  up to ten years  from the date of grant.  Under the 1987  Long-Term
Incentive Program,  which expired in April 1997, we granted the same awards, and
on January 1 of each year 0.6% of the  outstanding  shares of our  common  stock
became available for grant.
  Under  the 1997  Long-Term  Incentive  Program,  performance  share  units are
awarded to key  employees in the form of either  common stock or cash at the end
of a  three-year  period based on AT&T's  total  shareholder  return as measured
against  a peer  group  of  industry  competitors.  Under  the 1987  Long-  Term
Incentive Program, performance share units with the same terms were also awarded
to key employees based on AT&T's  return-to-equity  performance  compared with a
target.


<PAGE>
 On August 1, 1997,  substantially  all of our  employees  were  granted a stock
option award to purchase 100 shares  representing a total of 12.5 million shares
of our common stock.  The options vest after three years and are  exercisable up
to ten years from the grant date.
  Under the AT&T 1996 Employee Stock  Purchase Plan (Plan),  which was effective
July 1, 1996, we are authorized to issue up to 50 million shares of common stock
to our eligible employees. Under the terms of the Plan, employees may have up to
10% of their  earnings  withheld to purchase  AT&T's common stock.  The purchase
price of the stock on the date of exercise  is 85% of the  average  high and low
sale  prices of shares on the New York Stock  Exchange  for that day.  Under the
Plan, we sold approximately 3 million shares to employees in both 1997 and 1996.
  We apply  Accounting  Principles  Board Opinion No. 25,  "Accounting for Stock
Issued to Employees," and related  Interpretations  in accounting for our plans.
Accordingly,  no  compensation  expense has been  recognized for our stock-based
compensation  plans other than for our  performance-based  and restricted  stock
awards,  SARs, and prior to July 1, 1996, for the stock purchase plan for former
McCaw  Cellular  Communications,  Inc.  employees.  Compensation  costs  charged
against income were $94 and $40 in 1997 and 1996, respectively.

  A summary of option transactions is shown below:

                                  Weighted-         Weighted-
                                   Average           Average
                                   Exercise          Exercise
Shares in Thousands         1997    Price      1996   Price     1995
Outstanding at January 1  46,910   $33.89    47,689  $43.21   40,285
Lucent and NCR
  spin-off adjustments         -        -    22,678       -        -
Options granted           36,485   $38.81     9,132  $45.53   13,276
Options and SARs
  exercised              (10,832)  $24.89   (10,708) $19.16   (8,181)
Average exercise price                                        $29.39
Options assumed in
  purchase of LIN              -        -         -       -    3,382
Options canceled or
  forfeited:
  Lucent and NCR
    spin-offs                  -        -   (16,179) $37.25        -
  Other employee plans    (4,058)  $40.47    (5,702) $37.12   (1,073)

At December 31:
Options outstanding       68,505   $37.50    46,910  $33.89   47,689
Average exercise price                                        $43.21
Options exercisable       22,981   $33.26    28,034  $28.81   28,775
Shares available
  for grant               85,859        -    19,693       -   17,524



<PAGE>
  Effective on the dates of spin-off of Lucent and NCR,  AT&T stock options held
by Lucent and NCR employees were canceled.  For the holders of unexercised  AT&T
stock options,  the number of options was adjusted and all exercise  prices were
decreased  immediately  following  each  spin-off  date to preserve the economic
values of the options that existed prior to those dates.
  During 1997 402,057 SARs were exercised and no SARs were granted.  At December
31, 1997, 341,783 SARs remained unexercised, all of which were exercisable.
  AT&T has adopted the disclosure-only  provisions of SFAS No. 123,  "Accounting
for  Stock-Based  Compensation."  If AT&T had elected to recognize  compensation
costs based on the fair value at the date of grant for awards in 1997,  1996 and
1995,  consistent  with the  provisions  of SFAS No. 123,  AT&T's net income and
earnings  per common share would have been  reduced to the  following  pro forma
amounts:

For the Years Ended December 31                1997    1996    1995
Income from continuing operations            $4,384  $5,502 $ 3,022
Income(loss) from discontinued operations        99     146  (2,902)
Gain on sale of discontinued operations          66     162       -
Net income                                   $4,549  $5,810 $   120

Earnings per common share-basic:
  Continuing operations                      $ 2.70  $ 3.42 $  1.91
  Discontinued operations                      0.06    0.09   (1.83)
  Gain on sale of discontinued operations      0.04    0.10       -
  Net income                                 $ 2.80  $ 3.61 $  0.08

Earnings per common share-diluted:
  Continuing operations                      $ 2.69  $ 3.41 $  1.90
  Discontinued operations                      0.06    0.09   (1.82)
  Gain on sale of discontinued operations      0.04    0.10       -
  Net income                                 $ 2.79  $ 3.60 $  0.08

  Without the effect of pro forma costs related to the  conversion of options in
the Lucent and NCR spin-offs,  pro forma income from  continuing  operations was
$5,532, or $3.42 per diluted common share in 1996.
  The pro  forma  effect  on net  income  for  1997,  1996  and  1995 may not be
representative of the pro forma effect on net income of future years because the
SFAS No. 123 method of  accounting  for pro forma  compensation  expense has not
been applied to options granted prior to January 1, 1995.
  The  weighted-average  fair values at date of grant for options granted during
1997,  1996 and 1995 were  $9.09,  $13.12  and  $14.02,  respectively,  and were
estimated using the Black-Scholes  option-pricing  model. The risk-free interest
rates applied for 1997, 1996 and 1995 were 6.16%, 6.11% and 6.44%, respectively.
The following  assumptions  were applied for periods before the Lucent spin-off,
subsequent  to the Lucent  spin-off  through  December 31,  1996,  and for 1997,
respectively: (i) expected dividend yields of 2.4%, 2.8% and 2.2%, (ii) expected
volatility rates of 19.0%, 21.0% and 21.8%, and (iii) expected lives of 5.0, 4.5
and 4.5 years.


<PAGE>
  The following table summarizes  information about stock options outstanding at
December 31, 1997:

                          Options Outstanding            Options Exercisable
                                Weighted-
                   Number        Average    Weighted-    Number      Weighted-
 Range of      Outstanding at   Remaining   Average   Exercisable at Average
 Exercise      Dec. 31, 1997   Contractual  Exercise  Dec. 31, 1997  Exercise
  Prices       (in thousands)     Life       Price    (in thousands)   Price

$ 1.11 - $15.76       318         1.9       $13.64          318       $13.64
 15.83 -  27.12     6,611         3.5        24.40        6,611        24.40
 27.16 -  34.95     7,890         6.4        34.16        5,088        24.50
 35.20 -  36.74     6,207         5.7        35.61        4,495        35.54
 36.75             12,501         9.4        36.75            -        36.75
 36.76 -  39.30     4,229         6.0        37.41        3,304        37.20
 39.31             17,810         9.0        39.31           22        39.31
 39.32 -  47.37    11,813         7.6        45.15        3,143        45.19
 48.28 -  60.00     1,126         9.9        54.58            -            -

                   68,505         7.5       $37.50       22,981       $33.26


11. DEBT OBLIGATIONS

DEBT MATURING WITHIN ONE YEAR
At December 31                                1997          1996
Commercial paper                            $3,113        $1,950
Currently maturing long-term debt              874           463
Other                                           11            36
Total debt maturing within one year         $3,998        $2,449
Weighted-average interest rate of
  short-term debt                             5.8%          5.5%

  A consortium of lenders provides  revolving credit  facilities of $5.0 billion
to AT&T. These credit  facilities are intended for general  corporate  purposes,
which include support for AT&T's  commercial  paper, and were unused at December
31, 1997.


<PAGE>
LONG-TERM OBLIGATIONS
At December 31                                       1997      1996
Interest Rates (a)      Maturities
DEBENTURES
4 3/8% to 4 3/4%        1998-1999                  $  500    $  500
5 1/8% to 6%            2000-2001                     500       500
8 1/8% to 8 5/8%        2002-2031                   1,996     1,996

NOTES
5 9/38% to 7 3/4%       1998-2025                   4,000     4,341
8% to 8 17/20%          1998-2025                     579       786
9 3/5% to 12 7/8%       1998-2004                      30        60
Variable rate           1998-2054                      67       115
Total debentures and notes                          7,672     8,298
Other                                                  83       112
Less: Unamortized discount-net                         55        64
Total long-term obligations                         7,700     8,346
Less: Currently maturing long-term debt               874       463
Net long-term obligations                          $6,826    $7,883

(a) Note that 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.

  This table shows the  maturities  at December 31, 1997, of the $7,700 in total
long-term obligations:

        1998      1999    2000     2001    2002       Later Years
        $874    $1,063    $658     $657    $504         $3,944


12. FINANCIAL INSTRUMENTS

In the normal course of business we use various financial instruments, including
derivative financial instruments, for purposes other than trading. We do not use
derivative  financial  instruments for speculative  purposes.  These instruments
include letters of credit, guarantees of debt, interest rate swap agreements and
foreign currency exchange  contracts.  Interest rate swap agreements and foreign
currency  exchange  contracts  are used to  mitigate  interest  rate and foreign
currency  exposures.  Collateral  is  generally  not required for these types of
instruments.
  By their nature all such instruments  involve risk,  including the credit risk
of nonperformance by  counterparties,  and our maximum potential loss may exceed
the amount recognized in our balance sheet.  However,  at December 31, 1997, and
1996, in management's opinion there was no significant risk



<PAGE>
of loss in the event of nonperformance of the  counterparties to these financial
instruments.  We control our exposure to credit risk through  credit  approvals,
credit limits and monitoring procedures. We do not have any significant exposure
to  any  individual  customer  or  counterparty,   nor  do  we  have  any  major
concentration of credit risk related to any financial instruments.

LETTERS OF CREDIT
Letters of credit are  purchased  guarantees  that  ensure  our  performance  or
payment to third parties in accordance  with specified  terms and conditions and
do not create any additional risk to AT&T.

GUARANTEES OF DEBT
From  time  to time we  guarantee  the  debt  of our  subsidiaries  and  certain
unconsolidated joint ventures.  Additionally,  in connection with restructurings
of AT&T in 1996,  we issued  guarantees  for certain  debt  obligations  of AT&T
Capital and NCR. At December 31,  1997,  and 1996,  respectively,  the amount of
guaranteed debt associated with AT&T Capital and NCR was $120 and $230.

INTEREST RATE SWAP AGREEMENTS
We enter into  interest rate swaps to manage our exposure to changes in interest
rates and to lower our overall costs of financing. We enter into swap agreements
to  manage  the  fixed/floating  mix of our debt  portfolio  in order to  reduce
aggregate risk to interest rate movements.  Interest rate swaps also allow us to
raise funds at floating  rates and  effectively  swap them into fixed rates that
are  lower  than  those  available  to us if  fixed-rate  borrowings  were  made
directly.  These agreements involve the exchange of floating-rate for fixed-rate
payments or fixed-rate for  floating-rate  payments  without the exchange of the
underlying  principal amount. Fixed interest rate payments at December 31, 1997,
are at rates ranging from 6.96% to 7.75%.
Floating-rate payments are based on rates tied to LIBOR.
  The following  table indicates the types of swaps in use at December 31, 1997,
and 1996, and their weighted-average  interest rates. Average variable rates are
those in effect at the  reporting  date and may  change  significantly  over the
lives of the contracts.
                                                1997      1996
Fixed to variable swaps-notional amount         $422      $632
  Average receive rate                         7.54%     7.55%
  Average pay rate                             5.67%     5.32%
Variable to fixed swaps-notional amount         $249      $351
  Average receive rate                         5.70%     5.77%
  Average pay rate                             7.42%     5.71%

  The  weighted-average  remaining  terms of the swap  contracts are 3 years for
1997 and 5 years for 1996.



<PAGE>
FOREIGN EXCHANGE
We enter into foreign currency exchange contracts, including forward
and option  contracts,  to manage our  exposure to changes in currency  exchange
rates,  principally French francs,  Deutsche marks,  British pounds sterling and
Japanese yen. The use of these  derivative  financial  instruments  allows us to
reduce our  exposure  to the risk of adverse  changes in  exchange  rates on the
eventual  reimbursement to foreign telephone  companies for their portion of the
revenues  billed by AT&T for calls  placed in the U.S. to a foreign  country and
other  foreign  currency  payables  and  receivables.   These  transactions  are
generally expected to occur in less than one year.

FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The  following  table  summarizes  the  notional  amounts of material  financial
instruments.  The  notional  amounts  represent  agreed-upon  amounts  on  which
calculations of dollars to be exchanged are based. They do not represent amounts
exchanged by the parties and, therefore,  are not a measure of our exposure. Our
exposure  is  limited to the fair value of the  contracts  with a positive  fair
value plus interest receivable, if any, at the reporting date.

DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS

                                       1997          1996
                                     Contract/     Contract/
                                     Notional      Notional
                                      Amount        Amount
Interest rate swap agreements          $671          $983
Foreign exchange:
  Forward contracts                     426           646
  Option contracts                        2            65
Letters of credit                        63           264
Guarantees of debt                      242           328

  The tables  below show the  valuation  methods  and the  carrying  amounts and
estimated fair values of material financial instruments.

FINANCIAL INSTRUMENT                  VALUATION METHOD
Debt excluding capital leases         Market quotes or based on rates
                                        available to us for debt with
                                        similar terms and maturities
Letters of credit                     Fees paid to obtain the
                                        obligations
Guarantees of debt                    There are no quoted market prices
                                        for similar agreements available
Interest rate swap agreements         Market quotes obtained from dealers
Foreign exchange contracts            Market quotes



<PAGE>
  For debt excluding  capital leases,  the carrying amounts and fair values were
$10,810  and  $11,112,   respectively,   for  1997;  and  $10,319  and  $10,609,
respectively, for 1996.

DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
                                                1997
                                      Carrying         Fair
                                       Amount          Value
                                    Asset   Liab.   Asset  Liab.

Interest rate swap agreements          $3    $10       $5   $31
Foreign exchange
  forward contracts                     -     21        3    33
                                                1996
                                      Carrying         Fair
                                       Amount          Value
                                    Asset   Liab.   Asset  Liab.

Interest rate swap agreements          $5    $ 8      $47   $12
Foreign exchange
  forward contracts                     6     15        7    35


13. 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, 1997.  These matters could
affect the operating results of any one quarter when resolved in future periods.
However,  we believe  that after final  disposition  any  monetary  liability or
financial  impact  to us  beyond  that  provided  for at  year-end  would not be
material  to our  annual  consolidated  financial  statements.  We  lease  land,
buildings and equipment  through  contracts that expire in various years through
2032. Our rental expense under  operating  leases was $822 in 1997, $718 in 1996
and $653 in 1995.  The following  table shows our future  minimum lease payments
due under  noncancelable  operating  leases at December 31, 1997.  Such payments
total  $3,384.  The total of minimum  rentals to be received in the future under
noncancelable subleases as of December 31, 1997, was $275.


              1998     1999     2000     2001     2002    Later Years
              $652     $528     $444     $334     $249         $1,177



<PAGE>
14. QUARTERLY INFORMATION (UNAUDITED)

1997                                    First    Second     Third    Fourth
Revenues                              $12,662   $12,825   $13,004   $12,828
Operating income                        1,639     1,511     1,775     2,043
Income from continuing operations       1,088       928     1,133     1,323
Income from discontinued
  operations                               38        31        20        11
Gain on sale of discontinued
  operation                                 -         -        66         -
Net income                              1,126       959     1,219     1,334

Income per common share-basic:
    Continuing operations                 .67       .57       .70       .81
  Discontinued operations                 .02       .02       .01       .01
  Gain on sale of discontinued
    operation                               -         -       .04         -
  Net income                              .69       .59       .75       .82
Income per common share-diluted:
Continuing operations                     .67       .57       .69       .81
Discontinued operations                   .02       .02       .02         -
Gain on sale of discontinued
    operation                               -         -       .04         -
  Net income                              .69       .59       .75       .81

Dividends declared                        .33       .33       .33       .33

Stock price*:
  High                                $41 7/8  $38 1/4  $45 15/16  $63 15/16
  Low                                  34 3/8   30 3/4   34 1/4     43 3/16
  Quarter-end close                    34 7/8   35 1/16  44 1/4     61 5/16

* Stock prices obtained from the Composite Tape



<PAGE>
1996                                    First    Second     Third    Fourth
Revenues                              $12,378   $12,459   $12,837   $12,872
Operating income                        2,369     2,273     2,211     1,910
Income from continuing
  operations                            1,439     1,509     1,380     1,245
Income(loss) from discontinued
  operations                              (77)      (18)       52       216
Gain on sale of
  discontinued operation                    -         -         -       162
Net income                              1,362     1,491     1,432     1,623

Income(loss) per common share-basic:
  Continuing operations                   .90       .94       .85       .77
  Discontinued operations                (.05)     (.01)      .04       .13
    Gain on sale of
    discontinued operation                  -         -         -       .10
    Net income                            .85       .93       .89      1.00

Income(loss) per common share-diluted:
    Continuing operations                 .90       .93       .85       .77
    Discontinued operations              (.05)     (.01)      .04       .13
    Gain on sale of discontinued
      operation                             -         -         -       .10
      Net income                          .85       .92       .89      1.00

Dividends declared                        .33       .33       .33       .33
Stock price*:
  High                                $68 7/8   $64 7/8   $62 3/8      $44 1/2
  Low                                  60 1/8    58        49 1/4       33 1/4
  Quarter-end close                    61 1/8    62        52 1/4       43 3/8

* Stock prices obtained from the Composite Tape

    Stock  prices on or before  September  30, 1996,  have not been  restated to
reflect the Lucent  spin-off.  Stock prices on or before December 31, 1996, have
not been restated to reflect the NCR spin-off.


15. SUBSEQUENT EVENT

On January 8, 1998,  AT&T signed a definitive  merger  agreement  with  Teleport
Communications  Group  Inc.  (TCG)  for  an  all-stock   transaction  valued  at
approximately  $11.3  billion.  Under  the  agreement  each  TCG  share  will be
exchanged  for .943 of an AT&T  share.  The  merger  is  subject  to  regulatory
approvals and certain  other  conditions as well as the receipt of opinions that
the merger will be tax-free to TCG  shareowners.  The transaction is expected to
close in the second half of 1998.



© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission